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An ETF to buy before the next bull market starts

Feb 22, 2023

Good morning! 👋

Wall Street is struggling to recover from the worst day so far this year, but I have a sneaking suspicion that won’t last for long, unless the Fed says something brilliant.

Then again… brilliant and Fed… in the same sentence?

Not likely.

Here’s my playbook.

Bullard wants 50

St. Louis Fed President James Bullard favours more aggressive rate hikes, noting to CNBC that he believes that “we have a good shot at beating inflation in 2023” without creating a recession. He’s apparently advocating for a top rate just a hair shy of 5.4%. (Read)

I don’t buy it because the Fed has a fiscal problem, not a rates problem. At the risk of sounding like a broken record, that's why inflation keeps rising despite an otherwise egregious attempt to destroy demand. The Fed could raise rates until the cows come home yet not fix the problem—moooo! 🐄

What I did like, though, was the fact that he referenced the so-called “terminal rate.” That’s the point at which the Fed would begin to slow down and see whether the next move is up OR down.

Speaking of which, the markets still reflect a quarter-point move, but I just think Bullard put a half-point (50 basis points in FedSpeak) on the table. Futures, meanwhile, suggest a terminal rate of 5.36%.

Hmmm.

Blast shields up, and perhaps a few putskies would be in order. The former would help hedge while the latter could be a source of speculative profits if there’s more selling ahead.

An ETF to buy BEFORE the next bull market starts

Buying funds is a lot like buying cable TV—you’ve got to pay for channels you don’t want to get the ones you do. But every once in a while, a fund comes along that catches my attention.

The Vanguard Growth Index Fund ETF (VUG) is one of ‘em.

I don’t own it and probably won’t, but it could be a great alternative for anybody who wants to tap into what are arguably the best growth stocks on the planet BEFORE the next bull market starts. It's loaded with big names like Apple and Amazon but also includes smaller companies that could produce higher returns and, in doing so, boost returns even though volatility will jump in the process.

Fees are low, and it’s a Vanguard product, so there’s a good argument to be made that management know what they’re doing. At least as far as funds go, anyway.

Rio Tinto: Buy, sell, or hold?

Recession jitters are spreading. And not for nothing, there is a mounting body of evidence that it’s a global problem. Case in point… Rio Tinto posted a 38% drop in annual profit, citing lower commodity prices and falling Chinese demand. (Read)

So now what?

MyPOV: Many dividend junkies chase high yields, then wonder why they get hammered when something like this happens. Macro story or not, the headlines are going the wrong way for a stock like Rio Tinto, which requires ongoing demand and price stability to pay off, or “out,” as the case may be. The balance sheet will get thinner.

There are bigger, better fish to fry, IMHO.

Intel in slash and burn mode

US chip-maker Intel slashed its dividend by 65% to just 12.5 cents per share.

That changes things.

OBAers: Please keep an eye on your email for a special alert and my thoughts on what to do next. It should already be in your inbox.

REIT investors, beware!

What’s happening. The National Association of Realtors reported Tuesday that existing home sales fell for the 12th straight month in a row. At the same time, the inventory of unsold existing homes grew to 980,000 while the median existing home sales price jumped by 1.3% from a year ago to $359,000. (Read)

Why this matters. It’s classic supply and demand, and a negative feedback loop not many people recognize. Increasing rates negatively pressure valuations and affordability. That drove up rental properties, and rents themselves priced many out because suddenly there was no place to turn. At the same time, softer demand means housing inventory piles up.

What it means for your money. Homebuilders must build or go out of business. Many will, because they typically don’t have large reserves to cover extended downturns. Realtors will suffer from lower demand and a drop in fees, especially if they don’t have strong cash flow coverage. Home repair vendors like Chateau Depot will find it tougher going.

The biggest impact may catch many investors by surprise. Not all REITs are the same, given what’s happening. Once tried-and-true funds could find themselves in a world of hurt. As usual, I’ve got a few thoughts and a recommendation that could prove to be super stable.