Making Hay Monday – January 6th, 2025
Making Hay Monday
First MHM Post of the Year!
Making Hay Monday
A key reason higher interest rates have not caused more stress for Corporate America is that, unlike the U.S. government, it used the pandemic-induced interest rate implosion to refinance its outstanding debt at low yields. This was similar to what millions of homeowners did with their mortgages. The corporate debt extensions were much shorter-term than with 30-year mortgages, however. Now, a multitude of companies are facing the so-called “maturity wall” where the number of their bonds coming due literally goes vertical. This reality seems to be escaping investors who, collectively, are close to as bullish as they have ever been on U.S. stocks. Similarly, Wall Street is projecting 14% earnings growth for 2025. This is despite the rapidly rising cost of capital and a global economy that looks increasingly squishy, if not recessionary.
Asia has long been the world’s primary growth driver. China, of course, was the main engine behind that for many years. However, under the iron-fist rule of Xi Jinping, its once-roaring economy has decelerated down to developed-world levels. It is now lagging even Japan. At this point, it may not be unfair to refer to it as “the sick man of Asia”, a pejorative once applied to Germany with regard to Europe. Of course, based on the disastrous impact of Germany’s energy policies, kneecapping its long formidable industrial base, it is also once again an economic basket case.
“There is some crazy stuff going on in a stock market that is trading in a bubble by any measure (other than the perspective of Wall Street which, as we all know, is in the business of convincing people to buy things they shouldn’t buy).” -Michael Lewitt, publisher of The Credit Strategist
The Yield Shield
For those who think the oversold bond market may soon rally, a high-octane way to play that potentiality would be with those specialized real estate vehicles known as Mortgage REITs or mREITs. By cherry-picking individual names, you can easily attain yields in excess of 10% such as with the only member of this sub-sector that is covered by Value Line.
Evergreen Compatibility Survey
Importantly, these are legitimate yields; i.e., they are not inclusive of return of capital, an income-boosting ploy to which many funds resort. Too often, retail investors simply look at the yield a security is generating, particularly with funds, and assume it is from net-earned cash flow. Frequently, that’s not the case and a reliance on return of capital to support the yield can, and often does, eventually lead to payout cuts.
When a security offers a yield as high as 10%, it’s safe to assume there is a decent amount of risk that goes with the high income. That is indeed the case with mREITs. As this newsletter has pointed out in the past with regard to this niche of the publicly traded real estate market, mREITs are essentially leveraged bond funds. In this case, the bond type instruments are actually mortgages, mostly of the government-guaranteed variety…
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IMPORTANT DISCLOSURES
This material has been distributed solely for informational and educational purposes only and is not a solicitation or an offer to buy any security or to participate in any trading strategy. All material presented is compiled from sources believed to be reliable, but accuracy, adequacy, or completeness cannot be guaranteed, and David Hay makes no representation as to its accuracy, adequacy, or completeness.
The information herein is based on David Hay’s beliefs, as well as certain assumptions regarding future events based on information available to David Hay on a formal and informal basis as of the date of this publication. The material may include projections or other forward-looking statements regarding future events, targets or expectations. Past performance is no guarantee of future results. There is no guarantee that any opinions, forecasts, projections, risk assumptions, or commentary discussed herein will be realized or that an investment strategy will be successful. Actual experience may not reflect all of these opinions, forecasts, projections, risk assumptions, or commentary.
David Hay shall have no responsibility for: (i) determining that any opinion, forecast, projection, risk assumption, or commentary discussed herein is suitable for any particular reader; (ii) monitoring whether any opinion, forecast, projection, risk assumption, or commentary discussed herein continues to be suitable for any reader; or (iii) tailoring any opinion, forecast, projection, risk assumption, or commentary discussed herein to any particular reader’s investment objectives, guidelines, or restrictions. Receipt of this material does not, by itself, imply that David Hay has an advisory agreement, oral or otherwise, with any reader.
David Hay serves on the Investment Committee in his capacity as Co-Chief Investment Officer of Evergreen Gavekal (“Evergreen”), registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. The registration of Evergreen in no way implies a certain level of skill or expertise or that the SEC has endorsed the firm or David Hay. Investment decisions for Evergreen clients are made by the Evergreen Investment Committee. Please note that while David Hay co-manages the investment program on behalf of Evergreen clients, this publication is not affiliated with Evergreen and do not necessarily reflect the views of the Investment Committee. The information herein reflects the personal views of David Hay as a seasoned investor in the financial markets and any recommendations noted may be materially different than the investment strategies that Evergreen manages on behalf of, or recommends to, its clients.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this material, will be profitable, equal any corresponding indicated performance level(s), or be suitable for your portfolio. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
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