Gleanings
Thanks to a subscriber for this report from Raymond James which may be of interest. Here is a section:
Another theme we think is surfacing is inflation driven by Trump's potential fiscal stimulus program. Hence, a return to "real assets," or stuff stocks, should have an increased weighting in portfolios. Verily, the price of real assets, relative to financial assets, is at historic lows. Consequently, investors' mindsets should be focused towards higher inflation, higher interest rates, and reduced disinflation. As an example, China's PPI hooked up in September for the first time since 2012. We believe the same thing is happening here in the U.S.
Accordingly, REITs, timber, agriculture, collectibles (wine, art, diamonds, precious metal coins, farmland, etc.), and MLPs should have an increased weighting in portfolios, in our view. To this MLP point, we recently met with one of the savviest MLP-centric portfolio managers on Wall Street, who believes the midstream and downstream MLPs are ripe for a number of good years going forward. He suggests the bad news is in the rearview mirror: the capital markets are wide open for the MLPs; we are consuming an extra 1 million barrels of crude oil per day, and the MLPs traded at around a 30% discount relative to par.
The MLP sector is highly leveraged as a rule so it collapsed when oil prices fell. By the same token it is also benefiting from the rise in oil prices and with the high yields evident, particularly in the pipelines sector, it now offers upside leverage.
The Alerian MLP Total Return Index hit a new recovery high this week and a clear downward dynamic would be required to question medium-term potential for additional upside.
Investors are beginning to contemplate what rising inflation is going to mean for their investments. Right now there are expectations for future inflation but it has not yet reacted to proposed fiscal stimulus or expected tax cuts. However bond yields have reacted, which means that yields are well above inflation rates at present. That represents a headwind for real assets like precious metals which do best when inflation is outpacing interest rate hikes or in simpler terms when people lose faith in fiat currency.
Gold prices have been falling since July but the decline has been particularly persistent since early November. The progression of lower rally highs remains intact and a rally of more than $25 will be required to at least check the consistency of the decline.