Tech Top? Plus, More on Utilities and Inflation Hedging

While it certainly appears that on a longer-term basis, tech is the best-positioned sector in the years ahead from the standpoint of growth, current free cash flow, and chart positioning (with the March 2000 high of 5100-ish on the NAZ still a long way off), my reading of sentiment is that the pros have started selling to the little guys.  Now, the legitimate giant growth stock of our era, AAPL, is so cheap on a growth-to-P/E basis that it may be immune, but most of the NAZ is not doing well operationally (partly due to Apple).  Thus I'm suspicious that this second great run of tech stocks in this calendar year "needs" to, at best, consolidate.

Yet my call that utilities (income) "should" outperform tech may or may not be true, given the ramifications of QE to infinity.  After all, the premise of owning a high P/E, slow- or no-growth stock is that the dividend is desirable no matter whether the stock price rises.  In this regard, the aggressive Fed rhetoric has forced me to reduce utilities' weighting.  Income vehicles have simply performed poorly during QE1 and QE2.  Why it should be different now, short-term moves aside, with a more aggressive QE policy, is unclear.

The Fed may have engaged in as important a policy initiative with QEternity as did the Volcker Fed in October 1979 with its new policy of restraining the money supply growth rate to fight the inflation that prior Feds had helped cause.

So as Lord Keynes said, when the facts change, so must our minds, and our strategy.

Interim pullbacks notwithstanding, it looks as though the U.S. its post-Depression history of rapid growth in the money supply in an environment of negative interest rates as far as the eye can see.

Historically, the more "negative" that interest rates are relative to price inflation, the faster gold and silver (and oil) prices rise.  All other asset prices have been less predictable, including mining stocks.

Back into the inflation hedge pool big-time.

Utility Stocks Well-Positioned for the Short Term and Beyond; But Also Bullish on Cheap Inflation Hedge Plays in the Stock Market

A few months ago, I was (half-)joking that utility stocks were turning into the new mo-mo stocks.  Well, the NAZ stocks as usual have turned into what they so often are, and have out-performed the XLU and such stalwarts as Con Ed by a massive amount lately.  This tends to reverse.  Importantly, Treasury yields are stubbornly holding at very low levels.  The Treasury bond buyer is giving up quite a lot of yield versus utility stocks that both yield more and also, ultimately, provide a degree of inflation protection. 

Last year my Treasury holdings peaked at about 30% portfolio weighting, mostly in very long-term zero coupon bonds.  This has now gone to zero (as disclosed about 203 months ago), and I have been adding a bit more utilities to get to about a 15% weighting. 

There are also, though, a growing number of undervalued inflation hedges in the portfolio, as I think the ultra-ultra-low interest rate scenario in the U.S. is looking a bit bizarre.  But I think the simpler play is for a convergence of interest rates between Treasurys and high quality muni bonds and utilities, with the former yields moseying on up over time and the latter moving on down-- potentially explosively as occurred last summer with Treasury yields.  If you blinked, you missed the move.

Over time, I am increasingly bullish on inflation/value stocks such as HP and AGU.  AGU is of interest in that it is challenging a multi-year triple top with the catalyst of a New York-based hedge fund (Jana Partners) looking to force a restructuring.  At 10X earnings with strong finances and a global reach, this one looks very interesting.