Wealth Management

In a piece for Bloomberg, Michael McKenzie and Ye Xie discuss recent economic data which has dispelled the notion that the economy is on the verge of a recession. This has resulted in traders pushing back their timeline of when the Fed will start its rate-cutting cycle and increases the odds that the Fed will continue hiking rates.

Both developments are bearish for fixed income. YTD, the asset class has enjoyed strong gains but this was, in part, due to expectations that inflation and economic growth will continue trending lower, leading to a pivot in Fed policy.

In addition to these catalysts, inflows into fixed income have been strong as traders look to lock in higher yields. Yet, these yields are here to stay at least for some time given the stickiness of inflation and the resilience of the labor market and consumer spending. 

Clearly, the market has been caught off guard as well. This is evident from the huge jumps in yields on short-term Treasuries following better than expected jobs reports in recent months. Additionally after a short blip higher, jobless claims are once again trending lower, indicating that while turnover has increased, the economy continues to add jobs. 


Finsum: Fixed income has performed well YTD, but the asset class’ gains are eroding as the odds of a recession and imminent Fed rate cut cycle have diminished. 

In an article for SmartAsset, Patrick Villanova CEPF discusses the pros and cons of investing for retirement in TIPS, Treasuries, and annuities. All of these are methods for retirees to generate income during their retirement. And, this is increasingly needed given that traditional pensions are being phased out of existence. 

TIPS are treasuries that are designed to protect against inflation. In essence, the yield is fixed, while the principal varies based on inflation. Some will create income through buying TIPS of different maturities, creating an income stream that is indexed to inflation. 

An annuity functions similarly but without the inflation component. Essentially, it’s a way to turn cash into an income stream. Treasuries are the most straightforward vehicle for saving, and it’s the benchmark that other methods are compared against. 

According to Villanova, the best strategy ultimately depends on a retiree’s lifespan and the rate of inflation. Assuming a moderate inflation rate of 2.5%, Treasuries would outperform annuities and TIPS slightly. If inflation returned to levels seen in the past decade, then Treasuries would perform the best. If inflation were to average 5%, then the TIPS strategy would handily outperform Treasuries and annuities.

However, annuities would handily outperform in the event that a retiree lives longer than 20 years. Given that the income of annuities is fixed, the value of this income would be diluted by higher levels of inflation. 


Finsum: Annuities, TIPS, and Treasuries are 3 of the most popular methods to create income during retirement. Patrick Villanova compares and contrasts each to see which is the best strategy for retirees.

 

In RealMoney, Jim Collins, the founder and President of Excelsior Capital, discusses his DEATH model portfolio which bets against hype-fueled companies via short-selling and put options. 

The portfolio has a 74% gain over the past year, even managing to hold onto impressive gains despite recent strength in equities. It has a simple construction of 10 equally weighted positions. The guiding principle behind the company is to bet against shaky companies with lofty valuations. 

Some examples include Teladoc Health and SelectQuote which were among the best-performing stocks in 2020. However, this resulted in valuations that reached absurd levels. Collins believes that one factor in these stocks’ gains were inflows into Ark Investments’ family of funds as these were two of its largest holdings. Now, these stocks are falling back to Earth in terms of valuation and stock price, while Collins sees more downside. 

Collins believes that these short-selling opportunities emerge when analysts and fund managers stop applying basic principles of valuation to their holdings. He cites Peloton as an example given its massive valuation that was similar to a software company despite the company being in the business of selling exercise equipment which is historically a competitive, low-margin business. 


Finsum: Even with recent strength in equities, Jim Collins continues to see opportunity on the short-side. His DEATH model portfolio is constructed to bet against 10 of the most hype-fueled companies in the market. 

 

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