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Markets Cheer Powell’s Taper Plan as China Issues Mount!

The buyer needs a hundred eyes, the seller not one. George Herbert

One of the lovely experiences during the year is during the holiday season. Parents now endure the time tested ritual of going on line after Thanksgiving to find their kids the one present that will bring so much joy. Naturally, the item is desired by 50 million other parents who are also motivated to give Johnny and Susie something which light up their face. For kids, unwrapping the perfectly layered paper and discovering a treasure is the highlight of the year. If you are involved with trying to make money in nearly any field of endeavor, the question of what you are getting is of similar importance, maybe more so. With so many different asset choices available, considering the reason for a purchase is something which should be given much contemplation before you plunk down your hard earned money. Let’s consider some facts to digest as part of the discussion about the nature of what you are buying.

The ten year treasury bond currently trades with a yield to maturity of 1.46%. Many corporate bonds trade with yields of 3-5%, depending on their credit history. Buyers who are looking for income are having a hard to finding it in the bond market because of these low yields. As such, they take on more risk buying less credit worthy assets like junk bonds (higher yields- think 5-8% or more). A different approach would be to look at owning real estate related assets. By law, a REIT must pay out 90% of it’s taxable net income to it’s investors. The real estate industry revolves around financing. Many larger REIT’s are able to finance their properties at quite attractive rates. The best REIT’s make sure they ladder debt so no one year has a huge percentage of debt due. Most public investors don’t have the skill set to buy distressed real estate with the intent of refurbishing it and selling it for a capital gain. Instead, they will consider what kind assets a REIT owns. REIT’s can have exposure to a variety of sectors. Clearly, owning raw land is different than owning 1000 industrial properties which have ten year leases tied to inflation. A REIT which has occupancy rates of 95-98% on commercial holdings is different than a class B or C mall which has 20-25% vacancy rates. Like the kid who receives his gift during the holidays, what exactly am I getting when I buy this asset? As part of this question, the next consideration is what price am I paying? We will leave that for another day, but clearly, lower is better than higher.

In the financial markets last week, the reassuring words of Fed Chairman Jay Powell helped ease China concerns revolving a looming default by Chinese developer Evergrande. With tapering scheduled for November or December, inflation worries might actually bring higher interest rates earlier than the Fed planned. Coupled with more government involvement in the education and gaming sectors, investors have to consider what a more aggressive Chinese government could do with respect to large US companies. Case in point is Nike, which warned about supply chain issues and strong demand. Elsewhere in China, the government decided Bitcoin and Ethereum are going to be banned. A related topic is the digital Renmimbi (Yuan) and how other cryptos might effect the government’s offering. When one crypto is legal tender, and the other is not, well, which one do you think has a better chance of public usage?

If we are going to bring up government affairs, it makes sense to consider the plight of the Biden agenda in the US. This weekend will see contentious discussions between the moderate and progressive segments of the Democratic party. It is an attempt to find a way to pass link an infrastructure bill and progressive budget which borders on the obscene. The moderates hold a great deal of leverage so it remains to be seen how it turns out. Elsewhere, AOC and the squad decided to try and hold the bills hostage to rejecting Iron Dome funding for Israel. Cortez, who famously wore the slogan of ‘tax the rich’ on the derriere of a dress she wore for a high profile fundraiser, appears to be the face of the Democratic party. Selling t-shirts and other gear echoing the tax the wealthy sentiment does seem to be a bit, shall we say, inconsistent with the current progressive platform. With the midterms a year out, Democrats control the budgeting process and a failure to extend and raise debt limits would wreak havoc on global financial markets. The next few weeks and months in Washington DC will be important for investors, both parties, and quite naturally, the world, China included.

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Thank you for reading the blog this week, and if you have any questions about investing, please email me at information@y-hc.com.

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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.

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