Happy Friday folks! Instead of waking up to the news that the aggressive rate hikes towards a ‘market neutral’ overnight rate have been working, we were met with an inflation print far above economists' expectations at a 40-year high of 8.6%! Now is the time to allocate tactically, gone are the days of set it and forget it passive ETF investing and in are the times of thematic, global macro strategies with such funds outperforming 65% of other investment styles during Q1 2022. Read on for our long-form investment pick recommendation to bear in this market!
“Success is not final; failure is not fatal: it is the courage to continue that counts.” – Winston Churchill
Market Talk
The week was going well, buyers were pulling their weight and the market traded sideways, with sellers having been unable to take the S&P 500 below that key 4000-point level for about two weeks now…that all came to a sharp end as the U.S. Bureau of Labor Statistics released the monthly CPI figure with prices increasing 1% for the month of May. This huge risk-off catalyst shocked the market as economists were predicting the more aggressive rates and tone of the Federal Reserve to have worked, therefore now leaving investors uncertain and over a quarter more bearish than last week…
Long: AGNC Investment Corp. (AGNC:NASDAQ)
For our long-term pick this week, we have decided to feature AGNC Investment Corp, which operates as a mortgage real estate investment trust (MREIT) in the United States. For starters, a mortgage REIT aims to borrow money at a low, short-term lending rate and uses the capital to purchase higher-yielding assets in the long term, such as mortgage-backed securities (MBSs). The net interest margin between the yield on the assets they’ve invested in minus the average borrowing rate is the mortgage REIT's return - if one can monitor the difference, there won’t be many surprises in the company’s profitability.
Taking a look at the chart above, the yield curve stayed relatively flat through 2020 and 2021 - however, history has shown these headwinds to only be temporary as the economy spends far more time expanding than contracting, therefore, a steepening yield curve tends to be the case unless we are experiencing a recession. Now, not only is the yield-curve steepening, but AGNC has invested 97.5% of their $68.6 billion portfolio into agency MBSs, providing plenty of protection and also giving AGNC the opportunity to leverage their assets when a buying opportunity like this presents itself again. Moreover, the one-year average dividend yield for all publicly traded U.S equity REITs was 2.7% at the end of April. AGNC’s? 12.05%! - and they’ve been able to hold above 10% for the last while as their 5 Year Average Dividend Yield stands at 11.30%. Moreover, the technicals also back this narrative as AGNC has obviously had a rough past 2 years. However, there are signs that show a reversal is in the books for the stock as investors begin to flock toward companies that have suffered from these treasury rates over the last couple of years. The most significant signal - a double bottom. This pattern is widely used by traders that follow a major or minor downtrend in a particular security and signals the reversal and the beginning of a potential uptrend.
Chart of the Day - US 2-Year Government Bond Yield Breakout!?
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