Making Sense of Conflicting Data

Friday’s jobs data is showing a big pop of 295,000 new non-farm payroll hires — well above the Wall Street consensus of 240,000 such jobs. The results put bond investors in full retreat, with the 10-year T-Note yield rising to 2.2% while the U.S. dollar index (DXY) reached a fresh multi-year high. The unemployment rate fell to 5.5% from 5.6% and put Fed watchers on the edge of their chairs wondering if Fed Chair Janet Yellen and her colleagues are behind the curve.

One would think that the bump in employment data would provide some relief to commodities, as more jobs historically are a precursor to more demand of just about everything. When the employment data crossed the tape before Friday’s opening bell, investors and traders who were taking long positions in commodities must have felt an early sign of relief, and why shouldn’t they? But the prices of oil, copper, gold and just about every other hard asset class did not rise in response. Instead, they traded lower on the news, with some commodities hitting new lows for the current cycle.

When looking at global gross domestic product (GDP) and how much of a lead the United States carries within the big macro picture, it is clear that what is good for America is even better for the rest of the world. U.S. GDP drives the global bus when it comes to generating import and export growth and, thankfully, it’s in cruise control. It is exciting to postulate that following a bitter winter where the greatest concentration of population is in the frozen tundra of the Northeast, employers were working overtime to bring on new talent at a record pace.

The quandary facing the Fed is whether the job market is in a stealth bull market or whether it is a precursor to other yet-to-be-seen inflationary trends. To date, the larger risk to global growth has been deflation, prompting massive quantitative easing from central banks in China, Japan and most recently Europe. History shows that job growth is a lagging indicator at the end of an economic expansion, so it’s important for investors not to get their knickers in a knot over a one-month jump in what are mostly low-paying jobs. In the wake of $2/gallon gas prices, retail sales for what is supposed to be the best selling season of the year have missed forecasts by a country mile.

When the market dives on a robust jobs number, the “sell first, ask questions later” reaction simply offers more rational investors the very dip they have been patiently waiting for and a chance to buy great assets that have been caught up in a momentum-driven market. I welcome the pullback as a long-overdue cleansing of emotions that the current rally is oblivious to consolidation.

A powerful move in the dollar that is hitting new highs only makes domestic assets that much more in demand. Thus, using any short-term weakness in the market to initiate and add to core positions will be well rewarded down the road. For high-yield income investors, legging into assets that have a floating rate feature is how to take full advantage of a broad-based sell-off.

If the Fed is going to move up its plan to raise short-term interest rates, such a move simply would translate into higher income for adjustable rate real estate investment trusts (REITs), business development companies (BDCs) that issue floating rate loans and financial companies that will earn more from lending. I noted in the latest Cash Machine Weekly Hotline that the great rotation out of fixed income was not far off the horizon, but I honestly didn’t expect it to come in early March, and yet here we are.

Fortunately for Cash Machine subscribers, we’ve been preparing for this higher rate cycle for months by positioning our investible capital into asset classes that are sensitive to economic growth, inflation and rising interest rates. Most of the smartest market participants have no idea if the Fed has it right or whether the central bank is behind the curve, but what I do know is that a 1% move lower in the major averages shouldn’t spook anyone out of the market. Short-term dislocation is simply a wake-up call for bond investors.

The right action to take is to align your portfolio with the landscape. To that end, consider a stock like Pennant Park Floating Rate Capital (PFLT), a lender of capital to middle-market private companies in the form of floating rate senior secured loans. On March 5, the company announced an increase in its monthly distribution to $0.095 per share from $0.09 per share, effective immediately.

This is how income investors win in what may be a potential rising-rate market. With the shares of PFLT trading at $14, the current yield is 8.2% and the stock is trading within a half point of a new multi-year high. If rates continue to ratchet higher, PFLT will continue to raise its payout and the share price will invariably trade higher. The big question is whether investors will not be complacent with their eroding fixed income assets and get busy repositioning their income-based capital to where dividend-paying capital is best served. It is our mission at Cash Machine to make sure that happens.

In case you missed it, I encourage you to read my e-letter column from last week about high-yield alternative asset classes. I also invite you to comment in the space provided below my commentary.