Generating Rising Income from the Global ‘Reflation’ Trade

Bryan Perry

Bryan Perry has three decades of experience inside Wall Street. Bryan’s experience has given him a unique approach to high-yield investing.

This year, the stock market is off to a red-hot start and investor expectations are rising on the hopes of several major themes taking hold that will positively impact asset valuations.

Factors favoring market gains include improving economic growth and potential reductions in tax rates for corporations and individuals. President Trump is targeting tax rate cuts, infrastructure spending, repatriation of capital from corporations’ offshore accounts, deregulation, fair trade, health care reform and immigration reform.

This is nothing short of a massive undertaking. But when considering the long-term benefits of such an aggressive agenda, it does not surprise me in the least that the equity markets are trading firmly higher on the notion of a global ‘reflation’ of economic growth as measured in gross domestic product (GDP), which leads to higher asset valuations.

Focusing first on rapidly growing the economy would enhance the president’s public standing as he seeks to win support on other, more divisive and politically charged agenda items. Such an approach would make smooth the Trump transition — because everyone loves a strong economy — and this is where he can best demonstrate leadership. Forwarding a pro-business tax plan coupled with initiatives for slashing government waste is falling on receptive ears.

Trump is a businessman, and running the government like a well-oiled, highly efficient company is not feasible in its purest form because of broad and growing entitlement programs, which are necessary. However, getting leaner and meaner on the non-entitlement areas of a bloated federal government is fully doable. As sobering as that might sound to hundreds of thousands of federal bureaucrats, the reality is that some might discover that their time in those jobs may be winding down.

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The market seems to sense that this is the rational course Trump and Congress will take, as the wait-and-see period during the first weeks of 2017 gave way to a buying binge led by improving jobs data. Strong economic data is a non-partisan green light for the stock market and has set in motion the next leg higher in the current rally, with the Fed taking a more hawkish tone based on the “good” news for the U.S. economy.

With the reflation trade on, income investors have to consider how best to benefit from the tailwinds of a powerful combination of faster economic growth and the Trump agenda, which is moving from the drawing board to Capitol Hill. This is no time to be a spectator, but rather a proactive income investor taking full advantage of this rapidly changing investment landscape. To that end, I present a blueprint plan for successful income generation and appreciation of capital.

The major high-yield themes to embrace for 2017 and beyond include investing in:

  • Closed-end funds focused on infrastructure
  • Floating-rate business development companies (BDCs) and commercial finance real estate investment trusts (REITs)
  • Hotel, gaming, office REITs, data center and cell tower REITs, industrial REITs
  • Short-term corporate and distressed credit debt funds
  • Private equity firms and big-cap banks stocks
  • Covered-call, closed-end technology funds
  • Liquefied Natural Gas (LNG) master limited partnerships (MLPs)
  • Select big-cap integrated energy and gas pipeline/transfer/storage/logistics MLPs

There are currently 27 holdings in my model Cash Machine portfolio sporting a blended current dividend yield of 9.1%, which is remarkable given that several components have rallied by double-digit percentages since the first of the year. Of the 27 holdings, seven of them pay out monthly, with the balance of the portfolio paying quarterly. When fully invested, the portfolio will contain a total of 33 positions, and no more than 3% of capital will be allocated to any single recommendation.

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It is my view that these themes will gain momentum as the year progresses and that the income holdings recommended in my Cash Machine high-yield advisory that are tied to these themes will have a banner year. Almost across the board, the three Cash Machine portfolios have enjoyed a strong start out of the 2017 gate and continue to build on those early gains. With earnings coming in to bolster those holdings, there is growing reason to expect several big winners this year that will give us much to crow about as well as take to the bank. You can find all about how to put these powerful 2017 investment themes and high-yield assets to work by clicking here and putting in place an action plan that has your investable capital dedicated for income as a first and foremost priority.

In case you missed it, I encourage you to read my e-letter column from last week about the advantages of employing bull-call spreads.

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Baltimore-based investment firm T. Rowe Price is advising investors to underweight stocks and overweight bonds for the first time since 2000. The conservative investment company’s Asset Allocation Group acknowledged that the U.S. economy may improve under new “pro-growth policies” but elevated equity valuations fall short of adequately reflecting downside risks. This modest tactical shift provides investors with the potential to add equities in the future at attractive valuations. Ro

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