By Brad Brigg
I recently sat down with Andy Obermueller, Chief Investment Strategist of Fast-Track Millionaire , for an exclusive interview about a wide range of topics such as cryptos, interest rates, and pot stocks.
StreetAuthority Daily: Let’s start off with some fun… You recently advised your readers to sell their stake in ripple. Did Buffett make you break up with cryptocurrencies?
Andy: I see what you did there. I suppose you’re referring to Buffett’s comments at the annual Berkshire Hathaway shareholders meeting.
SAD: Yeah, he said something like bitcoin being “rat poison.”
Andy: Classic Buffett.
Look, you know the Oracle of Omaha is not prone to loose talk or rants, and I think his assessment is worth paying attention to. He’s not saying that bitcoin is prone to crash or even that it’s going to, he’s simply arguing that, like gold, cryptos are speculative and, importantly, that they are not a productive asset.
Buffett wants a return on his money. If one had bought gold at the time of Christ, he opined, the compound annual growth rate to now would be infinitesimal. He’s right. For the time being, I think we’re far better off with productive assets, and that’s why I exited ripple at a gain recently. I’d rather park those dollars in one of our aggressive growth picks and pick up a disproportionate gain over time — like we’re doing with our pot stock pick, MedRelief.
SAD: So that’s it, you’re breaking up with bitcoin. (I’m kidding…)
Andy: OK you got me. You know I’m a huge fan of Mr. Buffett and greatly respect his opinion. But it is worth noting that Buffett is something of a technophobe. Others on Wall Street either have or are in the process of embracing crypto in a huge way. So while I’m glad that we took profits on ripple, I have my own ideas and I’m not by any stretch of the imagination giving up on this space. I will evaluate each opportunity as it comes our way and make the best recommendation I can using the best information available. Stay tuned.
SAD: OK fair enough. Let’s switch gears to something more serious. As you know, the 10-year Treasury yield recently crossed the 3% mark. Why was this important?
Andy: The 10-Year has been in the 2% zone since 2011, which is a very long time on Wall Street. Remember the most dangerous words an investor can say: “This time things are going to be different.”
We’ve gotten accustomed to cheap money, such to the point that a lot of people have sort of forgotten that rates move higher sooner or later — especially in a good economy, which we’ve got.
While stock investors tend to ignore fixed-income securities, they are nevertheless important — there’s a lot more debt than equity in the world. Rising interest rates are worth paying attention to because rising rates lure money out of the market.
SAD: Explain that for our readers. I don’t think a lot of investors understand just how much of a drain rising rates can be on the stock market.
Andy: Two reasons: First, borrowed funds account for a huge portion of Wall Street’s daily trading activity, and consequently traders tend to recalibrate their strategies when the cost of borrowed funds rises. Second, if the cost to borrow rises, the reward for lending does, too. If a certain yield were guaranteed — and the 10-Year Treasury is as close to a guarantee as one can come — then the ever-present potential for downside market risk becomes less attractive to some investors. The talking heads on the financial channels call this a “flight to quality.”
As these two separate factors play out in one-two punch fashion, they tend to feed each other. Bottom line: Absent some sort of terrible global unrest — God help us — if there is a factor that’s likely to end the long bull run, my best guess is rising bond yields will be it. To be sure, stock traders live in the bondholders’ world.
SAD: So what happens next?
Andy: I’ve said before and I still think that the earnings multiple of the market, which today is elevated by historical standards, will hold until bond yields inch up toward 4%. Make no mistake: That day is approaching.
At its most recent meeting, the central bank left rates unchanged, which was expected. But observers also think the Fed will raise rates twice more this year, and a CNBC survey said 86% of economists expect another increase in June.
That’s the past. What’s next? My guess is the board of governors is most concerned with inflation. Unemployment is historically low, and data released by the government recently showed that wages and prices are increasing. That’s a good thing for working families — but one can have too much of a good thing. The Fed’s game plan seems to be a long, slow rise toward higher rates to contain inflation. That’s all there is to it.
As far as my readers, well, you know Fast-Track Millionaire aims to be ahead of the crowd. Always! I don’t want you to wait until interest rates are tickling the 4% threshold to think through how you will respond to this — by then it likely will be too late. Rising yields tend to mean lower stock prices, and the S&P 500 is flat for the year, as I write. The algorithms are always watching — you can tell that by looking at the spike in sell volume when the market slid when the yield rose above 3%. With all that in mind, we need to think rationally about the best course of action.
SAD : So what are you telling your readers to do if rates keep rising?
Andy: Here’s my best recommendation… If the yield on the 10-Year hits 3.7% (up from the current 2.95%) and stays there for three trading sessions, I think that’s close enough to 4% to merit action. At that point, the time will have come to decide whether to keep in place the funds allocated to market. Conservative accounts might well want to move some or all of the 80% portion of their portfolios allocated to the broader market into investment-grade corporate bonds. I, for one, would rather latch onto a modest rate of growth — say 5% — than to risk losing 10%, 25% or more if the market turns south for an extended period. Remember, strong investment accounts aren’t just measured by how well they do when stock prices are rising — they really shine when they can manage any sort of gain in a down-trending market.
When the tide goes out, it’s not just going to impact your S&P fund, it’s likely going to affect your investments across the board, including companies in the Fast-Track portfolio. That’s no reflection on these companies, it’s simply a nod to the macroeconomic reality of rising rates. I don’t like to surprise my readers, I want them to be prepared for me to suggest that they buy or add to some of those stocks as they are falling. Right now, that seems easy. “Sure,” you think. “I can do that.” But the fact is, it’s very difficult psychologically for investors to hit “buy” when stocks are falling. You must counter this with hyperrationality, discipline and focus.
Practically speaking, I’m telling my readers to inventory their assets. Assess how you can best move from equities to fixed income. Determine what percentage of your assets you will allocate to each risk — that is, how much you will move from equities to bonds. Concurrently, remind yourself why you bought the individual stocks you own — if that has not changed, don’t sell when the price falls — BUY. Research low-cost investment grade bond funds and choose two. Then write your plan and stick to it, knowing and accepting the fact that neither you nor I will ever be able to sell every top and buy every bottom.
SAD : OK, last question. Your subscribers are sitting on a pretty big gain on your pot stock recommendation (about 43% in two months, at last count). What can you tell us about the company that’s acquiring this pick?
Andy : Nice try. I’m not going to give away the name of the pick, because it wouldn’t be fair to my Fast-Track Millionaire subscribers. (I’m sure they can probably figure it out anyway, but I’m not going to make it easy.) Suffice it to say, we’re going to add the acquiring company to our Fast-Track portfolio.
It’s a fun exercise to create an ideal cannabis company in your mind and then go looking for it. It’s actually a job that I might be the best at given my experience in the cannabis space and in evaluating the potential of cutting-edge companies. What amazes me is how closely this pick matches the ideal company I had in my head. With all those factors in mind, I think it’s is an obvious long-term winner that we simply cannot ignore.
SAD : Fair enough, you know I had to try. Thanks for taking the time, Andy.
Andy : You bet, let’s do this again soon.
Editor Note : I want to thank Andy once again for taking the time for this quick Q&A. I hope you found it as fascinating as I did.