WEBVTT - Mainstay's Kudla Favors Tech in a Rate Hike Environment (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>dot Com, the radio, plus Globo Last and on your radio.

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters

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<v Speaker 1>on Katherine Cowdery. The stock market is adding to this

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<v Speaker 1>week's advanced The SMP five funded on course for its

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<v Speaker 1>biggest weekly game since March. The equity benchmarks remain higher

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<v Speaker 1>after funder Reserve chair Janet Yellen said the ongoing improvement

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<v Speaker 1>in the US economy would warrant another interest rate increase

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<v Speaker 1>in the coming months. She stopped short of giving an

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<v Speaker 1>explicit hint that the Central Bank will act in June.

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<v Speaker 1>The dollar extended its largest monthly game, which, like the markets,

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<v Speaker 1>every fifteen minutes throughout the trading day. DAL Industrial average

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<v Speaker 1>is currently up thirty eight points to tens of a

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<v Speaker 1>percent at seventeen thousand, eight hundred sixty six. SMP five

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<v Speaker 1>up eight points four tens of a percent to two thousand,

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<v Speaker 1>ninety eight, NAZDAC higher by twenty seven, I gained a

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<v Speaker 1>half per centence treating at forty nine West Texas intermediate

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<v Speaker 1>crude oil up three cents of barrel at fifty spout

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<v Speaker 1>goal down eleven dollars forty cents announced at twelve eleven

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<v Speaker 1>thirty ten year treasury down six thirty seconds with the

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<v Speaker 1>yield of one point eight five And that's a Bloomberg

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<v Speaker 1>business flash. It is time now for the t report.

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<v Speaker 1>Thank you, yes Vaneck the exchange traded funds. I was

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<v Speaker 1>actually looking at it exchange traded fund right now looking

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<v Speaker 1>at those closed and bond funds. M. Vanneck Vector's et

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<v Speaker 1>f s. Expect more from your muni's target tax exempting,

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<v Speaker 1>combined maturity and credit quality, all with low cost e

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<v Speaker 1>t f s. Visit vanak dot com slash Muni Vanack

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<v Speaker 1>access the opportunities. Let's go to Catherine Cowdery for our

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<v Speaker 1>e t F report. Bond dealers maybe using an e

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<v Speaker 1>t F as a kind of secondary balance sheet. Lisa A.

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<v Speaker 1>Brahma Witz wrote the column for Bloomberg Gadfly. Basically, this

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<v Speaker 1>is all adding up to people thinking that the dealers

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<v Speaker 1>are using these e t f s as if they're

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<v Speaker 1>their own inventories. Abrahma Witz points to the recent volatile

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<v Speaker 1>in the biggest junk bond e t F h y

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<v Speaker 1>G or the I Shares I box high yield corporate

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<v Speaker 1>bond fund. She notes that it's experienced record breaking daily withdrawals,

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<v Speaker 1>even though the broader market has encountered relatively little turbulence.

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<v Speaker 1>According to Abramowitz, in an environment where banks have stepped

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<v Speaker 1>back as counterparties, e t f s have become a

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<v Speaker 1>convenient solution for some dealers. They're saying, look, we'll take

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<v Speaker 1>a client's money, We'll use it to buy shares of

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<v Speaker 1>this e t F. You can redeem the shares in

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<v Speaker 1>kind for the underlying security. So basically you give them

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<v Speaker 1>the shares and then you get a whole bunch of bonds,

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<v Speaker 1>and then they sell those bonds to their clients. In

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<v Speaker 1>other words, some dealers are relying on h y G

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<v Speaker 1>as an easy source of bonds when clients want them.

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<v Speaker 1>That's your Bloomberg ETF report. I'm Katherine Cowderie. You're listening

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<v Speaker 1>to Taking Stock with Bill Box and Katholeen Hayes on

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<v Speaker 1>Bloomberg Radio, taking stock of the stock market, the bond market,

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<v Speaker 1>e t f s and more. As we head into

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<v Speaker 1>the Memorial Day weekend and the official start of summer,

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<v Speaker 1>how does the second half of the year look for investors?

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<v Speaker 1>What can you do with your money to make sure

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<v Speaker 1>you make a little money over the rest of the year.

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<v Speaker 1>Let's put all these questions to Dave Coula. He's CEO

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<v Speaker 1>and chief investment strategy strategist at main Stay Capital Management. Dave,

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<v Speaker 1>I'm glad you could find some time for us. Is

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<v Speaker 1>uh you get ready for the three day weekend? Absolutely?

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<v Speaker 1>Good afternoon, Kathleen. So I know that even though you

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<v Speaker 1>are probably thinking about I don't know, barbecues and all

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<v Speaker 1>the rest of it, you were listening to Janet Yellen's

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<v Speaker 1>conversation at Radcliffe Harvard University with the Harvard economist Greg

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<v Speaker 1>Mancute this afternoon. I think a lot of traders were

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<v Speaker 1>surprised that Gregg asked the obvious question, how does the

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<v Speaker 1>economy look to you right now? And what about the

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<v Speaker 1>metis coming up? What about rate hikes? She said, it's

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<v Speaker 1>appropriate to do another rate hike if the incoming data

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<v Speaker 1>support it. What do you take away from that? Well,

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<v Speaker 1>she was pretty direct in the way that she answered

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<v Speaker 1>that question, but it it confirmed what I think a

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<v Speaker 1>lot of people in thinking more recently that June or

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<v Speaker 1>July are on the table for a probable rate hike. Uh,

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<v Speaker 1>It'll either be June or July. If they want to

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<v Speaker 1>wait past the Brexit vote. But you know, that's I

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<v Speaker 1>think being mostly being priced in. FED futures have risen

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<v Speaker 1>a lot in terms of predicting that as either June

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<v Speaker 1>or July, and that's our expectation. We'll get a we'll

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<v Speaker 1>get a hike in June or July. David, what does

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<v Speaker 1>it tell you about the tone of the investors if

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<v Speaker 1>everything seems to hang on whether the Federal Reserve raises

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<v Speaker 1>interest rates five basis points? Is that any way to

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<v Speaker 1>run a portfolio well, tim The The unfortunate thing about

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<v Speaker 1>the environment we're in is, you know, it is a

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<v Speaker 1>like it or not, it's it's been largely a FED

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<v Speaker 1>fueled UH stock market. If if you look at the

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<v Speaker 1>volatility that we've had in the first quarter and really

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<v Speaker 1>over the past several quarters, UH, it seems that, you know,

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<v Speaker 1>as we look at it and analyze it, it tends

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<v Speaker 1>to be fundamental. Is a hard look at fundamentals that

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<v Speaker 1>send the market down and then the federal central banks

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<v Speaker 1>that come in and prop the market back up. And

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<v Speaker 1>we had a very good example that in the first quarter,

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<v Speaker 1>not just our FED, but what was going on in

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<v Speaker 1>Europe and maybe to a lesser extent Japan, but uh

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<v Speaker 1>it has become a very important dynamic in terms of

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<v Speaker 1>the financial markets and specifically stocks. So, Dave, when we

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<v Speaker 1>have talked to you over the last few months, your

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<v Speaker 1>position had been for sometime you're pretty bolish on stocks.

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<v Speaker 1>You turn much more cautious. Where are you now when

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<v Speaker 1>you when you look at the stock market and the

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<v Speaker 1>prospects for further gains, for treading water or actually some

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<v Speaker 1>kind of crustioner sell off. But if we look at

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<v Speaker 1>where we are and where we've come from, we're now

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<v Speaker 1>in the eighth year of the second longest bowl market

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<v Speaker 1>in the history of stocks. You can't go further probably,

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<v Speaker 1>uh in. And as we've been talking about, you know,

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<v Speaker 1>people ask the question, are we still in a secular

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<v Speaker 1>bull market? There was a question, did may have last

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<v Speaker 1>year start a new bear market? Well, we're only a

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<v Speaker 1>couple of percent away from new highs, so we might

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<v Speaker 1>start the clock over on that anyway. But but what

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<v Speaker 1>we believe is we're in this trading range and it's

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<v Speaker 1>and it's larger that tug of war between the Fed

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<v Speaker 1>and fundamentals, as we like to say, and then trading

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<v Speaker 1>range of the last two years has been five we're

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<v Speaker 1>bumping up against on the S and P five hundred

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<v Speaker 1>right now, so we're at high end of that trading range.

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<v Speaker 1>And so we think for that reason, uh, it makes

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<v Speaker 1>sense for investors to look at their portfolio. UH, look

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<v Speaker 1>at the games, you know, with this run back up

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<v Speaker 1>and with this run over the past seven years plus.

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<v Speaker 1>Uh and and a little bit of caution we think

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<v Speaker 1>is prudent. At this point. We're long into this bull

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<v Speaker 1>market and we're at the top end of the trading

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<v Speaker 1>range we've had the last two years. So David, you're

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<v Speaker 1>looking for any beat up assets. I mean, for example,

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<v Speaker 1>are you looking for any oil or energy companies to

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<v Speaker 1>add to the portfolio. Well, I think some of the

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<v Speaker 1>areas that are interesting in this environment that are still

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<v Speaker 1>on the higher beta side. One is technology. Uh. And

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<v Speaker 1>it's interesting to know people think about financials, which are

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<v Speaker 1>also interesting through here with the with the feed hiking rates.

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<v Speaker 1>As net interest margin improves, they become more attractive. But

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<v Speaker 1>actually technology is the sector that tends to do the

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<v Speaker 1>best of all the industry sectors when the feed is

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<v Speaker 1>hiking rates. The reason for that is it's usually uh,

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<v Speaker 1>in coincidentally or accompanied by a strong economy. When we

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<v Speaker 1>have a strong economy, we've got capex cycles underway, which

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<v Speaker 1>is good for technology. Is industry is UH spending that money?

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<v Speaker 1>So technology for higher beta names. We like financials attractive

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<v Speaker 1>through here, but you know, still looking for those areas

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<v Speaker 1>we diversify into to reduce risk and overall volatility in

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<v Speaker 1>the portfolio as well. A guess on A today is

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<v Speaker 1>very keen on closed and bond funds, some of them

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<v Speaker 1>yielding about ten Is that something that you are watching

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<v Speaker 1>investing in, Well, we're typically using more E t F

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<v Speaker 1>E T N s, open end funds. We'll look at

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<v Speaker 1>closed and we'll look at close to in bond funds,

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<v Speaker 1>you know where they are relative to trading in A

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<v Speaker 1>at a premium. From time to time. We do like

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<v Speaker 1>in the area bonds. We still like preferred treasury inflation

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<v Speaker 1>protected securities look good through here, and even e M

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<v Speaker 1>debt has struggled a little bit more recently. But what

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<v Speaker 1>we've seen is is in the pullbacks we move on

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<v Speaker 1>to UH two more strength. So there's certainly some areas

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<v Speaker 1>areas within bonds with the threat of the FED raising

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<v Speaker 1>rates that are attractive, and that's because sovereign debt around

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<v Speaker 1>the world. Is the yields are so low that will

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<v Speaker 1>continue to put pressure on bonds here in the US

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<v Speaker 1>on the intermediate long end of the curve. David, you

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<v Speaker 1>have any interest in investing in gold or gold mining shares.

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<v Speaker 1>We've had some positions in both gold and gold mining

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<v Speaker 1>shares over the past several months. Gold bullion g l

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<v Speaker 1>D is h F. You used to play that directly. Uh,

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<v Speaker 1>it's you know, the problem with with gold we've seen

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<v Speaker 1>over the past week or several days here. Uh. You know,

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<v Speaker 1>when when the FED funds rate is at zero, industrates

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<v Speaker 1>are near zero, bonds are yielding near zero, it's okay

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<v Speaker 1>to hold a brick of gold that has no yield.

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<v Speaker 1>But as we look towards yields increasing, the Fed raising rates,

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<v Speaker 1>yields increasing on bonds, Uh, they don't look quite as attractive.

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<v Speaker 1>But is a diversifier and a portfolio. Precious metals from

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<v Speaker 1>time to time make a lot of sense because they

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<v Speaker 1>have a low or even negative correlation with stocks and

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<v Speaker 1>low correlation with bonds. Uh. So you know, we think

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<v Speaker 1>in light doses that can make sense from time to time.

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<v Speaker 1>So as for any particular ets, any fund that you

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<v Speaker 1>think is of one people could take a look at. Now,

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<v Speaker 1>what is a good prospect? Give us a couple of

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<v Speaker 1>you have them? Sure? So one way, Like I talked

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<v Speaker 1>about reads, you know in the areas of financials and

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<v Speaker 1>reads Global X super Dividend Read which is s R

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<v Speaker 1>E t UM. We we like reads through here we

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<v Speaker 1>have a high dividing, high yielding red with its dividen

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<v Speaker 1>yield currently at about seven, diversification geographically, and again reads

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<v Speaker 1>are a good bond proxy without raids going up quickly.

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<v Speaker 1>We think reads continue to look good UM and and

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<v Speaker 1>we like as we said, uh, you know an easy

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<v Speaker 1>way to play technology XLT, Financials XLF. We think that

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<v Speaker 1>there's an opportunity there. Thank you very much for spending

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<v Speaker 1>time with us. David Kudla he is the founder and

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<v Speaker 1>the chief executive officer and chief investment strategist for Mainstay

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<v Speaker 1>Capital Management is based in Troy, Michigan, helping to manage

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<v Speaker 1>more than two billion dollars of customer assets, and you

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<v Speaker 1>can follow him on Twitter at David Underscore Kudla k

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<v Speaker 1>U d l A. You're listening to Taking Stock, I'm

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<v Speaker 1>pim Fox, my co host Kathleen Hayes, and we take

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<v Speaker 1>you through to the close of trading. Next