The Fed rate hike is expected to come this afternoon and with that advisors have been positioning clients for every scenario that might follow any decision on interest rates; West Coast Raymond James advisor Chris Raper has a solution for taking advantage of the current investment environment.
“I try to get in synch with the markets. I’m always running plays in my head. ‘If this happens where do I need to go and if that happens where do I need to go.’ What I’m seeing right now is somewhere between 70%-80% probability according to the futures that the U.S. Fed is going to raise rates,” Raper told WP. “That tells me everybody believes it, so everybody’s already adjusted; so even if they raise rates I bet you the dollar falls – a bit. And the U.S. Fed’s going to do their best to talk the dollar down because it’s in their best interests to do that.”
All eyes remain on Washington.
“If they get weak-kneed -- and let’s remember that they have never raised rates in December -- which they have done on more than one occasion than you have to be prepared for the U.S. dollar to drop and drop significantly,” said Raper. “If that happens we’re going to have a big rally in oil and anything commodity-related.”
So, be prepared to trade (not invest) on this failure by the Fed to act.
However, longer term Raper’s more interested in taking what the markets will give him and currently he sees preferred shares as the biggest opportunity to exploit.
“I’m convinced that people that are selling their fixed-reset preferred shares right now do not understand what the guy that’s buying that is getting. You have to think of the psychology of it. These were bought in 2008-2010 and the deal might have been 2% on the reset above the five-year Government of Canada rate,” said Raper. “So when the guy bought he was thinking, ‘Five years from now surely the five-year rate will be 4% and I’ll get 6% and I’m very happy with that.’ But it turns out that the five-year Government of Canada rate is 0.8% so now all of sudden he’s getting 2.8% on his $25 and of course the markets move to current rates and preferred shares are currently being issued at 5% so the price comes down to between $15-$20.”
It’s at this point that the Warren Buffett’s of the world get greedy while everyone else gets scared.
“So, as far as he’s [buyer of preferred shares in 2008-2010] concerned he’s lost 20% to 40% of his capital depending on the deal. So, he says, ‘What’s it going to in the next five year? Zero,’ so he says get me out of this thing and throws the baby out with the bathwater,” said Raper. “So, we’ve been running around with a big basket trying to catch babies.”
And what’s Raper buying?
“We’re looking for 2.5%-3% over the Government of Canada five-year rate on the reset and we can buy them at a significant discount,” said Raper. “I just can’t see a lot of downside risk from here.”