Hey there, folks! Tim Melvin here, and welcome back to the Benzinga Yield Report Weekly Update. We’ve returned to the trusty Lucky Turtle shirt, hoping to summon some warmer weather. Walking the dog in forty-degree temperatures has me dreaming of sunshine, and I’m sure my friends up north, dealing with snow and freezing temps, can relate. But hey, you chose to live up there—I’ll take my forty degrees, thank you very much!
Now, let’s dive into the numbers from the past week. Despite what headlines and political rhetoric might have you believe; the U.S. economy is not on the brink of disaster. It’s not perfect, sure, but compared to the rest of the world, we’re leading the pack. Just look at last week’s jobs report: 256,000 new jobs and a 4.1% unemployment rate. Wall Street and D.C. economists predicted a measly 150,000 jobs and a higher unemployment rate. The market, acting like a junkie dependent on low interest rates, panicked and sold off at the sign of a strong economy. But let’s keep it real: a strong economy is a good thing, even if it rattles the stock market.
The U.S. remains the best major economy globally. Consumers are spending—not just on essentials like food but also on durable goods and discretionary items. We’re traveling, staying in hotels, and catching Broadway shows. Yes, the bottom 20% of income earners are struggling, and we need better policies to lift them up. But for most people, jobs are plentiful, bills are getting paid, and assets are in better shape than they’ve been in decades.
Now, let’s tackle the fearmongering around debt. Yes, credit card debt is at an all-time high, but so are incomes and net assets. As a percentage of what we owe, credit card payments are tiny. Defaults and delinquencies are ticking up, but they’re coming from historically low levels. This isn’t a crisis for consumers or big corporations. Small businesses with floating-rate debt might feel some pressure, but overall, the economy’s fundamentals are solid.
Inflation remains the biggest risk. PPI numbers came in slightly lower than expected, with food prices dropping in January. However, commodity prices, especially for essentials like corn, soybeans, and livestock, are inching up. Inflation isn’t dead, and the bond market is taking notice, with yields climbing steadily. Bond prices are back in a downtrend, signaling strength in the economy but also reminding us that volatility is here to stay.
Speaking of volatility, the stock market is at precarious levels: 200% market cap to GDP, a 30x earnings multiple, and a 38 CAPE ratio. These valuations have historically led to corrections, but predicting a crash just to sell subscriptions isn’t my style. Instead, I’ll say this: embrace the volatility. When everyone else is panicking, that’s your time to shine.
In our portfolio, energy stocks, particularly natural gas, continue to shine. Natural gas is a long-term winner, supported by global demand, AI energy needs, and Europe’s pivot away from Russian energy. Companies like Coterra and Devon have seen strong gains, and we’re sticking to our bullish stance on energy infrastructure. Renewable energy is growing, but coal and natural gas will remain vital for decades. Nuclear? I’m a fan, but it’s a regulatory nightmare in the U.S. compared to China’s efficiency in building plants.
Nuclear plants are a long-term solution for clean energy, but their development in the U.S. faces significant challenges. Building a nuclear plant here can take 10-15 years or more, compared to about five years in countries like China. Regulatory hurdles are a major factor, with multiple layers of oversight from federal to local levels. Environmental impact studies, public hearings, and opposition from various interest groups add years to the process.
Costs are another hurdle. The average cost of constructing a nuclear plant in the U.S. can exceed $10 billion, significantly higher than initial estimates. The Vogtle Electric Generating Plant in Georgia is a prime example: initially projected to cost $14 billion and take about seven years, it ended up costing over $30 billion and took nearly 15 years to complete. Cost overruns stem from delays, stringent safety requirements, and the complexity of modern reactor designs. In contrast, China’s centralized decision-making and streamlined processes allow for faster and more cost-effective construction, typically under $5 billion per plant.
On the REIT front, residential mortgage REITs like AGNC and NLY are absolute standouts. These REITs offer yields of 14-15%, making them attractive even in volatile environments. Residential mortgage REITs are benefiting from stable cash flows and wide spreads, and their ability to cover dividends is a testament to their resilience. The current interest rate environment allows these REITs to reinvest at higher yields, ensuring sustainable income streams. For investors, these REITs not only provide a high yield but also offer the potential for capital appreciation as the interest rate environment stabilizes or improves.
Commercial mortgage REITs are equally compelling. Players like Starwood and KKR are perfectly positioned to act as lenders of last resort, a strategic advantage in today’s market. Starwood, with minimal exposure to U.S. office properties, has managed to sidestep one of the sector’s biggest challenges, while KKR, though more aggressive, is capitalizing on high-quality assets with strong cash flow potential. Ladder Capital, with its minimal office exposure, is another gem in this space. These REITs thrive on volatility, using it to negotiate better deals and expand their portfolios of high-quality loans. Their role as opportunistic lenders ensures they’ll not just survive but thrive in the current environment.
What makes mortgage REITs particularly attractive right now is the ability to use market volatility to your advantage. Reinvesting dividends at lower prices enhances long-term returns, and the wide spreads currently seen in both residential and commercial mortgage REITs provide a cushion against short-term fluctuations. For investors seeking stable income and growth potential, this sector is ripe with opportunity.
Other highlights include Redwood Trust, which raised its dividend even as the stock dipped. That’s a buy signal in my book. Mosaic and other farmland stocks are also catching bids, and we’re ready to add more on any pullbacks. Infrastructure plays like the NYLI CBRE Global Infrastructure Megatrends Term Fund remain compelling, combining traditional and renewable energy with toll roads and other assets.
To wrap it up, folks, this market is priced for perfection, but the world is anything but perfect. Don’t fear the volatility. Use it to your advantage. Be a buyer when others are selling, and you’ll set yourself up for a fantastic 2025. Our portfolio’s 10% dividend yield and margin of safety have us positioned for success, no matter what the headlines scream.
Thanks for tuning in to this week’s update. Let’s make this year wildly profitable and maybe even a little entertaining along the way. Cheers!