By Anthony Mirhaydari
The market continues to grind higher, comforted by the Fed's cheap money pumping and the multi-month reprieve from the budget showdown in Washington.
But it's not all rainbows and lollipops. Investors seem to be growing increasingly concerned about the health of the global economy.
China, once more concerned about rising inflation, is clamping down on its short-term money market. Recent U.S. economic data has been disappointing to the downside, from the September jobs report to Thursday's flash manufacturing PMI. Japan's trade deficit hit a fresh record as a weak yen boosts the price of food and fuel imports.
As a result, for the first time since the Fed started talking up a tapering of its ongoing $85 billion-a-month bond buying stimulus in May, long-term interest rates are falling hard and fast. The 10-year Treasury yield has dropped from 3% in September to 2.5% now. (We're still far above the 1.7% low seen in May, however.)
This is being driven both by a softening of the data, as well as indications from the Fed that its tapering plans have been pushed back to early 2014, or perhaps later. They know that the job market remains weak. They know that the fight over taxes and spending between President Obama and Congressional Republicans is far from over. And they know that the housing market is already suffering from the bump up in mortgage rates.
In response, investors are digging up the old "reach-for-yield" playbook that served them so well over the last few years, particularly in 2011 as interest rates collapsed.
Corporate bond yields are falling in sympathy, boosting bond prices. And this is also boosting yield-sensitive bond-like stocks, such as mortgage REITs and utility stocks. Real-estate stocks are also benefiting from the positive impact lower long-term interest rates will have on the housing market.
Cyclical, economically-sensitive stocks, on the other hand, are suffering.
I've recommended clients take advantage by playing Treasury bonds via the leveraged Direxion 20 Year Plus Treasury Bull 3x /zigman2/quotes/209018185/composite TMF +3.73% . The position is up more than 9% since I added it to my Edge Letter Sample Portfolio on Sept. 23. If you're weary of leverage, consider the iShares 20+ Year Treasury Bond /zigman2/quotes/206026314/composite TLT +1.19% instead.
For real estate, I've recommended the ProShares Ultra Real Estate /zigman2/quotes/208407935/composite URE -0.28% as well as individual stocks like Duke-week Realty /zigman2/quotes/200302802/composite DRE -0.28% .
Disclosure: Anthony has recommended TMF, URE and DRE to his clients.