Get Ready to Profit from Higher Rates and a Tech Sell-Off

Irving Kahn was one of the oldest active investors.

Born in 1905, Kahn began his career on Wall Street in 1928. He continued investing up until the ripe old age of 108.

He was probably more surprised than anyone else by his longevity. And with 86 years of personal investment experience, you could say Kahn was the ultimate long-term investor.

In a 2002 interview, when Kahn would have been in his late 90s, he said:

I’m at the stage in life where I get a lot of pleasure out of finding a cheap stock.

One of the best times in Khan’s investment career was during the worst times for most other investors. The first trade he ever made was shorting a copper mining company, just months before the 1929 Crash.

And as stock fell more than 50%, Khan had a field day, buying financially healthy companies that were depressed by indiscriminate selling.

Khan told Telegraph Money:

In my early days, the equities market was dominated by speculators looking for tips. The only serious investing was done by a few large institutions that stuck to bonds and shares in well-established companies.

And it’s those well-established companies that helped Khan clean up when all prices were down. While everyone was losing cash, Khan nearly doubled his money.

You might soon have the same opportunity.

While we probably won’t see a 1929 style crash this year, a few well-established companies might go on the biggest sale in years.

Let me give you an example of how you could profit.

Could the biggest stocks fall?

You may have noticed the US Federal Reserve lifted rates yesterday. The Fed board unanimously passed a rate hike from 1.5% to 1.75%.

New head of the Fed Jerome Powell, reasoned that because the US economic outlook has strengthened, it would be proper to edge interest rates higher.

The Fed has also increased their view on economic growth for the next two years. They now believe the US economy will grow by 2.7% this year and 2.4% in 2019.

You may have noticed the US Federal Reserve lifted rates yesterday. The Fed board unanimously passed a rate hike from 1.5% to 1.75%. 23-03-2018

Source: Bloomberg
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Yet this isn’t all that important. What’s far more important is how investors reacted to the Fed’s outlook and their decision to increase interest rates.

After the rate hike decision, US bond yields spiked, almost clearing 3%.

After the rate hike decision, US bond yields spiked clearing almost 3%. 23-03-2018

Source: Bloomberg
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Why does that matter, you ask? 

The yield of a government bond is simply its return. For example, if you could buy a US 10-year bond yielding 6%, then you’d earn a 6% return on your money annually.

And because the US government likely won’t default anytime soon, you can assume this is a risk free return. Meaning you’ll earn 6% annually, no matter what.

As this yield moves higher, it encourages large institutions to hop out of stocks and into bonds. Why take on risk for potentially a 2% higher return, when you can earn a risk-free return of 3–4%?

That’s the idea, anyway.

But even before bond yields reach that 4% market, there’s one group of stocks that could fall regardless. It’s a group of well-established stocks that have a whole host of risk factors attached, according to Nomura Inc.

Nomura, a wealth management and research firm, believe big US tech might soon fall over.

If you read yesterday’s Money Morning, you’ll know about the recent fall in Facebook Inc. [NASDAQ:FB]. The social network has been lax protecting user’s data and it’s caused concerns over the prosperity of the platform.

Nomura believe companies like Facebook, Alphabet Inc. [NASDAQ:GOOG] and, Inc. [NASDAQ:AMZN] could soon face tighter regulation.

Not just about how these companies use and protect data. The government might also tell these companies how to operate in the US, or put restrictions on their future growth.

The bottom line is that trade wars, populism, income inequality can be looked at in isolation, but together they all point to a reaction against the growth of fluid intangible-intensive industries such as the data/platform companies,’ said Bilal Hafeez, Nomura currency strategist.

And with valuations at ‘insane levels’, some believe 2018 could be the tipping point for big US tech.

And with valuations at ‘insane levels’, some believe, 2018 could be the tipping point for big US tech. 23-03-2018

Source: Bloomberg
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If Amazon, Google or Facebook do sell down 20% or so, I urge you to take a hard look.

The strength of big tech

I’m not going to lie. Buying a stock for more than 20-times earnings is scary. Such a multiple reflects expectations for higher future growth. But when is going with the herd ever a wise decision in the market?

Of course, big US tech trades on multiples a whole lot higher than 20-times.

Even with their recent sell-off, Facebook trades at 27-times earnings. Investors believe Google is worth more than 34-times earnings. And who could forget Amazon, trading on a whopping price-to-earnings (P/E) ratio of 345-times?

There is a reason these marvellous companies trade at high multiples. Investors aren’t just crazy.

As Bilal mentioned, a lot of these companies have most of their value in intangibles. For Facebook, this is their network. For Amazon it’s their customer obsession. For Google, it’s their search algorithm.

These things cost very little to maintain, yet they do most of the heavy lifting when drawing sales and earnings.

Of course, regulation is a risk. Government have limited companies they deem to be too large and powerful in the past.

But it might be a risk worth taking if these three tech giants drop to extremely attractive prices. I’m sure Khan would be keen to take a swing.

Kind regards,

Harje Ronngard,
Editor, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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