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Blackstone Is A Smart Housing And Private Equity Play

By Tom Yorke

The July jobs number has now been spun many ways, but it still seems to us a bit underwhelming. The 7.4 % jobless rate is clearly better and close to the magic number of 7% the Fed has earmarked as the level they would start to taper their purchases of securities, or is that number now 6.5%?

Communications from the Fed have been a bit confusing of late. Below the surface it seems like many have just given up looking for work or gone to the ranks of self-employed. Throw in the fact that average hourly earnings were down .01 % and average hours worked were off a touch, this seems to us like just an OK number, but nothing to write home about.

Reality Check

We feel we have grinded a lot out of the US Equities markets this year without their being an intuitive reason for stocks to continue to rise. Perhaps it may be just the path of least resistance, but I’m cautious about US equities. Domestically growth is a bit slow, inflation seems to be about 0.2% in July and 2.0% on an annualized basis.

There needs to be some type of bump from somewhere to help jump start things, but it just doesn’t seem to be out there. I would not be too surprised once everyone returns from the Hamptons, Martha’s Vineyard, and the hills of New England that people take some chips of the table.

September and October have never been famous for anything other than disasters and meltdowns. Yearend follows closely thereafter, so why not take your gains year to date on the S&P Index,  which represents two good years, and say sayonara to 2013?

Washington Sinkholes

This doesn’t even factor in the mess yet to be made when Congress returns from their summer break and tries to deal with the 2014 budget before September 30.

Given the $100 billion dollar federal spending gap, sequestration, taxes hikes, loopholes, debt ceilings, and continuing resolutions , all seemed poised to create a disaster on almost any day this Fall.

Frankly, I expect the litany of sound bites we get out of Washington this fall to be deafening. Given the current state of things, along with the new independence some of the fringe lawmakers, even those with steel in their stomachs, will likely  beg for mercy. A good review of the situation can be found here.

Back to Basics

Given the current circumstances I feel it’s a good time to look closer at our Covestor portfolios again. A number of the alternative asset classes that help make up these portfolios, like Emerging Markets, the International Markets, Precious Metals, and Commodities, have been a drag on the overall performance.

As a result these Covestor portfolios appear to be well positioned, to respond to global events going forward. International and Emerging markets have looked to have survived a beat down and now have some people sniffing around at their values.

Gold prices are trying hard to put in a bottom and have the help of tremendous overseas physical demand, as opposed to “paper” gold which trades hands via ETF’s and never really gets delivered anywhere. Our hunch is getting the alternative assets positioned now, at lower prices, gives them room to run going forward and do their job more effectively.

A few charts courtesy of Bloomberg LLP are below.

EFA is an ETF that tracks the International Equities Index: MSCI EAFE

EEM is an ETF that tracks the Emerging Markets Index.

(GLD) is the ETF which tracks GOLD.

Note that all of these are attempting to find a floor and starting to look better.

Adjusting things

I did some maturity shortening of our US Bond positions by selling TLT ( an iShares ETF with bonds of 20 + years until maturities ) and adding TLH (bonds of 10-20 year maturities) and also added some UST (7-10 year maturities) to try and keep the volatility down for our bonds. The 30-year bullish bond run is coming to an end and yields cannot fall to zero in the longer dates.

I added some Blackstone Group (BX) as an additional play in the housing sector. They have acquired quite a lot of properties and currently rent them, but will also someday be a seller. This will clearly help them. They are also a private equity play, as they are very involved in buying and financing businesses.

Additionally, the stock currently yields about 4% and still trades below its original issue price, and as such I feel it also has room to run.

Another addition has been Sysco Corp. (SYY), a commercial food service supplier and a titan in their industry; currently they yield about 3.20 %. The most recent two employment numbers, given that food services has represented 50% of the new hires, would seem to support this business. The 5-year dividend growth at 5.48% , we expect the returns to be slow but steady. The UUP, or dollar Bullish index ETF, has been another position I have used to diversify away from US equity exposure.

When bond prices start to fall, interest rates go up, and investors look to move money to where they are being fairly treated; ie Higher Rates, so the dollar will get potentially better bid. This of course is meant to offset the any fall in equity prices as well.

The investments discussed are held in client accounts as of July 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. The opinions and views expressed herein are of the portfolio manager and may differ from other managers, or the firm as a whole. Investors cannot invest directly in an index. Indexes have no fees.

Tom Yorke

Tom Yorke

Oceanic Capital Management, LLC is a registered investment adviser based in New York. I am Tom Yorke, Oceanic’s Managing Director.

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