Good morning and happy Monday. Earning season for small-caps is still upon us. Over the course of the week a number of companies I have covered will be releasing their results for Q4. Keep an eye out on updates in the Telegram channel where I will provide a quick update for all Pro members. If the news is notable enough I will publish updates on the covered companies here.

I’ve been thinking a lot about the Federal Reserve and interest rates this past weekend. Eventually I think the Fed will start cutting rates as things in the economy start to break. The remainder of this article will highlight my high level thoughts here. But before we get into the Fed cutting rates, first a word from today’s sponsor…

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The Fed Will Cut

I don’t know when it will happen but eventually the Federal Reserve will start cutting rates. Bond prices will move up aggressively as the Federal Reserve turns the money printer back on. Yields will plummet. The move will be aggressive, quick and when it happens you better have your portfolio positioned to maximize your exposure.

Risky garbage equities will do the best. Companies that are trading for basement level valuations with non-existent near-term cash flows will fly when the Fed starts cutting. The worst companies in the world will get a turn or two higher in multiple expansion. It will be an incredible move and when it comes it will come fast.

Companies with gobs of high rate debt should perform extremely well — especially the ones with variable rate debt. Any company that needs near-term financing will perform well. Look for companies with a large portion of their debt stack in short term liabilities that needs to be refinanced. The debt market will turn back on and money will start flowing quickly.

The housing market will catch a bid too. As rates go down potential buyers of homes will rush to the flood gates. There will be a huge increase in the demand for housing. The Fed has artificially turned down the demand for housing as they have moved rates up. A large portion of would be home buyers are waiting on the sidelines for home prices to come down or interest rates to begin their move lower. When rates go down again it will be a floodgate of pent-up demand. Housing prices could make new highs.

But before the Fed starts cutting again we will need something in the economy to break. As long as the economy continues to function like it has been, the Fed will likely hold their ground and keep rates high. There needs to be justification for the Fed to cut and reverse course. A few ideas I had:

1. An all out global recession and high unemployment

2. A collapse in housing prices leading to the uproar of the middle class who has most of their net worth in their home

3. High interest rates taking down too many heavily in-debt companies

4. The interest payable on the national debt becoming a significant cost burden to service

5. Any other numerous event where something in the economy just stops working, leading to a financially dire circumstance

Making macro predictions is hard. The logic behind the prediction isn’t the tough part. It is the timing of those predictions. I’m not making any drastic moves to my portfolio to time a rate cut. I continue to buy low priced equities that are trading significantly below replacement value. It is what I have done my entire career and it works. The day I start buying options to time a macro prediction like the Fed cutting rates is the day I lose significant sums of capital.

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