Buy These Stocks Before A Fed Rate Cut In September 2024

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ADRs, or American Depositary Receipts, are securities representing shares of foreign companies traded on U.S. stock exchanges.Investors can purchase ADRs to invest in foreign companies without needing...

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href=https://seekingalpha.com/article/4717384-buy-these-stocks-before-a-fed-rate-cut-in-september-2024><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>ADRs, or American Depositary Receipts, are securities representing shares of foreign companies traded on U.S. stock exchanges.Investors can purchase ADRs to invest in foreign companies without needing...</p>\n\n<a href=\"https://seekingalpha.com/article/4717384-buy-these-stocks-before-a-fed-rate-cut-in-september-2024\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU1280957306.USD","symbol_name":"THREADNEEDLE (LUX) US CONTRARIAN CORE EQUITIES \"AUP\" (USD) 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foreign companies without needing to directly buy shares on foreign exchanges.ADRs provide a way for U.S. investors to diversify their portfolios and access international markets.ADRs, particularly in Japan with underlying Japanese Yen denominations, are my favorite currently.REITs and high-yield bond funds round out my list of favorite FED rate cut plays.Matteo Colombo Ideas, some old some new Data by YCharts I had been buying some rate-sensitive plays early, earlier than I should have, but they now seem to be finally reacting as the likelihood of a rate cut becomes within a hair's breadth of reality. One new idea I am adding to my list outside REITs, dividend stocks, and bond funds is ADRs, particularly those listed in Japan. We can see from the introductory chart that the Japanese Yen has gone through a brutal bloodbath of depreciation since we began our rate hiking cycle in 2022, all the while Japan has remained in a zirp environment. Most of the major currencies in the world have been instituting rate hikes to curb inflation, whereas a few like Japan have not. Finding the disconnect between two major economies where one is about to hike while we cut could present some currency appreciation opportunities. Having been a long-time investor in Panasonic Holdings Corporation's (OTCPK:PCRHY)(OTCPK:PCRFF) ADR, I have now come to realize that part of the reason I was getting smoked was not just the fact that they have performed poorly in the last few years, but also that the underlying currency for which the shares in the ADR wrapper is denominated in is getting smoked as well. Since the benefit and detriment of buying ADRs is the total return being appreciation + currency exchange rate, this is a nice area of the market that should be rate sensitive and positive for those that hold USD accounts as the USD weakens. ADRs and OTC Japanese stocks For those that believe the Yen will strengthen against the dollar as the BOJ hikes, and we cut, Japanese ADRs could be a great currency play, here is a great run down from Todd Wax CFA:  Prices of American depositary receipts reflect both a foreign firm's locally traded share price and the exchange rate movements of its home country's currency against the dollar. A common misperception is that American depositary receipts, which bundle ordinary shares of an overseas-listed company into a U.S.-traded security, don't carry currency risk. Driving the confusion is the fact that ADRs, as they are commonly known, are traded in U.S. dollars. While ADRs effectively spare U.S. investors the administrative expense and foreign tax assessments associated with trading in foreign-listed stocks, they don't nullify the impact of currency exchange rate fluctuations. The price of an ADR is affected by the movements of both the company's local share price and the national currency rate of exchange against the U.S. dollar.  To further amplify the total return possibilities that now may be coiled up in Japanese names, the Tokyo Stock Exchange just went through a wicked correction after the unwinding of the \"Japanese Yen Carry Trade\"[which is hopefully mostly over]. This was largely due to the Bank of Japan indicating future rate hikes on the horizon just as we go into our cutting cycle, almost certainly starting in September. Here is a news release from the Japanese Times after Jerome Powell's Jackson Hole comments from 8/24:  The yen rose against the dollar after Ueda's [BOJ Gov. Kazuo Ueda] remarks and extended its gains on those from Powell, as markets focused on prospects of a narrowing U.S.-Japan interest rate gap. \"The yen buying today is understandable given Governor Ueda showed very little sign of a shift in the views and plans of the BoJ following the financial market turmoil earlier this month,\" said Derek Halpenny, head of research global markets EMEA at MUFG, in a note to clients. The Japanese currency's rebound comes as a relief for the BOJ, which has been under political pressure to stem its falls that hurt consumption by inflating imported food and fuel costs.  Dividends paid in yen net of exchange rate fees Dividends are another factor in trading ADRs or OTC stocks denominated in dollars. The dividends will be paid in Japanese Yen but could also appreciate net of exchange rate fees when paid to the holder. The TTM Dividends are paid based on the Yen as paid to investors on the Tokyo Stock Exchange. As long as the companies do not cut their dividends, the yield should increase if the Yen continues to strengthen. The Buffett Japan list  ITOCHU Corporation (OTCPK:ITOCY). Mitsubishi Corporation (OTCPK:MSBHF). Mitsui & Co., Ltd. (OTCPK:MITSY). Sumitomo Corporation (OTCPK:SSUMY). Marubeni Corporation (OTCPK:MARUY).  Data by YCharts The Warren Buffett Berkshire Hathaway list of Japanese stocks are all sprawling holdings companies, much in the fashion of Berkshire Hathaway Inc. (BRK.B)(BRK.A) itself. These trading houses operate in the energy, construction, oil & gas, fashion, lifestyle businesses, joint transportation projects with foreign countries, metals and mining joint ventures, and even convenience stores like Lawson [whom you may be familiar with if you've been to Japan or Honolulu, HI). If it prints money, they're interested in bolting on an incremental profit builder. The bet in total was $8 Billion plus, with much of the acquisition being financed by floating ultra-low rate bonds denominated in Yen into the Japanese market. This also hedged Berkshire's currency risk. Most of these bets had done very well until the Japanese Yen carry trade unwind. If you believe the Japanese market has bottomed and the carry trade is washed through, then this could be a great base for establishing a position in Japanese equities. Again, we could get the total return of the rebound in these cheap value names combined with the appreciation in the Yen as we cut and they hike. Dividend yields of the Buffett Japan portfolio Data by YCharts Buffett also touted these trading houses [the Japanese equivalent of a conglomerate holdings company] for their dividends. All are producing nice yields considering the decline in the Yen. Yen appreciation should see these yields climb in dollars. These companies are all vast conglomerates that own either outright or partially many great businesses. They are serial acquirers like Berkshire Hathaway, which is what attracted Warren Buffett to this play in the first place. He met with each and every CEO at these trading houses and felt that they were synergistically aligned with what Berkshire Hathaway does. Very easy for him to understand. In them, we are essentially buying mini Japanese Berkshire Hathaway's. All Graham Number values Data by YCharts To top it off, all of these companies would fall into what would be considered a Benjamin Graham number deal, where the price-to-book ratio times the price-to-earnings does not exceed 22.5. Certainly, attractive to Buffett considering the nice total returns they have provided over the previous decade to boot. Some of the best Japanese stocks from a total return perspective Data by YCharts From a total return perspective, it's surprising to see that most of these names actually beat the US market (SP500) over the past decade in a terrible Japanese stock market. Itochu actually beat the Nasdaq (QQQ) in total return over the previous 10 years and is still only trading at a 13.38 X P/E. Mind blown. That was all done with very little multiple expansion. And Toyota Data by YCharts My personal favorite in this currency bet scenario is Toyota Motor Corporation (TM). Trading at 8 X FWD earnings and over -27% off its high, it is the largest company by market cap weight on the Tokyo Stock Exchange. When trying to find a blue chip to protect your downside, Toyota is about as close as we will get to that in Japan. A dividend case study 7203.T- Toyota Japan Trajectory up stockinvest.us To casually demonstrate this trend of currency exchange rates priorly working against us in the case of Toyota, here are the dividends in Japanese Yen paid out from 2020 to 2024. The trajectory is clearly up, with dividends increasing per share, but in Yen. Trajectory down Data by YCharts The dividend view for the American ADR of Toyota Motors looks like the company is going through a series of dividend cuts, but as demonstrated above, that is not the case. The dividend is simply tracking the downward depreciation of the Japanese Yen during our rate hiking cycle, which is set to reverse. The orange line in this case is the Yen/Dollar conversion rate and the purple line is the dividends per share as represented in dollars rather than Yen. This cycle is set to reverse with our first-rate cut in some years. High-Yield Bonds Data by YCharts Moving on from Japanese ADRs, high-yield junk bond funds like the SPDR Portfolio High Yield Bond ETF (SPHY) are still trading at very attractive yields. With a near record high 7.7% yield on the fund, a combination of price drop and credit spreads from rate hikes has propelled the yield into \"equity lite\" return territory. With 1,927 indexed bond holdings [based on ICE BofA US High-Yield Index] and not actively managed with only a .05% expense ratio, I like this monthly payer quite a bit. REITs Data by YCharts REITs are still a pretty good deal but have reacted probably the greatest as of recently to the possibility of a rate cut. Here we can see the most popular triple net REIT, Realty Income Corporation (O), and the Vanguard Real Estate ETF (VNQ) climbing in price and dropping in yield, trending in this direction starting around May 2024. I still believe REITs are a good deal with some meat left on the bone once cuts start. This trade probably won't be desirable by year-end, being just a vulture-picked carcass. Key dates in September The FED's September monetary policy meeting is Sept. 17-18. Here is a nice infographic from Reuters: Reuters The question is whether we get a 50 or 25 basis point cut. We still have ahead of us between now and then:  Q2 GDP Aug 29th. PCE. JOLTS Sep 4th. Payrolls Sep 9th. CPI Sep 12th.  Expect a lot of volatility in the interest rate betting markets with the passing of each one of these events. Cuts of some sort should be fairly consistent from now until the end of the year, so rate-sensitive plays should be \"in play\" from here until the New Year, in my opinion. Risks There could always be a no-cut scenario. I don't think anyone is expecting that, but the momentum, especially in REITs will unwind a bit should no cut happen in September. The Japanese market ADRs are not only dependent on currency strengthening/weakening, but also on the Japanese market remaining stable. There may be some more quirks and hedge fund margin calls left in the Japanese carry trade that come along unexpectedly. Summary I plan to start buying all the trading house ADRs and have already started on Toyota Motors. I have been buying REITs heavily since the beginning of the year, probably too early but currently happy with the result. Having last visited Tokyo in 2017 when the Yen was about 112 to 1 USD, the 144 to 1 number currently seems outrageous. I have had friends and family taking advantage of the weak Yen throughout the year, enjoying unusually cheap Japanese vacations. However, Japan is a resource-poor country, importing lots of goods to support all sectors of the economy. A weak currency is horrible for imports. The public has expressed their dismay with inflation and wants the BOJ to act. Foreign tourists have further driven up demand, giving pricing power to retailers, which is good for them and bad for locals who may not have seen coinciding wage increases. I like all these plays equally, but think that the REIT trade is waning a bit.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"economic","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462118726"}