Rates Are Still Going To Rise – Here’s How To Prepare

If you think that last week’s inflation numbers would cause the Fed to pivot, I have a bridge conveniently located in lower Manhattan that offers easy access to Brooklyn available for immediate sale.

You could make millions charging other people big bucks to use your new bridge and recoup your costs in no time.

Yes, the chatter last Thursday was that the new inflation would allow the Fed to slow the pace of rate hikes, and so stocks skyrocketed.

But this does not mean rates have stopped climbing. The Fed itself has said so.

Here’s why, and how to position your portfolio to weather the coming rate hikes…

Look, the Fed has already talked about doing slowing the pace of rate hikes, possibly starting as soon as December.

But Jay Powell warned us that the pace did not matter as much as the ultimate level of Fed Funds rates would reach. He said that he now thinks that will be higher than the estimated 4.6% level.

The additional rate hikes of at least 100 basis points are not baked into stock prices.

With the S&P 500 priced at almost 20 times earnings, I cannot say stocks are cheap here either.

Fed officials rushed out last Thursday to tell people that inflation was not beaten yet and more rate hikes were coming:

  • Mary Daly, the head of the San Francisco Fed, said 7.7% might be lower than 8%, but it is a long way from the 2% target.
  • Cleveland Fed President Loretta Mester said the inflation trend is still unacceptably high.
  • Kansas City Fed President Esther George told us that inflation was still too high and monetary policy had more work to do.
  • Dallas Fed President Lorie Logan said that there were no rate cuts anytime soon and that more increases were coming.

The markets ignored them and partied like it was 1999.

The boom of 1998, as you you may recall, was followed by a very ugly 2000.

For now, I am sticking with my strategy of owning heavily discounted closed-end funds in Underground Income and low PE, high-yield bank stocks with solid balance sheets and excellent credit conditions, and carefully selected undervalued REITs for readers of The 20% Letter.

So far, they are both working really well. I expect that to continue.

I am also constantly on the lookout for special situations with upside potential regardless of market movements for you, the readers of The Hidden Profits Report.

One of my favorite hunting grounds for special situations is among companies that have announced a strategic review. A strategic review is a discussion of a board committee about what changes need to be made to the business to increase profitability., There is often a discussion about selling unprofitable or non-core subsidiaries or selling the company outright.

The board of Garrett Motion (GTX) is said to be having talks about strategic alternatives and possibly selling the company.

You may never have heard of Garrett Motion if you are not a car-loving gearhead. If you are a gearhead, you are very familiar with this company,

Garrett Motion makes turbochargers for the automobile industry and is one of three companies that dominate the industry.

The company filed for bankruptcy in 2020 and emerged in April 2022. Garrett Motion did not file because the business needed to be better or because they could not pay their bills.

It was the only way to settle a matter involving asbestos brake pads with its former owner Honeywell (HON).

The pads in question were sold back in the early 1980s.

That is behind them, and the company should produce more than $300 million of free cash flow in 2022.

Garrett Motion is not worried about competition from electric cars killing the turbo business. Instead, they are pioneers in the development of electric vehicle turbochargers.

Construction and farm machinery will always need some turbocharged boost to get the job done.

The market for turbochargers, both conventional and electric, will be growing for years to come.

With an eye to the future of the automobile, Garrett Motion is also developing cybersecurity systems for connected cars.

This stock is cheap. Management expects to produce between $310 and $370 million this year. The equity value of the stock right now is just $461 million.

The stock is trading at 1.3 times free cash flow.

A sale of this company would be worth at least twice the current stock price and probably more than that level.

The stock has no coverage from Wall Street, so the best way to unlock this company’s massive amount of hidden value might be to sell the business outright.

No matter what the market does, you own a great business producing tons of cash flow at a ridiculously low valuation and with a decent probability of a sale sooner rather than later.

-Tim Melvin

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