Equity markets had a mixed picture in yesterday's trading, with the cyclical-heavy Dow Jones Industrial Average up nearly 1%, the S&P 500 up only 0.2%, but the growth-heavy Nasdaq down greater than 1%. The divergence between the three indices could be explained by the rise in 10-Year Treasury Yield, which advanced to 1.66%. The rise of interest rates directly lifted up the financial stocks, as portfolio names Wells Fargo (WFC) and Morgan Stanley (MS) advanced towards their 52-week high. Cyclical stocks such as Boeing (BA) or Nucor (NUE) got a lifting hand as well. To explain the action, the 10-Year Yield rises as bond prices drop, which in turn occurs when bond investors sell bonds, which suggests they are optimistic on the economic outlook. In short, we think that the rise of the 10-Y Yield suggests the bond market is optimistic on the economic outlook, hence explaining the strong performance of cyclical stocks.

The good performance of value, cyclical stocks was in the expense of the high-valuation, high growth technology stocks. Portfolio names such as Microsoft (MSFT) declined 1.7%, Advanced Micro Devices (AMD) declined 3.8%. Rise of interest rates poses a greater discount to the future valuation of these companies, since they are generally categorized as long-duration assets.

In the near future, we do see the 10-Y Yield advanced towards 2%. We will write a more detailed analysis later, but a 2% 10-Y Yield means more of the kinds of actions that occured today (pain for growth, outperform for cyclicals).

In light of the packed actions yesterday, we made a lot of portfolio changes that we would like to update with you. We apologize we weren't able to give live updates, because simply there were too many actions occurring at the same time, that there was no time to generate detailed analyses.   

Holding Shares Of Ford Motors (F) As It Makes New 52-Week Highs

Yesterday, Ford made 21-year high, closing above 24$/share. It was an 11% gain yesterday for the stock. We urge that investors who follow us on this name, when they have a big gain intra-day like this, it is prudent to do some trimming. We would be too, if our situation wasn't unique. Because we own options in this name, and the fact that our trading in other names yielded fruitful results, our portfolio total value have surged so much that we're still underweight on our Ford position. Before the surge, our Ford position was ~18%, right at where we allocate it to be. After the surge, Ford position is only 16%, 2% below where we want it to be. We are also sitting on 23% cash, compared to the 5% that we want for our portfolio. What all this means now is that we're grossly under-invested, and if we trim shares of Ford, we would be even more under-invested. We love the status of our portfolio right now, and we decided to not alter our Ford position. We do note that the price of Ford is a bit extended to us, so we would not buy it here. 2022 earnings estimates is 2.00$ per share, which we think will likely be revised higher by analysts when the company reports later this month, but the 2.00$ number makes it so shares of Ford are trading at 12x forward earnings, higher than the 10x multiple that we are comfortable with for now. Given all this, we're not buying shares of Ford here. When we decide to make a purchase, we will plead our case.

Adding To Morgan Stanley (MS)

We sold shares of MS at ~100$ last week, when we said that shares was at resistance. That decision was correct on technical analysis, as shares did hit resistance and re-visited 97$. However, we weren't able to bottom-catch it, as shares surged from 97$ to ~105$ in the past 2 trading days. Two points: i) this move was in conjunction with the 10-year yield which is finally breaking out and ii) technically, shares of MS are breaking out as well. Given that we're underweight in this position and the price level was not too far from our cost basis, we added to our MS position. MS is now at 6.9% of our portfolio.

Adding To Nucor (NUE)

We also added to shares of Nucor (NUE) yesterday. We were grossly underweighting that position, and even with the purchase yesterday, we're only 3.8% there compared to the 5% that we allocate it to be. We find this price level attractive, as shares have been battling between 100 - 120. Our outlook for the steel industry also have not changed.

Adding To Eli Lilly (LLY)

We bought more shares of Eli Lilly (LLY) as shares traded down ~2% yesterday. We did this simply because we could: we could buy on a down-day and we were underweight in this position. Furthermore, the fact that LLY traded down yesterday was a sector-based move and very easy to explain: investors were buying the attacks (economically-sensitive stocks) and selling the defensives (healthcare, techs). We're mid-cycle here and at some point, investors will have to rotate back into defensive, given the uncertainties of the economic outlook driven by monetary policy.

Adding To Microsoft (MSFT)

Our final action yesterday was adding to Microsoft (MSFT). Same reasons: we could buy on a down day and we were underweight in this name.

You can always update the status of our portfolio here.