A new tailwind for the energy trade … home demand slows, will it bring down prices? … the 10-year jumps on forecasts for a 50-basis point rate hike

Lots happening in the news. Today, let’s bounce around to several stories that are likely to impact your portfolio in the coming days and months.

***U.S. to ramp up natural gas exports to Europe

This last Friday, U.S. and EU officials said they are targeting to supply Europe with an additional 15 billion cubic meters of American liquefied natural gas (LNG).

How much will this help Europe reduce its dependence on Russian energy?

Here’s The Wall Street Journal:

The boost in U.S. gas deliveries goes only part of the way in covering the shortfall Europe faces in turning away from Russian gas.

Officials across the continent are racing to sign new contracts with producers in the Middle East and Africa before next winter.

France has ended subsidies for new gas heaters in homes and will instead subsidize electric heat pumps. Italy, the second-largest consumer of Russian gas after Germany, is considering burning coal at some power plants rather than natural gas.

This is yet another tailwind for the energy trade we’ve been highlighting here in the Digest.

Keep in mind, we can’t just flip a switch and begin supplying more LNG to Europe. We’re already maxed out to our current capacity.

On this note, back to the WSJ:

The plan to end Europe’s consumption of Russian gas will take at least several years. Countries that produce LNG are running their export terminals at full capacity, and building new ones takes time.

The U.S. is the world’s largest natural-gas producer, and in January and December, it was the largest exporter of LNG. Nearly 70% of those LNG shipments went to the 27 nations of the EU, the U.K. and Turkey.

“We are exporting right now every molecule that has a terminal available to liquefy it,” said U.S. Energy Secretary Jennifer Granholm. “Because of the price, there is a desire to liquefy it and send it.”

So, building out more domestic capacity is going to be a tailwind for the companies that help facilitate LNG exports.

***It turns out, this is the exact type of company our macro specialist, Eric Fry, just recommended to his Investment Report subscribers

From Eric’s trade alert last week:

The U.S. oil and gas sector has embarked on a new phase of prosperity; this notoriously volatile, boom-bust industry is booming once again.

The SPDR Oil & Gas Exploration and Production ETF (XOP), for example, has soared 66% over the last 12 months, while many individual names in the energy sector have doubled or tripled during the last year.

Despite these big moves, the new bull market in energy stocks is probably still in its infancy. If $100+ oil becomes the new normal, rather than a temporary fluke, oil companies will begin minting money.

Eric recommended three midstream energy partnerships. This type of business owns and operates income-generating assets like oil and gas pipelines and storage facilities.

As the U.S. tries to build out its infrastructure to meet the new demand from Europe, these companies will benefit.

Last week, we highlighted the Alerian MLP ETF, AMLP, as an example of this corner of the market. It holds some of the biggest midstream energy partnerships, including Magellan, Enterprise, and Energy Transfer.

As I write, the distribution yield of AMLP is 7.75%. Meanwhile, the average distribution yield of Eric’s three picks comes in even higher, at 8.1%. Plus, Eric picked his recommendations based on their yield and potential for outsize price gains.

If you’re looking to generate income in this inflationary environment – as well as growth, as the U.S. responds to Europe’s energy needs – you just found it.

***Meanwhile, will slowing home sales cool off housing inflation?

Analysts were expecting home sales to post a small increase from January to February.

Instead, last week, we learned that they fell 5.4%.

Also, pending home sales, which measure signed contracts on existing homes, fell 4.1% month-over-month.

From CNBC

:

This is the fourth straight month of declines in pending sales, which are an indicator of future closings, one to two months out.

Since this count is based on signed contracts in February, when mortgage rates really started to take off, it is a strong indicator of how the market is reacting to the new rate environment, especially as it is entering the crucial spring season.

Will this falling demand slow down the explosive home-price gains we’ve seen across the nation in recent months?

Well, yes, it may slow the rate at which home prices will rise – but don’t confuse that with the chance to buy homes at lower prices than they’re at today.

Experts are suggesting that higher home prices and surging mortgage rates may slow demand, but current homeowners will simply de-list their homes rather than sell at lower prices.

Translation – don’t expect any relief on new home prices.

Lawrence Yun, the chief economist at the National Association of Realtors, wrote in an email that he expects home prices to go up 5% this year. Though that’s only about one-third the pace of 2021’s increase, it’s still “up.”

Plus, keep in mind, the odds are climbing that we’ll see a 50-basis-point interest rate hike at the next Fed meeting – which will put even more upward pressure on total home expense.

Not the best time to be a would-be homeowner…or an investor in mortgage lending companies.

Below, we look at the chart of PennyMac Financial Services (PFSI).

It’s a great, well-run company, but it’s facing the headwind of higher prices and soaring mortgage costs.

After a monster 2020 and a solid 2021, PFSI is down 23% here in 2022.

Skyrocketing mortgage rates kneecap mortgage refinance demands, which is a huge part of business for a company like PFSI.

If have lenders in your portfolio, watch out.

***Finally, keep your eye on the 10-year Treasury yield

Last Friday, it hit a fresh two-year high.

The yield on the benchmark 10-year Treasury note jumped 10.4 basis points to 2.445%. As I write Monday morning, it’s pulled only slightly, trading at 2.422%.

The move comes alongside growing expectations that the Fed is going to be more aggressive in hiking rates.

As mentioned earlier in this Digest, this expectation is leading many analysts and big banks to think we’re going to see a 50-basis-point hike in May – and possible June.

From CNBC:

Goldman Sachs on Monday upped its forecast to 50-basis-point hikes at the May and June Fed meetings.

Bank of America on Friday joined those expecting bigger hikes. The firm expects 50-basis-point hikes in June and July, and 25-basis-point hikes at all other meetings this year…

Citigroup on Friday called for four 50 basis point hikes starting in May.

This belief about a half-point hike in May is backed up by CME’s FedWatch Tool.

As you can see below, current odds of the Fed hiking rates by 50 basis points at the May Fed meeting stands at 72.2%.

In recent weeks, we’ve been highlighting all sorts of ways to play a rising rate environment:

Oil stocks, midstream companies, commodities, gold, fertilizer companies, and top cybersecurity plays, among others. We’ll continue to bring you ideas. But, bottom line, if you haven’t taken steps to “rate-proof” your portfolio, I urge you to make time to plan it out today.

Have a good evening,

Jeff Remsburg