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Here’s the ideal portfolio based on the Fed wanting invstorsto borrow, says a Merrill Lynch veteran

Stocks are looking at another struggle, apart from techs, on Wednesday after some downbeat data. That’s as we wait for the outcome of the Federal Reserve’s last policy meeting of the year and progress on an ever-elusive stimulus deal.

A model portfolio for the next two to five years is what’s on offer from our call of the day from former Merrill Lynch executive Harley Bassman. He created and traded a variety of derivative and structured products during 26 years at Merrill Lynch, and is best known for inventing the MOVE index, which measures treasury volatility. He now writes the Convexity Maven newsletter.

He bases his advice on the Fed’s “near-promise to hold their overnight rate at effectively zero until at least 2023.” To that, Bassman says: “The Fed wants us to borrow, so that is exactly what I will do,” but says he prefers leverage (borrowed capital) risk, rather over credit risk.

For starters, he likes a couple of option plays on the S&P 500 SPX, +0.08% via the SPDR S&P 500 ETF SPY, +1.37%. Bassman says U.S. stocks are reasonably priced when stripping out FAAANM stocks (Facebook FB, -0.33%, Apple AAPL, -0.25%, Amazon.com AMZN, +0.27%, Alphabet GOOGL, +0.01%, Netflix NFLX, +0.08% and Microsoft MSFT, +0.36% ). He also suggests a play on the Europe Stoxx 50 FESXH21, +0.14%, giving investors exposure to dividend distributions that are sure to return.

Another investment move? Refinance your mortgage. “If a $300,000 mortgage at 3.83% is refinanced to 2.50%, the monthly payments would decline from $1,403 to $1,185,” he says, adding that rising inflation in the coming years means it’s better to lock that in sooner than later.

Bassman also likes mortgage real-estate investment trusts, which own mortgages exposed to residential and commercial property, but not hotels or apartments. The key is they use borrowed money instead of engaging in credit risk. For the same reasons, he’s keen on municipal bond closed-end funds, though those only run by well-known managers and that avoid credit risk from lesser states or agencies.

Gold GC00, +0.26% is another asset that is on his list of investments headed into 2021. “Gold is not a trade; it is a 20-year horizon asset diversification to hedge against a blimp-sized black swan landing in your backyard. A 5% allocation is likely dead money for quite a while, but I sleep well at night,” he says.

His favorite is long-dated interest rate options, though, which are used to make bets on the direction of interest rates. Those can’t be traded by individual investors, for now, though.

“Millennial spending supercharged by a COVID fiscal package may finally ignite inflation, but it is not clear when. This option allows one to benefit from the MMT boost to markets with an escape parachute for protection,” says Bassman. MMT, or Modern Monetary Theory, states that governments can borrow as needed and pay for it using new money.

Check out the whole thing here.

The markets

Stock futures YM00, +0.02% ES00, +0.10% gave up the gains after retail sales, alongside European stocks SXXP, +0.59% also pared gains, with the euro EURUSD, +0.30% firm strong eurozone purchasing managers numbers. Asian stocks also rose. The pound GBPUSD, +0.36% is getting boosted by reports of Brexit talks progress. Bitcoin prices BTCUSD, +5.41% have surged to a new high above $20,000.

The buzz

Ahead of the outcome of the Fed’s policy meeting, retail sales fell 1.1% in November as COVID-19 weighed on restaurants again. The Markit manufacturing and services purchasing managers indexes, and a home builders’ index are also due.

Congressional leaders held stimulus-package talks late into the night on Tuesday. Senate Majority Leader Mitch McConnell said the group agreed not to leave Washington for the holidays without that deal or a spending agreement that will avoid a government shutdown.

Shares of Aphria APHA, +4.03% and Tilray TLRY, +22.24% are soaring on a report the Canadian cannabis companies are in advanced talks to merge.

The U.K. will start clinical trials on a new COVID-19 vaccine from French biotech group Valneva VLA, +9.97%.

Shares of mobile-focused e-commerce platform Wish WISH, will start trading Wednesday on the Nasdaq at $24 a share, the top of a proposed range. And lending company Upstart priced its initial public at the low end — $20 — of an expected range.

Billionaire MacKenzie Scott has given away $4.1 billion to 384 organizations in the last four months, urging others to do the same to ease the pain of the COVID-19 pandemic’s “wrecking ball.”

The chart

Random reads

Many people are cheering actor Tom Cruise for reportedly ripping into “Mission Impossible 7” crew members for not following the COVID-19 rules.

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