Risk/Reward Vol. 116
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I've been praying all the week through/At home, at work and on the bus
I've been praying I can keep you/And earn enough for us."---lyrics from "Earn Enough for Us" by XTC
"I was always labelled the black sheep of the family/What a bad seed I grow up to be
But if you look at us now/You'll see the apple didn't fall far from the tree"---lyrics from "The Apple" by Eminem
"Frenchmen eat a lot of bouillabaisse there/Dutchmen eat a sauce called Hollandaise there
Smorgasbord in Swedish is the winner/In America, its TV dinner."---lyrics from "Hungarian Goulash No. 5" by Allan Sherman
Despite news from Europe that both Spain and the UK are officially back in recession, the Dow Industrial Average closed 200 points higher this week on the strength of better than expected earnings as reported by U.S. corporations. Indeed, as of mid week, over 80% of the companies reporting had exceeded their estimates. "All week through" corporations "earn(ed) enough" to answer investor "prayers".
Leading the way was Apple which recently had been viewed as a "bad seed". Its stock price had fallen 13% over the past two weeks---"far from the tree." But after reporting blockbuster earnings Tuesday at the market's close, Apple rose $49 or 8.9% on Wednesday and finished the week at $603. That said, I submit that Apple is still treated as a "black sheep" by the stock market--- by any comparative metric---price/earnings ratio/PEG rate/ growth rate---you name it. As great as its numbers are, its stock came no where near $632 which is the price point where I sold on April 10th. That is why I treat AAPL as a trading stock, not as an investment. And, unless and until Apple management is more attentive to shareholder value (e.g. how about distributing more of the $110billion of cash it holds!!), I will continue to do so.
So what gives with Holland(e) (these) daise? On Monday, the Dutch prime minister lost the confidence of his coalition cabinet which rejected the austerity measures to which he pledged Holland last fall. This followed on the heals of the French primary last Sunday where M. Hollande led the voting on a vow to re-evaluate France's commitment to austerity, a commitment made by M.Sarkozy. To add to this "bouillabaisse" of malaise, Italy's prime minister is also walking away from austerity as a means of addressing the Eurozone's sovereign debt crisis. Yikes! With each new election, it is increasingly likely that the Merkel-Sarkozy approach to the Eurozone sovereign debt crisis (austerity) will be replaced by more deficit borrowing. How that gets effected remains a mystery especially if Germany resists. In short, the "smorgasbord" of bad news from the "goulash" that is the Eurozone is far from over.
So what does this mean to me? Well, I remain over 40% in cash and wholly intolerant of any losing position. My array of preferred stock/exchange traded debt positions held steady during Monday's dip, and rose modestly throughout the week, all the while accruing dividends/interest at an average 7+% annual yield. This week, I bought two new real estate investment trust preferred issues (DLRpF and LSEpB) and added more tobacco (RAI) on a dip (no pun intended) . For the most part, I remain "risk off" (out of cyclical stocks) because I wonder what the stock market will do once the spate of stellar U.S. earnings reports abates. Pray tell, what will counter the downdraft of bad news from Europe--Spain in particular? Let's hope the stock market's reaction to Granada is more favorable than that of Allan Sherman ("Hello Muddah, Hello Fadduh/Here I am at Camp Granada/ Camp is very entertaining/ And they say we'll have some fun once it stops raining.")
Saturday, April 28, 2012
Saturday, April 21, 2012
April 21, 2012 Don't Cry for Me
Risk/Reward Vol 115
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I may take a holiday in Spain/Leave my wings behind me
Flush my worries down the drain/And fly away to somewhere new."---lyrics from "Holiday in Spain" by the Counting Crows
"You won't believe me/All you will see is a girl you once knew
Although she's dressed to the nines/At sixes and sevens with you
Don't cry for me Argentina"---lyrics from "Evita" by Andrew Lloyd Webber
"Opportunity, opportunity/This is your big opportunity
They shop around/Follow you without a sound"---lyrics from "Opportunity" by Elvis Costello
The Dow finished higher this week on the strength of good corporate earnings reports here in the U.S. and despite headwinds from Europe---particularly Spain. You won't "flush your worries down the drain" there these days! Indeed, a renewed concern over Spanish sovereign debt, the same kind of concern that plagued the stock market last fall (see Vol. 96 www.riskrewardblog.blogspot.com ) promises more choppiness in the coming weeks, and in my humble opinion portends more negative than positive action. We may be "leaving the wings" of this very good market behind. Here's why.
Last fall's roller coaster trading range was broken (and the stock market allowed to rise on good U.S. earnings reports) only when the European Central Bank (ECB) initiated the Long Term Refinancing Operation ( the "LTRO" as discussed at Vols. 98 and 107), in effect lending 1trillion Euros to European banks at 1% which in turn the banks used to purchase the sovereign debt of struggling countries such as Spain and Italy. Unfortunately, the Spanish banks already have exhausted the LTRO proceeds and without their participation in the auction of Spanish government bonds, the prices will plummet, and the yields will rise (sounds like the Picasso auction, doesn't it) such that the Spanish government will run out of money. Massive austerity measures and/or default loom ahead absent further European intervention. And default of the sovereign debt of a country the size of Spain would send the financial markets worldwide into a tailspin. The ECB has stated that due to inflation concerns, it likely will not embark on a third round of LTRO. To add more madness to the mix, France holds round one of its presidential elections this weekend with M. Sarkozy trailing his socialist opponent M. Hollande. Should M. Hollande ultimately prevail, the Merkel-Sarkozy partnership that has steered Europe recently will end---inaugarating a very uncertain future. And stock markets abhor uncertainty.
In short, unless and until there is a commitment for pan-European intervention on Spanish (and perhaps Italian) sovereign debt, I see the market being dominated by a "risk off " bias. As a consequence, I am avoiding cyclical stocks (those dependent on a growing economy such as steel, copper and manufacturing) and hunkering down with my preferred stocks and exchange traded debt---both of which pay great dividends but trade flat (at or near $25) absent exogenous events. I still have exposure to the preferred stocks of some European financials (DUA, IDG, NWpC, RBSpT, AEK, AEF, BCSpD, etc.) which pay handsome yields, but for which, my tolerance for loss is nearly zero. They will fall like rocks if a Spanish default approaches.
Oh, and speaking of market negatives, how about the decision by Argentine President Cristina Fernandez Kirchner this week to nationalize Argentina's largest oil company, YPF. The effect is to render worthless the common stock of that company, a large percentage of which is owned by Spanish oil giant Repsol. Such dictatorial conduct is remindful of "a girl we once knew"---Evita herself. However, when a populist leader (e.g. Hugo Chavez, Evo Morales, etc.) nationalizes a business (read, taking it over without paying a dime), it makes investment in emerging markets, in general, and in South America, in particular, significantly riskier. Investments that once were "nines" now look like "sixes and sevens". I cry for you, Argentina.
The above negative news notwithstanding, "big opportunities are around"---some currently available, some just around the corner. As to current opportunities, many more preferred stock and exchange traded debt offerings were made available this week to yield hungry investors like yours truly. I bought newly issued MFO (REIT exchange traded debt) and AHLpB (insurance preferred), paying 8 and 7.25% respectively. As to future opportunities, did you notice that the EPA published fracking regulations that don't go into effect until 2015 and even then, are no more restrictive than what responsible companies are already doing? According to the Wall Street Journal, this development was as surprising as would be George W. Bush receiving the Nobel Peace Prize. Perhaps President Obama now recognizes that cheap fossil fuels are a political asset. No matter, it moves the U.S. ever closer to a future of energy independence.
In closing, I remain cautious; 45% in cash. Any confirmed downward movement in a stock that I hold results in a sale. This week, my favorite, TNH, headed downward, and I sold it to lock in a 45% gain (down from 60%). With apologies to Andrew Lloyd Webber, the first quarter was an amazing, technicolor dreamcoat. I don't want to wake up one day like Joseph, at the bottom of some stock-drop gully, stripped of my profits.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I may take a holiday in Spain/Leave my wings behind me
Flush my worries down the drain/And fly away to somewhere new."---lyrics from "Holiday in Spain" by the Counting Crows
"You won't believe me/All you will see is a girl you once knew
Although she's dressed to the nines/At sixes and sevens with you
Don't cry for me Argentina"---lyrics from "Evita" by Andrew Lloyd Webber
"Opportunity, opportunity/This is your big opportunity
They shop around/Follow you without a sound"---lyrics from "Opportunity" by Elvis Costello
The Dow finished higher this week on the strength of good corporate earnings reports here in the U.S. and despite headwinds from Europe---particularly Spain. You won't "flush your worries down the drain" there these days! Indeed, a renewed concern over Spanish sovereign debt, the same kind of concern that plagued the stock market last fall (see Vol. 96 www.riskrewardblog.blogspot.com ) promises more choppiness in the coming weeks, and in my humble opinion portends more negative than positive action. We may be "leaving the wings" of this very good market behind. Here's why.
Last fall's roller coaster trading range was broken (and the stock market allowed to rise on good U.S. earnings reports) only when the European Central Bank (ECB) initiated the Long Term Refinancing Operation ( the "LTRO" as discussed at Vols. 98 and 107), in effect lending 1trillion Euros to European banks at 1% which in turn the banks used to purchase the sovereign debt of struggling countries such as Spain and Italy. Unfortunately, the Spanish banks already have exhausted the LTRO proceeds and without their participation in the auction of Spanish government bonds, the prices will plummet, and the yields will rise (sounds like the Picasso auction, doesn't it) such that the Spanish government will run out of money. Massive austerity measures and/or default loom ahead absent further European intervention. And default of the sovereign debt of a country the size of Spain would send the financial markets worldwide into a tailspin. The ECB has stated that due to inflation concerns, it likely will not embark on a third round of LTRO. To add more madness to the mix, France holds round one of its presidential elections this weekend with M. Sarkozy trailing his socialist opponent M. Hollande. Should M. Hollande ultimately prevail, the Merkel-Sarkozy partnership that has steered Europe recently will end---inaugarating a very uncertain future. And stock markets abhor uncertainty.
In short, unless and until there is a commitment for pan-European intervention on Spanish (and perhaps Italian) sovereign debt, I see the market being dominated by a "risk off " bias. As a consequence, I am avoiding cyclical stocks (those dependent on a growing economy such as steel, copper and manufacturing) and hunkering down with my preferred stocks and exchange traded debt---both of which pay great dividends but trade flat (at or near $25) absent exogenous events. I still have exposure to the preferred stocks of some European financials (DUA, IDG, NWpC, RBSpT, AEK, AEF, BCSpD, etc.) which pay handsome yields, but for which, my tolerance for loss is nearly zero. They will fall like rocks if a Spanish default approaches.
Oh, and speaking of market negatives, how about the decision by Argentine President Cristina Fernandez Kirchner this week to nationalize Argentina's largest oil company, YPF. The effect is to render worthless the common stock of that company, a large percentage of which is owned by Spanish oil giant Repsol. Such dictatorial conduct is remindful of "a girl we once knew"---Evita herself. However, when a populist leader (e.g. Hugo Chavez, Evo Morales, etc.) nationalizes a business (read, taking it over without paying a dime), it makes investment in emerging markets, in general, and in South America, in particular, significantly riskier. Investments that once were "nines" now look like "sixes and sevens". I cry for you, Argentina.
The above negative news notwithstanding, "big opportunities are around"---some currently available, some just around the corner. As to current opportunities, many more preferred stock and exchange traded debt offerings were made available this week to yield hungry investors like yours truly. I bought newly issued MFO (REIT exchange traded debt) and AHLpB (insurance preferred), paying 8 and 7.25% respectively. As to future opportunities, did you notice that the EPA published fracking regulations that don't go into effect until 2015 and even then, are no more restrictive than what responsible companies are already doing? According to the Wall Street Journal, this development was as surprising as would be George W. Bush receiving the Nobel Peace Prize. Perhaps President Obama now recognizes that cheap fossil fuels are a political asset. No matter, it moves the U.S. ever closer to a future of energy independence.
In closing, I remain cautious; 45% in cash. Any confirmed downward movement in a stock that I hold results in a sale. This week, my favorite, TNH, headed downward, and I sold it to lock in a 45% gain (down from 60%). With apologies to Andrew Lloyd Webber, the first quarter was an amazing, technicolor dreamcoat. I don't want to wake up one day like Joseph, at the bottom of some stock-drop gully, stripped of my profits.
Friday, April 13, 2012
April 14, 2012 Deja Vu
Risk/Reward Vol. 114
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Did you hear them talkin' 'bout it on the radio/Did you try to read the writin' on the wall
Did that voice inside you say/I've heard it all before
It's like deja vu all over again"---lyrics from "Deja Vu (All Over Again) by John Fogerty
"My kid's gonna grow up/Gonna grow up to be a fool
'Cause they ain't got no more room/No more room for him at school"---lyrics from "Why I Sing the Blues" by B.B. King
"Though April showers may come your way/They bring the flowers that bloom in May
So if it's raining have no regrets/Because if its raining rain, you know, its raining violets"---lyrics "April Showers" by Al Jolson
On Monday, the Dow Jones Industrial Average dropped 131 points, a hangover from the disappointing jobs report of the previous Friday. On Tuesday, it fell 214 points more on growing concern about European sovereign debt--especially from Spain. On Wednesday, the market rebounded 90 points on good earnings from Alcoa, the first Dow component to report quarterly results. On Thursday, the market leaped 181 points following a hint of QE3 from Federal Reserve Vice Chair Janet Yellen (see last week's discussion of the Fed's impact on the stock market), a good Italian bond auction and expectations of a good earnings season. On Friday, the Dow dropped 137 points on news of a slowdown in the growth of China's economy and a spike in Spanish debt yields. The Dow fell more than 1% for the second week in a row.
Does it seem that you "have heard it all before. It's like deja vu all over again"---a repeat of the yeah/boo roller coaster market of last fall: rising on positive domestic news and falling on worries from Europe and/or China? Geez, I hope not. But, just in case, I am prepared. I continue to pare consistent losers (this week EXC), even those that have not come close to my 8% loss limit. Moreover, with Europe queezy again, I reduced my exposure to it, taking double digit profits by halving my positions in IDG and NWpC. I still have exposure to European financials, and will watch them like a hawk. I like their dividends, but will not sacrifice the profit I have garnered on them.
On Wednesday, natural gas fell below $2/mmBTU (or cu. ft.) for the first time since 2002 and currently trades at 1/2 last year's level and $10 below the 2008 prevailing price. On Tuesday, it was reported that at winter's end, the amount of natural gas in storage was 2.5trillion cu. ft. which, due to the mild winter, was 1trillion cu. ft. more than normal. With natural gas being produced at elevated levels due to the miracle of fracking, it is estimated that the total U. S. storage capacity (4.4trillion cu. ft.) will be filled by early October---well in advance of the heating season. Unlike B.B. King's son, I am "schooled" and ain't no fool--there "ain't no more room!" This fact will depress the entire natural gas industry--from production to pipelines to storage. I surveyed my holdings on Wednesday and sold (still at a profit) any position that was more than 50% reliant upon natural gas for its revenues. This included ETP, BPW, SDT, CHKR and LINE (even though LINE has an excellent hedge in place). The whole sector stinks right now--and I am passing (on) gas.
But, don't confuse oil with gas. I still like domestic oil plays including CLMT, PER, NS JMF and MHRpD. I also like companies that USE natural gas. Indeed, my best performer year to date (over 60% profit) is TNH, a producer of ammonia fertilizer used in corn production. The increase in corn planting and the drop in the cost of its primary feedstock (natural gas) have resulted in a leap in anticipated profits and a spike in its stock price.
With the Q1 earnings season having begun this past week, I am sitting at 45% cash, well above my 25% position of just a few weeks ago. This week, I raised cash on Wednesday and Thursday by paring losses and taking profits on growth (non or low paying dividend) stocks. I even sold half of my AAPL to lock in a nearly 50% gain, something I could do with tax impunity because I held it in my 401 (k) where most of my "trading" stocks reside. Frankly, with the "risk on/risk off" teeter-totter back in vogue, the old adage "sell in May and go away" has some appeal--with April "showering" us in "viole(n)t" fits and starts. I very much want to keep my big dividend payers. They held their value all week, and even on Friday my loss was very modest considering the blood bath. But a wholesale exit with a 5% YTD gain plus paid and accrued dividends, which is what I would achieve if I liquidated today, is not out of the question. We will see what happens. Will U.S. earnings and guidance be strong enough to overcome renewed fears from Europe and uneven news from China? Who knows? But, I am positioned well, nimble and ready to move---either way.
I am mailing this edition on Friday because I am about to board a flight to London to see Barb, Lizzy, Matt, Paddy and of course Arthur. I will be back on Monday--- a Pan Galactic Three Day Pass a la Kilgore Trout.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Did you hear them talkin' 'bout it on the radio/Did you try to read the writin' on the wall
Did that voice inside you say/I've heard it all before
It's like deja vu all over again"---lyrics from "Deja Vu (All Over Again) by John Fogerty
"My kid's gonna grow up/Gonna grow up to be a fool
'Cause they ain't got no more room/No more room for him at school"---lyrics from "Why I Sing the Blues" by B.B. King
"Though April showers may come your way/They bring the flowers that bloom in May
So if it's raining have no regrets/Because if its raining rain, you know, its raining violets"---lyrics "April Showers" by Al Jolson
On Monday, the Dow Jones Industrial Average dropped 131 points, a hangover from the disappointing jobs report of the previous Friday. On Tuesday, it fell 214 points more on growing concern about European sovereign debt--especially from Spain. On Wednesday, the market rebounded 90 points on good earnings from Alcoa, the first Dow component to report quarterly results. On Thursday, the market leaped 181 points following a hint of QE3 from Federal Reserve Vice Chair Janet Yellen (see last week's discussion of the Fed's impact on the stock market), a good Italian bond auction and expectations of a good earnings season. On Friday, the Dow dropped 137 points on news of a slowdown in the growth of China's economy and a spike in Spanish debt yields. The Dow fell more than 1% for the second week in a row.
Does it seem that you "have heard it all before. It's like deja vu all over again"---a repeat of the yeah/boo roller coaster market of last fall: rising on positive domestic news and falling on worries from Europe and/or China? Geez, I hope not. But, just in case, I am prepared. I continue to pare consistent losers (this week EXC), even those that have not come close to my 8% loss limit. Moreover, with Europe queezy again, I reduced my exposure to it, taking double digit profits by halving my positions in IDG and NWpC. I still have exposure to European financials, and will watch them like a hawk. I like their dividends, but will not sacrifice the profit I have garnered on them.
On Wednesday, natural gas fell below $2/mmBTU (or cu. ft.) for the first time since 2002 and currently trades at 1/2 last year's level and $10 below the 2008 prevailing price. On Tuesday, it was reported that at winter's end, the amount of natural gas in storage was 2.5trillion cu. ft. which, due to the mild winter, was 1trillion cu. ft. more than normal. With natural gas being produced at elevated levels due to the miracle of fracking, it is estimated that the total U. S. storage capacity (4.4trillion cu. ft.) will be filled by early October---well in advance of the heating season. Unlike B.B. King's son, I am "schooled" and ain't no fool--there "ain't no more room!" This fact will depress the entire natural gas industry--from production to pipelines to storage. I surveyed my holdings on Wednesday and sold (still at a profit) any position that was more than 50% reliant upon natural gas for its revenues. This included ETP, BPW, SDT, CHKR and LINE (even though LINE has an excellent hedge in place). The whole sector stinks right now--and I am passing (on) gas.
But, don't confuse oil with gas. I still like domestic oil plays including CLMT, PER, NS JMF and MHRpD. I also like companies that USE natural gas. Indeed, my best performer year to date (over 60% profit) is TNH, a producer of ammonia fertilizer used in corn production. The increase in corn planting and the drop in the cost of its primary feedstock (natural gas) have resulted in a leap in anticipated profits and a spike in its stock price.
With the Q1 earnings season having begun this past week, I am sitting at 45% cash, well above my 25% position of just a few weeks ago. This week, I raised cash on Wednesday and Thursday by paring losses and taking profits on growth (non or low paying dividend) stocks. I even sold half of my AAPL to lock in a nearly 50% gain, something I could do with tax impunity because I held it in my 401 (k) where most of my "trading" stocks reside. Frankly, with the "risk on/risk off" teeter-totter back in vogue, the old adage "sell in May and go away" has some appeal--with April "showering" us in "viole(n)t" fits and starts. I very much want to keep my big dividend payers. They held their value all week, and even on Friday my loss was very modest considering the blood bath. But a wholesale exit with a 5% YTD gain plus paid and accrued dividends, which is what I would achieve if I liquidated today, is not out of the question. We will see what happens. Will U.S. earnings and guidance be strong enough to overcome renewed fears from Europe and uneven news from China? Who knows? But, I am positioned well, nimble and ready to move---either way.
I am mailing this edition on Friday because I am about to board a flight to London to see Barb, Lizzy, Matt, Paddy and of course Arthur. I will be back on Monday--- a Pan Galactic Three Day Pass a la Kilgore Trout.
Saturday, April 7, 2012
April 7, 2012 Picasso Auction
Risk/Reward Vol. 113
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Picasso moon, shining bright/The universe is working fine tonight
Picasso moon, illuninate me"---lyrics "Picasso Moon" by the Grateful Dead
"We gettin' money, man/I'll show you how to turn profit
In the hood, they call me "Joey the Profit"
First you cop it, then you cook it, then you chop it"---lyrics "The Profit" by Fat Joe
"Buy! Buy!/ Says the sign in the shop
Why? Why? Says the junk in the yard"---lyrics "Junk" by Paul McCartney
"We're movin' on up/To the east side
To a deluxe apartment in the sky
We're movin on up/To the east side
We finally got a piece of the pie"---lyrics "Movin' On Up" (theme song from "The Jeffersons")
As highlighted last week, any signal on future "quantitative easing" from the Federal Reserve moves the stock market---big time. On Tuesday, the Fed released minutes of its March meeting which cast doubt on its desire to continue any "easing" past the June termination of "Operation Twist" (the buying of long term Treasuries). That news, in conjunction with concerns about Europe and a disappointing Spanish bond auction, sent the Dow into a triple digit tailspin on Wednesday and contributed to the worst week of 2012--and Friday's job report portends a lower open next Monday.
Although I touched on it last week, all investors need to understand why "quantitative easing" and other "easy money" Federal Reserve policies have such a huge impact on the stock market. Large institutional investors are no different than you and me---they need a decent return. Currently, they cannot get it from Treasuries even though that "safe haven" is where all of us would love to park a large chunk of our money. So, why are Treasury yields so low?
Perhaps the following analogy will "illuminate" you. Suppose Picasso were still alive and selling his art in monthly auctions. Due to his reputation, the auctions attract numerous buyers, but Picasso is unsatisfied by the prices he is receiving. He devises the "bright" idea of controlling his "universe" by planting a shill in the audience to bid up prices. Over the course of a year or so, the prices at auction go to "the moon", but the shill ends up with 61% of the art. The "sale" to the shill is illusory, of course, because no money changes hands. But the prices paid by other buyers are high. Now, what happens if and when Picasso pulls the shill out of the auction? The prices drop, of course, and perhaps precipitously.
This is exactly what is happening in the Treasury bond market. As reported last week in the Wall Street Journal (Google "Lawrence Goodman and Federal Reserve"), the Federal Reserve via "quantitative easing" (QE) purchased, through bid, a stunning 61% of all of the new debt issued by the Treasury in 2011, and similarly large percentages in other recent years. It did so by expanding its balance sheet (read; printing money) which has gone from $900billion to $2.9trillion in 3 1/2 years. QE's stated purposes have been to keep Treasury bond prices high (and yields low), concomitantly to drive investors out of Treasuries and into the stock market (and thereby attempting to spur economic growth and job creation) and to flood banks with liquidity. And, it has worked, at least in part. Look at the stock market's recovery since 2009 and the bloated, excess reserves held by money center banks ($1.5 trillion---which is $400billion more than all of the US currency currently in circulation!). But, just like the shill's purchases of Picasso's art, it has created a false market. When QE ends (and it will end sometime or the excess reserves held by banks will be invested into the real economy with a hugely inflationary impact) and the Fed stops bidding up Treasury bond prices, those prices will fall unless some exogenous event (Eurozone failure, tsunami or an Iranian war) causes a massive "flight to safety" by purchasers other than the Fed.
So, it makes sense, does it not, that when the Fed hints that it may exit Treasury auctions, the prospect of lower prices (and higher yields) in the Treasury bond market begins to look like a real, and very attractive possiblity to me---and to institutional investors. And conversely, the stock market, which has risen because no one can get a decent yield on Treasury bonds, begins to look inflated. Investors (yours truly included) want to get out ahead of a stock market "correction". Thus, like Fat Joe, having "copped" and "cooked" some nice gains, they begin to take profits in some positions (sold all my AEG this week for a 20% profit) and to "chop" even small loss positions (sold POM at a slight loss) thereby raising cash in anticipation of a drop in Treasury prices, a rise in Treasury yields and a drop in stock prices. Unless and until the Fed hints it may continue some accommodation, I plan to continue to take some profits and to raise cash, pruning my holdings down to good yielders (and probably keeping AAPL). That said, I have not yet invested in the VIX or repurchased a Treasury short position which I discussed last week.
Speaking of yields, have you noticed the 1/4 page ads run by BlackRock in the WSJournal and the Financial Times hyping investment in HYG, its flagship junk (excuse me, high yield) bond exchange traded fund? As discussed last week, the market is flooded with new junk bond issues as companies seek to take advantage of the prevailing low interest rates which in turn are priced off of the low yields on Treasury bonds (called the "yield spread"). Check out www.quantumonline.com , a convenient place to "shop" for junk . I bought MHNB and KFI which yield 8% and 7.5% respectively, 50 basis points lower than earlier issues (MHNA and KFH) but still worthy of investment. I don't see putting these babies out in the "yard" anytime soon.
One reader this week asked me what I think of real estate. After several years of depression, it clearly is beginning to turn around. In fact, it is "movin' on up" as a percentage of my holdings. You don't have to be George and Weezy Jefferson to "get a piece of the pie" these days. As noted last week , I like the preferred shares of real estate investment trusts, particularly those that also carry a hefty common dividend. Currently, I own RASpC, CLNYpA, AHTpD, DFTpB, GRTpG, HPTpD, LXPpD, PEBpB, SFI pE and I as well as AGNC, NLY, HCN, SLA and the closed end fund RQI---each of which has appreciated in principal and pays over 7% annually in dividends and all of which on average pay in excess of 8 %
In closing, I wish all of you a joyous holiday weekend. On a personal note, Barb and I received one of the greatest dividends of all this week--- the birth of our fourth grandchild, Arthur Lucien Jaworksi---a dividend made possible by our all-time smartest investment---The Busch Girls
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Picasso moon, shining bright/The universe is working fine tonight
Picasso moon, illuninate me"---lyrics "Picasso Moon" by the Grateful Dead
"We gettin' money, man/I'll show you how to turn profit
In the hood, they call me "Joey the Profit"
First you cop it, then you cook it, then you chop it"---lyrics "The Profit" by Fat Joe
"Buy! Buy!/ Says the sign in the shop
Why? Why? Says the junk in the yard"---lyrics "Junk" by Paul McCartney
"We're movin' on up/To the east side
To a deluxe apartment in the sky
We're movin on up/To the east side
We finally got a piece of the pie"---lyrics "Movin' On Up" (theme song from "The Jeffersons")
As highlighted last week, any signal on future "quantitative easing" from the Federal Reserve moves the stock market---big time. On Tuesday, the Fed released minutes of its March meeting which cast doubt on its desire to continue any "easing" past the June termination of "Operation Twist" (the buying of long term Treasuries). That news, in conjunction with concerns about Europe and a disappointing Spanish bond auction, sent the Dow into a triple digit tailspin on Wednesday and contributed to the worst week of 2012--and Friday's job report portends a lower open next Monday.
Although I touched on it last week, all investors need to understand why "quantitative easing" and other "easy money" Federal Reserve policies have such a huge impact on the stock market. Large institutional investors are no different than you and me---they need a decent return. Currently, they cannot get it from Treasuries even though that "safe haven" is where all of us would love to park a large chunk of our money. So, why are Treasury yields so low?
Perhaps the following analogy will "illuminate" you. Suppose Picasso were still alive and selling his art in monthly auctions. Due to his reputation, the auctions attract numerous buyers, but Picasso is unsatisfied by the prices he is receiving. He devises the "bright" idea of controlling his "universe" by planting a shill in the audience to bid up prices. Over the course of a year or so, the prices at auction go to "the moon", but the shill ends up with 61% of the art. The "sale" to the shill is illusory, of course, because no money changes hands. But the prices paid by other buyers are high. Now, what happens if and when Picasso pulls the shill out of the auction? The prices drop, of course, and perhaps precipitously.
This is exactly what is happening in the Treasury bond market. As reported last week in the Wall Street Journal (Google "Lawrence Goodman and Federal Reserve"), the Federal Reserve via "quantitative easing" (QE) purchased, through bid, a stunning 61% of all of the new debt issued by the Treasury in 2011, and similarly large percentages in other recent years. It did so by expanding its balance sheet (read; printing money) which has gone from $900billion to $2.9trillion in 3 1/2 years. QE's stated purposes have been to keep Treasury bond prices high (and yields low), concomitantly to drive investors out of Treasuries and into the stock market (and thereby attempting to spur economic growth and job creation) and to flood banks with liquidity. And, it has worked, at least in part. Look at the stock market's recovery since 2009 and the bloated, excess reserves held by money center banks ($1.5 trillion---which is $400billion more than all of the US currency currently in circulation!). But, just like the shill's purchases of Picasso's art, it has created a false market. When QE ends (and it will end sometime or the excess reserves held by banks will be invested into the real economy with a hugely inflationary impact) and the Fed stops bidding up Treasury bond prices, those prices will fall unless some exogenous event (Eurozone failure, tsunami or an Iranian war) causes a massive "flight to safety" by purchasers other than the Fed.
So, it makes sense, does it not, that when the Fed hints that it may exit Treasury auctions, the prospect of lower prices (and higher yields) in the Treasury bond market begins to look like a real, and very attractive possiblity to me---and to institutional investors. And conversely, the stock market, which has risen because no one can get a decent yield on Treasury bonds, begins to look inflated. Investors (yours truly included) want to get out ahead of a stock market "correction". Thus, like Fat Joe, having "copped" and "cooked" some nice gains, they begin to take profits in some positions (sold all my AEG this week for a 20% profit) and to "chop" even small loss positions (sold POM at a slight loss) thereby raising cash in anticipation of a drop in Treasury prices, a rise in Treasury yields and a drop in stock prices. Unless and until the Fed hints it may continue some accommodation, I plan to continue to take some profits and to raise cash, pruning my holdings down to good yielders (and probably keeping AAPL). That said, I have not yet invested in the VIX or repurchased a Treasury short position which I discussed last week.
Speaking of yields, have you noticed the 1/4 page ads run by BlackRock in the WSJournal and the Financial Times hyping investment in HYG, its flagship junk (excuse me, high yield) bond exchange traded fund? As discussed last week, the market is flooded with new junk bond issues as companies seek to take advantage of the prevailing low interest rates which in turn are priced off of the low yields on Treasury bonds (called the "yield spread"). Check out www.quantumonline.com , a convenient place to "shop" for junk . I bought MHNB and KFI which yield 8% and 7.5% respectively, 50 basis points lower than earlier issues (MHNA and KFH) but still worthy of investment. I don't see putting these babies out in the "yard" anytime soon.
One reader this week asked me what I think of real estate. After several years of depression, it clearly is beginning to turn around. In fact, it is "movin' on up" as a percentage of my holdings. You don't have to be George and Weezy Jefferson to "get a piece of the pie" these days. As noted last week , I like the preferred shares of real estate investment trusts, particularly those that also carry a hefty common dividend. Currently, I own RASpC, CLNYpA, AHTpD, DFTpB, GRTpG, HPTpD, LXPpD, PEBpB, SFI pE and I as well as AGNC, NLY, HCN, SLA and the closed end fund RQI---each of which has appreciated in principal and pays over 7% annually in dividends and all of which on average pay in excess of 8 %
In closing, I wish all of you a joyous holiday weekend. On a personal note, Barb and I received one of the greatest dividends of all this week--- the birth of our fourth grandchild, Arthur Lucien Jaworksi---a dividend made possible by our all-time smartest investment---The Busch Girls
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