Risk/Reward Vol. 167
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I guess all is fair in love and war/Someone wins
But someone wins more/You never know what time will do
All I know is I've got some good news/I've got some bad news."---lyrics from "Good News/Bad News" by George Strait
"Stop in the name of love/Before you break my heart
Think it over/Think it over."---lyrics from "Stop In The Name of Love" sung by The Supremes
"Come round you rovin' gamblers/And a story I will tell
About the greatest gambler/You all should know him well."---lyrics from "Ramblin' Gamblin' Willie" by Bob Dylan
In what at first blush appeared to be an illogical twist, the Dow Jones Industrial Average (DJIA) rose 165 points this week despite lackluster earnings reports and bad economic data from around the globe: lower purchasing manager indices (signaling a slowdown) from both the U. S. and China and news that the recession in the Eurozone has worsened to the point of infecting Germany. Why hasn't the stock market tanked? The answer is simple: when stock prices are influenced more by monetary and fiscal policies than by economic fundamentals, "bad news" is indeed "good news" because "bad news" holds the prospect of more easy-money measures and government stimuli. Indeed, although "you never know what time will do", the prevailing wisdom is that because the Eurozone is in such bad shape, the European Central Bank (ECB) will lower its discount rate (the rate at which commercial banks borrow from central banks) from 0.75% to 0.50% at its meeting next Thursday. In addition, as proof that "all is fair in love and war", the austerity measures put in place throughout the Eurozone a few months ago as an inflation safeguard may soon be abandoned in favor of more government stimulus. As discussed previously (www.riskrewardblog.blogspot.com Vol. 126), easy money policies and government stimuli may have detrimental long term effects, but in the short run they are very good for stocks.
The market's overall strength notwithstanding, it did suffer a precipitous if ephemeral drop on Tuesday in response to a fake AP Tweet that the White House had been attacked and the President injured. In the span of a few minutes, the DJIA lost and then recovered 1%. Due to the Flash Crash of 2010 and the prospect of incidents such as this, I no longer rely on automatic sell orders. If you do, "think it over/ think it over." If you persist, then "in the name of love" be sure to use "stop"-limit orders, not "stop" orders. I leave it to you to ascertain the difference, but it is significant. Use of the former lessens the chance that such an event "will break your heart."
If the ECB lowers the discount rate and austerity in the Eurozone is abandoned, look for Eurozone stocks to rise and the Euro to fall in relation to the dollar. This is what happened to the Japanese stock market and the yen earlier this year when similar measures were announced in Japan. So "come round you rovin' gamblers/And a story I will tell." At that time I purchased a dollar hedged, exchange traded fund (ETF) holding a basket of Japanese stocks (DXJ) which has appreciated 27% since I acquired it January 9, 2013. I certainly am not "the greatest gambler", but next week I am contemplating buying HEDJ, a dollar hedged ETF holding a basket of Eurozone stocks. Maybe lightning will strike twice.
When "bad news" is "good news", when a fake Tweet can crash the stock market and when austerity is trumped by stimulus, one is left to wonder if fundamentals are now irrelevant. In such times, I resort to the advice of that noted investor, Bob Dylan
"The answer my friend is blowin' in the wind/The answer is blowin' in the wind."
P.S. This week, Linn Energy (LINE) and its affiliate Linco (LNCO) announced a monthly dividend policy making them ever more attractive to me.
P.S.S. I am comfortably ahead of my full year goal. That said, as of today, I do not intend to "sell in May." I hope I do not regret this decision. What are your intentions?
Saturday, April 27, 2013
Saturday, April 20, 2013
April 20, 2013 Rain Check
Risk/Reward Vol. 166
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Slow down, you move too fast
You've got to make the morning last."---lyrics from "Feeling Groovy (59th St. Bridge Song)" by Simon and Garfunkel
"Right to the top/Don't look back
Turning the rags/Giving commodities a rain check."---lyrics from "It's Time" by Imagine Dragons and as performed on "Glee"
"We'll count the hugs and the kisses
When dividends are due
'Cause I'm in the market for you."---lyrics from "I'm In The Market For You"---by Louis Armstrong
With Monday opening on disappointing growth numbers from China and closing with the terrorist attack in Boston, the stock market "slowed down." The market recovered on Tuesday, but fell again on Wednesday and limped through Thursday and Friday, with the Dow Jones Industrial Average closing down 318 points for the week. Having "moved too fast", stocks were bound to correct. It is unfortunate that one catalyst this week was "mourning."
But is the drop merely a temporary correction or is the stock market now priced "right to the top"? Will we "look back" on this week as the one during which riches "turned to rags"? Of course, no one knows for sure, but there are signs that the world's economy is slowing despite massive infusions of capital compliments of quantitative easing here and abroad. Prominent among these signs is the "rain check" on the demand for commodities. The international price of oil (Brent) fell below $100/bbl. for the first time since July, 2012. Copper prices are at their lowest point since October, 2011. On a broader scale, CFD, an exchange traded fund which tracks a host of commodities futures (oil, natural gas, copper, soybeans, corn, cattle, wheat, etc.) is at multi-year lows. Participants in this week's Global Commodities Conference in Switzerland predicted that commodity prices will likely continue their slide. And as for gold, "rain check" doesn't begin to describe its precipitous fall. With the emergence of the commodity-driven Chinese economy as a major influence on stock prices and with the financialization of commodities in general (via ETF's), the correlation between commodity demand and the stock market is no longer debatable. A sustained drop in commodity prices (read, demand) is a negative signal to the stock market.
So what did I do this week? I kept my eye on investments that held steady during the two days of triple digit declines. And two that warranted "hugs and kisses" were PGF and PGX, exchange traded funds that own a variety of preferred stocks. I bought more: PGX in my 401K because half of its holdings pay dividends that do not qualify for preferential tax treatment and PGF in my personal account because all of its holdings pay qualified dividends. Although neither of these has appreciated during the huge stock run of 2013, neither has fallen in price. Both pay monthly dividends, and both yield over 6% annually. And 6% is all that "I'm in the market for."
Next week should give some visibility on whether this swoon is a temporary correction or an early beginning to the summer doldrums which have characterized the past few years. In either event, I will continue my search for steady monthly payors like PGX and PGF (and their slightly more volatile closed end fund cousins, JPI, JPC and HPF), stocks that in times like this
"Ease my mind/Like a bridge over troubled waters."
P.S. And as for the year to date 30% decline of Apple---unless and until it deploys its pile of cash ($130bn) in a shareholder friendly way (say, a significant dividend increase or a massive buy back campaign), I am keeping my distance. Apparently, I am not alone.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Slow down, you move too fast
You've got to make the morning last."---lyrics from "Feeling Groovy (59th St. Bridge Song)" by Simon and Garfunkel
"Right to the top/Don't look back
Turning the rags/Giving commodities a rain check."---lyrics from "It's Time" by Imagine Dragons and as performed on "Glee"
"We'll count the hugs and the kisses
When dividends are due
'Cause I'm in the market for you."---lyrics from "I'm In The Market For You"---by Louis Armstrong
With Monday opening on disappointing growth numbers from China and closing with the terrorist attack in Boston, the stock market "slowed down." The market recovered on Tuesday, but fell again on Wednesday and limped through Thursday and Friday, with the Dow Jones Industrial Average closing down 318 points for the week. Having "moved too fast", stocks were bound to correct. It is unfortunate that one catalyst this week was "mourning."
But is the drop merely a temporary correction or is the stock market now priced "right to the top"? Will we "look back" on this week as the one during which riches "turned to rags"? Of course, no one knows for sure, but there are signs that the world's economy is slowing despite massive infusions of capital compliments of quantitative easing here and abroad. Prominent among these signs is the "rain check" on the demand for commodities. The international price of oil (Brent) fell below $100/bbl. for the first time since July, 2012. Copper prices are at their lowest point since October, 2011. On a broader scale, CFD, an exchange traded fund which tracks a host of commodities futures (oil, natural gas, copper, soybeans, corn, cattle, wheat, etc.) is at multi-year lows. Participants in this week's Global Commodities Conference in Switzerland predicted that commodity prices will likely continue their slide. And as for gold, "rain check" doesn't begin to describe its precipitous fall. With the emergence of the commodity-driven Chinese economy as a major influence on stock prices and with the financialization of commodities in general (via ETF's), the correlation between commodity demand and the stock market is no longer debatable. A sustained drop in commodity prices (read, demand) is a negative signal to the stock market.
So what did I do this week? I kept my eye on investments that held steady during the two days of triple digit declines. And two that warranted "hugs and kisses" were PGF and PGX, exchange traded funds that own a variety of preferred stocks. I bought more: PGX in my 401K because half of its holdings pay dividends that do not qualify for preferential tax treatment and PGF in my personal account because all of its holdings pay qualified dividends. Although neither of these has appreciated during the huge stock run of 2013, neither has fallen in price. Both pay monthly dividends, and both yield over 6% annually. And 6% is all that "I'm in the market for."
Next week should give some visibility on whether this swoon is a temporary correction or an early beginning to the summer doldrums which have characterized the past few years. In either event, I will continue my search for steady monthly payors like PGX and PGF (and their slightly more volatile closed end fund cousins, JPI, JPC and HPF), stocks that in times like this
"Ease my mind/Like a bridge over troubled waters."
P.S. And as for the year to date 30% decline of Apple---unless and until it deploys its pile of cash ($130bn) in a shareholder friendly way (say, a significant dividend increase or a massive buy back campaign), I am keeping my distance. Apparently, I am not alone.
Saturday, April 13, 2013
April 13, 2012 The Silver Hammer
Risk/Reward Vol. 165
THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Bang, bang, Maxwell's silver hammer/Came down on her head
Clang, clang Maxwells silver hammer/Made sure that she was dead."---lyrics from "Maxwell's Silver Hammer" by The Beatles
"The prettiest people do the ugliest things/For the road to riches and diamond rings
We shine because they hate us/Floss cause they degrade us
We trying to buy back our 40 acres"---lyrics from "All Falls Down" by Kanye West
"When you started off with nothing/ And you're proud that you're a self made man
Yes, I 'm stuck in the middle with you."---lyrics from "Stuck in the Middle" sung by the Stealers Wheel
"Bang, bang!" Another week, another record high for the Dow Jones Industrial Average and the S&P 500...and another two gurus join the list of those gravely concerned by the impact of quantitative easing here (QE3) and abroad (Japan). Sam Zell, the founder of several real estate investment trusts and known as the nation's largest landlord, likened the QE3-juiced stock market to the real estate bubble of 2006. He is convinced that it will burst, but like everyone else he doesn't know when. And Rick Rieder, the head of BlackRock's $752billion fixed income portfolio described QE3 as a "large, dull hammer" "Clang, clang!" Sooner or later, the "silver hammer" will "come down on our heads". Ask yourself, what will happen to interest rates once the Federal Reserve stops buying $45billion worth of Treasury securities and $40billion worth of home mortgages each month (which equates to 64% of all net Treasury debt and 34% of all home mortgages) ? Frankly, we are in uncharted waters, and no one knows. However, many gurus fear that quantitative easing has perverted our credit markets and that its inevitable cessation will cause a negative ripple throughout the financial world. In other words, unless we are nimble, our gains could "for sure be dead."
But, hey, while QE3 lasts, "we shine"! One consequence of QE3's cheap debt financing is the proliferation of stock "buy backs". Properly played they can provide a "road to riches and diamond rings." Allow me to explain. The classic means of valuing a stock is to apply a multiplier to a stock's projected earnings on a per share basis. If a company has projected earnings of say, $4 per share (determined by dividing the projected annual earnings by the number of shares outstanding) and the company trades at the S&P 500 average multiple of 15 times earnings, the stock will be valued at $60. A company can increase its share value in three ways: by increasing its total earnings; by aggressively growing its business (which typically results in the market applying a higher than average earnings multiple); or by reducing its share count. During times of low interest rates (like now thanks to QE3), corporations often borrow money and use it to repurchase their shares. This lowers the share count which increases earnings per share which in turn results in higher stock prices. For example, over the past 12 months, AT&T has borrowed more than $5billion at rates as low as 1.5% which it has used to repurchase shares carrying a 5% dividend. This 3.5% interest rate/dividend arbitrage has been a win/win for shareholders. In the past year, AT%T's stock price has risen 26% (while increasing its dividend) even though its projected earnings multiple is only the market average of 15, typical of a company experiencing only moderate growth. Look for massive buy backs as a signal to buy.
As the search for yield becomes more difficult, give consideration to buying business development company (BDC) stocks. As discussed in earlier editions, the primary business of BDC's is providing senior and mezzanine financing to companies that are "stuck in the middle" market: typically entrepreneurial entities run by "proud, self made men who started off with nothing"; but entities that are still too small to be deemed credit worthy by the public markets. Since the financial crisis of 2008, banks, the traditional funding source for the "middle market" have shied away from lending to these enterprises. That lending void has been filled in part by BDC's. I like them because in order to maintain their pass-through tax status, BDC's must distribute 90% of their earnings to their shareholders. Despite their outsized yields, BDC's have trailed the general market significantly so far this year, and thus they may present a buying opportunity. As noted last week, my favorite is ARCC. I also like the closed end fund FGB, which holds positions in several BDC's. A recently launched exchange traded fund, BDCS, is also worth a look.
Several times over the past few weeks, I have been contacted by Readers inquiring whether it is time to exit the market. I have no special insight on this, but I do listen to The Beatles. Ms. Market has "done right by me" even if "I don't know why she is riding so high." And although someday "I think I'm goin' to be sad", I "don't think it's today." So, I'm stickin' with her so long as she appears to have "a Ticket to Ride.".
THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Bang, bang, Maxwell's silver hammer/Came down on her head
Clang, clang Maxwells silver hammer/Made sure that she was dead."---lyrics from "Maxwell's Silver Hammer" by The Beatles
"The prettiest people do the ugliest things/For the road to riches and diamond rings
We shine because they hate us/Floss cause they degrade us
We trying to buy back our 40 acres"---lyrics from "All Falls Down" by Kanye West
"When you started off with nothing/ And you're proud that you're a self made man
Yes, I 'm stuck in the middle with you."---lyrics from "Stuck in the Middle" sung by the Stealers Wheel
"Bang, bang!" Another week, another record high for the Dow Jones Industrial Average and the S&P 500...and another two gurus join the list of those gravely concerned by the impact of quantitative easing here (QE3) and abroad (Japan). Sam Zell, the founder of several real estate investment trusts and known as the nation's largest landlord, likened the QE3-juiced stock market to the real estate bubble of 2006. He is convinced that it will burst, but like everyone else he doesn't know when. And Rick Rieder, the head of BlackRock's $752billion fixed income portfolio described QE3 as a "large, dull hammer" "Clang, clang!" Sooner or later, the "silver hammer" will "come down on our heads". Ask yourself, what will happen to interest rates once the Federal Reserve stops buying $45billion worth of Treasury securities and $40billion worth of home mortgages each month (which equates to 64% of all net Treasury debt and 34% of all home mortgages) ? Frankly, we are in uncharted waters, and no one knows. However, many gurus fear that quantitative easing has perverted our credit markets and that its inevitable cessation will cause a negative ripple throughout the financial world. In other words, unless we are nimble, our gains could "for sure be dead."
But, hey, while QE3 lasts, "we shine"! One consequence of QE3's cheap debt financing is the proliferation of stock "buy backs". Properly played they can provide a "road to riches and diamond rings." Allow me to explain. The classic means of valuing a stock is to apply a multiplier to a stock's projected earnings on a per share basis. If a company has projected earnings of say, $4 per share (determined by dividing the projected annual earnings by the number of shares outstanding) and the company trades at the S&P 500 average multiple of 15 times earnings, the stock will be valued at $60. A company can increase its share value in three ways: by increasing its total earnings; by aggressively growing its business (which typically results in the market applying a higher than average earnings multiple); or by reducing its share count. During times of low interest rates (like now thanks to QE3), corporations often borrow money and use it to repurchase their shares. This lowers the share count which increases earnings per share which in turn results in higher stock prices. For example, over the past 12 months, AT&T has borrowed more than $5billion at rates as low as 1.5% which it has used to repurchase shares carrying a 5% dividend. This 3.5% interest rate/dividend arbitrage has been a win/win for shareholders. In the past year, AT%T's stock price has risen 26% (while increasing its dividend) even though its projected earnings multiple is only the market average of 15, typical of a company experiencing only moderate growth. Look for massive buy backs as a signal to buy.
As the search for yield becomes more difficult, give consideration to buying business development company (BDC) stocks. As discussed in earlier editions, the primary business of BDC's is providing senior and mezzanine financing to companies that are "stuck in the middle" market: typically entrepreneurial entities run by "proud, self made men who started off with nothing"; but entities that are still too small to be deemed credit worthy by the public markets. Since the financial crisis of 2008, banks, the traditional funding source for the "middle market" have shied away from lending to these enterprises. That lending void has been filled in part by BDC's. I like them because in order to maintain their pass-through tax status, BDC's must distribute 90% of their earnings to their shareholders. Despite their outsized yields, BDC's have trailed the general market significantly so far this year, and thus they may present a buying opportunity. As noted last week, my favorite is ARCC. I also like the closed end fund FGB, which holds positions in several BDC's. A recently launched exchange traded fund, BDCS, is also worth a look.
Several times over the past few weeks, I have been contacted by Readers inquiring whether it is time to exit the market. I have no special insight on this, but I do listen to The Beatles. Ms. Market has "done right by me" even if "I don't know why she is riding so high." And although someday "I think I'm goin' to be sad", I "don't think it's today." So, I'm stickin' with her so long as she appears to have "a Ticket to Ride.".
Saturday, April 6, 2013
April 6, 2013 The TINA Factor
Risk/Reward Vol. 164
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Big wheel keep on turning/Proud Mary keep on burning
And we're rollin', rollin'/Rollin' down the river."---lyrics from "Proud Mary" sung by TINA Turner
"Heh, ho they love the way I do it
Heh, ho there's really nothing to it
But, heh I'm big in Japan, I'm big in Japan"---lyrics from "Big in Japan" by Tom Waits
"Branch water and tomato wine/Creosote and turpentine
Sour mash and new moonshine/Down on the copperline."---lyrics from "Copperline" by James Taylor
After reaching an all time high on Tuesday, the Dow Jones Industrial Average (DJIA) experienced two body blows this week. On Wednesday it suffered a triple digit drop on disappointing unemployment claim numbers, a fall in the purchasing manager's index and war-like rumblings from North Korea. On Friday, the monthly jobs report fell far below expectations; so low in fact that former Obama Administration chief economist Austan Goolsbee likened it to a "punch to the gut". After an ugly opening, the DJIA closed down Friday, but only 41 points for the day and only 13 points for the week. In light of these bad economic reports, one wonders whether the "big wheel" that is the stock market can "keep on turning, keep on burning, rollin', rollin', rollin' down the river?" Many commentators answer yes, and in so doing quote Lady Thatcher who several years ago, in response to a question on why she supported free market capitalism, said "There Is No Alternative"; a quote that the tabloids of the day transformed into the TINA Factor. Where, other than stocks and stock like investments, can one achieve any meaningful return today? In an era where central banks have depressed to near zero the return on treasury securites and instruments priced in relation thereto (e.g. investment grade bonds, certificates of deposit, money market accounts, etc.) "There Is No Alternative" to equity or equity like investments. In a very real sense, today, investing is all about getting some return; risk be damned. Monetary policy now holds sway over the stock market with investment fundamentals relegated to the back burner.
If you doubt how monetary policy now dominates stock markets, focus on what happened this past Thursday in Japan. That day, the Bank of Japan (BoJ) (the equivalent to our central bank, the Federal Reserve) in its most aggressive move yet to encourage industrial investment and to spur exports by devaluing the yen, announced its intention to increase the money supply in Japan by doubling its balance sheet in two years through the purchase of $70billion of newly issued Japanese treasury bonds---each month. Talk about quantitative easing and "loving the way we do it." The reaction was swift and "big in Japan." Within minutes of the announcement, a tsunami of money flowed into the Nikkei (the Japanese stock index) causing it to rise 2%, and the yen fell 2% in value versus the U.S. dollar. Oh, and as for creating a disincentive for anyone other than the BoJ to purchase those new treasury bonds, "there's really nothing to it"---literally. The yield on the 10 year Japanese bond is now hovering at or below 0.5%. That's right--- ZERO (which apparently is no longer just the name of a WWII fighter-bomber in Japan.) The reaction was also big here with my holdings in DXJ, the dollar hedged Japanese exchange traded fund that tracks the broader Japanese stock market, spiking 7.5% in one day!
And if you doubt the current disconnect between the stock market and investing fundamentals, note the depressed prices of virtually every industrial commodity--including many that have been directly correlated to the stock market for several years. Even the greatest bellwether of all, copper, is diverging from the stock market, with copper prices hitting multi month lows. Name the industrial commodity: iron ore, oil, natural gas, corn, "branch water, creosote, turpentine" (but maybe not "sour mash and moonshine") and note that the demand therefor and thus the prices thereof are following the "copperline"--- downward. Understandably, inventories in these commodities are building which indicates that economic activity is slowin'---and yet, contrary to investing fundamentals, the stock market keeps on rollin'. Again, the reason: central banks, the entities that set monetary policy throughout the world, believe that to kick start their economies (read, grow jobs) they must increase the supply of money in an effort to devalue their currency and thus promote exports. Simultaneously, they discourage investment in safe instruments that create no jobs like treasury bonds and c.d.'s and encourage investment in riskier job creating enterprises. With more money chasing a limited number of industrial stocks, prices of those stocks naturally rise. In short, the TINA Factor. Time will tell whether the ploy actually kick starts those economies (which this week's employment numbers belie) or it merely results in over inflated stock prices.
And so it goes. Remember, dear Readers, remain vigilant and nimble. A stock market that inflates with little regard for underlying investment fundamentals can turn on a dime---and perhaps that turn has begun. No matter what---do not fall in love with the stock market. It is merely a means to achieve a return. Indeed, when it comes to achieving any return on investment, recall the admonition of MY favorite TINA (Turner, that is)
"What's love got to do with it?"
P.S. During the big drop on Wednesday I bought more ARCC, my favorite business development company which had the misfortune of pricing its secondary offering that day. I took advantage of the situation and bought in a trough. Its dividend rate in my hands is nearly 9%. I wish I had bought more DXJ that day as well.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Big wheel keep on turning/Proud Mary keep on burning
And we're rollin', rollin'/Rollin' down the river."---lyrics from "Proud Mary" sung by TINA Turner
"Heh, ho they love the way I do it
Heh, ho there's really nothing to it
But, heh I'm big in Japan, I'm big in Japan"---lyrics from "Big in Japan" by Tom Waits
"Branch water and tomato wine/Creosote and turpentine
Sour mash and new moonshine/Down on the copperline."---lyrics from "Copperline" by James Taylor
After reaching an all time high on Tuesday, the Dow Jones Industrial Average (DJIA) experienced two body blows this week. On Wednesday it suffered a triple digit drop on disappointing unemployment claim numbers, a fall in the purchasing manager's index and war-like rumblings from North Korea. On Friday, the monthly jobs report fell far below expectations; so low in fact that former Obama Administration chief economist Austan Goolsbee likened it to a "punch to the gut". After an ugly opening, the DJIA closed down Friday, but only 41 points for the day and only 13 points for the week. In light of these bad economic reports, one wonders whether the "big wheel" that is the stock market can "keep on turning, keep on burning, rollin', rollin', rollin' down the river?" Many commentators answer yes, and in so doing quote Lady Thatcher who several years ago, in response to a question on why she supported free market capitalism, said "There Is No Alternative"; a quote that the tabloids of the day transformed into the TINA Factor. Where, other than stocks and stock like investments, can one achieve any meaningful return today? In an era where central banks have depressed to near zero the return on treasury securites and instruments priced in relation thereto (e.g. investment grade bonds, certificates of deposit, money market accounts, etc.) "There Is No Alternative" to equity or equity like investments. In a very real sense, today, investing is all about getting some return; risk be damned. Monetary policy now holds sway over the stock market with investment fundamentals relegated to the back burner.
If you doubt how monetary policy now dominates stock markets, focus on what happened this past Thursday in Japan. That day, the Bank of Japan (BoJ) (the equivalent to our central bank, the Federal Reserve) in its most aggressive move yet to encourage industrial investment and to spur exports by devaluing the yen, announced its intention to increase the money supply in Japan by doubling its balance sheet in two years through the purchase of $70billion of newly issued Japanese treasury bonds---each month. Talk about quantitative easing and "loving the way we do it." The reaction was swift and "big in Japan." Within minutes of the announcement, a tsunami of money flowed into the Nikkei (the Japanese stock index) causing it to rise 2%, and the yen fell 2% in value versus the U.S. dollar. Oh, and as for creating a disincentive for anyone other than the BoJ to purchase those new treasury bonds, "there's really nothing to it"---literally. The yield on the 10 year Japanese bond is now hovering at or below 0.5%. That's right--- ZERO (which apparently is no longer just the name of a WWII fighter-bomber in Japan.) The reaction was also big here with my holdings in DXJ, the dollar hedged Japanese exchange traded fund that tracks the broader Japanese stock market, spiking 7.5% in one day!
And if you doubt the current disconnect between the stock market and investing fundamentals, note the depressed prices of virtually every industrial commodity--including many that have been directly correlated to the stock market for several years. Even the greatest bellwether of all, copper, is diverging from the stock market, with copper prices hitting multi month lows. Name the industrial commodity: iron ore, oil, natural gas, corn, "branch water, creosote, turpentine" (but maybe not "sour mash and moonshine") and note that the demand therefor and thus the prices thereof are following the "copperline"--- downward. Understandably, inventories in these commodities are building which indicates that economic activity is slowin'---and yet, contrary to investing fundamentals, the stock market keeps on rollin'. Again, the reason: central banks, the entities that set monetary policy throughout the world, believe that to kick start their economies (read, grow jobs) they must increase the supply of money in an effort to devalue their currency and thus promote exports. Simultaneously, they discourage investment in safe instruments that create no jobs like treasury bonds and c.d.'s and encourage investment in riskier job creating enterprises. With more money chasing a limited number of industrial stocks, prices of those stocks naturally rise. In short, the TINA Factor. Time will tell whether the ploy actually kick starts those economies (which this week's employment numbers belie) or it merely results in over inflated stock prices.
And so it goes. Remember, dear Readers, remain vigilant and nimble. A stock market that inflates with little regard for underlying investment fundamentals can turn on a dime---and perhaps that turn has begun. No matter what---do not fall in love with the stock market. It is merely a means to achieve a return. Indeed, when it comes to achieving any return on investment, recall the admonition of MY favorite TINA (Turner, that is)
"What's love got to do with it?"
P.S. During the big drop on Wednesday I bought more ARCC, my favorite business development company which had the misfortune of pricing its secondary offering that day. I took advantage of the situation and bought in a trough. Its dividend rate in my hands is nearly 9%. I wish I had bought more DXJ that day as well.
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