Sunday, December 29, 2013
December 28, 2013 Alpha
Risk/Reward Vol. 201
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"What's it all about Alfie?/Is it just for the moment we live
What's it all about/When you sort it out Alfie?"---lyrics from "Alfie" by Burt Bacharach
"When this old world starts getting me down/And people are just too much for me to face
I climb way up to the top of the stairs/And all my cares just drift right into space
Up on the roof."---lyrics from "Up On The Roof" sung by The Drifters
"For we can fly up, up and away/In my beautiful, my beautiful balloon
The world's a nicer place in my beautiful balloon
It wears a nicer face in my beautiful balloon."---lyrics "Up, Up and Away" sung by The Fifth Dimension
In the financial world, "Alpha"measures the risk adjusted return on an investment. 2013 has been an incredible year for Alpha as the Dow Jones Industrial Average hit another weekly high on Friday. But, "when you sort it out/what's it all about, Alpha?" Is Alpha sustainable or "is it just for the moment?" Financial commentators certainly don't know "what it's all about", with some predicting a continued rosy picture for stocks and others forecasting a steep decline. Personally, I don't know if the stock market can continue to set records, but I do not see a precipitous fall. As I have written previously, with interest rates so low, There Is No Alternative to equities if one wants a decent return. (See a discussion of the "TINA"factor at Vol. 164 www.riskrewardblog.blogspot.com )
Speaking of interest rates, the yield on the 10 Year Treasury Bond broke through the 3% ceiling, an event that back in September I predicted would not happen even if QE3 tapering began. (See Vol.186 www.riskrewardblog.blogspot.com ) I may have been wrong, but the consequences of rates "Up on the Roof" "are not too much for me to face." Indeed, from what I can tell, with interest rates having "climbed way up to the top of the stairs" (the other side of 3%, that is) "this old world isn't getting me down" at all. I'm not saying "all my cares are going to just drift right into space." But, so long as the rise in interest rates is gradual, the impact on the stock market in general and my holdings in particular should be negligible.
Not that I would object to a general rise in interest rates (otherwise known as inflation). Indeed, this is what I wrote in Vol. 1 ( www.riskrewardblog.blogspot.com ):
"As I have explained to each of you, I am in search of a 6%, pre tax return. Throughout most of my life, this would have been a layup. From 1969 through 1997, the 10 Treasury rates rarely fell below 6%. From 1980 through 1985, they never fell below 10%. So, at this stage in my life all I need is a little inflation."
Unfortunately, I do not foresee inflation any time soon. Indeed, the recent minutes of the Federal Reserve bespeak a concern that we are headed into a period of sustained deflation despite the Fed's accommodative monetary policy. Deflation has plagued Japan for nearly 20 years and the conditions that have caused it ( e.g. an aging population, productivity gains and globalization of supply) plague us as well. For an interesting discussion on this topic, Google "Stephen Conwill Japan deflation." (Mr. Conwill is an actuary and President of Milliman of Japan.) The threat of deflation doesn't mean that we cannot earn a decent return (look at this year's Alpha!), but it does mean that we cannot do so simply by investing in low risk securities such as Treasury bonds.
I wish you all a very Happy New Year and may 2014 bring you continued prosperity. A special thanks to those who have responded to my posts. Investing is difficult in today's low interest rate environment. So take some advice from Burt Bacharach and "Make It Easy on Yourself." If you ever feel like "Raindrops Keep Fallin' On Your Head", drop me a line. I'm not "On My Own," and you shouldn't be either. After all, "That's What Friends Are For."
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Saturday, December 21, 2013
December 21, 2013 Top Of The World
Risk/Reward Vol. 200
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Hey life, look at me/I can see the reality
Cause when you shook me/Took me out of my world
I woke up/Suddenly I just woke up/To the happening."---lyrics from "The Happening" sung by The Supremes
"It's beginning to look a lot like Christmas/Everywhere you go
Take a look at the five and ten/Glimmering once again."---lyrics from "It's Beginning to Look a Lot Like Christmas" sung by everyone
"So they sprinkled gold dust in your hair of gold/And starlight in your eyes of blue
Just like me/They long to be/Close to you.---lyrics from "Close to You" by The Carpenters
Wow, on Wednesday Uncle Ben Bernanke and the Federal Reserve's Open Market Commitee (FOMC) "shook us/Took us out of our world." Early that afternoon, contrary to prevailing wisdom, the FOMC announced that starting in January it would reduce or "taper" by $10 billion/month its program (known as QE3) of purchasing $85 billion/month worth of Treasury securities and mortgages. The FOMC further stated that it would continue to keep short term interest rates low, but likely would reduce gradually its asset purchases down to zero by year end 2014. The "market woke up/Suddenly it just woke up to the happening." Within minutes of the announcement, the Dow Jones Industrial Average (DJIA) left negative territory and rose over 100 points. By day's end, the DJIA was up 293 points. Activity moderated on Thursday and at the close on Friday, but the DJIA was up 466 points for the week setting another record high.
With Wednesday's action, "it's beginning to look a lot like Christmas/Everywhere you go" in the stock market. Was Wednesday's meteoric rise simply an example of the oft cited but inexplicable Santa Claus effect? If you review the news stories that morning, you will see that no one predicted a huge rise in the stock indices should tapering begin. And after the fact, the rationale for the rise was poorly explained; if explained at all. I suggest the reason for the rise was the response in the underappreciated but extremely important bond market. Indeed, "take a look at the five and ten" year Treasury Bonds and in particular their yields in the wake of the announcement. Obviously, bond traders took heart in the fact that tapering, notwithstanding, the short term Treasury rates would remain at historic lows for the foreseeable future. Moreover, as discussed in last week's edition, it is my belief that tapering was already priced into bonds so I was not surprised by the traders' nonchalance. As a consequence, the yield on the 10 Year Treasury Bond (its importance to asset prices in general and income securities in particular is explained at Vol. 172 www.riskrewardblog.blogspot.com ) closed on Wednesday at 2.88; exactly where it was throughout most of the week. This stability signalled to stock buyers that the value of their assets would not be eroded by a spike in interest rates, and green lights in the stock market were "glimmering once again." The 10 Year yield closed the week at 2.89%.
For me, the bond market's muted response to QE3's tapering is tantamount to "sprinkling gold dust in my hair /And starlight in my eyes of blue." Why, you ask? I contend that the stock market has harbored a fear that tapering would result in the 10Year rate spiking well above 3% which in turn would cause the price of assets priced in relation to that rate to fall in value (remember the price of an interest rate sensitive securtiy falls when interest rates increase). It is for this reason that these assets have traded at depressed prices since the specter of tapering first arose back in May. And no asset class has suffered more than"Closed(to you") end funds, especially closed end funds comprised of preferred stocks (e.g. FFC, HPI, HPF, etc.), municipal bonds (EIM, MVF), REIT's (RQI), and utilities (UTF and BUI) many of which are trading at double digit discounts to net asset value and all of which pay handsome (often monthly) dividends. They will continue to be depressed through year end as many investors look to sell their losers in order to capture tax losses in what otherwise was a gang buster year. Thus in the short term, closed end funds may present excellent opportunities "to be long". BUT CAUTION, don't act "Just like me"---do your own homework and draw your own conclusions.
In the words of The Capenters, "We've Only Just Begun" QE3 tapering and "For All We Know" its longer term consequences could result in a series of "Rainy Days and Mondays."--- which "always get us down." But for now the markets are "On Top of The World." Moreover, no matter what, I intend to "Have Myself a Merry Little Christmas." I am wishing you the same.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Hey life, look at me/I can see the reality
Cause when you shook me/Took me out of my world
I woke up/Suddenly I just woke up/To the happening."---lyrics from "The Happening" sung by The Supremes
"It's beginning to look a lot like Christmas/Everywhere you go
Take a look at the five and ten/Glimmering once again."---lyrics from "It's Beginning to Look a Lot Like Christmas" sung by everyone
"So they sprinkled gold dust in your hair of gold/And starlight in your eyes of blue
Just like me/They long to be/Close to you.---lyrics from "Close to You" by The Carpenters
Wow, on Wednesday Uncle Ben Bernanke and the Federal Reserve's Open Market Commitee (FOMC) "shook us/Took us out of our world." Early that afternoon, contrary to prevailing wisdom, the FOMC announced that starting in January it would reduce or "taper" by $10 billion/month its program (known as QE3) of purchasing $85 billion/month worth of Treasury securities and mortgages. The FOMC further stated that it would continue to keep short term interest rates low, but likely would reduce gradually its asset purchases down to zero by year end 2014. The "market woke up/Suddenly it just woke up to the happening." Within minutes of the announcement, the Dow Jones Industrial Average (DJIA) left negative territory and rose over 100 points. By day's end, the DJIA was up 293 points. Activity moderated on Thursday and at the close on Friday, but the DJIA was up 466 points for the week setting another record high.
With Wednesday's action, "it's beginning to look a lot like Christmas/Everywhere you go" in the stock market. Was Wednesday's meteoric rise simply an example of the oft cited but inexplicable Santa Claus effect? If you review the news stories that morning, you will see that no one predicted a huge rise in the stock indices should tapering begin. And after the fact, the rationale for the rise was poorly explained; if explained at all. I suggest the reason for the rise was the response in the underappreciated but extremely important bond market. Indeed, "take a look at the five and ten" year Treasury Bonds and in particular their yields in the wake of the announcement. Obviously, bond traders took heart in the fact that tapering, notwithstanding, the short term Treasury rates would remain at historic lows for the foreseeable future. Moreover, as discussed in last week's edition, it is my belief that tapering was already priced into bonds so I was not surprised by the traders' nonchalance. As a consequence, the yield on the 10 Year Treasury Bond (its importance to asset prices in general and income securities in particular is explained at Vol. 172 www.riskrewardblog.blogspot.com ) closed on Wednesday at 2.88; exactly where it was throughout most of the week. This stability signalled to stock buyers that the value of their assets would not be eroded by a spike in interest rates, and green lights in the stock market were "glimmering once again." The 10 Year yield closed the week at 2.89%.
For me, the bond market's muted response to QE3's tapering is tantamount to "sprinkling gold dust in my hair /And starlight in my eyes of blue." Why, you ask? I contend that the stock market has harbored a fear that tapering would result in the 10Year rate spiking well above 3% which in turn would cause the price of assets priced in relation to that rate to fall in value (remember the price of an interest rate sensitive securtiy falls when interest rates increase). It is for this reason that these assets have traded at depressed prices since the specter of tapering first arose back in May. And no asset class has suffered more than"Closed(to you") end funds, especially closed end funds comprised of preferred stocks (e.g. FFC, HPI, HPF, etc.), municipal bonds (EIM, MVF), REIT's (RQI), and utilities (UTF and BUI) many of which are trading at double digit discounts to net asset value and all of which pay handsome (often monthly) dividends. They will continue to be depressed through year end as many investors look to sell their losers in order to capture tax losses in what otherwise was a gang buster year. Thus in the short term, closed end funds may present excellent opportunities "to be long". BUT CAUTION, don't act "Just like me"---do your own homework and draw your own conclusions.
In the words of The Capenters, "We've Only Just Begun" QE3 tapering and "For All We Know" its longer term consequences could result in a series of "Rainy Days and Mondays."--- which "always get us down." But for now the markets are "On Top of The World." Moreover, no matter what, I intend to "Have Myself a Merry Little Christmas." I am wishing you the same.
Saturday, December 14, 2013
December 14, 2014 Skyfall(Not)
Risk/Reward Vol. 199
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"She, she ain't real/She is a stranger
Sure, she's got it all/But baby is that what you really want?
Rumor has it."---lyrics from "Rumor Has It" sung by Adele
"You wanted me so much/But I didn't get it
How could a fellow be so blind
And we began to rock steady
Steady rockin' all night long."---lyrics from "Rock Steady" sung by The Whispers
"Here I go again
I hear those trumpets blow again
All aglow again
Taking a chance on love "---lyrics from "Taking a Chance On Love" sung by Frank Sinatra
Although "She is a stranger", "She's got it all (the power that is), and "Rumor has it" that a favorite economic barometer for Federal Reserve Chair-nominee Janet Yellen (as well as outgoing Chair Bernanke) is the job opportunity number. That statistic was released on Tuesday and showed 3.93 million job opportunities, the most since May, 2008. At first blush this should be viewed as good news, but "Baby is that what you really want?" It's not what the stock market wanted as the Dow Jones Industrial Average (DJIA), after gaining steam on Monday, ended the week down 265 points. Many stock traders believe that this improved job opportunities number plus the real possibility of a budget deal by Congress (one passed the House late Thursday) heightens the likelihood of QE3 tapering and by extension means higher interest rates and lower asset prices.
I suggest that Mr. Market is overreacting. Indeed, "How could a fellow be so blind?" Doesn't "he get it?" When interest rates are the concern, look to the bond market. And the bond market is telling us that tapering sometime before March 2014 is already priced-in. Indeed, despite tapering's imminence (we should get a good read on its actual timing after next week's Federal Open Market Committee (FOMC) meeting), the yield on the bellwether 10 Year Treasury Bond held "rock steady/Steady rockin' all night (and all week) long" below 2.9% As I wrote last week (see Vol. 198 www.riskrewardblog.blogspot.com) this suggests to me that hemorrhaging by other interest rate sensitive securities is near the end.
So, does my above-stated conclusion mean that "I hear the trumpets blow again," that "I'm all aglow again", and that I'm "willing to take a chance" again on these rate sensitive securites such as preferred stocks, real estate investment trusts, levered closed end funds, business development companies, etc. exposure to which I have pared? (See Vol. 195 www.riskrewardblog.blogspot.com ) NO, NOT YET! Although many of these are at or near their 52 week lows (e.g. O, FFC, FLC), I must resist the temptation to go bottom hunting. If I am right, there should be ample opportunity to purchase them at bargain prices (if not at their absolute low points) once better visibilty on the actual tapering timeline appears.
Next week's market again will be dominated by what is done and said at the FOMC meeting. If QE3 tapering begins or its initiation in January is foretold, I am predicting that the bond market will not experience a"Skyfall". As stated above, I believe that the bond market has already priced tapering into interest rates and that its implementation will not "Set Fire to the Rain." That said, I will continue to sit on my large cash position until more certainty is had on this front. I will then buy into my favorite, interest rate sensitive, income producing sectors and hopefully, like Adele, be "Rolling In The Deep" soon thereafter.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"She, she ain't real/She is a stranger
Sure, she's got it all/But baby is that what you really want?
Rumor has it."---lyrics from "Rumor Has It" sung by Adele
"You wanted me so much/But I didn't get it
How could a fellow be so blind
And we began to rock steady
Steady rockin' all night long."---lyrics from "Rock Steady" sung by The Whispers
"Here I go again
I hear those trumpets blow again
All aglow again
Taking a chance on love "---lyrics from "Taking a Chance On Love" sung by Frank Sinatra
Although "She is a stranger", "She's got it all (the power that is), and "Rumor has it" that a favorite economic barometer for Federal Reserve Chair-nominee Janet Yellen (as well as outgoing Chair Bernanke) is the job opportunity number. That statistic was released on Tuesday and showed 3.93 million job opportunities, the most since May, 2008. At first blush this should be viewed as good news, but "Baby is that what you really want?" It's not what the stock market wanted as the Dow Jones Industrial Average (DJIA), after gaining steam on Monday, ended the week down 265 points. Many stock traders believe that this improved job opportunities number plus the real possibility of a budget deal by Congress (one passed the House late Thursday) heightens the likelihood of QE3 tapering and by extension means higher interest rates and lower asset prices.
I suggest that Mr. Market is overreacting. Indeed, "How could a fellow be so blind?" Doesn't "he get it?" When interest rates are the concern, look to the bond market. And the bond market is telling us that tapering sometime before March 2014 is already priced-in. Indeed, despite tapering's imminence (we should get a good read on its actual timing after next week's Federal Open Market Committee (FOMC) meeting), the yield on the bellwether 10 Year Treasury Bond held "rock steady/Steady rockin' all night (and all week) long" below 2.9% As I wrote last week (see Vol. 198 www.riskrewardblog.blogspot.com) this suggests to me that hemorrhaging by other interest rate sensitive securities is near the end.
So, does my above-stated conclusion mean that "I hear the trumpets blow again," that "I'm all aglow again", and that I'm "willing to take a chance" again on these rate sensitive securites such as preferred stocks, real estate investment trusts, levered closed end funds, business development companies, etc. exposure to which I have pared? (See Vol. 195 www.riskrewardblog.blogspot.com ) NO, NOT YET! Although many of these are at or near their 52 week lows (e.g. O, FFC, FLC), I must resist the temptation to go bottom hunting. If I am right, there should be ample opportunity to purchase them at bargain prices (if not at their absolute low points) once better visibilty on the actual tapering timeline appears.
Next week's market again will be dominated by what is done and said at the FOMC meeting. If QE3 tapering begins or its initiation in January is foretold, I am predicting that the bond market will not experience a"Skyfall". As stated above, I believe that the bond market has already priced tapering into interest rates and that its implementation will not "Set Fire to the Rain." That said, I will continue to sit on my large cash position until more certainty is had on this front. I will then buy into my favorite, interest rate sensitive, income producing sectors and hopefully, like Adele, be "Rolling In The Deep" soon thereafter.
Saturday, December 7, 2013
December 7, 2013 Wearing Shades
Risk/Reward Vol. 198
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"So twiddly-dee, twiddly dum
Look out baby, cause here I come
So get ready, so get ready."---lyrics from "Get Ready" sung by The Temptations
"Apogee solar bright/Apogee through the night
Apogee over ground/Don't think I'll be coming down."---lyrics from "Apogee" by Jethro Tull
"Things are great/And they're only getting better
I'm doing all right/Getting good grades
The future's so bright/I gotta wear shades."---lyrics from "Future's So Bright I Gotta Wear Shades" by Timbuk 3
All week the market absorbed and processed news in anticipation of Friday's all important, "Look out baby, cause here I come," jobs report. As the week unfolded, good news on employment from ADP ("twiddly-dee") and on the GDP front ("twiddly dum") conditioned the market to "get ready, get ready" for a jobs report at or near a 200,000 increase. In the Bizarro World of investing that meant that the Dow Jones Industrial Average (DJIA) dropped 264 points through Thursday because good economic news heightens the likelihood that the Federal Reserve will taper its QE3 program which in turn could cause interest rates to spike and potentially could depress stock prices. When the jobs report came in as expected on Friday, the DJIA rose 198 points, closing the week only 66 points down. How come?
I believe the market rose on Friday because of happenings in the bond market. Anticipating a good jobs number and the real possibililty that QE3 tapering will begin in December or January, the yield on the 10 Year Treasury Bond rose precipitously from 2.74% last Friday to 2.88% on Thursday. However, when the good jobs report came on Friday, the rate on the 10 Year held below 2.9% To me, this means that if the Federal Reserve begins tapering within the next 60 days (and I think it will based upon several weeks of good economic news and the recent comments of some Fed members such as Charles Plosser), interest rates will not spike. Indeed, they may be at their "Apogee" whether "solar bright or through the night" I for one "don't think they'll be coming down", either. We are where we were back in mid September when the investing world believed that QE3 tapering was imminent only to be shocked when it was not implemented. I predicted then as I do again today that 3% is the ceiling on the 10Year yield for the foreseeable future---and that it will hold even if tapering begins soon--and let's all hope it does. (See Vol. 186 www.riskrewardblog.blogspot.com )
If I am right, then "Things are great/And they're only going to get better" for me. Don't get me wrong. "I'm doing all right this year/Getting good grades" if you will. But if tapering begins and the rate on the 10 Year stays below 3%, my "future's so bright/I gotta wear shades." I will deploy cash into my favorite income producing sectors (bdc's, preferred stock, REIT's),reap some capital appreciation (because these sectors are oversold) and collect outsized dividends. I just need to be patient for a few weeks. The next big event on the interest rate front is the FOMC meeting on December 15-16. We should get a good read on tapering then. And speaking of a "future so bright" did you catch the forward guidance given by two of my favorite oil plays (KMP and LINE)? Income investors should read what each said this week about next year's distributions.
Investing is not easy. I have spent a great deal of time studying the market. As The Temptations say, it's "Really Got a Hold On Me." That said, I "Ain't Too Proud to Beg" for input and advice. I am interested in learning "The Way You Do The Thing You Do." So unless you're "Too Busy Thinking About Your Baby", drop me a line with your thoughts and observations. Doing so would be like "Sunshine on a Cloudy Day." and will put me on "Cloud Nine."
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