Risk/Reward Vol. 218
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You may be right/I may be crazy
But it just may be a lunatic/You're looking for."---lyrics from "You May Be Right" sung by Billy Joel
"People who need people
Are the luckiest people in the world
Children needing other children"---lyrics from "People" sung by Barbra Streisand
"A room is still a room
Even when there's nothing there but gloom
But a room is not a house
And a house is not a home."---lyrics from "A House Is Not a Home" sung by Dionne Warwick
Busch's Postulate: Interest rates will not increase in the foreseeable future.
In so postulating, I posit two premises: 1) economies in countries with aging and shrinking populations do not grow; and 2) the above notwithstanding, central bankers and the economists that they employ believe they can spur economic growth by maintaining low interest rates. I lit on these two premises while reading Harry Dent Jr.'s new book "The Demographic Cliff". If you google Mr. Dent, you may conclude that he is a crackpot. "You may be right/He may be crazy/But it just may be a lunatic (as opposed to an economist) that we are looking for." And before dismissing premise number one, take a gander at Japan's experience over the past 15 years and keep an eye on present day Europe. One has long suffered from economic stagnation, even deflation and the other is on the verge. (Indeed , my concern is such that I am currently spending several days on the French Riviera helping its economy.) The US is not far behind. All three have aging/shrinking populations. Dent is not alone in his thinking. Read the musings of Stephen Conwill who as president of Milliman of Japan has witnessed deflation first hand and who has issued the following challenge: "Find in history an example of an economy that has combined solid growth with a declining population."
It is Mr. Dent's further contention that a person's peak age of consumption is 46--- a larger abode, college tuition, a second home, a nicer car, etc. With the post World War II Baby Boom ending in 1961, simple math led Dent to conclude that Baby Boomer consumption crested in 2007. The offspring of the Boomers have heretofore reproduced at less than the population replacement rate (1.84 births per woman vs. 2.1 needed to simply replace a population) and even that rate is trending down. Apparently, they do not believe that "People who need people/Are the luckiest people in the world." Or that "children need other children." As Harry puts it, in the US the dyers are outnumbering the buyers. (N.B. In 2012 deaths outnumbered births in the US non-Hispanic white population for the first time in history.) The birth rate in Europe and Japan is even lower, and if you think that China will help spur demand, think of the impact of the "one child rule". Hence, Dent sees years of lessening demand world wide and slow to no growth.
So how does this impact my investing? As noted in premise two above, central bankers have unlimited hubris, but limited tools to combat slow growth. They can keep short term interest rates low by fiat (e.g. via the Fed fund rate) and longer term ones low by quantitative easing (e.g. buying bonds and mortgages). Both may have a short term positive impact on the stock market but neither has proven to spur economic growth. As reported this week, despite spending hundreds of billions of dollars to suppress mortgage rates (QE3), new home sales for March were at an annualized rate of 384,000 down from February and downright puny when compared to the 1,400,000 new homes sold in 2005. Last week, the number of existing home sales was reported at an annualized rate of 4.6million compared to 7.25million in 2005. Talk about "nothing there but gloom." I guess Dionne is right, "a room is not a house/And a house is not a home"--- if no one buys it, that is. Yet, despite demonstrated ineffectiveness, we can expect the Fed to keep interest rates low. And as long as interest rates stay low (especially on the 10Year US Treasury Bond) my high yielding, income securities remain a good investment. Holding pat with preferred stocks, utilities, real estate investment trusts and leveraged close end funds seems the right thing to do.
The mediocre performance of the stock market year to date (as of Friday the Dow Jones Industrial Average is down 1% and the S&P is up less than 1%) reflects mounting concern over the prospects for solid economic growth despite low interest rates. Some, like Dent, believe that slow growth could become no growth or even deflation. I'm not saying that any day soon you, like Ms. Warwick, will be able to "put $100 down and buy a car", but the deflationary impact of an aging/shrinking population is disconcerting. And as for Janet Yellen, like all central bankers,
"The moment she wakes up
Before she puts on her make up
She says a little prayer"
that low interest rates will spur growth. Bonne chance, Janet!
Au revoir from Nice.
Saturday, April 26, 2014
Saturday, April 19, 2014
April 19, 2014 Bond Lorde
Risk/Reward Vol. 217
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I know y'all think I'm lyin'
But listen you're wrong
Like I told you before
My word is bond."---lyrics "Word is Bond" sung by Ice T
"Then I began to fall so low
Lost all my friends/Had no where to go
Because nobody knows you
When you're down and out."---lyrics from "Nobody Knows You When You're Down and Out" sung by Eric Clapton
"We were in the hospital
Waiting for you to get well
In the ambulance you were laughing
The real fun was when we were young."---lyrics from "Hospital" sung by Lorde
As loyal readers know, I am an income investor. Because interest rates have been at historic lows since the financial crisis of 2008, my search for yield has forced me out of investment grade bonds and into riskier income securities such as master limited partnerships, real estate investment trusts, utlilites, preferred stocks, etc. But, "like I told you before", "my world is (still dictated by) bonds." With as many equity positions as I have, "I know y'all think I'm lying'"; "but listen you're wrong." Bonds, particularly the 10 Year U.S. Treasury Bond ("10Year"), influence, nay dominate, my every move. My thesis is this: understanding income producing stocks requires understanding bonds. Here is why. Backed by the full faith, credit and property of the United States, the 10Year is the security most analogous to the hypothetical risk-free asset upon which modern portfolio theory is based. All income securities are priced in relation (or "spread") to the return available on risk free assets; the greater the risk, the greater the spread that Mr. Market demands. Thus any movement in price/yield on the 10Year necessarily impacts all income securities. That's why I follow the bond market so assiduously. I even tolerate Rick Santelli's speaking voice (or rather his yelling). His insights on the bond market heard daily on CNBC are worth the screech and signal more about what to expect than any other commentary on that station. Also, it's why I read any and all columns written by Jon Hilsenrath of the Wall Street Journal ( free for non subscribers via Google one or two days after publication). His columns on bonds and interest rates are so influential, he refuses to Tweet, fearing the possible impact of an off-handed, unedited comment.
As loyal readers also know, central banks greatly influence bond prices (and thus their yields) by controlling short term interest rates, issuing forward guidance and purchasing bonds outright in programs such as the Federal Reserves's QE3. Less well known is the influence of two large bond fund sponsors, PIMCO and BlackRock, and the men who run them, Bill Gross and Larry Fink. If you look at the bond funds offered by your 401(k), chances are one or more are sponsored by PIMCO or BlackRock. Between them, these two sponsors control over $3Trillion worth of bonds, or over 3%% of the world's supply ($90TR). By comparison, despite having purchased $85billion of bonds per month for more than a year (QE3), the Federal Reserve today holds a total of $4Trillion in bonds, only 25% more than PIMCO and BlackRock. As you know, the spike in interest rates last year (after almost 30 years of falling rates) caused the price of bonds to plummet. (Remember, rising rates means falling prices.) Not surprisingly, "nobody fell so low" as Bill Gross who for the past decade has been known as the Bond King. Gross' reputation also suffered from orchestrating the departure of PIMCO's popular CEO, Mohamed El Erian. Indeed, recently it has been as if "Gross lost all his friends/and Had no where to go" But in my opinion, Gross' current diminished circumstance presents an excellent opportunity for income investors. It was precisely "Because nobody wanted to know Gross/When he was down and out" that I was able to purchase, at a discount to net asset value, shares of PFN, a closed end bond fund personally managed by Gross. PFN pays a 9+% annual dividend on a monthly basis and heretofore rarely if ever traded at a discount. In my opinion, buying PFN (and Gross' expertise) at a discount (still available, by the way) is like getting front row seats below face value to an Eric Clapton concert.
On the equity side, few sectors have outperformed real estate investment trusts (REIT's) this year. REIT's suffered from the spike in interest rates in 2013 because, as discussed above, they trade in relation to the 10Year. If interest rates increase as they did sharply last summer, prices fall. But REIT's have flourished in this year's surprisingly (to person's other than me, that is--see Vol. 186 http://www.riskrewardblog.blogspot.com ) stable rate environment . And in the REIT sector, health care REIT's have done particularly well. These entities own health care facilities which they rent via long term, triple net leases to hospitals, nursing home operators and physician groups. You may be of the opinion that "the real fun was when we were young", but the future for aging America is "in the ambulance" and/or "in the hospital waiting to get well". Consequently, I own HCN and HCP, both of which are up over 10% year to date. Since both now pay only a mid 5% dividend due to their run up in price, I do not see them appreciating in the next several months. For that reason, I recently purchased shares in HCT, a smaller health care REIT run by Nicholas Schorsch and William Kahane. They built ARCP into the largest commercial, triple net REIT in the country. I look for them to repeat that success in the health care arena, all the while maintaining a 7% dividend.
Thankfully, the markets rallied this holiday-shortened week. The Dow Jones Industrial Average closed up 382 points. And speaking of thanks, thank you all for your patience as I struggle to make sense of investing. Recording my thoughts and observations is helping me to formulate an investment philosophy. Moreover, I find your feedback to be invaluable. Clearly, I remain a novice, and under no circumstance would I, like Lorde, request that you "let me be your ruler, ruler." I do not wish to "live that fantasy." But I am convinced that the better we understand concepts such as relational asset pricing, the better investors we will be. We will no longer be merely "driving Cadillacs in our dreams." Instead, we will be enjoying:
"...Cristal, Maybach, diamonds on our timepiece
Jet planes, islands, and tigers on a gold leash."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I know y'all think I'm lyin'
But listen you're wrong
Like I told you before
My word is bond."---lyrics "Word is Bond" sung by Ice T
"Then I began to fall so low
Lost all my friends/Had no where to go
Because nobody knows you
When you're down and out."---lyrics from "Nobody Knows You When You're Down and Out" sung by Eric Clapton
"We were in the hospital
Waiting for you to get well
In the ambulance you were laughing
The real fun was when we were young."---lyrics from "Hospital" sung by Lorde
As loyal readers know, I am an income investor. Because interest rates have been at historic lows since the financial crisis of 2008, my search for yield has forced me out of investment grade bonds and into riskier income securities such as master limited partnerships, real estate investment trusts, utlilites, preferred stocks, etc. But, "like I told you before", "my world is (still dictated by) bonds." With as many equity positions as I have, "I know y'all think I'm lying'"; "but listen you're wrong." Bonds, particularly the 10 Year U.S. Treasury Bond ("10Year"), influence, nay dominate, my every move. My thesis is this: understanding income producing stocks requires understanding bonds. Here is why. Backed by the full faith, credit and property of the United States, the 10Year is the security most analogous to the hypothetical risk-free asset upon which modern portfolio theory is based. All income securities are priced in relation (or "spread") to the return available on risk free assets; the greater the risk, the greater the spread that Mr. Market demands. Thus any movement in price/yield on the 10Year necessarily impacts all income securities. That's why I follow the bond market so assiduously. I even tolerate Rick Santelli's speaking voice (or rather his yelling). His insights on the bond market heard daily on CNBC are worth the screech and signal more about what to expect than any other commentary on that station. Also, it's why I read any and all columns written by Jon Hilsenrath of the Wall Street Journal ( free for non subscribers via Google one or two days after publication). His columns on bonds and interest rates are so influential, he refuses to Tweet, fearing the possible impact of an off-handed, unedited comment.
As loyal readers also know, central banks greatly influence bond prices (and thus their yields) by controlling short term interest rates, issuing forward guidance and purchasing bonds outright in programs such as the Federal Reserves's QE3. Less well known is the influence of two large bond fund sponsors, PIMCO and BlackRock, and the men who run them, Bill Gross and Larry Fink. If you look at the bond funds offered by your 401(k), chances are one or more are sponsored by PIMCO or BlackRock. Between them, these two sponsors control over $3Trillion worth of bonds, or over 3%% of the world's supply ($90TR). By comparison, despite having purchased $85billion of bonds per month for more than a year (QE3), the Federal Reserve today holds a total of $4Trillion in bonds, only 25% more than PIMCO and BlackRock. As you know, the spike in interest rates last year (after almost 30 years of falling rates) caused the price of bonds to plummet. (Remember, rising rates means falling prices.) Not surprisingly, "nobody fell so low" as Bill Gross who for the past decade has been known as the Bond King. Gross' reputation also suffered from orchestrating the departure of PIMCO's popular CEO, Mohamed El Erian. Indeed, recently it has been as if "Gross lost all his friends/and Had no where to go" But in my opinion, Gross' current diminished circumstance presents an excellent opportunity for income investors. It was precisely "Because nobody wanted to know Gross/When he was down and out" that I was able to purchase, at a discount to net asset value, shares of PFN, a closed end bond fund personally managed by Gross. PFN pays a 9+% annual dividend on a monthly basis and heretofore rarely if ever traded at a discount. In my opinion, buying PFN (and Gross' expertise) at a discount (still available, by the way) is like getting front row seats below face value to an Eric Clapton concert.
On the equity side, few sectors have outperformed real estate investment trusts (REIT's) this year. REIT's suffered from the spike in interest rates in 2013 because, as discussed above, they trade in relation to the 10Year. If interest rates increase as they did sharply last summer, prices fall. But REIT's have flourished in this year's surprisingly (to person's other than me, that is--see Vol. 186 http://www.riskrewardblog.blogspot.com ) stable rate environment . And in the REIT sector, health care REIT's have done particularly well. These entities own health care facilities which they rent via long term, triple net leases to hospitals, nursing home operators and physician groups. You may be of the opinion that "the real fun was when we were young", but the future for aging America is "in the ambulance" and/or "in the hospital waiting to get well". Consequently, I own HCN and HCP, both of which are up over 10% year to date. Since both now pay only a mid 5% dividend due to their run up in price, I do not see them appreciating in the next several months. For that reason, I recently purchased shares in HCT, a smaller health care REIT run by Nicholas Schorsch and William Kahane. They built ARCP into the largest commercial, triple net REIT in the country. I look for them to repeat that success in the health care arena, all the while maintaining a 7% dividend.
Thankfully, the markets rallied this holiday-shortened week. The Dow Jones Industrial Average closed up 382 points. And speaking of thanks, thank you all for your patience as I struggle to make sense of investing. Recording my thoughts and observations is helping me to formulate an investment philosophy. Moreover, I find your feedback to be invaluable. Clearly, I remain a novice, and under no circumstance would I, like Lorde, request that you "let me be your ruler, ruler." I do not wish to "live that fantasy." But I am convinced that the better we understand concepts such as relational asset pricing, the better investors we will be. We will no longer be merely "driving Cadillacs in our dreams." Instead, we will be enjoying:
"...Cristal, Maybach, diamonds on our timepiece
Jet planes, islands, and tigers on a gold leash."
Saturday, April 12, 2014
April 12 , 2014 Ronnie
Risk/Reward Vol. 216
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You're just too good to be true/Can't take my eyes off of you
You'd be like heaven to touch/I wanna hold you so much."---lyrics from "Too Good To Be True" sung by The Four Seasons
"You keep lifting me higher/Than I've ever been lifted before
So keep it up/Quench my desire
And I'll be at your side for evermore."---lyrics from "Higher and Higher" sung by Jackie Wilson
"Wherever it is/I'll fly
Whatever it takes/I'll try."---lyrics from "Whatever It Takes" sung by Leona Lewis
The Dow Jones Industrial Average, the NASDAQ Composite and the S&P 500 are all in tailspins. But, this week was "just too good to be true" for those who own income securities. Preferred stock, mortgage real estate investment trusts and leveraged closed end funds "were like heaven to touch/I loved holding them so much." Why you ask? As I have written in the past (Vols. 172 and 207 www.riskrewardblog.blogspot.com ), income securities are priced in relation to (or "spread" from) the 10 Year U.S. Treasury Bond. As the interest rate on the 10Year decreases (and concomitantly its price increases), the yields from other income securities become more attractive to investors, and the prices thereof increase. With the release on Wednesday of the minutes from the March Federal Reserve meeting, concerns about the Fed raising interest rates any time soon abated. In response, the yield on the 10 Year sank into low 2.6% territory. In turn, the prices of income securities held firm or increased on Thursday and Friday even as the broader markets sputtered and crashed.
For example, despite double digit gains year to date, several preferred stock closed end funds attracted higher bids all week. The reason is clear: they are paying an 8+% dividend. That is remarkable in this yield starved world. Indeed, the ones I own "keep lifting me higher/Than I've ever been lifted before." Moreover, so long as the 10Year interest rate stays at or below 2.8%, I believe these funds will "keep it up/ and Quench my desire." If they do, "I'll be at their side for evermore." A good place to research them is www.cefconnect.com . Access the Fund Screener, and screen for Taxable Income-Preferreds. You will see 17 funds displayed. They are all very similar. I like to buy ones that trade at a discount to net asset value. If you do buy, however, remember noted investor Frankie Valli's warning: "Can't take my eyes off of you". Because, if the 10Year rate increases, preferred funds will drop like rocks. These are not for the faint of heart.
Central banks keep interest rates low to discourage saving, to encourage investment and to spur economic growth. In the wake of the Great Recession, central bankers have adopted other "Wherever it is/I'll fly/Whatever it is/I'll try" policies to further encourage growth including forward guidance and outright asset purchases ( e.g. quantitative easing). Unfortunately, these initiatives have not been as successful as hoped, and central bankers are running out of ammunition. Interest rates can not go much lower without adverse consequences, many of which are beginning to surface For example, junk bonds now average a meager 5.2% return; subprime collateralized loan obligations (CLO'S) are selling as they did in 2007; and Greece successfully issued 5 year bonds just this week at 4.95%. These rates do not adequately compensate investors for the risks they are undertaking. To make matters worse, many fear that demographics (read, 40 years of low birth rates in developed nations) have reduced demand so much that world wide deflation may be near. The Japanese economy (the world's third largest) has been deflationary for the past several years; little wonder considering more adult than baby diapers are sold there. No kidding! (pun intended.) As I have written previously (Vol. 204 www.riskrewardblog.blogspot.com ), deflation is a greater threat today than inflation.
In sum, current central bank monetary policies have run out of steam as engines of economic growth. And, with interest rates as low as they are, central bankers have little if anything left to offer. One can debate the form, but a change in fiscal policy is sorely needed. I prefer Reaganomics (tax reform) over Keynes (government spending). Unfortunately, there is little prospect for either during an election year. Not surprisingly, these days I find myself singing:
"Ronnie, Ronnie, Ronnie why did you go?
Ronnie, oh Ronnie, Ronnie I am regretting
But can't stop forgetting
Because you/ You were my first love."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You're just too good to be true/Can't take my eyes off of you
You'd be like heaven to touch/I wanna hold you so much."---lyrics from "Too Good To Be True" sung by The Four Seasons
"You keep lifting me higher/Than I've ever been lifted before
So keep it up/Quench my desire
And I'll be at your side for evermore."---lyrics from "Higher and Higher" sung by Jackie Wilson
"Wherever it is/I'll fly
Whatever it takes/I'll try."---lyrics from "Whatever It Takes" sung by Leona Lewis
The Dow Jones Industrial Average, the NASDAQ Composite and the S&P 500 are all in tailspins. But, this week was "just too good to be true" for those who own income securities. Preferred stock, mortgage real estate investment trusts and leveraged closed end funds "were like heaven to touch/I loved holding them so much." Why you ask? As I have written in the past (Vols. 172 and 207 www.riskrewardblog.blogspot.com ), income securities are priced in relation to (or "spread" from) the 10 Year U.S. Treasury Bond. As the interest rate on the 10Year decreases (and concomitantly its price increases), the yields from other income securities become more attractive to investors, and the prices thereof increase. With the release on Wednesday of the minutes from the March Federal Reserve meeting, concerns about the Fed raising interest rates any time soon abated. In response, the yield on the 10 Year sank into low 2.6% territory. In turn, the prices of income securities held firm or increased on Thursday and Friday even as the broader markets sputtered and crashed.
For example, despite double digit gains year to date, several preferred stock closed end funds attracted higher bids all week. The reason is clear: they are paying an 8+% dividend. That is remarkable in this yield starved world. Indeed, the ones I own "keep lifting me higher/Than I've ever been lifted before." Moreover, so long as the 10Year interest rate stays at or below 2.8%, I believe these funds will "keep it up/ and Quench my desire." If they do, "I'll be at their side for evermore." A good place to research them is www.cefconnect.com . Access the Fund Screener, and screen for Taxable Income-Preferreds. You will see 17 funds displayed. They are all very similar. I like to buy ones that trade at a discount to net asset value. If you do buy, however, remember noted investor Frankie Valli's warning: "Can't take my eyes off of you". Because, if the 10Year rate increases, preferred funds will drop like rocks. These are not for the faint of heart.
Central banks keep interest rates low to discourage saving, to encourage investment and to spur economic growth. In the wake of the Great Recession, central bankers have adopted other "Wherever it is/I'll fly/Whatever it is/I'll try" policies to further encourage growth including forward guidance and outright asset purchases ( e.g. quantitative easing). Unfortunately, these initiatives have not been as successful as hoped, and central bankers are running out of ammunition. Interest rates can not go much lower without adverse consequences, many of which are beginning to surface For example, junk bonds now average a meager 5.2% return; subprime collateralized loan obligations (CLO'S) are selling as they did in 2007; and Greece successfully issued 5 year bonds just this week at 4.95%. These rates do not adequately compensate investors for the risks they are undertaking. To make matters worse, many fear that demographics (read, 40 years of low birth rates in developed nations) have reduced demand so much that world wide deflation may be near. The Japanese economy (the world's third largest) has been deflationary for the past several years; little wonder considering more adult than baby diapers are sold there. No kidding! (pun intended.) As I have written previously (Vol. 204 www.riskrewardblog.blogspot.com ), deflation is a greater threat today than inflation.
In sum, current central bank monetary policies have run out of steam as engines of economic growth. And, with interest rates as low as they are, central bankers have little if anything left to offer. One can debate the form, but a change in fiscal policy is sorely needed. I prefer Reaganomics (tax reform) over Keynes (government spending). Unfortunately, there is little prospect for either during an election year. Not surprisingly, these days I find myself singing:
"Ronnie, Ronnie, Ronnie why did you go?
Ronnie, oh Ronnie, Ronnie I am regretting
But can't stop forgetting
Because you/ You were my first love."
Saturday, April 5, 2014
April 5, 2014 Deja Vu
Risk/Reward Vol. 215
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Work it/Make it/Do it
Makes us
Harder/Better/Faster/Stronger."---lyrics from "Stronger" sung by Kanye West
"That I'm strong enough to live without you
Strong enough and I quit crying
Long enough, now I'm stong enough
To know you gotta go."---lyrics from "Strong Enough" sung by Cher
"And I can feel this for sure, ooh
I've been here before/I can feel this for sure
For sure/For sure."---lyrics from "Deja Vu" sung by Teena Marie
What amazed me about the high frequency trading revelation made on "60 Minutes" last Sunday by author Michael Lewis was how little it impacted the stock market. Whether high frequency traders (HFT's) extract a penny here or a nickel there as part of order execution or otherwise "rig" the stock market apparently is of no moment to the investing public as another record high was reached by the S&P 500 this week. If not the HFT's, then the market makers of old would be extracting some toll. As someone who has traded stocks for years, I know that order execution is "Easier/Better/Faster/Stronger----and CHEAPER" now than at any time in the past. Whether HFT's "Made it/Did it" or some other actor is responsible, I say good riddance to the days of old.
Friday's selloff was led by NASDAQ's momentum stocks, and I predict will not continue in the broader market next week. Indeed with encouraging data from purchasing agents and good news on the jobs front, some are wondering whether the economy is "Strong Enough" to withstand a quicker pace of pullbacks by the Federal Reserve. In other words, is the economy "stong enough to live without" any quantitative easing and is it time to signal that the 0% Fed Funds rate has "gotta go"? Many suspect not, given counter indications from Federal Reserve Chair Janet Yellen delivered in a speech last Monday in Chicago wherein she discussed at length her view that the labor market still suffers from too much slack (more people willing and capable of filling jobs than there are jobs for them to fill). So long as that slack persists, she is of the mind that accommodative monetary policies will be needed.
But "can I feel this for sure"? Several articles this week pointed to these very same accommodative policies as the cause of many asset classes attaining bubble status, driven there by yield hungry investors like me. Here are some examples. 1) European sovereign debt is in great demand. It is trading at pre-Eurozone crisis levels. Spanish and Italian 10Year rates are as low as they have been since 2005. 2) Corporate bond issuance in general is at near record levels, and the rate spread between the 10Year Treasury and junk bonds is only 355 basis points (3.55%) which is at its lowest point since 2007. 3) Citigroup is launching a new suite of subprime debt instruments--the same poisonous fruit that precipitated the 2008 banking crisis. Add to this the resurfacing of a debate among central bankers as to whether monetary policy should take into account asset bubbles (see comments this week from Fed Gov. Jeremy Stein), and I sense "Deja Vu." It's as if "I've been here before/I can feel this for sure." Indeed, it was exactly one year ago (Vol. 165 www.riskrewardblog.blogspot.com ) that I warned that the Federal Reserve could do something to burst the then growing asset bubbles----exactly the ones inflating today. And it did so a few weeks later when Chair Bernanke hinted that QE3 could end within weeks (it didn't), a hint that caused the bond market and the stocks that trade in relation thereto (e.g. real estate investment trusts, preferred stocks, business development companies, utilities, master limited partnerships, etc.) to plummet. That event is now known as the "Taper Tantrum."
Despite Friday's negative action, both the Dow Jones Industrial Average and the S&P 500 finished up for the week. I sense that Ms. Yellen is at a cross roads. Will she do as she said this week and let the accommodative "Beat Go On" even if it results in asset bubbles continuing to inflate? Or, like Chairperson Bernanke last year, will she hint that accommodative policies will end sooner than expected and cause another interest rate/bond market tantrum? Positioned as I am, if she takes the latter course, I will be Cher-in' the following theme song:
"Bang, bang, she shot me down
Bang, bang I hit the ground
Bang, bang that awful sound
Bang, bang Ms. Yellen shot me down."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Work it/Make it/Do it
Makes us
Harder/Better/Faster/Stronger."---lyrics from "Stronger" sung by Kanye West
"That I'm strong enough to live without you
Strong enough and I quit crying
Long enough, now I'm stong enough
To know you gotta go."---lyrics from "Strong Enough" sung by Cher
"And I can feel this for sure, ooh
I've been here before/I can feel this for sure
For sure/For sure."---lyrics from "Deja Vu" sung by Teena Marie
What amazed me about the high frequency trading revelation made on "60 Minutes" last Sunday by author Michael Lewis was how little it impacted the stock market. Whether high frequency traders (HFT's) extract a penny here or a nickel there as part of order execution or otherwise "rig" the stock market apparently is of no moment to the investing public as another record high was reached by the S&P 500 this week. If not the HFT's, then the market makers of old would be extracting some toll. As someone who has traded stocks for years, I know that order execution is "Easier/Better/Faster/Stronger----and CHEAPER" now than at any time in the past. Whether HFT's "Made it/Did it" or some other actor is responsible, I say good riddance to the days of old.
Friday's selloff was led by NASDAQ's momentum stocks, and I predict will not continue in the broader market next week. Indeed with encouraging data from purchasing agents and good news on the jobs front, some are wondering whether the economy is "Strong Enough" to withstand a quicker pace of pullbacks by the Federal Reserve. In other words, is the economy "stong enough to live without" any quantitative easing and is it time to signal that the 0% Fed Funds rate has "gotta go"? Many suspect not, given counter indications from Federal Reserve Chair Janet Yellen delivered in a speech last Monday in Chicago wherein she discussed at length her view that the labor market still suffers from too much slack (more people willing and capable of filling jobs than there are jobs for them to fill). So long as that slack persists, she is of the mind that accommodative monetary policies will be needed.
But "can I feel this for sure"? Several articles this week pointed to these very same accommodative policies as the cause of many asset classes attaining bubble status, driven there by yield hungry investors like me. Here are some examples. 1) European sovereign debt is in great demand. It is trading at pre-Eurozone crisis levels. Spanish and Italian 10Year rates are as low as they have been since 2005. 2) Corporate bond issuance in general is at near record levels, and the rate spread between the 10Year Treasury and junk bonds is only 355 basis points (3.55%) which is at its lowest point since 2007. 3) Citigroup is launching a new suite of subprime debt instruments--the same poisonous fruit that precipitated the 2008 banking crisis. Add to this the resurfacing of a debate among central bankers as to whether monetary policy should take into account asset bubbles (see comments this week from Fed Gov. Jeremy Stein), and I sense "Deja Vu." It's as if "I've been here before/I can feel this for sure." Indeed, it was exactly one year ago (Vol. 165 www.riskrewardblog.blogspot.com ) that I warned that the Federal Reserve could do something to burst the then growing asset bubbles----exactly the ones inflating today. And it did so a few weeks later when Chair Bernanke hinted that QE3 could end within weeks (it didn't), a hint that caused the bond market and the stocks that trade in relation thereto (e.g. real estate investment trusts, preferred stocks, business development companies, utilities, master limited partnerships, etc.) to plummet. That event is now known as the "Taper Tantrum."
Despite Friday's negative action, both the Dow Jones Industrial Average and the S&P 500 finished up for the week. I sense that Ms. Yellen is at a cross roads. Will she do as she said this week and let the accommodative "Beat Go On" even if it results in asset bubbles continuing to inflate? Or, like Chairperson Bernanke last year, will she hint that accommodative policies will end sooner than expected and cause another interest rate/bond market tantrum? Positioned as I am, if she takes the latter course, I will be Cher-in' the following theme song:
"Bang, bang, she shot me down
Bang, bang I hit the ground
Bang, bang that awful sound
Bang, bang Ms. Yellen shot me down."
Subscribe to:
Posts (Atom)