Saturday, August 30, 2014
August 30, 2014 Reachin'/Low
Risk/Reward Vol. 233(2)
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“And I know the sky may be high
But, Baby, it ain’t really that high
Reach for the stars
Let’s reach for the stars.”---lyrics from ‘Reach For The Stars” sung by Will.I.Am
“How low can you go?
I could go low/Lower than you know.”---lyrics from “How Low Can You Go” sung by Ludacris
“You got no guts/You get no glory
And I’m bettin’ my money on an ace in the hole
Think I’m getting’ out of control.”---lyrics from “Out of Control” sung by The Eagles
For the month of August, the Dow Jones Industrial Average is up over 3% and the S&P 500 is up nearly 4% with each index fully recovering from July's correction and each hitting record highs this week. Truly, “the sky may be high/But, Baby, it aint’ that high” when markets “reach for the stars”. And, “reachin’ for the stars” is what the stock markets are doing. Indeed, prices are so high, I had to be very selective as I began my re-entry this week. Municipal bond closed end funds, preferred stock funds and some oil plays still look attractive.
Aiding the stock market’s “reach for the stars” has been the falling yield in the bond market, most notably the yield on the all-important 10Year Treasury Bond. Traditionally, as bond yields fall, stocks become more attractive. This certainly has held true recently as the cyclically adjusted price/earning ratio for the S&P 500 (CAPE, see Vol. 226 www.riskrewardblog.blogspot.com for a discussion of this) has been stretched to historic levels. With the US 10Year yielding only 2.34% at yesterday’s close, one is left to wonder “How Low Can It Go?” “Lower than you know”, or at least lower than the experts know. Indeed, at the start of the year, any suggestion that the yield on the 10Year would be below 2.35% on Labor Day would have been deemed “Ludacris.”
And now these very same experts are questioning whether the Federal Reserve has lost the ability to raise interest rates if and when it decides the time is right. A provocative opinion piece written by George Melloan in the August 26, 2014 edition of the Wall Street Journal suggests that interest rates indeed may be “getting’ out the the Fed’s control.” I recommend the piece to your attention. Therein Melloan analyzes each of the Fed’s traditional tools for raising rates (e.g. reverse repos, raising interest rates paid on reserves, and its “ace in the hole” raising the Fed funds rate). He then concludes that none of these may be effective in a world awash in liquidity---liquidity made available through accommodative monetary policies adopted by central banks world wide. Can the Fed expect to increase the 10Year Treasury rate by tightening its short term interest rate reins if the European Central Bank loosens its belt and embarks on a new round of quantitative easing? Forty percent of U.S. government issued debt is owned by foreign interests currently, and that percentage continues to increase. And why not, when the German 10 Year Bund yields only 0.89% and the Spanish 10Year yields only 2.2%. Given a choice, who wouldn’t rather own the US 10Year, even at a 2.3% yield?
How valuable are the opinions of so-called experts in this “Desperado” world, anyway? None has provided me with a “Peaceful, Easy Feeling." How about you? None can say with any conviction whether stocks will continue to climb and/or interest rates will continue to fall. Even if one were to predict “How Long” this “Life in the Fast Lane” will continue, I, for one, would not believe their "Lyin' Eyes." The only approach an individual investor can take is to remain nimble, reserving to oneself the ability “to check out anytime you want.” That’s what I did, and what undoubtedly I will decide to do again “One of These Nights.
Saturday, August 23, 2014
August 23, 2014 Do What You Say
Risk/Reward Vol. 232
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Why don’t you do what you say
Say what you mean
One thing leads to another.”---lyrics from “One Thing Leads to Another” sung by The Fixx
“We bounce to this track
Hands to the sky/And throw your hair back
Bounce, bounce, bounce.”---lyrics from “Bounce” sung by Calvin Harris
“Listen children, all is not lost
All is not lost, oh no, no
Can you dig it?/Yes I can
And I’ve waited such a long time
For the day.”---lyrics from “Saturday in the Park” sung by Chicago
On August 9th, when last I wrote, I noted that from my vantage point on the sidelines, prices throughout the oil patch had fallen significantly and that several stocks including master limited partnerships KMR, KMP and ETP (each of which is controlled by Kinder Morgan (KMI)) were “very attractive.” Sadly, although I “said what I meant”, I had no time to “to do what I said.” “One thing (low prices) led to another (a buyout).” Indeed, the very next day, Sunday August 10th, Richard Kinder, the chairman of KMI announced a reorganization effectively collapsing KMR, KMP and ETP into KMI under terms very favorable to KMR, KMP and ETP shareholders. The shares of these skyrocketed when the market opened on August 11th and are now up 30% in just two weeks.
Kinder Morgan shares were not the only stocks that shone brightly these past two weeks. The lessening of tension in both Ukraine and the Gaza Strip caused investors to put “Hands to the sky/And throw their hair back” as the Dow Jones Industrial Average gained nearly 500 points and the S&P 500 entered record territory. Aiding this “Bounce, bounce, bounce” was a return to the belief that the Federal Reserve would maintain its zero-bound monetary policy. Indeed, on Friday August 15th the rate on the US 10Year Treasury Bond fell to 2.35%, its lowest point since the “taper tantrum” began on June 19, 2013. The rate has remained suppressed closing at 2.40% yesterday.
Despite broad gains in the market in general, however, the income securities that I favor still have not recovered to where they were earlier this summer. What “I’ve waited such a long time for is the day” when a clearer read on future interest rates can be had. And that day may have occurred yesterday when, at the much anticipated Jackson Hole conference, both Fed Chair Janet Yellen and ECB President Mario Draghi reiterated their devotion to low rates. Her comments in particular were interpreted as supporting a slight rise in short term rates next summer and a measured move upward thereafter. “Can you dig it?/Yes, I can.” So, “listen children, all is not lost/All is not lost” when it comes to more 2014 profits. I am reviewing and revising my buy list. Likely, I’ll be invested again once the impact of Jackson Hole is fully digested by the market---which could be as early as next week.
In retrospect and upon reflection, I am comfortable with my decision to lock-in my 7+% gain for the year on July 31st--- including the sale of KMP, KMR or ETP . “Does Anybody Really Know What Time It Is?” when it comes to predicting mergers, acquisitions or reorganizations? That said, participation in Kinder’s meteoric rise during the past two weeks would have “Colour(ed) My World” very green indeed. After Richard Kinder made the announcement, I received emails from several subscriber/Kinder shareholders to the effect of “Wishing You Were Here.” I must admit, these notes did not ease the pain, but they did “Make Me Smile.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Why don’t you do what you say
Say what you mean
One thing leads to another.”---lyrics from “One Thing Leads to Another” sung by The Fixx
“We bounce to this track
Hands to the sky/And throw your hair back
Bounce, bounce, bounce.”---lyrics from “Bounce” sung by Calvin Harris
“Listen children, all is not lost
All is not lost, oh no, no
Can you dig it?/Yes I can
And I’ve waited such a long time
For the day.”---lyrics from “Saturday in the Park” sung by Chicago
On August 9th, when last I wrote, I noted that from my vantage point on the sidelines, prices throughout the oil patch had fallen significantly and that several stocks including master limited partnerships KMR, KMP and ETP (each of which is controlled by Kinder Morgan (KMI)) were “very attractive.” Sadly, although I “said what I meant”, I had no time to “to do what I said.” “One thing (low prices) led to another (a buyout).” Indeed, the very next day, Sunday August 10th, Richard Kinder, the chairman of KMI announced a reorganization effectively collapsing KMR, KMP and ETP into KMI under terms very favorable to KMR, KMP and ETP shareholders. The shares of these skyrocketed when the market opened on August 11th and are now up 30% in just two weeks.
Kinder Morgan shares were not the only stocks that shone brightly these past two weeks. The lessening of tension in both Ukraine and the Gaza Strip caused investors to put “Hands to the sky/And throw their hair back” as the Dow Jones Industrial Average gained nearly 500 points and the S&P 500 entered record territory. Aiding this “Bounce, bounce, bounce” was a return to the belief that the Federal Reserve would maintain its zero-bound monetary policy. Indeed, on Friday August 15th the rate on the US 10Year Treasury Bond fell to 2.35%, its lowest point since the “taper tantrum” began on June 19, 2013. The rate has remained suppressed closing at 2.40% yesterday.
Despite broad gains in the market in general, however, the income securities that I favor still have not recovered to where they were earlier this summer. What “I’ve waited such a long time for is the day” when a clearer read on future interest rates can be had. And that day may have occurred yesterday when, at the much anticipated Jackson Hole conference, both Fed Chair Janet Yellen and ECB President Mario Draghi reiterated their devotion to low rates. Her comments in particular were interpreted as supporting a slight rise in short term rates next summer and a measured move upward thereafter. “Can you dig it?/Yes, I can.” So, “listen children, all is not lost/All is not lost” when it comes to more 2014 profits. I am reviewing and revising my buy list. Likely, I’ll be invested again once the impact of Jackson Hole is fully digested by the market---which could be as early as next week.
In retrospect and upon reflection, I am comfortable with my decision to lock-in my 7+% gain for the year on July 31st--- including the sale of KMP, KMR or ETP . “Does Anybody Really Know What Time It Is?” when it comes to predicting mergers, acquisitions or reorganizations? That said, participation in Kinder’s meteoric rise during the past two weeks would have “Colour(ed) My World” very green indeed. After Richard Kinder made the announcement, I received emails from several subscriber/Kinder shareholders to the effect of “Wishing You Were Here.” I must admit, these notes did not ease the pain, but they did “Make Me Smile.”
Saturday, August 9, 2014
August 9, 2014 Musical Chairs
Risk/Reward Vol. 231
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“You don’t know what you’ve got
‘Til it’s gone
They paved over paradise
And put up a parking lot.”---lyrics from “Yellow Taxi” sung by Joni Mitchell
“And now my baby’s playing musical chairs
Round and round
And when the music stops
She’s not there.”---lyrics from “Musical Chairs” sung by Yung Berg
“Nobody gets too much heaven no more
It’s much harder to come by
I’m waiting in line”---lyrics from “Too Much Heaven” sung by the Bee Gees
As noted last week, my sell signal came on July 30th in the form of a nine basis point spike in yield on the 10Year Treasury Bond(10Year) to which much of my portfolio was correlated. Since that time, those nine basis points have retrenched, and as of Friday's close the yield on the 10Year was at a year-to-date low of 2.42%. So why have I not repurchased that portfolio? The answer is simple---because the securities comprising that portfolio continued to drop in price despite a rally in the 10Year. Does this mean the correlation no longer applies? Is Joni right that “You don’t know what you’ve got/Til it’s gone?” Yes and no. I believe that the correlation holds, but not in the presence of the current combination of exogenous threats: the continued unrest in the Gaza and Iraq, the threat of retaliation by Russia and most importantly the ever weakening economies in Europe and South America. I am not alone in this belief. In an article in Thursday’s edition of the Financial Times, market guru Mohamed El Erian blamed last week’s across-the-board sell-off on the “…cumulative impact of multiple causes …cover(ing) geopolitical, financial, economic and policy factors,…(which caused) conventional correlations among asset classes to break down.” Safety became and remains paramount. Investors seeking to park funds in a safe place have few, if any, alternatives to Treasury securities. The only real alternative, the German bund, is ridiculously more expensive in comparison. Thus, now more than ever, the US is the financial world’s “paved paradise” and the 10 Year is the world’s “parking lot.” Not so, the securities otherwise priced in relation thereto such as high yield bonds, senior loans and closed end funds. Check the last 10 trading days of activity in the relevant exchange traded funds (ETF): JNK (high yield bonds), BKLN (senior loans) and PCEF (closed end funds).
Why not? Here’s my take. When the yield on the 10Year spiked on July 30th and its price correspondingly fell, those securities priced in relation thereto fell much more quickly and much more precipitously. Indeed, those of us who use limit orders found them going “round and round.” It was like playing “musical chairs” and when the “music stopped”, buyers at or above the limit price “were not there”. I had to sell at the price that Mr. Market bid—something I dislike. The very situation about which I had written in Vol. 227 (www.riskrewardblog.blogspot.com ) had occurred. Due to Dodd-Frank and other regulations, commercial banks were not there as backstop buyers. News articles over the next several days noted the absence of backstop buyers (a/k/a market makers) and the resultant lack of liquidity in these sectors. It is small wonder that the very investors that had driven the prices of these securities so high (and their yields so low) are continuing to exit. Indeed, Friday's Wall Street Journal reported that, as of Wednesday, junk bond funds experienced the largest weekly net outflow in history---$7.1billion eclipsing by a mile the previous weekly net withdrawal record of $4.6billion experienced during the "taper tantrum" of June 2013. To give some perspective on this, in May these same funds had a net inflow of $2.61billion. I have no doubt that I will own these securities again, but not until prices stabilize at a level that rewards me for this liquidity risk.
Remember just a few short years ago when our lament was that “Nobody gets too much oil no more/It’s much harder to come by/I’m waiting in line.” The recent drop in the US domestic (WTI) price of oil suggests that this is no longer the case. XOP, the domestic oil exploration and production ETF, has fallen 11% in value since its June high, and the price of AMLP, the master limited partnership ETF (which should be insulated from price swings) has fallen 6% since then. That stated, VNR, LINE, LNCO, KMR, KMP, BBEP and ETP (all which I sold last week) have stabilized and have begun to regain this week. Some commentators suggest that next month, once a refinery in Coffeyville, KS comes back on line, WTI should rise again. In any event, prices throughout the oil patch are very attractive.
Friday's action turned an otherwise bad week positive. Until then it seemed that nothing worked---not even market correlations. It is for this reason that I remain on the sidelines. But whether you join me there, you hold pat or you buy, remember the investors credo (with attribution to the Brothers Gibb):
“Whether you're a brother or whether you're a mother,
You're stayin' alive, stayin' alive.
Feel the city breakin' and everybody shakin',
And we're stayin' alive, stayin' alive.
Ah, ha, ha, ha, stayin' alive, stayin' alive.
Ah, ha, ha, ha, stayin' alive.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“You don’t know what you’ve got
‘Til it’s gone
They paved over paradise
And put up a parking lot.”---lyrics from “Yellow Taxi” sung by Joni Mitchell
“And now my baby’s playing musical chairs
Round and round
And when the music stops
She’s not there.”---lyrics from “Musical Chairs” sung by Yung Berg
“Nobody gets too much heaven no more
It’s much harder to come by
I’m waiting in line”---lyrics from “Too Much Heaven” sung by the Bee Gees
As noted last week, my sell signal came on July 30th in the form of a nine basis point spike in yield on the 10Year Treasury Bond(10Year) to which much of my portfolio was correlated. Since that time, those nine basis points have retrenched, and as of Friday's close the yield on the 10Year was at a year-to-date low of 2.42%. So why have I not repurchased that portfolio? The answer is simple---because the securities comprising that portfolio continued to drop in price despite a rally in the 10Year. Does this mean the correlation no longer applies? Is Joni right that “You don’t know what you’ve got/Til it’s gone?” Yes and no. I believe that the correlation holds, but not in the presence of the current combination of exogenous threats: the continued unrest in the Gaza and Iraq, the threat of retaliation by Russia and most importantly the ever weakening economies in Europe and South America. I am not alone in this belief. In an article in Thursday’s edition of the Financial Times, market guru Mohamed El Erian blamed last week’s across-the-board sell-off on the “…cumulative impact of multiple causes …cover(ing) geopolitical, financial, economic and policy factors,…(which caused) conventional correlations among asset classes to break down.” Safety became and remains paramount. Investors seeking to park funds in a safe place have few, if any, alternatives to Treasury securities. The only real alternative, the German bund, is ridiculously more expensive in comparison. Thus, now more than ever, the US is the financial world’s “paved paradise” and the 10 Year is the world’s “parking lot.” Not so, the securities otherwise priced in relation thereto such as high yield bonds, senior loans and closed end funds. Check the last 10 trading days of activity in the relevant exchange traded funds (ETF): JNK (high yield bonds), BKLN (senior loans) and PCEF (closed end funds).
Why not? Here’s my take. When the yield on the 10Year spiked on July 30th and its price correspondingly fell, those securities priced in relation thereto fell much more quickly and much more precipitously. Indeed, those of us who use limit orders found them going “round and round.” It was like playing “musical chairs” and when the “music stopped”, buyers at or above the limit price “were not there”. I had to sell at the price that Mr. Market bid—something I dislike. The very situation about which I had written in Vol. 227 (www.riskrewardblog.blogspot.com ) had occurred. Due to Dodd-Frank and other regulations, commercial banks were not there as backstop buyers. News articles over the next several days noted the absence of backstop buyers (a/k/a market makers) and the resultant lack of liquidity in these sectors. It is small wonder that the very investors that had driven the prices of these securities so high (and their yields so low) are continuing to exit. Indeed, Friday's Wall Street Journal reported that, as of Wednesday, junk bond funds experienced the largest weekly net outflow in history---$7.1billion eclipsing by a mile the previous weekly net withdrawal record of $4.6billion experienced during the "taper tantrum" of June 2013. To give some perspective on this, in May these same funds had a net inflow of $2.61billion. I have no doubt that I will own these securities again, but not until prices stabilize at a level that rewards me for this liquidity risk.
Remember just a few short years ago when our lament was that “Nobody gets too much oil no more/It’s much harder to come by/I’m waiting in line.” The recent drop in the US domestic (WTI) price of oil suggests that this is no longer the case. XOP, the domestic oil exploration and production ETF, has fallen 11% in value since its June high, and the price of AMLP, the master limited partnership ETF (which should be insulated from price swings) has fallen 6% since then. That stated, VNR, LINE, LNCO, KMR, KMP, BBEP and ETP (all which I sold last week) have stabilized and have begun to regain this week. Some commentators suggest that next month, once a refinery in Coffeyville, KS comes back on line, WTI should rise again. In any event, prices throughout the oil patch are very attractive.
Friday's action turned an otherwise bad week positive. Until then it seemed that nothing worked---not even market correlations. It is for this reason that I remain on the sidelines. But whether you join me there, you hold pat or you buy, remember the investors credo (with attribution to the Brothers Gibb):
“Whether you're a brother or whether you're a mother,
You're stayin' alive, stayin' alive.
Feel the city breakin' and everybody shakin',
And we're stayin' alive, stayin' alive.
Ah, ha, ha, ha, stayin' alive, stayin' alive.
Ah, ha, ha, ha, stayin' alive.”
Saturday, August 2, 2014
August 2, 2014 Na Na Hey Hey
Risk/Reward Vol. 230
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Six o’clock already
I was just in the middle of a dream
It’s just another manic Monday.”---lyrics from “Manic Monday” sung by The Bangles
“Waiting for Wednesday
My stomach doesn’t hurt bad enough
Pain always is the sign
Waiting for Wednesday.”---lyrics from “Waiting on Wednesday” sung by Lisa Loeb
“I wanna see you kiss him
I’m gonna see you kiss him/ Goodbye
Na na na na/Na na na na
Hey hey/Goodbye.”---lyrics from “Na Na Hey Hey” sung by Steam
Last week’s edition evoked a flurry of responses including one that I circulated. That loyal reader advised me to liquidate because I had surpassed my annual goal (6%) and because holding for more bespoke a lack of discipline. So what is my discipline? To answer that question, I reread several past editions (as I am wont to do) and found guidance in Vol. 221 (www.riskrewardblog.blogspot.com ). Therein, I stated that “I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity with movement by that singularity providing clarity on when to buy, hold or sell.” That singularity, for me of course, is the yield on the 10 Year Treasury Bond. As the trading day began on “manic Monday”, the yield on the 10Year held steady and by “six o’clock” it had risen hardly at all. Thus, I did not sell. Come Tuesday, the continuing conflict in the Mideast spurred a further flight to safe investments, and the news from Europe was that the yield on the Spanish 10 Year bond was LESS than that on the US 10 Year. These factors resulted in an increased demand for the 10Year which in turn raised its price and lowered its yield. This action increased the value of interest rate-sensitive securities many of which I hold. Thus, on what was a down day for the Dow Jones Industrial Average and the S&P 500, the portfolios that I manage reached all time highs.
And then came Wednesday—a day which all market watchers were “waiting for” On Wednesday came the release of second quarter gross domestic product (GDP) numbers, of the quarterly personal consumption expenditure index (a/k/a PCE--- the inflation indicator deemed most reliable by the Federal Reserve) and of a statement at the conclusion of the Fed’s monthly meeting. Coming off a great Tuesday, “my stomach didn’t hurt.” But the combination of a blockbuster GDP report (up an annualized 4% in Q2) and a spike in inflation (core PCE up 1.7%--close to the Fed’s target of 2%) led Mr. Market to believe that it is now more likely that the Fed will raise interest rates sooner than expected; this despite protestations in the Fed’s press release to the contrary. This belief manifested in the yield on the 10Year spiking a whopping 9 basis points, its largest one-day move since last November. Its price fell accordingly. (N.B. A rise in yield means a drop in price) The value of those securities priced in relation to the 10Year (closed end preferred stock funds, high yield bond funds, etc.—you know, the kind I like and own) dropped as well.
Per my discipline, this was the movement in the 10Year yield which told me to sell. So come Thursday morning, it was “Na na na na/Na na na na/Hey, hey/Goodbye” to the interest rate-sensitive portion of my portfolios. I was not alone in “wanting to kiss him (Mr. Market, that is) good bye’ as the DJIA fell nearly 200 points as I sold and 316 points by day’s end. In so doing, the DJIA gave back all of its year to date gains. Meanwhile, the S&P shaved 39 points (2%!). The bloodbath continued on Friday, albeit at a slower pace due in part to the fact that Friday's jobs report was lukewarm thus lessening fears of an even sooner hike in interest rates. Would I have retained more profit had I sold on Monday or Tuesday? Yes, but that would have been undisciplined. I waited for a clear signal, the type which Wednesday provided. My one mistake was not exiting Wednesday before the market closed. Had I done so, I would have avoided a reduction in profits incident to the mass exodus on Thursday. That said, I escaped with the vast majority of my year to date gains and remain very pleased with my approach--- and my results.
I don’t know how quickly I will redeploy the considerable amount of cash I raised this week. But that does not mean I will sit idle. I will continue to study and to test. When the time is right, like The Bangles, I will
Slide my feet up the street
Bend my back
Shift my arm and pull it back.
Then, I will walk like an Egyptian
back into the fray.
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