Saturday, January 31, 2015
January 31, 2015 They Can't Take That Away
Risk/Reward Vol. 252
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“The way you haunt my dreams.
No, no - they can't take that away from me”---lyrics from “Can’t Take That Away From Me” sung (originally) by Fred Astaire
“You got my cellphone number
Make that call”---lyrics from “Cell Phone #” sung by The Plain White T’s
“The world that we’re livin’ in
People keep on giving in
Making wrong decisions
Only visions of the dividend”---lyrics from “Where Is The Love” sung by Black Eyed Peas
Volatility continued this week. The Dow Jones Industrial Average had positive and negative triple digit days, closing down 508 points. The S&P 500 closed down 57 points. January saw each drop more than 3%. Clearly, we are in the throes of what market guru Mohamed El Erian terms “divergence.” Good job growth and encouraging earning reports in the US are trumped by continuing problems in Europe and Asia. As an example, the Eurozone’s economic powerhouse, Germany, this week reported that it is in a state deflation. The composite price of goods and services there has fallen 0.3% year to year as of January. And then there is Greece. Adding to the uncertainty this week was the enigmatic press release issued by the Federal Reserve at the conclusion of its mid week meeting. Some interpreted the statement as signaling that short term interest rates will rise as soon as June. Others read it to mean no rate increase until 2016. So which is it? We must not forget that Janet Yellen is a student of the Great Depression. As such, her “dreams are haunted” by the Fed’s decision to raise rates in 1937, just as the country was emerging from the Depression’s trough. That premature move caused the economy to tumble again. With inflation still far below the Fed’s target of 2% and with gross domestic product growth languishing below 3%, I simply don’t see the Fed raising rates anytime soon---especially when every other central bank is cutting rates. My prediction---the Fed “won’t take that (low rates) away from me” until September, at the earliest. Even then, any increase will be modest and likely will not adversely affect my bellwether, the 10 Year US Treasury Bond. (10Year) (By the way, "Can't Take It Away From Me" was #3 on the 1937 Hit Parade.)
Whatever challenges face global economies generally, they do not affect Apple. Did you see the “cellphone number” it reported this week? In the first quarter alone (Apple’s fiscal year began October 1, 2014), Apple sold 74 million iPhones---that’s 34,000 iPhones per hour, 24 hours per day, seven days per week. That incredible performance translated into $3.08 of profit per share---for the quarter. Despite paying a decent dividend and sponsoring the largest share buyback in history (Apple reduced its share count by 10% last year), Apple still has $175 billion of cash and marketable securities on its books. To put that in perspective, there are only 46 companies in the world that Apple could not buy----using only its excess cash and cash equivalents. If it so desired, without any debt, Apple could buy Disney, Visa, Amazon, Citigroup or countless others. And yet, Apple trades at only 13 times its forward price/earnings ratio (much less if you subtract its cash)--- well below the market’s average. If you don’t own Apple, you should give serious consideration to “making that call” to your broker.
In the volatile “world we’re livin’ in”, “people keep giving in” to their fears. As a consequence, they “make the wrong decisions.” They sell everything: even income producing (read, dividend paying) securities which are a safe harbor in a low interest rate environment. And that is where we are today. The interest rate on the 10Year ended the week at 1.67%, its lowest close in nearly 2 years. For those who have a “vision for dividends” such as yours truly, sell-offs of income producers provide excellent buying opportunities. Two cases in point arose this week. ETP, one of my favorite pipeline master limited partnerships, announced an acquisition which many viewed negatively due to its short term cost. ETP’s stock plummeted below $59, a buy signal to me. Under no foreseeable circumstance will the acquisition negatively impact ETP’s juicy dividend. By Friday, ETP was back over $61 despite the general market’s downward trajectory. On Friday, SO one of my favorite utilities reported cost overruns on one of its major projects. The stock fell 4% in one day. I’m betting that it will recover fully by the end of next week, buoyed by its consistent and attractive dividend.
For many, stock market volatility is like a Black Eyed Peas’ greatest hit album. Some days you feel “love drunk” as the market moves up the “Hump.” Other days you get pummeled---"Boom, Boom, Pow." But for me, volatility is a side show. My focus remains the 10Year yield; the lower it goes, the better I do. Times have been very good recently. And the good times will keep on rollin' so long as forces do not cause the yield on the 10Year to spike. So Janet, don't cause rates to rise. Once you “Get It Started", I may have to exit.
Saturday, January 24, 2015
January 24, 2015 Droppin' Like Flies
Risk/Reward Vol. 251
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“You're a three-decker sauerkraut And toadstool sandwich, With arsenic sauce!”---lyrics from “You’re A Mean One, Mr. Grinch” sung by Thurl Ravenscroft
“Oh, we're dropping; like flies. Bye, bye. You're droppin' like flies”---lyrics from “Droppin’ Like Flies” sung by Motley Crue
“And honey you should know That I could never go on without you Green eyes”---lyrics from “Green Eyes” sung by Coldplay
For the first time in a while, the most significant news of the week came from Europe. On Thursday, Mario Draghi the head of the European Central Bank (ECB) announced that the ECB is embarking on its own version of quantitative easing. The ECB will be purchasing 60billion Euros worth of public and private securities each month for a minimum of 20 months. The purpose of this campaign is to spur economic growth and to stave off deflation. Draghi wants to depress interest rates so that investors will be forced to invest in riskier assets, and consumers will be incentivized to purchase goods by accessing cheap debt. This ambitious move was done despite Germany’s opposition. In effect, the ECB is now Santa Claus for some weaker members of the Eurozone, handing them a blank check. But for Angela Merkel, the ECB is Mr. Grinch, serving her “a three-decker sauerkraut and toadstool sandwich with arsenic sauce.”
But how effective will Europe’s version of QE be in spurring economic growth? Apparently, Mr. Market thinks it will work. The Dow Jones Industrial Average rose 259 points or 1.48% and the S&P rose 31 points or 1.53% on the news that day (although they gave back half of those gains on Friday). I am not so sure. After all, the yields on the benchmark sovereign bonds of Europe’s largest economies have been “droppin’ like flies/ Bye bye/ droppin’ like flies” without QE. Even before the ECB’s announcement, the yield on the German Bund was 0.51%; on the French 10 year 0.72%; on the Italian 10 Year 1.71%; and on the Spanish 10 Year 1.55%. How much lower will they/can they go? That said, one benefit for me from the ECB’s move is that QE likely will keep the yield on the bellwether US Ten Year Treasury Bond in check. It finished the week at 1.82% (exactly where it was last Friday) despite a Wall Street Journal article authored by Federal Reserve insider Jon Hilsenrath reporting that the Fed was still on track to raise short term rates this year: this despite the ECB's contrary move and despite inflation running well below the Fed's target of 2%. All eyes and ears will be on the Fed meeting next week for any signal as to when a rate rise may occur.
So how do low yields on the 10Year benefit me? “Honey, you should know” by now. If the yield on the US Ten Year is held down, then the yields on the securities correlated to the 10Year (e.g. preferred stock, real estate investment trusts a/k/a REIT’s and municipal bonds) will likewise remain low and concomitantly their price/value will rise. (Remember, lower yields mean higher prices) (See the exhaustive discussion of correlation at Vol. 221 www.riskrewardblog.blogspot.com ). Indeed, “green” is what you see when you look at the year-to-date returns on the preferred stock closing table found at www.online.wsj.com/mdc/public/page/2_3024-Preferreds.html . I hold preferred stock in closed end funds which provide diversification and leverage at the same time. My favorite preferred closed end fund, FFC is up 9% so far in 2015 while paying an 8% dividend amortized monthly. My favorite REIT, Realty Income Corporation (O) is up 14% year to date while paying a 4.2% dividend amortized monthly. And my favorite municipal bond closed end fund MQT is up nearly 2.5% year to date while paying a tax advantaged dividend of over 6% amortized monthly.
I am comfortable with my portfolio, but it is interest rate sensitive. Thus I must be vigilant. With the ECB embarking upon an ambitious QE program, yields on longer term bonds, such as the US 10Year, should remain low even if the Federal Reserve raises rates at the shorter end. That said I have been unpleasantly surprised by sudden yield hikes in the past. When last that happened I felt like Coldplay:
“One minute I held the key
Next the walls were closed on me
And I discovered that my castles stand
Upon pillars of salt and pillars of sand”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“You're a three-decker sauerkraut And toadstool sandwich, With arsenic sauce!”---lyrics from “You’re A Mean One, Mr. Grinch” sung by Thurl Ravenscroft
“Oh, we're dropping; like flies. Bye, bye. You're droppin' like flies”---lyrics from “Droppin’ Like Flies” sung by Motley Crue
“And honey you should know That I could never go on without you Green eyes”---lyrics from “Green Eyes” sung by Coldplay
For the first time in a while, the most significant news of the week came from Europe. On Thursday, Mario Draghi the head of the European Central Bank (ECB) announced that the ECB is embarking on its own version of quantitative easing. The ECB will be purchasing 60billion Euros worth of public and private securities each month for a minimum of 20 months. The purpose of this campaign is to spur economic growth and to stave off deflation. Draghi wants to depress interest rates so that investors will be forced to invest in riskier assets, and consumers will be incentivized to purchase goods by accessing cheap debt. This ambitious move was done despite Germany’s opposition. In effect, the ECB is now Santa Claus for some weaker members of the Eurozone, handing them a blank check. But for Angela Merkel, the ECB is Mr. Grinch, serving her “a three-decker sauerkraut and toadstool sandwich with arsenic sauce.”
But how effective will Europe’s version of QE be in spurring economic growth? Apparently, Mr. Market thinks it will work. The Dow Jones Industrial Average rose 259 points or 1.48% and the S&P rose 31 points or 1.53% on the news that day (although they gave back half of those gains on Friday). I am not so sure. After all, the yields on the benchmark sovereign bonds of Europe’s largest economies have been “droppin’ like flies/ Bye bye/ droppin’ like flies” without QE. Even before the ECB’s announcement, the yield on the German Bund was 0.51%; on the French 10 year 0.72%; on the Italian 10 Year 1.71%; and on the Spanish 10 Year 1.55%. How much lower will they/can they go? That said, one benefit for me from the ECB’s move is that QE likely will keep the yield on the bellwether US Ten Year Treasury Bond in check. It finished the week at 1.82% (exactly where it was last Friday) despite a Wall Street Journal article authored by Federal Reserve insider Jon Hilsenrath reporting that the Fed was still on track to raise short term rates this year: this despite the ECB's contrary move and despite inflation running well below the Fed's target of 2%. All eyes and ears will be on the Fed meeting next week for any signal as to when a rate rise may occur.
So how do low yields on the 10Year benefit me? “Honey, you should know” by now. If the yield on the US Ten Year is held down, then the yields on the securities correlated to the 10Year (e.g. preferred stock, real estate investment trusts a/k/a REIT’s and municipal bonds) will likewise remain low and concomitantly their price/value will rise. (Remember, lower yields mean higher prices) (See the exhaustive discussion of correlation at Vol. 221 www.riskrewardblog.blogspot.com ). Indeed, “green” is what you see when you look at the year-to-date returns on the preferred stock closing table found at www.online.wsj.com/mdc/public/page/2_3024-Preferreds.html . I hold preferred stock in closed end funds which provide diversification and leverage at the same time. My favorite preferred closed end fund, FFC is up 9% so far in 2015 while paying an 8% dividend amortized monthly. My favorite REIT, Realty Income Corporation (O) is up 14% year to date while paying a 4.2% dividend amortized monthly. And my favorite municipal bond closed end fund MQT is up nearly 2.5% year to date while paying a tax advantaged dividend of over 6% amortized monthly.
I am comfortable with my portfolio, but it is interest rate sensitive. Thus I must be vigilant. With the ECB embarking upon an ambitious QE program, yields on longer term bonds, such as the US 10Year, should remain low even if the Federal Reserve raises rates at the shorter end. That said I have been unpleasantly surprised by sudden yield hikes in the past. When last that happened I felt like Coldplay:
“One minute I held the key
Next the walls were closed on me
And I discovered that my castles stand
Upon pillars of salt and pillars of sand”
Saturday, January 17, 2015
January 17, 2015 Sweet Child O' Mine
Risk/Reward Vol. 250
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Oh, baby
I, I, I, I’m fallin’”---lyrics from “Fallin’” sung by Alicia Keyes
“Take me down to the paradise city
Where the grass is green and the girls are pretty.”---lyrics from “Paradise City” sung by Guns N Roses
“There’s a million oil rigs pumping
That black gold all over the world”---lyrics from “One Good Well” sung by Don Williams
Year to date, both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index are down about 2%. “Oh, baby”, should one be worried that stocks will continue “fallin’”? After all, earnings season is underway, and it has been underwhelming to say the least. That said, let’s not forget what happened last year. Remember? Between the close on December 31, 2013 and February 4, 2014, the DJIA fell 1131 points or 6.8% only to rebound sharply and to finish the year with a total return of nearly 10%. (See Vols. 205-207 www.riskrewardblog.blogspot.com ) I see nothing to indicate that the year-to-date dip is anything other than profit taking and repositioning. Friday's solid move upward corroborates this belief. As emphasized repeatedly here, where else can money go if one wants any return at all? The answer is the same as it was in 2013 and 2014 (See Vols. 164 and 201 www.riskrewardblog.blogspot.com ) --- TINA---There Is No Alternative--- to US equities.
Well maybe one—municipal bond funds. In 2014, muni/bond funds were a “paradise city” with the S&P Municipal Bond Index (Index) seeing a double digit total return, much of it tax preferred and with very little volatility. Talk about “where the grass is green and the girls are pretty!” On a personal level, I held my municipal bond closed end funds for the entire year, and my return mirrored that of the Index. If the yield on the bellwether 10 Year US Treasury Bond (to which muni bond funds are correlated) does not rise too quickly and stays below 2.5% (and year to date it has been sinking, closing at 1.81% on Friday), municipal bond funds should have another good year. Adding to their attraction are the following facts: 1) fewer municipalities are floating bonds thus increasing the appeal of those bonds already in the market; and 2) repayment risk is very low with only 57 defaults last year out of 20,000 issuers. As noted, I invest in this sector through closed end funds because they employ leverage to enhance returns. I employ a triangular selection process, choosing those funds that trade below net asset value, have a greater than 6% tax preferred annual dividend and garner at least a Bronze rating on Morningstar. I hold currently MYI, EIM, VGM, MQT, MVF, PML, MYD, PMO, OIA, MUA and MNP, all in my personal (non 401k or IRA) account.
I am not calling a bottom on oil prices (or am I?), but did you notice the resistance this week to prices below $44/bbl and the 10% rebound that followed? Right now “There’s a million rigs pumping/That black gold all over the world”. But with all of the cut backs in capital spending (this week Shell walked away from a massive project in Qatar and Statoil abandoned several Arctic Circle leases), the glut will diminish. On the domestic side, producers have done much to reduce the cost of hydraulic fracturing (“fracking”). Conoco announced recently that its fracking operations would continue to be profitable even at $40/bbl. EOG reported that it could make a 10% profit on $40/bbl. oil. I have a feeling that we may have seen oil's nadir.
The market has displayed some negative vibes so far this year, but certainly not an “Appetite For Destruction.” By no means is Mr. Market “Knockin’ on Heaven’s Door.” As Axl, himself, advises, “all we need is a little patience”. Certainly, that virtue paid off last year. And as noted above, if one wants a return on one’s investment, the US stock market is the only game in town---make that, in the world . Unlike Mr. Rose, one need not ask:
“Where do we go
Where do we go now
Where do we go
Sweet Child ‘O Mine?”
Saturday, January 10, 2015
January 10, 2015 Rescue Me
Risk/Reward Vol. 249
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Can’t undo a fall like this
Cause love don’t know what distance is
Yeah, I know it’s crazy.”---lyrics from “I Want Crazy” sung by Hunter Hayes
“I’m down/I’m really down
I’m down/Down on the ground.”---lyrics from “I’m Down” sung by The Beatles
“Rescue me/Take me in your arms
Rescue me/I want your tender charms.”---lyrics from “Rescue Me” sung by Fontella Bass
At one time during the trading day on Tuesday, the Dow Jones Industrial Average (DJIA) hit 17,262; more than 570 points below its close the previous Friday. This drop caused many talking heads to predict that 2015 would be the year of the Bear; that Mr. Market “can’t undo a fall like this.” After all, the price of oil, the fuel upon which the entire world runs, had fallen below $50/bbl. But by Thursday’s close the DJIA had gained 645 points, ending 3.7% higher than where it had been just two days previous. "Yeah, I know it's crazy." Friday saw some profit taking and some negative reaction to last month’s reported average wage decrease. But the week ended at 17,737 just 0.5% below where it ended last week.
So what is an investor to make of this roller coaster market? Down 3% one day, up 4 % the next with the VIX (which measure market volatility) itself trading wildly. How is one to interpret Friday’s jobs report which has US unemployment at 5.6% yet wages continuing to fall? Does the fact that the Eurozone is now in a state of deflation (with consumer prices having fallen 0.2% year to year as of December, 2014) pose a threat to our economy? Is oil at $47/bbl. indicative of an economic slowdown or will cheap oil boost consumer spending? Where can one look for guidance? I, for one, pay little heed to these conflicting signs and continue my laser focus on the benchmark US 10 Year Treasury. And “its yield is down/it’s really down/it’s down/Down on the ground” finishing the week at 1.97%.
So what does a low yield on the 10Year mean to me? It means that the rest of the world has capitulated. Investors worldwide are looking to the US to “Rescue me/Take me in your arms/Rescue me/I want your tender charms.” Capital is flowing stateside. And why not? The German 10 Year Bund is yielding 0.49%, the Spanish 10 Year 1.71%, the French 10 Year 0.78%----this as the European Central Bank (ECB) is contemplating a round of quantitative easing (purchasing sovereign and corporate debt) which will only depress yields further. The resultant global search for yield combined with a concern for safety (which events in France this week only heightened) should equate to continued market appreciation here in the US. Moreover, the strengthening of the dollar versus every other currency in the world will put a damper on the Federal Reserve’s appetite to raise short term interest rates ( whose impact on longer term rates such as that on the 10Year is questionable anyhow--- see last week’s edition discussing same www.riskrewardblog.blogspot.com ). The easy money punch bowl provided by the Fed very well may continue into the third quarter of 2015. In sum I see favorable conditions for US- centric equities in general (other than those in the oil patch), and US-centric income securities (real estate investment trusts, municipal bond funds, preferred stock, etc.) in particular.
The world’s economy is struggling just as that of the US is turning the corner. As discussed above, this likely is good news for the US stock market in the short to intermediate run, but may drag all financial assets down in time. I see the Federal Reserve paying closer attention to foreign affairs in the coming months as suggested in its December meeting minutes released this week. I can hear Mario Draghi of the ECB on the telephone with Fed Chair Yellen even now, quoting the following Beatles refrain:
“Help me if you can, I'm feeling down
And I do appreciate you being 'round
Help me get my feet back on the ground
Won't you please, please help me”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Can’t undo a fall like this
Cause love don’t know what distance is
Yeah, I know it’s crazy.”---lyrics from “I Want Crazy” sung by Hunter Hayes
“I’m down/I’m really down
I’m down/Down on the ground.”---lyrics from “I’m Down” sung by The Beatles
“Rescue me/Take me in your arms
Rescue me/I want your tender charms.”---lyrics from “Rescue Me” sung by Fontella Bass
At one time during the trading day on Tuesday, the Dow Jones Industrial Average (DJIA) hit 17,262; more than 570 points below its close the previous Friday. This drop caused many talking heads to predict that 2015 would be the year of the Bear; that Mr. Market “can’t undo a fall like this.” After all, the price of oil, the fuel upon which the entire world runs, had fallen below $50/bbl. But by Thursday’s close the DJIA had gained 645 points, ending 3.7% higher than where it had been just two days previous. "Yeah, I know it's crazy." Friday saw some profit taking and some negative reaction to last month’s reported average wage decrease. But the week ended at 17,737 just 0.5% below where it ended last week.
So what is an investor to make of this roller coaster market? Down 3% one day, up 4 % the next with the VIX (which measure market volatility) itself trading wildly. How is one to interpret Friday’s jobs report which has US unemployment at 5.6% yet wages continuing to fall? Does the fact that the Eurozone is now in a state of deflation (with consumer prices having fallen 0.2% year to year as of December, 2014) pose a threat to our economy? Is oil at $47/bbl. indicative of an economic slowdown or will cheap oil boost consumer spending? Where can one look for guidance? I, for one, pay little heed to these conflicting signs and continue my laser focus on the benchmark US 10 Year Treasury. And “its yield is down/it’s really down/it’s down/Down on the ground” finishing the week at 1.97%.
So what does a low yield on the 10Year mean to me? It means that the rest of the world has capitulated. Investors worldwide are looking to the US to “Rescue me/Take me in your arms/Rescue me/I want your tender charms.” Capital is flowing stateside. And why not? The German 10 Year Bund is yielding 0.49%, the Spanish 10 Year 1.71%, the French 10 Year 0.78%----this as the European Central Bank (ECB) is contemplating a round of quantitative easing (purchasing sovereign and corporate debt) which will only depress yields further. The resultant global search for yield combined with a concern for safety (which events in France this week only heightened) should equate to continued market appreciation here in the US. Moreover, the strengthening of the dollar versus every other currency in the world will put a damper on the Federal Reserve’s appetite to raise short term interest rates ( whose impact on longer term rates such as that on the 10Year is questionable anyhow--- see last week’s edition discussing same www.riskrewardblog.blogspot.com ). The easy money punch bowl provided by the Fed very well may continue into the third quarter of 2015. In sum I see favorable conditions for US- centric equities in general (other than those in the oil patch), and US-centric income securities (real estate investment trusts, municipal bond funds, preferred stock, etc.) in particular.
The world’s economy is struggling just as that of the US is turning the corner. As discussed above, this likely is good news for the US stock market in the short to intermediate run, but may drag all financial assets down in time. I see the Federal Reserve paying closer attention to foreign affairs in the coming months as suggested in its December meeting minutes released this week. I can hear Mario Draghi of the ECB on the telephone with Fed Chair Yellen even now, quoting the following Beatles refrain:
“Help me if you can, I'm feeling down
And I do appreciate you being 'round
Help me get my feet back on the ground
Won't you please, please help me”
Saturday, January 3, 2015
January 3, 2015 Feelin' Groovy
Risk/Reward Vol. 248
THIS IS NOT INVESTMENT OR TAX ADVICE, IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It's of utmost importance
We're dealing with a volatile substance."---lyrics from "Never Tell" sung by The Violent Femmes
"What you think isn't always true
And you don't know where your interest lies."---lyrics from "You Don't Know Where Your Interest LIe" sung by Paul Simon
"Wait till next year/Wait till next year
I've got an image to nurse
And a role to rehearse."---lyrics from "Wait Til Next Year" sung by Eric Burdon and The Animals
Those who simply bought index funds triumphed once again in 2014. The Dow Jones Industrial Average provided nearly 10% in total return (appreciation plus dividends) and the S&P nearly 13%. But 2014 also proved that when we are dealing with equities, "we're dealing with a volatile substance." Remembering this is "of utmost importance." Indeed, a mere three weeks ago the Dow was trading 800 points below its year end close at which time it was heading toward a total annual return of less than 5%. I fell just short of my 6% annual goal, but did so holding considerable cash and with considerably less volatility. Indeed, had I not been defrauded by ARCP and had I been able to unload my oil stocks within my 8% loss limit, I would have done much better. For me, the key to profitability lies in minimizing losses. In fact, in retrospect I should have sold back in July when I was up 10% and was contemplating liquidation. (see Vol. 229 www.riskrewardblog.blogspot.com ) Coulda, woulda, shoulda---volatile indeed!
Many stories have and will be written about the stock market's performance in 2014. But what the commentators "think isn't always true." For me, the story of the year is "where your interest (rate) lies." As 2014 dawned, quantitative easing was coming to an end, and as a consequence, very few wags predicted that the rate on the bellwether 10 year US Treasury Bond would go down as the year progressed--- let alone prognosticated that it would end the year at 2.17%, 86 basis point below where it started. This year-long continuation of low rates made bond buying unattractive for anyone seeking a yield thereby pushing even widows and orphans into equities. More significantly, it fueled the incredible stock buy back spree about which I wrote in Vol. 245 (www.riskrewardblog.blogspot.com). With the rest of the world foundering, where else could one put one's money but US equities. That is plain to see in hindsight, but was not so obvious as we lived Fed meeting to Fed meeting anticipating an interest rate hike that never came. Hopefully, Chair Yellen's clearer vision will reduce volatility in 2015.
So what will "next year" bring, Mr. Market? "I've got an image to nurse." 2015 again will be about interest rates. I am confident that the Federal Reserve will not raise short term rates until June, and I continue to believe that a rise in those rates will have minimal impact on longer term ones(10-30 year bonds). Longer term rates respond more to inflation which I see remaining in check (below 2% here, much lower worldwide) for the foreseeable future. Demand for goods and services is waning here and abroad for a host of reasons including demographics. With demand low, unemployment worldwide will remain high and wages, the primary driver of inflation, will remain stagnant. Low inflation and thus low long term rates is good news for my favorite income plays (preferred stock, utilities, municipal bond funds, mlp's and real estate investment trusts) all of which do well in such an environment. Cheap credit also will continue to fuel stock buy backs. This year's wild card is energy. No one predicted the dramatic decrease in oil and natural gas prices experienced in the second half of 2014. I do not see them remaining depressed all year as more companies cut back on their capital expenditures and exploration efforts. Buying solid companies (CVX, COP, ETP, KMI) on dips and looking for a confirmed rise in prices as a signal to buy more speculative plays should reward market watchers this year.
I close on some personal news. After 38 years of practicing law with Michael Best & Friedrich LLP, I decided to retire as of December 31, 2014. My years at MBF were rewarding on so many fronts, but the lure of MBF's pension plan, devised to incentivize people of my age to leave, proved irresistible. That said, I am not ready to abandon completely the profession that I was born to practice. And so, effective January 1, 2015, I have associated in an "of counsel" capacity with the law firm of Hansen Reynolds Dickinson Crueger LLC (www.hrdclaw.com). HRDC is a litigation boutique founded by four of my former partners a few years ago and now has offices in Milwaukee, Madison and Chicago. You will hear more about my professional plans in the coming days and weeks, but with the New Year dawning, I am living a Paul Simon lyric: I am
"Lookin' for fun and feelin' groovy!"
THIS IS NOT INVESTMENT OR TAX ADVICE, IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It's of utmost importance
We're dealing with a volatile substance."---lyrics from "Never Tell" sung by The Violent Femmes
"What you think isn't always true
And you don't know where your interest lies."---lyrics from "You Don't Know Where Your Interest LIe" sung by Paul Simon
"Wait till next year/Wait till next year
I've got an image to nurse
And a role to rehearse."---lyrics from "Wait Til Next Year" sung by Eric Burdon and The Animals
Those who simply bought index funds triumphed once again in 2014. The Dow Jones Industrial Average provided nearly 10% in total return (appreciation plus dividends) and the S&P nearly 13%. But 2014 also proved that when we are dealing with equities, "we're dealing with a volatile substance." Remembering this is "of utmost importance." Indeed, a mere three weeks ago the Dow was trading 800 points below its year end close at which time it was heading toward a total annual return of less than 5%. I fell just short of my 6% annual goal, but did so holding considerable cash and with considerably less volatility. Indeed, had I not been defrauded by ARCP and had I been able to unload my oil stocks within my 8% loss limit, I would have done much better. For me, the key to profitability lies in minimizing losses. In fact, in retrospect I should have sold back in July when I was up 10% and was contemplating liquidation. (see Vol. 229 www.riskrewardblog.blogspot.com ) Coulda, woulda, shoulda---volatile indeed!
Many stories have and will be written about the stock market's performance in 2014. But what the commentators "think isn't always true." For me, the story of the year is "where your interest (rate) lies." As 2014 dawned, quantitative easing was coming to an end, and as a consequence, very few wags predicted that the rate on the bellwether 10 year US Treasury Bond would go down as the year progressed--- let alone prognosticated that it would end the year at 2.17%, 86 basis point below where it started. This year-long continuation of low rates made bond buying unattractive for anyone seeking a yield thereby pushing even widows and orphans into equities. More significantly, it fueled the incredible stock buy back spree about which I wrote in Vol. 245 (www.riskrewardblog.blogspot.com). With the rest of the world foundering, where else could one put one's money but US equities. That is plain to see in hindsight, but was not so obvious as we lived Fed meeting to Fed meeting anticipating an interest rate hike that never came. Hopefully, Chair Yellen's clearer vision will reduce volatility in 2015.
So what will "next year" bring, Mr. Market? "I've got an image to nurse." 2015 again will be about interest rates. I am confident that the Federal Reserve will not raise short term rates until June, and I continue to believe that a rise in those rates will have minimal impact on longer term ones(10-30 year bonds). Longer term rates respond more to inflation which I see remaining in check (below 2% here, much lower worldwide) for the foreseeable future. Demand for goods and services is waning here and abroad for a host of reasons including demographics. With demand low, unemployment worldwide will remain high and wages, the primary driver of inflation, will remain stagnant. Low inflation and thus low long term rates is good news for my favorite income plays (preferred stock, utilities, municipal bond funds, mlp's and real estate investment trusts) all of which do well in such an environment. Cheap credit also will continue to fuel stock buy backs. This year's wild card is energy. No one predicted the dramatic decrease in oil and natural gas prices experienced in the second half of 2014. I do not see them remaining depressed all year as more companies cut back on their capital expenditures and exploration efforts. Buying solid companies (CVX, COP, ETP, KMI) on dips and looking for a confirmed rise in prices as a signal to buy more speculative plays should reward market watchers this year.
I close on some personal news. After 38 years of practicing law with Michael Best & Friedrich LLP, I decided to retire as of December 31, 2014. My years at MBF were rewarding on so many fronts, but the lure of MBF's pension plan, devised to incentivize people of my age to leave, proved irresistible. That said, I am not ready to abandon completely the profession that I was born to practice. And so, effective January 1, 2015, I have associated in an "of counsel" capacity with the law firm of Hansen Reynolds Dickinson Crueger LLC (www.hrdclaw.com). HRDC is a litigation boutique founded by four of my former partners a few years ago and now has offices in Milwaukee, Madison and Chicago. You will hear more about my professional plans in the coming days and weeks, but with the New Year dawning, I am living a Paul Simon lyric: I am
"Lookin' for fun and feelin' groovy!"
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