February 7, 2015 Too Marvelous For Words

Risk/Reward Vol. 253

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

“For nobody else, gave me a thrill/ With all your faults, I love you still
It had to be you, wonderful you/ It had to be you”---lyrics from “It Had To Be You” sung by Frank Sinatra

“On the rebound, it's a replay
On the rebound, it's a replay
Your love was on the rebound”---lyrics from “On the Rebound” sung by Uriah Heep

“Were you the last to know?
Were you left out in the cold?
What you did was low”---lyrics from “Low” sung by Kelly Clarkson

If ever a week exemplified the adage “There is No Alternative” (to United States equities, that is), it was this one. (TINA discussed in Vols. 164, 201 and 250 www.riskrewardblog.blogspot.com ). The two major indices regained all of their year-to-date losses with the Dow Jones Industrial Average closing 660 points higher and the S&P 500 up 60 points above last Friday’ close. This was achieved even though Europe remains in the dumps with the European Central Bank balking at buying Greek debt.
China’s growth prospects are so dim, its central bank loosened reserve requirements hoping to encourage more lending. Literally, “nobody else gave me a thrill/ With all your faults, I love US equities still/ It had to be you, wonderful you/ It had to be you.”---if you want any return on your investment. And I see no end in sight.

The guidance given during the most recent earnings season (which just now is concluding) indicates that, cumulatively, the companies comprising the S&P500 will grow profits 3.5% this year which is well above an earlier forecast of 1.1% growth. Moreover, oil prices are “on the rebound.” I’m not sure we will experience “a replay” of $100/bbl. oil, but seeing the price rise above $50 has given Mr. Market assurance that the all- important domestic energy industry will continue to grow and prosper. Adding further encouragement is the growth in employment. A report on Friday indicated that 257,000 net new jobs were added in January.

The only negative on the domestic front this week was the sharp increase in the yield on the 10Year US Treasury Bond. This bellwether against which all income securities are priced spiked from 1.67% last Friday to 1.94% at the close yesterday. Bond traders are signaling their belief that the good news described above will justify the Federal Reserve raising short term rates sooner than 2016. This week's spike negatively impacted my interest rate sensitive portfolio, but I am holding pat. (Remember higher rates mean lower prices.) Certainly, I don’t “want to be the last to know” or to otherwise be “left out in the cold” should rates continue to rise sharply. But, I believe the rise will moderate if not reverse. I see too many headwinds to the Fed taking action this year. For example, on Monday the U.S. Commerce Department released last month’s personal consumption expenditure (PCE) index upon which the Fed relies for measuring inflation. That index indicated that we are well below the Fed’s targeted 2% annual inflation rate. Raising interest rates would only dampen inflation more. Moreover, other Commerce Department numbers indicate that US exports are declining. This is a direct result of the strength of the US dollar versus other world currencies. Raising interest rates strengthens a currency and thus would only exacerbate this problem. Time will tell, but I am still of the belief that interest rates will remain low. That said, my eye remains focused on the yield/rate on the 10Year.

Investors in US equities this week were “On the Sunny Side of the Street”, “Come Rain or Shine.” They reaped more than just “Pennies From Heaven” and “Three Coins in a Fountain.” Moreover, their good fortune was not the product of “Witchcraft” and was not a gift from some “Stranger in the Night.” It came from understanding that opportunities exist here unlike anywhere else in the world. And with apologies to Ol’ Blue Eyes, that is “Too Marvelous For Words.”