Risk/Reward Vol 264
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Buy it, use it, break it, fix it,
Trash it, change it, mail it,
Charge it, point it, zoom it, press it”---lyrics from “Technological” sung by Daft Punk
“Whoa, we're half way there
Whoa, livin' on a prayer”---lyrics “Livin’ On a Prayer” sung by Bon Jovi
“Is that all there is/Is that all there is
If that's all there is my friends/Then let's keep dancing”---lyrics from “Is That All There Is” sung by Peggy Lee
The NASDAQ Index, comprised of the top 100 “Technological” companies, set a new record on Friday surpassing its previous high set fifteen years ago during the Dotcom days. This rise also caused the S&P 500 Index to flirt with a new high because many NASDAQ companies are also in the S&P. Leading the advance was Amazon which rose 15% on Friday despite reporting another quarter of negative earnings. Investors are willing to forego profits because they love the growth story that is and always has been Amazon---first books, then Kindles and now logistics and web services. As long as consumers “buy it, use it, break it, fix it/Trash it, change it, mail it/Charge it, point it, zoom it, press it”----and it is supplied and/or delivered by Amazon, investors will support the stock. Oh and talk about a good day. On Friday alone, Amazon founder Jeff Bezos’ net worth rose $5billion.
We are midway through the earnings season. How are doing “half way there?” So far, 53% of the companies reporting have missed sales (top line) expectations, but 73% have beaten earnings per share expectations. This dichotomy is not surprising in light of the impact of share buy backs highlighted in last week’s edition. (www.riskrewardblog.blogspot.com ). Overall the performance has been less than stellar, but has been good enough to put both the Dow Jones Industrial Average (+1.44%) and the S&P 500 (+2.86%) back into positive territory for 2015. So are these gains on solid footing, or are we “livin’ on a prayer?”
When tech stocks lead the way and more than half of the companies miss on the top line (despite lowered expectations), one is left to wonder “is that all there is/is that all there is” to support a rally? Should we “keep dancing” or is the music about to end? Having been burned badly by NASDAQ stocks fifteen years ago, I am leery of any market dominated by the tech sector. Moreover, even in the presence of massive stock buy-back programs (which reduce denominators in earnings per share calculations), stocks are at the high end of historic valuations. The S&P 500 stocks are trading at 27 times earnings averaged over the past 10 years---something that they have not done since before the Dotcom collapse. “Is that all there is”---indeed.
But for the NASDAQ 100 (+7.52%), stocks so far in 2015 have been a risky and only marginally rewarding investment. Is the six year bull market about to end? Who knows? I, for one, am holding pat, overweight cash. I remember only too well my Y2K NASDAQ love affair--- and the woe it begot me. Back then, I found myself living these Bon Jovi lyrics:
“Shot through the heart and you're to blame
You (NASDAQ) give love a bad name.”
Sunday, April 26, 2015
Sunday, April 19, 2015
April 19, 2015 Malaise
Risk/Reward Vol. 263
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The dog ate my homework. Not really, but something just as incredible did occur. My computer chose to “refresh” as I was doing final edits to this week’s edition. When it rebooted all of my work product was gone. I walked away in frustration and decided not to publish this week. But what happened on Friday was too important to let pass without comment. So I will dispense with the usual format and go directly to the point.
According to the financial press, the 279 point (1.5%) drop in the Dow Jones Industrial Average (DJIA) on Friday resulted from a change in the rules applicable to the Chinese stock market, concern over Greece’s possible exit from the Eurozone and a few notable quarterly earnings misses (e.g. GE). Really? These unremarkable events may have caused a negative day but were they enough to wipe out all of the DJIA’s year to date gain? Methinks not. I suspect that the malaise exhibited by market mavens Fink, El Erian, Summers and Gundlach which I have reported over the past few weeks is beginning to in-fect (or at least af-fect) others. This week the most prominent buzz kill came in the form of a transcript of a conversation between billionaire investors Ken Langone and Stanley Druckenmiller (George Soros’ former colleague) in which Druckenmiller likened the current stock market bubble to 2005-06---just before the subprime fiasco. He sees the current situation "ending badly."
No one is saying that the stock market will crash tomorrow, next month or even this year. That said, one must balance risk with reward. Personally, I see little reward from investing in any risk assets at present: bonds or equities with bonds being the riskier of the two. Obviously, Friday’s action demonstrates that I am not alone. So again this week I held pat; not selling anything but overweight cash.
Next week’s calendar is full of earnings reports. Track how many companies meet top line (sales) expectations. (Earnings per share have become less indicative of a company's performance due to the plethora of distortive share buy back programs.) Also, keep an eye on the guidance that companies provide for coming quarters. Guidance could foretell if any stock gains can be expected for the year.
Sunday, April 12, 2015
April 12, 2015 Bubble Pop
Risk/Reward Vol. 262
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“More and more each day
It's not supposed to hurt this way
Tell me, why”---lyrics from “Why” sung by Avril Lavigne
“This is out of our reach
Out of our reach
Negative creep”---lyrics from “Negative Creep” sung by Nirvana
“I got my bubble, hey, I got my bubble, hey hey
I got my bubble, yeah, I make my bubble pop”---lyrics from “Bubble Pop” sung by Rihanna
Contrary to last week's prediction, the stock markets this week were calm with both of the major US indices gaining nearly 1.5%. Their movement was steady, and with the exception of Tuesday, stocks rose “more and more each day.” So, Mr. Know-It-All, “tell me why?” “Tell me why” we are approaching record highs on both the S&P 500 and the Dow Jones Industrial Average when the consensus is that corporate earnings will disappoint this quarter? “Tell me why” the CAC 40 (France), the DAX (Germany) and the FTSE 100 (Great Britain) are at multiyear highs when Europe continues its march toward deflation? “Tell me why” this is occurring when the Chinese economy is now predicted to grow at less than a 7% clip, and the emerging markets are struggling? “Tell me why?”
As demonstrated week after week, my powers of prognostication are questionable at best. Knowing what will happen is clearly “out of my reach/Out of my reach.” But here is my take on where we are. Those of you fully invested in the market are continuing to enjoy the fruits of worldwide quantitative easing (QE). Although our Federal Reserve stopped printing money to buy assets last October, it continues to suppress interest rates and to encourage more risk by rolling over its massive $4.5 trillion balance sheet and by keeping short term yields near zero. In addition, this year the European Central Bank embarked on its own QE-buying spree purchasing 60billionEuro’s worth of sovereign debt every month for the foreseeable future. The impact is obvious. With short to medium duration bonds throughout Europe doing a “negative creep”, with the German 10 Year Bund yielding only 0.15%, the French 10Year bond yielding 0.43% and the Spanish 10Year bond yielding only 1.22%, investors in search of a return have few choices: buy US debt (US 10Year yielding a mere 1.9% and investment grade corporate bonds only 2.9%) or buy progressively more expensive equities in the hope that they will continue to appreciate.
With stocks trading at record multiples of earnings, are we “in a bubble, hey/a bubble hey”? Don’t rely on me for an answer. Read Larry Fink’s letter to shareholders. For those who don't know, Mr. Fink is the founder and chairman of BlackRock, the world's largest asset manager with $4.5trillion (yes, that's trillion) under management. The letter can be found at www.blackrock.com . In pertinent part, it reads: “The mix of growing assets and shrinking yields is creating a dangerous imbalance. Yet monetary policy makers (read: central bankers) seem insufficiently attuned to the conundrum their actions are creating for investors: reach for yield and continue to fuel the expanding bubble or remain on the sidelines...” Fink calls the search for yield the “greatest source of prudential risk in the financial system.” How close are we to having the “bubble pop?” I don’t know. I do know that one of my favorite market guru’s, Mohamed El Erian, said last week that he is now mostly invested in cash because "asset prices have been pushed by central bankers to very elevated levels.” I too remain overweighted in cash.
And so, two weeks in a row this publication bears a negative tone while the markets continue to rise. Come to your own conclusions, and share them with me. Maybe I am too much like Rihanna. Instead of pleading "Please don't stop the music", I am living in “Disturbia”, opening an “Umbrella” and “Taking a Bow.” I can't help it. I am uneasy. Thus I am cautious. “Sticks and stones may break my bones”, but I am not “just gonna stand there and watch my nest egg burn.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“More and more each day
It's not supposed to hurt this way
Tell me, why”---lyrics from “Why” sung by Avril Lavigne
“This is out of our reach
Out of our reach
Negative creep”---lyrics from “Negative Creep” sung by Nirvana
“I got my bubble, hey, I got my bubble, hey hey
I got my bubble, yeah, I make my bubble pop”---lyrics from “Bubble Pop” sung by Rihanna
Contrary to last week's prediction, the stock markets this week were calm with both of the major US indices gaining nearly 1.5%. Their movement was steady, and with the exception of Tuesday, stocks rose “more and more each day.” So, Mr. Know-It-All, “tell me why?” “Tell me why” we are approaching record highs on both the S&P 500 and the Dow Jones Industrial Average when the consensus is that corporate earnings will disappoint this quarter? “Tell me why” the CAC 40 (France), the DAX (Germany) and the FTSE 100 (Great Britain) are at multiyear highs when Europe continues its march toward deflation? “Tell me why” this is occurring when the Chinese economy is now predicted to grow at less than a 7% clip, and the emerging markets are struggling? “Tell me why?”
As demonstrated week after week, my powers of prognostication are questionable at best. Knowing what will happen is clearly “out of my reach/Out of my reach.” But here is my take on where we are. Those of you fully invested in the market are continuing to enjoy the fruits of worldwide quantitative easing (QE). Although our Federal Reserve stopped printing money to buy assets last October, it continues to suppress interest rates and to encourage more risk by rolling over its massive $4.5 trillion balance sheet and by keeping short term yields near zero. In addition, this year the European Central Bank embarked on its own QE-buying spree purchasing 60billionEuro’s worth of sovereign debt every month for the foreseeable future. The impact is obvious. With short to medium duration bonds throughout Europe doing a “negative creep”, with the German 10 Year Bund yielding only 0.15%, the French 10Year bond yielding 0.43% and the Spanish 10Year bond yielding only 1.22%, investors in search of a return have few choices: buy US debt (US 10Year yielding a mere 1.9% and investment grade corporate bonds only 2.9%) or buy progressively more expensive equities in the hope that they will continue to appreciate.
With stocks trading at record multiples of earnings, are we “in a bubble, hey/a bubble hey”? Don’t rely on me for an answer. Read Larry Fink’s letter to shareholders. For those who don't know, Mr. Fink is the founder and chairman of BlackRock, the world's largest asset manager with $4.5trillion (yes, that's trillion) under management. The letter can be found at www.blackrock.com . In pertinent part, it reads: “The mix of growing assets and shrinking yields is creating a dangerous imbalance. Yet monetary policy makers (read: central bankers) seem insufficiently attuned to the conundrum their actions are creating for investors: reach for yield and continue to fuel the expanding bubble or remain on the sidelines...” Fink calls the search for yield the “greatest source of prudential risk in the financial system.” How close are we to having the “bubble pop?” I don’t know. I do know that one of my favorite market guru’s, Mohamed El Erian, said last week that he is now mostly invested in cash because "asset prices have been pushed by central bankers to very elevated levels.” I too remain overweighted in cash.
And so, two weeks in a row this publication bears a negative tone while the markets continue to rise. Come to your own conclusions, and share them with me. Maybe I am too much like Rihanna. Instead of pleading "Please don't stop the music", I am living in “Disturbia”, opening an “Umbrella” and “Taking a Bow.” I can't help it. I am uneasy. Thus I am cautious. “Sticks and stones may break my bones”, but I am not “just gonna stand there and watch my nest egg burn.”
Sunday, April 5, 2015
April 4, 2015 Bottom Line
Risk/Reward Vol. 261
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
‘I won't pay, I won't pay ya, no way
Why don't you get a job?
Say no way, say no way ya, no way
Why don't you get a job?”---lyrics from “Why Don’t You Get A Job” sung by The Offspring
“I'm dying to(o)
The sun will shine
The bottom line
I follow you”---lyrics from “Bottom Line” sung by Depeche Mode
“Why's this fussing and a-fighting?
I want to know, Lord, I want to know
Why's this cheating and backbiting?
I want to know, oh, Lord, I want to know now”---lyrics from “Fussing and Fighting” sung by Bob Marley
With both the Dow Jones Industrial Average and the S&P500 flat year to date, one wonders what the second quarter will bring. The employment news reported on Friday does not bode well for the economy and thus casts doubt on the markets. Only 126,000 jobs were added in March, well below the 245,000 that were expected. Moreover, adjustments to previously reported numbers lowered average monthly job growth for the first quarter of 2015 to 197,000 as compared to 324,000 in the last quarter of 2014. It appears that the answer to the question “Why don’t you get a job” is because “I won’t pay, I won’t pay ya, no way.” On the positive side was news that the unemployment rate remained at 5.5%, but even that was tempered by the fact that the employment participation rate fell to 67.8%, the lowest percentage since 1978.
So why has job growth slowed? Many commentators place the blame on an anticipated drop in corporate earnings. They fear that that this quarter and indeed this year “the sun will not shine” on “the bottom line.” One reason lies in the strong dollar. A strong dollar versus other major currencies has the effect of lowering foreign based revenue. A Euro’s worth of earnings last year at this time was worth $1.37. It is worth $1.08 today. Stated differently, the same amount of sales in Europe (Euros) this year means 26% less in reported dollar revenue. This has proven problematic for every major company with significant international operations and/or sales. In short, the strength of the dollar is a major headwind for earnings, and earnings are the major determinant of a stock’s price. With the average S&P500 stock trading at an historically rich 17 times expected future earnings, any drop in those earnings (even if the reason is solely the dollar/Euro exchange rate) will undoubtedly exert downward pressure on stock prices. Without earnings growth and stock appreciation, corporate managers will not hire.
So what does this all mean to an income investor such as yours truly? If next month’s job report also disappoints, we likely will not see the Federal Reserve raise interest rates in June. Indeed, the immediate reaction to Friday’s jobs number upon the yield of the bellwether 10Year Treasury Bond so portends, as it fell to 1.84%. For me, nothing is more important than knowing the timing and extent of any interest rate change. “I want to know, Lord, I want to know now.” The Fed itself will not tip its hand, but look for a public debate by and between individual Fed members and Fed watchers as rate hawks and rate doves engage in “fussing and a-fighting” over the next few weeks and months. In the meantime, I remain overweighted in cash.
Next week should prove interesting as Alcoa kicks off the first quarter’s earnings report season. Between earnings and Fed watching, I see a period of volatility in the markets with as many boo days as yea days. All the while, market commentators will be overreacting both to the positive and to the negative, as if taught by that noted financial journalist, Bob Marley:
“Come on and stir it up; ..., little darlin'!
Stir it up; come on, baby!
Come on and stir it up, yeah!
Little darlin', stir it up! O-oh!”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
‘I won't pay, I won't pay ya, no way
Why don't you get a job?
Say no way, say no way ya, no way
Why don't you get a job?”---lyrics from “Why Don’t You Get A Job” sung by The Offspring
“I'm dying to(o)
The sun will shine
The bottom line
I follow you”---lyrics from “Bottom Line” sung by Depeche Mode
“Why's this fussing and a-fighting?
I want to know, Lord, I want to know
Why's this cheating and backbiting?
I want to know, oh, Lord, I want to know now”---lyrics from “Fussing and Fighting” sung by Bob Marley
With both the Dow Jones Industrial Average and the S&P500 flat year to date, one wonders what the second quarter will bring. The employment news reported on Friday does not bode well for the economy and thus casts doubt on the markets. Only 126,000 jobs were added in March, well below the 245,000 that were expected. Moreover, adjustments to previously reported numbers lowered average monthly job growth for the first quarter of 2015 to 197,000 as compared to 324,000 in the last quarter of 2014. It appears that the answer to the question “Why don’t you get a job” is because “I won’t pay, I won’t pay ya, no way.” On the positive side was news that the unemployment rate remained at 5.5%, but even that was tempered by the fact that the employment participation rate fell to 67.8%, the lowest percentage since 1978.
So why has job growth slowed? Many commentators place the blame on an anticipated drop in corporate earnings. They fear that that this quarter and indeed this year “the sun will not shine” on “the bottom line.” One reason lies in the strong dollar. A strong dollar versus other major currencies has the effect of lowering foreign based revenue. A Euro’s worth of earnings last year at this time was worth $1.37. It is worth $1.08 today. Stated differently, the same amount of sales in Europe (Euros) this year means 26% less in reported dollar revenue. This has proven problematic for every major company with significant international operations and/or sales. In short, the strength of the dollar is a major headwind for earnings, and earnings are the major determinant of a stock’s price. With the average S&P500 stock trading at an historically rich 17 times expected future earnings, any drop in those earnings (even if the reason is solely the dollar/Euro exchange rate) will undoubtedly exert downward pressure on stock prices. Without earnings growth and stock appreciation, corporate managers will not hire.
So what does this all mean to an income investor such as yours truly? If next month’s job report also disappoints, we likely will not see the Federal Reserve raise interest rates in June. Indeed, the immediate reaction to Friday’s jobs number upon the yield of the bellwether 10Year Treasury Bond so portends, as it fell to 1.84%. For me, nothing is more important than knowing the timing and extent of any interest rate change. “I want to know, Lord, I want to know now.” The Fed itself will not tip its hand, but look for a public debate by and between individual Fed members and Fed watchers as rate hawks and rate doves engage in “fussing and a-fighting” over the next few weeks and months. In the meantime, I remain overweighted in cash.
Next week should prove interesting as Alcoa kicks off the first quarter’s earnings report season. Between earnings and Fed watching, I see a period of volatility in the markets with as many boo days as yea days. All the while, market commentators will be overreacting both to the positive and to the negative, as if taught by that noted financial journalist, Bob Marley:
“Come on and stir it up; ..., little darlin'!
Stir it up; come on, baby!
Come on and stir it up, yeah!
Little darlin', stir it up! O-oh!”
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