Risk/Reward Vol. 268
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“I'm so excited
And I just can't hide it
I'm about to lose control
And I think I like it”---lyrics from “Excited” sung by The Pointer Sisters
“Nothin like the old school
Ain't nuttin like the old school”---lyrics from “Old School” sung by 2Pac
“And I'm bringing you a love that's true.
So get ready, so get ready”---lyrics from “Get Ready” sung by The Temptations
When it comes to this year's stock market, have you heard anyone say “I’m so excited/And I just can’t hide it?” Has anyone exclaimed that “I’m about to lose control?” Or even “I like it?” I have not, and with the news on Friday that the nation’s economy shrank 0.7% in the first quarter, I don’t see a lot of excitement forthcoming. Experts now predict that the economy will grow about 2% for the year, consistent with the sluggish pace experienced over the past few years. With no new monetary stimulus at play (QE3 is over, and short term interest rates cannot go much lower), the stock market remains in a tight trading range. Year to date, the Dow Jones Industrial Average is up only 1.05%, and the S&P 500 is up 2.36%.
The performance of these indices would be much worse if not for an avalanche of share buy backs and dividend raises. Between these two shareholder-friendly moves, corporations comprising the S&P 500 will return a record $1Trillion to shareholders in 2015. Buybacks (which reduce the denominator in eps calculations) alone will raise earnings per share at least 4% for more than 100 companies this year. Exemplifying this is Pfizer (PFE) which is up 11% year to date notwithstanding fourteen consecutive quarters of diminishing sales and three straight quarters of earnings declines. Despite this poor performance, the pharma giant known for Lipitor, Viagra and Lyrica has kept its stock buoyed by coupling earnings announcements with huge buybacks and dividend increases. Is this bad? I don’t think so. Through the 1960’s, publicly traded corporations on average returned more than 50% of their earnings to shareholders primarily via dividends. That percentage fell dramatically in subsequent years. Indeed, dividends were considered passe during the dot.com era. Their return and that of their step sister, share buybacks, should be welcomed by income seekers of a certain age (e.g. yours truly). Like 2Pac, I say “Nothin like old school/Ain’t nuttin’ like old school.”
So far this year, I have not been penalized by sitting on a pile of cash. The DJIA and S&P’s paltry returns have not warranted taking much risk. I have not sat idly, however. I am “gettin’ ready/gettin’ ready” for my chosen moment to buy. As reported previously, that will be when the timing of the Fed’s decision to raise short term interest rates becomes clearer. Based upon the Fed Funds futures and the current yield on the bellwether 10Year Treasury (2.12%), most market participants are looking for the first rate increase in December. I am hoping that it occurs before then (say, September), that it sends a shock through the markets and that it thereby creates a significant buying opportunity. A good shopping list can be had by going to Google Finance’s stock screener, selecting a minimum dividend rate (e.g 3.5%) and sorting by market cap. There you will find "a love that's true." You will see some great, blue chip companies, many of which will be hammered once rates increase--- if only for a short while.
Like it or not, great buying opportunities arise when stock markets drop. And the next rain on the current bull market's parade likely will occur when the Federal Reserve raises interest rates. We all know it is going to happen, so get on with it, Janet. Bring on the storm. Until then, I will continue to invoke The Temptations:
“Sunshine, blue skies, please go away
I know to you it might sound strange
But I wish it would rain
How I wish that it would rain”
Sunday, May 31, 2015
Sunday, May 17, 2015
May 17, 2015 Don't Worry 'Bout Me
Risk/Reward Vol. 267
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Give me one reason to stay here
And I'll turn right back around”---lyrics from “Give Me One Reason” sung by Tracy Chapman
“I'm friends with the monster that's under my bed
Get along with the voices inside of my head”---lyrics from “Monster” sung by Eminem feat. Rihanna
“Out along the edge
Is always where I burn to be
Highway to the danger zone”---lyrics from “Danger Zone” sung by Kenny Loggins
So what caused the stock market to “turn right back around” on Thursday with the Dow Jones Industrial Average and the S&P 500 both gaining 1.1% and the S&P setting a new record high? The financial rags on Friday were noticeably silent as to why. If I were to “give you one reason” it would be the disappointing Producer Price Index published Thursday morning. Unexpectedly, it showed that the average selling price of domestic products fell 0.4% in April. In the minds of many, this deflationary news lessened the likelihood that the Federal Reserve (which so desperately wants inflation at 2%) will raise rates any time soon. This caused the yield on the bellwether 10 Year Treasury Bond (“10 Year”) to drop more than 10 basis points by the close on Friday. Indeed, the Fed Funds Futures market now pegs the chance of a rate increase earlier than year end at less than 50%. No rate increase means a continuation of easy money, and easy money has fueled the bull market for the past six years.
But is that easy-money bet wise? “The voices in my head” tell me that a rate increase will happen this year. Will it happen in June? Now, probably not. In September? Could be. This year? Probably. And based upon the “taper tantrum” that occurred when the end of QE was first discussed in 2013, the reaction in the bond market will be swift and violent once a rate increase becomes more certain. See the discussions at Vols. 172 and 211 www.riskrewardblog.blogspot.com . For income investors such yours truly, the ones whose favorite securities trade in relation to the yield on 10 Year, a violent increase in rates is “the monster that’s under my bed.” Something that is always there; something that is to be feared and avoided.
Accordingly, if I remain mostly on the sidelines for the next several months, so be it. I do not see any segment of the market catching fire. Despite the nice run in the indices this week, they remain in a tight trading zone with returns in the 1-3% range; returns not warranting the risk. At my age and stage, I have no reason to be “along the edge”, let alone on a “highway to the danger zone.” In times past, that “is always where I get burned.” For the reasons discussed in the past few editions, I look for both the stock and bond markets to remain choppy for the foreseeable future.
When it comes to this market, I find solace in the lyrics of Kenny Loggins. When will the rate increase come? I don’t know. Certainly, I’m NOT prepared to announce:
“(This is it) Make no mistake where you are
(This is it) Your back's to the corner
(This is it) Don't be a fool anymore”
That said, I remain very cautious. “Footloose”, I am not. Instead, I am overweight in cash. There, “Dip, dip,dip/I’m alright/Nobody worry ‘bout me.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Give me one reason to stay here
And I'll turn right back around”---lyrics from “Give Me One Reason” sung by Tracy Chapman
“I'm friends with the monster that's under my bed
Get along with the voices inside of my head”---lyrics from “Monster” sung by Eminem feat. Rihanna
“Out along the edge
Is always where I burn to be
Highway to the danger zone”---lyrics from “Danger Zone” sung by Kenny Loggins
So what caused the stock market to “turn right back around” on Thursday with the Dow Jones Industrial Average and the S&P 500 both gaining 1.1% and the S&P setting a new record high? The financial rags on Friday were noticeably silent as to why. If I were to “give you one reason” it would be the disappointing Producer Price Index published Thursday morning. Unexpectedly, it showed that the average selling price of domestic products fell 0.4% in April. In the minds of many, this deflationary news lessened the likelihood that the Federal Reserve (which so desperately wants inflation at 2%) will raise rates any time soon. This caused the yield on the bellwether 10 Year Treasury Bond (“10 Year”) to drop more than 10 basis points by the close on Friday. Indeed, the Fed Funds Futures market now pegs the chance of a rate increase earlier than year end at less than 50%. No rate increase means a continuation of easy money, and easy money has fueled the bull market for the past six years.
But is that easy-money bet wise? “The voices in my head” tell me that a rate increase will happen this year. Will it happen in June? Now, probably not. In September? Could be. This year? Probably. And based upon the “taper tantrum” that occurred when the end of QE was first discussed in 2013, the reaction in the bond market will be swift and violent once a rate increase becomes more certain. See the discussions at Vols. 172 and 211 www.riskrewardblog.blogspot.com . For income investors such yours truly, the ones whose favorite securities trade in relation to the yield on 10 Year, a violent increase in rates is “the monster that’s under my bed.” Something that is always there; something that is to be feared and avoided.
Accordingly, if I remain mostly on the sidelines for the next several months, so be it. I do not see any segment of the market catching fire. Despite the nice run in the indices this week, they remain in a tight trading zone with returns in the 1-3% range; returns not warranting the risk. At my age and stage, I have no reason to be “along the edge”, let alone on a “highway to the danger zone.” In times past, that “is always where I get burned.” For the reasons discussed in the past few editions, I look for both the stock and bond markets to remain choppy for the foreseeable future.
When it comes to this market, I find solace in the lyrics of Kenny Loggins. When will the rate increase come? I don’t know. Certainly, I’m NOT prepared to announce:
“(This is it) Make no mistake where you are
(This is it) Your back's to the corner
(This is it) Don't be a fool anymore”
That said, I remain very cautious. “Footloose”, I am not. Instead, I am overweight in cash. There, “Dip, dip,dip/I’m alright/Nobody worry ‘bout me.”
Sunday, May 10, 2015
May 10, 2015 See The Exit
Risk/Reward Vol. 266
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“So Goldilocks for a while
Would you mind
Smiling your perfect smile”---lyrics from “Goldilocks Sometimes” sung by The Monkees
“A weather man of words
But I could never shoot down
My high-flying bird”---lyrics from “High Flying Bird” sung by Elton John
“Baby see the exit, exit, see the exit, let's go, out this club
Exit, exit, exit, see the exit, let's go out this club, exit”---lyrics from “Exit” sung by RKelly
Who would have thought that a so-so April jobs report on Friday would vault the Dow Jones Industrial Average (DJIA) 1.5% (267 points) and the S&P 500 1.35% (28 points)? Only Mr. Market. The economy added a respectable 223,000 jobs last month, and unemployment fell to 5.4%. But the job participation rate remained at an historic low (only 62.8% of eligible workers were employed or looking for work), and wages grew at annual rate of only 2.2%, far below the 3-3.5% that labor economists believe is necessary to sustain healthy economic growth. So why the bump? Market commentators called the jobs report “Goldilocks”: “ not too hot” so as to cause the Federal Reserve to raise interest rates before September; “not too cold” so as to indicate a stalled economy; “just right” for the market to trade within its year-to-date range. And so, the stock market's steady downward march over the previous few days was halted and reversed by the Labor Department’s “perfect smile” jobs numbers.
And what a reversal it was from Tuesday and Wednesday when the DJIA sank 239 points (and even more intraday). The market declined in the aftermath of comments from Fed Chair Janet Yellen early in the week that “equity market valuations were generally quite high.” Talk about “a weather man of words/shooting down/a high flying bird!” Clearly, whatever else one believes impacts the stock market, one cannot deny that the Fed is influence numero uno. A few negative words from Janet and the market lost all of its year to date gains; two days later a jobs report indicating that the Fed may not raise rates until September caused the indices to flirt with all time highs. I believe that these “mixed signals,” about which I wrote last week (www.riskrewardblog.blogspot.com ), will cause the markets to yo-yo until the Fed makes a definitive move.
The bond market mirrored the stock market’s action with the yield on the bellwether 10 Year US Treasury reaching as high as 2.24% midweek before falling to 2.15% at Friday’s close. (Remember: as yields increase, prices decline.) However, on a percentage basis, the bond market is much more volatile and will remain so until the Fed raises rates. The reason is simple and has been the subject of recent comments from virtually every market guru from Bill Gross to Jeffrey Gundlach to Mohamed El Erian to Stanley Druckenmiller to Larry Summers to Howard Marks to most recently Jamie Dimon, the head of JPMorganChase. And that reason is this: a lack of liquidity---which is a fancy way of saying there won’t be enough buyers when everyone wants out of bonds and starts yelling “ Baby see the exit, exit, see the exit, let's go, out this club/Exit, exit, exit, see the exit, let's go out this club, exit.” In the past, large banks (e.g. Citibank, JPMorganChase, Wells Fargo, Deutsche Bank, etc.) served as the buyers of last resort or “market makers” for all types of bonds. Historically, this role had been profitable for large banks. At the same time, the role served to stabilize the bond market. But market making, in the short run, can and has exposed these institutions to significant risk; the type that occurred in 2008-2009 when the bottom fell out of all markets necessitating government assistance. The Dodd-Frank law was enacted, in part, to address the bond trading risks faced by banks, in particular the large ones such as Citibank which were deemed “too big to fail.” In typical regulatory fashion, however, Dodd Frank appears to have overshot the mark and now, in a classic example of “unintended consequences”, Dodd-Frank has created a bond market powder keg. Without large banks serving as market makers, buying when others don't want to and backstopping prices, the bond market likely will fall precipitously once the Fed raises rates. This is the main reason that income investors (preferred stocks, REIT's, municipal bond funds, utilities, etc.) such as yours truly, whose securities trade in relation to the bond market, must remain cautious and vigilant. And why, Dear Readers, I remain overweight in cash.
And so the beat goes on--- with the stock and bond markets down significantly one day; up significantly the next. I see this pattern continuing until the greatest influence on Mr. Market's conduct, the Fed, finally raises rates. Like The Monkees, of this “I’m a believer/Not a trace of doubt in my mind.” Unless, of course, I change my mind.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“So Goldilocks for a while
Would you mind
Smiling your perfect smile”---lyrics from “Goldilocks Sometimes” sung by The Monkees
“A weather man of words
But I could never shoot down
My high-flying bird”---lyrics from “High Flying Bird” sung by Elton John
“Baby see the exit, exit, see the exit, let's go, out this club
Exit, exit, exit, see the exit, let's go out this club, exit”---lyrics from “Exit” sung by RKelly
Who would have thought that a so-so April jobs report on Friday would vault the Dow Jones Industrial Average (DJIA) 1.5% (267 points) and the S&P 500 1.35% (28 points)? Only Mr. Market. The economy added a respectable 223,000 jobs last month, and unemployment fell to 5.4%. But the job participation rate remained at an historic low (only 62.8% of eligible workers were employed or looking for work), and wages grew at annual rate of only 2.2%, far below the 3-3.5% that labor economists believe is necessary to sustain healthy economic growth. So why the bump? Market commentators called the jobs report “Goldilocks”: “ not too hot” so as to cause the Federal Reserve to raise interest rates before September; “not too cold” so as to indicate a stalled economy; “just right” for the market to trade within its year-to-date range. And so, the stock market's steady downward march over the previous few days was halted and reversed by the Labor Department’s “perfect smile” jobs numbers.
And what a reversal it was from Tuesday and Wednesday when the DJIA sank 239 points (and even more intraday). The market declined in the aftermath of comments from Fed Chair Janet Yellen early in the week that “equity market valuations were generally quite high.” Talk about “a weather man of words/shooting down/a high flying bird!” Clearly, whatever else one believes impacts the stock market, one cannot deny that the Fed is influence numero uno. A few negative words from Janet and the market lost all of its year to date gains; two days later a jobs report indicating that the Fed may not raise rates until September caused the indices to flirt with all time highs. I believe that these “mixed signals,” about which I wrote last week (www.riskrewardblog.blogspot.com ), will cause the markets to yo-yo until the Fed makes a definitive move.
The bond market mirrored the stock market’s action with the yield on the bellwether 10 Year US Treasury reaching as high as 2.24% midweek before falling to 2.15% at Friday’s close. (Remember: as yields increase, prices decline.) However, on a percentage basis, the bond market is much more volatile and will remain so until the Fed raises rates. The reason is simple and has been the subject of recent comments from virtually every market guru from Bill Gross to Jeffrey Gundlach to Mohamed El Erian to Stanley Druckenmiller to Larry Summers to Howard Marks to most recently Jamie Dimon, the head of JPMorganChase. And that reason is this: a lack of liquidity---which is a fancy way of saying there won’t be enough buyers when everyone wants out of bonds and starts yelling “ Baby see the exit, exit, see the exit, let's go, out this club/Exit, exit, exit, see the exit, let's go out this club, exit.” In the past, large banks (e.g. Citibank, JPMorganChase, Wells Fargo, Deutsche Bank, etc.) served as the buyers of last resort or “market makers” for all types of bonds. Historically, this role had been profitable for large banks. At the same time, the role served to stabilize the bond market. But market making, in the short run, can and has exposed these institutions to significant risk; the type that occurred in 2008-2009 when the bottom fell out of all markets necessitating government assistance. The Dodd-Frank law was enacted, in part, to address the bond trading risks faced by banks, in particular the large ones such as Citibank which were deemed “too big to fail.” In typical regulatory fashion, however, Dodd Frank appears to have overshot the mark and now, in a classic example of “unintended consequences”, Dodd-Frank has created a bond market powder keg. Without large banks serving as market makers, buying when others don't want to and backstopping prices, the bond market likely will fall precipitously once the Fed raises rates. This is the main reason that income investors (preferred stocks, REIT's, municipal bond funds, utilities, etc.) such as yours truly, whose securities trade in relation to the bond market, must remain cautious and vigilant. And why, Dear Readers, I remain overweight in cash.
And so the beat goes on--- with the stock and bond markets down significantly one day; up significantly the next. I see this pattern continuing until the greatest influence on Mr. Market's conduct, the Fed, finally raises rates. Like The Monkees, of this “I’m a believer/Not a trace of doubt in my mind.” Unless, of course, I change my mind.
Sunday, May 3, 2015
May 3, 2015 Mixed Signals
Risk/Reward Vol. 265
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Sorry, but I have been too busy to compose a typical Risk/Reward. All good---just too busy. That said, once again, too much occurred this week to let it pass without comment.
Thursday and Friday were quite a roller coaster ---the Dow down 200 one day then up 200 the next. Despite this action, the week ended nearly where it did last week. Why the volatility, you ask? Mixed signals. Corporate earnings are ok, but top line performance is spotty and guidance is cautious. The economy grew at a disappointing 0.2% in the first quarter, but employment numbers continue to improve. Add to this the uncertainty arising from the Federal Reserve's press release after its mid week meeting. It left many Fed watchers wondering whether the first rate increase would occur in June or September or not at all this year. Mixed signals indeed--- at least for those in the equity market.
The bond market however traded with much more certainty. The yield on the bellwether 10 Year Treasury Bond rose steadily after the Fed meeting. It ended the week at 2.12%, 20 basis points above its close last week. This 10% increase bespoke conviction by bond traders that the Fed will raise rates this year, a sluggish economy notwithstanding. Indeed, the rapidity of the increase in the 10Year yield indicates that many in the bond market see the increase coming in June. Frankly, a rate bump before the release of Q2 economic numbers (which would be in July) makes sense if the Fed is hell bent on an increase in 2015---as it appears to be. If Q2 economic data disappoints, as it well could, the Fed would have a difficult time raising rates at all this year.
At this point, I want an increase in June. If one occurs, it will cause the market to oversell income securities---of this I am certain. And I have identified a slew of great stocks that I will buy if and when an increase occurs. Take a look at my favorite triple net lease, real estate investment trust (REIT), Realty Income (O). O owns nearly 4500 single purpose buildings leased to highly rated tenants like Firestone, Publix, Taco Bell, Home Depot, etc. Moreover, it has increased its dividend every quarter for 70 quarters. Nevertheless, its stock price is down double digits over the past 3 months which has caused its annual yield to approach 5%. It is a must buy once the Fed announces a rate increase. Also take a look at the senior living REIT space where Ventas (VTR), Senior Housing (SNR) and Omega (OHI) have likewise suffered double digit losses since February. These are solid companies with a history of increasing dividends. They too are on my shopping list once the Fed acts.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Sorry, but I have been too busy to compose a typical Risk/Reward. All good---just too busy. That said, once again, too much occurred this week to let it pass without comment.
Thursday and Friday were quite a roller coaster ---the Dow down 200 one day then up 200 the next. Despite this action, the week ended nearly where it did last week. Why the volatility, you ask? Mixed signals. Corporate earnings are ok, but top line performance is spotty and guidance is cautious. The economy grew at a disappointing 0.2% in the first quarter, but employment numbers continue to improve. Add to this the uncertainty arising from the Federal Reserve's press release after its mid week meeting. It left many Fed watchers wondering whether the first rate increase would occur in June or September or not at all this year. Mixed signals indeed--- at least for those in the equity market.
The bond market however traded with much more certainty. The yield on the bellwether 10 Year Treasury Bond rose steadily after the Fed meeting. It ended the week at 2.12%, 20 basis points above its close last week. This 10% increase bespoke conviction by bond traders that the Fed will raise rates this year, a sluggish economy notwithstanding. Indeed, the rapidity of the increase in the 10Year yield indicates that many in the bond market see the increase coming in June. Frankly, a rate bump before the release of Q2 economic numbers (which would be in July) makes sense if the Fed is hell bent on an increase in 2015---as it appears to be. If Q2 economic data disappoints, as it well could, the Fed would have a difficult time raising rates at all this year.
At this point, I want an increase in June. If one occurs, it will cause the market to oversell income securities---of this I am certain. And I have identified a slew of great stocks that I will buy if and when an increase occurs. Take a look at my favorite triple net lease, real estate investment trust (REIT), Realty Income (O). O owns nearly 4500 single purpose buildings leased to highly rated tenants like Firestone, Publix, Taco Bell, Home Depot, etc. Moreover, it has increased its dividend every quarter for 70 quarters. Nevertheless, its stock price is down double digits over the past 3 months which has caused its annual yield to approach 5%. It is a must buy once the Fed announces a rate increase. Also take a look at the senior living REIT space where Ventas (VTR), Senior Housing (SNR) and Omega (OHI) have likewise suffered double digit losses since February. These are solid companies with a history of increasing dividends. They too are on my shopping list once the Fed acts.
Subscribe to:
Posts (Atom)