Risk/Reward Vol. 271
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“When I'm gone (when I'm gone)
When I'm gone (when I'm gone)
You're gonna miss me when I'm gone”—lyrics from “Cups (You’re Gonna Miss Me) sung by Lulu and The Lampshades
“Imagine how the world could be
So very fine
So happy together”---lyrics from “Happy Together” sung by The Turtles
“The foot bone connected to the leg bone,
The leg bone connected to the knee bone”---lyrics from “Dem Bones” sung by Everyone
The Dow Jones Industrial Average and the S&P 500 have barely moved since last I wrote two weeks ago. In fact, I am sure that “You did not miss me when I was gone/When I was gone/When I was gone.” Plot the 50 Day Moving Average on these indices, year to date, and you will see both undulate over and under the nearly flat 50DMA like gentle waves. This remarkably stable condition prevails despite a worsening of the Greek debt crisis; a story to which much blame is assigned to explain day to day market variability. I don’t know what will cause the stock market to break up or down. Maybe it will be when the Fed raises rates in September or December, but one would think much of that has been baked into stock prices already. But the wags who proclaimed that this is a “stock picker’s market” (that is, one where gains are achieved on individual stocks and not on stock indices) appear to be right.
The stock pickers that have done the best this year are those that have identified merger and acquisition candidates. And there are a lot of them. The Wall Street Journal reported yesterday that we are headed for the most active m&a year on record. More than $2.15 trillion worth of deals have been announced as of the third week in June which puts us on a pace to eclipse 2007’s $4.3 trillion merger mania. (Yikes! Does that portend something?) With debt so cheap, plenty of cash on balance sheets and stock prices still high, corporate managers “imagine how the world could be/So very fine/So happy together.” No industry exemplifies this thinking more than health insurance where Humana is for sale, United Health is stalking Aetna and Anthem wants to buy CIGNA---and where, with this week’s Supreme Court decision, we march inexorably to a one party payer system.
This has NOT been a good few months for those who like income producing stocks; that is, those correlated to the bond market. It is for this reason that I am so heavily weighted in cash, having sold most of these in March. However, it has been a great time to study these correlations. And if anyone doubts the existence of correlations (which I define as “the foot bone connected to the leg bone/And the leg bone connected to the knee bone, etc.”), I suggest you do the following. Access Yahoo Finance, and click on the 10Yr. Bond hyperlink. When it opens locate the chart and click on the 2y hyperlink. When it opens click on “Comparison” and enter OHI, the symbol for Omega Health Investors one of my favorite real estate investment trusts (REIT’s). What will be displayed is a chart showing the relative performance between the yield on the 10Yr. and the price of OHI. Have you ever seen a more perfect inverse relationship? Plug in any income stock (REIT, BDC, preferred stock) and you will see similar results. I look for these correlations, focus like a hawk on the yield on the 10Year and make investment decisions accordingly. At present, all signs are that the yield on the 10Yr is headed up. Thus I am in cash until that yield stabilizes. I only need stability because what I seek is steady income (for example, the yield on OHI is presently over 6% annually). However, if the yield on the 10 Year falls, all the better for me because I achieve capital appreciation as well as income. It is an imperfect system, but it protects me from experiencing what befell the stock markets in 2008-2009; an event which has had a greater influence on my investing philosophy than the spectacular gains achieved thereafter.
Having interviewed countless money managers and read countless books on investing, I am convinced that all of us in the game are looking for the one, true secret to investing success. Barb calls it “the one trick”- as in “he is a one trick pony.” For me, the “one trick” is trading in correlation to the yield on the 10Yr. Like The Turtles, that yield
“…showed me what to do
Exactly what to do
How I fell in love with you.”
Sunday, June 28, 2015
Sunday, June 14, 2015
June 14, 2015 Fed Up
Risk/Reward Vol 270
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Their lips are lying
Only real is real
Grease is the word”---lyrics from “Grease Is The Word” sung by the cast of Grease
“You got to get back up
And when they push you down
You got to get back up”---lyrics from “Get Back Up” sung by T.I. (feat. Chris Brown)
“I’m fed up (ayy), I’m fed up (ayy), I’m fed up (ayy)
I’m so sick and tired of being sick and tired”---lyrics from “Fed Up” sung by DJ Khaled (feat. Lil Wayne)
As a longtime, devoted reader of several financial publications, I can state that, with a few exceptions (e.g. Jon Hilsenrath), financial journalists like their counterparts elsewhere in the Fourth Estate just mail it in. After Wednesday’s huge 236 point jump in the Dow Jones Industrial Average (DJIA), the financial rags were remarkably silent as to the reason ---and, of course, none of them predicted it. Even market-focused Investor’s Business Daily (IBD) disappointed by reporting that “stocks rallied broadly amid signs of progress in Athens.” After Friday’s 140 point drop all IBD could report is “indexes fell as a setback in the bailout talks between Greece and its creditors weighed on sentiment.” Greece? “Greece is the word?” I don’ think so. I think “their lips are lying.” The sad truth is that financial reporters and the publications that employ them don’t help us understand market dynamics. They would rather be silent than be wrong.
Although the indices are stuck in a tight trading range (DJIA up 0.43% and S&P 500 up 1.71% year to date) some individual stocks and sectors have done very well. Year to date, JPMorgan (JPM) is up 7.73%, Goldman Sachs(GS) is up 8.57% and KBE (the banking ETF) is up 9.63%. My hometown stock, Lilly(LLY) (which Barb and I have owned most of our married life) is up 13.23%. But before the “buy and hold” crowd becomes too smug, please note that it was not until 2015 that JPM consistently traded above its 1999 price; that GS still trades far below its 2007 price; and that LLY trades below its year 2000 highs. The years in between have been dominated by forces that “pushed these stocks down.” It is about time that they “got back up/got back up.”
As “sick and tired” as we all are by the Federal Reserve's dominion over the financial world, be prepared to be “Fed up (ayy)/Fed up (ayy)/ Fed up (ayy)” again this week as the Federal Reserve Open Market Committee meets on June 16-17. The conventional wisdom is that if the Fed intends to raise short term interest rates in September, it will so signal in the press release and/or the press conference following this meeting. No signal will be read as postponing the rate increase until December. Either way look for volatility the afternoon of the 17th. If you have not done so already, you may wish to prune some of your interest rate sensitive holdings in advance.
Rest assured, Dear Readers, that even if financial reporters do not spend “Summer Nights” pouring over closing tables, earnings call transcripts and comparative graphs in search of what drives markets, I do. I do so because “You Are the One(s) I Want” to please. I can’t help it. I am “Hopelessly Devoted To You.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Their lips are lying
Only real is real
Grease is the word”---lyrics from “Grease Is The Word” sung by the cast of Grease
“You got to get back up
And when they push you down
You got to get back up”---lyrics from “Get Back Up” sung by T.I. (feat. Chris Brown)
“I’m fed up (ayy), I’m fed up (ayy), I’m fed up (ayy)
I’m so sick and tired of being sick and tired”---lyrics from “Fed Up” sung by DJ Khaled (feat. Lil Wayne)
As a longtime, devoted reader of several financial publications, I can state that, with a few exceptions (e.g. Jon Hilsenrath), financial journalists like their counterparts elsewhere in the Fourth Estate just mail it in. After Wednesday’s huge 236 point jump in the Dow Jones Industrial Average (DJIA), the financial rags were remarkably silent as to the reason ---and, of course, none of them predicted it. Even market-focused Investor’s Business Daily (IBD) disappointed by reporting that “stocks rallied broadly amid signs of progress in Athens.” After Friday’s 140 point drop all IBD could report is “indexes fell as a setback in the bailout talks between Greece and its creditors weighed on sentiment.” Greece? “Greece is the word?” I don’ think so. I think “their lips are lying.” The sad truth is that financial reporters and the publications that employ them don’t help us understand market dynamics. They would rather be silent than be wrong.
Although the indices are stuck in a tight trading range (DJIA up 0.43% and S&P 500 up 1.71% year to date) some individual stocks and sectors have done very well. Year to date, JPMorgan (JPM) is up 7.73%, Goldman Sachs(GS) is up 8.57% and KBE (the banking ETF) is up 9.63%. My hometown stock, Lilly(LLY) (which Barb and I have owned most of our married life) is up 13.23%. But before the “buy and hold” crowd becomes too smug, please note that it was not until 2015 that JPM consistently traded above its 1999 price; that GS still trades far below its 2007 price; and that LLY trades below its year 2000 highs. The years in between have been dominated by forces that “pushed these stocks down.” It is about time that they “got back up/got back up.”
As “sick and tired” as we all are by the Federal Reserve's dominion over the financial world, be prepared to be “Fed up (ayy)/Fed up (ayy)/ Fed up (ayy)” again this week as the Federal Reserve Open Market Committee meets on June 16-17. The conventional wisdom is that if the Fed intends to raise short term interest rates in September, it will so signal in the press release and/or the press conference following this meeting. No signal will be read as postponing the rate increase until December. Either way look for volatility the afternoon of the 17th. If you have not done so already, you may wish to prune some of your interest rate sensitive holdings in advance.
Rest assured, Dear Readers, that even if financial reporters do not spend “Summer Nights” pouring over closing tables, earnings call transcripts and comparative graphs in search of what drives markets, I do. I do so because “You Are the One(s) I Want” to please. I can’t help it. I am “Hopelessly Devoted To You.”
Sunday, June 7, 2015
June 7, 2015 Wrecking Ball
Risk/Reward Vol. 269
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“I came in like a wrecking ball
All I wanted was to break your walls
All you ever did was wreck me
Yeah, you, you wreck me”---lyrics from “Wrecking Ball” sung by Miley Cyrus
“There's no way out of this dark place
No hope, no future”---lyrics from “No Way Out” sung by Phil Collins
“Need a little sweetness in my life
Your sugar! (sugar!) Yes, please (yes, please)”---lyrics from “Sugar” sung by Maroon 5
If, in the future, you ever doubt the influence that the European Central Bank (ECB) and the Federal Reserve have on the financial markets just remember this week. On Wednesday, ECB President Mario Draghi’s offhand comment that the ECB would not use quantitative easing to suppress volatility in Europe’s bond market caused a rout in the German Bund the yield on which jumped 32 basis points (from 0.57 to 0.89%) in just two days. That action rippled through the world bond market “like a wrecking ball/breaking down walls.” If I had not reduced my holdings in interest rate sensitive securities, it would have “wrecked me,” as the yield on the benchmark US 10 Year Treasury Bond (off which most income securities are priced) skyrocketed to heights not seen since October last year. (Remember a rise in yield equates to a drop in price.) If you want a cogent explanation watch Rick Santelli’s interview of Jeffrey Gundlach on Wednesday last which can be accessed through CNBC’s archived videos.
The rise in yields and the concomitant drop in bond prices continued on Friday on the heels of a better-than-expected jobs report. The report was so good, it increased the odds that the Federal Reserve will increase short term rates in September. Traders looked to shed low yielding bonds---and guess what---found very few buyers. The fewer the buyers, the lower the bid; the lower the bid, the greater the volatility. Thus the swings in the bond market have become huge. But why? As discussed in previous editions ( See Vol. 266 www.riskrewardblog.blogspot.com ), since the passage of the Dodd-Frank Act in 2010, major banks, which used to serve as bond market makers (buyers of last resort), no longer are permitted to serve that function. With no market makers in place, those wanting to sell bonds have no ready outlet. “There’s no way out of the dark place.” As the desire to unload low yielding bonds increases (as it will when the Fed increases short term rates), sellers will see “no hope” of avoiding a fire sale.
In today’s world and as seen this week, a significant downdraft in the bond market negatively impacts stock markets. The Dow Jones Industrial Average gave back most of its year to date gains, and the S&P 500 is now up only 1.65%. Why, you ask? As discussed in last week’s edition, much of the gain in stocks this year has resulted from stock buy backs and increased dividends, both of which have been fueled by massive borrowings (bank debt and bonds) by corporations taking advantage of the zero bound interest rates provided by central banks. If the central banks take away this “Sugar! Sugar!/Yes, please/Yes,please” borrowing will slow, buybacks will end and stock prices will drop. The anticipation of this occurring caused stock markets to drop last week.
As I have written in the past, rising yields are inevitable and in the long run should be welcomed by income investors such as yours truly. Unfortunately, the voyage there will be more volatile than in times past due to the absence of bond market makers. The next few months will be a breathtaking roller coaster ride for income investors especially those holding bonds where sellers will outnumber buyers; remindful of what those noted investors Maroon 5 warned:
“And like a little girl cries in the face of a monster that lives in her dreams
Is there anyone out there 'cause it's getting harder and harder to breathe.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“I came in like a wrecking ball
All I wanted was to break your walls
All you ever did was wreck me
Yeah, you, you wreck me”---lyrics from “Wrecking Ball” sung by Miley Cyrus
“There's no way out of this dark place
No hope, no future”---lyrics from “No Way Out” sung by Phil Collins
“Need a little sweetness in my life
Your sugar! (sugar!) Yes, please (yes, please)”---lyrics from “Sugar” sung by Maroon 5
If, in the future, you ever doubt the influence that the European Central Bank (ECB) and the Federal Reserve have on the financial markets just remember this week. On Wednesday, ECB President Mario Draghi’s offhand comment that the ECB would not use quantitative easing to suppress volatility in Europe’s bond market caused a rout in the German Bund the yield on which jumped 32 basis points (from 0.57 to 0.89%) in just two days. That action rippled through the world bond market “like a wrecking ball/breaking down walls.” If I had not reduced my holdings in interest rate sensitive securities, it would have “wrecked me,” as the yield on the benchmark US 10 Year Treasury Bond (off which most income securities are priced) skyrocketed to heights not seen since October last year. (Remember a rise in yield equates to a drop in price.) If you want a cogent explanation watch Rick Santelli’s interview of Jeffrey Gundlach on Wednesday last which can be accessed through CNBC’s archived videos.
The rise in yields and the concomitant drop in bond prices continued on Friday on the heels of a better-than-expected jobs report. The report was so good, it increased the odds that the Federal Reserve will increase short term rates in September. Traders looked to shed low yielding bonds---and guess what---found very few buyers. The fewer the buyers, the lower the bid; the lower the bid, the greater the volatility. Thus the swings in the bond market have become huge. But why? As discussed in previous editions ( See Vol. 266 www.riskrewardblog.blogspot.com ), since the passage of the Dodd-Frank Act in 2010, major banks, which used to serve as bond market makers (buyers of last resort), no longer are permitted to serve that function. With no market makers in place, those wanting to sell bonds have no ready outlet. “There’s no way out of the dark place.” As the desire to unload low yielding bonds increases (as it will when the Fed increases short term rates), sellers will see “no hope” of avoiding a fire sale.
In today’s world and as seen this week, a significant downdraft in the bond market negatively impacts stock markets. The Dow Jones Industrial Average gave back most of its year to date gains, and the S&P 500 is now up only 1.65%. Why, you ask? As discussed in last week’s edition, much of the gain in stocks this year has resulted from stock buy backs and increased dividends, both of which have been fueled by massive borrowings (bank debt and bonds) by corporations taking advantage of the zero bound interest rates provided by central banks. If the central banks take away this “Sugar! Sugar!/Yes, please/Yes,please” borrowing will slow, buybacks will end and stock prices will drop. The anticipation of this occurring caused stock markets to drop last week.
As I have written in the past, rising yields are inevitable and in the long run should be welcomed by income investors such as yours truly. Unfortunately, the voyage there will be more volatile than in times past due to the absence of bond market makers. The next few months will be a breathtaking roller coaster ride for income investors especially those holding bonds where sellers will outnumber buyers; remindful of what those noted investors Maroon 5 warned:
“And like a little girl cries in the face of a monster that lives in her dreams
Is there anyone out there 'cause it's getting harder and harder to breathe.”
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