Risk/Reward Vol. 274
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
“I should be so lucky
Lucky, lucky, lucky
I should be so lucky in love”---lyrics from “I Should Be So Lucky” sung by Kylie Minogue
“I just wanna color outside the lines
I’ve been reprimanded ‘bout a thousand times
I’m a rulebreaker
You know, I’m a rulebreaker.”---lyrics from “Rulebreaker” sung by Ashlee Simpson
“Hey, I don’t feel so good lately
Must I take pills for stability
You take me right to the edge.”---lyrics from “Stability” sung by Deborah Harry
Those who are acquainted with my bride know that “I should be so lucky/Lucky, lucky, lucky/I should be so lucky in love.” And never more than this week. On Tuesday, in the wake of Monday’s 600 point drop in the Dow Jones Industrial Average (DJIA), Barb decided to buy some master limited partnership interests. She did so without any input from me and after consulting one of our investment advisors, Nick Webster. This coincided with encouragement from another of our advisors, Dave Bartz. (Yes, dear Readers, neither Barb nor I are so stupid as to trust all of our money to my management.) Emboldened by her move, on Wednesday, I decided to start buying again. According to Seneca, “luck is what happens when preparation meets opportunity.” Having studied assiduously while on the sidelines, I was prepared with a list of stocks to take advantage of what I perceived as a great opportunity.
I recognize that some may be disappointed that I did not follow my self-imposed rule to refrain from buying until the Federal Reserve decided to raise rates. Unlike Ashlee Simpson, “I don’t wanna color outside the lines/I’ve not been reprimanded a thousand times/ and I’m not a rulebreaker.” But slavishly following a rule just did not make sense when Kinder Morgan dropped so low as to pay a 6.5% dividend; when Realty Income likewise dropped in price so as to pay a 5% dividend; when ETP was paying nearly 9%; when the price of GAB and FFC fell 8% below net asset value, etc., etc. So I bought, and then I bought some more. By week’s end, I had deployed 25% of my available cash.
So how about next week? If I keep “feeling so good” as I have “lately”; if I sense that we are not “to the edge”; and if Mr. Market does not need “pills for stability”, I likely will continue to buy. The key is stability; something I sensed on Thursday and Friday as the Federal Reserve met in Jackson Hole. Indeed, even as the stock market precipitously fell and then rose just as abruptly, the yield on the benchmark 10 Year US Treasury remained remarkably stable. I am beginning to believe that the bond market has priced in a 0.25% increase this year, and it matters little if it happens in September or December. If I continue to see evidence of stability in the 10 Year yield, I will continue to buy.
Wow, what a ride! Who would have thought on Monday, that both the DJIA and the S&P 500 would end up for the week? Times like these are great learning experiences and present wonderful opportunities for those who maintain a healthy cash reserve. I am very interested in your take on what occurred and what you believe will happen in the near future. Follow Deborah Harry's advice and : “Call me, call me on the line/Call me, call me any, anytime/Call me, call me any day or night/Call me.”
Sunday, August 30, 2015
Sunday, August 23, 2015
August 23, 2015 Correction
Risk/Reward Vol. 273
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I remain on summer sabbatical. But, the extraordinary events of the past two trading days mandate that I memorialize my impressions.
On Thursday, aspecific concerns about global growth caused a sharp decline. That decline became a rout on Friday in response to news that the Chinese manufacturing index (PMI) had fallen to its lowest level since 2009. Chinese manufacturing now is officially in a state of contraction. By their close on Friday, both the Dow Jones Industrial Average and the S&P500 had fallen 5% in two days, and each is now in a correction. (A market correction is a drop of at least 10% from a market’s high experienced in the previous 12 months.)
So why did this news from China rock our markets? Because bad news from China impacts more of the world than from anywhere else; the US included. As detailed in Vol. 74 of this venerable publication (www.riskrewardblog.blogspot.com ), Chinese industrial production single handedly supports most emerging market economies. These economies are heavily dependent upon exporting commodities. China consumes 53% of the world’s cement, 48% of its iron ore, 50% of its coal, 45% of its lead, 40-50% of its copper, 36% of its steel and a growing percentage of its oil. With Chinese production slowing, the world is in a state of commodity oversupply. Emblematic of this oversupply is crude oil, the price of which fell below $40/bbl on Friday. This is a drop of 55% from last year. Crude is at its lowest price in six years.
In 2009, when China’s PMI was last at its current depressed level, the Chinese government embarked upon a massive stimulus program; building power plants, roads and thousands of new apartments. The byproduct of this program was a resurgence of commodity prices, a boost in emerging market prosperity and steady if sluggish worldwide economic growth. China’s willingness or ability to repeat that program in 2015 is suspect. Instead, many are expecting China to engage in a currency war in which China will allow its yuan (a/k/a RMB) to devalue 25-30% against the dollar. This will make Chinese products so cheap no Western country will be able to compete. Compounding any devaluation by China is the impending rate increase promised by the Federal Reserve sometime this year; a move which will strengthen the dollar against every other currency and which will make American products even less price competitive.
With the above as a backdrop, a correction to the unprecedented six year bull market should not be a surprise. How long it will last and how deep it will go remain to be seen. As for me, I stay focused on the rate of the US Ten Year Treasury Bond which once again fell below 2.10%. The volatility it has experienced in anticipation of the Fed’s rate increase was magnified by the news from China. That volatility is why I went to cash several months ago and is why I will remain so deployed until the rate increase is announced.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I remain on summer sabbatical. But, the extraordinary events of the past two trading days mandate that I memorialize my impressions.
On Thursday, aspecific concerns about global growth caused a sharp decline. That decline became a rout on Friday in response to news that the Chinese manufacturing index (PMI) had fallen to its lowest level since 2009. Chinese manufacturing now is officially in a state of contraction. By their close on Friday, both the Dow Jones Industrial Average and the S&P500 had fallen 5% in two days, and each is now in a correction. (A market correction is a drop of at least 10% from a market’s high experienced in the previous 12 months.)
So why did this news from China rock our markets? Because bad news from China impacts more of the world than from anywhere else; the US included. As detailed in Vol. 74 of this venerable publication (www.riskrewardblog.blogspot.com ), Chinese industrial production single handedly supports most emerging market economies. These economies are heavily dependent upon exporting commodities. China consumes 53% of the world’s cement, 48% of its iron ore, 50% of its coal, 45% of its lead, 40-50% of its copper, 36% of its steel and a growing percentage of its oil. With Chinese production slowing, the world is in a state of commodity oversupply. Emblematic of this oversupply is crude oil, the price of which fell below $40/bbl on Friday. This is a drop of 55% from last year. Crude is at its lowest price in six years.
In 2009, when China’s PMI was last at its current depressed level, the Chinese government embarked upon a massive stimulus program; building power plants, roads and thousands of new apartments. The byproduct of this program was a resurgence of commodity prices, a boost in emerging market prosperity and steady if sluggish worldwide economic growth. China’s willingness or ability to repeat that program in 2015 is suspect. Instead, many are expecting China to engage in a currency war in which China will allow its yuan (a/k/a RMB) to devalue 25-30% against the dollar. This will make Chinese products so cheap no Western country will be able to compete. Compounding any devaluation by China is the impending rate increase promised by the Federal Reserve sometime this year; a move which will strengthen the dollar against every other currency and which will make American products even less price competitive.
With the above as a backdrop, a correction to the unprecedented six year bull market should not be a surprise. How long it will last and how deep it will go remain to be seen. As for me, I stay focused on the rate of the US Ten Year Treasury Bond which once again fell below 2.10%. The volatility it has experienced in anticipation of the Fed’s rate increase was magnified by the news from China. That volatility is why I went to cash several months ago and is why I will remain so deployed until the rate increase is announced.
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