Risk/Reward Vol. 277
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”---Janet Yellen September 17, 2015
“Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change”---Janet Yellen September 24, 2015
Although my sabbatical is at an end, events this week conspired to make a full edition impossible. However, the stark difference in the two statements above, spoken only one week apart, compels a comment. During that short span of 7 days, what “further improvement in the labor market” occurred and/or what data was reported that indicated that “inflation will move back to its 2 percent objective”? The answer is clear: none. Then, how come Chair Yellen was so uncommitted on the 17th and on the 24th so definitive that a rate increase will occur in 2015? The answer is equally clear--- and disheartening. She was responding to Mr. Market’s disappointment in her performance on the 17th; a disappointment evidenced by a 3% drop in both the Dow Jones Industrial Average and the S&P 500.
C’mon, Ma’m! You and your cohorts are not to respond to trading vicissitudes. You are to set monetary policy to maximize employment and to stabilize prices, both of which you have achieved and both of which are in jeopardy should you continue your easy money policy. Start normalizing rates now so that those who rely upon conservative investments (e.g bonds, savings accounts, cd’s, etc.) can achieve a decent rate of return. Otherwise an entire generation of savers and every pension fund in the country will find themselves unable to fund their retirement obligations.
Out of the debris made of the markets this week, I did spy one gem. I bought BP at $30.05. Wow! BP has not traded this low since immediately after the Deepwater Horizon disaster in 2010. At that time, the threat to BP was existential. Today, the only threat to BP is whether it can maintain its whopping 8% dividend. All indications are that it can shoulder this $7billion annual dividend obligation given that it has settled virtually all of the claims arising from that disaster, is divesting unproductive assets and sits on $30 billion in cash. So I bought some. We will see how it does.
Once I a confident that a 2015 rate hike is fully priced into the market, I will be looking to add to interest rate sensitive positions.
Sunday, September 27, 2015
Sunday, September 20, 2015
September 20, 2015 ZIRP
Risk/Reward Vol. 276
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Although my sabbatical continues, I am compelled, once again, to reflect on what occurred. And this week was all about the decision by the Federal Reserve to stand pat on its zero interest rate policy (ZIRP). Although the decision was not a surprise, the rationale, as articulated by the Fed in its press statement and as expanded by Chair Yellen in her press conference, was.
Instead of focusing on employment and price stability which are the Fed’s mandates, the Chair spoke of many things including the Committee’s consideration of economic conditions in China and emerging markets, a strong dollar and volatility in the stock market. Since when are these the Fed’s concerns? Indeed, this lack of focus left markets worldwide wondering what developments, if any, will cause the Fed to raise rates. After all, unemployment is at 5% (which historically has been viewed as full employment) and the consumer price index (CPI) inflated (less food and energy) 1.8% year over year in August, a rate that approximates the Fed’s stated inflation goal of 2%. Moreover, GDP grew at a healthy 3.4% in the second quarter. So why not raise rates ?
Mr. Market abhors uncertainty, and the Fed’s trepidation in light of the above described data has made what was already
opaque monetary policymaking even murkier. What data point is going to improve so markedly between now and the end of the year so as to provide the Fed the assurance it needs to warrant a rate increase? I doubt any. So if the Fed does raise rates in December, it will be viewed as an arbitrary act, not one driven by data. This in turn will leave Mr. Market to wonder when and under what circumstances future increases will be implemented. It is not surprising that the Dow Jones Industrial Average and the S&P 500 fell 1.74% and 1.62% respectively on Friday.
On a personal level, my week was salvaged by real estate investment trusts (O and OHI) and preferred stocks (PGX and FFC), sectors which do well when the yield on the US 10 Year Treasury falls, as it did in the wake of the Fed’s announcement. That said, my appetite to add to any position has been lessened for the reasons discussed above.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Although my sabbatical continues, I am compelled, once again, to reflect on what occurred. And this week was all about the decision by the Federal Reserve to stand pat on its zero interest rate policy (ZIRP). Although the decision was not a surprise, the rationale, as articulated by the Fed in its press statement and as expanded by Chair Yellen in her press conference, was.
Instead of focusing on employment and price stability which are the Fed’s mandates, the Chair spoke of many things including the Committee’s consideration of economic conditions in China and emerging markets, a strong dollar and volatility in the stock market. Since when are these the Fed’s concerns? Indeed, this lack of focus left markets worldwide wondering what developments, if any, will cause the Fed to raise rates. After all, unemployment is at 5% (which historically has been viewed as full employment) and the consumer price index (CPI) inflated (less food and energy) 1.8% year over year in August, a rate that approximates the Fed’s stated inflation goal of 2%. Moreover, GDP grew at a healthy 3.4% in the second quarter. So why not raise rates ?
Mr. Market abhors uncertainty, and the Fed’s trepidation in light of the above described data has made what was already
opaque monetary policymaking even murkier. What data point is going to improve so markedly between now and the end of the year so as to provide the Fed the assurance it needs to warrant a rate increase? I doubt any. So if the Fed does raise rates in December, it will be viewed as an arbitrary act, not one driven by data. This in turn will leave Mr. Market to wonder when and under what circumstances future increases will be implemented. It is not surprising that the Dow Jones Industrial Average and the S&P 500 fell 1.74% and 1.62% respectively on Friday.
On a personal level, my week was salvaged by real estate investment trusts (O and OHI) and preferred stocks (PGX and FFC), sectors which do well when the yield on the US 10 Year Treasury falls, as it did in the wake of the Fed’s announcement. That said, my appetite to add to any position has been lessened for the reasons discussed above.
Sunday, September 13, 2015
September 13, 2015 It's Time
Risk/Reward Vol.275
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I am enjoying the last gasps of summer too much to compose a full blown edition. That said, the Federal Reserve meeting scheduled for next week is too important to go without comment.
Two weeks ago, I reported that I had re-entered ahead of the September Fed meeting in order to take advantage of what I viewed as an excellent buying opportunity. I also stated that if stability returned to the market I would buy more. Well, stability did not return, and the buying opportunity proved to be less than excellent. That said, I have not approached a sell point on any position, and all tolled the positions I bought are down less than 1.5 %. I don't consider this bad considering that much of what I bought is in the oil patch (RDS-S, BP, KMI and ETP) which continues to be hammered.
So why the volatility? Oh, we can mention China or domestic gdp growth or emerging market risk, but all of these are inconsequential when compared to the uncertainty surrounding what the Fed will do. As the market closed on Friday, bond futures put the odds at 23% that the Fed will raise rates next week. These odds are too low. Unemployment has fallen to nearly 5%, and the most recent economic data indicates that gdp growth is currently at 3+%. Admittedly, inflation is well below the Fed's target of 2%, but I see nothing between now and the end of the year that will cause that to increase. Don't forget that very early in 2015, Janet Yellen stated that absent a significant reversal in direction, rates would be raised sometime in 2015. Directionally, the economy has continued to improve, She missed her best opportunity to raise rates in June. Her next best time is now. I look for the Fed to take a baby step. Instead of implementing a 25 basis point increase (which is a typical move), I see a 15 bp (0.15%) bump and a clear signal that it is a "one and done" until sometime in 2016.
For goodness sake, Janet, get this done. My favorite quote this week is from the Financial Times: "Once again the fate of the global economy rests on the judgment of a few individuals without reliable economic models to guide them."
Subscribe to:
Posts (Atom)