Risk/Reward Vol. 322
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Earlier this week, I enjoyed a glass of wine with a subscriber. He told me that at the time I first published Risk/Reward (2010) he began investing in index funds (e.g. SPY or DIA). So far he has doubled his investment thus exceeding my performance by a good measure. I congratulated him as I do all who have stayed the course and held index funds since that time. As I reflected further upon his accomplishment, I was reminded of two painful lessons that I have learned. First, no gain is achieved until the underlying security is sold. And second, TIMING is everything. Allow me to elaborate.
In 2000, I was heavily invested in tech stocks (the so called dot com world). On paper I had more than doubled my invested capital in very short order. I had no intention of selling---even when the dot com world began to crater. I was convinced that I was smarter than Mr. Market. Each day I awoke believing that "today, he would see it my way", and that the tech world would recover. He didn't, and the stocks I owned never did recover. (Indeed it took the tech index, NASDAQ, 15 years to reach year 2000 levels.) Things got so bad that I stopped looking. My paper profits eroded and became huge, crushing losses. I swore that if I ever got back "on top", I would not ride the market down again. This oath (and a few strokes of dumb luck) helped me recover and kept me from losing money in the 2008-2009 market swoon. As I have written previously, my approach today is informed first and foremost by the dot com fiasco and the Great Recession. I do not know when the next crash will occur, but history tells me it will. Every move I make is in anticipation of that event. At age 65, I could not withstand what happened to me in 2000-2001. That is why I mitigate loss and take profits---two things one cannot do unless one sells. It's true that I have not caught the full measure of the 2009-2016 "buy and hold" flood tide. But I missed the 2008-2009 ebb tide and am preparing to avoid the next tsunami. Are you? If so, please let me know how.
The obvious rejoinder to my approach is the fact that over the past 20 years the S&P 500 Index (available for purchase via the ETF, SPY) has averaged, with reinvested dividends, an 8.2% annual return. This is true, but leads to the second lesson I have learned. One's return is dependent upon one's starting and ending points in TIME. For example, if one had invested in the S&P 500 in December, 2007 (when it was at 1500) one would not have seen a profit until February, 2013, more than five years later. Worse, for more than 16 months of that TIME one's investment would have been down more than 33% and for a short TIME would have been worth half. With the luxury of unlimited TIME, buying and holding equities may make sense. But I am 65. I don't have the TIME to wait out another stock market crash. Thus I am a trader. I may be running out of TIME. But, I'll be damned if I am going to run out of money.
Did you notice the impact of Fed member Lael Brainerd's speech on Monday? As mentioned in last week's edition, several market participants feared that she was becoming a rate hawk. Any such concerns were put to rest on Monday. In advance of her very dovish speech, the S&P 500 was in the negative. Afterward, it rose 2% as the odds for a September rate increase fell sharply. The companies comprising the S&P have a total market capitalization of $20 trillion so her soothing words resulted in increasing Mr. Market's net worth $400 billion ($20 trillion x 0.02= $400 billion). Now that is market power my friends---exercised by just one junior member of the Federal Reserve. And you say that this is not a Fed dominated stock market? Remember, what Janet Yellen gives, Janet Yellen can take away.
As usual, my focus remains on the 10 Year US Treasury, the security against which most other income securities are measured ("spread"). Its yield continued to hover around 1.7% which tells me that Mr. Bond believes that a September rate increase is off the table, but a December one is more than likely. Indeed, the odds of a December bump now are at 60%. Keep your eyes on the Fed meeting this week. It should be illuminating.
Barb and I are on assignment in Paris next week. We will be assisting Mr. Draghi in his attempt to spur European economic growth
Sunday, September 18, 2016
Sunday, September 11, 2016
September 11, 2016 Head Fake
Risk/Reward Vol. 321
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
As discussed last week, with interest rates world wide at zero or below the only game in town has been stocks. This remains true even though the performance of the underlying businesses does not warrant current valuations. The resultant bubble in stock prices has not gone unnoticed by market commentators who have increased their criticism of the Federal Reserve's refusal to raise rates. Mindful of this criticism and of the inflation of stock prices, heretofore rate dove Eric Rosengren of the Fed spoke on Friday of a possible rate increase as early as September. Mr. Market was unprepared for such a switch and began to sell. The rate of selling increased Friday afternoon when the Fed announced that uber rate dove Lael Brainerd will speak on Monday fueling rumors that she, too, will become more hawkish. By the close, both major indices had fallen over 2% experiencing their worst day in months. Not surprisingly, the bond market also tanked with the rate on the bellwether US Ten Year spiking above 1.6% (Remember, the higher the rate the lower the value.)
So what do I make of this? As I wrote last week, in my humble opinion, these hawkish teases are nothing but head fakes to address criticism of the Fed and to keep stock prices from hitting ridiculous new highs. Indeed, despite Friday's action, the futures market is still assessing only a 24% probability of a rate increase in September. Do I think that the Fed would do the unexpected in September and raise rates, a move that would cause a massive sell-off in the bond and stock markets as presaged on Friday? No way. This would seriously wound the candidate who advocates a hands-off approach to the Fed (Clinton) and play into the hands of the candidate who wants to audit the entire operation (Trump). That said, I remain comfortably on the sidelines and will await the Fed's next meeting scheduled for September 21 before deciding to buy---or not.
And speaking of central banks, earlier in the week the European Central Bank announced that it would stand pat in its asset buying program. It purchases 80billion Euro worth of sovereign and corporate bonds per month and will continue the program through March, 2017. The ECB may have trouble doing so, however, because it is running out of bonds to buy. It now owns 1/7th of the government debt of all of the Eurozone countries and is quickly absorbing all available corporate debt. Indeed, for the FIRST TIME IN THE HISTORY of corporate finance two companies, Sanofi and Henkel, issued negative interest rate bonds last week. That's right, you read that correctly. Sanofi borrowed 1billion Euros last week via a 3 1/2 year bond. During the life of the bond, Sanofi will pay no interest and 3 1/2 years from now will return less principal to the bondholder than it borrowed. In effect and in fact, Sanofi is being paid to borrow money. Does anyone think this is sustainable?
I don't, but I haven't a clue as to when it will end. I am reminded of 2005 when I sat on the board of a company where over 50% of its revenue came from real estate related sales. We were mindful of the real estate bubble even then and instituted a "canary in the mine shaft" early warning system to help us predict when the bubble would burst. We had about a 90 day window which helped us reduce exposure when the bubble began to deflate. But, there was no way we or anyone else could predict how disastrous that burst became. I have deja vu---all over again. That said, I cannot afford to sit in cash forever. I am sure that I will make several more forays into the stock market before it crashes. But these forays will be strategic and short lived. Indeed, I see one forming now. Unnoticed in Friday's furor was the fact that oil prices rose 5%. Nevertheless, oil stocks fell with the market in general. I am not buying now, but these type of events present profitable opportunities.
By nature, I am not a pessimist. But I am a realist. I do not know how anyone can be sanguine about the world's financial situation. Ceding so much power to central banks, as we did in the wake of the 2008 financial crisis, is proving a mistake. The value of every financial asset worldwide is now dictated by a handful of unelected central bankers. This policy has worked to the decided disadvantage of those without substantial assets thereby exacerbating the wealth gap and dampening the demand for goods and services. Add to this the aging demographic time bomb that exists in every developed economy and one must conclude that we are in for a rough ride. What can one do? I, for one, have become a trader. My buy/sell signals come from correlating the yield on the US Ten Year to other assets. I take profits often and mitigate against loss by selling losers early and maintaining a large cash position at all times. What can you do? How about showing this email to your financial advisor and asking if he/she agrees with its central premise (to wit, the value all financial assets is now largely dependent on the whims of a few central bankers). If he/she does agree, then ask what his/her plans are for your portfolio if and when central bankers begin to raise rates in earnest. If he/she does not agree, well.... Either way, please share the answers with me
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
As discussed last week, with interest rates world wide at zero or below the only game in town has been stocks. This remains true even though the performance of the underlying businesses does not warrant current valuations. The resultant bubble in stock prices has not gone unnoticed by market commentators who have increased their criticism of the Federal Reserve's refusal to raise rates. Mindful of this criticism and of the inflation of stock prices, heretofore rate dove Eric Rosengren of the Fed spoke on Friday of a possible rate increase as early as September. Mr. Market was unprepared for such a switch and began to sell. The rate of selling increased Friday afternoon when the Fed announced that uber rate dove Lael Brainerd will speak on Monday fueling rumors that she, too, will become more hawkish. By the close, both major indices had fallen over 2% experiencing their worst day in months. Not surprisingly, the bond market also tanked with the rate on the bellwether US Ten Year spiking above 1.6% (Remember, the higher the rate the lower the value.)
So what do I make of this? As I wrote last week, in my humble opinion, these hawkish teases are nothing but head fakes to address criticism of the Fed and to keep stock prices from hitting ridiculous new highs. Indeed, despite Friday's action, the futures market is still assessing only a 24% probability of a rate increase in September. Do I think that the Fed would do the unexpected in September and raise rates, a move that would cause a massive sell-off in the bond and stock markets as presaged on Friday? No way. This would seriously wound the candidate who advocates a hands-off approach to the Fed (Clinton) and play into the hands of the candidate who wants to audit the entire operation (Trump). That said, I remain comfortably on the sidelines and will await the Fed's next meeting scheduled for September 21 before deciding to buy---or not.
And speaking of central banks, earlier in the week the European Central Bank announced that it would stand pat in its asset buying program. It purchases 80billion Euro worth of sovereign and corporate bonds per month and will continue the program through March, 2017. The ECB may have trouble doing so, however, because it is running out of bonds to buy. It now owns 1/7th of the government debt of all of the Eurozone countries and is quickly absorbing all available corporate debt. Indeed, for the FIRST TIME IN THE HISTORY of corporate finance two companies, Sanofi and Henkel, issued negative interest rate bonds last week. That's right, you read that correctly. Sanofi borrowed 1billion Euros last week via a 3 1/2 year bond. During the life of the bond, Sanofi will pay no interest and 3 1/2 years from now will return less principal to the bondholder than it borrowed. In effect and in fact, Sanofi is being paid to borrow money. Does anyone think this is sustainable?
I don't, but I haven't a clue as to when it will end. I am reminded of 2005 when I sat on the board of a company where over 50% of its revenue came from real estate related sales. We were mindful of the real estate bubble even then and instituted a "canary in the mine shaft" early warning system to help us predict when the bubble would burst. We had about a 90 day window which helped us reduce exposure when the bubble began to deflate. But, there was no way we or anyone else could predict how disastrous that burst became. I have deja vu---all over again. That said, I cannot afford to sit in cash forever. I am sure that I will make several more forays into the stock market before it crashes. But these forays will be strategic and short lived. Indeed, I see one forming now. Unnoticed in Friday's furor was the fact that oil prices rose 5%. Nevertheless, oil stocks fell with the market in general. I am not buying now, but these type of events present profitable opportunities.
By nature, I am not a pessimist. But I am a realist. I do not know how anyone can be sanguine about the world's financial situation. Ceding so much power to central banks, as we did in the wake of the 2008 financial crisis, is proving a mistake. The value of every financial asset worldwide is now dictated by a handful of unelected central bankers. This policy has worked to the decided disadvantage of those without substantial assets thereby exacerbating the wealth gap and dampening the demand for goods and services. Add to this the aging demographic time bomb that exists in every developed economy and one must conclude that we are in for a rough ride. What can one do? I, for one, have become a trader. My buy/sell signals come from correlating the yield on the US Ten Year to other assets. I take profits often and mitigate against loss by selling losers early and maintaining a large cash position at all times. What can you do? How about showing this email to your financial advisor and asking if he/she agrees with its central premise (to wit, the value all financial assets is now largely dependent on the whims of a few central bankers). If he/she does agree, then ask what his/her plans are for your portfolio if and when central bankers begin to raise rates in earnest. If he/she does not agree, well.... Either way, please share the answers with me
Sunday, September 4, 2016
September 4, 2016 Zero Bound
Risk/Reward Vol. 320
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I have said it before (see Vols. 172 and 173 www.riskrewardblog.blogspot.com), and I will say it again: in today's bizzaro financial world, tepid, even bad, economic news is good for the stock market. The answer as to why is simple and has been the same for the past several years: namely, bad economic news lessens the likelihood that the Federal Reserve will raise interest rates. With interest rates at or near zero, the only game in town is stocks. So people keep buying, and stock prices keep rising. No better example of this occurred on Friday. In advance of the jobs report, the Dow Jones Industrial Average (DJIA) and S&P 500 futures were negative. Once the disappointing numbers were announced, the indices spiked into positive territory where they remained from opening through closing. Both the DJIA and the S&P 500 now sit within an eyelash of all time record highs. They would be even higher if Federal Reserve Governor Lacker had not suggested mid day Friday that a rate increase at the Fed's upcoming September 20-21 meeting was still a possibility. This was a head fake, believe me. As I have written previously, the Fed, comprised mostly of DC insiders, is not going to jeopardize Ms. Clinton's chances of election by surprising Mr. Market with a September rate increase. Indeed, Mr. Market is placing the odds of such an event at less than 20%.
If you doubt the outsized impact that the Federal Reserve has on the stock market, I suggest you Google "Kevin Warsh and S&P 500" and read his August 24, 2016 article in the Wall Street Journal. Mr. Warsh, a former Federal Reserve governor, is highly critical of his former employer especially its influence on every aspect of the financial markets. In that regard he observes "a simple troubling fact: from the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of the Federal Open Market Committee decisions." Re-read that quote, and then tell me there won't be a rude awakening in the stock market if and when the FOMC raises rates in earnest. Of course, that presupposes that it will. The Bank of Japan has not for more than 20 years. We may be in for more of the same.
Have you noticed that more and more commentators are losing patience with central bankers? Larry Kudlow went so far as to suggest in a tweet that "Fed needs to be leveled & start over. Get rid of phd's failed models" Jim Grant, among the world's most respected students of interest rates, recently observed that in over 5000 years of government borrowing this is the first time that a significant percentage of sovereign debt ( $16tn/$64tn=25%) has had a negative yield. The situation is unprecedented and central banks appear clueless on what to do next.
But enough negativity. There is nothing that this writer can do to change events, and I do not see any change on the horizon. Besides, the stock market is booming---so what the hell. After the upcoming Fed meeting and OPEC conference both scheduled for September, I may re-enter myself. I have a list at the ready.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I have said it before (see Vols. 172 and 173 www.riskrewardblog.blogspot.com), and I will say it again: in today's bizzaro financial world, tepid, even bad, economic news is good for the stock market. The answer as to why is simple and has been the same for the past several years: namely, bad economic news lessens the likelihood that the Federal Reserve will raise interest rates. With interest rates at or near zero, the only game in town is stocks. So people keep buying, and stock prices keep rising. No better example of this occurred on Friday. In advance of the jobs report, the Dow Jones Industrial Average (DJIA) and S&P 500 futures were negative. Once the disappointing numbers were announced, the indices spiked into positive territory where they remained from opening through closing. Both the DJIA and the S&P 500 now sit within an eyelash of all time record highs. They would be even higher if Federal Reserve Governor Lacker had not suggested mid day Friday that a rate increase at the Fed's upcoming September 20-21 meeting was still a possibility. This was a head fake, believe me. As I have written previously, the Fed, comprised mostly of DC insiders, is not going to jeopardize Ms. Clinton's chances of election by surprising Mr. Market with a September rate increase. Indeed, Mr. Market is placing the odds of such an event at less than 20%.
If you doubt the outsized impact that the Federal Reserve has on the stock market, I suggest you Google "Kevin Warsh and S&P 500" and read his August 24, 2016 article in the Wall Street Journal. Mr. Warsh, a former Federal Reserve governor, is highly critical of his former employer especially its influence on every aspect of the financial markets. In that regard he observes "a simple troubling fact: from the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of the Federal Open Market Committee decisions." Re-read that quote, and then tell me there won't be a rude awakening in the stock market if and when the FOMC raises rates in earnest. Of course, that presupposes that it will. The Bank of Japan has not for more than 20 years. We may be in for more of the same.
Have you noticed that more and more commentators are losing patience with central bankers? Larry Kudlow went so far as to suggest in a tweet that "Fed needs to be leveled & start over. Get rid of phd's failed models" Jim Grant, among the world's most respected students of interest rates, recently observed that in over 5000 years of government borrowing this is the first time that a significant percentage of sovereign debt ( $16tn/$64tn=25%) has had a negative yield. The situation is unprecedented and central banks appear clueless on what to do next.
But enough negativity. There is nothing that this writer can do to change events, and I do not see any change on the horizon. Besides, the stock market is booming---so what the hell. After the upcoming Fed meeting and OPEC conference both scheduled for September, I may re-enter myself. I have a list at the ready.
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