Risk/Reward Vol. 326 (correct version)
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I apologize for not advising you in advance, but I was at an invitation-only subscriber's conference in Florida last week and was unable to publish.
I concluded the last edition by stating that if one wanted a 6-7% return today, one needed to find a strategy other than "buy and hold". I stand by that statement, but I also note that "buy and hold", particularly buying and holding index stock funds, may be the safest play if one is looking for a lesser return. Here is the reasoning behind this statement. According to the Security and Exchange Commission, 67% of US stocks are owned by institutional investors: that is, pension funds, captive 401k's, insurance companies, sovereign funds, etc. Traditionally, institutional investors have employed a variety of experts such as hedge funds, fee based investment advisors, etc. in order to achieve returns better than the market in general. In recent times, over 70% these expensive experts have fallen short in comparison to inexpensive index funds. For this reason and because no return can be obtained in bonds these days and in response to new Federal regulations which mandate that institutional investors justify the fees they pay, many large players are now firing their experts, exiting bonds and buying index stock funds. Indeed, an article in last week's Wall Street Journal reported that in the past 3 years institutional investors have added $1.3 trillion into passive mutual funds (including ETF's) while removing $250billion from active management. Just a few days ago, Norway's huge sovereign fund ($880billion) announced it was increasing its stock holdings from 60 to 70% of its portfolio. In 2007, that sovereign fund was only 40% invested in stocks with 60% in bonds. Moreover, last week BlackRock, the world's largest investment company, announced that it now manages over $5trillion in assets (yes, that’s trillion), the lion's share of which are now housed in passive, indexed based exchange trade funds. With so much money pouring into index stock funds, it only makes sense that they will continue to hold value. In the minds of those who control the money, there simply is no alternative.
This fact has kept the two major indices reasonably stable over the past several months despite lower corporate earnings and despite an impending Federal Funds rate increase. Not so with the bond market and those securities that are correlated thereto. The yield on the all important US Ten Year Treasury has spiked to over 1.8%, its highest point since June as the bond market begins to "sell off" in advance of December's Federal Reserve meeting. This is true even though Mr. Market is still only assigning a 70% likelihood of the Fed increasing rates in December. Look for some signals out of next week's Fed meeting as to the likelihood of a move by year end---and moves beyond that date. If developments occur as expected, I likely will repeat what I did last December. I will buy en masse interest rate sensitive securities such as preferred stock closed end funds in the days after the Fed announces the rate increase. Why? Because Mr. Market invariably overreacts to such negative stimuli. I should see a few percentage point rebound in the succeeding weeks and months while enjoying healthy monthly dividend pay-outs. One factor that could impact any such gain would be the Fed raising rates again before June, 2017, the likelihood of which is currently pegged very low.
Also keep a watchful eye on oil. OPEC is scheduled to meet in November. If it votes to limit production, oil could be a very good play once again. The price continues to hover around $50/bbl., but could rise if a deal is cut. The stocks of oil companies are not reflecting confidence that a deal will be reached. Also weighing oil company stock prices down is the rise in the value of the dollar. Here is why. The dollar increases in value when US interest rates increase. This is because money is fungible and moves from low interest rate environments (e.g Europe) to higher rate environments (US). To effect this transfer one sheds Euros and acquires dollars. This is occurring even as I write. The Euro was worth $1.12 when Barb and I were in France earlier this month and now converts at $1.09. Since oil is priced in US dollars worldwide, an increase in the value of the dollar lowers the demand for oil (since by virtue of the exchange rate alone it is more expensive) and thus depresses its price.
I remain on the sidelines but am anxiously awaiting the results of OPEC's meeting in November and the December meeting of the Federal Reserve.
Sunday, October 30, 2016
Sunday, October 16, 2016
October 16, 2016 Demographics
Risk/Reward Vol. 325
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREI
Barb and I (read Barb) spent the past several days caring for two of our grandchildren (ages 4 1/2 years and 6 months) while their parents vacationed in Italy. Hey, raising kids is hard work. Barb is exhausted (but happily so), and I have never logged more office hours at my hobby job. Indeed, demographic data suggests that child rearing may be too hard, or at least too inconvenient, for today's young adults. As noted in previous editions, the fertility rate in the US is below replacement levels. And the fertility rate in other developed countries is even worse. Japan is already suffering a net decrease in population, and Germany is on pace to lose up to 10% of its population by 2050. This demographic train wreck has finally caught the notice of the economists at the Federal Reserve. Earlier this month, the St. Louis Fed published a report entitled "Understanding the New Normal: The Role of Demographics." Therein, the authors conclude that the New Normal (slow growth and low interest rates) likely will persist for decades because of the economic downdraft associated with the aging baby boomers and a declining replacement population. Duh! The Fed could have saved some time and effort if it had just read Harry Dent Jr.'s book "The Demographic Cliff" about which I wrote in Vol. 218 (www.riskrewardblog.blogspot.com). As I noted at the time, this book contains some serious scholarship done by an author who historically has not been taken seriously.
So what does this mean to me? I don't see the return of 3+% domestic annual economic growth any time soon---if at all. And I am not alone. The International Monetary Fund has lowered its projections for US economic growth in the coming year from 2.2% to 1.6%. Slower growth means lower revenues which in time means lower profits. This maxim was on full display this week as the earnings season began. Mr. Market is expecting a fifth consecutive quarter of lower gross revenues and lower profits from our major corporations. This in combination with an expected interest rate increase come December caused both the Dow Jones Industrial Average and the S&P 500 to experience a 1% decline this week. Both are now up only 4% year to date.
I make these observations and draw these conclusions not to depress you. My purpose is simply to expose the obvious. Look--- my logic is simple. People drive demand. Demand drives growth. Growth drives profits. Profits drive stock prices. By definition, if the number of people shrinks, stock prices in time will decline. Moreover,that decline will accelerate if the easy money available to corporations at low interest rates disappears. Why? Because much of the appreciation that stocks have enjoyed these past few years has been a byproduct of corporations borrowing money cheaply and buying back their stock thereby propping up their stock's price. Apparently, that Ponzi scheme is nearing an end. In other words, one cannot embrace the New Normal and believe that the S&P 500 will appreciate on average 7% per annum as it has since 1960. If you agree and need or want a 6+% return, then you will need to adopt a strategy other than buy and hold. I have and Risk/Reward is my attempt to explain it.
As noted last week, I remain on the sidelines in regard interest rate sensitive securities (my favorites) until I conclude that the US Ten Year Bond fully reflects the impact of future increases. The likelihood of a 25 basis point increase in December is very high with 14 of 17 FOMC members of the mind that an increase will occur sometime in 2016. This information was gleaned from the FOMC's September meeting minutes released this past week. I may not have to wait until the increase is officially adopted. I will await investment in the oil patch (another favorite) until after the OPEC meeting in November.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREI
Barb and I (read Barb) spent the past several days caring for two of our grandchildren (ages 4 1/2 years and 6 months) while their parents vacationed in Italy. Hey, raising kids is hard work. Barb is exhausted (but happily so), and I have never logged more office hours at my hobby job. Indeed, demographic data suggests that child rearing may be too hard, or at least too inconvenient, for today's young adults. As noted in previous editions, the fertility rate in the US is below replacement levels. And the fertility rate in other developed countries is even worse. Japan is already suffering a net decrease in population, and Germany is on pace to lose up to 10% of its population by 2050. This demographic train wreck has finally caught the notice of the economists at the Federal Reserve. Earlier this month, the St. Louis Fed published a report entitled "Understanding the New Normal: The Role of Demographics." Therein, the authors conclude that the New Normal (slow growth and low interest rates) likely will persist for decades because of the economic downdraft associated with the aging baby boomers and a declining replacement population. Duh! The Fed could have saved some time and effort if it had just read Harry Dent Jr.'s book "The Demographic Cliff" about which I wrote in Vol. 218 (www.riskrewardblog.blogspot.com). As I noted at the time, this book contains some serious scholarship done by an author who historically has not been taken seriously.
So what does this mean to me? I don't see the return of 3+% domestic annual economic growth any time soon---if at all. And I am not alone. The International Monetary Fund has lowered its projections for US economic growth in the coming year from 2.2% to 1.6%. Slower growth means lower revenues which in time means lower profits. This maxim was on full display this week as the earnings season began. Mr. Market is expecting a fifth consecutive quarter of lower gross revenues and lower profits from our major corporations. This in combination with an expected interest rate increase come December caused both the Dow Jones Industrial Average and the S&P 500 to experience a 1% decline this week. Both are now up only 4% year to date.
I make these observations and draw these conclusions not to depress you. My purpose is simply to expose the obvious. Look--- my logic is simple. People drive demand. Demand drives growth. Growth drives profits. Profits drive stock prices. By definition, if the number of people shrinks, stock prices in time will decline. Moreover,that decline will accelerate if the easy money available to corporations at low interest rates disappears. Why? Because much of the appreciation that stocks have enjoyed these past few years has been a byproduct of corporations borrowing money cheaply and buying back their stock thereby propping up their stock's price. Apparently, that Ponzi scheme is nearing an end. In other words, one cannot embrace the New Normal and believe that the S&P 500 will appreciate on average 7% per annum as it has since 1960. If you agree and need or want a 6+% return, then you will need to adopt a strategy other than buy and hold. I have and Risk/Reward is my attempt to explain it.
As noted last week, I remain on the sidelines in regard interest rate sensitive securities (my favorites) until I conclude that the US Ten Year Bond fully reflects the impact of future increases. The likelihood of a 25 basis point increase in December is very high with 14 of 17 FOMC members of the mind that an increase will occur sometime in 2016. This information was gleaned from the FOMC's September meeting minutes released this past week. I may not have to wait until the increase is officially adopted. I will await investment in the oil patch (another favorite) until after the OPEC meeting in November.
Sunday, October 9, 2016
October 9, 2016 Revolution
Risk/Reward Vol. 324
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What follows is a window into how my brain functions.
Having just spent eight days in Paris, I continue to marvel at how well ordered and uniform it is. Broad boulevards stretch for miles, all lined with beautiful five story limestone façade buildings capped with mansard roofs. But it was not always this way. Indeed until the 1850's, Paris was a medieval city, a patchwork of narrow, winding streets. After the Revolution of 1848, Louis Napoleon a/k/a Napoleon III (who was swept into power as a result of that revolution) ordered the destruction and reconstruction of much of the city. Why? Well, in large part to prevent another revolution. Broad boulevards are much more difficult to block than narrow passageways thus enabling those in power to deploy troops more quickly to quell nascent civil unrest.
France was just one of 50 countries that experienced revolution in 1848. A few years of bad economic conditions (e.g. the potato blight in Ireland, disappointing harvests on the Continent and rising unemployment attendant to the budding industrial revolution) caused ad hoc coalitions of reformers, farmers and workers in scores of countries to rise up against the entrenched and feckless empowered class. These upheavals resulted in large migrations (my great grandfather and great grandmother emigrated from Switzerland and Germany at this time) which in turn spawned anti-immigrant, nativist movements such as the Know Nothing Party in the United States.
Does this sound familiar? Are we not revisiting this same phenomenon? Clearly, the hangover from the Great Recession remains. Moreover, the entrenched, empowered class has proven feckless. As a result, ad hoc and disruptive coalitions have arisen. How else can one explain Brexit or Feel the Bern or Trump or Marine LePen or Colombia's no vote on the FARC plebiscite or the rise of trade protectionism or the emergence of nativist political parties throughout the world? Doesn't it seem that everyone is thinking if not shouting Howard Beale's line: "We're mad as hell, and we're not going to take this anymore."
So what does this have to do with investing? A lot, frankly, especially when it comes to being frustrated by and with the empowered class. In this regard, I recommend that you read Bill Gross' (the erstwhile Bond King) most recent Investment Outlook which can be found at http://www.janus.com/. Therein, he accuses the world's central bankers of employing a Martingale strategy; that is, doubling down continually on losing bets until one of them hits Such a strategy can succeed only if one has unlimited resources and as Gross notes, not even central banks have those. In the end, they must answer to the body politic which, as discussed above, is growing ever more restless with ineffective monetary parlor games such as negative interest rates. He concludes that at some point, investors, weary of choosing between receiving near zero returns on their money or taking outsized risks may abandon the standard financial complex altogether. The Bond King has already. Gross advocates selling stocks and bonds and buying gold and raw land. Now that's revolutionary.
My two areas of interest continue to move. The yield on the US Ten Year Bond rose steadily this week in advance of what most believe will be a rate increase in December. I will wait for this movement to slow before buying interest rate sensitive securities. And domestic oil hit $50/bbl for the first time since June. The latter is enticing but is based mostly on an a still-uncertain OPEC production freeze come the end of November. For now, I remain on the sidelines awaiting a more certain path to profitability.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What follows is a window into how my brain functions.
Having just spent eight days in Paris, I continue to marvel at how well ordered and uniform it is. Broad boulevards stretch for miles, all lined with beautiful five story limestone façade buildings capped with mansard roofs. But it was not always this way. Indeed until the 1850's, Paris was a medieval city, a patchwork of narrow, winding streets. After the Revolution of 1848, Louis Napoleon a/k/a Napoleon III (who was swept into power as a result of that revolution) ordered the destruction and reconstruction of much of the city. Why? Well, in large part to prevent another revolution. Broad boulevards are much more difficult to block than narrow passageways thus enabling those in power to deploy troops more quickly to quell nascent civil unrest.
France was just one of 50 countries that experienced revolution in 1848. A few years of bad economic conditions (e.g. the potato blight in Ireland, disappointing harvests on the Continent and rising unemployment attendant to the budding industrial revolution) caused ad hoc coalitions of reformers, farmers and workers in scores of countries to rise up against the entrenched and feckless empowered class. These upheavals resulted in large migrations (my great grandfather and great grandmother emigrated from Switzerland and Germany at this time) which in turn spawned anti-immigrant, nativist movements such as the Know Nothing Party in the United States.
Does this sound familiar? Are we not revisiting this same phenomenon? Clearly, the hangover from the Great Recession remains. Moreover, the entrenched, empowered class has proven feckless. As a result, ad hoc and disruptive coalitions have arisen. How else can one explain Brexit or Feel the Bern or Trump or Marine LePen or Colombia's no vote on the FARC plebiscite or the rise of trade protectionism or the emergence of nativist political parties throughout the world? Doesn't it seem that everyone is thinking if not shouting Howard Beale's line: "We're mad as hell, and we're not going to take this anymore."
So what does this have to do with investing? A lot, frankly, especially when it comes to being frustrated by and with the empowered class. In this regard, I recommend that you read Bill Gross' (the erstwhile Bond King) most recent Investment Outlook which can be found at http://www.janus.com/. Therein, he accuses the world's central bankers of employing a Martingale strategy; that is, doubling down continually on losing bets until one of them hits Such a strategy can succeed only if one has unlimited resources and as Gross notes, not even central banks have those. In the end, they must answer to the body politic which, as discussed above, is growing ever more restless with ineffective monetary parlor games such as negative interest rates. He concludes that at some point, investors, weary of choosing between receiving near zero returns on their money or taking outsized risks may abandon the standard financial complex altogether. The Bond King has already. Gross advocates selling stocks and bonds and buying gold and raw land. Now that's revolutionary.
My two areas of interest continue to move. The yield on the US Ten Year Bond rose steadily this week in advance of what most believe will be a rate increase in December. I will wait for this movement to slow before buying interest rate sensitive securities. And domestic oil hit $50/bbl for the first time since June. The latter is enticing but is based mostly on an a still-uncertain OPEC production freeze come the end of November. For now, I remain on the sidelines awaiting a more certain path to profitability.
Sunday, October 2, 2016
October 2, 2016 La France
Risk/Reward Vol. 323
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
We have just returned from Paris . If the world is relying upon France to jump start its economy, fuggitaboutit. Ten percent of France's gross domestic product derives from tourism. That of Paris is even more tourist dependent with over 500,000 people directly employed in that industry. Thanks to the threat of terrorism and squabbles with Russia tourism is down over 12% with foreign tourists staying away in droves. There has been a 46% decline in the number of Japanese tourists, 35% decline in Russian tourists and a 20% decline in Chinese tourists. Talk to any cabbie or tour guide about it, and their faces drop. What did it mean for Barb and me? How about a round trip ticket Chicago to Paris, taxes included, for $494? How about a half empty plane on the way home so that we could stretch out even in steerage? How about a "small group tour" that was so small it was only Barb and me? How about waiting in line only once to see a major historical site? How about dinner reservations anywhere we wanted? How about a one bedroom apartment on the "Fifth Avenue" of Paris (Rue St. Honore, one block from the Tuilerie gardens) for $290/night, all in? We spent more on air tickets and on a per diem basis for our trip to Philadelphia last fall. Let's see, you choose-- Paris or Philly?
I will publish a more fulsome edition next week. I do note however that the markets had a nice finish to the week and to the quarter. The Dow Jones Industrial Average is up 5% and the S&P 500 up 6% year to date. Moreover, oil caught a tail wind with news that OPEC may actually curtail production below 33million barrels/day. If true, this level would start to drain inventories as early as next year. The devil is in the details which are to be agreed, if at all, at OPEC's November 30th meeting. Some speculate that OPEC may rethink this strategy given that domestic US producers, who have become more efficient during the oil price decline, stand to be big winners if OPEC production is cut.
We had a great time in France, but are glad to be home.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
We have just returned from Paris . If the world is relying upon France to jump start its economy, fuggitaboutit. Ten percent of France's gross domestic product derives from tourism. That of Paris is even more tourist dependent with over 500,000 people directly employed in that industry. Thanks to the threat of terrorism and squabbles with Russia tourism is down over 12% with foreign tourists staying away in droves. There has been a 46% decline in the number of Japanese tourists, 35% decline in Russian tourists and a 20% decline in Chinese tourists. Talk to any cabbie or tour guide about it, and their faces drop. What did it mean for Barb and me? How about a round trip ticket Chicago to Paris, taxes included, for $494? How about a half empty plane on the way home so that we could stretch out even in steerage? How about a "small group tour" that was so small it was only Barb and me? How about waiting in line only once to see a major historical site? How about dinner reservations anywhere we wanted? How about a one bedroom apartment on the "Fifth Avenue" of Paris (Rue St. Honore, one block from the Tuilerie gardens) for $290/night, all in? We spent more on air tickets and on a per diem basis for our trip to Philadelphia last fall. Let's see, you choose-- Paris or Philly?
I will publish a more fulsome edition next week. I do note however that the markets had a nice finish to the week and to the quarter. The Dow Jones Industrial Average is up 5% and the S&P 500 up 6% year to date. Moreover, oil caught a tail wind with news that OPEC may actually curtail production below 33million barrels/day. If true, this level would start to drain inventories as early as next year. The devil is in the details which are to be agreed, if at all, at OPEC's November 30th meeting. Some speculate that OPEC may rethink this strategy given that domestic US producers, who have become more efficient during the oil price decline, stand to be big winners if OPEC production is cut.
We had a great time in France, but are glad to be home.
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