Risk/Reward Vol. 330
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The Trump Rally continues. In the three weeks since the election, the Dow Jones Industrial Average has gained 4.5% and is up nearly 10% year to date. The S&P 500 is up over 3% this month and over 8% year to date. And of course EVERYONE predicted this should Trump win. NOT. Google the following phrase: "what will stock market do if Trump wins" and read the pre-election predictions from Market Watch, CNBC, CNN, Goldman Sachs and any number of market gurus. Can you say Armageddon? Now browse the reports after the election and find me one cogent article on why Mr. Market is go giddy? You won't find one. So what lesson is an investor to take from this? Most would say: "See, you cannot time the market." and/or "Buy the index because history tells us it delivers on average a 7+% annual return." These shibboleths are not explanations. They are articles of faith. And faith is not a sufficient rationale for me--not when it comes to investing. Remember, the world was flat---until it wasn't. And all swans were white---until Australia was discovered.
To reiterate, I am not troubled by their failure to predict the intensity of the move, but I am bothered that virtually all market prognosticators were directionally wrong. Am I the only one of us who is? And as for the index buyers and the "buy and hold" crowd, I direct your attention to the time period 1929-1954. It took the Dow Jones Industrial Average more than 25 years to reach the level it achieved before "The Crash of 1929". So where can one find predictability? Although nothing is foolproof, I believe predictability can be found in the bond market; more particularly in the market for the 10Year US Treasury. The election notwithstanding, all indications were that interest rates would increase, and they have (although no one saw the intensity of the increase). Given this level of certainty, one could prepare by selling interest rate sensitive securities, raising cash and awaiting a signal to re-enter.
I believe the signal to re-enter will come after next month's Federal Reserve meeting. I am looking for indications as to the number and size of the rate increases for 2017 with a rate increase in December of this year now a foregone conclusion. I have my list of purchases lined up, and I am ready to execute. Again patience is my greatest challenge. Having jumped the gun in the past, hopefully I can resist even as those holding index funds prosper. And prosper they have---predictability be damned.
Sunday, November 27, 2016
Sunday, November 20, 2016
November 20, 2016 Fed Grip Ends
Risk/Reward Vol. 329
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
I am hunting this weekend. But, I could not let the week pass without some comment.
Another week beyond the election and another flirtation with record highs for the major stock indices. But to me the headline is "Fed Loses Grip on Mr. Market." Ever since I started Risk/Reward (2010), THE dominant market force has been the Federal Reserve. Harken back to the times leading up to and immediately after any Fed meeting or a Ben Bernanke/Janet Yellen speech. Huge swings resulted. Remember the Taper Tantrum in 2013 or more recently the 300 point swing in the Dow during Yellen's speech in April? (see Vol. 302 http://www.riskrewardblog.blogspot.com/). Her speech before Congress this week was a non event. Moreover, the Fed's power has been perverse. Contrary to how markets traditionally operate, for much of the past eight years bonds and stocks traded in unison, and good economic news caused equity prices to fall. (See Vol. 167) Why? Because the entire economic ecosystem became dependent upon ultra low interest rates. In the blink of an eye (or more accurately when PA went for Trump), that all changed. Since election day, bonds have tanked while stocks have skyrocketed. This is the natural order of things, Dear Readers.
I repeat, without any prompting from the Fed, investors have sold bonds and bought equities. Why? Because equities look inviting based upon fundamentals; not because of cheap debt-induced stock buybacks. For the first time in eight years, the repatriation of the trillions of dollars held overseas is a real possibility. Tax reform is in the air. And most importantly, the crushing burden of heavy regulation may end. This latter point cannot be overemphasized. Anyone who has run a business or advised those that do knows how heavy the yoke of regulation can be. Having someone at the top who has chafed under that burden and is dedicated to relieving it is unprecedented in my lifetime.
So will this cause me to recalibrate and become a buy and hold equity index investor? No. I applaud what is happening with these indices, but many of the headwinds of which I have written in the past (e.g. lower demand due to changing demographics) are still with us. Moreover, the strengthening of the dollar (which we are now experiencing) presents as many challenges as it does opportunities. My strategy remains the same: wait for the bond bloodbath to quiet and then buy mispriced interest rate sensitive securities. This approach has worked well for me in the past and is currently setting up nicely.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
I am hunting this weekend. But, I could not let the week pass without some comment.
Another week beyond the election and another flirtation with record highs for the major stock indices. But to me the headline is "Fed Loses Grip on Mr. Market." Ever since I started Risk/Reward (2010), THE dominant market force has been the Federal Reserve. Harken back to the times leading up to and immediately after any Fed meeting or a Ben Bernanke/Janet Yellen speech. Huge swings resulted. Remember the Taper Tantrum in 2013 or more recently the 300 point swing in the Dow during Yellen's speech in April? (see Vol. 302 http://www.riskrewardblog.blogspot.com/). Her speech before Congress this week was a non event. Moreover, the Fed's power has been perverse. Contrary to how markets traditionally operate, for much of the past eight years bonds and stocks traded in unison, and good economic news caused equity prices to fall. (See Vol. 167) Why? Because the entire economic ecosystem became dependent upon ultra low interest rates. In the blink of an eye (or more accurately when PA went for Trump), that all changed. Since election day, bonds have tanked while stocks have skyrocketed. This is the natural order of things, Dear Readers.
I repeat, without any prompting from the Fed, investors have sold bonds and bought equities. Why? Because equities look inviting based upon fundamentals; not because of cheap debt-induced stock buybacks. For the first time in eight years, the repatriation of the trillions of dollars held overseas is a real possibility. Tax reform is in the air. And most importantly, the crushing burden of heavy regulation may end. This latter point cannot be overemphasized. Anyone who has run a business or advised those that do knows how heavy the yoke of regulation can be. Having someone at the top who has chafed under that burden and is dedicated to relieving it is unprecedented in my lifetime.
So will this cause me to recalibrate and become a buy and hold equity index investor? No. I applaud what is happening with these indices, but many of the headwinds of which I have written in the past (e.g. lower demand due to changing demographics) are still with us. Moreover, the strengthening of the dollar (which we are now experiencing) presents as many challenges as it does opportunities. My strategy remains the same: wait for the bond bloodbath to quiet and then buy mispriced interest rate sensitive securities. This approach has worked well for me in the past and is currently setting up nicely.
Sunday, November 13, 2016
Novermber 13, 2016 Reflation
Risk/Reward Vol.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Wow. Were you watching the futures market election night? Talk about volatility. Late Tuesday night, the race was so close, a Year 2000 fiasco (remember the "hanging chad") became a possibility. Understandably the Dow Jones Industrial Average futures plummeted 800 points. Much of that was recovered by the end of the night when a winner was declared. Then, once the markets digested the news, all time highs were achieved in the DJIA. So why didn't Wall Street support Trump during the election? That's easy. No one thought he could win. Mr. Market does not support losers especially when Elizabeth Warren is on the other side. But once victory was assured, the prospect of de-regulation, infrastructure spending and tax reform caused the green lights to shine. Will the averages continue to appreciate and if so why?
They just might, and the reason can be found in the bond market. Allow me to explain. Although financial news reports invariably focus on the equity markets, the real action starts and ends in the bond market. Why? As explained by Warren Buffet (and as discussed in Vol. 207 http://www.riskrewardblog.blogspot.com), the rates of return that investors need from an investment are directly tied to the risk free rate of return. There is no "risk free" security in the real world, but the 10Year US Treasury Bond is the closest. Simply put, if one can achieve, say, a 6% return from the 10Year, why would one accept a lesser return from a riskier investment? Conversely, if one is only achieving a 1.7% return from the 10Year, but one perceives that a significantly higher one will be achieved from a solid, albeit "riskier" investment such a blue chip stock, a rational investor will sell the bond and buy the stock. And that is what is happening. The increased likelihood of infrastructure spending and other fiscal stimuli promised by Trump is very good news for heavy industrials which dominate the Dow. So Mr. Market has sold bonds and bought blue chips. As a consequence, behemoths like GM and Caterpillar are up more than 10% just since the election. Add to this Mr. Trump's desire that the Federal Reserve stop depressing yields on bonds and one has both fiscal and monetary policies aimed at raising rates: a perfect storm for reflation. Think not? Look at the yield on the 10Year. It has gone from 1.77 to 2.12 in one week---that's a 20% increase! Bond King Jeffrey Gundlach sees the yield rising another 40 basis points near term. Who am I to disagree?
So what does this mean to you and me? For the buy and hold equity index crowd it means an above average year at least for the Dow. For me it presents a great buying opportunity. For those who obsess on interest rates (such as yours truly) there is no time better to be in cash than when rates are escalating. And I am in cash. Moreover, I am expecting a road map of rate increases to be announced at the Fed's December meeting. After that, I will repurchase a host of my longtime favorite income producing securities, many of which are currently in the tank due to Mr. Market's overreaction to the reflation discussed above. I see a win/win: increased yields purchased at bargain prices. (Remember the higher the yield, the lower the price.) I just need to be patient.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Wow. Were you watching the futures market election night? Talk about volatility. Late Tuesday night, the race was so close, a Year 2000 fiasco (remember the "hanging chad") became a possibility. Understandably the Dow Jones Industrial Average futures plummeted 800 points. Much of that was recovered by the end of the night when a winner was declared. Then, once the markets digested the news, all time highs were achieved in the DJIA. So why didn't Wall Street support Trump during the election? That's easy. No one thought he could win. Mr. Market does not support losers especially when Elizabeth Warren is on the other side. But once victory was assured, the prospect of de-regulation, infrastructure spending and tax reform caused the green lights to shine. Will the averages continue to appreciate and if so why?
They just might, and the reason can be found in the bond market. Allow me to explain. Although financial news reports invariably focus on the equity markets, the real action starts and ends in the bond market. Why? As explained by Warren Buffet (and as discussed in Vol. 207 http://www.riskrewardblog.blogspot.com), the rates of return that investors need from an investment are directly tied to the risk free rate of return. There is no "risk free" security in the real world, but the 10Year US Treasury Bond is the closest. Simply put, if one can achieve, say, a 6% return from the 10Year, why would one accept a lesser return from a riskier investment? Conversely, if one is only achieving a 1.7% return from the 10Year, but one perceives that a significantly higher one will be achieved from a solid, albeit "riskier" investment such a blue chip stock, a rational investor will sell the bond and buy the stock. And that is what is happening. The increased likelihood of infrastructure spending and other fiscal stimuli promised by Trump is very good news for heavy industrials which dominate the Dow. So Mr. Market has sold bonds and bought blue chips. As a consequence, behemoths like GM and Caterpillar are up more than 10% just since the election. Add to this Mr. Trump's desire that the Federal Reserve stop depressing yields on bonds and one has both fiscal and monetary policies aimed at raising rates: a perfect storm for reflation. Think not? Look at the yield on the 10Year. It has gone from 1.77 to 2.12 in one week---that's a 20% increase! Bond King Jeffrey Gundlach sees the yield rising another 40 basis points near term. Who am I to disagree?
So what does this mean to you and me? For the buy and hold equity index crowd it means an above average year at least for the Dow. For me it presents a great buying opportunity. For those who obsess on interest rates (such as yours truly) there is no time better to be in cash than when rates are escalating. And I am in cash. Moreover, I am expecting a road map of rate increases to be announced at the Fed's December meeting. After that, I will repurchase a host of my longtime favorite income producing securities, many of which are currently in the tank due to Mr. Market's overreaction to the reflation discussed above. I see a win/win: increased yields purchased at bargain prices. (Remember the higher the yield, the lower the price.) I just need to be patient.
Sunday, November 6, 2016
November 6, 2016 Hot Mess
Risk/Reward Vol. 327
THIS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Recently, both major indices have been in the red. The S&P 500 closed down on Friday, its ninth day in a row. It has not had nine consecutive losing days in 36 years. Moreover, both indices dropped through major resistance barriers on Wednesday: the Dow Jones Industrial Average closed below 18,000 and the S&P 500 closed below 2100. That said, the losses remain in a tight range with DJIA down only 1.5% and the S&P down only 3% over the past month. Consistent with the premise of last week's edition, both remain positive year to date. The consensus reason for the negativity is the uncertainty associated with the election. Mr. Market abhors uncertainty. Trump is a wild card as is a Democratic sweep of the presidency and both houses of Congress. Neither result is likely, but the possibility of either occurring has Mr. Market flummoxed. If the status quo prevails (Democrat president, Republican Congress) look for the markets to quickly reflate, less so if the Democrats gain control of the Senate. If either wild card scenario occurs look for a significant downdraft in the markets. It is no mystery why so many are heavily in cash.
While the indices remain reasonably flat, interest rate sensitive securities are undergoing a major re-pricing in advance of the Federal Reserve's anticipated rate increase come December. And make no mistake, a rate increase is coming. The press release following the conclusion of the Fed's meeting on Wednesday indicated that if just "some further evidence of continued progress" toward re-inflation occurs, a rate increase is likely. Many market mavens interpreted the use of "some" to many "any", and the requisite evidence likely appeared with Friday's employment report. The annualized wage rate increase came in at 2.8%, more inflationary than expected. Absent an international "black swan" or a wild card election result, a rate increase in December is a lock. In anticipation of that increase, bond funds are experiencing record withdrawals. Bond--like stocks such as telecoms, REIT's, preferred stocks, etc. are at low levels not seen since February. With the futures market still assigning only a 72% likelihood of a December increase, I believe that room remains for these sectors (my favorites) to go lower. In any event, I see no reason to buy in advance of the actual rate increase announcement which should come December 14th.
Oil prices and concomitantly oil stocks remain a hot mess. Mixed messages are coming from Iran and Saudi Arabia in advance of the much anticipated OPEC meeting scheduled this month. Are the talks, aimed at limiting production, on course or have they been derailed? Adding to the madness was news on Thursday that US oil inventories grew by 14.4million barrels during the week ending October 28th, their largest build ever. Oil prices now are in the mid $40's/bbl. well below where they were two weeks ago. Where is oil going? Who knows? All I know is that I am waiting until OPEC meets before buying despite some very tempting prices and yields available with my old standby's BP, RDS and a host of domestic pipeline companies.
Recently, I was asked why Risk/Reward is so heavily weighted to interest rates and oil. The answer is that I am a one trick pony (interest rates) with a fixation on horse of a different color (oil). (Sorry for mixing equine metaphors.) I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity; the yield on the 10Year US Treasury Bond, with movement by that singularity providing clarity as when to buy, hold or sell. This approach requires daily vigilance, adherence to rules (e.g 8% loss limit) and fearing not buying and/or selling some or all of one's portfolio in short order. My approach is explained in more detail in Vol. 221 www.riskrewardblog.blogspot.com . This approach has made me a trader/market timer, but has reduced my anxiety in these uncertain times. That said, if ever again I see the 10Year paying 5%, I will buy all that I can and gladly abandon my approach.
THIS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Recently, both major indices have been in the red. The S&P 500 closed down on Friday, its ninth day in a row. It has not had nine consecutive losing days in 36 years. Moreover, both indices dropped through major resistance barriers on Wednesday: the Dow Jones Industrial Average closed below 18,000 and the S&P 500 closed below 2100. That said, the losses remain in a tight range with DJIA down only 1.5% and the S&P down only 3% over the past month. Consistent with the premise of last week's edition, both remain positive year to date. The consensus reason for the negativity is the uncertainty associated with the election. Mr. Market abhors uncertainty. Trump is a wild card as is a Democratic sweep of the presidency and both houses of Congress. Neither result is likely, but the possibility of either occurring has Mr. Market flummoxed. If the status quo prevails (Democrat president, Republican Congress) look for the markets to quickly reflate, less so if the Democrats gain control of the Senate. If either wild card scenario occurs look for a significant downdraft in the markets. It is no mystery why so many are heavily in cash.
While the indices remain reasonably flat, interest rate sensitive securities are undergoing a major re-pricing in advance of the Federal Reserve's anticipated rate increase come December. And make no mistake, a rate increase is coming. The press release following the conclusion of the Fed's meeting on Wednesday indicated that if just "some further evidence of continued progress" toward re-inflation occurs, a rate increase is likely. Many market mavens interpreted the use of "some" to many "any", and the requisite evidence likely appeared with Friday's employment report. The annualized wage rate increase came in at 2.8%, more inflationary than expected. Absent an international "black swan" or a wild card election result, a rate increase in December is a lock. In anticipation of that increase, bond funds are experiencing record withdrawals. Bond--like stocks such as telecoms, REIT's, preferred stocks, etc. are at low levels not seen since February. With the futures market still assigning only a 72% likelihood of a December increase, I believe that room remains for these sectors (my favorites) to go lower. In any event, I see no reason to buy in advance of the actual rate increase announcement which should come December 14th.
Oil prices and concomitantly oil stocks remain a hot mess. Mixed messages are coming from Iran and Saudi Arabia in advance of the much anticipated OPEC meeting scheduled this month. Are the talks, aimed at limiting production, on course or have they been derailed? Adding to the madness was news on Thursday that US oil inventories grew by 14.4million barrels during the week ending October 28th, their largest build ever. Oil prices now are in the mid $40's/bbl. well below where they were two weeks ago. Where is oil going? Who knows? All I know is that I am waiting until OPEC meets before buying despite some very tempting prices and yields available with my old standby's BP, RDS and a host of domestic pipeline companies.
Recently, I was asked why Risk/Reward is so heavily weighted to interest rates and oil. The answer is that I am a one trick pony (interest rates) with a fixation on horse of a different color (oil). (Sorry for mixing equine metaphors.) I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity; the yield on the 10Year US Treasury Bond, with movement by that singularity providing clarity as when to buy, hold or sell. This approach requires daily vigilance, adherence to rules (e.g 8% loss limit) and fearing not buying and/or selling some or all of one's portfolio in short order. My approach is explained in more detail in Vol. 221 www.riskrewardblog.blogspot.com . This approach has made me a trader/market timer, but has reduced my anxiety in these uncertain times. That said, if ever again I see the 10Year paying 5%, I will buy all that I can and gladly abandon my approach.
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