Risk/Reward Vol. 376
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Another week, another record as Mr. Market celebrated enactment of the President's tax reform bill. Articles pro and con are yours for the reading, but a few things are clear. Corporate tax rates for both Subchapter C and Subchapter S filers have dropped. People in high tax states are disadvantaged. And the amount exempt from estate tax has been doubled. Will any of this impact you? Probably, but as my banner above reads "This is not tax advice."
The most underreported story of the tax bill is its impact on interest rates. The rate on the all important 10Year US Treasury Bond is now almost 2.5%, a meteoric rise in just a few days. Why? Well for several reasons. One, the tax bill is deemed inflationary and the rate on the 10Year is most responsive to inflationary pressures and expectations. Second,, the tax bill has been scored to create a $1.5 trillion deficit over the next ten years which can be gapped only by more borrowing by the US government. With more debt available it arguably will become cheaper to buy. And remember lower bond prices means higher rates. Third, as reported last week, the spread between the rate on the 2 Year and the 10Year was out of whack given the health of the economy. The two year rate was not going to drop so the spread had to widen on the long end. Fourth, bond buyers are becoming nervous as the biggest buyers in the world's bond markets, central banks via their quantitative easing policies, have signaled that they are curtailing bond purchases and reducing balance sheets in the coming months and years. All of these factors contributed to the fact that bond mutual funds experienced their biggest outflow of the year last week. Parenthetically, this may be a buying opportunity for me.
I would like to take this time to wish all of you who celebrate the holiday---Merry Christmas. We do celebrate it. It is our favorite time of the year. Our Christmas card this year is entitled "Blessings." Barb chose it, but the more I look at it the more I embrace it. I keep a framed copy on my credenza and look at it every day. It serves to remind me of all the blessings that have been bestowed upon me and for which I give thanks everyday. May all of you be so blessed. And for those who have been challenged this year, know that our thoughts and prayers are with you.
Sunday, December 24, 2017
Sunday, December 17, 2017
December 17, 2017 Tony Seba
Risk/Reward Vol. 375
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Surprise! Yes, Virginia, there is an edition this week. Why? Well my dear wife/girlfriend took a few spills on the slopes. The last one resulted in a wrenched knee. After consulting one of the Team USA Snowboard doctors, we decided to head home early for an in person inspection. The diagnosis: a grade 2 LCL sprain and a skier's thumb. Nothing she can't handle, but some pain and a great deal of inconvenience nevertheless. Shame on me for pushing her back into something she does not love. Thankfully she will not be disabled from her number one sport: trekking to the beach with grandchildren and libations in hand.
Wow. Another record setting week. The fuel continues to be tax reform. As the specifics emerge, financial consultants are listing those corporations that will benefit the most. Not surprisingly, they are mostly big names (e.g. Apple, financial instituions and C corporatins in general). Thus the blue chips found in the Dow Jones Industrial Average are leading the charge; up nearly 25% year to date. As I have stated repeatedly, I see no end in sight.
No end in sight despite a paltry 52 basis point spread between the yield on the 10 Year and the 2Year US Treasury Bonds, the smallest spread since the fall of 2007 . Conventional wisdom is that the flattening of this spread or yield curve suggests a slowing economy as investors opt for the safety of longer term Treasuries over shorter term ones. This time is likely different at least according to such market mavens as Mohamed El Erian. He posits that the shorter term, 2 year Bond, is reacting to the rise in the Federal Funds interest rate which the Fed raised again just this week and which is scheduled to rise three more times in 2018. In contrast, the longer end (the 10Year) is experiencing downward rate pressure due to two factors: one, low inflation and two, an influx of foreign buyers. This latter point is extremely significant. It suggests that the most important pricing mechanism for each and every US financial asset (the rate on the 10Year) is now dominated by factors outside the US. And the facts bear this out. Remember, because the European Central Bank is still buying every sovereign bond available at whatever price, the rates on the 10Year bonds of every major European country (e.g. Germany, France) remain well below ours. Therefore, foreign investors seeking highly rated government securities have no choice but to bid on US bonds thereby raising their prices and depressing their yields. Take a look at the spike in foreign buyers of US debt year to date. Foreign entities currently hold $6.3 trillion of US Bonds out of a total tradable amount of $14.7 trillion or nearly half. (Although the total US debt is $20.24 trillion, approximately $6 trillion is held by the Social Security Trust and similar government agencies and is not deemed tradable.) This means that rate watchers such as myself must keep an eagle eye on what the ECB does. Once it ends its bond buying spree (quantitative easing) our bonds will become less attractive and we should see the 10 Year yield spike. This will have a ripple effect on the price of all financial assets.
Three seemingly unconnected news reports on Thursday caught my eye. One, Toyota and Panasonic signed a joint venture to develop the next generation of lithium ion batteries for use in automobile production. Two, the Renault/Nissan Alliance announced that in the near future it will have 40 models with various driver autonomy capabilities. And three, Morgan Stanley issued a report that once driverless cars are the norm it foresees a 6.5% increase in alcohol consumption given the additional drinking time available to commuters. Seemingly unconnected but in reality very much interrelated. To this end, I HIGHLY RECOMMEND watching a 1:03 hour video presentation dated June 9, 2017 by futurist Tony Seba. It is available on YouTube. His premise is that single technology developments do not move the needle but the convergence of several innovations does. He cites the fact that the iPhone (which is only 10 years old) arose due to a combination of technological developments (computer, telephony and touch screen) He sees the same thing occurring with the development of longer lived and significantly cheaper batteries, improved electric vehicle performance and driving autonomy. The implications are enormously disruptive. It is a real mind blowing thought piece. A shoutout to a subscriber for alerting me to it.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Surprise! Yes, Virginia, there is an edition this week. Why? Well my dear wife/girlfriend took a few spills on the slopes. The last one resulted in a wrenched knee. After consulting one of the Team USA Snowboard doctors, we decided to head home early for an in person inspection. The diagnosis: a grade 2 LCL sprain and a skier's thumb. Nothing she can't handle, but some pain and a great deal of inconvenience nevertheless. Shame on me for pushing her back into something she does not love. Thankfully she will not be disabled from her number one sport: trekking to the beach with grandchildren and libations in hand.
Wow. Another record setting week. The fuel continues to be tax reform. As the specifics emerge, financial consultants are listing those corporations that will benefit the most. Not surprisingly, they are mostly big names (e.g. Apple, financial instituions and C corporatins in general). Thus the blue chips found in the Dow Jones Industrial Average are leading the charge; up nearly 25% year to date. As I have stated repeatedly, I see no end in sight.
No end in sight despite a paltry 52 basis point spread between the yield on the 10 Year and the 2Year US Treasury Bonds, the smallest spread since the fall of 2007 . Conventional wisdom is that the flattening of this spread or yield curve suggests a slowing economy as investors opt for the safety of longer term Treasuries over shorter term ones. This time is likely different at least according to such market mavens as Mohamed El Erian. He posits that the shorter term, 2 year Bond, is reacting to the rise in the Federal Funds interest rate which the Fed raised again just this week and which is scheduled to rise three more times in 2018. In contrast, the longer end (the 10Year) is experiencing downward rate pressure due to two factors: one, low inflation and two, an influx of foreign buyers. This latter point is extremely significant. It suggests that the most important pricing mechanism for each and every US financial asset (the rate on the 10Year) is now dominated by factors outside the US. And the facts bear this out. Remember, because the European Central Bank is still buying every sovereign bond available at whatever price, the rates on the 10Year bonds of every major European country (e.g. Germany, France) remain well below ours. Therefore, foreign investors seeking highly rated government securities have no choice but to bid on US bonds thereby raising their prices and depressing their yields. Take a look at the spike in foreign buyers of US debt year to date. Foreign entities currently hold $6.3 trillion of US Bonds out of a total tradable amount of $14.7 trillion or nearly half. (Although the total US debt is $20.24 trillion, approximately $6 trillion is held by the Social Security Trust and similar government agencies and is not deemed tradable.) This means that rate watchers such as myself must keep an eagle eye on what the ECB does. Once it ends its bond buying spree (quantitative easing) our bonds will become less attractive and we should see the 10 Year yield spike. This will have a ripple effect on the price of all financial assets.
Three seemingly unconnected news reports on Thursday caught my eye. One, Toyota and Panasonic signed a joint venture to develop the next generation of lithium ion batteries for use in automobile production. Two, the Renault/Nissan Alliance announced that in the near future it will have 40 models with various driver autonomy capabilities. And three, Morgan Stanley issued a report that once driverless cars are the norm it foresees a 6.5% increase in alcohol consumption given the additional drinking time available to commuters. Seemingly unconnected but in reality very much interrelated. To this end, I HIGHLY RECOMMEND watching a 1:03 hour video presentation dated June 9, 2017 by futurist Tony Seba. It is available on YouTube. His premise is that single technology developments do not move the needle but the convergence of several innovations does. He cites the fact that the iPhone (which is only 10 years old) arose due to a combination of technological developments (computer, telephony and touch screen) He sees the same thing occurring with the development of longer lived and significantly cheaper batteries, improved electric vehicle performance and driving autonomy. The implications are enormously disruptive. It is a real mind blowing thought piece. A shoutout to a subscriber for alerting me to it.
Sunday, December 10, 2017
December 10, 2017 Full Employment
Risk/Reward Vol. 374
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Another stellar week in stocks. And why not? Although all of the contours of tax reform have not been finalized, the most likely amendments provide a boon for Corporate America. According to Merrill Lynch the overall tax package is expected to provide a 14% boost in earnings to the stocks comprising the S&P 500. Since stocks are priced in part on a price to earnings ratio, a 14% boost in anticipated earnings should result in a 14% rise in stock prices assuming multiples (currently 19.8 times projected earnings) remain the same. This anticipated boost is IMHO the cause of the most recent spike in the indices.
Also helping is the continuing good news on the employment front. Unemployment is at 4.1% which is well below what economists once believed was "full employment." But how relevant is that unemployment rate? How can we be below "full employment"? Peek behind the numbers. The unemployment rate only measures the percentage of those currently participating in the job market who are without employment. Not measured are the 40% who choose not to participate. When they are added to the mix, one sees that the total employment rate is still down 2% from 2007. More striking is the fact that in the critical age bracket of 25 to 54, the rate of total employment is down 1.3% from 2007.
How come? In the upper age brackets, Baby Boomer retirements are contributing. But the numbers below retirement age are a direct result of overly accommodating disability benefits. In 1990 fewer than 2.5% of working age Americans received disability. In 2015, the number stood at 5.2%. That's right, one in 20 workers is on the dole. More shocking is the fact that 35% of disability beneficiaries (the largest group) claimed that a mental disorder precluded them from working. That's crazy.
The above statistic is why most market watchers focus on wages, not unemployment. Conventional wisdom is that wage increases are the key to economic growth. Higher wages mean more disposable income which means more consumption which means more production/economic growth. This number has been anemic with wages growing only 2.5% on an annual basis. Why remains a mystery to the economists at the Fed who still slavishly adhere to the Philips Curve about which I have written in the past. See Vol. 367 Riskrewardblog
There may not be an edition next week. Barb and I are headed to Colorado. We are skiing a few days in Keystone and then going to Denver to spend some time with Abby and her family. Speaking of Abby, if you have not followed her exploits you are missing out on a great story of entrepreneurship. Check her out at abbylouwalker.com and check out her product at vivianlou.com. Her book "Strap on a Pair---A Middle Aged, Middle Management, Middle Class Mom's Quest for Something More" is a triumph and makes an excellent stocking stuffer.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Another stellar week in stocks. And why not? Although all of the contours of tax reform have not been finalized, the most likely amendments provide a boon for Corporate America. According to Merrill Lynch the overall tax package is expected to provide a 14% boost in earnings to the stocks comprising the S&P 500. Since stocks are priced in part on a price to earnings ratio, a 14% boost in anticipated earnings should result in a 14% rise in stock prices assuming multiples (currently 19.8 times projected earnings) remain the same. This anticipated boost is IMHO the cause of the most recent spike in the indices.
Also helping is the continuing good news on the employment front. Unemployment is at 4.1% which is well below what economists once believed was "full employment." But how relevant is that unemployment rate? How can we be below "full employment"? Peek behind the numbers. The unemployment rate only measures the percentage of those currently participating in the job market who are without employment. Not measured are the 40% who choose not to participate. When they are added to the mix, one sees that the total employment rate is still down 2% from 2007. More striking is the fact that in the critical age bracket of 25 to 54, the rate of total employment is down 1.3% from 2007.
How come? In the upper age brackets, Baby Boomer retirements are contributing. But the numbers below retirement age are a direct result of overly accommodating disability benefits. In 1990 fewer than 2.5% of working age Americans received disability. In 2015, the number stood at 5.2%. That's right, one in 20 workers is on the dole. More shocking is the fact that 35% of disability beneficiaries (the largest group) claimed that a mental disorder precluded them from working. That's crazy.
The above statistic is why most market watchers focus on wages, not unemployment. Conventional wisdom is that wage increases are the key to economic growth. Higher wages mean more disposable income which means more consumption which means more production/economic growth. This number has been anemic with wages growing only 2.5% on an annual basis. Why remains a mystery to the economists at the Fed who still slavishly adhere to the Philips Curve about which I have written in the past. See Vol. 367 Riskrewardblog
There may not be an edition next week. Barb and I are headed to Colorado. We are skiing a few days in Keystone and then going to Denver to spend some time with Abby and her family. Speaking of Abby, if you have not followed her exploits you are missing out on a great story of entrepreneurship. Check her out at abbylouwalker.com and check out her product at vivianlou.com. Her book "Strap on a Pair---A Middle Aged, Middle Management, Middle Class Mom's Quest for Something More" is a triumph and makes an excellent stocking stuffer.
Sunday, December 3, 2017
December 3, 2017 24000
Risk/Reward Vol. 373
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
In breathtaking fashion, the Dow Jones Industrial Average broke through the 24,000 mark this week. This was the fifth time that it has surpassed a 1000 point milestone this year and it took barely a month. The impetus this time was the prospect and now reality of tax reform. And not even the guilty plea of General Flynn could derail it. The Dow and NASDAQ are both up over 20% year to date, and the S&P 500 is up over 18%. As has been discussed in numerous editions, the reasons are clear (low interest rates, TINA and an improved economy). No end is in sight, but I am intrigued by what could stop this bull run.
As I discussed last week, I see credit defaults as the biggest risk. But, that is not to dismiss other potential causes arising out of the surfeit of debt worldwide. Indeed, in her Congressional valedictory, out going Fed Chair Janet Yellen said that the trajectory of US government debt (currently $20trillion) was something "that should keep people awake at night." How ironic, Janet! Guess who is primarily responsible for this hot mess? How much of a mess is it? Let's look at the recently enacted budget. In the next fiscal year, the US government will spend $4.094trillion, $315 billion of which will be spend on interest payments on that $20trillion debt. Total government revenues from income tax, withholding, etc. are projected to be $3.654trillion under the old tax regime, a number that may total less under the tax plan passed this week. That leaves a deficit of $440 billion. Now, it does not take a genius to see that our Federal government is not only NOTrepaying debt, but is adding to it and borrowing money TO PAY THE INTEREST ON THAT DEBT. And the future looks worse. Next year 62% of all of that spending goes to MANDATED programs (Social Security and Medicare) which are scheduled to escalate rapidly in coming years as more Baby Boomers retire. Now you see why Janet can't sleep.
But will adding to the deficit adversely impact the stock market anytime soon? I don't think so. In fact, it likely will keep the "easy money" machine and thus the TINA effect (There Is No Alternative to stocks) alive. Think about it. What would happen if the Fed actually "normalized" interest rates? They would double thus raising interest payments from $315billion to $630 billion. In turn that would increase the deficit to over $700billion, and more borrowing would be necessary. No one, least of all those at the Federal Reserve wants to be responsible for that. So here is the dirty little secret that no one wants to admit. The Fed can't normalize rates because we can't afford the interest payments. And if you think the US is in the debt hell, take a look at Europe, Japan and China. To quote my favorite economist, Oliver Hardy, "Well here is another fine mess you've gotten us into."
So how does this play into credit defaults? Remember that all private debt is priced in relation to government debt. If Treasury bonds pay low interest then corporate bond rates correspondingly are low. And at present they are near historic lows. So the corporate world continues to borrow. Why not? Money is cheap. The corporations comprising the S&P 500 now have a debt to adjusted earnings ratio of 150%. Historically that number has been 0.70%. That's right, corporate debt has doubled and is growing. The ratio for less credit worth companies is worse. As investors in search of yield lend even more money to even riskier ventures, the likelihood of massive credit defaults increases. Keep your eye on this. I am. Remember it was credit defaults (eg subprime mortgage foreclosures) that caused the crash of 2008-2009
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
In breathtaking fashion, the Dow Jones Industrial Average broke through the 24,000 mark this week. This was the fifth time that it has surpassed a 1000 point milestone this year and it took barely a month. The impetus this time was the prospect and now reality of tax reform. And not even the guilty plea of General Flynn could derail it. The Dow and NASDAQ are both up over 20% year to date, and the S&P 500 is up over 18%. As has been discussed in numerous editions, the reasons are clear (low interest rates, TINA and an improved economy). No end is in sight, but I am intrigued by what could stop this bull run.
As I discussed last week, I see credit defaults as the biggest risk. But, that is not to dismiss other potential causes arising out of the surfeit of debt worldwide. Indeed, in her Congressional valedictory, out going Fed Chair Janet Yellen said that the trajectory of US government debt (currently $20trillion) was something "that should keep people awake at night." How ironic, Janet! Guess who is primarily responsible for this hot mess? How much of a mess is it? Let's look at the recently enacted budget. In the next fiscal year, the US government will spend $4.094trillion, $315 billion of which will be spend on interest payments on that $20trillion debt. Total government revenues from income tax, withholding, etc. are projected to be $3.654trillion under the old tax regime, a number that may total less under the tax plan passed this week. That leaves a deficit of $440 billion. Now, it does not take a genius to see that our Federal government is not only NOTrepaying debt, but is adding to it and borrowing money TO PAY THE INTEREST ON THAT DEBT. And the future looks worse. Next year 62% of all of that spending goes to MANDATED programs (Social Security and Medicare) which are scheduled to escalate rapidly in coming years as more Baby Boomers retire. Now you see why Janet can't sleep.
But will adding to the deficit adversely impact the stock market anytime soon? I don't think so. In fact, it likely will keep the "easy money" machine and thus the TINA effect (There Is No Alternative to stocks) alive. Think about it. What would happen if the Fed actually "normalized" interest rates? They would double thus raising interest payments from $315billion to $630 billion. In turn that would increase the deficit to over $700billion, and more borrowing would be necessary. No one, least of all those at the Federal Reserve wants to be responsible for that. So here is the dirty little secret that no one wants to admit. The Fed can't normalize rates because we can't afford the interest payments. And if you think the US is in the debt hell, take a look at Europe, Japan and China. To quote my favorite economist, Oliver Hardy, "Well here is another fine mess you've gotten us into."
So how does this play into credit defaults? Remember that all private debt is priced in relation to government debt. If Treasury bonds pay low interest then corporate bond rates correspondingly are low. And at present they are near historic lows. So the corporate world continues to borrow. Why not? Money is cheap. The corporations comprising the S&P 500 now have a debt to adjusted earnings ratio of 150%. Historically that number has been 0.70%. That's right, corporate debt has doubled and is growing. The ratio for less credit worth companies is worse. As investors in search of yield lend even more money to even riskier ventures, the likelihood of massive credit defaults increases. Keep your eye on this. I am. Remember it was credit defaults (eg subprime mortgage foreclosures) that caused the crash of 2008-2009
Sunday, November 26, 2017
November 26, 2017 Canaries
Risk/Reward Vol 372
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
For the reasons discussed last week (TINA, improved economy and cheap money), I, for one, was not surprised by the record setting week that Mr. Market just experienced. As has been the case often this year, Amazon led the charge. Up nearly 5%% for the week and over 58% year to date, Mr. Bezos' company not only has made him the richest man in the world ($100billion net worth), but also the most feared. Indeed, the specter of Amazon domination in such varied fields as entertainment and drug delivery has spurred a bevy of big time merger talks including ATT/Time Warner, CVS/Aetna and Disney/Fox. The boxes bearing the distinctive Amazon tape that accumulate in our building's mail room and the hours I spend watching Trial and Retribution, Red Oak and Catastrophe are testaments to the power of that juggernaut.
Although I remain generally bullish on the market, I am neither a Pollyanna nor a Jeremiah. One would be foolish not to peer over the horizon in search of that which may disrupt this unprecedented string of upward moves. As I have written in previous editions, today reminds me of sitting in board meetings in 2006 of a company that was heavily reliant upon construction and land development. We sensed that the real estate boom could not last forever. We just did not know when it would end. We created a "canary in the mine shaft" report that we thought would give us visibility on a collapse. It worked, but no report could have predicted the severity of the crash of 2008. As suggested last week, I believe there are some canaries worth watching today. Inflation and monetary policy always merit monitoring, but frankly with central banks so attuned to these I don't see them as the cause of any sudden reversal. But credit risk, that is a different matter.
What do I mean? Remember Lehman Brothers? Back in 2008 it was a major player in the financial world serving as a prime broker and counterparty for several large institutions. In order to boost its own profits, Lehman Brothers bet heavily on the highly illiquid subprime mortgage market. When that market suffered a host of reversals, Lehman found itself in a cash crunch and filed for bankruptcy. This caused a run on various types of credit insurance (swaps, etc.) held by AIG and others. The ensuing game of financial musical chairs froze the credit markets world wide. Central banks were forced to cheapen the cost of and to backstop virtually all credit. Thus began the current era of low interest rates and quantitative easing. We have yet return to anything close to "normal" prompting some to call this era of easy money the "new normal."
But, the new normal has its own risks. With rates at record lows for nearly a decade and with so much money available, investors seeking a return, even conservative ones like insurance companies and pension funds, have been forced into much riskier assets. Equities, junk bonds, emerging country sovereign debt and senior loans have replaced triple A rated government bonds in their portfolios. Indeed, a recent report by the Chicago branch of the Federal Reserve noted that credit conditions are as loose as they have been since 1993---looser than they were in 2006. Small wonder the yield on European junk bonds fell below 2% this week for the first time ever. As the stretch for yield causes money to flow into even riskier investments, the threat of default increases. And it is credit defaults, not disappointing earnings, rate increases or inflation that in my humble opinion will take the oxygen out this market.
It is only prudent that you find your own canary.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
For the reasons discussed last week (TINA, improved economy and cheap money), I, for one, was not surprised by the record setting week that Mr. Market just experienced. As has been the case often this year, Amazon led the charge. Up nearly 5%% for the week and over 58% year to date, Mr. Bezos' company not only has made him the richest man in the world ($100billion net worth), but also the most feared. Indeed, the specter of Amazon domination in such varied fields as entertainment and drug delivery has spurred a bevy of big time merger talks including ATT/Time Warner, CVS/Aetna and Disney/Fox. The boxes bearing the distinctive Amazon tape that accumulate in our building's mail room and the hours I spend watching Trial and Retribution, Red Oak and Catastrophe are testaments to the power of that juggernaut.
Although I remain generally bullish on the market, I am neither a Pollyanna nor a Jeremiah. One would be foolish not to peer over the horizon in search of that which may disrupt this unprecedented string of upward moves. As I have written in previous editions, today reminds me of sitting in board meetings in 2006 of a company that was heavily reliant upon construction and land development. We sensed that the real estate boom could not last forever. We just did not know when it would end. We created a "canary in the mine shaft" report that we thought would give us visibility on a collapse. It worked, but no report could have predicted the severity of the crash of 2008. As suggested last week, I believe there are some canaries worth watching today. Inflation and monetary policy always merit monitoring, but frankly with central banks so attuned to these I don't see them as the cause of any sudden reversal. But credit risk, that is a different matter.
What do I mean? Remember Lehman Brothers? Back in 2008 it was a major player in the financial world serving as a prime broker and counterparty for several large institutions. In order to boost its own profits, Lehman Brothers bet heavily on the highly illiquid subprime mortgage market. When that market suffered a host of reversals, Lehman found itself in a cash crunch and filed for bankruptcy. This caused a run on various types of credit insurance (swaps, etc.) held by AIG and others. The ensuing game of financial musical chairs froze the credit markets world wide. Central banks were forced to cheapen the cost of and to backstop virtually all credit. Thus began the current era of low interest rates and quantitative easing. We have yet return to anything close to "normal" prompting some to call this era of easy money the "new normal."
But, the new normal has its own risks. With rates at record lows for nearly a decade and with so much money available, investors seeking a return, even conservative ones like insurance companies and pension funds, have been forced into much riskier assets. Equities, junk bonds, emerging country sovereign debt and senior loans have replaced triple A rated government bonds in their portfolios. Indeed, a recent report by the Chicago branch of the Federal Reserve noted that credit conditions are as loose as they have been since 1993---looser than they were in 2006. Small wonder the yield on European junk bonds fell below 2% this week for the first time ever. As the stretch for yield causes money to flow into even riskier investments, the threat of default increases. And it is credit defaults, not disappointing earnings, rate increases or inflation that in my humble opinion will take the oxygen out this market.
It is only prudent that you find your own canary.
Sunday, November 19, 2017
November 19, 2017 Limited Supply
Risk/Reward Vol. 371
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
On Wednesday, all three major indices dropped. The S&P 500 lost more than 0.5% for the first time in 50 trading days, the longest such streak since 1965. Reading the financial press the next morning, one would have thought a bear market was afoot. That is until the trading day began. Bang. Bear talk disappeared as the bulls ran again. By the close Thursday, both the Dow Jones Industrial Average and the S&P 500 were up 0.8% and the NADAQ jumped 1.3%. Apparently, every reporter is looking to break the news that a correction is impending, even if one is no where in sight. Lost in the reports was the fact that Wednesday's slip notwithstanding, the S&P has fallen by 1% in a single day only four times this year, its fewest since 1964 and that it has not had 3% intraday drop in over 250 days--an all time record.
Why do stocks continue to rise, Fridays' negative close notwithstanding? As I have preached ad nauseam herein, one reason is that with interest rates so low, there simply is no alternative to stocks right now (TINA). Another reason is that the economy seems to be improving. A third reason is that there are fewer stock issues to buy. Allow me to explain. A limited supply means a higher price---Econ 101. In 1996 there were 7522 publicly traded companies in the US, the stock of which was yours to buy. Today, there are only 3671 public companies. How come? Thanks to central bank policies (quantitative easing, low rates, etc.) the financial world is awash in money. With so much money available, fast growing companies need not look to the public markets for capital. They can access private equity and other such entities which are hungry to put their capital to work. In 1996, 845 companies went public. In 2016, only 127 did. Concomitantly, undervalued public companies can access that same ready source of capital to go private. Read Jason Thomas' piece in Friday's Wall Street Journal on the implications of this development. One takeaway is that the reduction in the number of stock issues available to purchase has contributed to stock prices being less correlated to an individual company's fundamentals and more correlated to fund flows into the market in general.
For the few of us who remain fixated on interest rates and are less fascinated by stock prices (our numbers seem to be dwindling), comments by Robert Kaplan on Tuesday, a noted Federal Reserve dove, caused a minor panic in the fixed income community. He stated that he now is considering voting to raise short term interest rates in December and three times in 2018. I took the opportunity to buy one of my favorites (HPS) on the cheap. It recovered nicely the next day as Mrs. Bond came to see that the rise in short term rates resulting from Kaplan's comments had not adversely impacted longer term rates (read the rate on the10Year US Treasury Bond) and thus should not impact the securities correlated thereto such as HPS. Indeed, the spread between the interest rate on the 2Year versus the 10Year US Treasury Bond has contracted to less than 65 basis points, the flattest since November, 2007. This indicates that Mrs. Bond is pricing in the raises discussed by Kaplan yet still believes the prospects for inflation remain subdued. The persistence of lower longer term rates means that the era of easy money likely will continue even if the Fed increases rates on the short end of the curve. Indeed, with rates so low, corporations and governments are borrowing like mad. Corporate bond issuances are on a record pace and junk bond issuances are 17% higher than in 2016. The issuance of bonds by emerging market countries is through the roof. I read this to mean that the continuation of easy money is less threatened by rate risk than by default risk. (Venezuela anyone? Venezuela? Or 2006? 2006?). But that discussion is for another day.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
On Wednesday, all three major indices dropped. The S&P 500 lost more than 0.5% for the first time in 50 trading days, the longest such streak since 1965. Reading the financial press the next morning, one would have thought a bear market was afoot. That is until the trading day began. Bang. Bear talk disappeared as the bulls ran again. By the close Thursday, both the Dow Jones Industrial Average and the S&P 500 were up 0.8% and the NADAQ jumped 1.3%. Apparently, every reporter is looking to break the news that a correction is impending, even if one is no where in sight. Lost in the reports was the fact that Wednesday's slip notwithstanding, the S&P has fallen by 1% in a single day only four times this year, its fewest since 1964 and that it has not had 3% intraday drop in over 250 days--an all time record.
Why do stocks continue to rise, Fridays' negative close notwithstanding? As I have preached ad nauseam herein, one reason is that with interest rates so low, there simply is no alternative to stocks right now (TINA). Another reason is that the economy seems to be improving. A third reason is that there are fewer stock issues to buy. Allow me to explain. A limited supply means a higher price---Econ 101. In 1996 there were 7522 publicly traded companies in the US, the stock of which was yours to buy. Today, there are only 3671 public companies. How come? Thanks to central bank policies (quantitative easing, low rates, etc.) the financial world is awash in money. With so much money available, fast growing companies need not look to the public markets for capital. They can access private equity and other such entities which are hungry to put their capital to work. In 1996, 845 companies went public. In 2016, only 127 did. Concomitantly, undervalued public companies can access that same ready source of capital to go private. Read Jason Thomas' piece in Friday's Wall Street Journal on the implications of this development. One takeaway is that the reduction in the number of stock issues available to purchase has contributed to stock prices being less correlated to an individual company's fundamentals and more correlated to fund flows into the market in general.
For the few of us who remain fixated on interest rates and are less fascinated by stock prices (our numbers seem to be dwindling), comments by Robert Kaplan on Tuesday, a noted Federal Reserve dove, caused a minor panic in the fixed income community. He stated that he now is considering voting to raise short term interest rates in December and three times in 2018. I took the opportunity to buy one of my favorites (HPS) on the cheap. It recovered nicely the next day as Mrs. Bond came to see that the rise in short term rates resulting from Kaplan's comments had not adversely impacted longer term rates (read the rate on the10Year US Treasury Bond) and thus should not impact the securities correlated thereto such as HPS. Indeed, the spread between the interest rate on the 2Year versus the 10Year US Treasury Bond has contracted to less than 65 basis points, the flattest since November, 2007. This indicates that Mrs. Bond is pricing in the raises discussed by Kaplan yet still believes the prospects for inflation remain subdued. The persistence of lower longer term rates means that the era of easy money likely will continue even if the Fed increases rates on the short end of the curve. Indeed, with rates so low, corporations and governments are borrowing like mad. Corporate bond issuances are on a record pace and junk bond issuances are 17% higher than in 2016. The issuance of bonds by emerging market countries is through the roof. I read this to mean that the continuation of easy money is less threatened by rate risk than by default risk. (Venezuela anyone? Venezuela? Or 2006? 2006?). But that discussion is for another day.
Sunday, November 12, 2017
November 12, 2017 Tax Flop
Risk/Reward Vol. 370
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
OK. So as a result of the collapse of the President's tax plan the Dow Jones Industrial Average suffered its first negative close in eight weeks. But c'mon guys, down a measly 0.5%? That is hardly a blip. I stand by my previous statement that tax reform or not, the stock market will continue at current or higher levels until a reasonable alternative arises. And that alternative does not appear to be bonds any time soon. The rate on the all important U S Treasury 10 Year Bond continues to hover around 2.4%, hardly an attractive return. I highly recommend a read of Martin Wolf's column in Saturday's Financial Times. He addresses the entire low-interest-rate=stock-bubble debate in a succinct yet comprehensive manner. His take is that even though stocks are in historic Shiller PE territory (above 30x) we are also experiencing historically and persistently low interest rates. For a host of reasons, he does not see this predicament ending soon.
And speaking of historically low rates, I do mean HISTORICALLY LOW rates. Recently the Bank of England (the British central bank) did an analysis of world wide interest rates back to the 13th Century. That was at the dawning of a banking renaissance in Siena and Florence; banking that had not been so robust since Roman times. The BOE found that the rates prevailing in the spring and summer of 2016 were lower than at any time since at least 1273. Given the depth of this interest rate trough and how little rates have risen in the past year, I do not see bonds providing a reasonable return for conservative investors any time soon. Those that play the bond market for capital gains (think shorting) may do well if rates start to climb, but I suspect it will be a long time before traditional fixed income securities provide a livable return.
Lost in the news surrounding tax reform (or more appropriately the lack thereof) is the amazing story in oil. Do you appreciate the level of turmoil afoot in Saudi Arabia right now? Between sabre rattling with Iran and arrests in the royal family, the world outside the US is getting very nervous about a secure supply of petroleum from its largest producer. Indeed, the price of oil on the international market (Brent) is now above $64/barrel. In contrast, WTI (US price oil) is $56/bbl. Indeed, had the problems in Arabia arisen before our post 2008 oil boom they would have dominated our headlines. Now they are a page 3 item at best. Between our record high domestic production (thanks to fracking) and the improved supply from Canada, North America is getting close to energy independence. And frankly were supplies to be totally cut off, between our reserves and our ability to ramp up production we could get by. Not so the rest of the world. This gives us a 'uu-uge advantage. One that is rarely discussed these days outside this publication.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
OK. So as a result of the collapse of the President's tax plan the Dow Jones Industrial Average suffered its first negative close in eight weeks. But c'mon guys, down a measly 0.5%? That is hardly a blip. I stand by my previous statement that tax reform or not, the stock market will continue at current or higher levels until a reasonable alternative arises. And that alternative does not appear to be bonds any time soon. The rate on the all important U S Treasury 10 Year Bond continues to hover around 2.4%, hardly an attractive return. I highly recommend a read of Martin Wolf's column in Saturday's Financial Times. He addresses the entire low-interest-rate=stock-bubble debate in a succinct yet comprehensive manner. His take is that even though stocks are in historic Shiller PE territory (above 30x) we are also experiencing historically and persistently low interest rates. For a host of reasons, he does not see this predicament ending soon.
And speaking of historically low rates, I do mean HISTORICALLY LOW rates. Recently the Bank of England (the British central bank) did an analysis of world wide interest rates back to the 13th Century. That was at the dawning of a banking renaissance in Siena and Florence; banking that had not been so robust since Roman times. The BOE found that the rates prevailing in the spring and summer of 2016 were lower than at any time since at least 1273. Given the depth of this interest rate trough and how little rates have risen in the past year, I do not see bonds providing a reasonable return for conservative investors any time soon. Those that play the bond market for capital gains (think shorting) may do well if rates start to climb, but I suspect it will be a long time before traditional fixed income securities provide a livable return.
Lost in the news surrounding tax reform (or more appropriately the lack thereof) is the amazing story in oil. Do you appreciate the level of turmoil afoot in Saudi Arabia right now? Between sabre rattling with Iran and arrests in the royal family, the world outside the US is getting very nervous about a secure supply of petroleum from its largest producer. Indeed, the price of oil on the international market (Brent) is now above $64/barrel. In contrast, WTI (US price oil) is $56/bbl. Indeed, had the problems in Arabia arisen before our post 2008 oil boom they would have dominated our headlines. Now they are a page 3 item at best. Between our record high domestic production (thanks to fracking) and the improved supply from Canada, North America is getting close to energy independence. And frankly were supplies to be totally cut off, between our reserves and our ability to ramp up production we could get by. Not so the rest of the world. This gives us a 'uu-uge advantage. One that is rarely discussed these days outside this publication.
Sunday, November 5, 2017
November 5, 2017 Powell
Risk/Reward Vol. 369
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
When will it ever end? Several months ago I quoted Jim Paulsen, the well respected former chief investment strategist for Wells Fargo, who said that the current stock market rally could last forever. He may be right. Whether he is or not, the events of this week set the table for the bulls to keep running.
First, the President nominated Jerome Powell as the next Federal Reserve Chair. As has been discussed at length in this publication, Mr. Market has been worried that The Donald would name Congressional Republican favorites John Taylor or Kevin Warsh. Their nomination would have caused a negative reaction in the markets as the prospect of higher interest rates sooner would have heightened. Mr. Powell has been aligned with both Bernanke and Yellen in rate setting policy and with Yellen in the gradual reduction of the Fed's balance sheet. In other words, the clear path set by Yellen which Mohammed El Erian has termed "a beautiful normalization" and which Mr. Market has loved will continue.
Second, the Republican tax reform bill went public this week. Can anyone say "hot mess". I mean really guys and gals could you publish a more distasteful POS? In its current form, it contains something to piss off everyone and stands as much chance of passage as camel through the eye of a needle. And yet...And yet...And yet. This mishigas notwithstanding all three of the major indices closed the week at record highs. As I reported last week, I don't see the market's performance being adversely affected by the success or failure of any tax proposal. Think TINA (There Is No Alternative)!
Third, the economy is humming. More than 75% of the S&P 500 beat earnings estimates last quarter which is well above average. As of Friday's report, unemployment is at a 17 year low. Add to this the fact that growth in 3rd quarter gross domestic product came in above 3% on an annualized basis. The insanity in DC aside, what could be better? To this last point, one is left to marvel as to how out of touch our government and those who report the news really are. As sick as all of the Harvey Weinstein inspired stories have been at least they have taken politics off the front page. Unfortunately, Mr. Market has not been able to change headlines despite experiencing an incredible year so far.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
When will it ever end? Several months ago I quoted Jim Paulsen, the well respected former chief investment strategist for Wells Fargo, who said that the current stock market rally could last forever. He may be right. Whether he is or not, the events of this week set the table for the bulls to keep running.
First, the President nominated Jerome Powell as the next Federal Reserve Chair. As has been discussed at length in this publication, Mr. Market has been worried that The Donald would name Congressional Republican favorites John Taylor or Kevin Warsh. Their nomination would have caused a negative reaction in the markets as the prospect of higher interest rates sooner would have heightened. Mr. Powell has been aligned with both Bernanke and Yellen in rate setting policy and with Yellen in the gradual reduction of the Fed's balance sheet. In other words, the clear path set by Yellen which Mohammed El Erian has termed "a beautiful normalization" and which Mr. Market has loved will continue.
Second, the Republican tax reform bill went public this week. Can anyone say "hot mess". I mean really guys and gals could you publish a more distasteful POS? In its current form, it contains something to piss off everyone and stands as much chance of passage as camel through the eye of a needle. And yet...And yet...And yet. This mishigas notwithstanding all three of the major indices closed the week at record highs. As I reported last week, I don't see the market's performance being adversely affected by the success or failure of any tax proposal. Think TINA (There Is No Alternative)!
Third, the economy is humming. More than 75% of the S&P 500 beat earnings estimates last quarter which is well above average. As of Friday's report, unemployment is at a 17 year low. Add to this the fact that growth in 3rd quarter gross domestic product came in above 3% on an annualized basis. The insanity in DC aside, what could be better? To this last point, one is left to marvel as to how out of touch our government and those who report the news really are. As sick as all of the Harvey Weinstein inspired stories have been at least they have taken politics off the front page. Unfortunately, Mr. Market has not been able to change headlines despite experiencing an incredible year so far.
Sunday, October 29, 2017
October 29, 2017 Exit Redux
Risk/Reward Vol. 368
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
In Vol. 365 published at the beginning of this month I wrote the following:
"I do not see the stock market rally ending. As for interest rate sensitive securities (my favorites) caution is in the wind. The shine came off of these a bit again this week with the 10Year yield spiking, but not so much as to warrant any move. The monthly dividends that I receive far outweigh the slight hit to capital that I suffered these past two weeks. And with the futures now anticipating a December hike, all should be peaceful for the next 3 months. Should be, but may not be. That is because in the next few weeks The Donald is going to name a new Federal Reserve chair. Indeed, this week he interviewed Kevin Warsh for the job. As noted previously, Warsh has been critical of Bernanke/Yellen's easy money approach and is deemed a rate hawk. If he is the chosen one, it may cause rates to jump. Consequently, I may collect one more month's dividends and then sell while rates climb to a new "Warsh" normal."
How prophetic! This week those who support a hawkish approach to interest rates received a boost when The Donald took a straw poll of Republican Senators as to who the next Fed Chair should be and John Taylor won. He of the famous "Taylor Rule" is even more hawkish on rates than Kevin Warsh. The increased likelihood that Taylor would be named caused the yield on the US Ten Year Bond to spike above 2.45% on Wednesday, its highest yield in seven months. (Remember: the higher the yield the lower the price.) This sudden move was the signal I needed to exit my interest rate sensitive portfolio and to take a seat on the sidelines. Later in the week the yield fell a bit on rumors that Powell was still in the running. That move in turn was moderated by hawkish news that for the second quarter in a row gross domestic product exceeded 3% on an annualized basis. Given this volatility, I will let the dust settle and let rates stabilize (and hopefully overshoot) before re-entering. I may not be out too long given that the President now plans to announce his Fed Chair nominee next week. In retrospect I should have exited a few days earlier and indeed thought of so doing. But I was out of town and otherwise occupied. It cost me a few shekels, but the fun I had in the sun more than compensated for the small reduction in profits.
As for those of you who are index investors, the party continues. At dinner the other night I was asked whether the current rally is in anticipation of the passage of the President's tax plan and whether failure to pass it would result in a pull back. I have no doubt that the prospect of tax reform has played some role in the spurt, but even if it does not pass I do not see a sell off. Indeed, given recent positive corporate earnings reports, I foresee even market fundamentalists continuing to buy. Lastly, as I have written in the past, until there is an alternative investment that promises some meaningful return, stocks are the only game in town.
Sunday, October 15, 2017
October 15, 2017 Stock Index Wow
Risk/Reward Vol. 367
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Wow. Both of the major indices are up 15% year to date with no end in sight. As I have written ad nauseam fundamentals do not justify these nose bleed valuations. Indeed, as of midday Friday, the Shiller CAPE price/earnings ratio was 31.2, higher than it was before the '29 Crash. Indeed, it has exceeded 30 only three times: 1929, 1999-2000 (dot com) and now. But what do fundamentals have to do with this market? I say nothing. The fact remains that for the vast majority of investors, There Is No Alternative (TINA) to the stock market. Traditional alternatives (bonds, cd's, money markets) produce no return at all and actually are much riskier given the uncertainty surrounding interest rates.
The earnings report issued this week by Blackrock, the world's largest money manager, underscores TINA. Blackrock now has over $6trillion under management. It and its major competitor, Vanguard, now manage over $11trillion. To put that into perspective, the gross domestic product of China (the world's second largest economy) is $11 trillion. As for their percentage of the market, the total amount of assets under management worldwide is somewhere between $70 and 80 trillion. But more significant than their market share is how they are growing. The lion's share of new funds being managed is going into passive, index funds. In other words, everyone is investing in the same thing---stock indices. Little wonder then that the two largest stock indices, the Dow Jones Industrial Average and the S&P 500 continue to increase in value every day. I hesitate to use the word Ponzi, but self fulfilling prophecy works.
So, when, if ever, will it end? Simple: when there are alternatives. But alternatives won't arise unless and until central bankers stop suppressing rates--- which they continue to do despite hints to the contrary. Don't forget, the German 6 year bond still pays a negative interest rate and the 10 year yields only 0.41%. Similar yields prevail in France and Japan. Why? Because central banks, under the guise of "quantitative easing", continue to bid up sovereign bond prices (thereby depressing the yields) so that no one else can or will buy the bonds. This negatively affects the yield on all other debt because all debt is priced in relation to government bonds (the "spread"). The natural consequence is for investors to buy equities in lieu of low yielding debt. Yield suppression has been tolerated in the decade since the Great Recession in order to spur employment which in turn is supposed to spur inflation and economic growth. But the connection between low unemployment and inflation (the Phillips Curve) is slowly being debunked as is the perceived infallibility of central bankers, most of whom view the Philips Curve as the Holy Grail. In the meantime, central banks have run out of tools should we face another true, economic crisis. That is why some conservative monetarists are clamoring for speedier rate hikes. Notably among them are John Taylor and Kevin Warsh, two of the leading candidates for Federal Reserve chair. Should either be nominated, look for Mr. Market to take a pause. But even if one of these two is elevated, the entrenched bureaucracy of the Fed will be hard to turn. So I do not expect any significant jump in debt yields and thus no great stock reversal any time soon.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Wow. Both of the major indices are up 15% year to date with no end in sight. As I have written ad nauseam fundamentals do not justify these nose bleed valuations. Indeed, as of midday Friday, the Shiller CAPE price/earnings ratio was 31.2, higher than it was before the '29 Crash. Indeed, it has exceeded 30 only three times: 1929, 1999-2000 (dot com) and now. But what do fundamentals have to do with this market? I say nothing. The fact remains that for the vast majority of investors, There Is No Alternative (TINA) to the stock market. Traditional alternatives (bonds, cd's, money markets) produce no return at all and actually are much riskier given the uncertainty surrounding interest rates.
The earnings report issued this week by Blackrock, the world's largest money manager, underscores TINA. Blackrock now has over $6trillion under management. It and its major competitor, Vanguard, now manage over $11trillion. To put that into perspective, the gross domestic product of China (the world's second largest economy) is $11 trillion. As for their percentage of the market, the total amount of assets under management worldwide is somewhere between $70 and 80 trillion. But more significant than their market share is how they are growing. The lion's share of new funds being managed is going into passive, index funds. In other words, everyone is investing in the same thing---stock indices. Little wonder then that the two largest stock indices, the Dow Jones Industrial Average and the S&P 500 continue to increase in value every day. I hesitate to use the word Ponzi, but self fulfilling prophecy works.
So, when, if ever, will it end? Simple: when there are alternatives. But alternatives won't arise unless and until central bankers stop suppressing rates--- which they continue to do despite hints to the contrary. Don't forget, the German 6 year bond still pays a negative interest rate and the 10 year yields only 0.41%. Similar yields prevail in France and Japan. Why? Because central banks, under the guise of "quantitative easing", continue to bid up sovereign bond prices (thereby depressing the yields) so that no one else can or will buy the bonds. This negatively affects the yield on all other debt because all debt is priced in relation to government bonds (the "spread"). The natural consequence is for investors to buy equities in lieu of low yielding debt. Yield suppression has been tolerated in the decade since the Great Recession in order to spur employment which in turn is supposed to spur inflation and economic growth. But the connection between low unemployment and inflation (the Phillips Curve) is slowly being debunked as is the perceived infallibility of central bankers, most of whom view the Philips Curve as the Holy Grail. In the meantime, central banks have run out of tools should we face another true, economic crisis. That is why some conservative monetarists are clamoring for speedier rate hikes. Notably among them are John Taylor and Kevin Warsh, two of the leading candidates for Federal Reserve chair. Should either be nominated, look for Mr. Market to take a pause. But even if one of these two is elevated, the entrenched bureaucracy of the Fed will be hard to turn. So I do not expect any significant jump in debt yields and thus no great stock reversal any time soon.
Friday, October 13, 2017
October 8, 2017 Cassis
Risk/Reward Vol. 366
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Greetings from Cassis. I have been instructed by my bride to stop describing how beautiful it is here. So if you are inclined to come, don't. She does not want any one else to "discover it."
Week after week after week of record highs. This while bond yields inch higher. I see few if any clouds on the horizon that could stop the upward march of equities and certainly nothing that would cause a collapse. Enjoy.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Greetings from Cassis. I have been instructed by my bride to stop describing how beautiful it is here. So if you are inclined to come, don't. She does not want any one else to "discover it."
Week after week after week of record highs. This while bond yields inch higher. I see few if any clouds on the horizon that could stop the upward march of equities and certainly nothing that would cause a collapse. Enjoy.
Saturday, September 30, 2017
October 1 2017 Warsh?
Risk/Reward Vol. 365
We have been in Cassis for a week. We have hiked, kayaked, rented a motorboat and beached it (daily). The weather has been glorious. Next week we have a few day trips planned. The economy in France seems much improved since our visit last spring. Cassis is a beach destination for the French (very little English heard or spoken here) and even though this is the end of the season, business remains quite brisk.
Another week, another record. The Dow Jones Industrial Average is up 13% year to date and 23% over the past 12 months. As noted in Saturday's Wall Street Journal, the Trump Rally seems to have found new legs with talk of tax reform, gross domestic profit growth hitting 3% on an annualized basis and an economy sufficiently strong to warrant a Fed funds rate increase come December. As to this last point, Fed Chair Yellen gave a speech earlier in the week wherein she bemoaned the Fed's inability to jump start inflation, but remained steadfast that inflation or not a December rate increase is in order. The bond market heard her loud and clear as the yield on the all important US Ten Year Treasury jumped to 2.34% by week's end. The future's market is now pegging the odds of such an increase at over 80%.
I do not see the stock market rally ending. As for interest rate sensitive securities (my favorites) caution is in the wind. The shine came off of these a bit again this week with the 10Year yield spiking, but not so much as to warrant any move. The monthly dividends that I receive far outweigh the slight hit to capital that I suffered these past two weeks. And with the futures now anticipating a December hike, all should be peaceful for the next 3 months. Should be, but may not be. That is because in the next few weeks The Donald is going to name a new Federal Reserve chair. Indeed, this week he interviewd Kevin Warsh for the job. As noted previously, Warsh has been critical of Bernanke/Yellen's easy money approach and is deemed a rate hawk. If he is the chosen one, it may cause rates to jump. Consequently, I may collect one more month's dividends and then sell while rates climb to a new "Warsh" normal.
We have been in Cassis for a week. We have hiked, kayaked, rented a motorboat and beached it (daily). The weather has been glorious. Next week we have a few day trips planned. The economy in France seems much improved since our visit last spring. Cassis is a beach destination for the French (very little English heard or spoken here) and even though this is the end of the season, business remains quite brisk.
Another week, another record. The Dow Jones Industrial Average is up 13% year to date and 23% over the past 12 months. As noted in Saturday's Wall Street Journal, the Trump Rally seems to have found new legs with talk of tax reform, gross domestic profit growth hitting 3% on an annualized basis and an economy sufficiently strong to warrant a Fed funds rate increase come December. As to this last point, Fed Chair Yellen gave a speech earlier in the week wherein she bemoaned the Fed's inability to jump start inflation, but remained steadfast that inflation or not a December rate increase is in order. The bond market heard her loud and clear as the yield on the all important US Ten Year Treasury jumped to 2.34% by week's end. The future's market is now pegging the odds of such an increase at over 80%.
I do not see the stock market rally ending. As for interest rate sensitive securities (my favorites) caution is in the wind. The shine came off of these a bit again this week with the 10Year yield spiking, but not so much as to warrant any move. The monthly dividends that I receive far outweigh the slight hit to capital that I suffered these past two weeks. And with the futures now anticipating a December hike, all should be peaceful for the next 3 months. Should be, but may not be. That is because in the next few weeks The Donald is going to name a new Federal Reserve chair. Indeed, this week he interviewd Kevin Warsh for the job. As noted previously, Warsh has been critical of Bernanke/Yellen's easy money approach and is deemed a rate hawk. If he is the chosen one, it may cause rates to jump. Consequently, I may collect one more month's dividends and then sell while rates climb to a new "Warsh" normal.
Sunday, September 24, 2017
September 24, 2017 Balance Sheet Reduction
Risk/Reward Vol. 364
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The content of the Federal Reserve's press release and follow-on conference on Wednesday should have surprised no one. Chair Yellen has done much over the past several months to prepare the markets for what was announced. First, the reduction of the Fed's bloated, $4.5 trillion balance sheet now begins, albeit ever so slowly. Second, there is no immediate increase in the Fed funds rate. And third, one should expect another rate increase in December Yet, both the stock and the bond markets reacted negatively to the announcement with the yield on the US Ten Year Bond spiking from 2.24 to 2.28. (Remember, higher yields mean lower prices.) The combination of the Fed presser and Hurricane Maria's impact on Puerto Rico also caused several of my muni closed end funds to plummet. This occurred despite the fact that the ones I hold have limited to no exposure to PR bonds. Given Yellen's forewarning, the fact that the Fed also lowered its normalized rate goal and my double check that PR was not a concern, I decided to buy. I added to several positons and bought back into PGX which is trading at a favorable 332 basis point yield spread at present. (See Vol. 343 www.riskrewardblog.blogspot.com). We will see how this gambit develops.
Although visibility on the Fed's actions for the remainder of 2017 became clearer this week, 2018 is still very much in doubt. Due to resignations and normal rotation, several key Federal Reserve positions will be filled in the coming months. Will Trump nominate "easy money" doves? Will he re-nominate Janet Yellen as Chair? Some say his penchant for low rates will lead him this way. That said, the leading candidates for Chair mentioned by the press ( Warsh and Taylor) are both decidedly more hawkish on rates than Yellen. No matter who is named, however, I don't see rates approaching historic norms. Why? Because no central banker in the world has been able to spur economic growth sufficient to cause inflation. Indeed, despite several years of "recovery", the economy is still not "recovered" enough to register 2% annual inflation, a number deemed ideal by economists. And lest we forget, economists dominate central banks. Until that magical (albeit arbitrary) number is met or exceeded, easy money (translate low interest rates) will prevail.
So why do I care so much about rates and monetary policy? Because, Dear Reader, I am 66 years old. According to classic portfolio theory, I should be 66% invested in Triple A rated bonds of various maturities yielding an income of 6% per year. This carefree existence is what we were all raised to believe would be the reward for saving and maximizing 401k contributions. Guess what. It ain't here now, and it looks like it will never return. So those of us who look to investments as a source of income need to develop a strategy to produce income without the benefit of traditional income producing assets such as bonds, cd's , money market accounts, savings accounts or any other debt instruments. Moreover, given the paltry returns available via common stock dividends we need to develop a SELLING strategy. I have one. It is based upon the yield on the 10Year US Treasury Bond. (See Vol. 343 Riskrewardblog) Do you have one? If so, kindly share it with me.
Barb and I arrived in Cassis yesterday. Cassis is a lovely fishing village turned tourist destination in Provence. Since this trip was planned by Barb it has as its theme water and nature, weather permitting. Google "Cassis Calanques" and you will see some of the hikes we plan to take. Roman ruins? Not so much this time. Although we are at the end of the season, last night saw a lively crowd at the twenty or so restaurants along the docks. The fish they serve are literally 20 paces from the boats that net them. And what I like most is that in the twelve hours we have been here we have not heard or read one word of English. Pas un mot!
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The content of the Federal Reserve's press release and follow-on conference on Wednesday should have surprised no one. Chair Yellen has done much over the past several months to prepare the markets for what was announced. First, the reduction of the Fed's bloated, $4.5 trillion balance sheet now begins, albeit ever so slowly. Second, there is no immediate increase in the Fed funds rate. And third, one should expect another rate increase in December Yet, both the stock and the bond markets reacted negatively to the announcement with the yield on the US Ten Year Bond spiking from 2.24 to 2.28. (Remember, higher yields mean lower prices.) The combination of the Fed presser and Hurricane Maria's impact on Puerto Rico also caused several of my muni closed end funds to plummet. This occurred despite the fact that the ones I hold have limited to no exposure to PR bonds. Given Yellen's forewarning, the fact that the Fed also lowered its normalized rate goal and my double check that PR was not a concern, I decided to buy. I added to several positons and bought back into PGX which is trading at a favorable 332 basis point yield spread at present. (See Vol. 343 www.riskrewardblog.blogspot.com). We will see how this gambit develops.
Although visibility on the Fed's actions for the remainder of 2017 became clearer this week, 2018 is still very much in doubt. Due to resignations and normal rotation, several key Federal Reserve positions will be filled in the coming months. Will Trump nominate "easy money" doves? Will he re-nominate Janet Yellen as Chair? Some say his penchant for low rates will lead him this way. That said, the leading candidates for Chair mentioned by the press ( Warsh and Taylor) are both decidedly more hawkish on rates than Yellen. No matter who is named, however, I don't see rates approaching historic norms. Why? Because no central banker in the world has been able to spur economic growth sufficient to cause inflation. Indeed, despite several years of "recovery", the economy is still not "recovered" enough to register 2% annual inflation, a number deemed ideal by economists. And lest we forget, economists dominate central banks. Until that magical (albeit arbitrary) number is met or exceeded, easy money (translate low interest rates) will prevail.
So why do I care so much about rates and monetary policy? Because, Dear Reader, I am 66 years old. According to classic portfolio theory, I should be 66% invested in Triple A rated bonds of various maturities yielding an income of 6% per year. This carefree existence is what we were all raised to believe would be the reward for saving and maximizing 401k contributions. Guess what. It ain't here now, and it looks like it will never return. So those of us who look to investments as a source of income need to develop a strategy to produce income without the benefit of traditional income producing assets such as bonds, cd's , money market accounts, savings accounts or any other debt instruments. Moreover, given the paltry returns available via common stock dividends we need to develop a SELLING strategy. I have one. It is based upon the yield on the 10Year US Treasury Bond. (See Vol. 343 Riskrewardblog) Do you have one? If so, kindly share it with me.
Barb and I arrived in Cassis yesterday. Cassis is a lovely fishing village turned tourist destination in Provence. Since this trip was planned by Barb it has as its theme water and nature, weather permitting. Google "Cassis Calanques" and you will see some of the hikes we plan to take. Roman ruins? Not so much this time. Although we are at the end of the season, last night saw a lively crowd at the twenty or so restaurants along the docks. The fish they serve are literally 20 paces from the boats that net them. And what I like most is that in the twelve hours we have been here we have not heard or read one word of English. Pas un mot!
Sunday, September 17, 2017
September 17, 2017 Harvey and Irma
Risk/Reward Vol. 363
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
They may not have been to Texas or Florida, but Harvey and Irma were a relief to Mr. Market. So much so, the Dow Jones Industrial Average and the S&P 500 both hit new highs this week. A relief? Well, yes. The current damage estimates are 50 to 75% lower than first thought. Oil and gas are beginning to flow out of Texas, and the power rangers are at work restoring electricity in Florida. For reasons that I have explained ad nauseam (most prominently TINA or There Is No Alternative), the stock market just keeps on rising. It seems as though nothing, not the political mess in Washington, not the threat of a nuclear attack, not even back to back enormous storms can stop the stock market juggernaut.
Although most of you probably have concluded that my travels are merely for pleasure, they are not. Last weekend was spent on Lake Burton, GA in the company of subscribers and an investment professional. Like most of us, the subscribers wondered how long the upward march of equities would last and whether they were overpaying for professional money management. The professional was just that---professional. He listened to the concerns and opined only when pressed. It is his belief that given the current interest rate environment, the huge amount of money still on the sidelines and continued improvement in earnings per share (admittedly due in large part to buy backs), the stock market has more room to run. More importantly, he does not see any event that will cause a precipitous decline. As loyal readers know, I agree. That said, my portfolio is designed with 2000-01 and 2008-9 in mind. I am ready for a massive correction even if one is not readily apparent.
For those who watch interest rates (and all of us should), there were several developments this week. Most importantly, the Labor Department released Consumer Price Index numbers on Thursday. Prices rose 1.9% on an annualized basis in August, higher than expected. This level of inflation undoubtedly will provide the Federal Reserve the backbone to begin reducing its $4.5 trillion balance sheet as early as next week's Fed meeting. It also may be close enough to the Fed's desired inflation rate of 2% (measured by PCE, a more conservative gauge than CPI) to justify a 25 basis point interest rate hike in December. The odds of this occurring rose above 50% Thursday afternoon. Also on Thursday, the Bank of England gave guidance that it may soon raise short term rates. Add to this, the European Central Bank's pledge to end quantitative easing soon and one can see a world wide effort to "normalize" interest rates. As a consequence, the rate on the all important US 10 Year Treasury Bond rose from a fear-of-hurricane-induced low of less 2.05% last week to over 2.20% at this week's end. This is quite a jump. I am still comfortable in my interest rate holdings, but should this pace continue I will need to reconsider my positions.
Continuing my quest for knowledge, next week Barb and I head to France for three weeks. We have taken an apartment in Cassis, a small seaside town in Provence. I will be focused particularly on the cost of wine, bread, cheese and fine dining. If I miss a week or two or three, please know that it is only because of my dedication to research--- and to you, my Dear Readers.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
They may not have been to Texas or Florida, but Harvey and Irma were a relief to Mr. Market. So much so, the Dow Jones Industrial Average and the S&P 500 both hit new highs this week. A relief? Well, yes. The current damage estimates are 50 to 75% lower than first thought. Oil and gas are beginning to flow out of Texas, and the power rangers are at work restoring electricity in Florida. For reasons that I have explained ad nauseam (most prominently TINA or There Is No Alternative), the stock market just keeps on rising. It seems as though nothing, not the political mess in Washington, not the threat of a nuclear attack, not even back to back enormous storms can stop the stock market juggernaut.
Although most of you probably have concluded that my travels are merely for pleasure, they are not. Last weekend was spent on Lake Burton, GA in the company of subscribers and an investment professional. Like most of us, the subscribers wondered how long the upward march of equities would last and whether they were overpaying for professional money management. The professional was just that---professional. He listened to the concerns and opined only when pressed. It is his belief that given the current interest rate environment, the huge amount of money still on the sidelines and continued improvement in earnings per share (admittedly due in large part to buy backs), the stock market has more room to run. More importantly, he does not see any event that will cause a precipitous decline. As loyal readers know, I agree. That said, my portfolio is designed with 2000-01 and 2008-9 in mind. I am ready for a massive correction even if one is not readily apparent.
For those who watch interest rates (and all of us should), there were several developments this week. Most importantly, the Labor Department released Consumer Price Index numbers on Thursday. Prices rose 1.9% on an annualized basis in August, higher than expected. This level of inflation undoubtedly will provide the Federal Reserve the backbone to begin reducing its $4.5 trillion balance sheet as early as next week's Fed meeting. It also may be close enough to the Fed's desired inflation rate of 2% (measured by PCE, a more conservative gauge than CPI) to justify a 25 basis point interest rate hike in December. The odds of this occurring rose above 50% Thursday afternoon. Also on Thursday, the Bank of England gave guidance that it may soon raise short term rates. Add to this, the European Central Bank's pledge to end quantitative easing soon and one can see a world wide effort to "normalize" interest rates. As a consequence, the rate on the all important US 10 Year Treasury Bond rose from a fear-of-hurricane-induced low of less 2.05% last week to over 2.20% at this week's end. This is quite a jump. I am still comfortable in my interest rate holdings, but should this pace continue I will need to reconsider my positions.
Continuing my quest for knowledge, next week Barb and I head to France for three weeks. We have taken an apartment in Cassis, a small seaside town in Provence. I will be focused particularly on the cost of wine, bread, cheese and fine dining. If I miss a week or two or three, please know that it is only because of my dedication to research--- and to you, my Dear Readers.
Monday, September 4, 2017
September 4, 2017 The Big Four
Risk/Reward Vol. 362
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
How do you invest? Do you buy individual stocks, mutual funds, closed end funds or exchange traded funds? Do you know or do you have your financial advisor make all such decisions? Chances are everyone who reads this owns some fund sponsored by one or more of these four companies: Blackrock, Vanguard , State Street or Fidelity. Blackrock and Vanguard combined have $11 trillion under management. These giants are quickly becoming the go-to portals for anyone investing in passive funds which have become all the rage. Indeed, index funds, the passive investor's favorite vehicle, are attracting record inflows each quarter.
So what does this mean? By year end 2016, the average total stake that these four owned in each of the companies comprising the S&P 500 was over 21%. Moreover, combined they are the largest shareholders in 90% of all of the S&P 500 firms. Yes, you read that correctly, 90%. That means that these four now, or in the foreseeable future, are in a position to control every major corporation in the United States. And we scoff at the oligarchs that control Russia!
Does this bother anyone? Well, yes. Slowly and ever so quietly, scholars and regulators are beginning to evaluate the implications. Will firms controlled by commons shareholders actively compete with each other? Will there be room for innovation and creative destruction, the life forces of a free market? These questions are why words such as collusion and conscious parallelism which harken back to trust busting days are emerging once again.
I don't see this development impacting investing any time soon. But it is something to watch as these behemoths grow ever larger and ever more powerful.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
How do you invest? Do you buy individual stocks, mutual funds, closed end funds or exchange traded funds? Do you know or do you have your financial advisor make all such decisions? Chances are everyone who reads this owns some fund sponsored by one or more of these four companies: Blackrock, Vanguard , State Street or Fidelity. Blackrock and Vanguard combined have $11 trillion under management. These giants are quickly becoming the go-to portals for anyone investing in passive funds which have become all the rage. Indeed, index funds, the passive investor's favorite vehicle, are attracting record inflows each quarter.
So what does this mean? By year end 2016, the average total stake that these four owned in each of the companies comprising the S&P 500 was over 21%. Moreover, combined they are the largest shareholders in 90% of all of the S&P 500 firms. Yes, you read that correctly, 90%. That means that these four now, or in the foreseeable future, are in a position to control every major corporation in the United States. And we scoff at the oligarchs that control Russia!
Does this bother anyone? Well, yes. Slowly and ever so quietly, scholars and regulators are beginning to evaluate the implications. Will firms controlled by commons shareholders actively compete with each other? Will there be room for innovation and creative destruction, the life forces of a free market? These questions are why words such as collusion and conscious parallelism which harken back to trust busting days are emerging once again.
I don't see this development impacting investing any time soon. But it is something to watch as these behemoths grow ever larger and ever more powerful.
Sunday, August 13, 2017
August 13, 2017 North Korea
Risk/Reward Vol. 361
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
There is nothing like the threat of a nuclear holocaust to test the strength and resiliency of the stock market. And given that the rhetoric exchanged this week has not been experienced since the Cuban Missile Crisis of 1962, I would say Mr. Market came through very well. Despite the sabre rattling, all three major indices ended the week down only 1-1.5%. Hardly a blip for those who have done so well this year. Why the drop? As those who have experienced such times in the past know, whenever there is the threat of a major negative event many investors decide to take profits off the table. A concomitant "flight to safety" ensues. This manifests in a sell off of stock and the purchase of the safest investment known, US Government Bonds. This played out as expected with the yield on the all important US Ten Year Bond dropping from 2.28 to 2.191% this week. (Remember a drop in yield means that the demand and price of the bond is up.)
My portfolio dropped more precipitously than the indices. Three reasons underlie this: 1) since closed end funds (my favorites) are thinly traded, a flight to safety invariably exaggerates the decline because there are fewer buyers to stop the stampede; 2) many of the funds I own went ex-dividend on Wednesday and Friday which always results in a temporary decline ; and 3) many closed end funds were trading above net asset value which is an independent reason to sell. Had I not experienced such a flight in the past, I may have panicked. I did not. Instead, I checked that the value of the bonds to which they are correlated had increased, and I checked the strength of the underlying assets each holds. This exercise confirmed that the cause of the drop was indeed exogenous. Friday's positive action in the sector is evidence that a buying opportunity may be afoot. If the upward trend continues on Monday, I will be a purcaser.
I had a delightful face to face with a subscriber this week during which we exchanged observations and ideas. I find this invigorating and was reminded that one reason I started Risk/Reward was to engender just such conversations. Sadly, with few exceptions this type of dialogue has not developed. Sometimes I feel like WALL-E. During this week's meeting, I listed and prioritized my daily reads. I put the Financial Times, Seeking Alpha, Twitter and Grant's Almost Daily blog above the Wall Street Journal and IBD. Two of my favorites are free! I also recommended reading books by Benjamin Graham, Bill O'Neil and Jim Cramer--- in that order.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
There is nothing like the threat of a nuclear holocaust to test the strength and resiliency of the stock market. And given that the rhetoric exchanged this week has not been experienced since the Cuban Missile Crisis of 1962, I would say Mr. Market came through very well. Despite the sabre rattling, all three major indices ended the week down only 1-1.5%. Hardly a blip for those who have done so well this year. Why the drop? As those who have experienced such times in the past know, whenever there is the threat of a major negative event many investors decide to take profits off the table. A concomitant "flight to safety" ensues. This manifests in a sell off of stock and the purchase of the safest investment known, US Government Bonds. This played out as expected with the yield on the all important US Ten Year Bond dropping from 2.28 to 2.191% this week. (Remember a drop in yield means that the demand and price of the bond is up.)
My portfolio dropped more precipitously than the indices. Three reasons underlie this: 1) since closed end funds (my favorites) are thinly traded, a flight to safety invariably exaggerates the decline because there are fewer buyers to stop the stampede; 2) many of the funds I own went ex-dividend on Wednesday and Friday which always results in a temporary decline ; and 3) many closed end funds were trading above net asset value which is an independent reason to sell. Had I not experienced such a flight in the past, I may have panicked. I did not. Instead, I checked that the value of the bonds to which they are correlated had increased, and I checked the strength of the underlying assets each holds. This exercise confirmed that the cause of the drop was indeed exogenous. Friday's positive action in the sector is evidence that a buying opportunity may be afoot. If the upward trend continues on Monday, I will be a purcaser.
I had a delightful face to face with a subscriber this week during which we exchanged observations and ideas. I find this invigorating and was reminded that one reason I started Risk/Reward was to engender just such conversations. Sadly, with few exceptions this type of dialogue has not developed. Sometimes I feel like WALL-E. During this week's meeting, I listed and prioritized my daily reads. I put the Financial Times, Seeking Alpha, Twitter and Grant's Almost Daily blog above the Wall Street Journal and IBD. Two of my favorites are free! I also recommended reading books by Benjamin Graham, Bill O'Neil and Jim Cramer--- in that order.
Sunday, August 6, 2017
August 6, 2017 Continue Forever
Risk/Reward Vol. 360
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Excellent earnings reports, a calm bond market, a good jobs report and most importantly TINA (There Is No Alternative--to stocks, that is) again combined to send the Dow Jones Industrial Average to record highs. Euphoria is everywhere. Indeed, on Friday, Jim Paulsen, the former chief investment strategist at Wells Fargo, said that given the current low interest rate environment and the lack of inflation the bull market could "continue forever." Talk about exuberance! But is it irrational as claimed by former Fed Chair Alan Greenspan on Friday?
As I have written exhaustively in the past, the current stock "bubble" is a direct result of central bank policies world wide. Every major central bank has driven interest rates to zero and beyond in the hope of creating inflation which they believe is necessary to spur economic growth and prosperity. This logic was explained in detail in Vol. 359
http://www.riskrewardblog.blogspot.com/. Clearly, the logic is faulty, but central banks have shown no inclination to revisit it. The two factors that they believe will cause inflation are low unemployment and low interest rates. Well, Friday's jobs report puts unemployment at a remarkably small 4.3%, and yet inflation remains stubbornly low. Indeed, a report from the G-20 (the 20 largest economies in the world) released on Thursday indicates that inflation in the developed world is currently as low as it was in 2009-- at the depths of the recession. With unemployment so low, that leaves low interest rates as the only inflationary tool left in the box. As long as the Federal Reserve, the ECB, the Bank of England and the Bank of Japan continue the current low rate environment, the stock market should continue to do well. Forever, Jim? I doubt it. Let's just say the bulls will continue to run until they don't.
If inflation is not in our future (and for demographic reasons I don't believe that it is, see Vol. 358 www.riskrewardblog.blogspot.com), what if anything will cause the bull stock market to end? One way would be for central banks to revisit the above explained logic. But as noted in previous editions, that ain't gonna happen until the composition of central bank boards changes. A second could be a black swan event. North Korea launching a nuclear attack, Iran closing the Straits of Hormuz or some cataclysmic natural disaster could do it. But a black swan is always a risk and thus not a reason to exit now. Another looming risk is credit default. As discussed at length this week in an edition of Grant's Almost Daily e-newsletter, with so much money available, lenders (particularly unregulated ones) are competing vigorously to put money to work. Not only are they competing on rates, they are also lessening the protections they normally require. We are again in an era loose underwriting and "covenant lite". As you may recall these factors led to the subprime mortgage crisis of 2008. Do I see a repeat of 2008? No. First, any such defaults would hit non-regulated lenders much more than commercial banks. In other words, the losses would be felt and absorbed by the 1% and not the general public. And two, commercial banks are much more capital secure than they were. Nevertheless, it is something to watch.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Excellent earnings reports, a calm bond market, a good jobs report and most importantly TINA (There Is No Alternative--to stocks, that is) again combined to send the Dow Jones Industrial Average to record highs. Euphoria is everywhere. Indeed, on Friday, Jim Paulsen, the former chief investment strategist at Wells Fargo, said that given the current low interest rate environment and the lack of inflation the bull market could "continue forever." Talk about exuberance! But is it irrational as claimed by former Fed Chair Alan Greenspan on Friday?
As I have written exhaustively in the past, the current stock "bubble" is a direct result of central bank policies world wide. Every major central bank has driven interest rates to zero and beyond in the hope of creating inflation which they believe is necessary to spur economic growth and prosperity. This logic was explained in detail in Vol. 359
http://www.riskrewardblog.blogspot.com/. Clearly, the logic is faulty, but central banks have shown no inclination to revisit it. The two factors that they believe will cause inflation are low unemployment and low interest rates. Well, Friday's jobs report puts unemployment at a remarkably small 4.3%, and yet inflation remains stubbornly low. Indeed, a report from the G-20 (the 20 largest economies in the world) released on Thursday indicates that inflation in the developed world is currently as low as it was in 2009-- at the depths of the recession. With unemployment so low, that leaves low interest rates as the only inflationary tool left in the box. As long as the Federal Reserve, the ECB, the Bank of England and the Bank of Japan continue the current low rate environment, the stock market should continue to do well. Forever, Jim? I doubt it. Let's just say the bulls will continue to run until they don't.
If inflation is not in our future (and for demographic reasons I don't believe that it is, see Vol. 358 www.riskrewardblog.blogspot.com), what if anything will cause the bull stock market to end? One way would be for central banks to revisit the above explained logic. But as noted in previous editions, that ain't gonna happen until the composition of central bank boards changes. A second could be a black swan event. North Korea launching a nuclear attack, Iran closing the Straits of Hormuz or some cataclysmic natural disaster could do it. But a black swan is always a risk and thus not a reason to exit now. Another looming risk is credit default. As discussed at length this week in an edition of Grant's Almost Daily e-newsletter, with so much money available, lenders (particularly unregulated ones) are competing vigorously to put money to work. Not only are they competing on rates, they are also lessening the protections they normally require. We are again in an era loose underwriting and "covenant lite". As you may recall these factors led to the subprime mortgage crisis of 2008. Do I see a repeat of 2008? No. First, any such defaults would hit non-regulated lenders much more than commercial banks. In other words, the losses would be felt and absorbed by the 1% and not the general public. And two, commercial banks are much more capital secure than they were. Nevertheless, it is something to watch.
Sunday, July 30, 2017
July 30, 2017 Weak Dollar
Risk/Reward Vol. 359
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Good earnings reports and a "steady as she goes" Federal Reserve meeting combined to send stocks to new record highs. All three major indices are up double digits year to date. This week the stellar performer was the Dow Jones Industrial Average. How come? The DJIA is comprised of 30 big, international industrials like Exxon, Verizon, GE, Apple, Merck, etc. Their domestic profits have been ok, but there foreign incomes have been superior. This is for two reasons. One, the European economy has been steadily improving. And two, a weak dollar. Year to date, the Euro is 12% higher versus the dollar. The dollar has sunk in similar percentages against the peso, the Canadian dollar and the yen. Since US companies report earnings in dollars, the exchange rate alone has provided a significant boost in profits even if foreign sales had remained stagnant---which they did not.
Why is the dollar tanking? One, the dollar spiked in value with The Donald's election as the world believed that a business friendly President and a Republican Congress would do much to boost the economy including tax reform and infrastructure spending. Such activity would strengthen the dollar. Have you read the headlines recently? The Donald can't steer his own ship let alone a Congress. Second, the world is preparing for the European Central Bank to wean the Eurozone from quantitative easing (massive government bond buying. Without the ECB backstopping Euro bonds, interest rates in Europe are sure to rise (many are negative now). This is occurring at the same time the Federal Reserve has expressed a cautious approach to normalizing rates. Thus with one central bank becoming more interest rate hawkish (ECB) while the other more dovish, a currency shift is occurring. Dollars are being sold and Euros purchased. This is just the opposite of what occurred last winter.
We know that passive index investors have done well. So how have I done? The total portfolio that I manage is up 5% year to date (much of it tax advantaged) even though I have maintained a 50% cash position at all times. I am quite pleased given my aversion to risk. Recently, the positions I have taken in municipal bond funds have experienced capital appreciation. As the likelihood of tax reform continues to lessen, the value of these holdings increases. Moreover, they continue to pay on average above 5.5% tax free, amortized monthly.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Good earnings reports and a "steady as she goes" Federal Reserve meeting combined to send stocks to new record highs. All three major indices are up double digits year to date. This week the stellar performer was the Dow Jones Industrial Average. How come? The DJIA is comprised of 30 big, international industrials like Exxon, Verizon, GE, Apple, Merck, etc. Their domestic profits have been ok, but there foreign incomes have been superior. This is for two reasons. One, the European economy has been steadily improving. And two, a weak dollar. Year to date, the Euro is 12% higher versus the dollar. The dollar has sunk in similar percentages against the peso, the Canadian dollar and the yen. Since US companies report earnings in dollars, the exchange rate alone has provided a significant boost in profits even if foreign sales had remained stagnant---which they did not.
Why is the dollar tanking? One, the dollar spiked in value with The Donald's election as the world believed that a business friendly President and a Republican Congress would do much to boost the economy including tax reform and infrastructure spending. Such activity would strengthen the dollar. Have you read the headlines recently? The Donald can't steer his own ship let alone a Congress. Second, the world is preparing for the European Central Bank to wean the Eurozone from quantitative easing (massive government bond buying. Without the ECB backstopping Euro bonds, interest rates in Europe are sure to rise (many are negative now). This is occurring at the same time the Federal Reserve has expressed a cautious approach to normalizing rates. Thus with one central bank becoming more interest rate hawkish (ECB) while the other more dovish, a currency shift is occurring. Dollars are being sold and Euros purchased. This is just the opposite of what occurred last winter.
We know that passive index investors have done well. So how have I done? The total portfolio that I manage is up 5% year to date (much of it tax advantaged) even though I have maintained a 50% cash position at all times. I am quite pleased given my aversion to risk. Recently, the positions I have taken in municipal bond funds have experienced capital appreciation. As the likelihood of tax reform continues to lessen, the value of these holdings increases. Moreover, they continue to pay on average above 5.5% tax free, amortized monthly.
Sunday, July 23, 2017
July 23, 2017 Signs, Signs Everywhere Signs
Risk/Reward Vol. 359
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Each week the three major indices reach for new records. The NASDAQ was on a ten day winning streak until profit taking ended that run on Friday. As noted previously, the Shiller CAPE ratio ( an historical measure of price/earning ratios) is above 30 for only the third time in history; the others being just before the crashes of 1929 and 2000. Short selling interest is as low as it has been since May, 2007. Everyone is a holder or a buyer, and there is plenty of cash on the sidelines. Mr. Market is positively euphoric. In normal times, these are sell signals. But these are not normal times. Never before have the world's central banks been so laser focused on one metric to the seeming exclusion of others: achieving 2% inflation. Japan is so desperate to reach that goal it has maintained zero bound interest rates for several years. Originally believing its easy money monetary policy would achieve that number in 2011, Japan's lead central banker was quoted this week as predicting 2% inflation in 2020. (Hey, Mr. Kuroda, have you ever heard of Albert Einstein's definition of insanity? See Vol 358 http://www.riskrewardblog.blogspot.com/ ). On Thursday, European Central Bank President Draghi stated that due to low inflation the ECB would continue quantitative easing (purchasing 60billion Euro worth of government bonds each month) for the foreseeable future. And as we know from last week's Congressional testimony, due to her concerns about lagging inflation, Janet Yellen is rethinking the timetable of the balance sheet reduction and interest rate normalization that Federal Reserve intimated just a month ago.
Why the fascination with inflation? As highlighted last week, central bankers are almost all economists. One tenet of modern economics is the Phillip's Curve which, simply put, posits that there is an inverse relationship between the rate of unemployment and the rate of inflation. The theory is that the lower the unemployment rate, the higher the wages as employers compete for labor; the higher the wages the more disposable income; the more disposable income, the more demand for goods and services; the more demand for goods and services the more their prices inflate; the more prices inflate,the more manufacturers produce; the more that manufacturers produce the more the economy grows. So, following the above logic (synthesized from the Fed's FAQ page) , inflation resulting from higher wages should precede economic growth. Thus, if a central banker believes that his/her job is to grow the economy (and that is a questionable proposition) then he/she would want to see inflation before cutting back on accommodative policies. Seem simplistic? Scarily so, especially since it isn't working. Unemployment is at 4.4% which is below what was thought to be full employment (5%) just a few years ago, and yet the rate of inflation is falling; most recently measured at 1.4%. Central bankers everywhere are perplexed. Hey, Janet, wake up. Maybe the world's social programs are so "rich", people would rather retire or drop out of the work force than work. Take a look at our record low job participation rate---only 62.7% of eligible persons are in the potential work force. Oh, and maybe more disposable income does not equate to more demand. That is certainly true for those over age 65 which constitute an ever increasing percentage of the developed world's population. Look at Japan! Whatever the reason, the Phillip's Curve ain't working in real life. Meanwhile, accommodative monetary policies are inflating the value of financial assets worldwide.
Do you doubt this? Since 2008, central bank policy has mattered more than anything else when it comes to the value of financial assets; be they bonds, securities directly correlated to bonds (my favorites) or equities. With historic low interest rates (in the history of the world there have NEVER been negative interest rates until now) and a reckless bond buying programs (quantitative easing) central bankers everywhere have driven virtually every investor, be they pension plans or Ma and Pa, out of government bonds, money markets, etc. and into much riskier bonds and stocks. Put another way, does any reader of this edition believe that we are NOT in a stock market bubble? And look at commercial real estate. Thanks to the surplus of cheap credit provided by our central banks, some buyers of apartment complexes are now receiving 10 year interest only loans. This has caused a bidding war with buyers paying so much that they are left with a sub 5% yield. This is at least 50% lower than in "normal" times. (Remember lower yields result from higher prices.) With prices so high no wonder speculative developers are constructing apartments at an alarming rate; apartments that likely will remain empty. Think I'm nuts? Look around. All of this is a direct result of a surplus of money and historically low rates--- thanks to central banks. The above notwithstanding, so long as central banks continue to provide the punch there is no reason to stop drinking from the bowl.
So the obvious question is when will central banks forsake the Phillip's Curve and get serious about normalizing rates? Not the half hearted measures announced a few months ago by the Fed which take years to achieve and which can be derailed by any stock market reaction, but serious efforts to raise rates no matter how the financial markets respond. So long as the current lineup is in charge the answer is never (note Japan's sorry story alluded to above). But come February, 2018 a change can be expected. Chair Yellen's term comes to an end and the smart money is that she will be replaced by Kevin Warsh, Glen Hubbard or John Taylor--all of whom have been highly critical of our monetary policy. All three are more concerned by asset bubbles (like the stock market) and normalizing rates than with achieving an arbitrary inflation number. Some of these guys are more aggressive than others. Once the nomination process begins, let's see how the smart money reacts. That may provide a truer sell signal.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Each week the three major indices reach for new records. The NASDAQ was on a ten day winning streak until profit taking ended that run on Friday. As noted previously, the Shiller CAPE ratio ( an historical measure of price/earning ratios) is above 30 for only the third time in history; the others being just before the crashes of 1929 and 2000. Short selling interest is as low as it has been since May, 2007. Everyone is a holder or a buyer, and there is plenty of cash on the sidelines. Mr. Market is positively euphoric. In normal times, these are sell signals. But these are not normal times. Never before have the world's central banks been so laser focused on one metric to the seeming exclusion of others: achieving 2% inflation. Japan is so desperate to reach that goal it has maintained zero bound interest rates for several years. Originally believing its easy money monetary policy would achieve that number in 2011, Japan's lead central banker was quoted this week as predicting 2% inflation in 2020. (Hey, Mr. Kuroda, have you ever heard of Albert Einstein's definition of insanity? See Vol 358 http://www.riskrewardblog.blogspot.com/ ). On Thursday, European Central Bank President Draghi stated that due to low inflation the ECB would continue quantitative easing (purchasing 60billion Euro worth of government bonds each month) for the foreseeable future. And as we know from last week's Congressional testimony, due to her concerns about lagging inflation, Janet Yellen is rethinking the timetable of the balance sheet reduction and interest rate normalization that Federal Reserve intimated just a month ago.
Why the fascination with inflation? As highlighted last week, central bankers are almost all economists. One tenet of modern economics is the Phillip's Curve which, simply put, posits that there is an inverse relationship between the rate of unemployment and the rate of inflation. The theory is that the lower the unemployment rate, the higher the wages as employers compete for labor; the higher the wages the more disposable income; the more disposable income, the more demand for goods and services; the more demand for goods and services the more their prices inflate; the more prices inflate,the more manufacturers produce; the more that manufacturers produce the more the economy grows. So, following the above logic (synthesized from the Fed's FAQ page) , inflation resulting from higher wages should precede economic growth. Thus, if a central banker believes that his/her job is to grow the economy (and that is a questionable proposition) then he/she would want to see inflation before cutting back on accommodative policies. Seem simplistic? Scarily so, especially since it isn't working. Unemployment is at 4.4% which is below what was thought to be full employment (5%) just a few years ago, and yet the rate of inflation is falling; most recently measured at 1.4%. Central bankers everywhere are perplexed. Hey, Janet, wake up. Maybe the world's social programs are so "rich", people would rather retire or drop out of the work force than work. Take a look at our record low job participation rate---only 62.7% of eligible persons are in the potential work force. Oh, and maybe more disposable income does not equate to more demand. That is certainly true for those over age 65 which constitute an ever increasing percentage of the developed world's population. Look at Japan! Whatever the reason, the Phillip's Curve ain't working in real life. Meanwhile, accommodative monetary policies are inflating the value of financial assets worldwide.
Do you doubt this? Since 2008, central bank policy has mattered more than anything else when it comes to the value of financial assets; be they bonds, securities directly correlated to bonds (my favorites) or equities. With historic low interest rates (in the history of the world there have NEVER been negative interest rates until now) and a reckless bond buying programs (quantitative easing) central bankers everywhere have driven virtually every investor, be they pension plans or Ma and Pa, out of government bonds, money markets, etc. and into much riskier bonds and stocks. Put another way, does any reader of this edition believe that we are NOT in a stock market bubble? And look at commercial real estate. Thanks to the surplus of cheap credit provided by our central banks, some buyers of apartment complexes are now receiving 10 year interest only loans. This has caused a bidding war with buyers paying so much that they are left with a sub 5% yield. This is at least 50% lower than in "normal" times. (Remember lower yields result from higher prices.) With prices so high no wonder speculative developers are constructing apartments at an alarming rate; apartments that likely will remain empty. Think I'm nuts? Look around. All of this is a direct result of a surplus of money and historically low rates--- thanks to central banks. The above notwithstanding, so long as central banks continue to provide the punch there is no reason to stop drinking from the bowl.
So the obvious question is when will central banks forsake the Phillip's Curve and get serious about normalizing rates? Not the half hearted measures announced a few months ago by the Fed which take years to achieve and which can be derailed by any stock market reaction, but serious efforts to raise rates no matter how the financial markets respond. So long as the current lineup is in charge the answer is never (note Japan's sorry story alluded to above). But come February, 2018 a change can be expected. Chair Yellen's term comes to an end and the smart money is that she will be replaced by Kevin Warsh, Glen Hubbard or John Taylor--all of whom have been highly critical of our monetary policy. All three are more concerned by asset bubbles (like the stock market) and normalizing rates than with achieving an arbitrary inflation number. Some of these guys are more aggressive than others. Once the nomination process begins, let's see how the smart money reacts. That may provide a truer sell signal.
Sunday, July 16, 2017
July 16, 2017 Insanity
Risk/Reward Vol 358
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The headline in Thursday's Investor Business Daily read " Yellen Triggers Stock Rally." What? Did I not praise her in the last edition for her newly adopted low profile and her desire to make Fed watching as exciting as paint drying? It seems that central bankers worldwide just can't resist meddling. Talk about the hubris of the elite. So what did she say and why the reaction? In testimony before Congress, Yellen admitted that the current, paltry 1.4% rate of inflation (2% inflation now being the Fed's Holy Grail) may be the result of something other than transitory low prices in commodities and that as a consequence future rate hikes may be more gradual. Mr. Market and Mrs. Bond interpreted this to mean that the Fed's balance sheet reduction anticipated to begin in September and/or its anticipated December rate hike may not occur. In other words, the easy money punch bowl may continue. This sent bond yields lower and stock prices higher.
The problem with the Fed, as I see it, is that it is populated by academic economists who, despite giving lip service to "following the data, slavishly follow models they developed decades ago. If one truly "follows the data", how can one not conclude that a decade of easy money has not spurred the economy? And who says inflation necessarily equates to economic growth? Look at the period 1850 to 1900, the sweet spot of the industrial revolution and one of, if not the greatest, period of economic growth in US history. The annual rate of inflation was 0.17%. In other words $1 in 1850 was worth $1.09 in 1900. Inflation had little to do with economic growth. What did? The population of the US more than TRIPLED. As I have written again and again, no matter how much money or credit one has, one does not buy houses, cribs, diapers or mini vans if one does not have children. And old people and recent immigrants are not big buyers of anything. Simply put, we are a consumer driven economy, and we do not have enough consumers. We need policies that incent those in the upper and middle classes of child bearing age to propagate. The Fed's stated belief that easy money will spur growth is insane given Einstein's definition. ("Insanity is doing the same thing over and over again expecting different results.") The only result that I see is pushing investors out of interest bearing instruments (bond, cd's and savings accounts) and into equities. No wonder the stock market is trading (read: bubbling) at record price/earnings ratios with no end in sight.
And speaking of insane, I re-entered the oil patch this week. Here's the backstory. As loyal readers know, no petro stock has taken a beating like Kinder Morgan. Once the darling of the pipeline companies, its ill fated reorganization and 75% dividend cut in 2015 put KMI at the back of the pack. That said it remains the largest player in the field, and slowly but surely it has been regaining credibility. That is until last month when its much touted TransMountain, Alberta to British Columbia, construction project ran into a series of environmental roadblocks. This news caused its stock to plummet. That said, I was attracted to its preferred, KMIpA, which trades well below par and is currently yielding over 11%. A quick look at KMI's financials led me to conclude that the preferred is not at risk no matter what happens in Canada. Thus I bought. I also continue to pick up municipal bond closed end funds on dips.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The headline in Thursday's Investor Business Daily read " Yellen Triggers Stock Rally." What? Did I not praise her in the last edition for her newly adopted low profile and her desire to make Fed watching as exciting as paint drying? It seems that central bankers worldwide just can't resist meddling. Talk about the hubris of the elite. So what did she say and why the reaction? In testimony before Congress, Yellen admitted that the current, paltry 1.4% rate of inflation (2% inflation now being the Fed's Holy Grail) may be the result of something other than transitory low prices in commodities and that as a consequence future rate hikes may be more gradual. Mr. Market and Mrs. Bond interpreted this to mean that the Fed's balance sheet reduction anticipated to begin in September and/or its anticipated December rate hike may not occur. In other words, the easy money punch bowl may continue. This sent bond yields lower and stock prices higher.
The problem with the Fed, as I see it, is that it is populated by academic economists who, despite giving lip service to "following the data, slavishly follow models they developed decades ago. If one truly "follows the data", how can one not conclude that a decade of easy money has not spurred the economy? And who says inflation necessarily equates to economic growth? Look at the period 1850 to 1900, the sweet spot of the industrial revolution and one of, if not the greatest, period of economic growth in US history. The annual rate of inflation was 0.17%. In other words $1 in 1850 was worth $1.09 in 1900. Inflation had little to do with economic growth. What did? The population of the US more than TRIPLED. As I have written again and again, no matter how much money or credit one has, one does not buy houses, cribs, diapers or mini vans if one does not have children. And old people and recent immigrants are not big buyers of anything. Simply put, we are a consumer driven economy, and we do not have enough consumers. We need policies that incent those in the upper and middle classes of child bearing age to propagate. The Fed's stated belief that easy money will spur growth is insane given Einstein's definition. ("Insanity is doing the same thing over and over again expecting different results.") The only result that I see is pushing investors out of interest bearing instruments (bond, cd's and savings accounts) and into equities. No wonder the stock market is trading (read: bubbling) at record price/earnings ratios with no end in sight.
And speaking of insane, I re-entered the oil patch this week. Here's the backstory. As loyal readers know, no petro stock has taken a beating like Kinder Morgan. Once the darling of the pipeline companies, its ill fated reorganization and 75% dividend cut in 2015 put KMI at the back of the pack. That said it remains the largest player in the field, and slowly but surely it has been regaining credibility. That is until last month when its much touted TransMountain, Alberta to British Columbia, construction project ran into a series of environmental roadblocks. This news caused its stock to plummet. That said, I was attracted to its preferred, KMIpA, which trades well below par and is currently yielding over 11%. A quick look at KMI's financials led me to conclude that the preferred is not at risk no matter what happens in Canada. Thus I bought. I also continue to pick up municipal bond closed end funds on dips.
Sunday, July 2, 2017
July 2, 2017 Draghi
Risk/Reward Vol. 357
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Words have consequences when one is a central banker. Ask Ben Bernanke. Remember the "taper tantrum" of 2013 when he surprised the market by announcing a tapering of bond purchases without sufficient forewarning? Well, Janet Yellen remembers it and that is why she takes such pain to condition the market for any move of significance. For example, Mr. Market has been warned and fully expects the Fed to allow its balance sheet to run off at the rate of $10 to 50 billion per month starting this fall, to raise rates one more time this calendar year and to raise rates three times in 2018. Springing surprises is anathema to Chair Yellen. As she has stated on numerous occasions, she wants Fed actions to be as exciting as watching paint dry. This is a lesson that European Central Bank President Mario Draghi needs to learn. On Tuesday, out of the blue, he stated the following: "All the signs now point to a strengthening and broadening recovery in the euro area. Deflationary forces have been replaced by reflationary ones." What! Reflation has appeared nowhere in his previous comments. The reaction in the bond market was swift and significant as fixed income investors interpreted the statement to mean that the ECB would soon end its very accommodative 60billion Euro/month bond buying program. Since bond markets are more globalized than equity markets, the sell off hit everywhere including the United States. Yields (which move opposite to prices) shot through the roof. The yield on the all important US Ten Year Treasury Bond ("10Year") jumped from 2.14 to 2.3%, a huge move given the stability in rates below 2.2% that we have experienced recently. Predictably, the prices of those securities that are correlated to the 10Year fell.
So what did I, a man whose portfolio is closely pegged to the 10Year, do? First, I determined that despite the hit, my portfolio remained green. But even if it had dipped into the red, I would not have sold so long as the losses were less than 5%. Why not sell? Because over several years of tracking interest rates, I have learned that Mrs. Bond, like Mr. Market, often overreacts when surprises are sprung. And a quick review of the context in which Draghi's comment was made (reaffirming the monthly bond purchase program) confirmed the overreaction. So I bought more of the same, preferred stock and municipal bond closed end funds. If I am right, I should see nice capital gains and healthy monthly dividends from my new acquisitions.
The stock market, too, took a time out in the wake of Draghi's comments but came back strong by week's end. Seemingly each of the major indices flirts with a new record high on a daily basis despite periodic warnings that stock prices are bloated. This week's warning was a report that the CAPE (Nobel Prize winner Robert Shiller's comparative price/earnings chart) was near 30 for only the third time in its history. The other two were just before the stock market crashes of 1929 and 1999. Again, I say "So what". In a world dominated by central bank policies that depress interest rates, There Is No Alternative ("TINA") to stocks. In this regard, the House Financial Services Committee held hearings this week on "The Federal Reserve's Impact on Main Street, Retirees and Savings." The consensus of those that spoke was that the decade long easy money policies of the Federal Reserve have enriched the investor class at the expense of savers. Duh! One need not look beyond my 92 year old mother. At her age, traditional advice would have her in short term bonds and cd's. And that is where she is. As each matures she reinvests, often for below 2% returns. If her level of care increases she will erode principal. Should she be in stocks? Some would say yes, but what would a 10% or even a 2% correction do to her? No thank you. And she is not alone. One economist who testified at the hearing estimated that the past decade of centrally planned low interest rates has cost savers nearly $2.5 trillion in interest that in more normal times they could have expected. And to what end? As I have written ad nauseum in this blog, low interest rates have proven ineffective at spurring our economy which is growing at a pitiful 1.4% annually. No matter how low the rate, no one is going to buy what one does not need. People without children do not buy diapers, cribs, houses or minivans. And old people don't buy much at all. Look around. We are a childless, aging country. In other words, an economy with an ever shrinking number of buyers simply cannot grow no matter how accommodative its monetary policy. Finding ways to prosper in such an environment is the challenge we all face.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Words have consequences when one is a central banker. Ask Ben Bernanke. Remember the "taper tantrum" of 2013 when he surprised the market by announcing a tapering of bond purchases without sufficient forewarning? Well, Janet Yellen remembers it and that is why she takes such pain to condition the market for any move of significance. For example, Mr. Market has been warned and fully expects the Fed to allow its balance sheet to run off at the rate of $10 to 50 billion per month starting this fall, to raise rates one more time this calendar year and to raise rates three times in 2018. Springing surprises is anathema to Chair Yellen. As she has stated on numerous occasions, she wants Fed actions to be as exciting as watching paint dry. This is a lesson that European Central Bank President Mario Draghi needs to learn. On Tuesday, out of the blue, he stated the following: "All the signs now point to a strengthening and broadening recovery in the euro area. Deflationary forces have been replaced by reflationary ones." What! Reflation has appeared nowhere in his previous comments. The reaction in the bond market was swift and significant as fixed income investors interpreted the statement to mean that the ECB would soon end its very accommodative 60billion Euro/month bond buying program. Since bond markets are more globalized than equity markets, the sell off hit everywhere including the United States. Yields (which move opposite to prices) shot through the roof. The yield on the all important US Ten Year Treasury Bond ("10Year") jumped from 2.14 to 2.3%, a huge move given the stability in rates below 2.2% that we have experienced recently. Predictably, the prices of those securities that are correlated to the 10Year fell.
So what did I, a man whose portfolio is closely pegged to the 10Year, do? First, I determined that despite the hit, my portfolio remained green. But even if it had dipped into the red, I would not have sold so long as the losses were less than 5%. Why not sell? Because over several years of tracking interest rates, I have learned that Mrs. Bond, like Mr. Market, often overreacts when surprises are sprung. And a quick review of the context in which Draghi's comment was made (reaffirming the monthly bond purchase program) confirmed the overreaction. So I bought more of the same, preferred stock and municipal bond closed end funds. If I am right, I should see nice capital gains and healthy monthly dividends from my new acquisitions.
The stock market, too, took a time out in the wake of Draghi's comments but came back strong by week's end. Seemingly each of the major indices flirts with a new record high on a daily basis despite periodic warnings that stock prices are bloated. This week's warning was a report that the CAPE (Nobel Prize winner Robert Shiller's comparative price/earnings chart) was near 30 for only the third time in its history. The other two were just before the stock market crashes of 1929 and 1999. Again, I say "So what". In a world dominated by central bank policies that depress interest rates, There Is No Alternative ("TINA") to stocks. In this regard, the House Financial Services Committee held hearings this week on "The Federal Reserve's Impact on Main Street, Retirees and Savings." The consensus of those that spoke was that the decade long easy money policies of the Federal Reserve have enriched the investor class at the expense of savers. Duh! One need not look beyond my 92 year old mother. At her age, traditional advice would have her in short term bonds and cd's. And that is where she is. As each matures she reinvests, often for below 2% returns. If her level of care increases she will erode principal. Should she be in stocks? Some would say yes, but what would a 10% or even a 2% correction do to her? No thank you. And she is not alone. One economist who testified at the hearing estimated that the past decade of centrally planned low interest rates has cost savers nearly $2.5 trillion in interest that in more normal times they could have expected. And to what end? As I have written ad nauseum in this blog, low interest rates have proven ineffective at spurring our economy which is growing at a pitiful 1.4% annually. No matter how low the rate, no one is going to buy what one does not need. People without children do not buy diapers, cribs, houses or minivans. And old people don't buy much at all. Look around. We are a childless, aging country. In other words, an economy with an ever shrinking number of buyers simply cannot grow no matter how accommodative its monetary policy. Finding ways to prosper in such an environment is the challenge we all face.
Sunday, June 18, 2017
June 18, 2017 Inconsequential
Risk/Reward Vol. 356
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The biggest news this week was how inconsequential the eventful action taken by the Federal Reserve proved to be. Eventful because it laid out a detailed plan on how the Fed intends to reduce its $4.5 billion balance sheet over the next 4 or 5 years. Initially, it will allow $10billion per month of mortgages and bonds to mature without replacement with the amount rising to $50billion per month over time. Inconsequential, because once unveiled, this news did not cause interest rates to increase as one might have expected. Credit Chair Yellen and the Fed for conditioning the market for this plan. She wants the Fed to fade into the woodwork and to have its doings be as exciting as watching paint dry. Wednesday's news conference was a good first step.
Thanks to Goldilocks and TINA (discussed last week http://www.riskrewardblog.blogspot.com ) Mr. Market kept trading at historic highs. Traditional metrics such as price to earnings ratios just don't matter anymore because There Is No Alternative to stocks. Will this change someday? No doubt, but who knows when. One of my favorites, Jeffrey Gundlach, this week advised short term traders to sell in advance of what he believes will be a mid summer correction. His belief is based upon what he perceives to be stretched valuations. But what valuations are to be considered stretched today? Markets have been wildly distorted by a decade of artificially depressed interest rates (e.g. the Fed's quantitative easing). And the recent implementation of the "fiduciary rule" could operate to distort markets even more. The details of that rule are beyond the scope of this publication but no doubt it will push more and more money managers into low cost index funds. Active management has been and will continue to be replaced by group think and herd mentality. Think not? Ask your money manager.
I continue to hold pat with my income producing portfolio. Finding gems is becoming harder given the stable and slightly downward trend dominating the yield on the US Ten Year Treasury to which much of my strategy is correlated. I did add some more municipal bond closed end fund positions to my taxable account. Their value continues to hold steady, and I should see decent monthly dividends from these. Oil continues to be a drag with its price hitting year to date lows this week. And lastly, talk about a disrupter! I continue to marvel at Jeff Bezos. How would you like to be in the grocery business now that Amazon has purchased Whole Foods? The number one logistics company in the world now owns the number one store in the hottest grocery store segment---natural and organic foods. Yikes.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The biggest news this week was how inconsequential the eventful action taken by the Federal Reserve proved to be. Eventful because it laid out a detailed plan on how the Fed intends to reduce its $4.5 billion balance sheet over the next 4 or 5 years. Initially, it will allow $10billion per month of mortgages and bonds to mature without replacement with the amount rising to $50billion per month over time. Inconsequential, because once unveiled, this news did not cause interest rates to increase as one might have expected. Credit Chair Yellen and the Fed for conditioning the market for this plan. She wants the Fed to fade into the woodwork and to have its doings be as exciting as watching paint dry. Wednesday's news conference was a good first step.
Thanks to Goldilocks and TINA (discussed last week http://www.riskrewardblog.blogspot.com ) Mr. Market kept trading at historic highs. Traditional metrics such as price to earnings ratios just don't matter anymore because There Is No Alternative to stocks. Will this change someday? No doubt, but who knows when. One of my favorites, Jeffrey Gundlach, this week advised short term traders to sell in advance of what he believes will be a mid summer correction. His belief is based upon what he perceives to be stretched valuations. But what valuations are to be considered stretched today? Markets have been wildly distorted by a decade of artificially depressed interest rates (e.g. the Fed's quantitative easing). And the recent implementation of the "fiduciary rule" could operate to distort markets even more. The details of that rule are beyond the scope of this publication but no doubt it will push more and more money managers into low cost index funds. Active management has been and will continue to be replaced by group think and herd mentality. Think not? Ask your money manager.
I continue to hold pat with my income producing portfolio. Finding gems is becoming harder given the stable and slightly downward trend dominating the yield on the US Ten Year Treasury to which much of my strategy is correlated. I did add some more municipal bond closed end fund positions to my taxable account. Their value continues to hold steady, and I should see decent monthly dividends from these. Oil continues to be a drag with its price hitting year to date lows this week. And lastly, talk about a disrupter! I continue to marvel at Jeff Bezos. How would you like to be in the grocery business now that Amazon has purchased Whole Foods? The number one logistics company in the world now owns the number one store in the hottest grocery store segment---natural and organic foods. Yikes.
Sunday, June 11, 2017
June 11, 2017 Comey
Risk/Reward Vol. 355
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Does anyone feel good about what happened on Thursday? Who won in the Comey matter? The President claims "victory" but do you agree? Most commentators believe that the Donald avoided any serious threat of impeachment, but that the Comey revelations further weakened the President politically. Hope of any significant legislation this year is fading fast. In the UK, Prime Minister May received a shellacking at the polls thereby losing her gambit to strengthen the Tory's erstwhile majority. And the ECB, Europe's central bank, issued a statement indicating it would not cut rates further, but gave no indication of its future course. Indeed, I have encountered only one person who feels good about Thursday. Mr. Market. Friday's profit taking in the NASDAQ notwithstanding, Mr. Market continues to reach new highs on an almost daily basis. How come?
As discussed previously, I believe that the answer lies with two of Mr. Market's girlfriends: Goldilocks and Tina. As I reported two years ago (see Vol. 266 http://www.riskrewardblog.blogspot.com/) there are few things that Mr. Market likes better than predictability. He likes when the political and economic landscape is "not too hot" and "not too cold" ; just like Goldilock's porridge. And that condition certainly applies today. Mr. Market knows that with the economy running at 2% growth and the prospect of any stimulus fading, the Federal Reserve will likely not raise rates prospectively more than twice this calendar year. Knowing this causes the yields available in the bond market and the securities that trade in relation thereto (a/k/a the fixed income market) to depress and stabilize at the same time. This in turn causes fixed income investors to chase yield futher and further up the risk curve. Indicative of this is the fact that the yield spread between junk bonds and Treasuries fell to a 10 year low this week. At some point (like now) the return on risky fixed income becomes too great and investors are forced to buy stocks if they want any return. In other words, There Is No Alternative to stocks or TINA.
The spikes in stock prices have not been uniform however. Until Friday's rotation out of tech and into industrials and oil, stocks in the petroleum sector have been laggards. This is small wonder when reporting is so bad in the oil patch. News that is supposed to go one way (e.g. anticipated reduction in gasoline inventory) goes wildly the other way---as happened this past week. Moreover I am just not comfortable with oil stocks when the price of crude is below $50 and when it is directionally heading downward. Thus I sold my oil positions early in the week and took a small loss. I was otherwise a buyer however. As I presaged in the last edition, I bought several positions in municipal bond closed end funds. As I noted last week, this sector took a beating after the election in anticipation of tax reform that would make them less appealing. The prospect of any such reform in light of current DC politics is slim. And although muni's have made a decent recovery, there is still room for appreciation. Moreover, the tax free 5.5% income amortized and paid monthly is an added bonus.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Does anyone feel good about what happened on Thursday? Who won in the Comey matter? The President claims "victory" but do you agree? Most commentators believe that the Donald avoided any serious threat of impeachment, but that the Comey revelations further weakened the President politically. Hope of any significant legislation this year is fading fast. In the UK, Prime Minister May received a shellacking at the polls thereby losing her gambit to strengthen the Tory's erstwhile majority. And the ECB, Europe's central bank, issued a statement indicating it would not cut rates further, but gave no indication of its future course. Indeed, I have encountered only one person who feels good about Thursday. Mr. Market. Friday's profit taking in the NASDAQ notwithstanding, Mr. Market continues to reach new highs on an almost daily basis. How come?
As discussed previously, I believe that the answer lies with two of Mr. Market's girlfriends: Goldilocks and Tina. As I reported two years ago (see Vol. 266 http://www.riskrewardblog.blogspot.com/) there are few things that Mr. Market likes better than predictability. He likes when the political and economic landscape is "not too hot" and "not too cold" ; just like Goldilock's porridge. And that condition certainly applies today. Mr. Market knows that with the economy running at 2% growth and the prospect of any stimulus fading, the Federal Reserve will likely not raise rates prospectively more than twice this calendar year. Knowing this causes the yields available in the bond market and the securities that trade in relation thereto (a/k/a the fixed income market) to depress and stabilize at the same time. This in turn causes fixed income investors to chase yield futher and further up the risk curve. Indicative of this is the fact that the yield spread between junk bonds and Treasuries fell to a 10 year low this week. At some point (like now) the return on risky fixed income becomes too great and investors are forced to buy stocks if they want any return. In other words, There Is No Alternative to stocks or TINA.
The spikes in stock prices have not been uniform however. Until Friday's rotation out of tech and into industrials and oil, stocks in the petroleum sector have been laggards. This is small wonder when reporting is so bad in the oil patch. News that is supposed to go one way (e.g. anticipated reduction in gasoline inventory) goes wildly the other way---as happened this past week. Moreover I am just not comfortable with oil stocks when the price of crude is below $50 and when it is directionally heading downward. Thus I sold my oil positions early in the week and took a small loss. I was otherwise a buyer however. As I presaged in the last edition, I bought several positions in municipal bond closed end funds. As I noted last week, this sector took a beating after the election in anticipation of tax reform that would make them less appealing. The prospect of any such reform in light of current DC politics is slim. And although muni's have made a decent recovery, there is still room for appreciation. Moreover, the tax free 5.5% income amortized and paid monthly is an added bonus.
Sunday, June 4, 2017
June 4, 2017 Paris Accord
Risk/Reward Vol. 354
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING . RELY ON NOTHING STATED HEREIN
Reading newspapers and watching telecasts one would conclude that no one in the world agrees with The Donald's decision to abandon the Paris climate change accord. No one that is other than Mr. Market. Did you see the indices jump following the President's announcement? And the momentum it created powered them to record closes on Friday despite a disappointing jobs number. I suspect Mr. Market's reaction was less a ringing endorsement of Mr. Trump's environmental position than it was a recognition that the President would stand by his campaign promise to put America first in all matters---no matter how unpopular the action may be. Mr. Trump believed that the burden of the accord fell too heavily on the US in comparison to other countries and that was his rationale for the walk away. Good policy or bad is of no moment to me as an investor. Indeed, when it comes to investing, I am apolitical. I cannot afford to be otherwise---just like Mr. Market.
So with unemployment now at a multi year low of 4.3% why was the jobs report deemed disappointing? Two reasons come to mind. First, although unemployment is low it is so, in large part, due to a declining labor participation rate. Only 62% of eligible workers are employed, fully 5% below the pre-2007 participation rate. The delta between the unemployment rate and the unemployed rate is the huge number of eligible workers who are not seeking work. The second reason is that wages are growing at a snail's pace. Without wages increasing, demand remains depressed a fact borne out by the anemic growth in gross domestic product and a sub 2% inflation rate. The "laws of economics", particularly the Philips curve (low unemployment is supposed to result in higher inflation) upon which the Federal Reserve sets its policies, simply have not worked as postulated. I have my beliefs as to why (e.g. an aging work force) but that discussion is for another day.
So what does this mean to investors? To index buyers and the buy-and-hold crowd, I see no end insight. The S&P 500 is up nearly 9% year to date; the NASAQ is up 17%. Do I see them rising at such a clip going forward? No, but I see nothing to cause a precipitous drop either. For me and other interest rate sensitive investors I see more of the same; a sub 2.5% rate on the all important US Ten Year Bond and nothing on the horizon scheduled to rocket it higher. Even with a June rise in short term rates "baked in" , the 10Year closed on Friday at 2.159%. With no foreseeable need to reset, I will hold what I have and collect monthly dividends. I may add some more preferred closed end funds to my portfolio, but finding undervalued assets in that space is becoming more difficult. In addition, with the President so unpopular, the likelihood of significant tax reform is lessening. The prospect of tax reform has depressed tax free,municipal bond funds since the election. With reform fading and with low, stable interest rates, I will investigate deploying some taxable dollars into that tax free arena.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING . RELY ON NOTHING STATED HEREIN
Reading newspapers and watching telecasts one would conclude that no one in the world agrees with The Donald's decision to abandon the Paris climate change accord. No one that is other than Mr. Market. Did you see the indices jump following the President's announcement? And the momentum it created powered them to record closes on Friday despite a disappointing jobs number. I suspect Mr. Market's reaction was less a ringing endorsement of Mr. Trump's environmental position than it was a recognition that the President would stand by his campaign promise to put America first in all matters---no matter how unpopular the action may be. Mr. Trump believed that the burden of the accord fell too heavily on the US in comparison to other countries and that was his rationale for the walk away. Good policy or bad is of no moment to me as an investor. Indeed, when it comes to investing, I am apolitical. I cannot afford to be otherwise---just like Mr. Market.
So with unemployment now at a multi year low of 4.3% why was the jobs report deemed disappointing? Two reasons come to mind. First, although unemployment is low it is so, in large part, due to a declining labor participation rate. Only 62% of eligible workers are employed, fully 5% below the pre-2007 participation rate. The delta between the unemployment rate and the unemployed rate is the huge number of eligible workers who are not seeking work. The second reason is that wages are growing at a snail's pace. Without wages increasing, demand remains depressed a fact borne out by the anemic growth in gross domestic product and a sub 2% inflation rate. The "laws of economics", particularly the Philips curve (low unemployment is supposed to result in higher inflation) upon which the Federal Reserve sets its policies, simply have not worked as postulated. I have my beliefs as to why (e.g. an aging work force) but that discussion is for another day.
So what does this mean to investors? To index buyers and the buy-and-hold crowd, I see no end insight. The S&P 500 is up nearly 9% year to date; the NASAQ is up 17%. Do I see them rising at such a clip going forward? No, but I see nothing to cause a precipitous drop either. For me and other interest rate sensitive investors I see more of the same; a sub 2.5% rate on the all important US Ten Year Bond and nothing on the horizon scheduled to rocket it higher. Even with a June rise in short term rates "baked in" , the 10Year closed on Friday at 2.159%. With no foreseeable need to reset, I will hold what I have and collect monthly dividends. I may add some more preferred closed end funds to my portfolio, but finding undervalued assets in that space is becoming more difficult. In addition, with the President so unpopular, the likelihood of significant tax reform is lessening. The prospect of tax reform has depressed tax free,municipal bond funds since the election. With reform fading and with low, stable interest rates, I will investigate deploying some taxable dollars into that tax free arena.
Sunday, May 28, 2017
May 29, 2017 Gradual and Predictable
Risk/Reward Vol. 353
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Gradual and predictable"; these three words sent Mr. Market into paroxysms of joy on Wednesday. Within moments of their utterance, two of the three major indices jumped to record highs where they stayed into this holiday weekend. To what do these words refer? The approach that the Federal Reserve intends to take in reducing its bloated balance sheet. As you may recall, after the 2008 financial crisis, in order to depress interest rates of any and all duration and to support the housing market, the Federal Reserve printed money which it used to buy Treasury bonds and mortgages. In the course of so doing, the Federal Reserve's balance sheet rose from $800 billion to $4.5 trillion where it has remained for the past several years. With unemployment under control and with the prospect of steady if anemic economic growth now a reality, the Federal Reserve desires to downsize---something deemed prudent by all concerned. Just how to downsize has been a major issue with some Federal Reserve staff members suggesting the Fed sell these assets (bonds and mortgages) en masse. This likely would have wreaked havoc on the bond and mortgage markets, something the Fed desperately wished to avoid. And so a gentle run off of debt as it matures has been selected as the vehicle for reducing the balance sheet--- a technique designed to make the process "gradual and predictable." What a relief, even if it further fueled an already overheated stock market.
Understandably, the Fed's announcement also served to assuage an already heady bond market. The yield on the all important US Ten Year Treasury Bond fell below 2.25% on Wednesday and finished the week at that benchmark. The yield dropped despite a June increase in short term rates being a lock. Why? Because like Mr. Market, Mrs. Bond values predictability above all else. And so do I. With clarity as to the future course of Fed activity, I was comfortable adding to my interest rate sensitive portfolio. I purchased positions in JPI and LDP. I remained disciplined and resisted buying any closed end fund that was trading above its net asset value. This is not a hard and fast rule, but so long as there are alternatives trading below NAV, I go with them.
Also this week, members of OPEC and several other petro-producing nations agreed to extend oil production limits for another 10 months. This takes 1.8 million barrels/day off the market. Total world wide production was 82mm bbls/day before the cut. How effective this will be in raising oil prices remains to be seen in light of the ability of United States frackers to increase production cost effectively and at break neck speed. As has been reported ad nauseum in this publication, the wonder that is the US fracking industry continues to outsmart its foreign competition. More and more attention is paid to this juggernaut. Indeed, Exxon, the second largest oil company in the world has shed its traditional bias against fracking and is dedicating 25% of its capital expenditures to that technology this coming year. The impact of fracking is reflected in the lessening of OPEC's influence. Despite the announced extension of the production limits, the price of oil dropped. Mr. Market wanted OPEC to make even deeper cuts. As for me, it gave assurance that the flow of domestic oil will continue to increase. Accordingly, I bought some more pipeline funds (MIE and NML) on the dip.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Gradual and predictable"; these three words sent Mr. Market into paroxysms of joy on Wednesday. Within moments of their utterance, two of the three major indices jumped to record highs where they stayed into this holiday weekend. To what do these words refer? The approach that the Federal Reserve intends to take in reducing its bloated balance sheet. As you may recall, after the 2008 financial crisis, in order to depress interest rates of any and all duration and to support the housing market, the Federal Reserve printed money which it used to buy Treasury bonds and mortgages. In the course of so doing, the Federal Reserve's balance sheet rose from $800 billion to $4.5 trillion where it has remained for the past several years. With unemployment under control and with the prospect of steady if anemic economic growth now a reality, the Federal Reserve desires to downsize---something deemed prudent by all concerned. Just how to downsize has been a major issue with some Federal Reserve staff members suggesting the Fed sell these assets (bonds and mortgages) en masse. This likely would have wreaked havoc on the bond and mortgage markets, something the Fed desperately wished to avoid. And so a gentle run off of debt as it matures has been selected as the vehicle for reducing the balance sheet--- a technique designed to make the process "gradual and predictable." What a relief, even if it further fueled an already overheated stock market.
Understandably, the Fed's announcement also served to assuage an already heady bond market. The yield on the all important US Ten Year Treasury Bond fell below 2.25% on Wednesday and finished the week at that benchmark. The yield dropped despite a June increase in short term rates being a lock. Why? Because like Mr. Market, Mrs. Bond values predictability above all else. And so do I. With clarity as to the future course of Fed activity, I was comfortable adding to my interest rate sensitive portfolio. I purchased positions in JPI and LDP. I remained disciplined and resisted buying any closed end fund that was trading above its net asset value. This is not a hard and fast rule, but so long as there are alternatives trading below NAV, I go with them.
Also this week, members of OPEC and several other petro-producing nations agreed to extend oil production limits for another 10 months. This takes 1.8 million barrels/day off the market. Total world wide production was 82mm bbls/day before the cut. How effective this will be in raising oil prices remains to be seen in light of the ability of United States frackers to increase production cost effectively and at break neck speed. As has been reported ad nauseum in this publication, the wonder that is the US fracking industry continues to outsmart its foreign competition. More and more attention is paid to this juggernaut. Indeed, Exxon, the second largest oil company in the world has shed its traditional bias against fracking and is dedicating 25% of its capital expenditures to that technology this coming year. The impact of fracking is reflected in the lessening of OPEC's influence. Despite the announced extension of the production limits, the price of oil dropped. Mr. Market wanted OPEC to make even deeper cuts. As for me, it gave assurance that the flow of domestic oil will continue to increase. Accordingly, I bought some more pipeline funds (MIE and NML) on the dip.
Sunday, May 21, 2017
May 21, 2017 PIPE
Risk/Reward Vol. 352
THIS IS NOT INVESTMENT OR TAX ADVICE . IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
This week reminds us that Mr. Market is as responsive to politics as he is to economics, monetary policy or any other such stimulus. After all, the post election uptick is called the "Trump Rally." Thus, if The Donald's election can cause the market to rise, his bumbling can cause it to tumble. Why? Because his bumbling puts at risk tax relief and other reforms which underlie Mr. Market's euphoria.. That stated, Wednesday's swoon was hardly a correction. The recovery at week's end left each of the three major indices down approximately 1/2% for the week. Apparently, nothing...not even the threat of impeachment-- can slow this market. What a sight to behold!
And speaking of sights to behold, did you see that Amazon celebrated the 20th anniversary of its initial public offering this week? One hundred dollars invested in that IPO would be worth $64,000 today. Wow! I hope some of you had the foresight to buy AMZN then or when it faltered in 2001. I was not so lucky. At about the same time as AMZN's IPO, I took $100,000 and joined a group making a private investment in a publicly traded entity (appropriately called a "PIPE"). The company had preliminary orders from WalMart for a patented storage cabinet and had just assumed worldwide distribution rights for a large Canadian paper company. This investment seemed a much better bet than putting money into an online bookseller. One of the conditions of the PIPE was that I could not sell my stock for one year; an arrangement called (also appropriately) a "lock up." Immediately after my investment, the stock jumped in value, and I was feeling very good. But as the year expired, the stock tanked. Soon after it was delisted and in time I rode that $100,000 to ZERO. Had I put it in Amazon, it would be worth $64,000,000---that's 64 million---today. Woulda, coulda, shoulda, indeed.
The above is just one of my turn-of-the-century investment horror stories. So, Dear Reader, you can appreciate the genesis of my conservative investment approach today. I will never catch the next Amazon. But, henceforth, I will not get caught in an illiquid investment. And I will not ride one to the bottom ever, ever again. I keep to my knitting and sleep well at night. So what opportunities did my knitting provide me this week? The Donald's bumbling predictably produced a "flight to safety"; that is a rush to buy US Treasury bonds, the safest investment in the world. As the demand for these bonds increased, so did their price. And as we all know now, an increase in a bond's price means a drop in its yield. Normally, preferred stock closed end funds trade in lockstep with Treasury bonds. Sometimes, however there is a lag. I took advantage of such a lag this week and bought JPC, a quality fund with a very good yield trading at a substantial discount to net asset value.
THIS IS NOT INVESTMENT OR TAX ADVICE . IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
This week reminds us that Mr. Market is as responsive to politics as he is to economics, monetary policy or any other such stimulus. After all, the post election uptick is called the "Trump Rally." Thus, if The Donald's election can cause the market to rise, his bumbling can cause it to tumble. Why? Because his bumbling puts at risk tax relief and other reforms which underlie Mr. Market's euphoria.. That stated, Wednesday's swoon was hardly a correction. The recovery at week's end left each of the three major indices down approximately 1/2% for the week. Apparently, nothing...not even the threat of impeachment-- can slow this market. What a sight to behold!
And speaking of sights to behold, did you see that Amazon celebrated the 20th anniversary of its initial public offering this week? One hundred dollars invested in that IPO would be worth $64,000 today. Wow! I hope some of you had the foresight to buy AMZN then or when it faltered in 2001. I was not so lucky. At about the same time as AMZN's IPO, I took $100,000 and joined a group making a private investment in a publicly traded entity (appropriately called a "PIPE"). The company had preliminary orders from WalMart for a patented storage cabinet and had just assumed worldwide distribution rights for a large Canadian paper company. This investment seemed a much better bet than putting money into an online bookseller. One of the conditions of the PIPE was that I could not sell my stock for one year; an arrangement called (also appropriately) a "lock up." Immediately after my investment, the stock jumped in value, and I was feeling very good. But as the year expired, the stock tanked. Soon after it was delisted and in time I rode that $100,000 to ZERO. Had I put it in Amazon, it would be worth $64,000,000---that's 64 million---today. Woulda, coulda, shoulda, indeed.
The above is just one of my turn-of-the-century investment horror stories. So, Dear Reader, you can appreciate the genesis of my conservative investment approach today. I will never catch the next Amazon. But, henceforth, I will not get caught in an illiquid investment. And I will not ride one to the bottom ever, ever again. I keep to my knitting and sleep well at night. So what opportunities did my knitting provide me this week? The Donald's bumbling predictably produced a "flight to safety"; that is a rush to buy US Treasury bonds, the safest investment in the world. As the demand for these bonds increased, so did their price. And as we all know now, an increase in a bond's price means a drop in its yield. Normally, preferred stock closed end funds trade in lockstep with Treasury bonds. Sometimes, however there is a lag. I took advantage of such a lag this week and bought JPC, a quality fund with a very good yield trading at a substantial discount to net asset value.
Sunday, May 14, 2017
May 14, 2017 Sohn
Risk/Reward Vol. 351
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
With the major indices near all time highs, stable interest rates, improved earnings and the lowest volatility index (VIX) reading since 1993, shouldn't passive investors declare victory and drop the mike? After all virtually no active manager has outperformed the indices since the recovery began in 2010. Just let the chips ride forever. Right? Well, not according to the leading hedge fund managers who congregated earlier this week in New York for the annual Sohn Investment Conference. This is a great gathering, and I have written about it in the past. (See Vols. 220 and 306 www.riskrewardblog.blogspot.com) Comments from two of my favorites, Kevin Warsh, the former Federal Reserve official and Bond King Jeffrey Gundlach are worth noting. Warsh criticized the Fed for being too responsive to Mr. Market and advocated that it take a longer, more objective view of its role. Specifically, Warsh warned that the Fed's accommodative policies have left it with little to no powder should the economy nose dive again. Gundlach was more specific--- and more negative. He advocated shorting the S&P 500 which he views as extremely overvalued by any measure including CAPE about which I wrote last week.
So do I believe the markets will undergo a major correction any time soon? I doubt it for one reason: There Is No Alternative a/k/a the TINA factor. (See Vols. 164, 201, 250 and 253) Really, where else would any investor put his/hers/their money right now? Short term bonds provide virtually no return, and longer term debt is very risky considering the lack of liquidity (no market makers) about which I have also written in the past. No one can be criticized for adopting an all-in, equity index strategy given our recent history. That stated, only a fool would do so without giving some consideration to an exit. Sell in May and go away? Probably not. But never sell? Eek. Stated alternatively, it would be a shame if anyone rode his/her well deserved gains down the drain if and when a correction occurred. What to do? Well, how about practicing---just in case. Let me ask: how many of you have ever sold a stock for a gain? Not for a loss, for a gain. I bet very few. So do me a favor. Pick a big winner, hopefully held in a tax deferred account (e.g. 401k or IRA) and sell it next week. You can buy it back the next day, but sell it. Doing so will familiarize you with the mechanics of a sale and will help overcome the mental block that I am sure most if not all of you have about selling a winner. I do it all the time. Admittedly, I am a nut. But I will not be caught flat footed by what happened in 2000 or 2008. No way, no how. And it is what happened then that informs my investing approach first and foremost. If you are of a certain age, I recommend that those dates inform yours as well.
Is anyone else in awe of what American ingenuity has done to disrupt the world's energy market? Recall the state of things just 15 short years ago. Saddam Hussein had the power to choke the Straits of Hormuz through which sailed 20% of the world's oil supply each and every day. Truth be told, this threat was what really motivated the second Iraq war because the US was wholly incapable of supplying its own energy needs. Segue to today. Thanks to the emergence of new technology, most notably advances in fracking, the US is on the doorstep of energy independence and now sits as the world's swing producer. Today, if OPEC and Russia try to limit production, the gap is easily filled by frackers in the US. By July, US production of crude will exceed 10million/bbls/day, half again as much as it was in 2003-2004. And the sky is the limit as the cost of domestic production continues to drop. Even major international producers such as Shell are investing in Texas oil fields which lay abandoned just a few short years ago. I like pipelines in this space and am looking for a price dip in FEI or FPL before reinitiating positions.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
With the major indices near all time highs, stable interest rates, improved earnings and the lowest volatility index (VIX) reading since 1993, shouldn't passive investors declare victory and drop the mike? After all virtually no active manager has outperformed the indices since the recovery began in 2010. Just let the chips ride forever. Right? Well, not according to the leading hedge fund managers who congregated earlier this week in New York for the annual Sohn Investment Conference. This is a great gathering, and I have written about it in the past. (See Vols. 220 and 306 www.riskrewardblog.blogspot.com) Comments from two of my favorites, Kevin Warsh, the former Federal Reserve official and Bond King Jeffrey Gundlach are worth noting. Warsh criticized the Fed for being too responsive to Mr. Market and advocated that it take a longer, more objective view of its role. Specifically, Warsh warned that the Fed's accommodative policies have left it with little to no powder should the economy nose dive again. Gundlach was more specific--- and more negative. He advocated shorting the S&P 500 which he views as extremely overvalued by any measure including CAPE about which I wrote last week.
So do I believe the markets will undergo a major correction any time soon? I doubt it for one reason: There Is No Alternative a/k/a the TINA factor. (See Vols. 164, 201, 250 and 253) Really, where else would any investor put his/hers/their money right now? Short term bonds provide virtually no return, and longer term debt is very risky considering the lack of liquidity (no market makers) about which I have also written in the past. No one can be criticized for adopting an all-in, equity index strategy given our recent history. That stated, only a fool would do so without giving some consideration to an exit. Sell in May and go away? Probably not. But never sell? Eek. Stated alternatively, it would be a shame if anyone rode his/her well deserved gains down the drain if and when a correction occurred. What to do? Well, how about practicing---just in case. Let me ask: how many of you have ever sold a stock for a gain? Not for a loss, for a gain. I bet very few. So do me a favor. Pick a big winner, hopefully held in a tax deferred account (e.g. 401k or IRA) and sell it next week. You can buy it back the next day, but sell it. Doing so will familiarize you with the mechanics of a sale and will help overcome the mental block that I am sure most if not all of you have about selling a winner. I do it all the time. Admittedly, I am a nut. But I will not be caught flat footed by what happened in 2000 or 2008. No way, no how. And it is what happened then that informs my investing approach first and foremost. If you are of a certain age, I recommend that those dates inform yours as well.
Is anyone else in awe of what American ingenuity has done to disrupt the world's energy market? Recall the state of things just 15 short years ago. Saddam Hussein had the power to choke the Straits of Hormuz through which sailed 20% of the world's oil supply each and every day. Truth be told, this threat was what really motivated the second Iraq war because the US was wholly incapable of supplying its own energy needs. Segue to today. Thanks to the emergence of new technology, most notably advances in fracking, the US is on the doorstep of energy independence and now sits as the world's swing producer. Today, if OPEC and Russia try to limit production, the gap is easily filled by frackers in the US. By July, US production of crude will exceed 10million/bbls/day, half again as much as it was in 2003-2004. And the sky is the limit as the cost of domestic production continues to drop. Even major international producers such as Shell are investing in Texas oil fields which lay abandoned just a few short years ago. I like pipelines in this space and am looking for a price dip in FEI or FPL before reinitiating positions.
Sunday, May 7, 2017
May 7, 2017 Vive La France
Risk/Reward Vol. 350
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
We are back from France. Here is our report. By the time you read this edition, France will have elected a new president. What a choice: a nationalist wing nut or a feckless bureaucrat. Sound familiar. As for France's economy, it is in the toilet. One of its major industries, tourism, experienced a disappointing 2016 and from what we could see, 2017 will not fare better. Labor unions are restless. And most importantly, like the rest of Europe, France is facing a demographic time bomb. That stated, the country is beautiful. Plus, the French eat, drink and love better than any people on earth. They truly embody "joie de vivre." So what do they care? Indeed, if I didn't have 4 wonderful daughters, 4 great sons in law and 9, soon to be 10, grandchildren stateside, I would spend all my energy convincing my bride to move to Provence. And it would not take much convincing.
In our absence, the markets did well. Perhaps a little too well according to the Shiller Cyclically Adjusted Price Earnings Ratio or CAPE which measures relative historic stock valuations. CAPE is at a near record high; a level not seen since 2004. Traditionally, this signals overvaluation. Indeed, despite an anemic 0.7% growth in GDP in the first quarter, year to date the Dow Jones Industrial Average is up over 6%, the S&P 500 is up over 7% and the NASDAQ (about which I report little) is up 13%. Why don't I spend more time with NASDAQ? The answer is simple. It is tech heavy, and as a rule tech stocks do not pay dividends. To me, dividends are the mother's milk of investing. Speaking of dividends, I did not miss any, even though I was out of the market for two weeks. Several of my favorite monthly payers are scheduled to go ex-dividend next week As a consequence, I started repurchasing. Unfortunately, some of the preferred closed end funds that I fancy now trade above their net asset value so they were off limits to me. All of these repurchased positions are interest rate sensitive so I waited until after the Fed's meeting this week (where it stood pat on rates) before buying. The likelihood of a June increase is pegged at 80% according to the futures market. This is now priced into the market and accordingly has caused the rate on the all important US Treasury 10 Year Bond to rise above 2.35%. Through June, I anticipate that the 10Year rate will stabilize where it now resides with only a slight upward bias.
Hands down, the most thoughtful interest rate commentator today is Jim Grant, publisher of Grant's Interest Rate Observer. He holds more sway with me than either Jeffrey Gundlach or Bill Gross the current and former Bond Kings. Unfortunately, Grant's publication is extremely expensive. But good news! Grant's son and colleague, Phil Grant, now publishes an almost daily blog appropriately entitled "Almost Daily Grant's." You can have it sent to you via email by simply subscribing free of charge. The posts do not contain in depth analysis, but they do provide a glimpse into what the Grants believe the future holds for interest rates. Moreover, their principled criticism of the Fed is worth the read alone.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
We are back from France. Here is our report. By the time you read this edition, France will have elected a new president. What a choice: a nationalist wing nut or a feckless bureaucrat. Sound familiar. As for France's economy, it is in the toilet. One of its major industries, tourism, experienced a disappointing 2016 and from what we could see, 2017 will not fare better. Labor unions are restless. And most importantly, like the rest of Europe, France is facing a demographic time bomb. That stated, the country is beautiful. Plus, the French eat, drink and love better than any people on earth. They truly embody "joie de vivre." So what do they care? Indeed, if I didn't have 4 wonderful daughters, 4 great sons in law and 9, soon to be 10, grandchildren stateside, I would spend all my energy convincing my bride to move to Provence. And it would not take much convincing.
In our absence, the markets did well. Perhaps a little too well according to the Shiller Cyclically Adjusted Price Earnings Ratio or CAPE which measures relative historic stock valuations. CAPE is at a near record high; a level not seen since 2004. Traditionally, this signals overvaluation. Indeed, despite an anemic 0.7% growth in GDP in the first quarter, year to date the Dow Jones Industrial Average is up over 6%, the S&P 500 is up over 7% and the NASDAQ (about which I report little) is up 13%. Why don't I spend more time with NASDAQ? The answer is simple. It is tech heavy, and as a rule tech stocks do not pay dividends. To me, dividends are the mother's milk of investing. Speaking of dividends, I did not miss any, even though I was out of the market for two weeks. Several of my favorite monthly payers are scheduled to go ex-dividend next week As a consequence, I started repurchasing. Unfortunately, some of the preferred closed end funds that I fancy now trade above their net asset value so they were off limits to me. All of these repurchased positions are interest rate sensitive so I waited until after the Fed's meeting this week (where it stood pat on rates) before buying. The likelihood of a June increase is pegged at 80% according to the futures market. This is now priced into the market and accordingly has caused the rate on the all important US Treasury 10 Year Bond to rise above 2.35%. Through June, I anticipate that the 10Year rate will stabilize where it now resides with only a slight upward bias.
Hands down, the most thoughtful interest rate commentator today is Jim Grant, publisher of Grant's Interest Rate Observer. He holds more sway with me than either Jeffrey Gundlach or Bill Gross the current and former Bond Kings. Unfortunately, Grant's publication is extremely expensive. But good news! Grant's son and colleague, Phil Grant, now publishes an almost daily blog appropriately entitled "Almost Daily Grant's." You can have it sent to you via email by simply subscribing free of charge. The posts do not contain in depth analysis, but they do provide a glimpse into what the Grants believe the future holds for interest rates. Moreover, their principled criticism of the Fed is worth the read alone.
Sunday, April 23, 2017
April 23, 2017 Exit
Risk/Reward Vol. 349
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
You don't have to be a Mensa member to notice that over the past several days the yield on the all important US Ten Year Treasury Bond has come to rest below 2.25%. Why has the bond market rallied recently? (Remember the value of bonds increases as the yield declines.) Is it a flight to safety occasioned by the uncertainties surrounding North Korea and the French presidential election? Perhaps. But more likely, it is due to Mrs. Bond's continued skepticism first reported at Vol. 341 (www.riskrewardblog.blogspot.com) that The Donald cannot deliver on his promised 3-4% growth in gross domestic product. This is the opinion of John Authers, senior commentator for the Financial Times, Guggenheim Partners' Scott Minerd and JPMorgan's Nick Gartside, all significant bond market thought leaders. Oh, and it is also this writer's opinion. This point notwithstanding, I do not see the yield on the 10Year decreasing much over the next few weeks.
So what does the above mean to me? It means that given my upcoming overseas assignment (see below), I am exiting the market once again. Allow me to explain why.
First let's recap my overall approach. As I wrote in Vol 343:
"I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity (the 10 Year) with movement by that singularity providing clarity on when to buy, hold or sell. I submit that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can achieve a 6% return with minimal risk. I do not buy the 10Year. Instead, I buy higher yielding securities that are very closely correlated to the 10Year. For example, through study and observation, I know that highly regarded preferred stocks maintain a roughly 320 basis point (3.2%) spread to the yield on the 10Year. Thus if the yield on the 10 Year remains stable at 2.5% one can achieve a 5.7% return by merely holding a basket of highly rated preferred stocks (such as found in the exchange traded fund PGX) and collecting dividends. If the yield on the 10 Year declines, in time, the yield on these preferred stocks will also decline ultimately reaching equilibrium at the aforementioned 320 bp spread. As a result, an investor will enjoy a capital gain. (Remember the price of an interest rate sensitive security increases as the yield declines.) If the yield on the 10Year increases or one reasonably can anticipate such an increase, one sells thereby retaining any accrued dividends and reaping the aforementioned capital gain. One then waits on the sidelines, safe and sound in cash, until stability returns to the 10Year and hopefully ahead of preferred stock equilibrium."
Next, remember that I most recently re-entered the market (March 16, 2017) when the yield on the 10Year was at or near 2.6%. So, as of the end of this past week, I saw a decent capital gain. Moreover, since I buy mostly monthly payers, I had already captured April's dividend. Lastly, as noted above, I do not foresee any more near term downward movement in the 10Year yield. So at a mere $7 a position in transaction costs, why not capture the gain, sit in cash for a while and enjoy my days in Provence sans souci (translated "without worries"). Given my approach, this was a no brainer. Moreover, exiting the small positions I have in the oil patch also made sense given the bad vibes emanating from that sector recently. (e.g. anxiety arising from the upcoming OPEC meeting)
Did you also notice that Black Rock now has $5.4trillion in assets under management (AUM)? Did you further notice, that most of its recent growth has been in low cost, low margin passive investment vehicles such as exchange traded funds? The proliferation of passive investment is the most significant event in recent times in the world of asset management. It also raises some interesting questions. All is fine and dandy so long as the indices do well, but what happens if and when they correct? Will all those index investors sink at the same time given there is no active manager to intercede? And what about the fact that the three largest asset management groups (Black Rock, Vanguard and Fidelity) now control over $11trillion. This is stunning considering that the total amount of AUM in the US is only $18trillion and the total worldwide is $78trillion. Talk about market power. Let's just say I am glad I manage most of my own money and maintain the above described flexibility.
As noted, Barb and I leave today on assignment to Provence. We will be assessing the impact of the French presidential election up-close and first hand. This is a sacrifice, we know, but it should be of benefit to you, our Readers. And that is all that matters to us. So, a bientot.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
You don't have to be a Mensa member to notice that over the past several days the yield on the all important US Ten Year Treasury Bond has come to rest below 2.25%. Why has the bond market rallied recently? (Remember the value of bonds increases as the yield declines.) Is it a flight to safety occasioned by the uncertainties surrounding North Korea and the French presidential election? Perhaps. But more likely, it is due to Mrs. Bond's continued skepticism first reported at Vol. 341 (www.riskrewardblog.blogspot.com) that The Donald cannot deliver on his promised 3-4% growth in gross domestic product. This is the opinion of John Authers, senior commentator for the Financial Times, Guggenheim Partners' Scott Minerd and JPMorgan's Nick Gartside, all significant bond market thought leaders. Oh, and it is also this writer's opinion. This point notwithstanding, I do not see the yield on the 10Year decreasing much over the next few weeks.
So what does the above mean to me? It means that given my upcoming overseas assignment (see below), I am exiting the market once again. Allow me to explain why.
First let's recap my overall approach. As I wrote in Vol 343:
"I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity (the 10 Year) with movement by that singularity providing clarity on when to buy, hold or sell. I submit that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can achieve a 6% return with minimal risk. I do not buy the 10Year. Instead, I buy higher yielding securities that are very closely correlated to the 10Year. For example, through study and observation, I know that highly regarded preferred stocks maintain a roughly 320 basis point (3.2%) spread to the yield on the 10Year. Thus if the yield on the 10 Year remains stable at 2.5% one can achieve a 5.7% return by merely holding a basket of highly rated preferred stocks (such as found in the exchange traded fund PGX) and collecting dividends. If the yield on the 10 Year declines, in time, the yield on these preferred stocks will also decline ultimately reaching equilibrium at the aforementioned 320 bp spread. As a result, an investor will enjoy a capital gain. (Remember the price of an interest rate sensitive security increases as the yield declines.) If the yield on the 10Year increases or one reasonably can anticipate such an increase, one sells thereby retaining any accrued dividends and reaping the aforementioned capital gain. One then waits on the sidelines, safe and sound in cash, until stability returns to the 10Year and hopefully ahead of preferred stock equilibrium."
Next, remember that I most recently re-entered the market (March 16, 2017) when the yield on the 10Year was at or near 2.6%. So, as of the end of this past week, I saw a decent capital gain. Moreover, since I buy mostly monthly payers, I had already captured April's dividend. Lastly, as noted above, I do not foresee any more near term downward movement in the 10Year yield. So at a mere $7 a position in transaction costs, why not capture the gain, sit in cash for a while and enjoy my days in Provence sans souci (translated "without worries"). Given my approach, this was a no brainer. Moreover, exiting the small positions I have in the oil patch also made sense given the bad vibes emanating from that sector recently. (e.g. anxiety arising from the upcoming OPEC meeting)
Did you also notice that Black Rock now has $5.4trillion in assets under management (AUM)? Did you further notice, that most of its recent growth has been in low cost, low margin passive investment vehicles such as exchange traded funds? The proliferation of passive investment is the most significant event in recent times in the world of asset management. It also raises some interesting questions. All is fine and dandy so long as the indices do well, but what happens if and when they correct? Will all those index investors sink at the same time given there is no active manager to intercede? And what about the fact that the three largest asset management groups (Black Rock, Vanguard and Fidelity) now control over $11trillion. This is stunning considering that the total amount of AUM in the US is only $18trillion and the total worldwide is $78trillion. Talk about market power. Let's just say I am glad I manage most of my own money and maintain the above described flexibility.
As noted, Barb and I leave today on assignment to Provence. We will be assessing the impact of the French presidential election up-close and first hand. This is a sacrifice, we know, but it should be of benefit to you, our Readers. And that is all that matters to us. So, a bientot.
Sunday, April 16, 2017
April 16, 2017 Gundlach Predicts
Risk/Reward Vol. 348
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
A spate of selling on Thursday brought the S&P 500 and the Dow Jones Industrial Average to their lowest close in two months. Whether the cause was the "Mother of All Bombs", the threat of another North Korean nuclear test or market fatigue in general is unclear. However, I see no reason for panic. Both indices are up over 3.5% year to date and continue to trade in a tight range. To me, the more interesting story is the yield on the US Ten Year Treasury Bond ("10Year"). On Thursday, the yield crept below 2.28% for the first time since November. At the same time, the spread between the 2Year Bond and the 10Year shrunk to a 5 month low. What this tells rate watchers like me is that Mrs. Bond expects a rise in short term rates but does not see significant economic growth in the medium or longer run---and certainly not growth in the 3-4% range touted by The Donald. This is consistent with my personal opinion (see Vol. 338 http://www.riskrewardblog.blogspot.com/ ) and my investment approach. Not surprisingly, my interest rate sensitive holdings did well this week.
Those who pay attention to interest rates also pay attention to the musings of the reigning Bond King, Jeffrey Gundlach. Far from shy and retiring, Mr. Gundlach shares his thoughts during periodic webcasts, replays of which are available online. During his most recent webcast (April 4th), Gundlach predicted that the yield on the 10Year will dip below 2.25% in the short term. He foresees rates increasing in the back half of the year, but does not see the 10Year hitting 3% in 2017. Gundlach predicts a bear bond market if the yield rises to that number. As noted in an earlier edition, erstwhile Bond King, Bill Gross, sees the bear bond market tipping point at any rate above 2.6% on a consistent basis. Personally, I am in Gross' camp on this one. Further, given the capital appreciation I have achieved recently, I plan on exiting my bond -like portfolio if and rilwhen a move toward 2.6% is confirmed.
Oil prices rose seven straight days before taking a breather at week's end. This win streak was the longest in the oil patch since 2012. News from OPEC that its members were likely to extend their production cut for another 6 months plus news that domestic oil supplies had shrunk contributed to the price increases. I was so encouraged I bought BP and Shell (RDS/B). My one disappointment this past week was HCLP which took back much of my double digit gains---for reasons which remain unexplained. Indeed, early in the week HCLP received some positive commentary so its tumble late in the week came as a surprise. This is one of the major downsides to investing in a stock that is not widely followed or covered. I remain in the green on both of my HCLP positions. I will not tolerate any movement into the red.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
A spate of selling on Thursday brought the S&P 500 and the Dow Jones Industrial Average to their lowest close in two months. Whether the cause was the "Mother of All Bombs", the threat of another North Korean nuclear test or market fatigue in general is unclear. However, I see no reason for panic. Both indices are up over 3.5% year to date and continue to trade in a tight range. To me, the more interesting story is the yield on the US Ten Year Treasury Bond ("10Year"). On Thursday, the yield crept below 2.28% for the first time since November. At the same time, the spread between the 2Year Bond and the 10Year shrunk to a 5 month low. What this tells rate watchers like me is that Mrs. Bond expects a rise in short term rates but does not see significant economic growth in the medium or longer run---and certainly not growth in the 3-4% range touted by The Donald. This is consistent with my personal opinion (see Vol. 338 http://www.riskrewardblog.blogspot.com/ ) and my investment approach. Not surprisingly, my interest rate sensitive holdings did well this week.
Those who pay attention to interest rates also pay attention to the musings of the reigning Bond King, Jeffrey Gundlach. Far from shy and retiring, Mr. Gundlach shares his thoughts during periodic webcasts, replays of which are available online. During his most recent webcast (April 4th), Gundlach predicted that the yield on the 10Year will dip below 2.25% in the short term. He foresees rates increasing in the back half of the year, but does not see the 10Year hitting 3% in 2017. Gundlach predicts a bear bond market if the yield rises to that number. As noted in an earlier edition, erstwhile Bond King, Bill Gross, sees the bear bond market tipping point at any rate above 2.6% on a consistent basis. Personally, I am in Gross' camp on this one. Further, given the capital appreciation I have achieved recently, I plan on exiting my bond -like portfolio if and rilwhen a move toward 2.6% is confirmed.
Oil prices rose seven straight days before taking a breather at week's end. This win streak was the longest in the oil patch since 2012. News from OPEC that its members were likely to extend their production cut for another 6 months plus news that domestic oil supplies had shrunk contributed to the price increases. I was so encouraged I bought BP and Shell (RDS/B). My one disappointment this past week was HCLP which took back much of my double digit gains---for reasons which remain unexplained. Indeed, early in the week HCLP received some positive commentary so its tumble late in the week came as a surprise. This is one of the major downsides to investing in a stock that is not widely followed or covered. I remain in the green on both of my HCLP positions. I will not tolerate any movement into the red.
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