Risk/Reward Vol. 338
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Where to begin? Week one of the The Donald's Presidency has produced a plethora of executive orders. Obviously, they pleased Mr. Market. The Dow Jones Industrial Average crashed through the 20,000 barrier above which it now comfortably sits. The S&P 500 continues to flirt with 2300 and the NASAQ is at nose bleed levels. So is this steady march upward sustainable? Currently, the major indices are trading at 21 times trailing twelve months' earnings---high by historic standards but not as frothy as in 1999 when they were at 24x. That said, in the end, it is corporate profits that drive stock prices. And corporate profits are dependent upon economic growth. On Friday, the US Bureau of Economic Analysis reported that the nation's gross domestic product grew at an annualized rate of only 1.6% in the fourth quarter and only at 1.9% for the entirety of 2016. This is a far cry from the 4% growth envisioned by President Trump. Indeed, the US has not seen even 3% in GDP growth (which is our post WWII average) since 2005 and last experienced 4% in 2000.
If we are to reach The Donald's desired level of GDP growth, it will be for reasons different from what has fueled growth in the past. Mr. Market's recent euphoria notwithstanding, we, as a society, still face a demographic cliff about which Harry Dent has written extensively. See Vol. 218 http://www.riskrewardblog.blogspot.com/
. Our home grown population is aging and shrinking, and no country in the history of mankind has experienced economic growth during a time of declining population. Is immigration, legal or illegal, the answer? Are trade wars, where we beggar our neighbors, the solution? Who knows? But no one can doubt that the middle and upper classes are not reproducing. Look around. Thursday evening, Barb and I (and an entire airplane) were "treated" to a family of seven returning from Florida. Their obnoxious behavior aside, what struck me is that one almost never sees a husband and wife and five children. When I was young such families were commonplace. Most Catholic families had five children at a minimum and Protestants and Jews had three. This observation prompted me to research the enrollment of my old school district, the Metropolitan School District of Washington Township, Marion County, Indiana. Despite affirmatively recruiting from other districts, Washington Township today has only 11,300 students in K-12. That is an average of less than 1000 students per class. My graduating high school class of 1969 was the smallest of those attending school at the time and numbered well over 1100. Assuming the average then to be 1250 per class (low I bet), the enrollment would have been 15,000 or so, a 33% increase over today's number. How does an economy grow when schools are being shuttered?
Not surprisingly, Dow 20,000 came, in part, at the expense of the bond market as many participants continued to rotate out of debt and into equities. The yield on the all important (to me at least) 10 Year US Treasury Bond again flirted with 2.5%, but encountered resistance at that level. I have no doubt that there will be several more foray's into that territory if the stock market continues to rise. Those foray's alone will not cause me to sell, however. My interest rate sensitive portfolio was purchased at very favorable prices when the "spread" between the yield on the 10Year and that available from my favories was wider than normal. Thus, I have a cushion well above 2.5%. My concern is not if the rate on the 10Year rises above 2.5%, but rather the velocity of that rise and whether it portends sustained rates above 2.75%. If so, I will harvest profits and reenter only when prices reset
Sunday, January 29, 2017
Sunday, January 22, 2017
January 22, 2017 Volume
Risk/Reward Vol. 337
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And so it begins. Who would have thought that The Donald would be the 45th President of the United States? Whatever his presidency may be, it surely will be different. And that, Dear Readers, is as political as I will get.
Lost in the week's hullaballoo was the action in the bond pits. The rate on the all important US Treasury 10Year Bond jumped to nearly 2.5% following news that inflation in December, as measured by CPI, had reached 0.3% for the month and 2.1% year over year. This development prompted many to sell bonds in the belief that inflation in 2017 will accelerate forcing the Fed to raise short term interest rates 4 times as opposed to 3 times which heretofore has been the consensus view. I remain convinced that other forces (such as the paltry rates available overseas) will moderate domestic bond yields and thus took the opportunity to add to several bond related positions.
As loyal readers know, my bond related positions include several preferred stocks and preferred stock closed end funds. My fascination with these investment vehicles has prompted some to ask why their investment advisors do not buy them---indeed why they are rarely if ever discussed. The answer is simple----volume. If you Google "Wall Street Journal Preferred Stock Closing Table" and "CEFConnect" you will see that many of the names that I own trade, on average, 25,000 shares or less daily. I typically buy in lots of 1000 and rarely accumulate more than a few thousand shares of any issue. Why? Because I do not want to impact the price and buying or selling more than 1000 shares at a time can have an impact. Now imagine you are a money manager entrusted with 50 accounts. Even if one believed that preferred stocks 337otherwise made sense for one's clients, one could not buy 50 positions at a time without massively disrupting if not manipulating any given stock's market. So unless you, as an individual investor, order such a purchase it will not happen. Remember, money managers are under great pressure to treat their clients equally. Indeed, for a host of reasons it is more important for them to be consistent than to be right. This is not a criticism, but it is a fact.
The domestic oil and gas rig count continues to increase. It now numbers 694 compared with 480 in March, 2016. This is a testament to American ingenuity, a national trait that was sorely underestimated by Saudi Arabia when it began flooding the market with oil in 2014. At the time, conventional wisdom was that US frackers needed $60/bbl. in order to break even. That may have been true in 2014, but by 2017 advances in technology have reduced the break even to $40/bbl. with some producers capable of profiting at $30/bbl. In addition new fracking "cocktails" (mixture of water, sand and pressure) have resulted in each well producing 40% more oil than in 2014. I see opportunity in oil/gas in 2017 and recently have added to my holdings in KYN and JMF.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And so it begins. Who would have thought that The Donald would be the 45th President of the United States? Whatever his presidency may be, it surely will be different. And that, Dear Readers, is as political as I will get.
Lost in the week's hullaballoo was the action in the bond pits. The rate on the all important US Treasury 10Year Bond jumped to nearly 2.5% following news that inflation in December, as measured by CPI, had reached 0.3% for the month and 2.1% year over year. This development prompted many to sell bonds in the belief that inflation in 2017 will accelerate forcing the Fed to raise short term interest rates 4 times as opposed to 3 times which heretofore has been the consensus view. I remain convinced that other forces (such as the paltry rates available overseas) will moderate domestic bond yields and thus took the opportunity to add to several bond related positions.
As loyal readers know, my bond related positions include several preferred stocks and preferred stock closed end funds. My fascination with these investment vehicles has prompted some to ask why their investment advisors do not buy them---indeed why they are rarely if ever discussed. The answer is simple----volume. If you Google "Wall Street Journal Preferred Stock Closing Table" and "CEFConnect" you will see that many of the names that I own trade, on average, 25,000 shares or less daily. I typically buy in lots of 1000 and rarely accumulate more than a few thousand shares of any issue. Why? Because I do not want to impact the price and buying or selling more than 1000 shares at a time can have an impact. Now imagine you are a money manager entrusted with 50 accounts. Even if one believed that preferred stocks 337otherwise made sense for one's clients, one could not buy 50 positions at a time without massively disrupting if not manipulating any given stock's market. So unless you, as an individual investor, order such a purchase it will not happen. Remember, money managers are under great pressure to treat their clients equally. Indeed, for a host of reasons it is more important for them to be consistent than to be right. This is not a criticism, but it is a fact.
The domestic oil and gas rig count continues to increase. It now numbers 694 compared with 480 in March, 2016. This is a testament to American ingenuity, a national trait that was sorely underestimated by Saudi Arabia when it began flooding the market with oil in 2014. At the time, conventional wisdom was that US frackers needed $60/bbl. in order to break even. That may have been true in 2014, but by 2017 advances in technology have reduced the break even to $40/bbl. with some producers capable of profiting at $30/bbl. In addition new fracking "cocktails" (mixture of water, sand and pressure) have resulted in each well producing 40% more oil than in 2014. I see opportunity in oil/gas in 2017 and recently have added to my holdings in KYN and JMF.
Sunday, January 15, 2017
January 15, 2017 Rationale
Risk/Reward Vol. 336
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In Vol. 333 http://www.riskrewardblog.blogspot.com/ I explained my rationale for re-entering the market in mid December. In a nutshell, the decision was based upon the meteoric yield increase on the US Treasury 10 Year Bond; from 1.3% in July to 1.8% on election day to 2.6% on December 7th. I also outlined the reasons why I believed the rotation out of bonds and into equities would slow. I predicted that the rate on the 10Year would stabilize and remain stable for the foreseeable future. In the ensuing month, the rotation has not only slowed, it has reverse albeit marginally. Whether this reversal is a result of the outsized spread in yields between the 10Year and every other sovereign security available (especially the German bund) or simply reflective of a technical resistance to breaching Dow 20,000 is of no moment to me. The fact is that bond yields have fallen.
So how does this affect me? Remember, although I do not own a lot of bonds, I invest and trade in securities that are priced in relation to the 10Year, most notably preferred stocks and preferred stock closed end funds. Based upon several years of study, if the spread on the yield between an investment grade preferred and the 10Year exceeds 350 basis points and the price of the preferred falls below its redemption value (typically $25) it signals a "buy". Another buy signal for me is when the rate on the 10Year experiences a spike as occurred during the 2013 Taper Tantrum (see Vols. 211 and 172) and again recently after the election. It is a fact, that from time to time, Mr. Market is overly exuberant in rotating out of one asset (e.g. bonds) and into another (e.g. stocks); a situation I perceived existed with the Trump rally and the incredible, one month, 44% rise in the 10Year yield. With the yield on the 10Year currently at or below 2.4%, I am up over 3% on the portfolio that I purchased after December 19th. (Remember as yields fall, prices increase.) That portfolio averages over 6.5% in annual dividends. I am still 50% in cash, but will deploy more if stability persists.
The above notwithstanding, we live in interesting times. No one predicted the Trump Rally. And no one is offering predictions for 2017. The closest to a prediction that I have read is contained in Bill Gross's January Investment Outlook. It is available on Janus Capital Group's website and I recommend it to your attention. Therein he posits the question that addresses, foursquare, my concern: are equities over priced and bonds over yielded? He concludes that the stock market and bond yields are currently priced in anticipation of a 3% growth in gross domestic product this year, a number he does not believe is achievable. That said, he warns that if he is wrong and the yield on the 10Year exceeds 2.6% it could signal a bond bear market, something we have not experienced in 30 years. If I perceive that happening, I will be out of my bond correlated portfolio before you can say----.
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