Risk/Reward Vol. 342
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Eleven straight days of record highs for the Dow Jones Industrial Average. It sounds like a broken record---but one stuck on a very pleasing note . Both major indices are up nearly 5.5% year to date. This week's impetus was a statement by Treasury Secretary Mnuchin that he foresees a very significant tax reform package from Congress before it recesses in August. Will the Trump Rally last? Should one buy? Hold? Sell? How is one to know?
I spent time with a subscriber this week who is in search of answers to these questions. He hopes to find them in technical analysis. Technical analysis is a method of forecasting the direction of future prices through the study of past market data, primarily price and volume. In its simplest from, it looks for signals to buy, hold or sell from historical stock charts. Technical analysis is available to anyone with a computer these days. Allow me to illustrate. One classic technical trading strategy is to track both the 20 day and the 200 day simple moving averages of a stock or exchange traded fund. One buys when the 20 crosses above the 200 and sells when it falls below. So open up Google Finance, type in SPY (the exchange trade fund for the S&P 500), adjust it to show the past 10years and add the 20 and 200 simple moving averages from the "technical" section. Voila. Note that had one followed this simple rule, one would have sold before the major dip in 2008 and would have brought back in mid 2010. In other words, one would have averted a major loss and would have reaped most of the gain achieved over the past seven years. Not bad.
As you know, I find my buy/hold/sell signals from movement in the 10 Year US Treasury Bond. This week, movement in the 10Year was influenced by the release of Fed's February meeting minutes. Phrases in the minutes such as "participants generally indicated that their economic forecasts had changed little since the December FOMC meeting" and rate increases could occur "fairly soon" led a consensus of Fed watchers to conclude that the odds of a rate hike in March are unlikely (30%), and that no more than three hikes can be expected this year. As a consequence, the yield on the 10Year came to rest at 2.315%, decidedly lower than last week. Concomitantly, my portfolio which is dominated by bond-like, interest rate sensitive securities (preferred stocks, preferred stock closed end funds, REIT's, etc.) rose this week. (Remember as interest rates decrease the prices of bonds and bond-like securities increase.)
No matter what strategy you follow, remember Warren Buffett's two rules of investing: #1 Never lose money; and #2 Never forget Rule #1. The importance of minimizing loss by selling losers sooner rather than later is stressed by every investing guru from William O'Neill (8% loss limit) to Chuck Hughes (5% loss limit) to all of the Market Wizards profiled by Jack Schwager (see Vol. 243 Riskrewardblog ). Yet, I bet almost everyone reading this email rode his/her stocks all the way to the floor during the crash of 2008-2009. If I am wrong please email me immediately. Why did you suffer those 25-40% losses? If it was inertia---that is a terrible reason. If it was adherence to a buy and hold strategy I suggest you rethink it---especially if you are a senior citizen such as yours truly. The next time you may not have the luxury of time to recover.
I read Warren Buffett's letter to his shareholders this weekend. Google and read it. As always, it is time well spent.
Sunday, February 26, 2017
Sunday, February 19, 2017
February 19, 2017 Authers
Risk/Reward Vol. 341
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Clearly, Mr. Market does not read the papers or watch the news. If he did, he would conclude that the current Administration is out of control and that we are heading, full throttle over a cliff. In such times, why would any rational investor up his/her stake? And yet, the Trump rally continues with the week ending on record highs. Why? Promised tax reform? Yes--- as discussed below. Deregulation? Most certainly. Look at bank stocks. With the promise and reality of relief from the Dodd-Frank Act, bank stocks as a group are up 27% since the election. Coal companies are back from the brink of bankruptcy now that executive orders neutralizing those of Obama have been signed. And master limited partnerships are doing well in a world that welcomes Keystone XL, Dakota and other major pipeline projects.
As for Mrs. Bond, she obviously reads the news, but does so with a healthy dose of skepticism. Fed Chair Janet Yellen took a decidedly hawkish tone this week in her testimony to Congress. She stated that a rate increase will be under consideration in March. Almost immediately the rate on the all important US 10 Treasury Bond rose to 2.5%. But by week's end, Mrs. Bond had digested other, less hawkish parts of Ms. Yellen's testimony including her statement that the Fed's bloated balance sheet will not be reduced any time soon. By Friday's close, the 10Year rate settled at 2.42% almost exactly where it had begun the week. My interest rate sensitive portfolio lost some ground following Yellen's testimony. That said, the stocks comprising it tend to lag movements in the 10Year so I look for them to recover next week.
So why is the bond market so stable while the stock market continues to rise? After all, the Trump rally immediately following his election saw the stock market gain at the expense of the bond market. Last November the rate on the Ten Year spiked from 1.8% to over 2.5% almost overnight. If the current rate stability is of interest to you (and it certainly is to me) I suggest you read John Authers' well reasoned article published in yesterday's Financial Times. It is available free of charge via a Google search. Authers submits that the two markets reflect opposite bets on the amount of tax and spending stimulus that Trump will be able to get from Congress. The stock market is betting a lot; the bond market not so much. I am with Mrs. Bond, at least in the short run. The next few months should be interesting. There will be winners, and there will be losers, at least according to Authers.
Stocks in the oil patch took a hit this week on news that gasoline consumption in the US fell to 8.2million barrels per day in January, a 4.4% year over year decline, and that a record 259million barrels remain in storage. Despite this, the domestic oil rig count grew to 597 last week, a major increase since this summer but still well below the 1609 oil rigs that were operating domestically in October 2014. Who would have thought just a few years ago that we would be talking about an oil glut? Thanks to fracking no one ever hears the phrase "peak oil" anymore. American ingenuity is marvelous.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Clearly, Mr. Market does not read the papers or watch the news. If he did, he would conclude that the current Administration is out of control and that we are heading, full throttle over a cliff. In such times, why would any rational investor up his/her stake? And yet, the Trump rally continues with the week ending on record highs. Why? Promised tax reform? Yes--- as discussed below. Deregulation? Most certainly. Look at bank stocks. With the promise and reality of relief from the Dodd-Frank Act, bank stocks as a group are up 27% since the election. Coal companies are back from the brink of bankruptcy now that executive orders neutralizing those of Obama have been signed. And master limited partnerships are doing well in a world that welcomes Keystone XL, Dakota and other major pipeline projects.
As for Mrs. Bond, she obviously reads the news, but does so with a healthy dose of skepticism. Fed Chair Janet Yellen took a decidedly hawkish tone this week in her testimony to Congress. She stated that a rate increase will be under consideration in March. Almost immediately the rate on the all important US 10 Treasury Bond rose to 2.5%. But by week's end, Mrs. Bond had digested other, less hawkish parts of Ms. Yellen's testimony including her statement that the Fed's bloated balance sheet will not be reduced any time soon. By Friday's close, the 10Year rate settled at 2.42% almost exactly where it had begun the week. My interest rate sensitive portfolio lost some ground following Yellen's testimony. That said, the stocks comprising it tend to lag movements in the 10Year so I look for them to recover next week.
So why is the bond market so stable while the stock market continues to rise? After all, the Trump rally immediately following his election saw the stock market gain at the expense of the bond market. Last November the rate on the Ten Year spiked from 1.8% to over 2.5% almost overnight. If the current rate stability is of interest to you (and it certainly is to me) I suggest you read John Authers' well reasoned article published in yesterday's Financial Times. It is available free of charge via a Google search. Authers submits that the two markets reflect opposite bets on the amount of tax and spending stimulus that Trump will be able to get from Congress. The stock market is betting a lot; the bond market not so much. I am with Mrs. Bond, at least in the short run. The next few months should be interesting. There will be winners, and there will be losers, at least according to Authers.
Stocks in the oil patch took a hit this week on news that gasoline consumption in the US fell to 8.2million barrels per day in January, a 4.4% year over year decline, and that a record 259million barrels remain in storage. Despite this, the domestic oil rig count grew to 597 last week, a major increase since this summer but still well below the 1609 oil rigs that were operating domestically in October 2014. Who would have thought just a few years ago that we would be talking about an oil glut? Thanks to fracking no one ever hears the phrase "peak oil" anymore. American ingenuity is marvelous.
Sunday, February 12, 2017
February 12, 2017 Aging
Risk/Reward Vol. 340
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What a week for firsts. For the first time on Friday, on the strength of The Donald's promised tax cut, the Dow Jones Industrial Average closed at 20,269, the S&P 500 at 2316 and the NASDAQ at 5734, all record highs. Last Sunday, for the first time a team overcame a 25 point deficit to win a Super Bowl. On Tuesday, for the first time, a vice president was called upon to break a tie vote for confirmation of a cabinet officer. Oh and here is first that didn't make the headlines. For the first time in HUMAN HISTORY, sometime this coming week (or next week or at least sometime this year) those aged 65 and older will outnumber those under 5 years of age. Not just in Japan, not just in Italy---but globally. Moreover, according to the same source (a US Census Report entitled "An Aging World"), by 2050 (my 100th year), those aged 65 and older will outnumber those under 5---two to one. To put this in perspective, the year I was born, there were nearly 3 times as many under age 5 globally as were 65 and older. And if those numbers weren't startling enough, take a look behind them, and you will find that the decline is disproportionately within the developed world---the segment that drives our economy. By 2050 ( a mere 33 years) the population of Africa will double becoming much younger than it is today. But even that fact is not enough to offset global aging.
So how are the economies of the developed world planning to grow with so many unproductive grey hairs? And how are they going to support their massive social programs which are geared to benefit the aged? Thirty years ain't that long. Perhaps Europe's decision to allow massive immigration is less motivated by humanitarian concerns than it is by economics. At least that is what is suggested by a paper issued by Germany's Federal Statistical Office (Destatis) which was reported this week in the German press. According to Destatis, the projected decline in German population has been stemmed by recent immigration from the Mideast. The paper goes on to stress the need to quickly integrate the migrants into the workforce so that they can begin to contribute money to the social welfare system. So far integration has been slow with many migrants too unskilled or otherwise unwilling to find work. Indeed, instead of alleviating the social burden, the migrants are adding to it. Understandably, one is now seeing a rise in nationalist political parties throughout Europe.
So what is the US's plan? Clearly, an open door is not in the cards under the current administration. Maybe tax breaks, infrastructure spending and the repatriation of overseas dollars will provide a sugar high---just like low rates did for a while. But from where is long term economic growth to come as the world ages? Don't expect it from China whose building boom almost singly saved the world's economy post 2008 (See Vol. 74 www.riskrewardblog.blogspot.com) . China faces its own demographic cliff thanks to its ill conceived (pun intended) One Child Policy. Everything points to several more years of slow to no growth---promises from The Donald notwithstanding.
So why do I fixate on demographics? Because a rapidly aging population equates to slow economic growth which in turn equates to low interest rates. And as I have explained ad nauseam I fixate on interest rates. They dictate my every investment move.
Thanks to a subscriber for giving me a head's up on BP's precipitous drop following a disappointing earnings call. The source of the disappointment was its Chair's admission that BP cannot meet its ambitious capital spending plan and also pay its healthy dividend without oil hitting $60/bbl by year end. I don't see the dividend suffering should that price not be met--- and it is the dividend that provides BP with price support. I added to my position.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What a week for firsts. For the first time on Friday, on the strength of The Donald's promised tax cut, the Dow Jones Industrial Average closed at 20,269, the S&P 500 at 2316 and the NASDAQ at 5734, all record highs. Last Sunday, for the first time a team overcame a 25 point deficit to win a Super Bowl. On Tuesday, for the first time, a vice president was called upon to break a tie vote for confirmation of a cabinet officer. Oh and here is first that didn't make the headlines. For the first time in HUMAN HISTORY, sometime this coming week (or next week or at least sometime this year) those aged 65 and older will outnumber those under 5 years of age. Not just in Japan, not just in Italy---but globally. Moreover, according to the same source (a US Census Report entitled "An Aging World"), by 2050 (my 100th year), those aged 65 and older will outnumber those under 5---two to one. To put this in perspective, the year I was born, there were nearly 3 times as many under age 5 globally as were 65 and older. And if those numbers weren't startling enough, take a look behind them, and you will find that the decline is disproportionately within the developed world---the segment that drives our economy. By 2050 ( a mere 33 years) the population of Africa will double becoming much younger than it is today. But even that fact is not enough to offset global aging.
So how are the economies of the developed world planning to grow with so many unproductive grey hairs? And how are they going to support their massive social programs which are geared to benefit the aged? Thirty years ain't that long. Perhaps Europe's decision to allow massive immigration is less motivated by humanitarian concerns than it is by economics. At least that is what is suggested by a paper issued by Germany's Federal Statistical Office (Destatis) which was reported this week in the German press. According to Destatis, the projected decline in German population has been stemmed by recent immigration from the Mideast. The paper goes on to stress the need to quickly integrate the migrants into the workforce so that they can begin to contribute money to the social welfare system. So far integration has been slow with many migrants too unskilled or otherwise unwilling to find work. Indeed, instead of alleviating the social burden, the migrants are adding to it. Understandably, one is now seeing a rise in nationalist political parties throughout Europe.
So what is the US's plan? Clearly, an open door is not in the cards under the current administration. Maybe tax breaks, infrastructure spending and the repatriation of overseas dollars will provide a sugar high---just like low rates did for a while. But from where is long term economic growth to come as the world ages? Don't expect it from China whose building boom almost singly saved the world's economy post 2008 (See Vol. 74 www.riskrewardblog.blogspot.com) . China faces its own demographic cliff thanks to its ill conceived (pun intended) One Child Policy. Everything points to several more years of slow to no growth---promises from The Donald notwithstanding.
So why do I fixate on demographics? Because a rapidly aging population equates to slow economic growth which in turn equates to low interest rates. And as I have explained ad nauseam I fixate on interest rates. They dictate my every investment move.
Thanks to a subscriber for giving me a head's up on BP's precipitous drop following a disappointing earnings call. The source of the disappointment was its Chair's admission that BP cannot meet its ambitious capital spending plan and also pay its healthy dividend without oil hitting $60/bbl by year end. I don't see the dividend suffering should that price not be met--- and it is the dividend that provides BP with price support. I added to my position.
Sunday, February 5, 2017
February 5, 2017 Seeking Alpha
Risk/Reward Vol. 339
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a downdraft earlier in the week, the major indices made a nice recovery at week's end. The Dow Jones Industrial Average is back above 20,000 and the S&P 500 is again flirting with 2300. Strong economic numbers including a better than expected jobs report contributed to the rebound. From my perspective however, the more important development was that the rise in the stock market was NOT at the expense of the bond market. Why? Because Wednesday afternoon, the Federal Reserve issued its post meeting press release which bespoke a "steady as she goes" approach. As usual it contained no firm commitments as to when any given rate increase may occur, but the professionals who interpret these press releases do not see any such move until June. Indeed, according to the futures market, the possibility of a rate increase in March is pegged at less than 20% while a hike in June is pegged at nearly 70%. The upshot is that the rate on the all important 10 Year Treasury Bond remained below 2.5% which in turn buoyed the value of much of my rate sensitive portfolio.
I bought more Shell this week despite its disappointing earnings report. More important to me was news that it had sold over $4billion of oil field holdings over the past several days. It has now sold more than $11 billion dollars of such assets and is well on its way to reducing its debt by $30billion this year. Shell borrowed over $54 billion to acquire BG last year as part of its commitment to reduce its reliance on oil and to increase natural gas production. The more Shell reduces its debt, the safer its outsized 6.5% dividend becomes. And it is this dividend that I find most attractive about Shell.
Speaking of natural gas, I initiated a position with Williams Partners (WPZ), a natural gas pipeline company this week. The past 18 months have not been kind to WPZ. It went to the alter twice only to be rebuffed by two different suitors at the last minute. A shake up at the board level now promises to deliver on what many have long believed to be its promise. Waiting for that to occur is made easier by its healthy 8+% dividend.
So how did I happen upon WPZ and any number of other investments I have made? Research. I read the Wall Street Journal and the Financial Times for macro investing trends, but for individual stock picks I find Investment Business Daily and especially Seeking Alpha helpful. IBD is a paid subscription, but Seeking Alpha is free, located at www.seekingalpha.com
I click on its Stock Ideas page and scroll through the articles until I find something of interest. Most of the articles are written by amateurs, but typically their research and analyses are spot on. I try to find at least two commentaries on a given security by different authors before acting on the information, but generally I have found the work reliable.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a downdraft earlier in the week, the major indices made a nice recovery at week's end. The Dow Jones Industrial Average is back above 20,000 and the S&P 500 is again flirting with 2300. Strong economic numbers including a better than expected jobs report contributed to the rebound. From my perspective however, the more important development was that the rise in the stock market was NOT at the expense of the bond market. Why? Because Wednesday afternoon, the Federal Reserve issued its post meeting press release which bespoke a "steady as she goes" approach. As usual it contained no firm commitments as to when any given rate increase may occur, but the professionals who interpret these press releases do not see any such move until June. Indeed, according to the futures market, the possibility of a rate increase in March is pegged at less than 20% while a hike in June is pegged at nearly 70%. The upshot is that the rate on the all important 10 Year Treasury Bond remained below 2.5% which in turn buoyed the value of much of my rate sensitive portfolio.
I bought more Shell this week despite its disappointing earnings report. More important to me was news that it had sold over $4billion of oil field holdings over the past several days. It has now sold more than $11 billion dollars of such assets and is well on its way to reducing its debt by $30billion this year. Shell borrowed over $54 billion to acquire BG last year as part of its commitment to reduce its reliance on oil and to increase natural gas production. The more Shell reduces its debt, the safer its outsized 6.5% dividend becomes. And it is this dividend that I find most attractive about Shell.
Speaking of natural gas, I initiated a position with Williams Partners (WPZ), a natural gas pipeline company this week. The past 18 months have not been kind to WPZ. It went to the alter twice only to be rebuffed by two different suitors at the last minute. A shake up at the board level now promises to deliver on what many have long believed to be its promise. Waiting for that to occur is made easier by its healthy 8+% dividend.
So how did I happen upon WPZ and any number of other investments I have made? Research. I read the Wall Street Journal and the Financial Times for macro investing trends, but for individual stock picks I find Investment Business Daily and especially Seeking Alpha helpful. IBD is a paid subscription, but Seeking Alpha is free, located at www.seekingalpha.com
I click on its Stock Ideas page and scroll through the articles until I find something of interest. Most of the articles are written by amateurs, but typically their research and analyses are spot on. I try to find at least two commentaries on a given security by different authors before acting on the information, but generally I have found the work reliable.
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