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.
Sunday, April 23, 2017
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.
Sunday, April 9, 2017
April 9, 2017 Balance Sheet
Risk/Reward Vol. 347
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Once again, both major indices ended the week where they began, a missile strike and a disappointing jobs report notwithstanding. That is not to suggest however that the week was without volatility. On Wednesday, a favorable ADP number caused the Dow Jones Industrial Average to gain triple digits in the morning only to be reversed and eclipsed that afternoon with the publication of unexpectedly hawkish minutes from the Fed's March meeting. Unexpected because the press release issued immediately after the March meeting gave no hint that downsizing the Fed's balance sheet had been hotly debated at the meeting. Hawkish because the consensus of the participants was that downsizing would begin this year and because some discussion was had on the merits of selling the entire bond portfolio at one time. A one time sale of over $2Trillion of Treasury securities (nearly 20% of the total amount of such securities available for sale) would undoubtedly deflate the value of the world's bond market, the prospect of which scared the h-e-double hockey sticks out of Mr. Market. This fear caused the stock market drop. Per usual, Mrs. Bond reacted more slowly. As the totality of the minutes were digested she came to realize (as did Mr. Market the next day) that the pace of bond reduction, if any, was dependent upon how the economy progressed and that market disruption would be taken into account. In short, the minutes were a trial balloon, the effect of which certainly was duly noted.
Because the bond market did not panic my interest rate sensitive holdings held their own for the week permitting me once again to harvest some dividends. This stability is both a good and a bad thing. Good because it provides some assurance that I will not be devastated by an overreaction. Bad because I suspect it is due, in part, to the ever lessening liquidity in the bond and bond related markets. As I have written in the past, until the passage of the Dodd Frank Act in 2010, major commercial banks maintained bond trading desks which literally served as bond market makers or buyers of last resort. Entities such as JP Morgan, Citigroup and Bank of America could absorb billions of dollars bonds and hold them until prices stabilized. After the most recent financial crisis, regulators deemed that function too risky for any FDIC insured institution and it was legislated away. In so doing, Congress may have created an even bigger problem because no substitute bond market safety valve has evolved. Meanwhile, as a result of low rates, more and more governments and corporations have issued and continue to issue more and more bonds. This brewing bottleneck is something to watch.
Instability in the Middle East is not good geopolitically, but it helps to support oil prices. Both Brent (international) and WTI (domestic) prices are now above $50/bbl. The domestic rig count continues to increase but is no where near its 2014 peak. My oil plays have done well with HCLP (the fracking sand miner) leading the way. It is up 15% since I purchased it on March 24th. I may not wait for it to re-establish a dividend before taking a profit. OKE and FPL are also doing nicely. I may increase my oil/gas patch exposure this week
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Once again, both major indices ended the week where they began, a missile strike and a disappointing jobs report notwithstanding. That is not to suggest however that the week was without volatility. On Wednesday, a favorable ADP number caused the Dow Jones Industrial Average to gain triple digits in the morning only to be reversed and eclipsed that afternoon with the publication of unexpectedly hawkish minutes from the Fed's March meeting. Unexpected because the press release issued immediately after the March meeting gave no hint that downsizing the Fed's balance sheet had been hotly debated at the meeting. Hawkish because the consensus of the participants was that downsizing would begin this year and because some discussion was had on the merits of selling the entire bond portfolio at one time. A one time sale of over $2Trillion of Treasury securities (nearly 20% of the total amount of such securities available for sale) would undoubtedly deflate the value of the world's bond market, the prospect of which scared the h-e-double hockey sticks out of Mr. Market. This fear caused the stock market drop. Per usual, Mrs. Bond reacted more slowly. As the totality of the minutes were digested she came to realize (as did Mr. Market the next day) that the pace of bond reduction, if any, was dependent upon how the economy progressed and that market disruption would be taken into account. In short, the minutes were a trial balloon, the effect of which certainly was duly noted.
Because the bond market did not panic my interest rate sensitive holdings held their own for the week permitting me once again to harvest some dividends. This stability is both a good and a bad thing. Good because it provides some assurance that I will not be devastated by an overreaction. Bad because I suspect it is due, in part, to the ever lessening liquidity in the bond and bond related markets. As I have written in the past, until the passage of the Dodd Frank Act in 2010, major commercial banks maintained bond trading desks which literally served as bond market makers or buyers of last resort. Entities such as JP Morgan, Citigroup and Bank of America could absorb billions of dollars bonds and hold them until prices stabilized. After the most recent financial crisis, regulators deemed that function too risky for any FDIC insured institution and it was legislated away. In so doing, Congress may have created an even bigger problem because no substitute bond market safety valve has evolved. Meanwhile, as a result of low rates, more and more governments and corporations have issued and continue to issue more and more bonds. This brewing bottleneck is something to watch.
Instability in the Middle East is not good geopolitically, but it helps to support oil prices. Both Brent (international) and WTI (domestic) prices are now above $50/bbl. The domestic rig count continues to increase but is no where near its 2014 peak. My oil plays have done well with HCLP (the fracking sand miner) leading the way. It is up 15% since I purchased it on March 24th. I may not wait for it to re-establish a dividend before taking a profit. OKE and FPL are also doing nicely. I may increase my oil/gas patch exposure this week
Sunday, April 2, 2017
April 2, 2017 Stalled
Risk/Reward Vol. 347
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Mr. Market was treading water in March. Both major indices ended the month within 75 basis points of where each began. The Trump rally has stalled as investors await the implementation and/or impact of The Donald's promises. He has acted on those that can be effected by executive order (e.g. regulations, energy, etc.) but those that require legislative action, like tax and health care reform, remain mired in Congress. Moreover, news on the economic front did little to inspire Mr. Market. Revisions to fourth quarter numbers reported this week did nothing to change the final 2016 growth in gross domestic product---an anemic 1.6%. How the President plans to reach GDP growth of 3-4% anytime soon is beyond me.
Anemic growth equates to low inflation which, in turn, justifies (at least in the minds of Fed officials) the Federal Reserve's continued dampening of interest rates. A report from the Bureau of Economic Analysis issued on Friday indicated that the core PCE Index (the Fed's favorite measure of inflation) rose 1.8% on an annualized basis in February. This is below the Fed's 2% target but is something to be monitored over the coming months. That said, Fed Vice Chair Stanley Fischer felt comfortable stating on CNBC that only two more interest rate increases this year seem appropriate. The yield on the all important (to me, at least) US Ten Year Treasury Bond ("10Year") traded in a tight range all week at or about 2.4%. As discussed in previous editions (Vol 34 www.riskrewardblog.blogspot.com) this is fine with me as I continue to harvest dividends each month.
In the portfolio that I personally manage, I am about 50% invested. I would like to deploy another 15-20%, but I am in no hurry. Although energy represents a small percentage of our current holdings, I remain fascinated by the sector. Several stories in the financial press this week reported how technology continues to reduce the cost of extracting domestic oil. If you have not done so, I suggest you read the story in Friday's Wall Street Journal entitled Fracking 2.0. It highlights EOG, the "Apple of the oil field." Its numbers are stunning. EOG produced the same amount of oil in 2016 as it did in 2014----at 1/3rd the cost! No wonder Saudi Arabia is shaking in its boots. I don't own EOG because of its tiny dividend, but I do own other companies/funds in the oil patch including HCLP, HEP and FPL. And speaking of energy, I initiated a position in Enviva Partners (EVA) the world's largest supplier of wood pellets to utilities. As a result of several environmental accords, utilities in Europe and Asia have pledged to use a higher percentage of bio-mass fuel in generating electricity. The easiest and cheapest form of bio-mass is wood pellets as supplied by EVA. Armed with several lucrative take-or-pay contracts, EVA has consistently met or exceeded its guidance. It currently is guiding an 8+% dividend this year which is right in my wheel house. If you are interested in EVA, I recommend that you read the transcript from its most recent analyst call. It's very impressive.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Mr. Market was treading water in March. Both major indices ended the month within 75 basis points of where each began. The Trump rally has stalled as investors await the implementation and/or impact of The Donald's promises. He has acted on those that can be effected by executive order (e.g. regulations, energy, etc.) but those that require legislative action, like tax and health care reform, remain mired in Congress. Moreover, news on the economic front did little to inspire Mr. Market. Revisions to fourth quarter numbers reported this week did nothing to change the final 2016 growth in gross domestic product---an anemic 1.6%. How the President plans to reach GDP growth of 3-4% anytime soon is beyond me.
Anemic growth equates to low inflation which, in turn, justifies (at least in the minds of Fed officials) the Federal Reserve's continued dampening of interest rates. A report from the Bureau of Economic Analysis issued on Friday indicated that the core PCE Index (the Fed's favorite measure of inflation) rose 1.8% on an annualized basis in February. This is below the Fed's 2% target but is something to be monitored over the coming months. That said, Fed Vice Chair Stanley Fischer felt comfortable stating on CNBC that only two more interest rate increases this year seem appropriate. The yield on the all important (to me, at least) US Ten Year Treasury Bond ("10Year") traded in a tight range all week at or about 2.4%. As discussed in previous editions (Vol 34 www.riskrewardblog.blogspot.com) this is fine with me as I continue to harvest dividends each month.
In the portfolio that I personally manage, I am about 50% invested. I would like to deploy another 15-20%, but I am in no hurry. Although energy represents a small percentage of our current holdings, I remain fascinated by the sector. Several stories in the financial press this week reported how technology continues to reduce the cost of extracting domestic oil. If you have not done so, I suggest you read the story in Friday's Wall Street Journal entitled Fracking 2.0. It highlights EOG, the "Apple of the oil field." Its numbers are stunning. EOG produced the same amount of oil in 2016 as it did in 2014----at 1/3rd the cost! No wonder Saudi Arabia is shaking in its boots. I don't own EOG because of its tiny dividend, but I do own other companies/funds in the oil patch including HCLP, HEP and FPL. And speaking of energy, I initiated a position in Enviva Partners (EVA) the world's largest supplier of wood pellets to utilities. As a result of several environmental accords, utilities in Europe and Asia have pledged to use a higher percentage of bio-mass fuel in generating electricity. The easiest and cheapest form of bio-mass is wood pellets as supplied by EVA. Armed with several lucrative take-or-pay contracts, EVA has consistently met or exceeded its guidance. It currently is guiding an 8+% dividend this year which is right in my wheel house. If you are interested in EVA, I recommend that you read the transcript from its most recent analyst call. It's very impressive.
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