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.
Sunday, May 28, 2017
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.
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