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.
Sunday, June 18, 2017
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.
Subscribe to:
Posts (Atom)