Risk/Reward Vol. 365
We have been in Cassis for a week. We have hiked, kayaked, rented a motorboat and beached it (daily). The weather has been glorious. Next week we have a few day trips planned. The economy in France seems much improved since our visit last spring. Cassis is a beach destination for the French (very little English heard or spoken here) and even though this is the end of the season, business remains quite brisk.
Another week, another record. The Dow Jones Industrial Average is up 13% year to date and 23% over the past 12 months. As noted in Saturday's Wall Street Journal, the Trump Rally seems to have found new legs with talk of tax reform, gross domestic profit growth hitting 3% on an annualized basis and an economy sufficiently strong to warrant a Fed funds rate increase come December. As to this last point, Fed Chair Yellen gave a speech earlier in the week wherein she bemoaned the Fed's inability to jump start inflation, but remained steadfast that inflation or not a December rate increase is in order. The bond market heard her loud and clear as the yield on the all important US Ten Year Treasury jumped to 2.34% by week's end. The future's market is now pegging the odds of such an increase at over 80%.
I do not see the stock market rally ending. As for interest rate sensitive securities (my favorites) caution is in the wind. The shine came off of these a bit again this week with the 10Year yield spiking, but not so much as to warrant any move. The monthly dividends that I receive far outweigh the slight hit to capital that I suffered these past two weeks. And with the futures now anticipating a December hike, all should be peaceful for the next 3 months. Should be, but may not be. That is because in the next few weeks The Donald is going to name a new Federal Reserve chair. Indeed, this week he interviewd Kevin Warsh for the job. As noted previously, Warsh has been critical of Bernanke/Yellen's easy money approach and is deemed a rate hawk. If he is the chosen one, it may cause rates to jump. Consequently, I may collect one more month's dividends and then sell while rates climb to a new "Warsh" normal.
Saturday, September 30, 2017
Sunday, September 24, 2017
September 24, 2017 Balance Sheet Reduction
Risk/Reward Vol. 364
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The content of the Federal Reserve's press release and follow-on conference on Wednesday should have surprised no one. Chair Yellen has done much over the past several months to prepare the markets for what was announced. First, the reduction of the Fed's bloated, $4.5 trillion balance sheet now begins, albeit ever so slowly. Second, there is no immediate increase in the Fed funds rate. And third, one should expect another rate increase in December Yet, both the stock and the bond markets reacted negatively to the announcement with the yield on the US Ten Year Bond spiking from 2.24 to 2.28. (Remember, higher yields mean lower prices.) The combination of the Fed presser and Hurricane Maria's impact on Puerto Rico also caused several of my muni closed end funds to plummet. This occurred despite the fact that the ones I hold have limited to no exposure to PR bonds. Given Yellen's forewarning, the fact that the Fed also lowered its normalized rate goal and my double check that PR was not a concern, I decided to buy. I added to several positons and bought back into PGX which is trading at a favorable 332 basis point yield spread at present. (See Vol. 343 www.riskrewardblog.blogspot.com). We will see how this gambit develops.
Although visibility on the Fed's actions for the remainder of 2017 became clearer this week, 2018 is still very much in doubt. Due to resignations and normal rotation, several key Federal Reserve positions will be filled in the coming months. Will Trump nominate "easy money" doves? Will he re-nominate Janet Yellen as Chair? Some say his penchant for low rates will lead him this way. That said, the leading candidates for Chair mentioned by the press ( Warsh and Taylor) are both decidedly more hawkish on rates than Yellen. No matter who is named, however, I don't see rates approaching historic norms. Why? Because no central banker in the world has been able to spur economic growth sufficient to cause inflation. Indeed, despite several years of "recovery", the economy is still not "recovered" enough to register 2% annual inflation, a number deemed ideal by economists. And lest we forget, economists dominate central banks. Until that magical (albeit arbitrary) number is met or exceeded, easy money (translate low interest rates) will prevail.
So why do I care so much about rates and monetary policy? Because, Dear Reader, I am 66 years old. According to classic portfolio theory, I should be 66% invested in Triple A rated bonds of various maturities yielding an income of 6% per year. This carefree existence is what we were all raised to believe would be the reward for saving and maximizing 401k contributions. Guess what. It ain't here now, and it looks like it will never return. So those of us who look to investments as a source of income need to develop a strategy to produce income without the benefit of traditional income producing assets such as bonds, cd's , money market accounts, savings accounts or any other debt instruments. Moreover, given the paltry returns available via common stock dividends we need to develop a SELLING strategy. I have one. It is based upon the yield on the 10Year US Treasury Bond. (See Vol. 343 Riskrewardblog) Do you have one? If so, kindly share it with me.
Barb and I arrived in Cassis yesterday. Cassis is a lovely fishing village turned tourist destination in Provence. Since this trip was planned by Barb it has as its theme water and nature, weather permitting. Google "Cassis Calanques" and you will see some of the hikes we plan to take. Roman ruins? Not so much this time. Although we are at the end of the season, last night saw a lively crowd at the twenty or so restaurants along the docks. The fish they serve are literally 20 paces from the boats that net them. And what I like most is that in the twelve hours we have been here we have not heard or read one word of English. Pas un mot!
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The content of the Federal Reserve's press release and follow-on conference on Wednesday should have surprised no one. Chair Yellen has done much over the past several months to prepare the markets for what was announced. First, the reduction of the Fed's bloated, $4.5 trillion balance sheet now begins, albeit ever so slowly. Second, there is no immediate increase in the Fed funds rate. And third, one should expect another rate increase in December Yet, both the stock and the bond markets reacted negatively to the announcement with the yield on the US Ten Year Bond spiking from 2.24 to 2.28. (Remember, higher yields mean lower prices.) The combination of the Fed presser and Hurricane Maria's impact on Puerto Rico also caused several of my muni closed end funds to plummet. This occurred despite the fact that the ones I hold have limited to no exposure to PR bonds. Given Yellen's forewarning, the fact that the Fed also lowered its normalized rate goal and my double check that PR was not a concern, I decided to buy. I added to several positons and bought back into PGX which is trading at a favorable 332 basis point yield spread at present. (See Vol. 343 www.riskrewardblog.blogspot.com). We will see how this gambit develops.
Although visibility on the Fed's actions for the remainder of 2017 became clearer this week, 2018 is still very much in doubt. Due to resignations and normal rotation, several key Federal Reserve positions will be filled in the coming months. Will Trump nominate "easy money" doves? Will he re-nominate Janet Yellen as Chair? Some say his penchant for low rates will lead him this way. That said, the leading candidates for Chair mentioned by the press ( Warsh and Taylor) are both decidedly more hawkish on rates than Yellen. No matter who is named, however, I don't see rates approaching historic norms. Why? Because no central banker in the world has been able to spur economic growth sufficient to cause inflation. Indeed, despite several years of "recovery", the economy is still not "recovered" enough to register 2% annual inflation, a number deemed ideal by economists. And lest we forget, economists dominate central banks. Until that magical (albeit arbitrary) number is met or exceeded, easy money (translate low interest rates) will prevail.
So why do I care so much about rates and monetary policy? Because, Dear Reader, I am 66 years old. According to classic portfolio theory, I should be 66% invested in Triple A rated bonds of various maturities yielding an income of 6% per year. This carefree existence is what we were all raised to believe would be the reward for saving and maximizing 401k contributions. Guess what. It ain't here now, and it looks like it will never return. So those of us who look to investments as a source of income need to develop a strategy to produce income without the benefit of traditional income producing assets such as bonds, cd's , money market accounts, savings accounts or any other debt instruments. Moreover, given the paltry returns available via common stock dividends we need to develop a SELLING strategy. I have one. It is based upon the yield on the 10Year US Treasury Bond. (See Vol. 343 Riskrewardblog) Do you have one? If so, kindly share it with me.
Barb and I arrived in Cassis yesterday. Cassis is a lovely fishing village turned tourist destination in Provence. Since this trip was planned by Barb it has as its theme water and nature, weather permitting. Google "Cassis Calanques" and you will see some of the hikes we plan to take. Roman ruins? Not so much this time. Although we are at the end of the season, last night saw a lively crowd at the twenty or so restaurants along the docks. The fish they serve are literally 20 paces from the boats that net them. And what I like most is that in the twelve hours we have been here we have not heard or read one word of English. Pas un mot!
Sunday, September 17, 2017
September 17, 2017 Harvey and Irma
Risk/Reward Vol. 363
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
They may not have been to Texas or Florida, but Harvey and Irma were a relief to Mr. Market. So much so, the Dow Jones Industrial Average and the S&P 500 both hit new highs this week. A relief? Well, yes. The current damage estimates are 50 to 75% lower than first thought. Oil and gas are beginning to flow out of Texas, and the power rangers are at work restoring electricity in Florida. For reasons that I have explained ad nauseam (most prominently TINA or There Is No Alternative), the stock market just keeps on rising. It seems as though nothing, not the political mess in Washington, not the threat of a nuclear attack, not even back to back enormous storms can stop the stock market juggernaut.
Although most of you probably have concluded that my travels are merely for pleasure, they are not. Last weekend was spent on Lake Burton, GA in the company of subscribers and an investment professional. Like most of us, the subscribers wondered how long the upward march of equities would last and whether they were overpaying for professional money management. The professional was just that---professional. He listened to the concerns and opined only when pressed. It is his belief that given the current interest rate environment, the huge amount of money still on the sidelines and continued improvement in earnings per share (admittedly due in large part to buy backs), the stock market has more room to run. More importantly, he does not see any event that will cause a precipitous decline. As loyal readers know, I agree. That said, my portfolio is designed with 2000-01 and 2008-9 in mind. I am ready for a massive correction even if one is not readily apparent.
For those who watch interest rates (and all of us should), there were several developments this week. Most importantly, the Labor Department released Consumer Price Index numbers on Thursday. Prices rose 1.9% on an annualized basis in August, higher than expected. This level of inflation undoubtedly will provide the Federal Reserve the backbone to begin reducing its $4.5 trillion balance sheet as early as next week's Fed meeting. It also may be close enough to the Fed's desired inflation rate of 2% (measured by PCE, a more conservative gauge than CPI) to justify a 25 basis point interest rate hike in December. The odds of this occurring rose above 50% Thursday afternoon. Also on Thursday, the Bank of England gave guidance that it may soon raise short term rates. Add to this, the European Central Bank's pledge to end quantitative easing soon and one can see a world wide effort to "normalize" interest rates. As a consequence, the rate on the all important US 10 Year Treasury Bond rose from a fear-of-hurricane-induced low of less 2.05% last week to over 2.20% at this week's end. This is quite a jump. I am still comfortable in my interest rate holdings, but should this pace continue I will need to reconsider my positions.
Continuing my quest for knowledge, next week Barb and I head to France for three weeks. We have taken an apartment in Cassis, a small seaside town in Provence. I will be focused particularly on the cost of wine, bread, cheese and fine dining. If I miss a week or two or three, please know that it is only because of my dedication to research--- and to you, my Dear Readers.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
They may not have been to Texas or Florida, but Harvey and Irma were a relief to Mr. Market. So much so, the Dow Jones Industrial Average and the S&P 500 both hit new highs this week. A relief? Well, yes. The current damage estimates are 50 to 75% lower than first thought. Oil and gas are beginning to flow out of Texas, and the power rangers are at work restoring electricity in Florida. For reasons that I have explained ad nauseam (most prominently TINA or There Is No Alternative), the stock market just keeps on rising. It seems as though nothing, not the political mess in Washington, not the threat of a nuclear attack, not even back to back enormous storms can stop the stock market juggernaut.
Although most of you probably have concluded that my travels are merely for pleasure, they are not. Last weekend was spent on Lake Burton, GA in the company of subscribers and an investment professional. Like most of us, the subscribers wondered how long the upward march of equities would last and whether they were overpaying for professional money management. The professional was just that---professional. He listened to the concerns and opined only when pressed. It is his belief that given the current interest rate environment, the huge amount of money still on the sidelines and continued improvement in earnings per share (admittedly due in large part to buy backs), the stock market has more room to run. More importantly, he does not see any event that will cause a precipitous decline. As loyal readers know, I agree. That said, my portfolio is designed with 2000-01 and 2008-9 in mind. I am ready for a massive correction even if one is not readily apparent.
For those who watch interest rates (and all of us should), there were several developments this week. Most importantly, the Labor Department released Consumer Price Index numbers on Thursday. Prices rose 1.9% on an annualized basis in August, higher than expected. This level of inflation undoubtedly will provide the Federal Reserve the backbone to begin reducing its $4.5 trillion balance sheet as early as next week's Fed meeting. It also may be close enough to the Fed's desired inflation rate of 2% (measured by PCE, a more conservative gauge than CPI) to justify a 25 basis point interest rate hike in December. The odds of this occurring rose above 50% Thursday afternoon. Also on Thursday, the Bank of England gave guidance that it may soon raise short term rates. Add to this, the European Central Bank's pledge to end quantitative easing soon and one can see a world wide effort to "normalize" interest rates. As a consequence, the rate on the all important US 10 Year Treasury Bond rose from a fear-of-hurricane-induced low of less 2.05% last week to over 2.20% at this week's end. This is quite a jump. I am still comfortable in my interest rate holdings, but should this pace continue I will need to reconsider my positions.
Continuing my quest for knowledge, next week Barb and I head to France for three weeks. We have taken an apartment in Cassis, a small seaside town in Provence. I will be focused particularly on the cost of wine, bread, cheese and fine dining. If I miss a week or two or three, please know that it is only because of my dedication to research--- and to you, my Dear Readers.
Monday, September 4, 2017
September 4, 2017 The Big Four
Risk/Reward Vol. 362
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
How do you invest? Do you buy individual stocks, mutual funds, closed end funds or exchange traded funds? Do you know or do you have your financial advisor make all such decisions? Chances are everyone who reads this owns some fund sponsored by one or more of these four companies: Blackrock, Vanguard , State Street or Fidelity. Blackrock and Vanguard combined have $11 trillion under management. These giants are quickly becoming the go-to portals for anyone investing in passive funds which have become all the rage. Indeed, index funds, the passive investor's favorite vehicle, are attracting record inflows each quarter.
So what does this mean? By year end 2016, the average total stake that these four owned in each of the companies comprising the S&P 500 was over 21%. Moreover, combined they are the largest shareholders in 90% of all of the S&P 500 firms. Yes, you read that correctly, 90%. That means that these four now, or in the foreseeable future, are in a position to control every major corporation in the United States. And we scoff at the oligarchs that control Russia!
Does this bother anyone? Well, yes. Slowly and ever so quietly, scholars and regulators are beginning to evaluate the implications. Will firms controlled by commons shareholders actively compete with each other? Will there be room for innovation and creative destruction, the life forces of a free market? These questions are why words such as collusion and conscious parallelism which harken back to trust busting days are emerging once again.
I don't see this development impacting investing any time soon. But it is something to watch as these behemoths grow ever larger and ever more powerful.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
How do you invest? Do you buy individual stocks, mutual funds, closed end funds or exchange traded funds? Do you know or do you have your financial advisor make all such decisions? Chances are everyone who reads this owns some fund sponsored by one or more of these four companies: Blackrock, Vanguard , State Street or Fidelity. Blackrock and Vanguard combined have $11 trillion under management. These giants are quickly becoming the go-to portals for anyone investing in passive funds which have become all the rage. Indeed, index funds, the passive investor's favorite vehicle, are attracting record inflows each quarter.
So what does this mean? By year end 2016, the average total stake that these four owned in each of the companies comprising the S&P 500 was over 21%. Moreover, combined they are the largest shareholders in 90% of all of the S&P 500 firms. Yes, you read that correctly, 90%. That means that these four now, or in the foreseeable future, are in a position to control every major corporation in the United States. And we scoff at the oligarchs that control Russia!
Does this bother anyone? Well, yes. Slowly and ever so quietly, scholars and regulators are beginning to evaluate the implications. Will firms controlled by commons shareholders actively compete with each other? Will there be room for innovation and creative destruction, the life forces of a free market? These questions are why words such as collusion and conscious parallelism which harken back to trust busting days are emerging once again.
I don't see this development impacting investing any time soon. But it is something to watch as these behemoths grow ever larger and ever more powerful.
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