Risk/Reward Vol. 378
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Wow. All I can say is wow. Another record breaking week and no end in sight. Not even Friday's disappointing GDP number could derail the market. To quote noted hedge fund manager Ray Dalio "We are in a Goldilocks period right now. Growth is good, everything is pretty good with a big jolt coming from changes in tax laws." He sees the market in the late part of a bull cycle with a market blow off rally fueled by cash from banks, corporations and individuals yet to be experienced. Add to such sentiment a report this week from the International Monetary Fund that the global economy is enjoying its broadest expansion since 2010, and a column in Friday's Wall Street Journal that tax reform may have an even broader positive impact than at first calculated, and it's no wonder Mr. Market is ecstatic.
Did you catch President Trump's speech at Davos? Look, I know The Donald is often tough to take. But that speech was a very articulate explanation of "America First". And frankly, I don't know how any American could take exception to it. Unambiguous in touting America's advantages (due of course to his leadership in tax reform and deregulation), the President also noted that America First is not America alone. He is right. American innovation is good for everyone worldwide. That speech made me wish that he could stay "presidential" (read, give up Twitter). But, then again, I didn't take on 16 Republicans and a shoe-in Democrat to become President against all odds.
So when, where and how will it all end? I don't see the cheap dollar hurting the stock market. If anything it makes America more competitive, a fact that was lamented by the ECB's Mario Draghi this week. He even accused the US of beggaring its neighbors via currency manipulation. Inflation? Maybe, but it hasn't hit yet. Interest rates? I doubt it. The world is still awash in negative yields thanks to the ECB and the Bank of Japan's continued bond buying programs (quantitative easing). Moreover, the Fed has announced its intentions for 2018 (three, maybe four small rate hikes and a slow reduction in its balance sheet) which presumably are priced into the markets. Jim Paulsen, the former head of equities at Wells Fargo, sees a 10-15% correction sometime this year borne of nothing other than exhaustion. He then hastened to add that it should be viewed as a buying opportunity. Noted investor Howard Marks published another letter to investors this week in which he counseled caution. At the same time however he did not advise leaving the market. To me the biggest threat is non economic. It is political. There is no doubt that a finding of an impeachable offense by the Special Prosecutor would send this country into a tailspin. Why would any investor want that?
Sunday, January 28, 2018
Sunday, January 21, 2018
January 21, 2018 Bueller
Risk/Reward Vol. 377
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
After nearly a month's hiatus, I am back. Like a broken record, the TINA effect (There Is No Alternative--to stocks) continues in full force. Indeed, the only change is its intensity. Dow 25,000 was reached in record time only to be eclipsed by Dow 26,000. Nothing seems to stand in Mr. Market's way, not even a government shutdown. Will it continue? That is the question debated almost daily in the financial press. The most compelling argument for higher prices is the consensus opinion that the President's tax reform legislation should equate to a 14% increase in corporate profits. That should mean a jump of 14% in stock prices, yet the indices are up only 5% since its passage. So does that mean at least another 10% increase? Why not? What is the most compelling argument that a correction is near? Let's hear from financial analyst Ferris Bueller. Bueller? Bueller? Bueller? Well if Bueller is silient, how about some advice from the utterer of that famous line, Ben Stein. For more than a decade he has advised buying the indices. And boy has he been proven right.
One voice in the wilderness is Martin Feldstein, a noted economist and Wall Street Journal contributor. He sees the rise of interest rates as the biggest threat to stocks. And indeed, the yield on the all important US Ten Year Treasury is now comfortably above 2.6% for the first time since 2014 and is experiencing upward pressure from a variety of forces. These forces include the reduction in the Fed's balance sheet, the ECB's decision to reduce its quantitative easing, China's threat to exit US bond buying and lastly, the meteoric rise in the yield on the US Two Year Bond, now over 2% for the first time since 2008! These increases in the yields on the 10Year and 2Year are impressive from a percentage point of view, but are a long way from what traditionally has been viewed as "normal". Moreover, the amount of central bank intervention in the bond markets is still huge and its unwinding will take years. I just don't see yields adversely impacting equities now or in the intermediate future.
In sum, I say enjoy the ride. It will last until it ends. When is that? I don't see anything on the horizon to suggest a correction. That said, now is the time to devise your exit strategy even if you do not deploy it for months or even years.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
After nearly a month's hiatus, I am back. Like a broken record, the TINA effect (There Is No Alternative--to stocks) continues in full force. Indeed, the only change is its intensity. Dow 25,000 was reached in record time only to be eclipsed by Dow 26,000. Nothing seems to stand in Mr. Market's way, not even a government shutdown. Will it continue? That is the question debated almost daily in the financial press. The most compelling argument for higher prices is the consensus opinion that the President's tax reform legislation should equate to a 14% increase in corporate profits. That should mean a jump of 14% in stock prices, yet the indices are up only 5% since its passage. So does that mean at least another 10% increase? Why not? What is the most compelling argument that a correction is near? Let's hear from financial analyst Ferris Bueller. Bueller? Bueller? Bueller? Well if Bueller is silient, how about some advice from the utterer of that famous line, Ben Stein. For more than a decade he has advised buying the indices. And boy has he been proven right.
One voice in the wilderness is Martin Feldstein, a noted economist and Wall Street Journal contributor. He sees the rise of interest rates as the biggest threat to stocks. And indeed, the yield on the all important US Ten Year Treasury is now comfortably above 2.6% for the first time since 2014 and is experiencing upward pressure from a variety of forces. These forces include the reduction in the Fed's balance sheet, the ECB's decision to reduce its quantitative easing, China's threat to exit US bond buying and lastly, the meteoric rise in the yield on the US Two Year Bond, now over 2% for the first time since 2008! These increases in the yields on the 10Year and 2Year are impressive from a percentage point of view, but are a long way from what traditionally has been viewed as "normal". Moreover, the amount of central bank intervention in the bond markets is still huge and its unwinding will take years. I just don't see yields adversely impacting equities now or in the intermediate future.
In sum, I say enjoy the ride. It will last until it ends. When is that? I don't see anything on the horizon to suggest a correction. That said, now is the time to devise your exit strategy even if you do not deploy it for months or even years.
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