Risk/Reward Vol. 382
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
By week's end the tale of the tape was positive. But the fact that the Dow and the S&P 500 were up around a half of a percent, that the NASDAQ did even better and that the rate on the 10 Year Treasury Bond closed unchanged from the previous Friday belies the volatility of the week. Tuesday following the holiday started on a sour note as Walmart reported disappointing earnings. As one of only 30 companies comprising the Dow, Walmart's immediate 10% drop walloped that index. In what has become a lockstep, the other indices followed suit. Wednesday saw a nice recovery in the morning only to experience a quick mid day reversal after the release of the Federal Reserve's January meeting minutes. Investors freaked over the Fed's use of the phrase "further gradual adjustments" to describe future rate increases. Both the stock and bond markets plummeted with the rate on the 10Year spiking over 2.94%. (Remember the higher to rate/yield the lower the price.) The week was salvaged by a massive upward move on Friday.
So why the jitters? I see a few reasons. First, we remain in a polarized political powder keg the importance of which should not be discounted. Second, anytime a major player like Walmart disappoints it sends negative vibes. And third, since 2008 Mr. Market has been buoyed by seemingly ever increasingly accommodative monetary policies. First, zero bound overnight interest rates and then several waves of quantitative easing the result of which was to push investors out of savings, cd's and bonds and into stocks and real estate. These moves contributed to what many believe is a stock market bubble. So naturally when recently the Fed elected to reverse the course of these accommodative policies ( e.g. gradually raising rates and slowly reducing its bond and mortgage portfolio), it raised the specter of that bubble bursting. Although heretofore both the actual and anticipated speed of the reversal has been very slow and although corporate profits have risen to almost justify the elevated stock prices, any hint that the trajectory of the reversal may increase causes a negative market reaction. Indeed Wednesday's precipitous drop was remindful of the "taper tantrum" of 2013 (see Vol. 175 www.riskrewardblog.blogspot. com) a repeat of which the Fed so desperately wants to avoid. Time will tell if the Fed can engineer what Mohamed El Erian has termed "a beautiful normalization." of rates. I think it can. And even with rates on the rise, I believe that TINA will persist for some time. Therefore, on the dip I added to my index ETF positions, bought Walmart and added a utility (SO) and a healthcare REIT (VTR) both of which IMHO are significantly undervalued.
Trigger warning: a soapbox moment. Recently, the Center for Disease Control and Prevention reported that as of September, 2017 the total US fertility rate is now 1.77 lifetime births per woman; down 16.4% since 2007 . This rate is lower than many European countries and is coming ever so close to that of Japan. Hey kids, the replacement rate is 2.1. The bottom line is that the effects of our demographic time bomb of which I have written in the past (see vol. 218) will soon be upon us, if not already. We ain't birthin' 'em so we need to import them. We can chose how many and from where, but let's get on with it. Debates about DACA, Dreamers, Walls, sh#tholes aside, we need people. No country has ever grown an economy while experiencing depopulation. To reiterate, we need an intelligent immigration policy. Can our deeply partisan and feckless Congress provide us one?
Sunday, February 25, 2018
Sunday, February 18, 2018
February 18, 2018 TINA Returns
Risk/Reward Vol. 381
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Friday's action notwithstanding (discussed below), this week was a welcome relief from the roller coaster ride which characterized the previous two. The Dow went green on 5 straight days rising 4.3% in its biggest one week percentage gain since November 2016. The S&P 500 also gained 4.3% in its best week since January, 2013 while the NASDAQ rose 5.3%, its best performance since December, 2011. That said, at current levels the Dow is 5.3%, the S&P 500 4.9% and the NASDAQ 3.6% below the records each set last month. So if TINA (There Is No Alternative) is still in effect and I believe it is, I see very few obstacles to regaining if not surpassing those levels in the near future. So why did the market correct? Once again, few have offered any explanation, and none has offered one that is definitive. The best one I read defaulted to Occam's Razor, the philosophical concept positing that when multiple explanations are advanced, use the simplest. Simply stated, lots of sellers sold for no particular reason other than others were selling.
So what obstacles do I see to continued upward movement? I foresee profit forecasts as good, monetary policy as stable and inflation within predictable bounds. Interest rates could be problematic if the rate on the US 10 Year Bond spikes above 3%, but as each day passes with the 10Year hovering at or near 2.9% the shock value recedes. The most recent inflation numbers are in check, with the all important core inflation (strips out volatile oil and food prices) holding at 1.8%. A major confrontation in Syria between Turkey, Russia and the US could cause a market panic although the incidents occurring there these past two weeks have received less news coverage than Kim Jo Yong's snarky side glance thrown toward Vice President Pence. (Excuse my digression, but do you realize that the comely lass is the North Korean Minister of Propaganda and has a long list of human rights violations? Jeez, folks, giving her any props is like fawning over Joseph Goebbels at the 1936 Olympics.) No, I stand by what I wrote a few editions ago. The major threat to Mr. Market is political. If you doubt me, review the hour by hour tape of Friday's action. The Dow was up nearly 230 points before Mueller released the 13 indictments. Within minutes the Dow lost all of its gain and finished a paltry 19 points to the positive. Having read the indictment, I do not see any spill over onto Trump (although Mueller is not finished). So all things being equal, the move upward should continue, albeit with the same amount of jitters we saw this week, unless and until another political bomb is dropped.
And how about those interest rates? I must admit that the rate on the US Ten Year has increased faster than I anticipated. The question is how soon will it reach then breach the 3% barrier. That barrier is significant because many commentators have speculated that at that level some investors may rotate out of stocks and into bonds. In other words, the TINA effect would be over. First, I don't believe 3% is attractive to any investor other than institutions that are required to hold a percentage of assets in bonds and foreign buyers who face even more depressed rates domestically. Second, the Ten Year rate is still suppressed by the overhang of quantitative easing as the Fed continues to be one of its largest buyers. Third, even in the absence of QE, the 10Year correlates to the rate of inflation which as noted above has remained steady. And lastly, the securities I like during a period of steady rates, preferred stocks, have not nose dived as one would have expected given the recent rate spike. Do those guys know something we don't? Who knows, but as always, the 10 Year is worth watching.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Friday's action notwithstanding (discussed below), this week was a welcome relief from the roller coaster ride which characterized the previous two. The Dow went green on 5 straight days rising 4.3% in its biggest one week percentage gain since November 2016. The S&P 500 also gained 4.3% in its best week since January, 2013 while the NASDAQ rose 5.3%, its best performance since December, 2011. That said, at current levels the Dow is 5.3%, the S&P 500 4.9% and the NASDAQ 3.6% below the records each set last month. So if TINA (There Is No Alternative) is still in effect and I believe it is, I see very few obstacles to regaining if not surpassing those levels in the near future. So why did the market correct? Once again, few have offered any explanation, and none has offered one that is definitive. The best one I read defaulted to Occam's Razor, the philosophical concept positing that when multiple explanations are advanced, use the simplest. Simply stated, lots of sellers sold for no particular reason other than others were selling.
So what obstacles do I see to continued upward movement? I foresee profit forecasts as good, monetary policy as stable and inflation within predictable bounds. Interest rates could be problematic if the rate on the US 10 Year Bond spikes above 3%, but as each day passes with the 10Year hovering at or near 2.9% the shock value recedes. The most recent inflation numbers are in check, with the all important core inflation (strips out volatile oil and food prices) holding at 1.8%. A major confrontation in Syria between Turkey, Russia and the US could cause a market panic although the incidents occurring there these past two weeks have received less news coverage than Kim Jo Yong's snarky side glance thrown toward Vice President Pence. (Excuse my digression, but do you realize that the comely lass is the North Korean Minister of Propaganda and has a long list of human rights violations? Jeez, folks, giving her any props is like fawning over Joseph Goebbels at the 1936 Olympics.) No, I stand by what I wrote a few editions ago. The major threat to Mr. Market is political. If you doubt me, review the hour by hour tape of Friday's action. The Dow was up nearly 230 points before Mueller released the 13 indictments. Within minutes the Dow lost all of its gain and finished a paltry 19 points to the positive. Having read the indictment, I do not see any spill over onto Trump (although Mueller is not finished). So all things being equal, the move upward should continue, albeit with the same amount of jitters we saw this week, unless and until another political bomb is dropped.
And how about those interest rates? I must admit that the rate on the US Ten Year has increased faster than I anticipated. The question is how soon will it reach then breach the 3% barrier. That barrier is significant because many commentators have speculated that at that level some investors may rotate out of stocks and into bonds. In other words, the TINA effect would be over. First, I don't believe 3% is attractive to any investor other than institutions that are required to hold a percentage of assets in bonds and foreign buyers who face even more depressed rates domestically. Second, the Ten Year rate is still suppressed by the overhang of quantitative easing as the Fed continues to be one of its largest buyers. Third, even in the absence of QE, the 10Year correlates to the rate of inflation which as noted above has remained steady. And lastly, the securities I like during a period of steady rates, preferred stocks, have not nose dived as one would have expected given the recent rate spike. Do those guys know something we don't? Who knows, but as always, the 10 Year is worth watching.
Sunday, February 11, 2018
February 11, 2018 Correction
Risk/Reward Vol. 380
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In just two weeks the major indices have gone from record highs to correction territory (down 10% or more). On Monday, the downdraft discussed last week became a storm as the Dow Jones Industrial Average lost over 1000 points in a single day for the first time ever; only to repeat the feat on Thursday. Mid day Friday saw a 12% trough until an afternoon rally helped turn the markets positive for the day. As the sun set, a survey of the damage showed that the S&P and the Dow were down over 5% for the week and over 2% year to date. That said despite non-stop jeremiads from the talking heads on CNBC, Bloomberg and Fox Business News, the damage was hardly record breaking. Indeed, corrections are the norm in bull markets. Thirty seven drops of 10% or more have occurred since World War II. We just have not seen one in a while. And although a 1000 point drop in the Dow had not occurred until this week, neither of those days ranks in the list of the 100 worst days in the market on a percentage basis. I am not minimizing the devastation. In today's vernacular, I am just "providing context." (Don't you just hate that phrase?)
What IS unusual about this correction are the questions surrounding its cause. Unlike previous drops it is not attributable to bad economic news or to the threat of war or to any exogenous event for that matter. It has been wholly caused by the market itself. But beyond that rather unsatisfying explanation, its etiology remains a mystery. Early in the week a few synthetic exchange traded notes tied to the VIX ( itself a synthetic measure of volatility) were the scapegoats. But c'mon talking heads, how can two funds totaling a few billion dollars cause such a move in the broader markets? Some blame the threat of a government shut down. But we faced that toothless tiger two weeks ago and laughed it off. Some blame the rich compromise which averted the shutdown but at the cost of adding to our mounting debt. Was this really a surprise? Others blame the specter of higher interest rates. But the 10Year ended the week almost exactly where it was the previous Friday. The most persuasive explanation attributes the correction to a stampede by the holders of index exchange traded funds with record outflows for the week being reported. Indeed, with the popularity of ETF's like SPY, DIA and QQQ (check your portfolio and I bet most of you own one or more of these) one can buy or sell entire market indices in the blink of an eye. Indices now trade like stocks, a fact that sends ripples through the underlying shares as the ETF sponsors (Vanguard, Black Rock, State Street, etc.) buy and sell in order to maintain adequate levels of liquidity. Lastly, perhaps the cause is my readership heeding my advice of last week to practice selling for a profit. Improbable, perhaps, but even a tiny pebble can cause a ripple in an unusually calm ocean.
I will leave it to others to determine the cause. My concern is what to do now. As a frequent profit taker and constant loss minimizer, I have lots of cash on the sideline. I spent much of Friday compiling my buy list. I do believe the above named ETF's will recover and I will deploy some there. But as loyal readers know, my favorites produce juicy dividends. Dividends not only produce income, they serve as a backstop against precipitous falls. Once I am convinced that a bottom has been reached, I will be a buyer.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In just two weeks the major indices have gone from record highs to correction territory (down 10% or more). On Monday, the downdraft discussed last week became a storm as the Dow Jones Industrial Average lost over 1000 points in a single day for the first time ever; only to repeat the feat on Thursday. Mid day Friday saw a 12% trough until an afternoon rally helped turn the markets positive for the day. As the sun set, a survey of the damage showed that the S&P and the Dow were down over 5% for the week and over 2% year to date. That said despite non-stop jeremiads from the talking heads on CNBC, Bloomberg and Fox Business News, the damage was hardly record breaking. Indeed, corrections are the norm in bull markets. Thirty seven drops of 10% or more have occurred since World War II. We just have not seen one in a while. And although a 1000 point drop in the Dow had not occurred until this week, neither of those days ranks in the list of the 100 worst days in the market on a percentage basis. I am not minimizing the devastation. In today's vernacular, I am just "providing context." (Don't you just hate that phrase?)
What IS unusual about this correction are the questions surrounding its cause. Unlike previous drops it is not attributable to bad economic news or to the threat of war or to any exogenous event for that matter. It has been wholly caused by the market itself. But beyond that rather unsatisfying explanation, its etiology remains a mystery. Early in the week a few synthetic exchange traded notes tied to the VIX ( itself a synthetic measure of volatility) were the scapegoats. But c'mon talking heads, how can two funds totaling a few billion dollars cause such a move in the broader markets? Some blame the threat of a government shut down. But we faced that toothless tiger two weeks ago and laughed it off. Some blame the rich compromise which averted the shutdown but at the cost of adding to our mounting debt. Was this really a surprise? Others blame the specter of higher interest rates. But the 10Year ended the week almost exactly where it was the previous Friday. The most persuasive explanation attributes the correction to a stampede by the holders of index exchange traded funds with record outflows for the week being reported. Indeed, with the popularity of ETF's like SPY, DIA and QQQ (check your portfolio and I bet most of you own one or more of these) one can buy or sell entire market indices in the blink of an eye. Indices now trade like stocks, a fact that sends ripples through the underlying shares as the ETF sponsors (Vanguard, Black Rock, State Street, etc.) buy and sell in order to maintain adequate levels of liquidity. Lastly, perhaps the cause is my readership heeding my advice of last week to practice selling for a profit. Improbable, perhaps, but even a tiny pebble can cause a ripple in an unusually calm ocean.
I will leave it to others to determine the cause. My concern is what to do now. As a frequent profit taker and constant loss minimizer, I have lots of cash on the sideline. I spent much of Friday compiling my buy list. I do believe the above named ETF's will recover and I will deploy some there. But as loyal readers know, my favorites produce juicy dividends. Dividends not only produce income, they serve as a backstop against precipitous falls. Once I am convinced that a bottom has been reached, I will be a buyer.
Sunday, February 4, 2018
February 5, 2018 (665)
Risk/Reward Vol. 379
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Holy smokes! If you were not tempted to sell when the Dow Jones Industrial Average sank 540 points on Monday and Tuesday, you probably were tempted come Friday afternoon. Is this the beginning of the end of the bull run? Is a correction around the corner? Who knows? No one. If you think otherwise, replay the evening telecasts this week of the Stock Prognosticator in Chief, Jim Cramer and listen to equivocation at its best. Like everyone else peddling advice, he talks almost exclusively about how to identify a good buying opportunity. Hey, Cramer how about spending 50% or even 10% of your time on identifying when to sell? Because remember, Dear Reader, a profit is not a profit until it is harvested. So again I ask, how many times have you sold a stock for a profit? You would be surprised to learn how few people have ever done so. Do yourself a favor. Just do it. Just sell something at a profit. Just so you know how and just so you know how good it feels. Because this week may not have been the catalyst for you to sell, but someday some impetus will be.
So what caused the downdraft? Well, I read the three most popular financial dailies every day and not one could muster a decent answer. Interest rate escalation emanating from heightened inflation forecasts was the most often cited. I would agree that interest rate news caused the volatility on Wednesday and Thursday. But Monday and Tuesday's drama? I don't buy it. I think the action on those two days was concern on what the President would say during the State of the Union or more importantly how it would be received. I am no Trumpeter, but viewed objectively (see the CBS Poll) he knocked that speech out of the park. So why didn't the markets skyrocket on Wednesday? Well they did until the Fed issued its press release at 1pm. Slightly hawkish language therein caused an already jittery market to lose most of its gains for the day. On Thursday a nascent recovery was squelched by interest rate news once again---the yield on the 30 Year Treasury went above 3% for the first time in nearly a year and the 10Year hit 2.78%, territory not seen for more than 3 years. The thought is that higher interest rates will make corporations less profitable as they refinance their record level of debt (1.5 times earnings on average for the S&P500) while simultaneously investors will forsake equities for bonds as rates increase. So how does one explain Friday when the yield on the 10 Year leaped to close at an eye popping 2.84% and the Dow Jones Industrial Average fell an astounding 665 points (-2.54%)? To a certain extent, it was a tale of two markets. The morning's stumble was in part a reaction to news that wages grew at an annualized rate of 2.9% last month which signaled that inflation was approaching more quickly than expected. This was reflected in the spike in the rate in the 10Year which is influenced heavily by inflation expectations. But the big drop, no doubt was motivated by politics just as I prognosticated last week and just as I reiterate this week. Check the hourly charts and you will see an otherwise bad day turn horrible as soon as the Nunez memo was released. Mr. Market's fear is that the memo could give Trump cover to fire Rod Rosenstein of the Justice Department, the man who named Robert Mueller as the special prosecutor and who heretofore has resisted entreaties from many to fire Mueller. Firing of Rosenstein, replacing him with someone who would in turn fire Mueller would result in a political melee the likes of which have not been seen since the famous "Saturday Night Massacre" during the Nixon administration. If such a crisis did arise the markets would tumble. Let's see how this plays out.
Lost in all the volatility and politics is appreciation for what we have achieved on the energy front. The U. S. Department of Energy reported this week that at over 10million bbls/day the US is positioned to surpass both Saudi Arabia and Russian to become the world's largest producer of oil. Thank you fracking! As a result of the further development of this technology, the US has DOUBLED, yes doubled oil production since 2008! And frankly the end of this march to energy independence is nowhere in sight. Also this week, Exxon Mobil announced that it now is focusing its investment on domestic production. It plans to invest billions into Texas' Permian Basin with the expectation that over the next few years it will add another 500,000 bbls/day to the US total. The dividends from energy independence are 'uge! It means that we can now threaten and implement sanctions in the Mideast that we would never have dreamed possible just a few years ago. It means that if we so choose we can leave that God forsaken part of the world to its own devices. In the future, we need not become entangled in Gulf Wars which we all know were about oil and not Weapons of Mass Destruction. You doubt me about the cause? Google and then read the April, 2001 "Strategic Policy Challenges of the 21st Century" prepared by the Baker Institute and the Council on Foreign Relations at the behest of Vice President Cheney. Or simply watch "Three Days of the Condor" a hauntingly prescient 1975 movie starring Robert Redford and Faye Dunaway and co-starring two of my favorite character actors, John Houseman and Max Von Sydow. A true classic that holds up well even today.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Holy smokes! If you were not tempted to sell when the Dow Jones Industrial Average sank 540 points on Monday and Tuesday, you probably were tempted come Friday afternoon. Is this the beginning of the end of the bull run? Is a correction around the corner? Who knows? No one. If you think otherwise, replay the evening telecasts this week of the Stock Prognosticator in Chief, Jim Cramer and listen to equivocation at its best. Like everyone else peddling advice, he talks almost exclusively about how to identify a good buying opportunity. Hey, Cramer how about spending 50% or even 10% of your time on identifying when to sell? Because remember, Dear Reader, a profit is not a profit until it is harvested. So again I ask, how many times have you sold a stock for a profit? You would be surprised to learn how few people have ever done so. Do yourself a favor. Just do it. Just sell something at a profit. Just so you know how and just so you know how good it feels. Because this week may not have been the catalyst for you to sell, but someday some impetus will be.
So what caused the downdraft? Well, I read the three most popular financial dailies every day and not one could muster a decent answer. Interest rate escalation emanating from heightened inflation forecasts was the most often cited. I would agree that interest rate news caused the volatility on Wednesday and Thursday. But Monday and Tuesday's drama? I don't buy it. I think the action on those two days was concern on what the President would say during the State of the Union or more importantly how it would be received. I am no Trumpeter, but viewed objectively (see the CBS Poll) he knocked that speech out of the park. So why didn't the markets skyrocket on Wednesday? Well they did until the Fed issued its press release at 1pm. Slightly hawkish language therein caused an already jittery market to lose most of its gains for the day. On Thursday a nascent recovery was squelched by interest rate news once again---the yield on the 30 Year Treasury went above 3% for the first time in nearly a year and the 10Year hit 2.78%, territory not seen for more than 3 years. The thought is that higher interest rates will make corporations less profitable as they refinance their record level of debt (1.5 times earnings on average for the S&P500) while simultaneously investors will forsake equities for bonds as rates increase. So how does one explain Friday when the yield on the 10 Year leaped to close at an eye popping 2.84% and the Dow Jones Industrial Average fell an astounding 665 points (-2.54%)? To a certain extent, it was a tale of two markets. The morning's stumble was in part a reaction to news that wages grew at an annualized rate of 2.9% last month which signaled that inflation was approaching more quickly than expected. This was reflected in the spike in the rate in the 10Year which is influenced heavily by inflation expectations. But the big drop, no doubt was motivated by politics just as I prognosticated last week and just as I reiterate this week. Check the hourly charts and you will see an otherwise bad day turn horrible as soon as the Nunez memo was released. Mr. Market's fear is that the memo could give Trump cover to fire Rod Rosenstein of the Justice Department, the man who named Robert Mueller as the special prosecutor and who heretofore has resisted entreaties from many to fire Mueller. Firing of Rosenstein, replacing him with someone who would in turn fire Mueller would result in a political melee the likes of which have not been seen since the famous "Saturday Night Massacre" during the Nixon administration. If such a crisis did arise the markets would tumble. Let's see how this plays out.
Lost in all the volatility and politics is appreciation for what we have achieved on the energy front. The U. S. Department of Energy reported this week that at over 10million bbls/day the US is positioned to surpass both Saudi Arabia and Russian to become the world's largest producer of oil. Thank you fracking! As a result of the further development of this technology, the US has DOUBLED, yes doubled oil production since 2008! And frankly the end of this march to energy independence is nowhere in sight. Also this week, Exxon Mobil announced that it now is focusing its investment on domestic production. It plans to invest billions into Texas' Permian Basin with the expectation that over the next few years it will add another 500,000 bbls/day to the US total. The dividends from energy independence are 'uge! It means that we can now threaten and implement sanctions in the Mideast that we would never have dreamed possible just a few years ago. It means that if we so choose we can leave that God forsaken part of the world to its own devices. In the future, we need not become entangled in Gulf Wars which we all know were about oil and not Weapons of Mass Destruction. You doubt me about the cause? Google and then read the April, 2001 "Strategic Policy Challenges of the 21st Century" prepared by the Baker Institute and the Council on Foreign Relations at the behest of Vice President Cheney. Or simply watch "Three Days of the Condor" a hauntingly prescient 1975 movie starring Robert Redford and Faye Dunaway and co-starring two of my favorite character actors, John Houseman and Max Von Sydow. A true classic that holds up well even today.
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