Risk/Reward Vol. 386
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last edition I predicted that the Federal Reserve's March meeting would dominate markets this week. I was wrong. Oh, the Fed's hawkish prediction of three rate hikes in 2019 and a year end 2020 Fed funds rate of a "modestly restrictive" 3.25 to 3.5% did cause the market to turn slightly negative on Wednesday. But that news was NOTHING compared to the bombshells that hit hourly on Thursday. First, Trump's lead counsel in the Mueller investigation resigned, then Trump announced a $60 billion tariff on Chinese imports, then China retaliated, then John Bolton was named the new National Security Advisor. The tumult continued on Friday as we waited out the Kabuki theater "government shutdown" threat for the umpteenth time. The result? A 1100+ point, two day drop in the Dow (which now is in correction territory), the S&P 500 going negative for the year and the NASDAQ dropping 6.5% in one week. Once again, politics Trumped everything (pun intended)
And let me correct myself. I don't mean politics. I mean Trump. I have followed the national news in general and politics in particular since the 1960 election when the youths of America (yes I was once young) were captivated by JFK and the whole Camelot thing. Unequivocally, I can state that never in that 58 year span have I seen anything like the phenomenon that is Donald Trump. Liked by some, hated by many, ignored by no one, his narcissism is something to behold. ( And believe me, I know something about narcissism). If he is not dominating the news for even a millisecond, he tweets something outrageous just to grab attention. Challenging Joe Biden to a fight, taunting Robert Mueller, belittling Jeff Sessions, humping Stormy Daniels, congratulating Vladimir Putin, reconciling with Kim Jong UN, beheading courtiers faster than the Red Queen and threatening a government shutdown are all in a day's work for him. His modus operandi is to keep everyone off guard and on edge, two positions Mr. Market detests. Consequently, one is left scratching one's head as to where to, or even whether to, invest.
I am exhausted. And the maelstrom has just begun. Can you imagine the campaign this fall and what is looking like the inevitable Democrat landslide? What will the "tweetstorm" look like then? How about next year when impeachment proceedings begin ? How do you think Mr. Market will react? As I have written many times, a profit is not a profit unless and until one sells. If the events of the past few weeks have not flashed some sell signs to you, I suggest the elections this fall will. If you manage your own money, what is your loss tolerance? Will you hold no matter what? If not, practice your exit strategy. Sell something, anything, for a profit---now. If you don't manage your own money, what will your investment professional do should a significant downturn occur? Sell at some point or hold indefinitely. Shouldn't you at least ask? The Dow has lost 3000 points (12%) in the past two months. We are still 5000 points ahead of election day 2016, but I don't like the direction. Indeed, I don't see anything on the horizon that is going to cause a market rebound. Do you? If so, please write me immediately. As longtime readers know, I am not a doomsayer. I am not predicting 2008 will be repeated. All I am saying is you don't have to be a Boy Scout to "Be Prepared."
Trump's dominance notwithstanding some interesting developments occurred this past week. First, despite "consensus" by Fed watchers that only three rate hikes will occur this year, a closer examination of the "dot plot" shows that 7 of 15 FOMC members favored four hikes. Watch this as 2018 progresses. Four hikes is certainly not out of the picture. Second, the projected year end 2020 Fed funds rate of 3.25-3.5% is above the "neutral interest rate" (the hypothetical rate of interest that neither promotes nor impedes GDP growth and/or employment). As such, the Fed is predicting that it will need to cool the economy in 2020 in order to curb inflation. This is startling considering the Fed has been highly accommodative to economic growth for a decade. Third, despite the two facts just cited, the rate on the all important 10 Year Treasury went down this week, at one time on Thursday dipping below 2.8%. (Remember: a dip in yield means an increase in price/demand.) Why? Clearly, Trump's unpredictability caused a temporary flight to safety and a bond buying spree. But I suspect something secular is afoot. I think the bond market questions the Fed's belief that the economy will grow as projected or that 2+% inflation as foreseen will ensue. As Karen Ward wrote in the Financial Times this week, economies don't prosper and inflation does not arise in countries facing demographic cliffs. With 27% of Japan's population now over the age of 65 (soon to be 40%) and with Europe and the US aging as well, spurring economic growth and a desired rate of inflation anywhere in the developed world will be a challenge.
Sunday, March 25, 2018
Sunday, March 18, 2018
March 18, 2018 Tillerson/Kudlow
Risk/Reward Vol. 385
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Cohn and Tillerson are out. Kudlow and Pompeo are in. Are Kelly and McMaster in or out? Lamb turns a red district blue. Mueller subpoenas Trump's campaign records. Uncertainty rules in DC, and as we all know, Mr. Market abhors uncertainty. Think not? Look at this week's market activity. Despite muted inflation numbers and generally good economic news, all major indices were down. Heck, the Dow Jones is virtually flat year to date. Accordingly, I continue to believe that the greatest threat to a healthy stock market is politics. How that plays out in the near term is a day to day phenomenon. Longer term, I see a Democrat landslide in November. Whether that is good or bad for the country as a general matter I leave for you to decide. I predict, however, that it will have a negative impact on the stock market. If the Democrats gain control of the House (looking ever more likely), I have no doubt that impeachment proceedings will commence. Talk about uncertainty! The fabled "Trump Bump" in stock prices will reverse, and we will see a major correction. Be prepared.
In the short run, look for news from the Fed to dominate market activity next week. The first FOMC meeting under the chairmanship of Mr. Powell takes place on Tuesday and Wednesday followed by his first news conference. A quarter point rate hike is expected. Hopefully, Powell will be more careful in his presentation than he was in his recent appearance before Congress. (See Vol 383 http://www.riskrewardblog.blogspot.com/ ). Powell's comments notwithstanding look for Mr.Market to react once the "dot plot" is published. That graph tracks each FOMC voting member's prediction of future interest rate movements. There has been some speculation that the "hawks" are desirous of four rate increases this year as opposed the three that most market watchers anticipate. Mid afternoon Wednesday should make for some interesting stock chart watching.
The subscriber conference this past week was most enlightening. Populated by "men of a certain age", laments about the sorry state of fixed income investments dominated the conversation. Since fixed income instruments (primarily bonds) are sensitive to inflation, I spent time upon my return revisiting what factors most influence inflation. Many economists believe that wage growth is the single most important factor and as such place great faith in the Phillips Curve (the alleged impact that low unemployment has upon wage growth and concomitantly upon inflation). Despite recent criticism of its application, the Phillips Curve informed much of what Fed Chairs Bernanke and Yellen believed and did. Look for what Chair Powell has to say about it if anything.
PS. For more on the Phillips Curve read John Authers' article entitled "Powell's View on Phillips Curve Will Shape Rate Debate" found in Saturday's Financial Times.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Cohn and Tillerson are out. Kudlow and Pompeo are in. Are Kelly and McMaster in or out? Lamb turns a red district blue. Mueller subpoenas Trump's campaign records. Uncertainty rules in DC, and as we all know, Mr. Market abhors uncertainty. Think not? Look at this week's market activity. Despite muted inflation numbers and generally good economic news, all major indices were down. Heck, the Dow Jones is virtually flat year to date. Accordingly, I continue to believe that the greatest threat to a healthy stock market is politics. How that plays out in the near term is a day to day phenomenon. Longer term, I see a Democrat landslide in November. Whether that is good or bad for the country as a general matter I leave for you to decide. I predict, however, that it will have a negative impact on the stock market. If the Democrats gain control of the House (looking ever more likely), I have no doubt that impeachment proceedings will commence. Talk about uncertainty! The fabled "Trump Bump" in stock prices will reverse, and we will see a major correction. Be prepared.
In the short run, look for news from the Fed to dominate market activity next week. The first FOMC meeting under the chairmanship of Mr. Powell takes place on Tuesday and Wednesday followed by his first news conference. A quarter point rate hike is expected. Hopefully, Powell will be more careful in his presentation than he was in his recent appearance before Congress. (See Vol 383 http://www.riskrewardblog.blogspot.com/ ). Powell's comments notwithstanding look for Mr.Market to react once the "dot plot" is published. That graph tracks each FOMC voting member's prediction of future interest rate movements. There has been some speculation that the "hawks" are desirous of four rate increases this year as opposed the three that most market watchers anticipate. Mid afternoon Wednesday should make for some interesting stock chart watching.
The subscriber conference this past week was most enlightening. Populated by "men of a certain age", laments about the sorry state of fixed income investments dominated the conversation. Since fixed income instruments (primarily bonds) are sensitive to inflation, I spent time upon my return revisiting what factors most influence inflation. Many economists believe that wage growth is the single most important factor and as such place great faith in the Phillips Curve (the alleged impact that low unemployment has upon wage growth and concomitantly upon inflation). Despite recent criticism of its application, the Phillips Curve informed much of what Fed Chairs Bernanke and Yellen believed and did. Look for what Chair Powell has to say about it if anything.
PS. For more on the Phillips Curve read John Authers' article entitled "Powell's View on Phillips Curve Will Shape Rate Debate" found in Saturday's Financial Times.
Saturday, March 17, 2018
March 12, 2018 Goldilocks
Risk/Reward Vol. 384
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All three of the major indices rose at least 3% this week with the NASDAQ hitting an all time high on Friday. But as has been the case this past month, the path was anything but smooth. Gary Cohn's resignation over the Trump tariff proposal sent shivers through Mr. Market who temporarily headed for the door mid week. But a "Goldilocks" jobs report on Friday salvaged the week with the Dow rising over 400 points that day. As detailed in the last edition, job figures promised to have an outsized impact on the market because last month's reported spike in wages spread inflation fears, caused a jump in interest rates and precipitated a true (although short) market correction from which we have yet to fully recover. Why Goldilocks? Because it was not too hot and not too cold. Not too hot because wage growth moderated thereby cooling inflation fears, and not too cold because 330,000 jobs were added as job participation rates improved.
So what do I see in the coming days? Given that February saw record withdrawals from equity funds and that the Dow and the S&P are still 3-4% below their January highs, I see room for market improvement. But it likely will not be a smooth ride. I started this publication eight years ago, and I have never seen any time like this. The markets don't swing weekly or even daily anymore; they swing hourly. Blame it on our unpredictable President, blame it on an "on the hour every hour" news cycle, blame it on the Special Prosecutor, heck "Blame It On the Rain" (remember Milli Vanilli?). Cause notwithstanding, volatility is upon us. For the foreseeable future, investing will not be for the faint of heart.
Well that's it Folks. Sorry for the shortened edition, but am boarding a flight to a subscriber conference in Beaver Creek, CO. Given its attendance list and its seriousness of purpose, I have no doubt that I will return ever more enlightened. P.S. Never book a flight that boards at 5:15 am the morning of Daylight Saving's "move forward."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All three of the major indices rose at least 3% this week with the NASDAQ hitting an all time high on Friday. But as has been the case this past month, the path was anything but smooth. Gary Cohn's resignation over the Trump tariff proposal sent shivers through Mr. Market who temporarily headed for the door mid week. But a "Goldilocks" jobs report on Friday salvaged the week with the Dow rising over 400 points that day. As detailed in the last edition, job figures promised to have an outsized impact on the market because last month's reported spike in wages spread inflation fears, caused a jump in interest rates and precipitated a true (although short) market correction from which we have yet to fully recover. Why Goldilocks? Because it was not too hot and not too cold. Not too hot because wage growth moderated thereby cooling inflation fears, and not too cold because 330,000 jobs were added as job participation rates improved.
So what do I see in the coming days? Given that February saw record withdrawals from equity funds and that the Dow and the S&P are still 3-4% below their January highs, I see room for market improvement. But it likely will not be a smooth ride. I started this publication eight years ago, and I have never seen any time like this. The markets don't swing weekly or even daily anymore; they swing hourly. Blame it on our unpredictable President, blame it on an "on the hour every hour" news cycle, blame it on the Special Prosecutor, heck "Blame It On the Rain" (remember Milli Vanilli?). Cause notwithstanding, volatility is upon us. For the foreseeable future, investing will not be for the faint of heart.
Well that's it Folks. Sorry for the shortened edition, but am boarding a flight to a subscriber conference in Beaver Creek, CO. Given its attendance list and its seriousness of purpose, I have no doubt that I will return ever more enlightened. P.S. Never book a flight that boards at 5:15 am the morning of Daylight Saving's "move forward."
Sunday, March 4, 2018
March 5, 2018 Tariff
Risk/Reward Vol 383
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All major indices lost ground this week with the Dow now negative for the year, the S&P 500 barely positive and the NASDAQ up 5% but still well below its January highs. Two factors were to blame for this week's negative vibe. The first was predictable; the second came out of left field. As you may recall from last week's edition, I highlighted as a threat to market stability the Fed's decision to raise rates at the short end of the bond curve while simultaneously reducing its holdings on the longer end. Former Chair Yellen's ability to explain this policy in soothing economic double speak heretofore had lessened market jitters even as the cheap money punchbowl was slowly withdrawn. Not so her successor. Frankly, Chair Powell's first appearance before Congress on Tuesday was a disaster. He eschewed double speak and intimated that the Fed may raise rates four times this year instead of the universally expected three times. Mr. Market freaked at this surprise testimony and headed to the door. The Dow dropped over 390 points from its intraday high. And speaking of surprises, Thursday brought something no one anticipated. Against the wishes of most of his advisors and catching his communication team completely off guard, The Donald announced 25% and 10% tariffs on steel and aluminum respectively. The Dow shed over 550 points from its high that day. What these tariffs mean in the longer run is yet to be determined.
Despite turbulence in the stock market, the bond market has remained remarkably stable. The all important 10 Year US Treasury Bond closed the week within a tight range of where it has been for a month. The fear of impending inflation which sparked the sudden rise in rates in early February has lessened. The bond futures "breakeven" numbers indicates that inflation over the next 5 to 10 years will remain below 2.5%. Since a majority of economists believe that the number one contributing factor to inflation is wage growth one should keep an eye on the jobs report scheduled to be issued March 9th. Recall (vol. 379 http://www.riskrewardblog.blogspot.com/ ) that it was last month's reported hourly wage increase of 2.9% that has caused much of the market turmoil we have been experiencing recently. I expect continued choppiness but this time hopefully with an upward tilt.
Trigger warning: soap box. As I have noted before, the popularity of passive investing has resulted in a massive increase in the assets managed by the three major sponsors of passive investing vehicles: BlackRock, Vanguard and State Street. Together they are the largest shareholders in over 90% of the companies comprising the S&P 500. That means of course that they are the largest shareholders in companies that directly compete with each other---every airline, every major bank, every player in every industry. Let that fact sink in, Dear Reader. Until now each of these companies has taken pains to be passive in regard the management of these corporations. They have done so to avoid antitrust scrutiny. Note I said until now. With the tragedy at Parkland in constant focus, BlackRock, Vanguard and State Street have all indicated that they intend to "engage" the management of the largest gun manufactures (in which not surprisingly these three behemoths hold the largest block of shares) as to their intentions toward reducing gun violence. As well intentioned as one may think this new activism is, it portends a great threat. Suppose these Big Three come to dislike the robust debate occurring on our news channels and "engage" the management of Disney (ABC), TimeWarner (CNN), Comcast (MSNBC, CNBC, NBC) and other outlets in which they hold the largest blocks importuning them to tone down or even slant their rhetoric? Would this be healthy? No way! I would rather face Russian interference in our political process (BTW have you ever seen such amateurish propaganda?) than have all of our major news outlets controlled by an oligarchy, the danger of which is clear and present. Just sayin'
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All major indices lost ground this week with the Dow now negative for the year, the S&P 500 barely positive and the NASDAQ up 5% but still well below its January highs. Two factors were to blame for this week's negative vibe. The first was predictable; the second came out of left field. As you may recall from last week's edition, I highlighted as a threat to market stability the Fed's decision to raise rates at the short end of the bond curve while simultaneously reducing its holdings on the longer end. Former Chair Yellen's ability to explain this policy in soothing economic double speak heretofore had lessened market jitters even as the cheap money punchbowl was slowly withdrawn. Not so her successor. Frankly, Chair Powell's first appearance before Congress on Tuesday was a disaster. He eschewed double speak and intimated that the Fed may raise rates four times this year instead of the universally expected three times. Mr. Market freaked at this surprise testimony and headed to the door. The Dow dropped over 390 points from its intraday high. And speaking of surprises, Thursday brought something no one anticipated. Against the wishes of most of his advisors and catching his communication team completely off guard, The Donald announced 25% and 10% tariffs on steel and aluminum respectively. The Dow shed over 550 points from its high that day. What these tariffs mean in the longer run is yet to be determined.
Despite turbulence in the stock market, the bond market has remained remarkably stable. The all important 10 Year US Treasury Bond closed the week within a tight range of where it has been for a month. The fear of impending inflation which sparked the sudden rise in rates in early February has lessened. The bond futures "breakeven" numbers indicates that inflation over the next 5 to 10 years will remain below 2.5%. Since a majority of economists believe that the number one contributing factor to inflation is wage growth one should keep an eye on the jobs report scheduled to be issued March 9th. Recall (vol. 379 http://www.riskrewardblog.blogspot.com/ ) that it was last month's reported hourly wage increase of 2.9% that has caused much of the market turmoil we have been experiencing recently. I expect continued choppiness but this time hopefully with an upward tilt.
Trigger warning: soap box. As I have noted before, the popularity of passive investing has resulted in a massive increase in the assets managed by the three major sponsors of passive investing vehicles: BlackRock, Vanguard and State Street. Together they are the largest shareholders in over 90% of the companies comprising the S&P 500. That means of course that they are the largest shareholders in companies that directly compete with each other---every airline, every major bank, every player in every industry. Let that fact sink in, Dear Reader. Until now each of these companies has taken pains to be passive in regard the management of these corporations. They have done so to avoid antitrust scrutiny. Note I said until now. With the tragedy at Parkland in constant focus, BlackRock, Vanguard and State Street have all indicated that they intend to "engage" the management of the largest gun manufactures (in which not surprisingly these three behemoths hold the largest block of shares) as to their intentions toward reducing gun violence. As well intentioned as one may think this new activism is, it portends a great threat. Suppose these Big Three come to dislike the robust debate occurring on our news channels and "engage" the management of Disney (ABC), TimeWarner (CNN), Comcast (MSNBC, CNBC, NBC) and other outlets in which they hold the largest blocks importuning them to tone down or even slant their rhetoric? Would this be healthy? No way! I would rather face Russian interference in our political process (BTW have you ever seen such amateurish propaganda?) than have all of our major news outlets controlled by an oligarchy, the danger of which is clear and present. Just sayin'
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