May 13, 2018 Ned Stark

Risk/Reward Vol. 393

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

What a wonderful week for Mr. Market. Seven green days in a row for the Dow. All the major indices rose approximately 2.5% for the week. The Dow and the S&P are now positive for the year and the NASDAQ is up over 7%. Moreover, volatility subsided as nice gains were achieved virtually every day. How come and how come now?

Some have suggested it was because the recent earnings season went so well. I think not. First, most of the earnings were reported in previous weeks---weeks which saw great volatility and had a definite negative bias. Second, going into last Monday, 80% of reporting companies had beaten estimates, but only 46% had seen positive price action. So to repeat, I don't think it was earnings.

Others have suggested that it was due to unprecedented stock buy backs. As this readership knows, stock buyback campaigns are designed to buoy stock prices; the thought of the boards that adopt them being that the stock of their own company is so undervalued as to be a good investment. The wisdom of this kind of investment is questionable, but these campaigns are now quite the vogue. In the first quarter of 2018, S&P 500 companies bought back at least $158billion of their own stock and are on pace to set new records. These same companies are also raising dividends. These moves have been fueled by the new tax law which has freed up cash and encouraged repatriation of foreign profits. But given that these purchases have been made steadily through the first quarter and given that such purchases generally are not made while stock prices are escalating, I do not see this as a reason for last week being so cheery.

I go back to my often articulated premise: as goes Mr.Trump so goes Mr. Market. Showing bold leadership, The Donald followed through with a campaign pledge to exit the Iran agreement. Other than a few flag burnings in Tehran, the Iranian response has been muted. Understandably, oil prices rose which was welcomed news in that market sector. This week also saw the return of three Americans held hostage by North Korea. The entire world watches in disbelief as the Kim-Trump love affair unfolds. In addition, Mr. Mueller was silent for the most part, and the Storm that is Ms. Daniels has become just another example of our President's well known and heretofore accepted amorality. But remember Dear Readers, that which rises with Mr. Trump falls with him as well. And to quote Ned Stark as he looked out upon the mid term elections, "Winter is coming."

I am attending a subscriber conference in Florida next week so do not expect an edition.