Risk/Reward Vol. 399
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last weekend I was in deer camp. Undisturbed by ruminants, I ruminated.
Both the S&P 500 and the Dow Jones Industrial Index are negative for the year, and the NASDAQ is barely green. Last week saw a 4% drop across the board. Once again the reportage as to the cause(s) was unrevealing. The two most frequently cited tropes: the Fed raising rates too quickly and the threat of a trade war, just don't fit. They have been in the wind for most of the year. While it is true that many companies are projecting slower growth in 2019, that too has long been expected. I put the cause on politics. In anticipation of a series of debilitating investigations run by a Democrat controlled House of Representative, I see Mr. Market taking profits accumulated since The Donald's election and rotating out of equities.
Why politics? Because like all of us, Mr. Market is not immune to them. If The Donald's election can boost a market, his downfall can diminish it. And let there be no doubt, the underlying purpose of the upcoming investigations is to destroy Donald Trump and his presidency. Moreover, given his predilection to overreact, the President will likely be his own worst enemy. Add to this the hard left turn of the Democrats as they select a candidate, and I foresee more turmoil (yes, that is possible) and increased uncertainty. And Mr. Market abhors uncertainty.
Has a rotation begun? Sadly, I think so. Take a look at bond yields. Given the Fed raising rates at the shorter end of the yield curve (Fed Funds or overnight rates) and given the supply of bonds increasing because of 1) the Fed selling its portfolio of longer term duration bonds as part of its balance sheet reduction and 2) the Treasury issuing more bonds to cover a larger than expected deficit, one would expect yields to increase. Remember an increase in the supply of bonds should lower their price which in turn should increase their yield. And yet bonds are selling like hot cakes, and yields/rates have plummeted. It is this drop which saddens me. The Ten Year which was consistently yielding 3.25% just two weeks ago is now trading at 3.05%. The Two Year was at 2.95% and now has fallen to 2.81%. This counterintuitive downward march in rates indicates that many investors are not just "raising cash" in order to re-enter the equity market when valuations are cheaper. Rather they are abandoning equities and buying bonds. Given the huge runup in stocks over the past several years and given the increase in interest rates to an almost rational level (3%), they have determined to take a profit and rest comfortably in bonds . Once out, I don't see many (especially Baby Boomers) coming back.
Sunday, November 25, 2018
Sunday, November 11, 2018
November 11, 2018 The War to End War
Risk/Reward Vol. 398
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
OK, Mr. Wise Guy, the Democrats took the House of Representatives. So why did the bulls run wild on Wednesday and why are the two major indices up over 2% for the week? Winter isn't coming, is it. Well, Dear Readers, don't be so quick in concluding that all is hunky dory. None of these new members takes office until January. More importantly, the committee chairs do not rotate until then. When they do is when one should fret. Have you read the Mollie Hemmingway article describing Rep. Jerry Nadler's overheard telephone conversation of last Wednesday? In that call, Nadler, the presumptive chair of the all powerful House Judiciary Committee, vowed to re-open the Trump-Russia probe and to impeach Kavanaugh. Moreover, on the Senate side, the claimed gain in Florida and the presumed victory in Arizona may not be. Fifty three Republican seats claimed on Election Night may become 51 in very short order. Indeed, Wednesday's 500+ gain in the Dow merely proved my point: to wit, Mr. Market is highly responsive to politics. The euphoria of that day was an expression of relief because in normal times a split in control of Congress is good for the stock market. But these are not normal times. I still see winter, and it starts in January, 2019.
Due to the election, there was little fanfare following this week's Federal Reserve meeting. The Fed Funds rate remained unchanged as is the norm for meetings after which the Chair does not hold a press conference. But that will change next year as each of the eight Fed meetings will be "live" : concluded with a press conference and thus one at which rates may change or other significant events could occur. As for action this week in the bond market, it appears that the rate on the 10 Year is finding a home in a narrow range around 3.2%. The rate on the 2Year has found traction around 2.95, and the one month is near 2.2%. Just 13 months ago the 2 Year struggled to get above 1.3%, and the one month was below 1%. Quite a welcome change for those interested in fixed income.
I continue to marvel at our domestic oil industry. It is a testament to the power of free enterprise and her twin sister innovation.. Just ten years ago, US oil production was 5million bbls/day and on a downward trajectory. Today, thanks to incredible technological advances in fracking and billions of dollars of private risk capital, the US produces over 11million bbls/day and is on its way to 12million in 2019. To put that in perspective, the US now is number one in the world in oil production surpassing both Saudi Arabia and Russia this year. Moreover, we are fast approaching actual energy independence. This allows us great flexibility in international relations. When was the last time you read anything about Kuwait or Iraq?
Monday, November 5, 2018
November 4, 2018 Farewell Authers
Risk/Reward Vol. 397
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last week I foresaw "several more days of roller coaster rides (in the equity market) with an overall downward trajectory." I was wrong. All three of the major indices were up 2.5% or so for the week apparently on the back of excellent quarterly reports and generally good economic news. Of particular interest to me was the news on Friday that wages grew at an annual rate of 3.1% in October, the most in over 9 years. This virtually guarantees a Fed funds rate increase in December and makes more certain the anticipated additional rate increases in 2019. If these increases occur, the overnight (Fed funds) rate should be 3-3.25% by year end 2019. If current spreads hold (N.B., in normal times the longer the maturity the higher the interest rate), two year treasuries will be paying 4%. This will allow me to lengthen my bond ladder which currently is very short term.
Why this week was overall positive in the equity markets eludes me. It just goes to show that no one is better than Mr. Market at humbling prognosticators. That said, I remain convinced that even Mr. Market is not immune to politics. Syllogistically, Trump has been very good for Mr. Market. A Democrat controlled House will be bad for Trump. Ergo, a Democrat controlled House will be bad for Mr. Market. Have those who own bank stocks read Maxine Waters' "pay back" quotes from her stump speech this week? And remember she is slated to become the Chair of the Financial Services Committee. How about Adam Schiff's pledge to reopen the Russian influence hearings if he becomes Chair of the House Intelligence Committee which he is in line to do? Or how about presumptive Speaker Pelosi's pledge to use subpoena power over the President as a negotiation tool? Undoubtedly, the President will resist every effort to unwind what he views as progress. Moreover, there is no doubt he will thumb his nose at Congressional subpoenas. This could result in an unprecedented Constitutional standoff. The rancor will be horrible.
As you may recall, my favorite financial reporter in recent times has been John Authers of the Financial Times. Recently he left FT for Bloomberg. I still follow him on Twitter but so far his reporting has lacked the depth I have come to admire. His former colleague at FT, Nicole Bullock, has filled the gap admirably. Her two pieces in yesterday's (11/3/18) FT were excellent. She reported on the possible impact of the election on stocks and on the record withdrawal from bond funds. Call it confirmation bias (since these have been two of my points of interest lately), but I do like her reportage. By the way, she and I do not agree on the election impact.
I hope I am wrong. But I still believe that winter is coming.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last week I foresaw "several more days of roller coaster rides (in the equity market) with an overall downward trajectory." I was wrong. All three of the major indices were up 2.5% or so for the week apparently on the back of excellent quarterly reports and generally good economic news. Of particular interest to me was the news on Friday that wages grew at an annual rate of 3.1% in October, the most in over 9 years. This virtually guarantees a Fed funds rate increase in December and makes more certain the anticipated additional rate increases in 2019. If these increases occur, the overnight (Fed funds) rate should be 3-3.25% by year end 2019. If current spreads hold (N.B., in normal times the longer the maturity the higher the interest rate), two year treasuries will be paying 4%. This will allow me to lengthen my bond ladder which currently is very short term.
Why this week was overall positive in the equity markets eludes me. It just goes to show that no one is better than Mr. Market at humbling prognosticators. That said, I remain convinced that even Mr. Market is not immune to politics. Syllogistically, Trump has been very good for Mr. Market. A Democrat controlled House will be bad for Trump. Ergo, a Democrat controlled House will be bad for Mr. Market. Have those who own bank stocks read Maxine Waters' "pay back" quotes from her stump speech this week? And remember she is slated to become the Chair of the Financial Services Committee. How about Adam Schiff's pledge to reopen the Russian influence hearings if he becomes Chair of the House Intelligence Committee which he is in line to do? Or how about presumptive Speaker Pelosi's pledge to use subpoena power over the President as a negotiation tool? Undoubtedly, the President will resist every effort to unwind what he views as progress. Moreover, there is no doubt he will thumb his nose at Congressional subpoenas. This could result in an unprecedented Constitutional standoff. The rancor will be horrible.
As you may recall, my favorite financial reporter in recent times has been John Authers of the Financial Times. Recently he left FT for Bloomberg. I still follow him on Twitter but so far his reporting has lacked the depth I have come to admire. His former colleague at FT, Nicole Bullock, has filled the gap admirably. Her two pieces in yesterday's (11/3/18) FT were excellent. She reported on the possible impact of the election on stocks and on the record withdrawal from bond funds. Call it confirmation bias (since these have been two of my points of interest lately), but I do like her reportage. By the way, she and I do not agree on the election impact.
I hope I am wrong. But I still believe that winter is coming.
October 28, 2018 Bond Funds
Risk/Reward Vol. 396
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I subscribe to three daily financial publications and read several online financial columns. No where did I read a cogent explanation for what occurred in the equity markets this week. Bomb threats? The caravan? Trump excoriating Fed governors? Draghi ending bond buying in the ECB? I don't think so. The only comment that made any sense was uttered by Larry Kudlow. He said the volatility was in anticipation of the Democrats winning the House. I think he is right. If he is, we should see several more days of roller coaster rides with an overall downward trajectory. As reiterated last week, the midterms are the reason that I have rotated into bonds. For the first time in a decade, bonds are paying a small albeit acceptable rate of return.
Last week's column spurred several comments and questions from subscribers. A few inquired whether I buy bonds or bond funds. I buy bonds. Conventional wisdom is that in times of increasing interest rates one should eschew buying bond funds. Why? Remember, bond funds never mature. They hold a portfolio of bonds which they continually rollover. As rates increase, lower paying bonds are sold and replaced. This is good in theory, but has a downside. Bonds with lower yields trade at reduced principal prices. Generally bond fund portfolios lose principal value quicker than the rates increase. Indeed, a simple look at major bond funds shows that they are in the red year to date. Individual bonds, on the other hand, held to maturity do not lose principal. Assuming the underlying issuer (e.g. the US Government) is solvent, one will receive one's principal and accrued interest on maturity. A more fulsome explanation is beyond the scope of this publication. Google "bond versus bond fund" for elucidation.
Another question was where do I buy the bonds. I buy them on bond exchanges sponsored by TD Ameritrade and Charles Schwab, two brokerage houses where I have on line accounts. Unlike in times past, I do not need the assistance of a broker to effect a purchase. The trade is closed as quickly as an equity buy. Given that this is a private exchange, the number and variety of bonds is limited but to date the offerings have been sufficient to satisfy me.
Winter is coming.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I subscribe to three daily financial publications and read several online financial columns. No where did I read a cogent explanation for what occurred in the equity markets this week. Bomb threats? The caravan? Trump excoriating Fed governors? Draghi ending bond buying in the ECB? I don't think so. The only comment that made any sense was uttered by Larry Kudlow. He said the volatility was in anticipation of the Democrats winning the House. I think he is right. If he is, we should see several more days of roller coaster rides with an overall downward trajectory. As reiterated last week, the midterms are the reason that I have rotated into bonds. For the first time in a decade, bonds are paying a small albeit acceptable rate of return.
Last week's column spurred several comments and questions from subscribers. A few inquired whether I buy bonds or bond funds. I buy bonds. Conventional wisdom is that in times of increasing interest rates one should eschew buying bond funds. Why? Remember, bond funds never mature. They hold a portfolio of bonds which they continually rollover. As rates increase, lower paying bonds are sold and replaced. This is good in theory, but has a downside. Bonds with lower yields trade at reduced principal prices. Generally bond fund portfolios lose principal value quicker than the rates increase. Indeed, a simple look at major bond funds shows that they are in the red year to date. Individual bonds, on the other hand, held to maturity do not lose principal. Assuming the underlying issuer (e.g. the US Government) is solvent, one will receive one's principal and accrued interest on maturity. A more fulsome explanation is beyond the scope of this publication. Google "bond versus bond fund" for elucidation.
Another question was where do I buy the bonds. I buy them on bond exchanges sponsored by TD Ameritrade and Charles Schwab, two brokerage houses where I have on line accounts. Unlike in times past, I do not need the assistance of a broker to effect a purchase. The trade is closed as quickly as an equity buy. Given that this is a private exchange, the number and variety of bonds is limited but to date the offerings have been sufficient to satisfy me.
Winter is coming.
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