Risk/Reward Vol. 272
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I am suspending the usual format of Risk/Reward for a few weeks in light of an impending move and crowded weekend social schedules. That said, I may send some random thoughts your way if the spirit moves me.
I remain convinced that the Greek affair is much to do about nothing. Indeed, the fear of a Grexit (Greek exit from the Euro) has never been about Greece. It always has been about contagion; the fear that should Greece exit the Euro then Portugal, Spain, Ireland and Italy (PIIGS) could follow suit. That fear has subsided in light of various programs adopted by the European Central Bank (ECB’s) under Mario Draghi, and those countries’ adherence to some modest economic reforms. If you doubt that contagion is a low risk, just look at the yield on the 10Year Bond from the PIIGS. Spain’s is 2.12%; Italy’s is 2.13% (both lower than the US 10Year) while that of Greece is nearly 13%. Remember, the lower the yield, the higher the price, the more creditworthy the debt.
Moreover, the amount of Greek debt held by foreigners has dropped from 247billion Euros in mid- 2012 to 34billion Euros today. That reduction alone lessens the blow from a Grexit; a blow which has been lessened even more by the ECB’s promise to backstop any country that suffers should Greece not reach a deal in the next few days. And this is an event which I believe is likely.
So once Mr. Market determines that Greece is not the boogeyman (and Friday’s action indicates that he may have so determined already), his focus will shift to corporate earnings which will begin to be reported in earnest this coming week. As for me, I will continue to focus on the timing of the Fed’s rate increase with plenty of cash ready to deploy.
Sunday, July 12, 2015
Sunday, June 28, 2015
June 28, 2015 Dem Bones
Risk/Reward Vol. 271
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“When I'm gone (when I'm gone)
When I'm gone (when I'm gone)
You're gonna miss me when I'm gone”—lyrics from “Cups (You’re Gonna Miss Me) sung by Lulu and The Lampshades
“Imagine how the world could be
So very fine
So happy together”---lyrics from “Happy Together” sung by The Turtles
“The foot bone connected to the leg bone,
The leg bone connected to the knee bone”---lyrics from “Dem Bones” sung by Everyone
The Dow Jones Industrial Average and the S&P 500 have barely moved since last I wrote two weeks ago. In fact, I am sure that “You did not miss me when I was gone/When I was gone/When I was gone.” Plot the 50 Day Moving Average on these indices, year to date, and you will see both undulate over and under the nearly flat 50DMA like gentle waves. This remarkably stable condition prevails despite a worsening of the Greek debt crisis; a story to which much blame is assigned to explain day to day market variability. I don’t know what will cause the stock market to break up or down. Maybe it will be when the Fed raises rates in September or December, but one would think much of that has been baked into stock prices already. But the wags who proclaimed that this is a “stock picker’s market” (that is, one where gains are achieved on individual stocks and not on stock indices) appear to be right.
The stock pickers that have done the best this year are those that have identified merger and acquisition candidates. And there are a lot of them. The Wall Street Journal reported yesterday that we are headed for the most active m&a year on record. More than $2.15 trillion worth of deals have been announced as of the third week in June which puts us on a pace to eclipse 2007’s $4.3 trillion merger mania. (Yikes! Does that portend something?) With debt so cheap, plenty of cash on balance sheets and stock prices still high, corporate managers “imagine how the world could be/So very fine/So happy together.” No industry exemplifies this thinking more than health insurance where Humana is for sale, United Health is stalking Aetna and Anthem wants to buy CIGNA---and where, with this week’s Supreme Court decision, we march inexorably to a one party payer system.
This has NOT been a good few months for those who like income producing stocks; that is, those correlated to the bond market. It is for this reason that I am so heavily weighted in cash, having sold most of these in March. However, it has been a great time to study these correlations. And if anyone doubts the existence of correlations (which I define as “the foot bone connected to the leg bone/And the leg bone connected to the knee bone, etc.”), I suggest you do the following. Access Yahoo Finance, and click on the 10Yr. Bond hyperlink. When it opens locate the chart and click on the 2y hyperlink. When it opens click on “Comparison” and enter OHI, the symbol for Omega Health Investors one of my favorite real estate investment trusts (REIT’s). What will be displayed is a chart showing the relative performance between the yield on the 10Yr. and the price of OHI. Have you ever seen a more perfect inverse relationship? Plug in any income stock (REIT, BDC, preferred stock) and you will see similar results. I look for these correlations, focus like a hawk on the yield on the 10Year and make investment decisions accordingly. At present, all signs are that the yield on the 10Yr is headed up. Thus I am in cash until that yield stabilizes. I only need stability because what I seek is steady income (for example, the yield on OHI is presently over 6% annually). However, if the yield on the 10 Year falls, all the better for me because I achieve capital appreciation as well as income. It is an imperfect system, but it protects me from experiencing what befell the stock markets in 2008-2009; an event which has had a greater influence on my investing philosophy than the spectacular gains achieved thereafter.
Having interviewed countless money managers and read countless books on investing, I am convinced that all of us in the game are looking for the one, true secret to investing success. Barb calls it “the one trick”- as in “he is a one trick pony.” For me, the “one trick” is trading in correlation to the yield on the 10Yr. Like The Turtles, that yield
“…showed me what to do
Exactly what to do
How I fell in love with you.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“When I'm gone (when I'm gone)
When I'm gone (when I'm gone)
You're gonna miss me when I'm gone”—lyrics from “Cups (You’re Gonna Miss Me) sung by Lulu and The Lampshades
“Imagine how the world could be
So very fine
So happy together”---lyrics from “Happy Together” sung by The Turtles
“The foot bone connected to the leg bone,
The leg bone connected to the knee bone”---lyrics from “Dem Bones” sung by Everyone
The Dow Jones Industrial Average and the S&P 500 have barely moved since last I wrote two weeks ago. In fact, I am sure that “You did not miss me when I was gone/When I was gone/When I was gone.” Plot the 50 Day Moving Average on these indices, year to date, and you will see both undulate over and under the nearly flat 50DMA like gentle waves. This remarkably stable condition prevails despite a worsening of the Greek debt crisis; a story to which much blame is assigned to explain day to day market variability. I don’t know what will cause the stock market to break up or down. Maybe it will be when the Fed raises rates in September or December, but one would think much of that has been baked into stock prices already. But the wags who proclaimed that this is a “stock picker’s market” (that is, one where gains are achieved on individual stocks and not on stock indices) appear to be right.
The stock pickers that have done the best this year are those that have identified merger and acquisition candidates. And there are a lot of them. The Wall Street Journal reported yesterday that we are headed for the most active m&a year on record. More than $2.15 trillion worth of deals have been announced as of the third week in June which puts us on a pace to eclipse 2007’s $4.3 trillion merger mania. (Yikes! Does that portend something?) With debt so cheap, plenty of cash on balance sheets and stock prices still high, corporate managers “imagine how the world could be/So very fine/So happy together.” No industry exemplifies this thinking more than health insurance where Humana is for sale, United Health is stalking Aetna and Anthem wants to buy CIGNA---and where, with this week’s Supreme Court decision, we march inexorably to a one party payer system.
This has NOT been a good few months for those who like income producing stocks; that is, those correlated to the bond market. It is for this reason that I am so heavily weighted in cash, having sold most of these in March. However, it has been a great time to study these correlations. And if anyone doubts the existence of correlations (which I define as “the foot bone connected to the leg bone/And the leg bone connected to the knee bone, etc.”), I suggest you do the following. Access Yahoo Finance, and click on the 10Yr. Bond hyperlink. When it opens locate the chart and click on the 2y hyperlink. When it opens click on “Comparison” and enter OHI, the symbol for Omega Health Investors one of my favorite real estate investment trusts (REIT’s). What will be displayed is a chart showing the relative performance between the yield on the 10Yr. and the price of OHI. Have you ever seen a more perfect inverse relationship? Plug in any income stock (REIT, BDC, preferred stock) and you will see similar results. I look for these correlations, focus like a hawk on the yield on the 10Year and make investment decisions accordingly. At present, all signs are that the yield on the 10Yr is headed up. Thus I am in cash until that yield stabilizes. I only need stability because what I seek is steady income (for example, the yield on OHI is presently over 6% annually). However, if the yield on the 10 Year falls, all the better for me because I achieve capital appreciation as well as income. It is an imperfect system, but it protects me from experiencing what befell the stock markets in 2008-2009; an event which has had a greater influence on my investing philosophy than the spectacular gains achieved thereafter.
Having interviewed countless money managers and read countless books on investing, I am convinced that all of us in the game are looking for the one, true secret to investing success. Barb calls it “the one trick”- as in “he is a one trick pony.” For me, the “one trick” is trading in correlation to the yield on the 10Yr. Like The Turtles, that yield
“…showed me what to do
Exactly what to do
How I fell in love with you.”
Sunday, June 14, 2015
June 14, 2015 Fed Up
Risk/Reward Vol 270
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Their lips are lying
Only real is real
Grease is the word”---lyrics from “Grease Is The Word” sung by the cast of Grease
“You got to get back up
And when they push you down
You got to get back up”---lyrics from “Get Back Up” sung by T.I. (feat. Chris Brown)
“I’m fed up (ayy), I’m fed up (ayy), I’m fed up (ayy)
I’m so sick and tired of being sick and tired”---lyrics from “Fed Up” sung by DJ Khaled (feat. Lil Wayne)
As a longtime, devoted reader of several financial publications, I can state that, with a few exceptions (e.g. Jon Hilsenrath), financial journalists like their counterparts elsewhere in the Fourth Estate just mail it in. After Wednesday’s huge 236 point jump in the Dow Jones Industrial Average (DJIA), the financial rags were remarkably silent as to the reason ---and, of course, none of them predicted it. Even market-focused Investor’s Business Daily (IBD) disappointed by reporting that “stocks rallied broadly amid signs of progress in Athens.” After Friday’s 140 point drop all IBD could report is “indexes fell as a setback in the bailout talks between Greece and its creditors weighed on sentiment.” Greece? “Greece is the word?” I don’ think so. I think “their lips are lying.” The sad truth is that financial reporters and the publications that employ them don’t help us understand market dynamics. They would rather be silent than be wrong.
Although the indices are stuck in a tight trading range (DJIA up 0.43% and S&P 500 up 1.71% year to date) some individual stocks and sectors have done very well. Year to date, JPMorgan (JPM) is up 7.73%, Goldman Sachs(GS) is up 8.57% and KBE (the banking ETF) is up 9.63%. My hometown stock, Lilly(LLY) (which Barb and I have owned most of our married life) is up 13.23%. But before the “buy and hold” crowd becomes too smug, please note that it was not until 2015 that JPM consistently traded above its 1999 price; that GS still trades far below its 2007 price; and that LLY trades below its year 2000 highs. The years in between have been dominated by forces that “pushed these stocks down.” It is about time that they “got back up/got back up.”
As “sick and tired” as we all are by the Federal Reserve's dominion over the financial world, be prepared to be “Fed up (ayy)/Fed up (ayy)/ Fed up (ayy)” again this week as the Federal Reserve Open Market Committee meets on June 16-17. The conventional wisdom is that if the Fed intends to raise short term interest rates in September, it will so signal in the press release and/or the press conference following this meeting. No signal will be read as postponing the rate increase until December. Either way look for volatility the afternoon of the 17th. If you have not done so already, you may wish to prune some of your interest rate sensitive holdings in advance.
Rest assured, Dear Readers, that even if financial reporters do not spend “Summer Nights” pouring over closing tables, earnings call transcripts and comparative graphs in search of what drives markets, I do. I do so because “You Are the One(s) I Want” to please. I can’t help it. I am “Hopelessly Devoted To You.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Their lips are lying
Only real is real
Grease is the word”---lyrics from “Grease Is The Word” sung by the cast of Grease
“You got to get back up
And when they push you down
You got to get back up”---lyrics from “Get Back Up” sung by T.I. (feat. Chris Brown)
“I’m fed up (ayy), I’m fed up (ayy), I’m fed up (ayy)
I’m so sick and tired of being sick and tired”---lyrics from “Fed Up” sung by DJ Khaled (feat. Lil Wayne)
As a longtime, devoted reader of several financial publications, I can state that, with a few exceptions (e.g. Jon Hilsenrath), financial journalists like their counterparts elsewhere in the Fourth Estate just mail it in. After Wednesday’s huge 236 point jump in the Dow Jones Industrial Average (DJIA), the financial rags were remarkably silent as to the reason ---and, of course, none of them predicted it. Even market-focused Investor’s Business Daily (IBD) disappointed by reporting that “stocks rallied broadly amid signs of progress in Athens.” After Friday’s 140 point drop all IBD could report is “indexes fell as a setback in the bailout talks between Greece and its creditors weighed on sentiment.” Greece? “Greece is the word?” I don’ think so. I think “their lips are lying.” The sad truth is that financial reporters and the publications that employ them don’t help us understand market dynamics. They would rather be silent than be wrong.
Although the indices are stuck in a tight trading range (DJIA up 0.43% and S&P 500 up 1.71% year to date) some individual stocks and sectors have done very well. Year to date, JPMorgan (JPM) is up 7.73%, Goldman Sachs(GS) is up 8.57% and KBE (the banking ETF) is up 9.63%. My hometown stock, Lilly(LLY) (which Barb and I have owned most of our married life) is up 13.23%. But before the “buy and hold” crowd becomes too smug, please note that it was not until 2015 that JPM consistently traded above its 1999 price; that GS still trades far below its 2007 price; and that LLY trades below its year 2000 highs. The years in between have been dominated by forces that “pushed these stocks down.” It is about time that they “got back up/got back up.”
As “sick and tired” as we all are by the Federal Reserve's dominion over the financial world, be prepared to be “Fed up (ayy)/Fed up (ayy)/ Fed up (ayy)” again this week as the Federal Reserve Open Market Committee meets on June 16-17. The conventional wisdom is that if the Fed intends to raise short term interest rates in September, it will so signal in the press release and/or the press conference following this meeting. No signal will be read as postponing the rate increase until December. Either way look for volatility the afternoon of the 17th. If you have not done so already, you may wish to prune some of your interest rate sensitive holdings in advance.
Rest assured, Dear Readers, that even if financial reporters do not spend “Summer Nights” pouring over closing tables, earnings call transcripts and comparative graphs in search of what drives markets, I do. I do so because “You Are the One(s) I Want” to please. I can’t help it. I am “Hopelessly Devoted To You.”
Sunday, June 7, 2015
June 7, 2015 Wrecking Ball
Risk/Reward Vol. 269
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“I came in like a wrecking ball
All I wanted was to break your walls
All you ever did was wreck me
Yeah, you, you wreck me”---lyrics from “Wrecking Ball” sung by Miley Cyrus
“There's no way out of this dark place
No hope, no future”---lyrics from “No Way Out” sung by Phil Collins
“Need a little sweetness in my life
Your sugar! (sugar!) Yes, please (yes, please)”---lyrics from “Sugar” sung by Maroon 5
If, in the future, you ever doubt the influence that the European Central Bank (ECB) and the Federal Reserve have on the financial markets just remember this week. On Wednesday, ECB President Mario Draghi’s offhand comment that the ECB would not use quantitative easing to suppress volatility in Europe’s bond market caused a rout in the German Bund the yield on which jumped 32 basis points (from 0.57 to 0.89%) in just two days. That action rippled through the world bond market “like a wrecking ball/breaking down walls.” If I had not reduced my holdings in interest rate sensitive securities, it would have “wrecked me,” as the yield on the benchmark US 10 Year Treasury Bond (off which most income securities are priced) skyrocketed to heights not seen since October last year. (Remember a rise in yield equates to a drop in price.) If you want a cogent explanation watch Rick Santelli’s interview of Jeffrey Gundlach on Wednesday last which can be accessed through CNBC’s archived videos.
The rise in yields and the concomitant drop in bond prices continued on Friday on the heels of a better-than-expected jobs report. The report was so good, it increased the odds that the Federal Reserve will increase short term rates in September. Traders looked to shed low yielding bonds---and guess what---found very few buyers. The fewer the buyers, the lower the bid; the lower the bid, the greater the volatility. Thus the swings in the bond market have become huge. But why? As discussed in previous editions ( See Vol. 266 www.riskrewardblog.blogspot.com ), since the passage of the Dodd-Frank Act in 2010, major banks, which used to serve as bond market makers (buyers of last resort), no longer are permitted to serve that function. With no market makers in place, those wanting to sell bonds have no ready outlet. “There’s no way out of the dark place.” As the desire to unload low yielding bonds increases (as it will when the Fed increases short term rates), sellers will see “no hope” of avoiding a fire sale.
In today’s world and as seen this week, a significant downdraft in the bond market negatively impacts stock markets. The Dow Jones Industrial Average gave back most of its year to date gains, and the S&P 500 is now up only 1.65%. Why, you ask? As discussed in last week’s edition, much of the gain in stocks this year has resulted from stock buy backs and increased dividends, both of which have been fueled by massive borrowings (bank debt and bonds) by corporations taking advantage of the zero bound interest rates provided by central banks. If the central banks take away this “Sugar! Sugar!/Yes, please/Yes,please” borrowing will slow, buybacks will end and stock prices will drop. The anticipation of this occurring caused stock markets to drop last week.
As I have written in the past, rising yields are inevitable and in the long run should be welcomed by income investors such as yours truly. Unfortunately, the voyage there will be more volatile than in times past due to the absence of bond market makers. The next few months will be a breathtaking roller coaster ride for income investors especially those holding bonds where sellers will outnumber buyers; remindful of what those noted investors Maroon 5 warned:
“And like a little girl cries in the face of a monster that lives in her dreams
Is there anyone out there 'cause it's getting harder and harder to breathe.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“I came in like a wrecking ball
All I wanted was to break your walls
All you ever did was wreck me
Yeah, you, you wreck me”---lyrics from “Wrecking Ball” sung by Miley Cyrus
“There's no way out of this dark place
No hope, no future”---lyrics from “No Way Out” sung by Phil Collins
“Need a little sweetness in my life
Your sugar! (sugar!) Yes, please (yes, please)”---lyrics from “Sugar” sung by Maroon 5
If, in the future, you ever doubt the influence that the European Central Bank (ECB) and the Federal Reserve have on the financial markets just remember this week. On Wednesday, ECB President Mario Draghi’s offhand comment that the ECB would not use quantitative easing to suppress volatility in Europe’s bond market caused a rout in the German Bund the yield on which jumped 32 basis points (from 0.57 to 0.89%) in just two days. That action rippled through the world bond market “like a wrecking ball/breaking down walls.” If I had not reduced my holdings in interest rate sensitive securities, it would have “wrecked me,” as the yield on the benchmark US 10 Year Treasury Bond (off which most income securities are priced) skyrocketed to heights not seen since October last year. (Remember a rise in yield equates to a drop in price.) If you want a cogent explanation watch Rick Santelli’s interview of Jeffrey Gundlach on Wednesday last which can be accessed through CNBC’s archived videos.
The rise in yields and the concomitant drop in bond prices continued on Friday on the heels of a better-than-expected jobs report. The report was so good, it increased the odds that the Federal Reserve will increase short term rates in September. Traders looked to shed low yielding bonds---and guess what---found very few buyers. The fewer the buyers, the lower the bid; the lower the bid, the greater the volatility. Thus the swings in the bond market have become huge. But why? As discussed in previous editions ( See Vol. 266 www.riskrewardblog.blogspot.com ), since the passage of the Dodd-Frank Act in 2010, major banks, which used to serve as bond market makers (buyers of last resort), no longer are permitted to serve that function. With no market makers in place, those wanting to sell bonds have no ready outlet. “There’s no way out of the dark place.” As the desire to unload low yielding bonds increases (as it will when the Fed increases short term rates), sellers will see “no hope” of avoiding a fire sale.
In today’s world and as seen this week, a significant downdraft in the bond market negatively impacts stock markets. The Dow Jones Industrial Average gave back most of its year to date gains, and the S&P 500 is now up only 1.65%. Why, you ask? As discussed in last week’s edition, much of the gain in stocks this year has resulted from stock buy backs and increased dividends, both of which have been fueled by massive borrowings (bank debt and bonds) by corporations taking advantage of the zero bound interest rates provided by central banks. If the central banks take away this “Sugar! Sugar!/Yes, please/Yes,please” borrowing will slow, buybacks will end and stock prices will drop. The anticipation of this occurring caused stock markets to drop last week.
As I have written in the past, rising yields are inevitable and in the long run should be welcomed by income investors such as yours truly. Unfortunately, the voyage there will be more volatile than in times past due to the absence of bond market makers. The next few months will be a breathtaking roller coaster ride for income investors especially those holding bonds where sellers will outnumber buyers; remindful of what those noted investors Maroon 5 warned:
“And like a little girl cries in the face of a monster that lives in her dreams
Is there anyone out there 'cause it's getting harder and harder to breathe.”
Sunday, May 31, 2015
May 31, 2015 So Excited (Not)
Risk/Reward Vol. 268
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“I'm so excited
And I just can't hide it
I'm about to lose control
And I think I like it”---lyrics from “Excited” sung by The Pointer Sisters
“Nothin like the old school
Ain't nuttin like the old school”---lyrics from “Old School” sung by 2Pac
“And I'm bringing you a love that's true.
So get ready, so get ready”---lyrics from “Get Ready” sung by The Temptations
When it comes to this year's stock market, have you heard anyone say “I’m so excited/And I just can’t hide it?” Has anyone exclaimed that “I’m about to lose control?” Or even “I like it?” I have not, and with the news on Friday that the nation’s economy shrank 0.7% in the first quarter, I don’t see a lot of excitement forthcoming. Experts now predict that the economy will grow about 2% for the year, consistent with the sluggish pace experienced over the past few years. With no new monetary stimulus at play (QE3 is over, and short term interest rates cannot go much lower), the stock market remains in a tight trading range. Year to date, the Dow Jones Industrial Average is up only 1.05%, and the S&P 500 is up 2.36%.
The performance of these indices would be much worse if not for an avalanche of share buy backs and dividend raises. Between these two shareholder-friendly moves, corporations comprising the S&P 500 will return a record $1Trillion to shareholders in 2015. Buybacks (which reduce the denominator in eps calculations) alone will raise earnings per share at least 4% for more than 100 companies this year. Exemplifying this is Pfizer (PFE) which is up 11% year to date notwithstanding fourteen consecutive quarters of diminishing sales and three straight quarters of earnings declines. Despite this poor performance, the pharma giant known for Lipitor, Viagra and Lyrica has kept its stock buoyed by coupling earnings announcements with huge buybacks and dividend increases. Is this bad? I don’t think so. Through the 1960’s, publicly traded corporations on average returned more than 50% of their earnings to shareholders primarily via dividends. That percentage fell dramatically in subsequent years. Indeed, dividends were considered passe during the dot.com era. Their return and that of their step sister, share buybacks, should be welcomed by income seekers of a certain age (e.g. yours truly). Like 2Pac, I say “Nothin like old school/Ain’t nuttin’ like old school.”
So far this year, I have not been penalized by sitting on a pile of cash. The DJIA and S&P’s paltry returns have not warranted taking much risk. I have not sat idly, however. I am “gettin’ ready/gettin’ ready” for my chosen moment to buy. As reported previously, that will be when the timing of the Fed’s decision to raise short term interest rates becomes clearer. Based upon the Fed Funds futures and the current yield on the bellwether 10Year Treasury (2.12%), most market participants are looking for the first rate increase in December. I am hoping that it occurs before then (say, September), that it sends a shock through the markets and that it thereby creates a significant buying opportunity. A good shopping list can be had by going to Google Finance’s stock screener, selecting a minimum dividend rate (e.g 3.5%) and sorting by market cap. There you will find "a love that's true." You will see some great, blue chip companies, many of which will be hammered once rates increase--- if only for a short while.
Like it or not, great buying opportunities arise when stock markets drop. And the next rain on the current bull market's parade likely will occur when the Federal Reserve raises interest rates. We all know it is going to happen, so get on with it, Janet. Bring on the storm. Until then, I will continue to invoke The Temptations:
“Sunshine, blue skies, please go away
I know to you it might sound strange
But I wish it would rain
How I wish that it would rain”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“I'm so excited
And I just can't hide it
I'm about to lose control
And I think I like it”---lyrics from “Excited” sung by The Pointer Sisters
“Nothin like the old school
Ain't nuttin like the old school”---lyrics from “Old School” sung by 2Pac
“And I'm bringing you a love that's true.
So get ready, so get ready”---lyrics from “Get Ready” sung by The Temptations
When it comes to this year's stock market, have you heard anyone say “I’m so excited/And I just can’t hide it?” Has anyone exclaimed that “I’m about to lose control?” Or even “I like it?” I have not, and with the news on Friday that the nation’s economy shrank 0.7% in the first quarter, I don’t see a lot of excitement forthcoming. Experts now predict that the economy will grow about 2% for the year, consistent with the sluggish pace experienced over the past few years. With no new monetary stimulus at play (QE3 is over, and short term interest rates cannot go much lower), the stock market remains in a tight trading range. Year to date, the Dow Jones Industrial Average is up only 1.05%, and the S&P 500 is up 2.36%.
The performance of these indices would be much worse if not for an avalanche of share buy backs and dividend raises. Between these two shareholder-friendly moves, corporations comprising the S&P 500 will return a record $1Trillion to shareholders in 2015. Buybacks (which reduce the denominator in eps calculations) alone will raise earnings per share at least 4% for more than 100 companies this year. Exemplifying this is Pfizer (PFE) which is up 11% year to date notwithstanding fourteen consecutive quarters of diminishing sales and three straight quarters of earnings declines. Despite this poor performance, the pharma giant known for Lipitor, Viagra and Lyrica has kept its stock buoyed by coupling earnings announcements with huge buybacks and dividend increases. Is this bad? I don’t think so. Through the 1960’s, publicly traded corporations on average returned more than 50% of their earnings to shareholders primarily via dividends. That percentage fell dramatically in subsequent years. Indeed, dividends were considered passe during the dot.com era. Their return and that of their step sister, share buybacks, should be welcomed by income seekers of a certain age (e.g. yours truly). Like 2Pac, I say “Nothin like old school/Ain’t nuttin’ like old school.”
So far this year, I have not been penalized by sitting on a pile of cash. The DJIA and S&P’s paltry returns have not warranted taking much risk. I have not sat idly, however. I am “gettin’ ready/gettin’ ready” for my chosen moment to buy. As reported previously, that will be when the timing of the Fed’s decision to raise short term interest rates becomes clearer. Based upon the Fed Funds futures and the current yield on the bellwether 10Year Treasury (2.12%), most market participants are looking for the first rate increase in December. I am hoping that it occurs before then (say, September), that it sends a shock through the markets and that it thereby creates a significant buying opportunity. A good shopping list can be had by going to Google Finance’s stock screener, selecting a minimum dividend rate (e.g 3.5%) and sorting by market cap. There you will find "a love that's true." You will see some great, blue chip companies, many of which will be hammered once rates increase--- if only for a short while.
Like it or not, great buying opportunities arise when stock markets drop. And the next rain on the current bull market's parade likely will occur when the Federal Reserve raises interest rates. We all know it is going to happen, so get on with it, Janet. Bring on the storm. Until then, I will continue to invoke The Temptations:
“Sunshine, blue skies, please go away
I know to you it might sound strange
But I wish it would rain
How I wish that it would rain”
Sunday, May 17, 2015
May 17, 2015 Don't Worry 'Bout Me
Risk/Reward Vol. 267
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Give me one reason to stay here
And I'll turn right back around”---lyrics from “Give Me One Reason” sung by Tracy Chapman
“I'm friends with the monster that's under my bed
Get along with the voices inside of my head”---lyrics from “Monster” sung by Eminem feat. Rihanna
“Out along the edge
Is always where I burn to be
Highway to the danger zone”---lyrics from “Danger Zone” sung by Kenny Loggins
So what caused the stock market to “turn right back around” on Thursday with the Dow Jones Industrial Average and the S&P 500 both gaining 1.1% and the S&P setting a new record high? The financial rags on Friday were noticeably silent as to why. If I were to “give you one reason” it would be the disappointing Producer Price Index published Thursday morning. Unexpectedly, it showed that the average selling price of domestic products fell 0.4% in April. In the minds of many, this deflationary news lessened the likelihood that the Federal Reserve (which so desperately wants inflation at 2%) will raise rates any time soon. This caused the yield on the bellwether 10 Year Treasury Bond (“10 Year”) to drop more than 10 basis points by the close on Friday. Indeed, the Fed Funds Futures market now pegs the chance of a rate increase earlier than year end at less than 50%. No rate increase means a continuation of easy money, and easy money has fueled the bull market for the past six years.
But is that easy-money bet wise? “The voices in my head” tell me that a rate increase will happen this year. Will it happen in June? Now, probably not. In September? Could be. This year? Probably. And based upon the “taper tantrum” that occurred when the end of QE was first discussed in 2013, the reaction in the bond market will be swift and violent once a rate increase becomes more certain. See the discussions at Vols. 172 and 211 www.riskrewardblog.blogspot.com . For income investors such yours truly, the ones whose favorite securities trade in relation to the yield on 10 Year, a violent increase in rates is “the monster that’s under my bed.” Something that is always there; something that is to be feared and avoided.
Accordingly, if I remain mostly on the sidelines for the next several months, so be it. I do not see any segment of the market catching fire. Despite the nice run in the indices this week, they remain in a tight trading zone with returns in the 1-3% range; returns not warranting the risk. At my age and stage, I have no reason to be “along the edge”, let alone on a “highway to the danger zone.” In times past, that “is always where I get burned.” For the reasons discussed in the past few editions, I look for both the stock and bond markets to remain choppy for the foreseeable future.
When it comes to this market, I find solace in the lyrics of Kenny Loggins. When will the rate increase come? I don’t know. Certainly, I’m NOT prepared to announce:
“(This is it) Make no mistake where you are
(This is it) Your back's to the corner
(This is it) Don't be a fool anymore”
That said, I remain very cautious. “Footloose”, I am not. Instead, I am overweight in cash. There, “Dip, dip,dip/I’m alright/Nobody worry ‘bout me.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Give me one reason to stay here
And I'll turn right back around”---lyrics from “Give Me One Reason” sung by Tracy Chapman
“I'm friends with the monster that's under my bed
Get along with the voices inside of my head”---lyrics from “Monster” sung by Eminem feat. Rihanna
“Out along the edge
Is always where I burn to be
Highway to the danger zone”---lyrics from “Danger Zone” sung by Kenny Loggins
So what caused the stock market to “turn right back around” on Thursday with the Dow Jones Industrial Average and the S&P 500 both gaining 1.1% and the S&P setting a new record high? The financial rags on Friday were noticeably silent as to why. If I were to “give you one reason” it would be the disappointing Producer Price Index published Thursday morning. Unexpectedly, it showed that the average selling price of domestic products fell 0.4% in April. In the minds of many, this deflationary news lessened the likelihood that the Federal Reserve (which so desperately wants inflation at 2%) will raise rates any time soon. This caused the yield on the bellwether 10 Year Treasury Bond (“10 Year”) to drop more than 10 basis points by the close on Friday. Indeed, the Fed Funds Futures market now pegs the chance of a rate increase earlier than year end at less than 50%. No rate increase means a continuation of easy money, and easy money has fueled the bull market for the past six years.
But is that easy-money bet wise? “The voices in my head” tell me that a rate increase will happen this year. Will it happen in June? Now, probably not. In September? Could be. This year? Probably. And based upon the “taper tantrum” that occurred when the end of QE was first discussed in 2013, the reaction in the bond market will be swift and violent once a rate increase becomes more certain. See the discussions at Vols. 172 and 211 www.riskrewardblog.blogspot.com . For income investors such yours truly, the ones whose favorite securities trade in relation to the yield on 10 Year, a violent increase in rates is “the monster that’s under my bed.” Something that is always there; something that is to be feared and avoided.
Accordingly, if I remain mostly on the sidelines for the next several months, so be it. I do not see any segment of the market catching fire. Despite the nice run in the indices this week, they remain in a tight trading zone with returns in the 1-3% range; returns not warranting the risk. At my age and stage, I have no reason to be “along the edge”, let alone on a “highway to the danger zone.” In times past, that “is always where I get burned.” For the reasons discussed in the past few editions, I look for both the stock and bond markets to remain choppy for the foreseeable future.
When it comes to this market, I find solace in the lyrics of Kenny Loggins. When will the rate increase come? I don’t know. Certainly, I’m NOT prepared to announce:
“(This is it) Make no mistake where you are
(This is it) Your back's to the corner
(This is it) Don't be a fool anymore”
That said, I remain very cautious. “Footloose”, I am not. Instead, I am overweight in cash. There, “Dip, dip,dip/I’m alright/Nobody worry ‘bout me.”
Sunday, May 10, 2015
May 10, 2015 See The Exit
Risk/Reward Vol. 266
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“So Goldilocks for a while
Would you mind
Smiling your perfect smile”---lyrics from “Goldilocks Sometimes” sung by The Monkees
“A weather man of words
But I could never shoot down
My high-flying bird”---lyrics from “High Flying Bird” sung by Elton John
“Baby see the exit, exit, see the exit, let's go, out this club
Exit, exit, exit, see the exit, let's go out this club, exit”---lyrics from “Exit” sung by RKelly
Who would have thought that a so-so April jobs report on Friday would vault the Dow Jones Industrial Average (DJIA) 1.5% (267 points) and the S&P 500 1.35% (28 points)? Only Mr. Market. The economy added a respectable 223,000 jobs last month, and unemployment fell to 5.4%. But the job participation rate remained at an historic low (only 62.8% of eligible workers were employed or looking for work), and wages grew at annual rate of only 2.2%, far below the 3-3.5% that labor economists believe is necessary to sustain healthy economic growth. So why the bump? Market commentators called the jobs report “Goldilocks”: “ not too hot” so as to cause the Federal Reserve to raise interest rates before September; “not too cold” so as to indicate a stalled economy; “just right” for the market to trade within its year-to-date range. And so, the stock market's steady downward march over the previous few days was halted and reversed by the Labor Department’s “perfect smile” jobs numbers.
And what a reversal it was from Tuesday and Wednesday when the DJIA sank 239 points (and even more intraday). The market declined in the aftermath of comments from Fed Chair Janet Yellen early in the week that “equity market valuations were generally quite high.” Talk about “a weather man of words/shooting down/a high flying bird!” Clearly, whatever else one believes impacts the stock market, one cannot deny that the Fed is influence numero uno. A few negative words from Janet and the market lost all of its year to date gains; two days later a jobs report indicating that the Fed may not raise rates until September caused the indices to flirt with all time highs. I believe that these “mixed signals,” about which I wrote last week (www.riskrewardblog.blogspot.com ), will cause the markets to yo-yo until the Fed makes a definitive move.
The bond market mirrored the stock market’s action with the yield on the bellwether 10 Year US Treasury reaching as high as 2.24% midweek before falling to 2.15% at Friday’s close. (Remember: as yields increase, prices decline.) However, on a percentage basis, the bond market is much more volatile and will remain so until the Fed raises rates. The reason is simple and has been the subject of recent comments from virtually every market guru from Bill Gross to Jeffrey Gundlach to Mohamed El Erian to Stanley Druckenmiller to Larry Summers to Howard Marks to most recently Jamie Dimon, the head of JPMorganChase. And that reason is this: a lack of liquidity---which is a fancy way of saying there won’t be enough buyers when everyone wants out of bonds and starts yelling “ Baby see the exit, exit, see the exit, let's go, out this club/Exit, exit, exit, see the exit, let's go out this club, exit.” In the past, large banks (e.g. Citibank, JPMorganChase, Wells Fargo, Deutsche Bank, etc.) served as the buyers of last resort or “market makers” for all types of bonds. Historically, this role had been profitable for large banks. At the same time, the role served to stabilize the bond market. But market making, in the short run, can and has exposed these institutions to significant risk; the type that occurred in 2008-2009 when the bottom fell out of all markets necessitating government assistance. The Dodd-Frank law was enacted, in part, to address the bond trading risks faced by banks, in particular the large ones such as Citibank which were deemed “too big to fail.” In typical regulatory fashion, however, Dodd Frank appears to have overshot the mark and now, in a classic example of “unintended consequences”, Dodd-Frank has created a bond market powder keg. Without large banks serving as market makers, buying when others don't want to and backstopping prices, the bond market likely will fall precipitously once the Fed raises rates. This is the main reason that income investors (preferred stocks, REIT's, municipal bond funds, utilities, etc.) such as yours truly, whose securities trade in relation to the bond market, must remain cautious and vigilant. And why, Dear Readers, I remain overweight in cash.
And so the beat goes on--- with the stock and bond markets down significantly one day; up significantly the next. I see this pattern continuing until the greatest influence on Mr. Market's conduct, the Fed, finally raises rates. Like The Monkees, of this “I’m a believer/Not a trace of doubt in my mind.” Unless, of course, I change my mind.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“So Goldilocks for a while
Would you mind
Smiling your perfect smile”---lyrics from “Goldilocks Sometimes” sung by The Monkees
“A weather man of words
But I could never shoot down
My high-flying bird”---lyrics from “High Flying Bird” sung by Elton John
“Baby see the exit, exit, see the exit, let's go, out this club
Exit, exit, exit, see the exit, let's go out this club, exit”---lyrics from “Exit” sung by RKelly
Who would have thought that a so-so April jobs report on Friday would vault the Dow Jones Industrial Average (DJIA) 1.5% (267 points) and the S&P 500 1.35% (28 points)? Only Mr. Market. The economy added a respectable 223,000 jobs last month, and unemployment fell to 5.4%. But the job participation rate remained at an historic low (only 62.8% of eligible workers were employed or looking for work), and wages grew at annual rate of only 2.2%, far below the 3-3.5% that labor economists believe is necessary to sustain healthy economic growth. So why the bump? Market commentators called the jobs report “Goldilocks”: “ not too hot” so as to cause the Federal Reserve to raise interest rates before September; “not too cold” so as to indicate a stalled economy; “just right” for the market to trade within its year-to-date range. And so, the stock market's steady downward march over the previous few days was halted and reversed by the Labor Department’s “perfect smile” jobs numbers.
And what a reversal it was from Tuesday and Wednesday when the DJIA sank 239 points (and even more intraday). The market declined in the aftermath of comments from Fed Chair Janet Yellen early in the week that “equity market valuations were generally quite high.” Talk about “a weather man of words/shooting down/a high flying bird!” Clearly, whatever else one believes impacts the stock market, one cannot deny that the Fed is influence numero uno. A few negative words from Janet and the market lost all of its year to date gains; two days later a jobs report indicating that the Fed may not raise rates until September caused the indices to flirt with all time highs. I believe that these “mixed signals,” about which I wrote last week (www.riskrewardblog.blogspot.com ), will cause the markets to yo-yo until the Fed makes a definitive move.
The bond market mirrored the stock market’s action with the yield on the bellwether 10 Year US Treasury reaching as high as 2.24% midweek before falling to 2.15% at Friday’s close. (Remember: as yields increase, prices decline.) However, on a percentage basis, the bond market is much more volatile and will remain so until the Fed raises rates. The reason is simple and has been the subject of recent comments from virtually every market guru from Bill Gross to Jeffrey Gundlach to Mohamed El Erian to Stanley Druckenmiller to Larry Summers to Howard Marks to most recently Jamie Dimon, the head of JPMorganChase. And that reason is this: a lack of liquidity---which is a fancy way of saying there won’t be enough buyers when everyone wants out of bonds and starts yelling “ Baby see the exit, exit, see the exit, let's go, out this club/Exit, exit, exit, see the exit, let's go out this club, exit.” In the past, large banks (e.g. Citibank, JPMorganChase, Wells Fargo, Deutsche Bank, etc.) served as the buyers of last resort or “market makers” for all types of bonds. Historically, this role had been profitable for large banks. At the same time, the role served to stabilize the bond market. But market making, in the short run, can and has exposed these institutions to significant risk; the type that occurred in 2008-2009 when the bottom fell out of all markets necessitating government assistance. The Dodd-Frank law was enacted, in part, to address the bond trading risks faced by banks, in particular the large ones such as Citibank which were deemed “too big to fail.” In typical regulatory fashion, however, Dodd Frank appears to have overshot the mark and now, in a classic example of “unintended consequences”, Dodd-Frank has created a bond market powder keg. Without large banks serving as market makers, buying when others don't want to and backstopping prices, the bond market likely will fall precipitously once the Fed raises rates. This is the main reason that income investors (preferred stocks, REIT's, municipal bond funds, utilities, etc.) such as yours truly, whose securities trade in relation to the bond market, must remain cautious and vigilant. And why, Dear Readers, I remain overweight in cash.
And so the beat goes on--- with the stock and bond markets down significantly one day; up significantly the next. I see this pattern continuing until the greatest influence on Mr. Market's conduct, the Fed, finally raises rates. Like The Monkees, of this “I’m a believer/Not a trace of doubt in my mind.” Unless, of course, I change my mind.
Sunday, May 3, 2015
May 3, 2015 Mixed Signals
Risk/Reward Vol. 265
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Sorry, but I have been too busy to compose a typical Risk/Reward. All good---just too busy. That said, once again, too much occurred this week to let it pass without comment.
Thursday and Friday were quite a roller coaster ---the Dow down 200 one day then up 200 the next. Despite this action, the week ended nearly where it did last week. Why the volatility, you ask? Mixed signals. Corporate earnings are ok, but top line performance is spotty and guidance is cautious. The economy grew at a disappointing 0.2% in the first quarter, but employment numbers continue to improve. Add to this the uncertainty arising from the Federal Reserve's press release after its mid week meeting. It left many Fed watchers wondering whether the first rate increase would occur in June or September or not at all this year. Mixed signals indeed--- at least for those in the equity market.
The bond market however traded with much more certainty. The yield on the bellwether 10 Year Treasury Bond rose steadily after the Fed meeting. It ended the week at 2.12%, 20 basis points above its close last week. This 10% increase bespoke conviction by bond traders that the Fed will raise rates this year, a sluggish economy notwithstanding. Indeed, the rapidity of the increase in the 10Year yield indicates that many in the bond market see the increase coming in June. Frankly, a rate bump before the release of Q2 economic numbers (which would be in July) makes sense if the Fed is hell bent on an increase in 2015---as it appears to be. If Q2 economic data disappoints, as it well could, the Fed would have a difficult time raising rates at all this year.
At this point, I want an increase in June. If one occurs, it will cause the market to oversell income securities---of this I am certain. And I have identified a slew of great stocks that I will buy if and when an increase occurs. Take a look at my favorite triple net lease, real estate investment trust (REIT), Realty Income (O). O owns nearly 4500 single purpose buildings leased to highly rated tenants like Firestone, Publix, Taco Bell, Home Depot, etc. Moreover, it has increased its dividend every quarter for 70 quarters. Nevertheless, its stock price is down double digits over the past 3 months which has caused its annual yield to approach 5%. It is a must buy once the Fed announces a rate increase. Also take a look at the senior living REIT space where Ventas (VTR), Senior Housing (SNR) and Omega (OHI) have likewise suffered double digit losses since February. These are solid companies with a history of increasing dividends. They too are on my shopping list once the Fed acts.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Sorry, but I have been too busy to compose a typical Risk/Reward. All good---just too busy. That said, once again, too much occurred this week to let it pass without comment.
Thursday and Friday were quite a roller coaster ---the Dow down 200 one day then up 200 the next. Despite this action, the week ended nearly where it did last week. Why the volatility, you ask? Mixed signals. Corporate earnings are ok, but top line performance is spotty and guidance is cautious. The economy grew at a disappointing 0.2% in the first quarter, but employment numbers continue to improve. Add to this the uncertainty arising from the Federal Reserve's press release after its mid week meeting. It left many Fed watchers wondering whether the first rate increase would occur in June or September or not at all this year. Mixed signals indeed--- at least for those in the equity market.
The bond market however traded with much more certainty. The yield on the bellwether 10 Year Treasury Bond rose steadily after the Fed meeting. It ended the week at 2.12%, 20 basis points above its close last week. This 10% increase bespoke conviction by bond traders that the Fed will raise rates this year, a sluggish economy notwithstanding. Indeed, the rapidity of the increase in the 10Year yield indicates that many in the bond market see the increase coming in June. Frankly, a rate bump before the release of Q2 economic numbers (which would be in July) makes sense if the Fed is hell bent on an increase in 2015---as it appears to be. If Q2 economic data disappoints, as it well could, the Fed would have a difficult time raising rates at all this year.
At this point, I want an increase in June. If one occurs, it will cause the market to oversell income securities---of this I am certain. And I have identified a slew of great stocks that I will buy if and when an increase occurs. Take a look at my favorite triple net lease, real estate investment trust (REIT), Realty Income (O). O owns nearly 4500 single purpose buildings leased to highly rated tenants like Firestone, Publix, Taco Bell, Home Depot, etc. Moreover, it has increased its dividend every quarter for 70 quarters. Nevertheless, its stock price is down double digits over the past 3 months which has caused its annual yield to approach 5%. It is a must buy once the Fed announces a rate increase. Also take a look at the senior living REIT space where Ventas (VTR), Senior Housing (SNR) and Omega (OHI) have likewise suffered double digit losses since February. These are solid companies with a history of increasing dividends. They too are on my shopping list once the Fed acts.
Sunday, April 26, 2015
April 26, 2015 Livin' On A Prayer
Risk/Reward Vol 264
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Buy it, use it, break it, fix it,
Trash it, change it, mail it,
Charge it, point it, zoom it, press it”---lyrics from “Technological” sung by Daft Punk
“Whoa, we're half way there
Whoa, livin' on a prayer”---lyrics “Livin’ On a Prayer” sung by Bon Jovi
“Is that all there is/Is that all there is
If that's all there is my friends/Then let's keep dancing”---lyrics from “Is That All There Is” sung by Peggy Lee
The NASDAQ Index, comprised of the top 100 “Technological” companies, set a new record on Friday surpassing its previous high set fifteen years ago during the Dotcom days. This rise also caused the S&P 500 Index to flirt with a new high because many NASDAQ companies are also in the S&P. Leading the advance was Amazon which rose 15% on Friday despite reporting another quarter of negative earnings. Investors are willing to forego profits because they love the growth story that is and always has been Amazon---first books, then Kindles and now logistics and web services. As long as consumers “buy it, use it, break it, fix it/Trash it, change it, mail it/Charge it, point it, zoom it, press it”----and it is supplied and/or delivered by Amazon, investors will support the stock. Oh and talk about a good day. On Friday alone, Amazon founder Jeff Bezos’ net worth rose $5billion.
We are midway through the earnings season. How are doing “half way there?” So far, 53% of the companies reporting have missed sales (top line) expectations, but 73% have beaten earnings per share expectations. This dichotomy is not surprising in light of the impact of share buy backs highlighted in last week’s edition. (www.riskrewardblog.blogspot.com ). Overall the performance has been less than stellar, but has been good enough to put both the Dow Jones Industrial Average (+1.44%) and the S&P 500 (+2.86%) back into positive territory for 2015. So are these gains on solid footing, or are we “livin’ on a prayer?”
When tech stocks lead the way and more than half of the companies miss on the top line (despite lowered expectations), one is left to wonder “is that all there is/is that all there is” to support a rally? Should we “keep dancing” or is the music about to end? Having been burned badly by NASDAQ stocks fifteen years ago, I am leery of any market dominated by the tech sector. Moreover, even in the presence of massive stock buy-back programs (which reduce denominators in earnings per share calculations), stocks are at the high end of historic valuations. The S&P 500 stocks are trading at 27 times earnings averaged over the past 10 years---something that they have not done since before the Dotcom collapse. “Is that all there is”---indeed.
But for the NASDAQ 100 (+7.52%), stocks so far in 2015 have been a risky and only marginally rewarding investment. Is the six year bull market about to end? Who knows? I, for one, am holding pat, overweight cash. I remember only too well my Y2K NASDAQ love affair--- and the woe it begot me. Back then, I found myself living these Bon Jovi lyrics:
“Shot through the heart and you're to blame
You (NASDAQ) give love a bad name.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Buy it, use it, break it, fix it,
Trash it, change it, mail it,
Charge it, point it, zoom it, press it”---lyrics from “Technological” sung by Daft Punk
“Whoa, we're half way there
Whoa, livin' on a prayer”---lyrics “Livin’ On a Prayer” sung by Bon Jovi
“Is that all there is/Is that all there is
If that's all there is my friends/Then let's keep dancing”---lyrics from “Is That All There Is” sung by Peggy Lee
The NASDAQ Index, comprised of the top 100 “Technological” companies, set a new record on Friday surpassing its previous high set fifteen years ago during the Dotcom days. This rise also caused the S&P 500 Index to flirt with a new high because many NASDAQ companies are also in the S&P. Leading the advance was Amazon which rose 15% on Friday despite reporting another quarter of negative earnings. Investors are willing to forego profits because they love the growth story that is and always has been Amazon---first books, then Kindles and now logistics and web services. As long as consumers “buy it, use it, break it, fix it/Trash it, change it, mail it/Charge it, point it, zoom it, press it”----and it is supplied and/or delivered by Amazon, investors will support the stock. Oh and talk about a good day. On Friday alone, Amazon founder Jeff Bezos’ net worth rose $5billion.
We are midway through the earnings season. How are doing “half way there?” So far, 53% of the companies reporting have missed sales (top line) expectations, but 73% have beaten earnings per share expectations. This dichotomy is not surprising in light of the impact of share buy backs highlighted in last week’s edition. (www.riskrewardblog.blogspot.com ). Overall the performance has been less than stellar, but has been good enough to put both the Dow Jones Industrial Average (+1.44%) and the S&P 500 (+2.86%) back into positive territory for 2015. So are these gains on solid footing, or are we “livin’ on a prayer?”
When tech stocks lead the way and more than half of the companies miss on the top line (despite lowered expectations), one is left to wonder “is that all there is/is that all there is” to support a rally? Should we “keep dancing” or is the music about to end? Having been burned badly by NASDAQ stocks fifteen years ago, I am leery of any market dominated by the tech sector. Moreover, even in the presence of massive stock buy-back programs (which reduce denominators in earnings per share calculations), stocks are at the high end of historic valuations. The S&P 500 stocks are trading at 27 times earnings averaged over the past 10 years---something that they have not done since before the Dotcom collapse. “Is that all there is”---indeed.
But for the NASDAQ 100 (+7.52%), stocks so far in 2015 have been a risky and only marginally rewarding investment. Is the six year bull market about to end? Who knows? I, for one, am holding pat, overweight cash. I remember only too well my Y2K NASDAQ love affair--- and the woe it begot me. Back then, I found myself living these Bon Jovi lyrics:
“Shot through the heart and you're to blame
You (NASDAQ) give love a bad name.”
Sunday, April 19, 2015
April 19, 2015 Malaise
Risk/Reward Vol. 263
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The dog ate my homework. Not really, but something just as incredible did occur. My computer chose to “refresh” as I was doing final edits to this week’s edition. When it rebooted all of my work product was gone. I walked away in frustration and decided not to publish this week. But what happened on Friday was too important to let pass without comment. So I will dispense with the usual format and go directly to the point.
According to the financial press, the 279 point (1.5%) drop in the Dow Jones Industrial Average (DJIA) on Friday resulted from a change in the rules applicable to the Chinese stock market, concern over Greece’s possible exit from the Eurozone and a few notable quarterly earnings misses (e.g. GE). Really? These unremarkable events may have caused a negative day but were they enough to wipe out all of the DJIA’s year to date gain? Methinks not. I suspect that the malaise exhibited by market mavens Fink, El Erian, Summers and Gundlach which I have reported over the past few weeks is beginning to in-fect (or at least af-fect) others. This week the most prominent buzz kill came in the form of a transcript of a conversation between billionaire investors Ken Langone and Stanley Druckenmiller (George Soros’ former colleague) in which Druckenmiller likened the current stock market bubble to 2005-06---just before the subprime fiasco. He sees the current situation "ending badly."
No one is saying that the stock market will crash tomorrow, next month or even this year. That said, one must balance risk with reward. Personally, I see little reward from investing in any risk assets at present: bonds or equities with bonds being the riskier of the two. Obviously, Friday’s action demonstrates that I am not alone. So again this week I held pat; not selling anything but overweight cash.
Next week’s calendar is full of earnings reports. Track how many companies meet top line (sales) expectations. (Earnings per share have become less indicative of a company's performance due to the plethora of distortive share buy back programs.) Also, keep an eye on the guidance that companies provide for coming quarters. Guidance could foretell if any stock gains can be expected for the year.
Sunday, April 12, 2015
April 12, 2015 Bubble Pop
Risk/Reward Vol. 262
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“More and more each day
It's not supposed to hurt this way
Tell me, why”---lyrics from “Why” sung by Avril Lavigne
“This is out of our reach
Out of our reach
Negative creep”---lyrics from “Negative Creep” sung by Nirvana
“I got my bubble, hey, I got my bubble, hey hey
I got my bubble, yeah, I make my bubble pop”---lyrics from “Bubble Pop” sung by Rihanna
Contrary to last week's prediction, the stock markets this week were calm with both of the major US indices gaining nearly 1.5%. Their movement was steady, and with the exception of Tuesday, stocks rose “more and more each day.” So, Mr. Know-It-All, “tell me why?” “Tell me why” we are approaching record highs on both the S&P 500 and the Dow Jones Industrial Average when the consensus is that corporate earnings will disappoint this quarter? “Tell me why” the CAC 40 (France), the DAX (Germany) and the FTSE 100 (Great Britain) are at multiyear highs when Europe continues its march toward deflation? “Tell me why” this is occurring when the Chinese economy is now predicted to grow at less than a 7% clip, and the emerging markets are struggling? “Tell me why?”
As demonstrated week after week, my powers of prognostication are questionable at best. Knowing what will happen is clearly “out of my reach/Out of my reach.” But here is my take on where we are. Those of you fully invested in the market are continuing to enjoy the fruits of worldwide quantitative easing (QE). Although our Federal Reserve stopped printing money to buy assets last October, it continues to suppress interest rates and to encourage more risk by rolling over its massive $4.5 trillion balance sheet and by keeping short term yields near zero. In addition, this year the European Central Bank embarked on its own QE-buying spree purchasing 60billionEuro’s worth of sovereign debt every month for the foreseeable future. The impact is obvious. With short to medium duration bonds throughout Europe doing a “negative creep”, with the German 10 Year Bund yielding only 0.15%, the French 10Year bond yielding 0.43% and the Spanish 10Year bond yielding only 1.22%, investors in search of a return have few choices: buy US debt (US 10Year yielding a mere 1.9% and investment grade corporate bonds only 2.9%) or buy progressively more expensive equities in the hope that they will continue to appreciate.
With stocks trading at record multiples of earnings, are we “in a bubble, hey/a bubble hey”? Don’t rely on me for an answer. Read Larry Fink’s letter to shareholders. For those who don't know, Mr. Fink is the founder and chairman of BlackRock, the world's largest asset manager with $4.5trillion (yes, that's trillion) under management. The letter can be found at www.blackrock.com . In pertinent part, it reads: “The mix of growing assets and shrinking yields is creating a dangerous imbalance. Yet monetary policy makers (read: central bankers) seem insufficiently attuned to the conundrum their actions are creating for investors: reach for yield and continue to fuel the expanding bubble or remain on the sidelines...” Fink calls the search for yield the “greatest source of prudential risk in the financial system.” How close are we to having the “bubble pop?” I don’t know. I do know that one of my favorite market guru’s, Mohamed El Erian, said last week that he is now mostly invested in cash because "asset prices have been pushed by central bankers to very elevated levels.” I too remain overweighted in cash.
And so, two weeks in a row this publication bears a negative tone while the markets continue to rise. Come to your own conclusions, and share them with me. Maybe I am too much like Rihanna. Instead of pleading "Please don't stop the music", I am living in “Disturbia”, opening an “Umbrella” and “Taking a Bow.” I can't help it. I am uneasy. Thus I am cautious. “Sticks and stones may break my bones”, but I am not “just gonna stand there and watch my nest egg burn.”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“More and more each day
It's not supposed to hurt this way
Tell me, why”---lyrics from “Why” sung by Avril Lavigne
“This is out of our reach
Out of our reach
Negative creep”---lyrics from “Negative Creep” sung by Nirvana
“I got my bubble, hey, I got my bubble, hey hey
I got my bubble, yeah, I make my bubble pop”---lyrics from “Bubble Pop” sung by Rihanna
Contrary to last week's prediction, the stock markets this week were calm with both of the major US indices gaining nearly 1.5%. Their movement was steady, and with the exception of Tuesday, stocks rose “more and more each day.” So, Mr. Know-It-All, “tell me why?” “Tell me why” we are approaching record highs on both the S&P 500 and the Dow Jones Industrial Average when the consensus is that corporate earnings will disappoint this quarter? “Tell me why” the CAC 40 (France), the DAX (Germany) and the FTSE 100 (Great Britain) are at multiyear highs when Europe continues its march toward deflation? “Tell me why” this is occurring when the Chinese economy is now predicted to grow at less than a 7% clip, and the emerging markets are struggling? “Tell me why?”
As demonstrated week after week, my powers of prognostication are questionable at best. Knowing what will happen is clearly “out of my reach/Out of my reach.” But here is my take on where we are. Those of you fully invested in the market are continuing to enjoy the fruits of worldwide quantitative easing (QE). Although our Federal Reserve stopped printing money to buy assets last October, it continues to suppress interest rates and to encourage more risk by rolling over its massive $4.5 trillion balance sheet and by keeping short term yields near zero. In addition, this year the European Central Bank embarked on its own QE-buying spree purchasing 60billionEuro’s worth of sovereign debt every month for the foreseeable future. The impact is obvious. With short to medium duration bonds throughout Europe doing a “negative creep”, with the German 10 Year Bund yielding only 0.15%, the French 10Year bond yielding 0.43% and the Spanish 10Year bond yielding only 1.22%, investors in search of a return have few choices: buy US debt (US 10Year yielding a mere 1.9% and investment grade corporate bonds only 2.9%) or buy progressively more expensive equities in the hope that they will continue to appreciate.
With stocks trading at record multiples of earnings, are we “in a bubble, hey/a bubble hey”? Don’t rely on me for an answer. Read Larry Fink’s letter to shareholders. For those who don't know, Mr. Fink is the founder and chairman of BlackRock, the world's largest asset manager with $4.5trillion (yes, that's trillion) under management. The letter can be found at www.blackrock.com . In pertinent part, it reads: “The mix of growing assets and shrinking yields is creating a dangerous imbalance. Yet monetary policy makers (read: central bankers) seem insufficiently attuned to the conundrum their actions are creating for investors: reach for yield and continue to fuel the expanding bubble or remain on the sidelines...” Fink calls the search for yield the “greatest source of prudential risk in the financial system.” How close are we to having the “bubble pop?” I don’t know. I do know that one of my favorite market guru’s, Mohamed El Erian, said last week that he is now mostly invested in cash because "asset prices have been pushed by central bankers to very elevated levels.” I too remain overweighted in cash.
And so, two weeks in a row this publication bears a negative tone while the markets continue to rise. Come to your own conclusions, and share them with me. Maybe I am too much like Rihanna. Instead of pleading "Please don't stop the music", I am living in “Disturbia”, opening an “Umbrella” and “Taking a Bow.” I can't help it. I am uneasy. Thus I am cautious. “Sticks and stones may break my bones”, but I am not “just gonna stand there and watch my nest egg burn.”
Sunday, April 5, 2015
April 4, 2015 Bottom Line
Risk/Reward Vol. 261
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
‘I won't pay, I won't pay ya, no way
Why don't you get a job?
Say no way, say no way ya, no way
Why don't you get a job?”---lyrics from “Why Don’t You Get A Job” sung by The Offspring
“I'm dying to(o)
The sun will shine
The bottom line
I follow you”---lyrics from “Bottom Line” sung by Depeche Mode
“Why's this fussing and a-fighting?
I want to know, Lord, I want to know
Why's this cheating and backbiting?
I want to know, oh, Lord, I want to know now”---lyrics from “Fussing and Fighting” sung by Bob Marley
With both the Dow Jones Industrial Average and the S&P500 flat year to date, one wonders what the second quarter will bring. The employment news reported on Friday does not bode well for the economy and thus casts doubt on the markets. Only 126,000 jobs were added in March, well below the 245,000 that were expected. Moreover, adjustments to previously reported numbers lowered average monthly job growth for the first quarter of 2015 to 197,000 as compared to 324,000 in the last quarter of 2014. It appears that the answer to the question “Why don’t you get a job” is because “I won’t pay, I won’t pay ya, no way.” On the positive side was news that the unemployment rate remained at 5.5%, but even that was tempered by the fact that the employment participation rate fell to 67.8%, the lowest percentage since 1978.
So why has job growth slowed? Many commentators place the blame on an anticipated drop in corporate earnings. They fear that that this quarter and indeed this year “the sun will not shine” on “the bottom line.” One reason lies in the strong dollar. A strong dollar versus other major currencies has the effect of lowering foreign based revenue. A Euro’s worth of earnings last year at this time was worth $1.37. It is worth $1.08 today. Stated differently, the same amount of sales in Europe (Euros) this year means 26% less in reported dollar revenue. This has proven problematic for every major company with significant international operations and/or sales. In short, the strength of the dollar is a major headwind for earnings, and earnings are the major determinant of a stock’s price. With the average S&P500 stock trading at an historically rich 17 times expected future earnings, any drop in those earnings (even if the reason is solely the dollar/Euro exchange rate) will undoubtedly exert downward pressure on stock prices. Without earnings growth and stock appreciation, corporate managers will not hire.
So what does this all mean to an income investor such as yours truly? If next month’s job report also disappoints, we likely will not see the Federal Reserve raise interest rates in June. Indeed, the immediate reaction to Friday’s jobs number upon the yield of the bellwether 10Year Treasury Bond so portends, as it fell to 1.84%. For me, nothing is more important than knowing the timing and extent of any interest rate change. “I want to know, Lord, I want to know now.” The Fed itself will not tip its hand, but look for a public debate by and between individual Fed members and Fed watchers as rate hawks and rate doves engage in “fussing and a-fighting” over the next few weeks and months. In the meantime, I remain overweighted in cash.
Next week should prove interesting as Alcoa kicks off the first quarter’s earnings report season. Between earnings and Fed watching, I see a period of volatility in the markets with as many boo days as yea days. All the while, market commentators will be overreacting both to the positive and to the negative, as if taught by that noted financial journalist, Bob Marley:
“Come on and stir it up; ..., little darlin'!
Stir it up; come on, baby!
Come on and stir it up, yeah!
Little darlin', stir it up! O-oh!”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
‘I won't pay, I won't pay ya, no way
Why don't you get a job?
Say no way, say no way ya, no way
Why don't you get a job?”---lyrics from “Why Don’t You Get A Job” sung by The Offspring
“I'm dying to(o)
The sun will shine
The bottom line
I follow you”---lyrics from “Bottom Line” sung by Depeche Mode
“Why's this fussing and a-fighting?
I want to know, Lord, I want to know
Why's this cheating and backbiting?
I want to know, oh, Lord, I want to know now”---lyrics from “Fussing and Fighting” sung by Bob Marley
With both the Dow Jones Industrial Average and the S&P500 flat year to date, one wonders what the second quarter will bring. The employment news reported on Friday does not bode well for the economy and thus casts doubt on the markets. Only 126,000 jobs were added in March, well below the 245,000 that were expected. Moreover, adjustments to previously reported numbers lowered average monthly job growth for the first quarter of 2015 to 197,000 as compared to 324,000 in the last quarter of 2014. It appears that the answer to the question “Why don’t you get a job” is because “I won’t pay, I won’t pay ya, no way.” On the positive side was news that the unemployment rate remained at 5.5%, but even that was tempered by the fact that the employment participation rate fell to 67.8%, the lowest percentage since 1978.
So why has job growth slowed? Many commentators place the blame on an anticipated drop in corporate earnings. They fear that that this quarter and indeed this year “the sun will not shine” on “the bottom line.” One reason lies in the strong dollar. A strong dollar versus other major currencies has the effect of lowering foreign based revenue. A Euro’s worth of earnings last year at this time was worth $1.37. It is worth $1.08 today. Stated differently, the same amount of sales in Europe (Euros) this year means 26% less in reported dollar revenue. This has proven problematic for every major company with significant international operations and/or sales. In short, the strength of the dollar is a major headwind for earnings, and earnings are the major determinant of a stock’s price. With the average S&P500 stock trading at an historically rich 17 times expected future earnings, any drop in those earnings (even if the reason is solely the dollar/Euro exchange rate) will undoubtedly exert downward pressure on stock prices. Without earnings growth and stock appreciation, corporate managers will not hire.
So what does this all mean to an income investor such as yours truly? If next month’s job report also disappoints, we likely will not see the Federal Reserve raise interest rates in June. Indeed, the immediate reaction to Friday’s jobs number upon the yield of the bellwether 10Year Treasury Bond so portends, as it fell to 1.84%. For me, nothing is more important than knowing the timing and extent of any interest rate change. “I want to know, Lord, I want to know now.” The Fed itself will not tip its hand, but look for a public debate by and between individual Fed members and Fed watchers as rate hawks and rate doves engage in “fussing and a-fighting” over the next few weeks and months. In the meantime, I remain overweighted in cash.
Next week should prove interesting as Alcoa kicks off the first quarter’s earnings report season. Between earnings and Fed watching, I see a period of volatility in the markets with as many boo days as yea days. All the while, market commentators will be overreacting both to the positive and to the negative, as if taught by that noted financial journalist, Bob Marley:
“Come on and stir it up; ..., little darlin'!
Stir it up; come on, baby!
Come on and stir it up, yeah!
Little darlin', stir it up! O-oh!”
Saturday, March 28, 2015
March 28, 2015 Two Steps Back
Risk/Reward Vol. 260
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“We've given each other some hard lessons lately
But we ain't learnin'
We're the same sad story that's a fact
One step up and two steps back”---lyrics from “One Step Up” sung by Bruce “The Boss” Springsteen
“For a small piece of paper/ It carries a lot of weight
Oh, that mean, mean, mean, mean, mean green”---lyrics from “For the Love of Money” sung by the O’Jays
“I got no fever/But I'm feeling the heat
Oh boy, someone get me out of here”---lyrics from “Get Me Out of Here” sung by Paul McCartney
Both the Dow Jones Industrial Average and the S&P500 fell this week. Year to date, both sit in the red. There are many cross currents at work (e.g. the divergent monetary policies here and in Europe, the rise in the dollar, the crisis in the Arabian peninsula, etc.) Indeed, it seems this year we take “one step up and two steps back.” “We’ve given ourselves some hard investing lessons lately”, but “we ain’t learning"”---at least I'm not. If you can make sense of it all, please contact me. Indeed, it is this pervasive uncertainty that caused me to sell several positions earlier this month (as discussed in Vol. 258 www.riskrewardblog.blogspot.com ). And I am not alone. So far this year, net outflows from equity exchange traded funds (ETF’s) total $44billion, more than at any time since the crash of 2009. SPY, the S&P500 ETF, alone has experienced $26billion in net outflows.
I still am heavily in cash. In the absence of inflation and without any ability to receive a return on short term deposits (have you checked money market and cd rates lately), cash is not a bad place to be. “For a small piece of paper/It carries a lot of weight/That mean, mean, mean, mean, mean green.” I am locked and loaded and ready to invest. I just don’t see many desirable targets. Again, I am not alone. Where are we headed? After six years of zero bound interest rates, we have a Federal Reserve which seems hell bent on raising rates in the face of contrary moves by virtually every other central bank in the world and, as noted above, in the complete absence of inflation. In so doing, corporate profits will suffer, and our balance of payments will worsen as consumers opt for cheaper imported items. To add to this uncertainty, the Fed has become more opaque in its communications.
Even though “I got no fever” to invest at present, I have repurchased some irresistibly cheap oil and gas plays and some preferred stock positions. These were made without great conviction, so if “I’m feeling the heat” from rising interest rates or otherwise, I will “get me out of here.” Accordingly, a major consideration in this round of investing was liquidity---the ability to sell at or near the last quoted price. The best way to insure liquidity is to purchase securities for which there is a robust market; to wit a lot of volume. Much of what has appealed to me in the past (e.g. closed end funds) is thinly traded. From time to time I have been disappointed by the spread between what is asked and what is bid on these. Volume lessens this spread. How has this affected my recent purchases? Here is an example. I opted for more PGX than FFC in the preferred stock fund space because PGX trades at 10 times the average daily volume of FFC. I did so even though PGX pays a substantially smaller dividend. For a discussion of the role of liquidity in investing, read Howard Marks’ ( see Vols. 173 and 234 www.riskrewardblog.blogspot.com ) excellent memo on the topic published just this week. It can be found at www.oaktreecapital.com/memo.aspx .
What I have written above reads negative. Truthfully, I am less negative than I am frustrated. But frustrated I must not become. I remain convinced that someday, I will find the secret sauce to investing. In that regard, I am like The Boss:
“Oh-oh, someday girl
I don't know when
We're gonna get to that place
Where we really wanna go
And we'll walk in the sun
But till then, tramps like us,
Baby we were born to run”
Saturday, March 21, 2015
March 21, 2015 Say What You Mean
Risk/Reward Vol. 259
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Say what you mean
Mean what you say
Think about the words
That you’re using”---lyrics from “Say What You Mean” sung by The Moody Blues
“And I don't give a damn about a greenback dollar
Spend it fast as I can/For a wailin song and a good guitar
The only thing that I understand, poor boy”---lyrics from “Greenback Dollar” sung by Hoyt Axton
“It was an itsy bitsy, teenie, weenie, yellow polka dot bikini
That she wore for the first time today”---lyrics from “Itsy Bitsy….” sung by Brian Hyland
Going into this week’s meeting of the Federal Reserve’s Open Market Committee (FOMC), the conventional wisdom was that if the FOMC removed the word “patient” from its forward guidance, an interest rate increase could be expected in June. In addition, it was believed that any such removal would cause the dollar to rise, the interest rate on the 10Year US Treasury to spike, the price of oil to drop and the stock market to plummet. “Patient” was removed, but in so doing the FOMC did not “Say what it meant/Or mean what it said. Instead, Chair Yellen emphasized that removal of the word “patient” does not mean that the FOMC will be “impatient” when it comes to any rate increase. Really? How disappointing, Janet. Is this casuistic double speak any kind of guidance? Did you really “think about the words/That you’re using?” To explain the ensuing spike in the stock market, the precipitous drop in the rate on the US Treasury 10Year Bond (10Year), the decline in the dollar vs. the euro and the rise in oil prices (all of which occurred in the 90 minutes between the issuance of FOMC press release and the end of Yellen’s press conference), commentators pointed to the obvious synonymity of “patient” and “not impatient” and to the following data points. First, the FOMC lowered the natural unemployment rate (that is, the rate at which wages will impact inflation) from 5.5-5.2% to 5.2-5% thereby effectively removing low unemployment as a reason to raise rates (as predicted in Vol. 254 www.riskrewardblog.blogspot.com ). Second, the FOMC lowered its 2015 GDP growth forecast from 2.6-3.0% to 2.3-2.7%. Third, the FOMC is now predicting ultra-low inflation for 2015 of 0.6-0.8%, well below its target of 2%. All of these augur a later rather than sooner rate increase, if one at all.
Mentioned only in passing by Yellen, but of equal importance to the three points above was the FOMC’s concern about the currency war of which I wrote last week. (See Vol. 258 www.riskrewardblog.blogspot.com). Raising rates any time soon will have the side effect of strengthening the dollar even more versus every other world currency. And a strong dollar already has begun to negatively impact our economy. As discussed last week, corporate profits for multinational corporations are down due in large part to currency exchange rates. Exports are suffering. And foreign tourists are staying home in droves. After all, one hundred dollar’s worth of entertainment which cost Eurotourists only sixty nine euros last year now costs them ninety six euros. By its charter, the Federal Reserve is to address only domestic economic issues. But clearly, domestic issues are “not the only thing it understands.” Indeed, it would be folly for the Fed to “not give a damn about (anything other than) a greenback dollar” because in this world, no currency exists in a vacuum.
The above points may have grabbed the attention of commentators this week, but I predict that the data point with the most significant long term impact is the shift in the individual FOMC member’s predictions as to what the year-end 2015 and 2016 overnight borrowing rates will be. These predictions are plotted on a graph called the “dot plot.” From these “itsy, bitsy, teeny, weeny polka dots”, one could see “for the first time today” a significant slowing of the pace of rate increases should they ever begin. The consensus of the members is now that at year end 2015 the overnight (or Fed funds) rate will be 0.625% as opposed to their consensus just three months ago that the rate would be 1.125%. Equally telling was the lowering of the consensus year end 2016 rate from 2.5% to 1.875%. These changes are significant for all investors, but particularly for income investors; those whose securities are priced in relation to the yield on the benchmark US 10Year. Once the dust settles from this week’s volatility, I can repurchase what I sold with more confidence that any profit I garner will not be eroded by a spike in the 10Year rate and a concomitant drop in price---even if a modest rate increase is instituted in June.
On Wednesday between 1:30 and 3:30 pm, the DJIA average spiked 2% and the yield on the bellwether 10Year dropped 6%. Billions of dollars were made or lost, all because a few, enigmatic words were written and/or spoken by a handful of economists. This leads one to ponder the awesome power that we have conferred on the Federal Reserve Board. No member is elected, and during one’s term, no member is answerable to anyone. Is this wise? Well, at present, perhaps. The alternative is leaving such weighty decisions to a community organizer or to an overly tanned, weepy weekend golfer. In the long run, however, the role of the Fed should be re-examined. Until then, we, like the Moody Blues, are left with the following “Question” about the Fed:
“Why do we never get an answer
When we're knocking at the door
It's not the way that you say it
When you do those things to me.
It's more the way that you mean it
When you tell me what will be”.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Say what you mean
Mean what you say
Think about the words
That you’re using”---lyrics from “Say What You Mean” sung by The Moody Blues
“And I don't give a damn about a greenback dollar
Spend it fast as I can/For a wailin song and a good guitar
The only thing that I understand, poor boy”---lyrics from “Greenback Dollar” sung by Hoyt Axton
“It was an itsy bitsy, teenie, weenie, yellow polka dot bikini
That she wore for the first time today”---lyrics from “Itsy Bitsy….” sung by Brian Hyland
Going into this week’s meeting of the Federal Reserve’s Open Market Committee (FOMC), the conventional wisdom was that if the FOMC removed the word “patient” from its forward guidance, an interest rate increase could be expected in June. In addition, it was believed that any such removal would cause the dollar to rise, the interest rate on the 10Year US Treasury to spike, the price of oil to drop and the stock market to plummet. “Patient” was removed, but in so doing the FOMC did not “Say what it meant/Or mean what it said. Instead, Chair Yellen emphasized that removal of the word “patient” does not mean that the FOMC will be “impatient” when it comes to any rate increase. Really? How disappointing, Janet. Is this casuistic double speak any kind of guidance? Did you really “think about the words/That you’re using?” To explain the ensuing spike in the stock market, the precipitous drop in the rate on the US Treasury 10Year Bond (10Year), the decline in the dollar vs. the euro and the rise in oil prices (all of which occurred in the 90 minutes between the issuance of FOMC press release and the end of Yellen’s press conference), commentators pointed to the obvious synonymity of “patient” and “not impatient” and to the following data points. First, the FOMC lowered the natural unemployment rate (that is, the rate at which wages will impact inflation) from 5.5-5.2% to 5.2-5% thereby effectively removing low unemployment as a reason to raise rates (as predicted in Vol. 254 www.riskrewardblog.blogspot.com ). Second, the FOMC lowered its 2015 GDP growth forecast from 2.6-3.0% to 2.3-2.7%. Third, the FOMC is now predicting ultra-low inflation for 2015 of 0.6-0.8%, well below its target of 2%. All of these augur a later rather than sooner rate increase, if one at all.
Mentioned only in passing by Yellen, but of equal importance to the three points above was the FOMC’s concern about the currency war of which I wrote last week. (See Vol. 258 www.riskrewardblog.blogspot.com). Raising rates any time soon will have the side effect of strengthening the dollar even more versus every other world currency. And a strong dollar already has begun to negatively impact our economy. As discussed last week, corporate profits for multinational corporations are down due in large part to currency exchange rates. Exports are suffering. And foreign tourists are staying home in droves. After all, one hundred dollar’s worth of entertainment which cost Eurotourists only sixty nine euros last year now costs them ninety six euros. By its charter, the Federal Reserve is to address only domestic economic issues. But clearly, domestic issues are “not the only thing it understands.” Indeed, it would be folly for the Fed to “not give a damn about (anything other than) a greenback dollar” because in this world, no currency exists in a vacuum.
The above points may have grabbed the attention of commentators this week, but I predict that the data point with the most significant long term impact is the shift in the individual FOMC member’s predictions as to what the year-end 2015 and 2016 overnight borrowing rates will be. These predictions are plotted on a graph called the “dot plot.” From these “itsy, bitsy, teeny, weeny polka dots”, one could see “for the first time today” a significant slowing of the pace of rate increases should they ever begin. The consensus of the members is now that at year end 2015 the overnight (or Fed funds) rate will be 0.625% as opposed to their consensus just three months ago that the rate would be 1.125%. Equally telling was the lowering of the consensus year end 2016 rate from 2.5% to 1.875%. These changes are significant for all investors, but particularly for income investors; those whose securities are priced in relation to the yield on the benchmark US 10Year. Once the dust settles from this week’s volatility, I can repurchase what I sold with more confidence that any profit I garner will not be eroded by a spike in the 10Year rate and a concomitant drop in price---even if a modest rate increase is instituted in June.
On Wednesday between 1:30 and 3:30 pm, the DJIA average spiked 2% and the yield on the bellwether 10Year dropped 6%. Billions of dollars were made or lost, all because a few, enigmatic words were written and/or spoken by a handful of economists. This leads one to ponder the awesome power that we have conferred on the Federal Reserve Board. No member is elected, and during one’s term, no member is answerable to anyone. Is this wise? Well, at present, perhaps. The alternative is leaving such weighty decisions to a community organizer or to an overly tanned, weepy weekend golfer. In the long run, however, the role of the Fed should be re-examined. Until then, we, like the Moody Blues, are left with the following “Question” about the Fed:
“Why do we never get an answer
When we're knocking at the door
It's not the way that you say it
When you do those things to me.
It's more the way that you mean it
When you tell me what will be”.
Saturday, March 14, 2015
March 14, 2014 Blurred Lines
Risk/Reward Vol. 258
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Over there/Over there
Send the word/Send the word over there
That the Yanks are coming/The Yanks are coming "---lyrics from "Over There" sung by George M. Cohan
"You have to learn to pace yourself
Pressure
You're just like everyone else
Pressure"---lyrics from "Pressure" sung by Billy Joel
"Can't let it get past me
You're far from plastic
Talk about getting blasted
I hate these blurred lines."---lyrics from "Blurred Lines" (apparently) written by Marvin Gaye
George M. Cohan wrote "Over There" when the US became embroiled in Europe's Great War. As described in Vol. 254 (www.riskrewardblog.blogspot.com ), the US is once again embroiled in a European war. This time it is a currency war. Since January, 2014 the Euro has dropped 25% against the dollar, falling over 12% in the past three months. It now sits at $1.04. Why is this important to US investors? It means that the profits earned by US companies with sales "Over There/Over there" are worth 25% less than a year ago. According to Thomson Reuters, this currency differential alone will cause the companies comprising the S&P 500 (which,combined, derive 35% of their total revenue from outside the US) to report 2.8% lower earnings in the first quarter of 2015 compared to last year. Lower earnings translates into lower valuations since the primary determinant of a stock's value is its earnings per share times a generally static market multiple. The converse is true for European companies, particularly those with a large presence in the US. "Send the word/send the word". Eurozone multinationals such as Luxottica, the eyewear manufacturer (e.g. Lenscrafters, Pearle Vision, RayBan, Oakley, etc.), are seeing their Euro denominated profits soar simply as a result of an appreciating dollar. One hundred dollars of profit earned from US sales translated into 69 Euros of profit one year ago. That same US profit today translates into 95 Euros of profit. With European companies booming as a result of the Euro's devaluation, "the Yanks are coming/The Yanks are coming." Or at least their investment dollars are. Several European stock indices including the broad based Stoxx Europe 600 are hitting multiyear highs.
The impact of the Euro's devaluation undoubtedly will put "Pressure" on the Federal Reserve's Open Market Committee (FOMC) when it meets next week. Any signal that the Fed is more resolute to raise interest rates in June will cause the dollar to appreciate even more against the Euro. This in turn will further depress US corporate profits. Several major US corporations such as Procter & Gamble, Apple, Intel and the auto manufactures already have warned that the strong dollar is impeding their ability to compete in the world market. With the US's recovery still very tenuous, any drop in sales by these and/or other US based multinationals could be deleterious to our economy. Add to this the deflationary effect of $45/bbl. oil and there is "Pressure", indeed, on the Fed not to act. As much as its hawkish members may want to raise rates, the entire FOMC may "have to learn to pace themselves." "Like everyone else", keep a close watch on the language of the FOMC's March 18th press release.
So what does all of this mean to an income investor like me? On the one hand, as demonstrated last week, the mere threat of an increase by the Fed can cause interest rate sensitive securities to tank. (Remember an increase in a security's interest rate means a decrease in its value). On the other hand, the major engine of the Euro's devaluation; to wit quantitative easing (bond purchasing) by the European Central Bank, has resulted in the yield on the bellwether US 10 Year Treasury Bond to fall despite the specter of the Fed moving rates up. After all, given a choice, with the German 10 Year Bund yielding only 0.26%, what rational investor wouldn't rather purchase a US 10Year yielding 2.11%? In short, I am seeing conflicting signals; signals which produced last week's volatility in both the stock and bond markets. "I hate these blurred lines." Wanting to avoid "getting blasted" by a precipitous rate hike (and price drop) which could come if the FOMC's communique next week bespeaks a June rate increase, I reduced my exposure to interest-rate-sensitive securities such as preferred stock closed end funds, real estate investment trusts and utilities. I may repurchase all that I sold this week as early as next week depending on the outcome of the FOMC meeting. I held most of these in tax deferred retirement accounts so the only costs associated with the sale were some modest trading fees ($7-9/transaction) and the off-chance of rapid capital appreciation.
With Marvin Gaye so prominent in the news this week, I sought inspiration from his song titles. The "Blurred Lines" described above make it nearly impossible to determine "What's Going On". Having "All I Need to Get By", I don't need to speculate. So instead of relying on what "I've Heard Through the Grapevine", I decided to "Give It Up"--for a short while at least.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Over there/Over there
Send the word/Send the word over there
That the Yanks are coming/The Yanks are coming "---lyrics from "Over There" sung by George M. Cohan
"You have to learn to pace yourself
Pressure
You're just like everyone else
Pressure"---lyrics from "Pressure" sung by Billy Joel
"Can't let it get past me
You're far from plastic
Talk about getting blasted
I hate these blurred lines."---lyrics from "Blurred Lines" (apparently) written by Marvin Gaye
George M. Cohan wrote "Over There" when the US became embroiled in Europe's Great War. As described in Vol. 254 (www.riskrewardblog.blogspot.com ), the US is once again embroiled in a European war. This time it is a currency war. Since January, 2014 the Euro has dropped 25% against the dollar, falling over 12% in the past three months. It now sits at $1.04. Why is this important to US investors? It means that the profits earned by US companies with sales "Over There/Over there" are worth 25% less than a year ago. According to Thomson Reuters, this currency differential alone will cause the companies comprising the S&P 500 (which,combined, derive 35% of their total revenue from outside the US) to report 2.8% lower earnings in the first quarter of 2015 compared to last year. Lower earnings translates into lower valuations since the primary determinant of a stock's value is its earnings per share times a generally static market multiple. The converse is true for European companies, particularly those with a large presence in the US. "Send the word/send the word". Eurozone multinationals such as Luxottica, the eyewear manufacturer (e.g. Lenscrafters, Pearle Vision, RayBan, Oakley, etc.), are seeing their Euro denominated profits soar simply as a result of an appreciating dollar. One hundred dollars of profit earned from US sales translated into 69 Euros of profit one year ago. That same US profit today translates into 95 Euros of profit. With European companies booming as a result of the Euro's devaluation, "the Yanks are coming/The Yanks are coming." Or at least their investment dollars are. Several European stock indices including the broad based Stoxx Europe 600 are hitting multiyear highs.
The impact of the Euro's devaluation undoubtedly will put "Pressure" on the Federal Reserve's Open Market Committee (FOMC) when it meets next week. Any signal that the Fed is more resolute to raise interest rates in June will cause the dollar to appreciate even more against the Euro. This in turn will further depress US corporate profits. Several major US corporations such as Procter & Gamble, Apple, Intel and the auto manufactures already have warned that the strong dollar is impeding their ability to compete in the world market. With the US's recovery still very tenuous, any drop in sales by these and/or other US based multinationals could be deleterious to our economy. Add to this the deflationary effect of $45/bbl. oil and there is "Pressure", indeed, on the Fed not to act. As much as its hawkish members may want to raise rates, the entire FOMC may "have to learn to pace themselves." "Like everyone else", keep a close watch on the language of the FOMC's March 18th press release.
So what does all of this mean to an income investor like me? On the one hand, as demonstrated last week, the mere threat of an increase by the Fed can cause interest rate sensitive securities to tank. (Remember an increase in a security's interest rate means a decrease in its value). On the other hand, the major engine of the Euro's devaluation; to wit quantitative easing (bond purchasing) by the European Central Bank, has resulted in the yield on the bellwether US 10 Year Treasury Bond to fall despite the specter of the Fed moving rates up. After all, given a choice, with the German 10 Year Bund yielding only 0.26%, what rational investor wouldn't rather purchase a US 10Year yielding 2.11%? In short, I am seeing conflicting signals; signals which produced last week's volatility in both the stock and bond markets. "I hate these blurred lines." Wanting to avoid "getting blasted" by a precipitous rate hike (and price drop) which could come if the FOMC's communique next week bespeaks a June rate increase, I reduced my exposure to interest-rate-sensitive securities such as preferred stock closed end funds, real estate investment trusts and utilities. I may repurchase all that I sold this week as early as next week depending on the outcome of the FOMC meeting. I held most of these in tax deferred retirement accounts so the only costs associated with the sale were some modest trading fees ($7-9/transaction) and the off-chance of rapid capital appreciation.
With Marvin Gaye so prominent in the news this week, I sought inspiration from his song titles. The "Blurred Lines" described above make it nearly impossible to determine "What's Going On". Having "All I Need to Get By", I don't need to speculate. So instead of relying on what "I've Heard Through the Grapevine", I decided to "Give It Up"--for a short while at least.
Saturday, March 7, 2015
March 7, 2015 Long Time Comin'
Risk/Reward Vol. 257
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Oh, bring it to me/Bring your sweet lovin'
Bring it on home to me."---lyrics from "Bring It On Home To Me" sung by Sam Cooke
"She's so European/She's one of a kind
And she's so European/I found out today."---lyrics from "She's So European" sung by KISS
"It's going down for real
It's going down for real"---lyrics from "GDFR" sung by Flo Rida
On Monday, the NASDAQ, the technology index, closed above 5000; up nearly 20% over the past 12 months and up 170% since I first began writing this blog in 2010. Oh, such "sweet lovin" it would have "brought home to me" had I invested in QQQ (the exchange traded fund that tracks the NASDAQ) back then. But the news of the NASDAQ attaining 5000 also "brought something else home to me,"--- very unpleasant memories. You see, it was March, 2000 when the NASDAQ last hit 5000. It has taken 15 years to reach that mark again. Back in March, 2000, I was a tech stock devotee and was riding very high. However within a matter of weeks of the NASDAQ hitting 5000, tech stocks generally and mine in particular (remember JDSUniphase, Nortel, Corning, etc.) began to fall. I rode them down to nearly nothing. That was a bitter lesson, but one I have not forgotten. That experience and the Crash of 2009 (which through dumb luck I avoided in its entirety ) have shaped my investment philosophy. Rule #1: Sell any stock before absorbing an 8% loss. Rule # 2: Never forget Rule #1.
If you read financial newspapers or blogs, you have noticed that nearly everyone is advocating exposure to European stocks. Many market gurus believe that the launching of quantitative easing there will have the same effect that it had here; to wit, to drive investors out of bonds and into equities. Indeed, if you have not noticed it before now, you are "finding out today" that Mrs. Market is "so European/She's so European." The exchange traded fund (ETF) that I use to invest in Europe, HEDJ, is up 18% year to date, and I continue to add positions. There are several other ETF's that invest in European stocks (e.g. Vanguard's VGK). I chose HEDJ because, as its name suggests, its holdings are hedged against the deflating Euro which now is worth only $1.08, its lowest point in 13 years.
Investing in oil became a bit riskier this week. Although the price of domestic crude held above $49/bbl., two news stories caused second thoughts in regard my re-entry into the sector. First, the storage facilities for domestic crude located at the US hub in Cushing, OK are nearing capacity. Should domestic oil supply outstrip storage capacity, the price of crude is "Going down for real/It's going down for real.". Some market watchers see a free fall to $25/bbl or lower. Second, the CEO of Exxon stated this week that investors should expect an extended period of depressed oil prices. The impact of hydraulic fracturing ("fracking") has yet to be fully felt even with the cutbacks in production announced recently by virtually every oil exploration and production company. Put simply, oil is becoming more plentiful everyday. I am keeping my oil stocks for now, but will watch crude prices like a hawk.
My discussion above of other market trends notwithstanding, I remain laser focused on the yield on the 10Year US Treasury ("10Year"). A better than expected jobs report on Friday and comments this week by several members of the Federal Reserve's Open Market Committee (FOMC) improved the odds that a rate increase will come as soon as June. The yield on the 10Year is now so portending as it skyrocketed to 2.24% on Friday, its highest close since December 26, 2014. Oh, and don't tell me that the major indices are not impacted by the yield on the 10Year as the Dow Jones Industrial Average gave up 279 points on Friday. It now stands where it was at year end 2014. The FOMC meeting on March 17-18 could be very telling on the timing of any rate increase; so much so that in advance of it, I may reduce temporarily my exposure to the most interest rate sensitive portion of my portfolio. To quote Sam Cooke, when it comes to any interest rate increase
"It's been a long time, a long time coming
But I know a change gonna come, oh yes it will."
And despite my heretofore belief to the contrary, it is looking more and more like it will come in June.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Oh, bring it to me/Bring your sweet lovin'
Bring it on home to me."---lyrics from "Bring It On Home To Me" sung by Sam Cooke
"She's so European/She's one of a kind
And she's so European/I found out today."---lyrics from "She's So European" sung by KISS
"It's going down for real
It's going down for real"---lyrics from "GDFR" sung by Flo Rida
On Monday, the NASDAQ, the technology index, closed above 5000; up nearly 20% over the past 12 months and up 170% since I first began writing this blog in 2010. Oh, such "sweet lovin" it would have "brought home to me" had I invested in QQQ (the exchange traded fund that tracks the NASDAQ) back then. But the news of the NASDAQ attaining 5000 also "brought something else home to me,"--- very unpleasant memories. You see, it was March, 2000 when the NASDAQ last hit 5000. It has taken 15 years to reach that mark again. Back in March, 2000, I was a tech stock devotee and was riding very high. However within a matter of weeks of the NASDAQ hitting 5000, tech stocks generally and mine in particular (remember JDSUniphase, Nortel, Corning, etc.) began to fall. I rode them down to nearly nothing. That was a bitter lesson, but one I have not forgotten. That experience and the Crash of 2009 (which through dumb luck I avoided in its entirety ) have shaped my investment philosophy. Rule #1: Sell any stock before absorbing an 8% loss. Rule # 2: Never forget Rule #1.
If you read financial newspapers or blogs, you have noticed that nearly everyone is advocating exposure to European stocks. Many market gurus believe that the launching of quantitative easing there will have the same effect that it had here; to wit, to drive investors out of bonds and into equities. Indeed, if you have not noticed it before now, you are "finding out today" that Mrs. Market is "so European/She's so European." The exchange traded fund (ETF) that I use to invest in Europe, HEDJ, is up 18% year to date, and I continue to add positions. There are several other ETF's that invest in European stocks (e.g. Vanguard's VGK). I chose HEDJ because, as its name suggests, its holdings are hedged against the deflating Euro which now is worth only $1.08, its lowest point in 13 years.
Investing in oil became a bit riskier this week. Although the price of domestic crude held above $49/bbl., two news stories caused second thoughts in regard my re-entry into the sector. First, the storage facilities for domestic crude located at the US hub in Cushing, OK are nearing capacity. Should domestic oil supply outstrip storage capacity, the price of crude is "Going down for real/It's going down for real.". Some market watchers see a free fall to $25/bbl or lower. Second, the CEO of Exxon stated this week that investors should expect an extended period of depressed oil prices. The impact of hydraulic fracturing ("fracking") has yet to be fully felt even with the cutbacks in production announced recently by virtually every oil exploration and production company. Put simply, oil is becoming more plentiful everyday. I am keeping my oil stocks for now, but will watch crude prices like a hawk.
My discussion above of other market trends notwithstanding, I remain laser focused on the yield on the 10Year US Treasury ("10Year"). A better than expected jobs report on Friday and comments this week by several members of the Federal Reserve's Open Market Committee (FOMC) improved the odds that a rate increase will come as soon as June. The yield on the 10Year is now so portending as it skyrocketed to 2.24% on Friday, its highest close since December 26, 2014. Oh, and don't tell me that the major indices are not impacted by the yield on the 10Year as the Dow Jones Industrial Average gave up 279 points on Friday. It now stands where it was at year end 2014. The FOMC meeting on March 17-18 could be very telling on the timing of any rate increase; so much so that in advance of it, I may reduce temporarily my exposure to the most interest rate sensitive portion of my portfolio. To quote Sam Cooke, when it comes to any interest rate increase
"It's been a long time, a long time coming
But I know a change gonna come, oh yes it will."
And despite my heretofore belief to the contrary, it is looking more and more like it will come in June.
Saturday, February 28, 2015
February 28, 2015 (New England) Patriot
Risk/Reward Vol. 256
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Come on, all you people, say
W-O-R-D up/W-O-R-D up"---lyrics from "Word Up" sung by Cameo
"And I ain't no democrat
And I ain't no republican
I am/I am/I am a patriot."---lyrics from "I Am a Patriot" sung by Jackson Browne
"Pump it up/Show me love
Pump it up/Let me see what you workin' wit' "---lyrics from "Pump It Up" sung by Missy Elliott
As predicted, Fed Chair Janet Yellen's testimony before Congress dominated the financial news this week. Although she hinted that the "W-O-R-D" "patience" would be eliminated in future Federal Reserve communiques regarding the timing of any rate increase, the yield on the bellwether 10Year US Treasury Bond ("10Year") did not go "up" as many had predicted. Instead it fell to 2% where it hovered for the remainder of the week. Why, you ask? Because the key determinant of any rate increase now has shifted from the unemployment rate to the rate of inflation/deflation; a switch this writer foresaw a few weeks ago. (See Vol. 254 www.riskrewardblog.blogspot.com ). Here is the portion of her testimony that signaled this switch: "Provided that the labor market conditions continue to improve and further improvement is expected, the committee anticipates that it will be appropriate to raise the target range for the federal funds when, on the basis of incoming data, the committee is reasonably confident that inflation will move back over the medium term toward our 2% objective."
Accordingly, now more than ever, income investors (those with holdings priced in relation to the 10Year) must be students of the presence or absence of inflation. On this point "I ain't no democrat/And I ain't no republican". I just want to know the direction. The data reported this week indicates that we are still nowhere near 2% inflation. Both existing and new home sales missed expectations, jobless claims increased and most significantly, the consumer price index (CPI) fell 0.7% between December and January and fell 0.1% over the past 12 months. Stripping food and energy from the equation (leaving the so-called "core inflation") results in the CPI increasing at an annual rate of only 1.6%, still quite far from 2%. And don't look for any inflationary trend elsewhere in the world. Deflation has hit the Eurozone. Consumer prices there have dropped 0.6% over the past year. Germany just issued 5 year bonds at a negative interest rate---that's right, those purchasers willingly bid upon and received the right to receive LESS in five years than what they paid this week! What? In short, incoming data indicates that every major economy in the world is deflating, not inflating It's no wonder the US bond market, including the bellwether 10Year, traded as if a rate increase were in the distant future. As an income investor, "I am/I am/ I am like a (New England) Patriot." I win with deflation---at least in the near term.
One sector in which prices appear to have bottomed is oil. A spate of production cuts has "pumped it up" with the price stabilizing just below $50/bbl. This has emboldened me to tiptoe back into the arena. As discussed last week, I have initiated several positions in the preferred stock of Magnum Hunter (MHRpC and MHRpD) which is really a natural gas play. These positions continue to "show me love.". This week I bought the preferred stock of Vanguard Natural Resources (VNRBP) after reading the transcript of a February 17, 2015 guidance call (available at www.vnrllc.com ). Therein, VNR's CEO "let me see what he was was workin' wit'. " He stated that VNR had reduced substantially its common share distribution, had strengthened its balance sheet and had solidified its hedges, all of which added to the credit worthiness of VNR's preferred. I am not alone in recognizing VNRBP as a bargain. It has appreciated 6.5% since I bought it on Monday. To reiterate, I believe that the recent stabilization of oil prices provides clarity as to which of the small oil and gas producers will survive and prosper. And I am betting on MHR and VNR.
For the second week, the major stock indices have remained remarkably stable. Given the negative incoming economic data, this performance is as good as one can expect. Through it all, I remain a student of that which impacts the yield on the 10Year. (See Vol. 221 www.riskrewardblog.blogspot.com ) To quote Jackson Browne:
"Doctor my eyes have seen the years
And the slow parade of fears without crying
Now I want to understand."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Come on, all you people, say
W-O-R-D up/W-O-R-D up"---lyrics from "Word Up" sung by Cameo
"And I ain't no democrat
And I ain't no republican
I am/I am/I am a patriot."---lyrics from "I Am a Patriot" sung by Jackson Browne
"Pump it up/Show me love
Pump it up/Let me see what you workin' wit' "---lyrics from "Pump It Up" sung by Missy Elliott
As predicted, Fed Chair Janet Yellen's testimony before Congress dominated the financial news this week. Although she hinted that the "W-O-R-D" "patience" would be eliminated in future Federal Reserve communiques regarding the timing of any rate increase, the yield on the bellwether 10Year US Treasury Bond ("10Year") did not go "up" as many had predicted. Instead it fell to 2% where it hovered for the remainder of the week. Why, you ask? Because the key determinant of any rate increase now has shifted from the unemployment rate to the rate of inflation/deflation; a switch this writer foresaw a few weeks ago. (See Vol. 254 www.riskrewardblog.blogspot.com ). Here is the portion of her testimony that signaled this switch: "Provided that the labor market conditions continue to improve and further improvement is expected, the committee anticipates that it will be appropriate to raise the target range for the federal funds when, on the basis of incoming data, the committee is reasonably confident that inflation will move back over the medium term toward our 2% objective."
Accordingly, now more than ever, income investors (those with holdings priced in relation to the 10Year) must be students of the presence or absence of inflation. On this point "I ain't no democrat/And I ain't no republican". I just want to know the direction. The data reported this week indicates that we are still nowhere near 2% inflation. Both existing and new home sales missed expectations, jobless claims increased and most significantly, the consumer price index (CPI) fell 0.7% between December and January and fell 0.1% over the past 12 months. Stripping food and energy from the equation (leaving the so-called "core inflation") results in the CPI increasing at an annual rate of only 1.6%, still quite far from 2%. And don't look for any inflationary trend elsewhere in the world. Deflation has hit the Eurozone. Consumer prices there have dropped 0.6% over the past year. Germany just issued 5 year bonds at a negative interest rate---that's right, those purchasers willingly bid upon and received the right to receive LESS in five years than what they paid this week! What? In short, incoming data indicates that every major economy in the world is deflating, not inflating It's no wonder the US bond market, including the bellwether 10Year, traded as if a rate increase were in the distant future. As an income investor, "I am/I am/ I am like a (New England) Patriot." I win with deflation---at least in the near term.
One sector in which prices appear to have bottomed is oil. A spate of production cuts has "pumped it up" with the price stabilizing just below $50/bbl. This has emboldened me to tiptoe back into the arena. As discussed last week, I have initiated several positions in the preferred stock of Magnum Hunter (MHRpC and MHRpD) which is really a natural gas play. These positions continue to "show me love.". This week I bought the preferred stock of Vanguard Natural Resources (VNRBP) after reading the transcript of a February 17, 2015 guidance call (available at www.vnrllc.com ). Therein, VNR's CEO "let me see what he was was workin' wit'. " He stated that VNR had reduced substantially its common share distribution, had strengthened its balance sheet and had solidified its hedges, all of which added to the credit worthiness of VNR's preferred. I am not alone in recognizing VNRBP as a bargain. It has appreciated 6.5% since I bought it on Monday. To reiterate, I believe that the recent stabilization of oil prices provides clarity as to which of the small oil and gas producers will survive and prosper. And I am betting on MHR and VNR.
For the second week, the major stock indices have remained remarkably stable. Given the negative incoming economic data, this performance is as good as one can expect. Through it all, I remain a student of that which impacts the yield on the 10Year. (See Vol. 221 www.riskrewardblog.blogspot.com ) To quote Jackson Browne:
"Doctor my eyes have seen the years
And the slow parade of fears without crying
Now I want to understand."
Saturday, February 21, 2015
February 21, 2015 Magnus Opus
Risk/Reward Vol. 255
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"But minute by minute by minute by minute
I keep holding on"---lyrics from "Minute By Minute" sung by The Doobie Brothers
"You won't see me
Time after time
You refuse to even listen"---lyrics from "You Won't See Me" sung by The Beatles
"'Cause rockin' and rollin', it's only howlin' at the moon
It's only howlin' at the moon"---lyrics from "Magnus Opus" sung by Kansas
As an income investor, my fate often rests upon the market's reaction to Federal Reserve meeting minutes. "Minute by minute by minute/I keep holding on"---and never so much as this week. Allow me to explain. As discussed in last week's edition (See Vol. 254 www.riskrewardblog.blogspot.com), many market participants believe that the improved domestic employment picture alone will prompt the Federal Reserve to raise short term interest rates, and to do so as early as this coming June. For the reasons explained in that edition, I disagree. But Mr. Market clearly is skittish and overreacts to any signal either way. As a consequence, the bellwether 10 Year US Treasury was volatile this week in sharp contrast to the quiescent major stock indices; Friday notwithstanding. On Monday and Tuesday, the yield on the 10Year spiked 12 basis points (6%) on news that some Fed members were anxious to eliminate the word "patience" from future Fed communiques thereby signaling a desire to raise rates sooner rather than later. On Wednesday, however, minutes from the Fed's January meeting were released. They bespoke a more hesitant tone in regard any rate increase. Also on Wednesday, the Commerce Department released January's producer price index. It showed that the prices businesses received for their goods and services declined (deflated) by 0.8% between December and January and that those same prices have remained flat over the preceding 12 months. This news was disappointing to the Fed which would prefer for these and other prices to inflate at a 2% annual rate before it begins to normalize interest rates. Housing start date released that day also showed a negative trend. In response, the rate retraced back to 2.07 and then gradually moved to 2.13 by week's end.
Because I believe that the yield on the 10Year will stabilize, I have held steady even as the capital appreciation that I experienced in January has eroded. (Remember the higher the yield the lower the price). As in income investor my primary focus is dividends and interest, not capital appreciation---although the latter is welcome anytime. That said, I will not tolerate any significant loss of capital. As a consequence, if the bellwether rate, off which many of my holdings are priced (e.g. preferred stock closed end funds, municipal bond funds, real estate investment trusts and utilities), continues to rise sharply and causes my capital position to enter the red zone, "you won't see me" in the market any longer. As I have stated "time after time", my primary purpose in this entire Riskreward exercise is to avoid loss. Doing so is a victory in and of itself. The cries of anguish uttered in 2008 still ring in my ears even if "you refuse to listen."
One very bright spot for me in an otherwise disappointing February has been the performance of the preferred stock of Magnum Hunter Resources (MHRpC and MHRpD). MHR is a small exploration company engaged primarily in fracking for oil; that is until 2014. At that time, MHR began divesting its oil properties (at the market's top) and investing heavily in natural gas properties. When the price of oil plunged recently, MHR was painted with the same brush as every other small oil exploration company and lost over half of its value. Thereafter, MHR's CEO went on a public relations campaign to explain that MHR was not an oil company, but a natural gas company---one that could operate profitably even if the price of natural gas fell to $2/mmBTU (current price is $2.82). Further, he has been candid and transparent on cash flow expectations, so much so that an article appeared Thursday in the online version of Forbes in which investment advisor Jim Collins sang the praises of MHR in general and its preferred stock in particular. Indeed, the MHRpD that I bought on January 23, 2015 is up 40% while still paying a 10% annual dividend amortized monthly. Follow on purchases of it and MHRpC have also experienced double digit appreciation. I must warn those that may be interested, MHR preferreds are not for the faint of heart. They are thinly traded and have a history of volatility. They have "caused me a lot of rockin' and rollin'. And in times past, I have found myself "howlin' at the moon" for owning them. That said, I intend to buy more. This time, it looks like Magnum Hunter may actually be a "Magnus Opus".
Over the next few weeks I see both fixed income and equity markets dominated once again by Federal Reserve signals. Look for volatility on February 24th when Chair Yellen addresses Congress and again on March 18th at the conclusion of the Fed's FOMC meeting. I will take my lead from the band, Kansas. If Yellen signals that interest rates will remain low, I likely will "Carry On, My Wayward Son." If she signals that an increase is imminent, I may disappear from the market like "Dust In The Wind"---reappearing only after that dust settles and rates attain some stability.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"But minute by minute by minute by minute
I keep holding on"---lyrics from "Minute By Minute" sung by The Doobie Brothers
"You won't see me
Time after time
You refuse to even listen"---lyrics from "You Won't See Me" sung by The Beatles
"'Cause rockin' and rollin', it's only howlin' at the moon
It's only howlin' at the moon"---lyrics from "Magnus Opus" sung by Kansas
As an income investor, my fate often rests upon the market's reaction to Federal Reserve meeting minutes. "Minute by minute by minute/I keep holding on"---and never so much as this week. Allow me to explain. As discussed in last week's edition (See Vol. 254 www.riskrewardblog.blogspot.com), many market participants believe that the improved domestic employment picture alone will prompt the Federal Reserve to raise short term interest rates, and to do so as early as this coming June. For the reasons explained in that edition, I disagree. But Mr. Market clearly is skittish and overreacts to any signal either way. As a consequence, the bellwether 10 Year US Treasury was volatile this week in sharp contrast to the quiescent major stock indices; Friday notwithstanding. On Monday and Tuesday, the yield on the 10Year spiked 12 basis points (6%) on news that some Fed members were anxious to eliminate the word "patience" from future Fed communiques thereby signaling a desire to raise rates sooner rather than later. On Wednesday, however, minutes from the Fed's January meeting were released. They bespoke a more hesitant tone in regard any rate increase. Also on Wednesday, the Commerce Department released January's producer price index. It showed that the prices businesses received for their goods and services declined (deflated) by 0.8% between December and January and that those same prices have remained flat over the preceding 12 months. This news was disappointing to the Fed which would prefer for these and other prices to inflate at a 2% annual rate before it begins to normalize interest rates. Housing start date released that day also showed a negative trend. In response, the rate retraced back to 2.07 and then gradually moved to 2.13 by week's end.
Because I believe that the yield on the 10Year will stabilize, I have held steady even as the capital appreciation that I experienced in January has eroded. (Remember the higher the yield the lower the price). As in income investor my primary focus is dividends and interest, not capital appreciation---although the latter is welcome anytime. That said, I will not tolerate any significant loss of capital. As a consequence, if the bellwether rate, off which many of my holdings are priced (e.g. preferred stock closed end funds, municipal bond funds, real estate investment trusts and utilities), continues to rise sharply and causes my capital position to enter the red zone, "you won't see me" in the market any longer. As I have stated "time after time", my primary purpose in this entire Riskreward exercise is to avoid loss. Doing so is a victory in and of itself. The cries of anguish uttered in 2008 still ring in my ears even if "you refuse to listen."
One very bright spot for me in an otherwise disappointing February has been the performance of the preferred stock of Magnum Hunter Resources (MHRpC and MHRpD). MHR is a small exploration company engaged primarily in fracking for oil; that is until 2014. At that time, MHR began divesting its oil properties (at the market's top) and investing heavily in natural gas properties. When the price of oil plunged recently, MHR was painted with the same brush as every other small oil exploration company and lost over half of its value. Thereafter, MHR's CEO went on a public relations campaign to explain that MHR was not an oil company, but a natural gas company---one that could operate profitably even if the price of natural gas fell to $2/mmBTU (current price is $2.82). Further, he has been candid and transparent on cash flow expectations, so much so that an article appeared Thursday in the online version of Forbes in which investment advisor Jim Collins sang the praises of MHR in general and its preferred stock in particular. Indeed, the MHRpD that I bought on January 23, 2015 is up 40% while still paying a 10% annual dividend amortized monthly. Follow on purchases of it and MHRpC have also experienced double digit appreciation. I must warn those that may be interested, MHR preferreds are not for the faint of heart. They are thinly traded and have a history of volatility. They have "caused me a lot of rockin' and rollin'. And in times past, I have found myself "howlin' at the moon" for owning them. That said, I intend to buy more. This time, it looks like Magnum Hunter may actually be a "Magnus Opus".
Over the next few weeks I see both fixed income and equity markets dominated once again by Federal Reserve signals. Look for volatility on February 24th when Chair Yellen addresses Congress and again on March 18th at the conclusion of the Fed's FOMC meeting. I will take my lead from the band, Kansas. If Yellen signals that interest rates will remain low, I likely will "Carry On, My Wayward Son." If she signals that an increase is imminent, I may disappear from the market like "Dust In The Wind"---reappearing only after that dust settles and rates attain some stability.
Saturday, February 14, 2015
February 14, 2015 War, What Is It Good For?
Risk/Reward Vol. 254
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Tell me why
Why, tell me why."---lyrics from "Tell Me Why" sung by Taylor Swift
"War, huh Good God
What is it good for?"---lyrics from "War" sung by Edwin Starr
"Like electricity, electricity
Sparks inside of me and I'm free, I am free."---lyrics from "Electricity" sung by Elton John
As the March meeting of the Federal Reserve approaches look for a shift away from employment and toward deflation as the key determinant of if and when the Fed begins to raise interest rates. As discussed here over the past two years (See e.g. Vols. 201 and 204 www.riskrewardblog.blogspot.com ) deflation is a central banker's greatest fear. And we appear to be headed in that direction. This week the Commerce Department announced that aggregate consumer spending (read, demand) dropped for the second consecutive month. So, "tell me why/Why tell me why" this is to be feared? The best explanation is contained in a speech given in 2002 by then Fed Chair Ben Bernanke ( www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm ) . As explained by Bernanke, deflation almost always results from a collapse in aggregate demand, the economic effects of which are recession, rising unemployment and financial stress. The Great Depression is the most recent example of sustained deflation, and it haunts this generation of central bankers like no other historical event. Why? Because central bankers have very few conventional tools to combat deflation. Indeed, the solution of the Great Depression had nothing to do with central banks. It was WWII which spurred unprecedented economic activity; first in arming the world and then in its wake, rebuilding virtually every city and town in Europe and Japan.
So, Edwin Starr, in answer to your question, "war is good for" for something---spurring economic activity Admittedly, the human cost is too great to desire a physical war. But wars come in many varieties, and we are in the midst of one right now---a currency war. Allow me to explain. One remedy for deflation in any one country is what Adam Smith phrased "beggaring thy neighbor": that is, in a world beset by lessening demand adopting economic policies that worsen other countries' ability to compete in comparison to yours. The easiest and most obvious means of accomplishing this is devaluing one's currency. Here is an example. If one wants more tourists to visit the Eurozone (tourism is Italy's largest industry and constitutes 7% of France's gross domestic product), devaluing the Euro from $1.40 to $1.14, as has occurred in the past twelve months, makes European travel very attractive to those outside the Eurozone. Indeed, a friend of ours is renting a beautiful three bedroom apartment in Grenada, Spain for $1000/month---much cheaper than living comparably in the US! And how does one devalue the Euro? The easiest way is to set interest rates at zero or below thereby punishing anyone who elects to hold Euros---just as the ECB has done. Savers of euros become losers. The thinking quickly becomes: "dump Euros and buy dollars even below the prevailing exchange rate because it will be worse tomorrow." And, this approach is spreading. Sweden's central bank announced this week that it will charge depositor institutions for retaining cash, a penalty which will trickle down to individual depositors in short order. In sum, a currency war is now fully underway with the US dollar appreciating versus every other major currency. That is not good news for US domestic industries. As a consequence and to complete the point made in the first paragraph, if for no reason other than to remain competitive in a deflationary world plagued by lessening aggregate demand, I do not see the Federal Reserve raising interest rates (and thereby strengthening the dollar even more) any time soon.
What does this mean for investors? I believe that the recent upward trend in the yield on the bellwether 10Year Treasury (from 1.6 % to 2% in two weeks) occasioned by the belief of many that the continuing improvement in employment numbers alone will cause to Fed to raise interest rates will abate or even reverse once the Fed's focus switches away from employment and toward deflation. I see that happening as soon as the Fed's March meeting. If I am right and the yield on the 10Year stabilizes near 2% or drops, a buying opportunity for interest rate sensitive stocks will present. One sector negatively impacted by the recent spike in rates has been utilities---"like electricity, electricity". Utilities as a group have experienced a 5% or more decline this month despite the broader market registering record highs. This sector did very well last year, and utilities are still relatively expensive. They are by no means "free." But, the dividends paid on some are now above 4%. If and when they approach 5%, they will be a bargain and will send "sparks inside of me." (Remember the higher the yield on dividend paying stocks, like bonds, the lower the price.)
We are at war---no doubt. But I have faith that our Federal Reserve will do the right thing and will keep interest rates low. Like Taylor Swift, Janet Yellen sees deflation for what it is:
"Trouble, trouble, trouble."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Tell me why
Why, tell me why."---lyrics from "Tell Me Why" sung by Taylor Swift
"War, huh Good God
What is it good for?"---lyrics from "War" sung by Edwin Starr
"Like electricity, electricity
Sparks inside of me and I'm free, I am free."---lyrics from "Electricity" sung by Elton John
As the March meeting of the Federal Reserve approaches look for a shift away from employment and toward deflation as the key determinant of if and when the Fed begins to raise interest rates. As discussed here over the past two years (See e.g. Vols. 201 and 204 www.riskrewardblog.blogspot.com ) deflation is a central banker's greatest fear. And we appear to be headed in that direction. This week the Commerce Department announced that aggregate consumer spending (read, demand) dropped for the second consecutive month. So, "tell me why/Why tell me why" this is to be feared? The best explanation is contained in a speech given in 2002 by then Fed Chair Ben Bernanke ( www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm ) . As explained by Bernanke, deflation almost always results from a collapse in aggregate demand, the economic effects of which are recession, rising unemployment and financial stress. The Great Depression is the most recent example of sustained deflation, and it haunts this generation of central bankers like no other historical event. Why? Because central bankers have very few conventional tools to combat deflation. Indeed, the solution of the Great Depression had nothing to do with central banks. It was WWII which spurred unprecedented economic activity; first in arming the world and then in its wake, rebuilding virtually every city and town in Europe and Japan.
So, Edwin Starr, in answer to your question, "war is good for" for something---spurring economic activity Admittedly, the human cost is too great to desire a physical war. But wars come in many varieties, and we are in the midst of one right now---a currency war. Allow me to explain. One remedy for deflation in any one country is what Adam Smith phrased "beggaring thy neighbor": that is, in a world beset by lessening demand adopting economic policies that worsen other countries' ability to compete in comparison to yours. The easiest and most obvious means of accomplishing this is devaluing one's currency. Here is an example. If one wants more tourists to visit the Eurozone (tourism is Italy's largest industry and constitutes 7% of France's gross domestic product), devaluing the Euro from $1.40 to $1.14, as has occurred in the past twelve months, makes European travel very attractive to those outside the Eurozone. Indeed, a friend of ours is renting a beautiful three bedroom apartment in Grenada, Spain for $1000/month---much cheaper than living comparably in the US! And how does one devalue the Euro? The easiest way is to set interest rates at zero or below thereby punishing anyone who elects to hold Euros---just as the ECB has done. Savers of euros become losers. The thinking quickly becomes: "dump Euros and buy dollars even below the prevailing exchange rate because it will be worse tomorrow." And, this approach is spreading. Sweden's central bank announced this week that it will charge depositor institutions for retaining cash, a penalty which will trickle down to individual depositors in short order. In sum, a currency war is now fully underway with the US dollar appreciating versus every other major currency. That is not good news for US domestic industries. As a consequence and to complete the point made in the first paragraph, if for no reason other than to remain competitive in a deflationary world plagued by lessening aggregate demand, I do not see the Federal Reserve raising interest rates (and thereby strengthening the dollar even more) any time soon.
What does this mean for investors? I believe that the recent upward trend in the yield on the bellwether 10Year Treasury (from 1.6 % to 2% in two weeks) occasioned by the belief of many that the continuing improvement in employment numbers alone will cause to Fed to raise interest rates will abate or even reverse once the Fed's focus switches away from employment and toward deflation. I see that happening as soon as the Fed's March meeting. If I am right and the yield on the 10Year stabilizes near 2% or drops, a buying opportunity for interest rate sensitive stocks will present. One sector negatively impacted by the recent spike in rates has been utilities---"like electricity, electricity". Utilities as a group have experienced a 5% or more decline this month despite the broader market registering record highs. This sector did very well last year, and utilities are still relatively expensive. They are by no means "free." But, the dividends paid on some are now above 4%. If and when they approach 5%, they will be a bargain and will send "sparks inside of me." (Remember the higher the yield on dividend paying stocks, like bonds, the lower the price.)
We are at war---no doubt. But I have faith that our Federal Reserve will do the right thing and will keep interest rates low. Like Taylor Swift, Janet Yellen sees deflation for what it is:
"Trouble, trouble, trouble."
Saturday, February 7, 2015
February 7, 2015 Too Marvelous For Words
Risk/Reward Vol. 253
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“For nobody else, gave me a thrill/ With all your faults, I love you still
It had to be you, wonderful you/ It had to be you”---lyrics from “It Had To Be You” sung by Frank Sinatra
“On the rebound, it's a replay
On the rebound, it's a replay
Your love was on the rebound”---lyrics from “On the Rebound” sung by Uriah Heep
“Were you the last to know?
Were you left out in the cold?
What you did was low”---lyrics from “Low” sung by Kelly Clarkson
If ever a week exemplified the adage “There is No Alternative” (to United States equities, that is), it was this one. (TINA discussed in Vols. 164, 201 and 250 www.riskrewardblog.blogspot.com ). The two major indices regained all of their year-to-date losses with the Dow Jones Industrial Average closing 660 points higher and the S&P 500 up 60 points above last Friday’ close. This was achieved even though Europe remains in the dumps with the European Central Bank balking at buying Greek debt.
China’s growth prospects are so dim, its central bank loosened reserve requirements hoping to encourage more lending. Literally, “nobody else gave me a thrill/ With all your faults, I love US equities still/ It had to be you, wonderful you/ It had to be you.”---if you want any return on your investment. And I see no end in sight.
The guidance given during the most recent earnings season (which just now is concluding) indicates that, cumulatively, the companies comprising the S&P500 will grow profits 3.5% this year which is well above an earlier forecast of 1.1% growth. Moreover, oil prices are “on the rebound.” I’m not sure we will experience “a replay” of $100/bbl. oil, but seeing the price rise above $50 has given Mr. Market assurance that the all- important domestic energy industry will continue to grow and prosper. Adding further encouragement is the growth in employment. A report on Friday indicated that 257,000 net new jobs were added in January.
The only negative on the domestic front this week was the sharp increase in the yield on the 10Year US Treasury Bond. This bellwether against which all income securities are priced spiked from 1.67% last Friday to 1.94% at the close yesterday. Bond traders are signaling their belief that the good news described above will justify the Federal Reserve raising short term rates sooner than 2016. This week's spike negatively impacted my interest rate sensitive portfolio, but I am holding pat. (Remember higher rates mean lower prices.) Certainly, I don’t “want to be the last to know” or to otherwise be “left out in the cold” should rates continue to rise sharply. But, I believe the rise will moderate if not reverse. I see too many headwinds to the Fed taking action this year. For example, on Monday the U.S. Commerce Department released last month’s personal consumption expenditure (PCE) index upon which the Fed relies for measuring inflation. That index indicated that we are well below the Fed’s targeted 2% annual inflation rate. Raising interest rates would only dampen inflation more. Moreover, other Commerce Department numbers indicate that US exports are declining. This is a direct result of the strength of the US dollar versus other world currencies. Raising interest rates strengthens a currency and thus would only exacerbate this problem. Time will tell, but I am still of the belief that interest rates will remain low. That said, my eye remains focused on the yield/rate on the 10Year.
Investors in US equities this week were “On the Sunny Side of the Street”, “Come Rain or Shine.” They reaped more than just “Pennies From Heaven” and “Three Coins in a Fountain.” Moreover, their good fortune was not the product of “Witchcraft” and was not a gift from some “Stranger in the Night.” It came from understanding that opportunities exist here unlike anywhere else in the world. And with apologies to Ol’ Blue Eyes, that is “Too Marvelous For Words.”
Saturday, January 31, 2015
January 31, 2015 They Can't Take That Away
Risk/Reward Vol. 252
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“The way you haunt my dreams.
No, no - they can't take that away from me”---lyrics from “Can’t Take That Away From Me” sung (originally) by Fred Astaire
“You got my cellphone number
Make that call”---lyrics from “Cell Phone #” sung by The Plain White T’s
“The world that we’re livin’ in
People keep on giving in
Making wrong decisions
Only visions of the dividend”---lyrics from “Where Is The Love” sung by Black Eyed Peas
Volatility continued this week. The Dow Jones Industrial Average had positive and negative triple digit days, closing down 508 points. The S&P 500 closed down 57 points. January saw each drop more than 3%. Clearly, we are in the throes of what market guru Mohamed El Erian terms “divergence.” Good job growth and encouraging earning reports in the US are trumped by continuing problems in Europe and Asia. As an example, the Eurozone’s economic powerhouse, Germany, this week reported that it is in a state deflation. The composite price of goods and services there has fallen 0.3% year to year as of January. And then there is Greece. Adding to the uncertainty this week was the enigmatic press release issued by the Federal Reserve at the conclusion of its mid week meeting. Some interpreted the statement as signaling that short term interest rates will rise as soon as June. Others read it to mean no rate increase until 2016. So which is it? We must not forget that Janet Yellen is a student of the Great Depression. As such, her “dreams are haunted” by the Fed’s decision to raise rates in 1937, just as the country was emerging from the Depression’s trough. That premature move caused the economy to tumble again. With inflation still far below the Fed’s target of 2% and with gross domestic product growth languishing below 3%, I simply don’t see the Fed raising rates anytime soon---especially when every other central bank is cutting rates. My prediction---the Fed “won’t take that (low rates) away from me” until September, at the earliest. Even then, any increase will be modest and likely will not adversely affect my bellwether, the 10 Year US Treasury Bond. (10Year) (By the way, "Can't Take It Away From Me" was #3 on the 1937 Hit Parade.)
Whatever challenges face global economies generally, they do not affect Apple. Did you see the “cellphone number” it reported this week? In the first quarter alone (Apple’s fiscal year began October 1, 2014), Apple sold 74 million iPhones---that’s 34,000 iPhones per hour, 24 hours per day, seven days per week. That incredible performance translated into $3.08 of profit per share---for the quarter. Despite paying a decent dividend and sponsoring the largest share buyback in history (Apple reduced its share count by 10% last year), Apple still has $175 billion of cash and marketable securities on its books. To put that in perspective, there are only 46 companies in the world that Apple could not buy----using only its excess cash and cash equivalents. If it so desired, without any debt, Apple could buy Disney, Visa, Amazon, Citigroup or countless others. And yet, Apple trades at only 13 times its forward price/earnings ratio (much less if you subtract its cash)--- well below the market’s average. If you don’t own Apple, you should give serious consideration to “making that call” to your broker.
In the volatile “world we’re livin’ in”, “people keep giving in” to their fears. As a consequence, they “make the wrong decisions.” They sell everything: even income producing (read, dividend paying) securities which are a safe harbor in a low interest rate environment. And that is where we are today. The interest rate on the 10Year ended the week at 1.67%, its lowest close in nearly 2 years. For those who have a “vision for dividends” such as yours truly, sell-offs of income producers provide excellent buying opportunities. Two cases in point arose this week. ETP, one of my favorite pipeline master limited partnerships, announced an acquisition which many viewed negatively due to its short term cost. ETP’s stock plummeted below $59, a buy signal to me. Under no foreseeable circumstance will the acquisition negatively impact ETP’s juicy dividend. By Friday, ETP was back over $61 despite the general market’s downward trajectory. On Friday, SO one of my favorite utilities reported cost overruns on one of its major projects. The stock fell 4% in one day. I’m betting that it will recover fully by the end of next week, buoyed by its consistent and attractive dividend.
For many, stock market volatility is like a Black Eyed Peas’ greatest hit album. Some days you feel “love drunk” as the market moves up the “Hump.” Other days you get pummeled---"Boom, Boom, Pow." But for me, volatility is a side show. My focus remains the 10Year yield; the lower it goes, the better I do. Times have been very good recently. And the good times will keep on rollin' so long as forces do not cause the yield on the 10Year to spike. So Janet, don't cause rates to rise. Once you “Get It Started", I may have to exit.
Saturday, January 24, 2015
January 24, 2015 Droppin' Like Flies
Risk/Reward Vol. 251
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“You're a three-decker sauerkraut And toadstool sandwich, With arsenic sauce!”---lyrics from “You’re A Mean One, Mr. Grinch” sung by Thurl Ravenscroft
“Oh, we're dropping; like flies. Bye, bye. You're droppin' like flies”---lyrics from “Droppin’ Like Flies” sung by Motley Crue
“And honey you should know That I could never go on without you Green eyes”---lyrics from “Green Eyes” sung by Coldplay
For the first time in a while, the most significant news of the week came from Europe. On Thursday, Mario Draghi the head of the European Central Bank (ECB) announced that the ECB is embarking on its own version of quantitative easing. The ECB will be purchasing 60billion Euros worth of public and private securities each month for a minimum of 20 months. The purpose of this campaign is to spur economic growth and to stave off deflation. Draghi wants to depress interest rates so that investors will be forced to invest in riskier assets, and consumers will be incentivized to purchase goods by accessing cheap debt. This ambitious move was done despite Germany’s opposition. In effect, the ECB is now Santa Claus for some weaker members of the Eurozone, handing them a blank check. But for Angela Merkel, the ECB is Mr. Grinch, serving her “a three-decker sauerkraut and toadstool sandwich with arsenic sauce.”
But how effective will Europe’s version of QE be in spurring economic growth? Apparently, Mr. Market thinks it will work. The Dow Jones Industrial Average rose 259 points or 1.48% and the S&P rose 31 points or 1.53% on the news that day (although they gave back half of those gains on Friday). I am not so sure. After all, the yields on the benchmark sovereign bonds of Europe’s largest economies have been “droppin’ like flies/ Bye bye/ droppin’ like flies” without QE. Even before the ECB’s announcement, the yield on the German Bund was 0.51%; on the French 10 year 0.72%; on the Italian 10 Year 1.71%; and on the Spanish 10 Year 1.55%. How much lower will they/can they go? That said, one benefit for me from the ECB’s move is that QE likely will keep the yield on the bellwether US Ten Year Treasury Bond in check. It finished the week at 1.82% (exactly where it was last Friday) despite a Wall Street Journal article authored by Federal Reserve insider Jon Hilsenrath reporting that the Fed was still on track to raise short term rates this year: this despite the ECB's contrary move and despite inflation running well below the Fed's target of 2%. All eyes and ears will be on the Fed meeting next week for any signal as to when a rate rise may occur.
So how do low yields on the 10Year benefit me? “Honey, you should know” by now. If the yield on the US Ten Year is held down, then the yields on the securities correlated to the 10Year (e.g. preferred stock, real estate investment trusts a/k/a REIT’s and municipal bonds) will likewise remain low and concomitantly their price/value will rise. (Remember, lower yields mean higher prices) (See the exhaustive discussion of correlation at Vol. 221 www.riskrewardblog.blogspot.com ). Indeed, “green” is what you see when you look at the year-to-date returns on the preferred stock closing table found at www.online.wsj.com/mdc/public/page/2_3024-Preferreds.html . I hold preferred stock in closed end funds which provide diversification and leverage at the same time. My favorite preferred closed end fund, FFC is up 9% so far in 2015 while paying an 8% dividend amortized monthly. My favorite REIT, Realty Income Corporation (O) is up 14% year to date while paying a 4.2% dividend amortized monthly. And my favorite municipal bond closed end fund MQT is up nearly 2.5% year to date while paying a tax advantaged dividend of over 6% amortized monthly.
I am comfortable with my portfolio, but it is interest rate sensitive. Thus I must be vigilant. With the ECB embarking upon an ambitious QE program, yields on longer term bonds, such as the US 10Year, should remain low even if the Federal Reserve raises rates at the shorter end. That said I have been unpleasantly surprised by sudden yield hikes in the past. When last that happened I felt like Coldplay:
“One minute I held the key
Next the walls were closed on me
And I discovered that my castles stand
Upon pillars of salt and pillars of sand”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“You're a three-decker sauerkraut And toadstool sandwich, With arsenic sauce!”---lyrics from “You’re A Mean One, Mr. Grinch” sung by Thurl Ravenscroft
“Oh, we're dropping; like flies. Bye, bye. You're droppin' like flies”---lyrics from “Droppin’ Like Flies” sung by Motley Crue
“And honey you should know That I could never go on without you Green eyes”---lyrics from “Green Eyes” sung by Coldplay
For the first time in a while, the most significant news of the week came from Europe. On Thursday, Mario Draghi the head of the European Central Bank (ECB) announced that the ECB is embarking on its own version of quantitative easing. The ECB will be purchasing 60billion Euros worth of public and private securities each month for a minimum of 20 months. The purpose of this campaign is to spur economic growth and to stave off deflation. Draghi wants to depress interest rates so that investors will be forced to invest in riskier assets, and consumers will be incentivized to purchase goods by accessing cheap debt. This ambitious move was done despite Germany’s opposition. In effect, the ECB is now Santa Claus for some weaker members of the Eurozone, handing them a blank check. But for Angela Merkel, the ECB is Mr. Grinch, serving her “a three-decker sauerkraut and toadstool sandwich with arsenic sauce.”
But how effective will Europe’s version of QE be in spurring economic growth? Apparently, Mr. Market thinks it will work. The Dow Jones Industrial Average rose 259 points or 1.48% and the S&P rose 31 points or 1.53% on the news that day (although they gave back half of those gains on Friday). I am not so sure. After all, the yields on the benchmark sovereign bonds of Europe’s largest economies have been “droppin’ like flies/ Bye bye/ droppin’ like flies” without QE. Even before the ECB’s announcement, the yield on the German Bund was 0.51%; on the French 10 year 0.72%; on the Italian 10 Year 1.71%; and on the Spanish 10 Year 1.55%. How much lower will they/can they go? That said, one benefit for me from the ECB’s move is that QE likely will keep the yield on the bellwether US Ten Year Treasury Bond in check. It finished the week at 1.82% (exactly where it was last Friday) despite a Wall Street Journal article authored by Federal Reserve insider Jon Hilsenrath reporting that the Fed was still on track to raise short term rates this year: this despite the ECB's contrary move and despite inflation running well below the Fed's target of 2%. All eyes and ears will be on the Fed meeting next week for any signal as to when a rate rise may occur.
So how do low yields on the 10Year benefit me? “Honey, you should know” by now. If the yield on the US Ten Year is held down, then the yields on the securities correlated to the 10Year (e.g. preferred stock, real estate investment trusts a/k/a REIT’s and municipal bonds) will likewise remain low and concomitantly their price/value will rise. (Remember, lower yields mean higher prices) (See the exhaustive discussion of correlation at Vol. 221 www.riskrewardblog.blogspot.com ). Indeed, “green” is what you see when you look at the year-to-date returns on the preferred stock closing table found at www.online.wsj.com/mdc/public/page/2_3024-Preferreds.html . I hold preferred stock in closed end funds which provide diversification and leverage at the same time. My favorite preferred closed end fund, FFC is up 9% so far in 2015 while paying an 8% dividend amortized monthly. My favorite REIT, Realty Income Corporation (O) is up 14% year to date while paying a 4.2% dividend amortized monthly. And my favorite municipal bond closed end fund MQT is up nearly 2.5% year to date while paying a tax advantaged dividend of over 6% amortized monthly.
I am comfortable with my portfolio, but it is interest rate sensitive. Thus I must be vigilant. With the ECB embarking upon an ambitious QE program, yields on longer term bonds, such as the US 10Year, should remain low even if the Federal Reserve raises rates at the shorter end. That said I have been unpleasantly surprised by sudden yield hikes in the past. When last that happened I felt like Coldplay:
“One minute I held the key
Next the walls were closed on me
And I discovered that my castles stand
Upon pillars of salt and pillars of sand”
Saturday, January 17, 2015
January 17, 2015 Sweet Child O' Mine
Risk/Reward Vol. 250
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Oh, baby
I, I, I, I’m fallin’”---lyrics from “Fallin’” sung by Alicia Keyes
“Take me down to the paradise city
Where the grass is green and the girls are pretty.”---lyrics from “Paradise City” sung by Guns N Roses
“There’s a million oil rigs pumping
That black gold all over the world”---lyrics from “One Good Well” sung by Don Williams
Year to date, both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index are down about 2%. “Oh, baby”, should one be worried that stocks will continue “fallin’”? After all, earnings season is underway, and it has been underwhelming to say the least. That said, let’s not forget what happened last year. Remember? Between the close on December 31, 2013 and February 4, 2014, the DJIA fell 1131 points or 6.8% only to rebound sharply and to finish the year with a total return of nearly 10%. (See Vols. 205-207 www.riskrewardblog.blogspot.com ) I see nothing to indicate that the year-to-date dip is anything other than profit taking and repositioning. Friday's solid move upward corroborates this belief. As emphasized repeatedly here, where else can money go if one wants any return at all? The answer is the same as it was in 2013 and 2014 (See Vols. 164 and 201 www.riskrewardblog.blogspot.com ) --- TINA---There Is No Alternative--- to US equities.
Well maybe one—municipal bond funds. In 2014, muni/bond funds were a “paradise city” with the S&P Municipal Bond Index (Index) seeing a double digit total return, much of it tax preferred and with very little volatility. Talk about “where the grass is green and the girls are pretty!” On a personal level, I held my municipal bond closed end funds for the entire year, and my return mirrored that of the Index. If the yield on the bellwether 10 Year US Treasury Bond (to which muni bond funds are correlated) does not rise too quickly and stays below 2.5% (and year to date it has been sinking, closing at 1.81% on Friday), municipal bond funds should have another good year. Adding to their attraction are the following facts: 1) fewer municipalities are floating bonds thus increasing the appeal of those bonds already in the market; and 2) repayment risk is very low with only 57 defaults last year out of 20,000 issuers. As noted, I invest in this sector through closed end funds because they employ leverage to enhance returns. I employ a triangular selection process, choosing those funds that trade below net asset value, have a greater than 6% tax preferred annual dividend and garner at least a Bronze rating on Morningstar. I hold currently MYI, EIM, VGM, MQT, MVF, PML, MYD, PMO, OIA, MUA and MNP, all in my personal (non 401k or IRA) account.
I am not calling a bottom on oil prices (or am I?), but did you notice the resistance this week to prices below $44/bbl and the 10% rebound that followed? Right now “There’s a million rigs pumping/That black gold all over the world”. But with all of the cut backs in capital spending (this week Shell walked away from a massive project in Qatar and Statoil abandoned several Arctic Circle leases), the glut will diminish. On the domestic side, producers have done much to reduce the cost of hydraulic fracturing (“fracking”). Conoco announced recently that its fracking operations would continue to be profitable even at $40/bbl. EOG reported that it could make a 10% profit on $40/bbl. oil. I have a feeling that we may have seen oil's nadir.
The market has displayed some negative vibes so far this year, but certainly not an “Appetite For Destruction.” By no means is Mr. Market “Knockin’ on Heaven’s Door.” As Axl, himself, advises, “all we need is a little patience”. Certainly, that virtue paid off last year. And as noted above, if one wants a return on one’s investment, the US stock market is the only game in town---make that, in the world . Unlike Mr. Rose, one need not ask:
“Where do we go
Where do we go now
Where do we go
Sweet Child ‘O Mine?”
Saturday, January 10, 2015
January 10, 2015 Rescue Me
Risk/Reward Vol. 249
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Can’t undo a fall like this
Cause love don’t know what distance is
Yeah, I know it’s crazy.”---lyrics from “I Want Crazy” sung by Hunter Hayes
“I’m down/I’m really down
I’m down/Down on the ground.”---lyrics from “I’m Down” sung by The Beatles
“Rescue me/Take me in your arms
Rescue me/I want your tender charms.”---lyrics from “Rescue Me” sung by Fontella Bass
At one time during the trading day on Tuesday, the Dow Jones Industrial Average (DJIA) hit 17,262; more than 570 points below its close the previous Friday. This drop caused many talking heads to predict that 2015 would be the year of the Bear; that Mr. Market “can’t undo a fall like this.” After all, the price of oil, the fuel upon which the entire world runs, had fallen below $50/bbl. But by Thursday’s close the DJIA had gained 645 points, ending 3.7% higher than where it had been just two days previous. "Yeah, I know it's crazy." Friday saw some profit taking and some negative reaction to last month’s reported average wage decrease. But the week ended at 17,737 just 0.5% below where it ended last week.
So what is an investor to make of this roller coaster market? Down 3% one day, up 4 % the next with the VIX (which measure market volatility) itself trading wildly. How is one to interpret Friday’s jobs report which has US unemployment at 5.6% yet wages continuing to fall? Does the fact that the Eurozone is now in a state of deflation (with consumer prices having fallen 0.2% year to year as of December, 2014) pose a threat to our economy? Is oil at $47/bbl. indicative of an economic slowdown or will cheap oil boost consumer spending? Where can one look for guidance? I, for one, pay little heed to these conflicting signs and continue my laser focus on the benchmark US 10 Year Treasury. And “its yield is down/it’s really down/it’s down/Down on the ground” finishing the week at 1.97%.
So what does a low yield on the 10Year mean to me? It means that the rest of the world has capitulated. Investors worldwide are looking to the US to “Rescue me/Take me in your arms/Rescue me/I want your tender charms.” Capital is flowing stateside. And why not? The German 10 Year Bund is yielding 0.49%, the Spanish 10 Year 1.71%, the French 10 Year 0.78%----this as the European Central Bank (ECB) is contemplating a round of quantitative easing (purchasing sovereign and corporate debt) which will only depress yields further. The resultant global search for yield combined with a concern for safety (which events in France this week only heightened) should equate to continued market appreciation here in the US. Moreover, the strengthening of the dollar versus every other currency in the world will put a damper on the Federal Reserve’s appetite to raise short term interest rates ( whose impact on longer term rates such as that on the 10Year is questionable anyhow--- see last week’s edition discussing same www.riskrewardblog.blogspot.com ). The easy money punch bowl provided by the Fed very well may continue into the third quarter of 2015. In sum I see favorable conditions for US- centric equities in general (other than those in the oil patch), and US-centric income securities (real estate investment trusts, municipal bond funds, preferred stock, etc.) in particular.
The world’s economy is struggling just as that of the US is turning the corner. As discussed above, this likely is good news for the US stock market in the short to intermediate run, but may drag all financial assets down in time. I see the Federal Reserve paying closer attention to foreign affairs in the coming months as suggested in its December meeting minutes released this week. I can hear Mario Draghi of the ECB on the telephone with Fed Chair Yellen even now, quoting the following Beatles refrain:
“Help me if you can, I'm feeling down
And I do appreciate you being 'round
Help me get my feet back on the ground
Won't you please, please help me”
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Can’t undo a fall like this
Cause love don’t know what distance is
Yeah, I know it’s crazy.”---lyrics from “I Want Crazy” sung by Hunter Hayes
“I’m down/I’m really down
I’m down/Down on the ground.”---lyrics from “I’m Down” sung by The Beatles
“Rescue me/Take me in your arms
Rescue me/I want your tender charms.”---lyrics from “Rescue Me” sung by Fontella Bass
At one time during the trading day on Tuesday, the Dow Jones Industrial Average (DJIA) hit 17,262; more than 570 points below its close the previous Friday. This drop caused many talking heads to predict that 2015 would be the year of the Bear; that Mr. Market “can’t undo a fall like this.” After all, the price of oil, the fuel upon which the entire world runs, had fallen below $50/bbl. But by Thursday’s close the DJIA had gained 645 points, ending 3.7% higher than where it had been just two days previous. "Yeah, I know it's crazy." Friday saw some profit taking and some negative reaction to last month’s reported average wage decrease. But the week ended at 17,737 just 0.5% below where it ended last week.
So what is an investor to make of this roller coaster market? Down 3% one day, up 4 % the next with the VIX (which measure market volatility) itself trading wildly. How is one to interpret Friday’s jobs report which has US unemployment at 5.6% yet wages continuing to fall? Does the fact that the Eurozone is now in a state of deflation (with consumer prices having fallen 0.2% year to year as of December, 2014) pose a threat to our economy? Is oil at $47/bbl. indicative of an economic slowdown or will cheap oil boost consumer spending? Where can one look for guidance? I, for one, pay little heed to these conflicting signs and continue my laser focus on the benchmark US 10 Year Treasury. And “its yield is down/it’s really down/it’s down/Down on the ground” finishing the week at 1.97%.
So what does a low yield on the 10Year mean to me? It means that the rest of the world has capitulated. Investors worldwide are looking to the US to “Rescue me/Take me in your arms/Rescue me/I want your tender charms.” Capital is flowing stateside. And why not? The German 10 Year Bund is yielding 0.49%, the Spanish 10 Year 1.71%, the French 10 Year 0.78%----this as the European Central Bank (ECB) is contemplating a round of quantitative easing (purchasing sovereign and corporate debt) which will only depress yields further. The resultant global search for yield combined with a concern for safety (which events in France this week only heightened) should equate to continued market appreciation here in the US. Moreover, the strengthening of the dollar versus every other currency in the world will put a damper on the Federal Reserve’s appetite to raise short term interest rates ( whose impact on longer term rates such as that on the 10Year is questionable anyhow--- see last week’s edition discussing same www.riskrewardblog.blogspot.com ). The easy money punch bowl provided by the Fed very well may continue into the third quarter of 2015. In sum I see favorable conditions for US- centric equities in general (other than those in the oil patch), and US-centric income securities (real estate investment trusts, municipal bond funds, preferred stock, etc.) in particular.
The world’s economy is struggling just as that of the US is turning the corner. As discussed above, this likely is good news for the US stock market in the short to intermediate run, but may drag all financial assets down in time. I see the Federal Reserve paying closer attention to foreign affairs in the coming months as suggested in its December meeting minutes released this week. I can hear Mario Draghi of the ECB on the telephone with Fed Chair Yellen even now, quoting the following Beatles refrain:
“Help me if you can, I'm feeling down
And I do appreciate you being 'round
Help me get my feet back on the ground
Won't you please, please help me”
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