Risk/Reward Vol. 361
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
There is nothing like the threat of a nuclear holocaust to test the strength and resiliency of the stock market. And given that the rhetoric exchanged this week has not been experienced since the Cuban Missile Crisis of 1962, I would say Mr. Market came through very well. Despite the sabre rattling, all three major indices ended the week down only 1-1.5%. Hardly a blip for those who have done so well this year. Why the drop? As those who have experienced such times in the past know, whenever there is the threat of a major negative event many investors decide to take profits off the table. A concomitant "flight to safety" ensues. This manifests in a sell off of stock and the purchase of the safest investment known, US Government Bonds. This played out as expected with the yield on the all important US Ten Year Bond dropping from 2.28 to 2.191% this week. (Remember a drop in yield means that the demand and price of the bond is up.)
My portfolio dropped more precipitously than the indices. Three reasons underlie this: 1) since closed end funds (my favorites) are thinly traded, a flight to safety invariably exaggerates the decline because there are fewer buyers to stop the stampede; 2) many of the funds I own went ex-dividend on Wednesday and Friday which always results in a temporary decline ; and 3) many closed end funds were trading above net asset value which is an independent reason to sell. Had I not experienced such a flight in the past, I may have panicked. I did not. Instead, I checked that the value of the bonds to which they are correlated had increased, and I checked the strength of the underlying assets each holds. This exercise confirmed that the cause of the drop was indeed exogenous. Friday's positive action in the sector is evidence that a buying opportunity may be afoot. If the upward trend continues on Monday, I will be a purcaser.
I had a delightful face to face with a subscriber this week during which we exchanged observations and ideas. I find this invigorating and was reminded that one reason I started Risk/Reward was to engender just such conversations. Sadly, with few exceptions this type of dialogue has not developed. Sometimes I feel like WALL-E. During this week's meeting, I listed and prioritized my daily reads. I put the Financial Times, Seeking Alpha, Twitter and Grant's Almost Daily blog above the Wall Street Journal and IBD. Two of my favorites are free! I also recommended reading books by Benjamin Graham, Bill O'Neil and Jim Cramer--- in that order.
Sunday, August 13, 2017
Sunday, August 6, 2017
August 6, 2017 Continue Forever
Risk/Reward Vol. 360
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Excellent earnings reports, a calm bond market, a good jobs report and most importantly TINA (There Is No Alternative--to stocks, that is) again combined to send the Dow Jones Industrial Average to record highs. Euphoria is everywhere. Indeed, on Friday, Jim Paulsen, the former chief investment strategist at Wells Fargo, said that given the current low interest rate environment and the lack of inflation the bull market could "continue forever." Talk about exuberance! But is it irrational as claimed by former Fed Chair Alan Greenspan on Friday?
As I have written exhaustively in the past, the current stock "bubble" is a direct result of central bank policies world wide. Every major central bank has driven interest rates to zero and beyond in the hope of creating inflation which they believe is necessary to spur economic growth and prosperity. This logic was explained in detail in Vol. 359
http://www.riskrewardblog.blogspot.com/. Clearly, the logic is faulty, but central banks have shown no inclination to revisit it. The two factors that they believe will cause inflation are low unemployment and low interest rates. Well, Friday's jobs report puts unemployment at a remarkably small 4.3%, and yet inflation remains stubbornly low. Indeed, a report from the G-20 (the 20 largest economies in the world) released on Thursday indicates that inflation in the developed world is currently as low as it was in 2009-- at the depths of the recession. With unemployment so low, that leaves low interest rates as the only inflationary tool left in the box. As long as the Federal Reserve, the ECB, the Bank of England and the Bank of Japan continue the current low rate environment, the stock market should continue to do well. Forever, Jim? I doubt it. Let's just say the bulls will continue to run until they don't.
If inflation is not in our future (and for demographic reasons I don't believe that it is, see Vol. 358 www.riskrewardblog.blogspot.com), what if anything will cause the bull stock market to end? One way would be for central banks to revisit the above explained logic. But as noted in previous editions, that ain't gonna happen until the composition of central bank boards changes. A second could be a black swan event. North Korea launching a nuclear attack, Iran closing the Straits of Hormuz or some cataclysmic natural disaster could do it. But a black swan is always a risk and thus not a reason to exit now. Another looming risk is credit default. As discussed at length this week in an edition of Grant's Almost Daily e-newsletter, with so much money available, lenders (particularly unregulated ones) are competing vigorously to put money to work. Not only are they competing on rates, they are also lessening the protections they normally require. We are again in an era loose underwriting and "covenant lite". As you may recall these factors led to the subprime mortgage crisis of 2008. Do I see a repeat of 2008? No. First, any such defaults would hit non-regulated lenders much more than commercial banks. In other words, the losses would be felt and absorbed by the 1% and not the general public. And two, commercial banks are much more capital secure than they were. Nevertheless, it is something to watch.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Excellent earnings reports, a calm bond market, a good jobs report and most importantly TINA (There Is No Alternative--to stocks, that is) again combined to send the Dow Jones Industrial Average to record highs. Euphoria is everywhere. Indeed, on Friday, Jim Paulsen, the former chief investment strategist at Wells Fargo, said that given the current low interest rate environment and the lack of inflation the bull market could "continue forever." Talk about exuberance! But is it irrational as claimed by former Fed Chair Alan Greenspan on Friday?
As I have written exhaustively in the past, the current stock "bubble" is a direct result of central bank policies world wide. Every major central bank has driven interest rates to zero and beyond in the hope of creating inflation which they believe is necessary to spur economic growth and prosperity. This logic was explained in detail in Vol. 359
http://www.riskrewardblog.blogspot.com/. Clearly, the logic is faulty, but central banks have shown no inclination to revisit it. The two factors that they believe will cause inflation are low unemployment and low interest rates. Well, Friday's jobs report puts unemployment at a remarkably small 4.3%, and yet inflation remains stubbornly low. Indeed, a report from the G-20 (the 20 largest economies in the world) released on Thursday indicates that inflation in the developed world is currently as low as it was in 2009-- at the depths of the recession. With unemployment so low, that leaves low interest rates as the only inflationary tool left in the box. As long as the Federal Reserve, the ECB, the Bank of England and the Bank of Japan continue the current low rate environment, the stock market should continue to do well. Forever, Jim? I doubt it. Let's just say the bulls will continue to run until they don't.
If inflation is not in our future (and for demographic reasons I don't believe that it is, see Vol. 358 www.riskrewardblog.blogspot.com), what if anything will cause the bull stock market to end? One way would be for central banks to revisit the above explained logic. But as noted in previous editions, that ain't gonna happen until the composition of central bank boards changes. A second could be a black swan event. North Korea launching a nuclear attack, Iran closing the Straits of Hormuz or some cataclysmic natural disaster could do it. But a black swan is always a risk and thus not a reason to exit now. Another looming risk is credit default. As discussed at length this week in an edition of Grant's Almost Daily e-newsletter, with so much money available, lenders (particularly unregulated ones) are competing vigorously to put money to work. Not only are they competing on rates, they are also lessening the protections they normally require. We are again in an era loose underwriting and "covenant lite". As you may recall these factors led to the subprime mortgage crisis of 2008. Do I see a repeat of 2008? No. First, any such defaults would hit non-regulated lenders much more than commercial banks. In other words, the losses would be felt and absorbed by the 1% and not the general public. And two, commercial banks are much more capital secure than they were. Nevertheless, it is something to watch.
Sunday, July 30, 2017
July 30, 2017 Weak Dollar
Risk/Reward Vol. 359
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Good earnings reports and a "steady as she goes" Federal Reserve meeting combined to send stocks to new record highs. All three major indices are up double digits year to date. This week the stellar performer was the Dow Jones Industrial Average. How come? The DJIA is comprised of 30 big, international industrials like Exxon, Verizon, GE, Apple, Merck, etc. Their domestic profits have been ok, but there foreign incomes have been superior. This is for two reasons. One, the European economy has been steadily improving. And two, a weak dollar. Year to date, the Euro is 12% higher versus the dollar. The dollar has sunk in similar percentages against the peso, the Canadian dollar and the yen. Since US companies report earnings in dollars, the exchange rate alone has provided a significant boost in profits even if foreign sales had remained stagnant---which they did not.
Why is the dollar tanking? One, the dollar spiked in value with The Donald's election as the world believed that a business friendly President and a Republican Congress would do much to boost the economy including tax reform and infrastructure spending. Such activity would strengthen the dollar. Have you read the headlines recently? The Donald can't steer his own ship let alone a Congress. Second, the world is preparing for the European Central Bank to wean the Eurozone from quantitative easing (massive government bond buying. Without the ECB backstopping Euro bonds, interest rates in Europe are sure to rise (many are negative now). This is occurring at the same time the Federal Reserve has expressed a cautious approach to normalizing rates. Thus with one central bank becoming more interest rate hawkish (ECB) while the other more dovish, a currency shift is occurring. Dollars are being sold and Euros purchased. This is just the opposite of what occurred last winter.
We know that passive index investors have done well. So how have I done? The total portfolio that I manage is up 5% year to date (much of it tax advantaged) even though I have maintained a 50% cash position at all times. I am quite pleased given my aversion to risk. Recently, the positions I have taken in municipal bond funds have experienced capital appreciation. As the likelihood of tax reform continues to lessen, the value of these holdings increases. Moreover, they continue to pay on average above 5.5% tax free, amortized monthly.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Good earnings reports and a "steady as she goes" Federal Reserve meeting combined to send stocks to new record highs. All three major indices are up double digits year to date. This week the stellar performer was the Dow Jones Industrial Average. How come? The DJIA is comprised of 30 big, international industrials like Exxon, Verizon, GE, Apple, Merck, etc. Their domestic profits have been ok, but there foreign incomes have been superior. This is for two reasons. One, the European economy has been steadily improving. And two, a weak dollar. Year to date, the Euro is 12% higher versus the dollar. The dollar has sunk in similar percentages against the peso, the Canadian dollar and the yen. Since US companies report earnings in dollars, the exchange rate alone has provided a significant boost in profits even if foreign sales had remained stagnant---which they did not.
Why is the dollar tanking? One, the dollar spiked in value with The Donald's election as the world believed that a business friendly President and a Republican Congress would do much to boost the economy including tax reform and infrastructure spending. Such activity would strengthen the dollar. Have you read the headlines recently? The Donald can't steer his own ship let alone a Congress. Second, the world is preparing for the European Central Bank to wean the Eurozone from quantitative easing (massive government bond buying. Without the ECB backstopping Euro bonds, interest rates in Europe are sure to rise (many are negative now). This is occurring at the same time the Federal Reserve has expressed a cautious approach to normalizing rates. Thus with one central bank becoming more interest rate hawkish (ECB) while the other more dovish, a currency shift is occurring. Dollars are being sold and Euros purchased. This is just the opposite of what occurred last winter.
We know that passive index investors have done well. So how have I done? The total portfolio that I manage is up 5% year to date (much of it tax advantaged) even though I have maintained a 50% cash position at all times. I am quite pleased given my aversion to risk. Recently, the positions I have taken in municipal bond funds have experienced capital appreciation. As the likelihood of tax reform continues to lessen, the value of these holdings increases. Moreover, they continue to pay on average above 5.5% tax free, amortized monthly.
Sunday, July 23, 2017
July 23, 2017 Signs, Signs Everywhere Signs
Risk/Reward Vol. 359
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Each week the three major indices reach for new records. The NASDAQ was on a ten day winning streak until profit taking ended that run on Friday. As noted previously, the Shiller CAPE ratio ( an historical measure of price/earning ratios) is above 30 for only the third time in history; the others being just before the crashes of 1929 and 2000. Short selling interest is as low as it has been since May, 2007. Everyone is a holder or a buyer, and there is plenty of cash on the sidelines. Mr. Market is positively euphoric. In normal times, these are sell signals. But these are not normal times. Never before have the world's central banks been so laser focused on one metric to the seeming exclusion of others: achieving 2% inflation. Japan is so desperate to reach that goal it has maintained zero bound interest rates for several years. Originally believing its easy money monetary policy would achieve that number in 2011, Japan's lead central banker was quoted this week as predicting 2% inflation in 2020. (Hey, Mr. Kuroda, have you ever heard of Albert Einstein's definition of insanity? See Vol 358 http://www.riskrewardblog.blogspot.com/ ). On Thursday, European Central Bank President Draghi stated that due to low inflation the ECB would continue quantitative easing (purchasing 60billion Euro worth of government bonds each month) for the foreseeable future. And as we know from last week's Congressional testimony, due to her concerns about lagging inflation, Janet Yellen is rethinking the timetable of the balance sheet reduction and interest rate normalization that Federal Reserve intimated just a month ago.
Why the fascination with inflation? As highlighted last week, central bankers are almost all economists. One tenet of modern economics is the Phillip's Curve which, simply put, posits that there is an inverse relationship between the rate of unemployment and the rate of inflation. The theory is that the lower the unemployment rate, the higher the wages as employers compete for labor; the higher the wages the more disposable income; the more disposable income, the more demand for goods and services; the more demand for goods and services the more their prices inflate; the more prices inflate,the more manufacturers produce; the more that manufacturers produce the more the economy grows. So, following the above logic (synthesized from the Fed's FAQ page) , inflation resulting from higher wages should precede economic growth. Thus, if a central banker believes that his/her job is to grow the economy (and that is a questionable proposition) then he/she would want to see inflation before cutting back on accommodative policies. Seem simplistic? Scarily so, especially since it isn't working. Unemployment is at 4.4% which is below what was thought to be full employment (5%) just a few years ago, and yet the rate of inflation is falling; most recently measured at 1.4%. Central bankers everywhere are perplexed. Hey, Janet, wake up. Maybe the world's social programs are so "rich", people would rather retire or drop out of the work force than work. Take a look at our record low job participation rate---only 62.7% of eligible persons are in the potential work force. Oh, and maybe more disposable income does not equate to more demand. That is certainly true for those over age 65 which constitute an ever increasing percentage of the developed world's population. Look at Japan! Whatever the reason, the Phillip's Curve ain't working in real life. Meanwhile, accommodative monetary policies are inflating the value of financial assets worldwide.
Do you doubt this? Since 2008, central bank policy has mattered more than anything else when it comes to the value of financial assets; be they bonds, securities directly correlated to bonds (my favorites) or equities. With historic low interest rates (in the history of the world there have NEVER been negative interest rates until now) and a reckless bond buying programs (quantitative easing) central bankers everywhere have driven virtually every investor, be they pension plans or Ma and Pa, out of government bonds, money markets, etc. and into much riskier bonds and stocks. Put another way, does any reader of this edition believe that we are NOT in a stock market bubble? And look at commercial real estate. Thanks to the surplus of cheap credit provided by our central banks, some buyers of apartment complexes are now receiving 10 year interest only loans. This has caused a bidding war with buyers paying so much that they are left with a sub 5% yield. This is at least 50% lower than in "normal" times. (Remember lower yields result from higher prices.) With prices so high no wonder speculative developers are constructing apartments at an alarming rate; apartments that likely will remain empty. Think I'm nuts? Look around. All of this is a direct result of a surplus of money and historically low rates--- thanks to central banks. The above notwithstanding, so long as central banks continue to provide the punch there is no reason to stop drinking from the bowl.
So the obvious question is when will central banks forsake the Phillip's Curve and get serious about normalizing rates? Not the half hearted measures announced a few months ago by the Fed which take years to achieve and which can be derailed by any stock market reaction, but serious efforts to raise rates no matter how the financial markets respond. So long as the current lineup is in charge the answer is never (note Japan's sorry story alluded to above). But come February, 2018 a change can be expected. Chair Yellen's term comes to an end and the smart money is that she will be replaced by Kevin Warsh, Glen Hubbard or John Taylor--all of whom have been highly critical of our monetary policy. All three are more concerned by asset bubbles (like the stock market) and normalizing rates than with achieving an arbitrary inflation number. Some of these guys are more aggressive than others. Once the nomination process begins, let's see how the smart money reacts. That may provide a truer sell signal.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Each week the three major indices reach for new records. The NASDAQ was on a ten day winning streak until profit taking ended that run on Friday. As noted previously, the Shiller CAPE ratio ( an historical measure of price/earning ratios) is above 30 for only the third time in history; the others being just before the crashes of 1929 and 2000. Short selling interest is as low as it has been since May, 2007. Everyone is a holder or a buyer, and there is plenty of cash on the sidelines. Mr. Market is positively euphoric. In normal times, these are sell signals. But these are not normal times. Never before have the world's central banks been so laser focused on one metric to the seeming exclusion of others: achieving 2% inflation. Japan is so desperate to reach that goal it has maintained zero bound interest rates for several years. Originally believing its easy money monetary policy would achieve that number in 2011, Japan's lead central banker was quoted this week as predicting 2% inflation in 2020. (Hey, Mr. Kuroda, have you ever heard of Albert Einstein's definition of insanity? See Vol 358 http://www.riskrewardblog.blogspot.com/ ). On Thursday, European Central Bank President Draghi stated that due to low inflation the ECB would continue quantitative easing (purchasing 60billion Euro worth of government bonds each month) for the foreseeable future. And as we know from last week's Congressional testimony, due to her concerns about lagging inflation, Janet Yellen is rethinking the timetable of the balance sheet reduction and interest rate normalization that Federal Reserve intimated just a month ago.
Why the fascination with inflation? As highlighted last week, central bankers are almost all economists. One tenet of modern economics is the Phillip's Curve which, simply put, posits that there is an inverse relationship between the rate of unemployment and the rate of inflation. The theory is that the lower the unemployment rate, the higher the wages as employers compete for labor; the higher the wages the more disposable income; the more disposable income, the more demand for goods and services; the more demand for goods and services the more their prices inflate; the more prices inflate,the more manufacturers produce; the more that manufacturers produce the more the economy grows. So, following the above logic (synthesized from the Fed's FAQ page) , inflation resulting from higher wages should precede economic growth. Thus, if a central banker believes that his/her job is to grow the economy (and that is a questionable proposition) then he/she would want to see inflation before cutting back on accommodative policies. Seem simplistic? Scarily so, especially since it isn't working. Unemployment is at 4.4% which is below what was thought to be full employment (5%) just a few years ago, and yet the rate of inflation is falling; most recently measured at 1.4%. Central bankers everywhere are perplexed. Hey, Janet, wake up. Maybe the world's social programs are so "rich", people would rather retire or drop out of the work force than work. Take a look at our record low job participation rate---only 62.7% of eligible persons are in the potential work force. Oh, and maybe more disposable income does not equate to more demand. That is certainly true for those over age 65 which constitute an ever increasing percentage of the developed world's population. Look at Japan! Whatever the reason, the Phillip's Curve ain't working in real life. Meanwhile, accommodative monetary policies are inflating the value of financial assets worldwide.
Do you doubt this? Since 2008, central bank policy has mattered more than anything else when it comes to the value of financial assets; be they bonds, securities directly correlated to bonds (my favorites) or equities. With historic low interest rates (in the history of the world there have NEVER been negative interest rates until now) and a reckless bond buying programs (quantitative easing) central bankers everywhere have driven virtually every investor, be they pension plans or Ma and Pa, out of government bonds, money markets, etc. and into much riskier bonds and stocks. Put another way, does any reader of this edition believe that we are NOT in a stock market bubble? And look at commercial real estate. Thanks to the surplus of cheap credit provided by our central banks, some buyers of apartment complexes are now receiving 10 year interest only loans. This has caused a bidding war with buyers paying so much that they are left with a sub 5% yield. This is at least 50% lower than in "normal" times. (Remember lower yields result from higher prices.) With prices so high no wonder speculative developers are constructing apartments at an alarming rate; apartments that likely will remain empty. Think I'm nuts? Look around. All of this is a direct result of a surplus of money and historically low rates--- thanks to central banks. The above notwithstanding, so long as central banks continue to provide the punch there is no reason to stop drinking from the bowl.
So the obvious question is when will central banks forsake the Phillip's Curve and get serious about normalizing rates? Not the half hearted measures announced a few months ago by the Fed which take years to achieve and which can be derailed by any stock market reaction, but serious efforts to raise rates no matter how the financial markets respond. So long as the current lineup is in charge the answer is never (note Japan's sorry story alluded to above). But come February, 2018 a change can be expected. Chair Yellen's term comes to an end and the smart money is that she will be replaced by Kevin Warsh, Glen Hubbard or John Taylor--all of whom have been highly critical of our monetary policy. All three are more concerned by asset bubbles (like the stock market) and normalizing rates than with achieving an arbitrary inflation number. Some of these guys are more aggressive than others. Once the nomination process begins, let's see how the smart money reacts. That may provide a truer sell signal.
Sunday, July 16, 2017
July 16, 2017 Insanity
Risk/Reward Vol 358
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The headline in Thursday's Investor Business Daily read " Yellen Triggers Stock Rally." What? Did I not praise her in the last edition for her newly adopted low profile and her desire to make Fed watching as exciting as paint drying? It seems that central bankers worldwide just can't resist meddling. Talk about the hubris of the elite. So what did she say and why the reaction? In testimony before Congress, Yellen admitted that the current, paltry 1.4% rate of inflation (2% inflation now being the Fed's Holy Grail) may be the result of something other than transitory low prices in commodities and that as a consequence future rate hikes may be more gradual. Mr. Market and Mrs. Bond interpreted this to mean that the Fed's balance sheet reduction anticipated to begin in September and/or its anticipated December rate hike may not occur. In other words, the easy money punch bowl may continue. This sent bond yields lower and stock prices higher.
The problem with the Fed, as I see it, is that it is populated by academic economists who, despite giving lip service to "following the data, slavishly follow models they developed decades ago. If one truly "follows the data", how can one not conclude that a decade of easy money has not spurred the economy? And who says inflation necessarily equates to economic growth? Look at the period 1850 to 1900, the sweet spot of the industrial revolution and one of, if not the greatest, period of economic growth in US history. The annual rate of inflation was 0.17%. In other words $1 in 1850 was worth $1.09 in 1900. Inflation had little to do with economic growth. What did? The population of the US more than TRIPLED. As I have written again and again, no matter how much money or credit one has, one does not buy houses, cribs, diapers or mini vans if one does not have children. And old people and recent immigrants are not big buyers of anything. Simply put, we are a consumer driven economy, and we do not have enough consumers. We need policies that incent those in the upper and middle classes of child bearing age to propagate. The Fed's stated belief that easy money will spur growth is insane given Einstein's definition. ("Insanity is doing the same thing over and over again expecting different results.") The only result that I see is pushing investors out of interest bearing instruments (bond, cd's and savings accounts) and into equities. No wonder the stock market is trading (read: bubbling) at record price/earnings ratios with no end in sight.
And speaking of insane, I re-entered the oil patch this week. Here's the backstory. As loyal readers know, no petro stock has taken a beating like Kinder Morgan. Once the darling of the pipeline companies, its ill fated reorganization and 75% dividend cut in 2015 put KMI at the back of the pack. That said it remains the largest player in the field, and slowly but surely it has been regaining credibility. That is until last month when its much touted TransMountain, Alberta to British Columbia, construction project ran into a series of environmental roadblocks. This news caused its stock to plummet. That said, I was attracted to its preferred, KMIpA, which trades well below par and is currently yielding over 11%. A quick look at KMI's financials led me to conclude that the preferred is not at risk no matter what happens in Canada. Thus I bought. I also continue to pick up municipal bond closed end funds on dips.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The headline in Thursday's Investor Business Daily read " Yellen Triggers Stock Rally." What? Did I not praise her in the last edition for her newly adopted low profile and her desire to make Fed watching as exciting as paint drying? It seems that central bankers worldwide just can't resist meddling. Talk about the hubris of the elite. So what did she say and why the reaction? In testimony before Congress, Yellen admitted that the current, paltry 1.4% rate of inflation (2% inflation now being the Fed's Holy Grail) may be the result of something other than transitory low prices in commodities and that as a consequence future rate hikes may be more gradual. Mr. Market and Mrs. Bond interpreted this to mean that the Fed's balance sheet reduction anticipated to begin in September and/or its anticipated December rate hike may not occur. In other words, the easy money punch bowl may continue. This sent bond yields lower and stock prices higher.
The problem with the Fed, as I see it, is that it is populated by academic economists who, despite giving lip service to "following the data, slavishly follow models they developed decades ago. If one truly "follows the data", how can one not conclude that a decade of easy money has not spurred the economy? And who says inflation necessarily equates to economic growth? Look at the period 1850 to 1900, the sweet spot of the industrial revolution and one of, if not the greatest, period of economic growth in US history. The annual rate of inflation was 0.17%. In other words $1 in 1850 was worth $1.09 in 1900. Inflation had little to do with economic growth. What did? The population of the US more than TRIPLED. As I have written again and again, no matter how much money or credit one has, one does not buy houses, cribs, diapers or mini vans if one does not have children. And old people and recent immigrants are not big buyers of anything. Simply put, we are a consumer driven economy, and we do not have enough consumers. We need policies that incent those in the upper and middle classes of child bearing age to propagate. The Fed's stated belief that easy money will spur growth is insane given Einstein's definition. ("Insanity is doing the same thing over and over again expecting different results.") The only result that I see is pushing investors out of interest bearing instruments (bond, cd's and savings accounts) and into equities. No wonder the stock market is trading (read: bubbling) at record price/earnings ratios with no end in sight.
And speaking of insane, I re-entered the oil patch this week. Here's the backstory. As loyal readers know, no petro stock has taken a beating like Kinder Morgan. Once the darling of the pipeline companies, its ill fated reorganization and 75% dividend cut in 2015 put KMI at the back of the pack. That said it remains the largest player in the field, and slowly but surely it has been regaining credibility. That is until last month when its much touted TransMountain, Alberta to British Columbia, construction project ran into a series of environmental roadblocks. This news caused its stock to plummet. That said, I was attracted to its preferred, KMIpA, which trades well below par and is currently yielding over 11%. A quick look at KMI's financials led me to conclude that the preferred is not at risk no matter what happens in Canada. Thus I bought. I also continue to pick up municipal bond closed end funds on dips.
Sunday, July 2, 2017
July 2, 2017 Draghi
Risk/Reward Vol. 357
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Words have consequences when one is a central banker. Ask Ben Bernanke. Remember the "taper tantrum" of 2013 when he surprised the market by announcing a tapering of bond purchases without sufficient forewarning? Well, Janet Yellen remembers it and that is why she takes such pain to condition the market for any move of significance. For example, Mr. Market has been warned and fully expects the Fed to allow its balance sheet to run off at the rate of $10 to 50 billion per month starting this fall, to raise rates one more time this calendar year and to raise rates three times in 2018. Springing surprises is anathema to Chair Yellen. As she has stated on numerous occasions, she wants Fed actions to be as exciting as watching paint dry. This is a lesson that European Central Bank President Mario Draghi needs to learn. On Tuesday, out of the blue, he stated the following: "All the signs now point to a strengthening and broadening recovery in the euro area. Deflationary forces have been replaced by reflationary ones." What! Reflation has appeared nowhere in his previous comments. The reaction in the bond market was swift and significant as fixed income investors interpreted the statement to mean that the ECB would soon end its very accommodative 60billion Euro/month bond buying program. Since bond markets are more globalized than equity markets, the sell off hit everywhere including the United States. Yields (which move opposite to prices) shot through the roof. The yield on the all important US Ten Year Treasury Bond ("10Year") jumped from 2.14 to 2.3%, a huge move given the stability in rates below 2.2% that we have experienced recently. Predictably, the prices of those securities that are correlated to the 10Year fell.
So what did I, a man whose portfolio is closely pegged to the 10Year, do? First, I determined that despite the hit, my portfolio remained green. But even if it had dipped into the red, I would not have sold so long as the losses were less than 5%. Why not sell? Because over several years of tracking interest rates, I have learned that Mrs. Bond, like Mr. Market, often overreacts when surprises are sprung. And a quick review of the context in which Draghi's comment was made (reaffirming the monthly bond purchase program) confirmed the overreaction. So I bought more of the same, preferred stock and municipal bond closed end funds. If I am right, I should see nice capital gains and healthy monthly dividends from my new acquisitions.
The stock market, too, took a time out in the wake of Draghi's comments but came back strong by week's end. Seemingly each of the major indices flirts with a new record high on a daily basis despite periodic warnings that stock prices are bloated. This week's warning was a report that the CAPE (Nobel Prize winner Robert Shiller's comparative price/earnings chart) was near 30 for only the third time in its history. The other two were just before the stock market crashes of 1929 and 1999. Again, I say "So what". In a world dominated by central bank policies that depress interest rates, There Is No Alternative ("TINA") to stocks. In this regard, the House Financial Services Committee held hearings this week on "The Federal Reserve's Impact on Main Street, Retirees and Savings." The consensus of those that spoke was that the decade long easy money policies of the Federal Reserve have enriched the investor class at the expense of savers. Duh! One need not look beyond my 92 year old mother. At her age, traditional advice would have her in short term bonds and cd's. And that is where she is. As each matures she reinvests, often for below 2% returns. If her level of care increases she will erode principal. Should she be in stocks? Some would say yes, but what would a 10% or even a 2% correction do to her? No thank you. And she is not alone. One economist who testified at the hearing estimated that the past decade of centrally planned low interest rates has cost savers nearly $2.5 trillion in interest that in more normal times they could have expected. And to what end? As I have written ad nauseum in this blog, low interest rates have proven ineffective at spurring our economy which is growing at a pitiful 1.4% annually. No matter how low the rate, no one is going to buy what one does not need. People without children do not buy diapers, cribs, houses or minivans. And old people don't buy much at all. Look around. We are a childless, aging country. In other words, an economy with an ever shrinking number of buyers simply cannot grow no matter how accommodative its monetary policy. Finding ways to prosper in such an environment is the challenge we all face.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Words have consequences when one is a central banker. Ask Ben Bernanke. Remember the "taper tantrum" of 2013 when he surprised the market by announcing a tapering of bond purchases without sufficient forewarning? Well, Janet Yellen remembers it and that is why she takes such pain to condition the market for any move of significance. For example, Mr. Market has been warned and fully expects the Fed to allow its balance sheet to run off at the rate of $10 to 50 billion per month starting this fall, to raise rates one more time this calendar year and to raise rates three times in 2018. Springing surprises is anathema to Chair Yellen. As she has stated on numerous occasions, she wants Fed actions to be as exciting as watching paint dry. This is a lesson that European Central Bank President Mario Draghi needs to learn. On Tuesday, out of the blue, he stated the following: "All the signs now point to a strengthening and broadening recovery in the euro area. Deflationary forces have been replaced by reflationary ones." What! Reflation has appeared nowhere in his previous comments. The reaction in the bond market was swift and significant as fixed income investors interpreted the statement to mean that the ECB would soon end its very accommodative 60billion Euro/month bond buying program. Since bond markets are more globalized than equity markets, the sell off hit everywhere including the United States. Yields (which move opposite to prices) shot through the roof. The yield on the all important US Ten Year Treasury Bond ("10Year") jumped from 2.14 to 2.3%, a huge move given the stability in rates below 2.2% that we have experienced recently. Predictably, the prices of those securities that are correlated to the 10Year fell.
So what did I, a man whose portfolio is closely pegged to the 10Year, do? First, I determined that despite the hit, my portfolio remained green. But even if it had dipped into the red, I would not have sold so long as the losses were less than 5%. Why not sell? Because over several years of tracking interest rates, I have learned that Mrs. Bond, like Mr. Market, often overreacts when surprises are sprung. And a quick review of the context in which Draghi's comment was made (reaffirming the monthly bond purchase program) confirmed the overreaction. So I bought more of the same, preferred stock and municipal bond closed end funds. If I am right, I should see nice capital gains and healthy monthly dividends from my new acquisitions.
The stock market, too, took a time out in the wake of Draghi's comments but came back strong by week's end. Seemingly each of the major indices flirts with a new record high on a daily basis despite periodic warnings that stock prices are bloated. This week's warning was a report that the CAPE (Nobel Prize winner Robert Shiller's comparative price/earnings chart) was near 30 for only the third time in its history. The other two were just before the stock market crashes of 1929 and 1999. Again, I say "So what". In a world dominated by central bank policies that depress interest rates, There Is No Alternative ("TINA") to stocks. In this regard, the House Financial Services Committee held hearings this week on "The Federal Reserve's Impact on Main Street, Retirees and Savings." The consensus of those that spoke was that the decade long easy money policies of the Federal Reserve have enriched the investor class at the expense of savers. Duh! One need not look beyond my 92 year old mother. At her age, traditional advice would have her in short term bonds and cd's. And that is where she is. As each matures she reinvests, often for below 2% returns. If her level of care increases she will erode principal. Should she be in stocks? Some would say yes, but what would a 10% or even a 2% correction do to her? No thank you. And she is not alone. One economist who testified at the hearing estimated that the past decade of centrally planned low interest rates has cost savers nearly $2.5 trillion in interest that in more normal times they could have expected. And to what end? As I have written ad nauseum in this blog, low interest rates have proven ineffective at spurring our economy which is growing at a pitiful 1.4% annually. No matter how low the rate, no one is going to buy what one does not need. People without children do not buy diapers, cribs, houses or minivans. And old people don't buy much at all. Look around. We are a childless, aging country. In other words, an economy with an ever shrinking number of buyers simply cannot grow no matter how accommodative its monetary policy. Finding ways to prosper in such an environment is the challenge we all face.
Sunday, June 18, 2017
June 18, 2017 Inconsequential
Risk/Reward Vol. 356
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The biggest news this week was how inconsequential the eventful action taken by the Federal Reserve proved to be. Eventful because it laid out a detailed plan on how the Fed intends to reduce its $4.5 billion balance sheet over the next 4 or 5 years. Initially, it will allow $10billion per month of mortgages and bonds to mature without replacement with the amount rising to $50billion per month over time. Inconsequential, because once unveiled, this news did not cause interest rates to increase as one might have expected. Credit Chair Yellen and the Fed for conditioning the market for this plan. She wants the Fed to fade into the woodwork and to have its doings be as exciting as watching paint dry. Wednesday's news conference was a good first step.
Thanks to Goldilocks and TINA (discussed last week http://www.riskrewardblog.blogspot.com ) Mr. Market kept trading at historic highs. Traditional metrics such as price to earnings ratios just don't matter anymore because There Is No Alternative to stocks. Will this change someday? No doubt, but who knows when. One of my favorites, Jeffrey Gundlach, this week advised short term traders to sell in advance of what he believes will be a mid summer correction. His belief is based upon what he perceives to be stretched valuations. But what valuations are to be considered stretched today? Markets have been wildly distorted by a decade of artificially depressed interest rates (e.g. the Fed's quantitative easing). And the recent implementation of the "fiduciary rule" could operate to distort markets even more. The details of that rule are beyond the scope of this publication but no doubt it will push more and more money managers into low cost index funds. Active management has been and will continue to be replaced by group think and herd mentality. Think not? Ask your money manager.
I continue to hold pat with my income producing portfolio. Finding gems is becoming harder given the stable and slightly downward trend dominating the yield on the US Ten Year Treasury to which much of my strategy is correlated. I did add some more municipal bond closed end fund positions to my taxable account. Their value continues to hold steady, and I should see decent monthly dividends from these. Oil continues to be a drag with its price hitting year to date lows this week. And lastly, talk about a disrupter! I continue to marvel at Jeff Bezos. How would you like to be in the grocery business now that Amazon has purchased Whole Foods? The number one logistics company in the world now owns the number one store in the hottest grocery store segment---natural and organic foods. Yikes.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The biggest news this week was how inconsequential the eventful action taken by the Federal Reserve proved to be. Eventful because it laid out a detailed plan on how the Fed intends to reduce its $4.5 billion balance sheet over the next 4 or 5 years. Initially, it will allow $10billion per month of mortgages and bonds to mature without replacement with the amount rising to $50billion per month over time. Inconsequential, because once unveiled, this news did not cause interest rates to increase as one might have expected. Credit Chair Yellen and the Fed for conditioning the market for this plan. She wants the Fed to fade into the woodwork and to have its doings be as exciting as watching paint dry. Wednesday's news conference was a good first step.
Thanks to Goldilocks and TINA (discussed last week http://www.riskrewardblog.blogspot.com ) Mr. Market kept trading at historic highs. Traditional metrics such as price to earnings ratios just don't matter anymore because There Is No Alternative to stocks. Will this change someday? No doubt, but who knows when. One of my favorites, Jeffrey Gundlach, this week advised short term traders to sell in advance of what he believes will be a mid summer correction. His belief is based upon what he perceives to be stretched valuations. But what valuations are to be considered stretched today? Markets have been wildly distorted by a decade of artificially depressed interest rates (e.g. the Fed's quantitative easing). And the recent implementation of the "fiduciary rule" could operate to distort markets even more. The details of that rule are beyond the scope of this publication but no doubt it will push more and more money managers into low cost index funds. Active management has been and will continue to be replaced by group think and herd mentality. Think not? Ask your money manager.
I continue to hold pat with my income producing portfolio. Finding gems is becoming harder given the stable and slightly downward trend dominating the yield on the US Ten Year Treasury to which much of my strategy is correlated. I did add some more municipal bond closed end fund positions to my taxable account. Their value continues to hold steady, and I should see decent monthly dividends from these. Oil continues to be a drag with its price hitting year to date lows this week. And lastly, talk about a disrupter! I continue to marvel at Jeff Bezos. How would you like to be in the grocery business now that Amazon has purchased Whole Foods? The number one logistics company in the world now owns the number one store in the hottest grocery store segment---natural and organic foods. Yikes.
Sunday, June 11, 2017
June 11, 2017 Comey
Risk/Reward Vol. 355
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Does anyone feel good about what happened on Thursday? Who won in the Comey matter? The President claims "victory" but do you agree? Most commentators believe that the Donald avoided any serious threat of impeachment, but that the Comey revelations further weakened the President politically. Hope of any significant legislation this year is fading fast. In the UK, Prime Minister May received a shellacking at the polls thereby losing her gambit to strengthen the Tory's erstwhile majority. And the ECB, Europe's central bank, issued a statement indicating it would not cut rates further, but gave no indication of its future course. Indeed, I have encountered only one person who feels good about Thursday. Mr. Market. Friday's profit taking in the NASDAQ notwithstanding, Mr. Market continues to reach new highs on an almost daily basis. How come?
As discussed previously, I believe that the answer lies with two of Mr. Market's girlfriends: Goldilocks and Tina. As I reported two years ago (see Vol. 266 http://www.riskrewardblog.blogspot.com/) there are few things that Mr. Market likes better than predictability. He likes when the political and economic landscape is "not too hot" and "not too cold" ; just like Goldilock's porridge. And that condition certainly applies today. Mr. Market knows that with the economy running at 2% growth and the prospect of any stimulus fading, the Federal Reserve will likely not raise rates prospectively more than twice this calendar year. Knowing this causes the yields available in the bond market and the securities that trade in relation thereto (a/k/a the fixed income market) to depress and stabilize at the same time. This in turn causes fixed income investors to chase yield futher and further up the risk curve. Indicative of this is the fact that the yield spread between junk bonds and Treasuries fell to a 10 year low this week. At some point (like now) the return on risky fixed income becomes too great and investors are forced to buy stocks if they want any return. In other words, There Is No Alternative to stocks or TINA.
The spikes in stock prices have not been uniform however. Until Friday's rotation out of tech and into industrials and oil, stocks in the petroleum sector have been laggards. This is small wonder when reporting is so bad in the oil patch. News that is supposed to go one way (e.g. anticipated reduction in gasoline inventory) goes wildly the other way---as happened this past week. Moreover I am just not comfortable with oil stocks when the price of crude is below $50 and when it is directionally heading downward. Thus I sold my oil positions early in the week and took a small loss. I was otherwise a buyer however. As I presaged in the last edition, I bought several positions in municipal bond closed end funds. As I noted last week, this sector took a beating after the election in anticipation of tax reform that would make them less appealing. The prospect of any such reform in light of current DC politics is slim. And although muni's have made a decent recovery, there is still room for appreciation. Moreover, the tax free 5.5% income amortized and paid monthly is an added bonus.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Does anyone feel good about what happened on Thursday? Who won in the Comey matter? The President claims "victory" but do you agree? Most commentators believe that the Donald avoided any serious threat of impeachment, but that the Comey revelations further weakened the President politically. Hope of any significant legislation this year is fading fast. In the UK, Prime Minister May received a shellacking at the polls thereby losing her gambit to strengthen the Tory's erstwhile majority. And the ECB, Europe's central bank, issued a statement indicating it would not cut rates further, but gave no indication of its future course. Indeed, I have encountered only one person who feels good about Thursday. Mr. Market. Friday's profit taking in the NASDAQ notwithstanding, Mr. Market continues to reach new highs on an almost daily basis. How come?
As discussed previously, I believe that the answer lies with two of Mr. Market's girlfriends: Goldilocks and Tina. As I reported two years ago (see Vol. 266 http://www.riskrewardblog.blogspot.com/) there are few things that Mr. Market likes better than predictability. He likes when the political and economic landscape is "not too hot" and "not too cold" ; just like Goldilock's porridge. And that condition certainly applies today. Mr. Market knows that with the economy running at 2% growth and the prospect of any stimulus fading, the Federal Reserve will likely not raise rates prospectively more than twice this calendar year. Knowing this causes the yields available in the bond market and the securities that trade in relation thereto (a/k/a the fixed income market) to depress and stabilize at the same time. This in turn causes fixed income investors to chase yield futher and further up the risk curve. Indicative of this is the fact that the yield spread between junk bonds and Treasuries fell to a 10 year low this week. At some point (like now) the return on risky fixed income becomes too great and investors are forced to buy stocks if they want any return. In other words, There Is No Alternative to stocks or TINA.
The spikes in stock prices have not been uniform however. Until Friday's rotation out of tech and into industrials and oil, stocks in the petroleum sector have been laggards. This is small wonder when reporting is so bad in the oil patch. News that is supposed to go one way (e.g. anticipated reduction in gasoline inventory) goes wildly the other way---as happened this past week. Moreover I am just not comfortable with oil stocks when the price of crude is below $50 and when it is directionally heading downward. Thus I sold my oil positions early in the week and took a small loss. I was otherwise a buyer however. As I presaged in the last edition, I bought several positions in municipal bond closed end funds. As I noted last week, this sector took a beating after the election in anticipation of tax reform that would make them less appealing. The prospect of any such reform in light of current DC politics is slim. And although muni's have made a decent recovery, there is still room for appreciation. Moreover, the tax free 5.5% income amortized and paid monthly is an added bonus.
Sunday, June 4, 2017
June 4, 2017 Paris Accord
Risk/Reward Vol. 354
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING . RELY ON NOTHING STATED HEREIN
Reading newspapers and watching telecasts one would conclude that no one in the world agrees with The Donald's decision to abandon the Paris climate change accord. No one that is other than Mr. Market. Did you see the indices jump following the President's announcement? And the momentum it created powered them to record closes on Friday despite a disappointing jobs number. I suspect Mr. Market's reaction was less a ringing endorsement of Mr. Trump's environmental position than it was a recognition that the President would stand by his campaign promise to put America first in all matters---no matter how unpopular the action may be. Mr. Trump believed that the burden of the accord fell too heavily on the US in comparison to other countries and that was his rationale for the walk away. Good policy or bad is of no moment to me as an investor. Indeed, when it comes to investing, I am apolitical. I cannot afford to be otherwise---just like Mr. Market.
So with unemployment now at a multi year low of 4.3% why was the jobs report deemed disappointing? Two reasons come to mind. First, although unemployment is low it is so, in large part, due to a declining labor participation rate. Only 62% of eligible workers are employed, fully 5% below the pre-2007 participation rate. The delta between the unemployment rate and the unemployed rate is the huge number of eligible workers who are not seeking work. The second reason is that wages are growing at a snail's pace. Without wages increasing, demand remains depressed a fact borne out by the anemic growth in gross domestic product and a sub 2% inflation rate. The "laws of economics", particularly the Philips curve (low unemployment is supposed to result in higher inflation) upon which the Federal Reserve sets its policies, simply have not worked as postulated. I have my beliefs as to why (e.g. an aging work force) but that discussion is for another day.
So what does this mean to investors? To index buyers and the buy-and-hold crowd, I see no end insight. The S&P 500 is up nearly 9% year to date; the NASAQ is up 17%. Do I see them rising at such a clip going forward? No, but I see nothing to cause a precipitous drop either. For me and other interest rate sensitive investors I see more of the same; a sub 2.5% rate on the all important US Ten Year Bond and nothing on the horizon scheduled to rocket it higher. Even with a June rise in short term rates "baked in" , the 10Year closed on Friday at 2.159%. With no foreseeable need to reset, I will hold what I have and collect monthly dividends. I may add some more preferred closed end funds to my portfolio, but finding undervalued assets in that space is becoming more difficult. In addition, with the President so unpopular, the likelihood of significant tax reform is lessening. The prospect of tax reform has depressed tax free,municipal bond funds since the election. With reform fading and with low, stable interest rates, I will investigate deploying some taxable dollars into that tax free arena.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING . RELY ON NOTHING STATED HEREIN
Reading newspapers and watching telecasts one would conclude that no one in the world agrees with The Donald's decision to abandon the Paris climate change accord. No one that is other than Mr. Market. Did you see the indices jump following the President's announcement? And the momentum it created powered them to record closes on Friday despite a disappointing jobs number. I suspect Mr. Market's reaction was less a ringing endorsement of Mr. Trump's environmental position than it was a recognition that the President would stand by his campaign promise to put America first in all matters---no matter how unpopular the action may be. Mr. Trump believed that the burden of the accord fell too heavily on the US in comparison to other countries and that was his rationale for the walk away. Good policy or bad is of no moment to me as an investor. Indeed, when it comes to investing, I am apolitical. I cannot afford to be otherwise---just like Mr. Market.
So with unemployment now at a multi year low of 4.3% why was the jobs report deemed disappointing? Two reasons come to mind. First, although unemployment is low it is so, in large part, due to a declining labor participation rate. Only 62% of eligible workers are employed, fully 5% below the pre-2007 participation rate. The delta between the unemployment rate and the unemployed rate is the huge number of eligible workers who are not seeking work. The second reason is that wages are growing at a snail's pace. Without wages increasing, demand remains depressed a fact borne out by the anemic growth in gross domestic product and a sub 2% inflation rate. The "laws of economics", particularly the Philips curve (low unemployment is supposed to result in higher inflation) upon which the Federal Reserve sets its policies, simply have not worked as postulated. I have my beliefs as to why (e.g. an aging work force) but that discussion is for another day.
So what does this mean to investors? To index buyers and the buy-and-hold crowd, I see no end insight. The S&P 500 is up nearly 9% year to date; the NASAQ is up 17%. Do I see them rising at such a clip going forward? No, but I see nothing to cause a precipitous drop either. For me and other interest rate sensitive investors I see more of the same; a sub 2.5% rate on the all important US Ten Year Bond and nothing on the horizon scheduled to rocket it higher. Even with a June rise in short term rates "baked in" , the 10Year closed on Friday at 2.159%. With no foreseeable need to reset, I will hold what I have and collect monthly dividends. I may add some more preferred closed end funds to my portfolio, but finding undervalued assets in that space is becoming more difficult. In addition, with the President so unpopular, the likelihood of significant tax reform is lessening. The prospect of tax reform has depressed tax free,municipal bond funds since the election. With reform fading and with low, stable interest rates, I will investigate deploying some taxable dollars into that tax free arena.
Sunday, May 28, 2017
May 29, 2017 Gradual and Predictable
Risk/Reward Vol. 353
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Gradual and predictable"; these three words sent Mr. Market into paroxysms of joy on Wednesday. Within moments of their utterance, two of the three major indices jumped to record highs where they stayed into this holiday weekend. To what do these words refer? The approach that the Federal Reserve intends to take in reducing its bloated balance sheet. As you may recall, after the 2008 financial crisis, in order to depress interest rates of any and all duration and to support the housing market, the Federal Reserve printed money which it used to buy Treasury bonds and mortgages. In the course of so doing, the Federal Reserve's balance sheet rose from $800 billion to $4.5 trillion where it has remained for the past several years. With unemployment under control and with the prospect of steady if anemic economic growth now a reality, the Federal Reserve desires to downsize---something deemed prudent by all concerned. Just how to downsize has been a major issue with some Federal Reserve staff members suggesting the Fed sell these assets (bonds and mortgages) en masse. This likely would have wreaked havoc on the bond and mortgage markets, something the Fed desperately wished to avoid. And so a gentle run off of debt as it matures has been selected as the vehicle for reducing the balance sheet--- a technique designed to make the process "gradual and predictable." What a relief, even if it further fueled an already overheated stock market.
Understandably, the Fed's announcement also served to assuage an already heady bond market. The yield on the all important US Ten Year Treasury Bond fell below 2.25% on Wednesday and finished the week at that benchmark. The yield dropped despite a June increase in short term rates being a lock. Why? Because like Mr. Market, Mrs. Bond values predictability above all else. And so do I. With clarity as to the future course of Fed activity, I was comfortable adding to my interest rate sensitive portfolio. I purchased positions in JPI and LDP. I remained disciplined and resisted buying any closed end fund that was trading above its net asset value. This is not a hard and fast rule, but so long as there are alternatives trading below NAV, I go with them.
Also this week, members of OPEC and several other petro-producing nations agreed to extend oil production limits for another 10 months. This takes 1.8 million barrels/day off the market. Total world wide production was 82mm bbls/day before the cut. How effective this will be in raising oil prices remains to be seen in light of the ability of United States frackers to increase production cost effectively and at break neck speed. As has been reported ad nauseum in this publication, the wonder that is the US fracking industry continues to outsmart its foreign competition. More and more attention is paid to this juggernaut. Indeed, Exxon, the second largest oil company in the world has shed its traditional bias against fracking and is dedicating 25% of its capital expenditures to that technology this coming year. The impact of fracking is reflected in the lessening of OPEC's influence. Despite the announced extension of the production limits, the price of oil dropped. Mr. Market wanted OPEC to make even deeper cuts. As for me, it gave assurance that the flow of domestic oil will continue to increase. Accordingly, I bought some more pipeline funds (MIE and NML) on the dip.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Gradual and predictable"; these three words sent Mr. Market into paroxysms of joy on Wednesday. Within moments of their utterance, two of the three major indices jumped to record highs where they stayed into this holiday weekend. To what do these words refer? The approach that the Federal Reserve intends to take in reducing its bloated balance sheet. As you may recall, after the 2008 financial crisis, in order to depress interest rates of any and all duration and to support the housing market, the Federal Reserve printed money which it used to buy Treasury bonds and mortgages. In the course of so doing, the Federal Reserve's balance sheet rose from $800 billion to $4.5 trillion where it has remained for the past several years. With unemployment under control and with the prospect of steady if anemic economic growth now a reality, the Federal Reserve desires to downsize---something deemed prudent by all concerned. Just how to downsize has been a major issue with some Federal Reserve staff members suggesting the Fed sell these assets (bonds and mortgages) en masse. This likely would have wreaked havoc on the bond and mortgage markets, something the Fed desperately wished to avoid. And so a gentle run off of debt as it matures has been selected as the vehicle for reducing the balance sheet--- a technique designed to make the process "gradual and predictable." What a relief, even if it further fueled an already overheated stock market.
Understandably, the Fed's announcement also served to assuage an already heady bond market. The yield on the all important US Ten Year Treasury Bond fell below 2.25% on Wednesday and finished the week at that benchmark. The yield dropped despite a June increase in short term rates being a lock. Why? Because like Mr. Market, Mrs. Bond values predictability above all else. And so do I. With clarity as to the future course of Fed activity, I was comfortable adding to my interest rate sensitive portfolio. I purchased positions in JPI and LDP. I remained disciplined and resisted buying any closed end fund that was trading above its net asset value. This is not a hard and fast rule, but so long as there are alternatives trading below NAV, I go with them.
Also this week, members of OPEC and several other petro-producing nations agreed to extend oil production limits for another 10 months. This takes 1.8 million barrels/day off the market. Total world wide production was 82mm bbls/day before the cut. How effective this will be in raising oil prices remains to be seen in light of the ability of United States frackers to increase production cost effectively and at break neck speed. As has been reported ad nauseum in this publication, the wonder that is the US fracking industry continues to outsmart its foreign competition. More and more attention is paid to this juggernaut. Indeed, Exxon, the second largest oil company in the world has shed its traditional bias against fracking and is dedicating 25% of its capital expenditures to that technology this coming year. The impact of fracking is reflected in the lessening of OPEC's influence. Despite the announced extension of the production limits, the price of oil dropped. Mr. Market wanted OPEC to make even deeper cuts. As for me, it gave assurance that the flow of domestic oil will continue to increase. Accordingly, I bought some more pipeline funds (MIE and NML) on the dip.
Sunday, May 21, 2017
May 21, 2017 PIPE
Risk/Reward Vol. 352
THIS IS NOT INVESTMENT OR TAX ADVICE . IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
This week reminds us that Mr. Market is as responsive to politics as he is to economics, monetary policy or any other such stimulus. After all, the post election uptick is called the "Trump Rally." Thus, if The Donald's election can cause the market to rise, his bumbling can cause it to tumble. Why? Because his bumbling puts at risk tax relief and other reforms which underlie Mr. Market's euphoria.. That stated, Wednesday's swoon was hardly a correction. The recovery at week's end left each of the three major indices down approximately 1/2% for the week. Apparently, nothing...not even the threat of impeachment-- can slow this market. What a sight to behold!
And speaking of sights to behold, did you see that Amazon celebrated the 20th anniversary of its initial public offering this week? One hundred dollars invested in that IPO would be worth $64,000 today. Wow! I hope some of you had the foresight to buy AMZN then or when it faltered in 2001. I was not so lucky. At about the same time as AMZN's IPO, I took $100,000 and joined a group making a private investment in a publicly traded entity (appropriately called a "PIPE"). The company had preliminary orders from WalMart for a patented storage cabinet and had just assumed worldwide distribution rights for a large Canadian paper company. This investment seemed a much better bet than putting money into an online bookseller. One of the conditions of the PIPE was that I could not sell my stock for one year; an arrangement called (also appropriately) a "lock up." Immediately after my investment, the stock jumped in value, and I was feeling very good. But as the year expired, the stock tanked. Soon after it was delisted and in time I rode that $100,000 to ZERO. Had I put it in Amazon, it would be worth $64,000,000---that's 64 million---today. Woulda, coulda, shoulda, indeed.
The above is just one of my turn-of-the-century investment horror stories. So, Dear Reader, you can appreciate the genesis of my conservative investment approach today. I will never catch the next Amazon. But, henceforth, I will not get caught in an illiquid investment. And I will not ride one to the bottom ever, ever again. I keep to my knitting and sleep well at night. So what opportunities did my knitting provide me this week? The Donald's bumbling predictably produced a "flight to safety"; that is a rush to buy US Treasury bonds, the safest investment in the world. As the demand for these bonds increased, so did their price. And as we all know now, an increase in a bond's price means a drop in its yield. Normally, preferred stock closed end funds trade in lockstep with Treasury bonds. Sometimes, however there is a lag. I took advantage of such a lag this week and bought JPC, a quality fund with a very good yield trading at a substantial discount to net asset value.
THIS IS NOT INVESTMENT OR TAX ADVICE . IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
This week reminds us that Mr. Market is as responsive to politics as he is to economics, monetary policy or any other such stimulus. After all, the post election uptick is called the "Trump Rally." Thus, if The Donald's election can cause the market to rise, his bumbling can cause it to tumble. Why? Because his bumbling puts at risk tax relief and other reforms which underlie Mr. Market's euphoria.. That stated, Wednesday's swoon was hardly a correction. The recovery at week's end left each of the three major indices down approximately 1/2% for the week. Apparently, nothing...not even the threat of impeachment-- can slow this market. What a sight to behold!
And speaking of sights to behold, did you see that Amazon celebrated the 20th anniversary of its initial public offering this week? One hundred dollars invested in that IPO would be worth $64,000 today. Wow! I hope some of you had the foresight to buy AMZN then or when it faltered in 2001. I was not so lucky. At about the same time as AMZN's IPO, I took $100,000 and joined a group making a private investment in a publicly traded entity (appropriately called a "PIPE"). The company had preliminary orders from WalMart for a patented storage cabinet and had just assumed worldwide distribution rights for a large Canadian paper company. This investment seemed a much better bet than putting money into an online bookseller. One of the conditions of the PIPE was that I could not sell my stock for one year; an arrangement called (also appropriately) a "lock up." Immediately after my investment, the stock jumped in value, and I was feeling very good. But as the year expired, the stock tanked. Soon after it was delisted and in time I rode that $100,000 to ZERO. Had I put it in Amazon, it would be worth $64,000,000---that's 64 million---today. Woulda, coulda, shoulda, indeed.
The above is just one of my turn-of-the-century investment horror stories. So, Dear Reader, you can appreciate the genesis of my conservative investment approach today. I will never catch the next Amazon. But, henceforth, I will not get caught in an illiquid investment. And I will not ride one to the bottom ever, ever again. I keep to my knitting and sleep well at night. So what opportunities did my knitting provide me this week? The Donald's bumbling predictably produced a "flight to safety"; that is a rush to buy US Treasury bonds, the safest investment in the world. As the demand for these bonds increased, so did their price. And as we all know now, an increase in a bond's price means a drop in its yield. Normally, preferred stock closed end funds trade in lockstep with Treasury bonds. Sometimes, however there is a lag. I took advantage of such a lag this week and bought JPC, a quality fund with a very good yield trading at a substantial discount to net asset value.
Sunday, May 14, 2017
May 14, 2017 Sohn
Risk/Reward Vol. 351
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
With the major indices near all time highs, stable interest rates, improved earnings and the lowest volatility index (VIX) reading since 1993, shouldn't passive investors declare victory and drop the mike? After all virtually no active manager has outperformed the indices since the recovery began in 2010. Just let the chips ride forever. Right? Well, not according to the leading hedge fund managers who congregated earlier this week in New York for the annual Sohn Investment Conference. This is a great gathering, and I have written about it in the past. (See Vols. 220 and 306 www.riskrewardblog.blogspot.com) Comments from two of my favorites, Kevin Warsh, the former Federal Reserve official and Bond King Jeffrey Gundlach are worth noting. Warsh criticized the Fed for being too responsive to Mr. Market and advocated that it take a longer, more objective view of its role. Specifically, Warsh warned that the Fed's accommodative policies have left it with little to no powder should the economy nose dive again. Gundlach was more specific--- and more negative. He advocated shorting the S&P 500 which he views as extremely overvalued by any measure including CAPE about which I wrote last week.
So do I believe the markets will undergo a major correction any time soon? I doubt it for one reason: There Is No Alternative a/k/a the TINA factor. (See Vols. 164, 201, 250 and 253) Really, where else would any investor put his/hers/their money right now? Short term bonds provide virtually no return, and longer term debt is very risky considering the lack of liquidity (no market makers) about which I have also written in the past. No one can be criticized for adopting an all-in, equity index strategy given our recent history. That stated, only a fool would do so without giving some consideration to an exit. Sell in May and go away? Probably not. But never sell? Eek. Stated alternatively, it would be a shame if anyone rode his/her well deserved gains down the drain if and when a correction occurred. What to do? Well, how about practicing---just in case. Let me ask: how many of you have ever sold a stock for a gain? Not for a loss, for a gain. I bet very few. So do me a favor. Pick a big winner, hopefully held in a tax deferred account (e.g. 401k or IRA) and sell it next week. You can buy it back the next day, but sell it. Doing so will familiarize you with the mechanics of a sale and will help overcome the mental block that I am sure most if not all of you have about selling a winner. I do it all the time. Admittedly, I am a nut. But I will not be caught flat footed by what happened in 2000 or 2008. No way, no how. And it is what happened then that informs my investing approach first and foremost. If you are of a certain age, I recommend that those dates inform yours as well.
Is anyone else in awe of what American ingenuity has done to disrupt the world's energy market? Recall the state of things just 15 short years ago. Saddam Hussein had the power to choke the Straits of Hormuz through which sailed 20% of the world's oil supply each and every day. Truth be told, this threat was what really motivated the second Iraq war because the US was wholly incapable of supplying its own energy needs. Segue to today. Thanks to the emergence of new technology, most notably advances in fracking, the US is on the doorstep of energy independence and now sits as the world's swing producer. Today, if OPEC and Russia try to limit production, the gap is easily filled by frackers in the US. By July, US production of crude will exceed 10million/bbls/day, half again as much as it was in 2003-2004. And the sky is the limit as the cost of domestic production continues to drop. Even major international producers such as Shell are investing in Texas oil fields which lay abandoned just a few short years ago. I like pipelines in this space and am looking for a price dip in FEI or FPL before reinitiating positions.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
With the major indices near all time highs, stable interest rates, improved earnings and the lowest volatility index (VIX) reading since 1993, shouldn't passive investors declare victory and drop the mike? After all virtually no active manager has outperformed the indices since the recovery began in 2010. Just let the chips ride forever. Right? Well, not according to the leading hedge fund managers who congregated earlier this week in New York for the annual Sohn Investment Conference. This is a great gathering, and I have written about it in the past. (See Vols. 220 and 306 www.riskrewardblog.blogspot.com) Comments from two of my favorites, Kevin Warsh, the former Federal Reserve official and Bond King Jeffrey Gundlach are worth noting. Warsh criticized the Fed for being too responsive to Mr. Market and advocated that it take a longer, more objective view of its role. Specifically, Warsh warned that the Fed's accommodative policies have left it with little to no powder should the economy nose dive again. Gundlach was more specific--- and more negative. He advocated shorting the S&P 500 which he views as extremely overvalued by any measure including CAPE about which I wrote last week.
So do I believe the markets will undergo a major correction any time soon? I doubt it for one reason: There Is No Alternative a/k/a the TINA factor. (See Vols. 164, 201, 250 and 253) Really, where else would any investor put his/hers/their money right now? Short term bonds provide virtually no return, and longer term debt is very risky considering the lack of liquidity (no market makers) about which I have also written in the past. No one can be criticized for adopting an all-in, equity index strategy given our recent history. That stated, only a fool would do so without giving some consideration to an exit. Sell in May and go away? Probably not. But never sell? Eek. Stated alternatively, it would be a shame if anyone rode his/her well deserved gains down the drain if and when a correction occurred. What to do? Well, how about practicing---just in case. Let me ask: how many of you have ever sold a stock for a gain? Not for a loss, for a gain. I bet very few. So do me a favor. Pick a big winner, hopefully held in a tax deferred account (e.g. 401k or IRA) and sell it next week. You can buy it back the next day, but sell it. Doing so will familiarize you with the mechanics of a sale and will help overcome the mental block that I am sure most if not all of you have about selling a winner. I do it all the time. Admittedly, I am a nut. But I will not be caught flat footed by what happened in 2000 or 2008. No way, no how. And it is what happened then that informs my investing approach first and foremost. If you are of a certain age, I recommend that those dates inform yours as well.
Is anyone else in awe of what American ingenuity has done to disrupt the world's energy market? Recall the state of things just 15 short years ago. Saddam Hussein had the power to choke the Straits of Hormuz through which sailed 20% of the world's oil supply each and every day. Truth be told, this threat was what really motivated the second Iraq war because the US was wholly incapable of supplying its own energy needs. Segue to today. Thanks to the emergence of new technology, most notably advances in fracking, the US is on the doorstep of energy independence and now sits as the world's swing producer. Today, if OPEC and Russia try to limit production, the gap is easily filled by frackers in the US. By July, US production of crude will exceed 10million/bbls/day, half again as much as it was in 2003-2004. And the sky is the limit as the cost of domestic production continues to drop. Even major international producers such as Shell are investing in Texas oil fields which lay abandoned just a few short years ago. I like pipelines in this space and am looking for a price dip in FEI or FPL before reinitiating positions.
Sunday, May 7, 2017
May 7, 2017 Vive La France
Risk/Reward Vol. 350
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
We are back from France. Here is our report. By the time you read this edition, France will have elected a new president. What a choice: a nationalist wing nut or a feckless bureaucrat. Sound familiar. As for France's economy, it is in the toilet. One of its major industries, tourism, experienced a disappointing 2016 and from what we could see, 2017 will not fare better. Labor unions are restless. And most importantly, like the rest of Europe, France is facing a demographic time bomb. That stated, the country is beautiful. Plus, the French eat, drink and love better than any people on earth. They truly embody "joie de vivre." So what do they care? Indeed, if I didn't have 4 wonderful daughters, 4 great sons in law and 9, soon to be 10, grandchildren stateside, I would spend all my energy convincing my bride to move to Provence. And it would not take much convincing.
In our absence, the markets did well. Perhaps a little too well according to the Shiller Cyclically Adjusted Price Earnings Ratio or CAPE which measures relative historic stock valuations. CAPE is at a near record high; a level not seen since 2004. Traditionally, this signals overvaluation. Indeed, despite an anemic 0.7% growth in GDP in the first quarter, year to date the Dow Jones Industrial Average is up over 6%, the S&P 500 is up over 7% and the NASDAQ (about which I report little) is up 13%. Why don't I spend more time with NASDAQ? The answer is simple. It is tech heavy, and as a rule tech stocks do not pay dividends. To me, dividends are the mother's milk of investing. Speaking of dividends, I did not miss any, even though I was out of the market for two weeks. Several of my favorite monthly payers are scheduled to go ex-dividend next week As a consequence, I started repurchasing. Unfortunately, some of the preferred closed end funds that I fancy now trade above their net asset value so they were off limits to me. All of these repurchased positions are interest rate sensitive so I waited until after the Fed's meeting this week (where it stood pat on rates) before buying. The likelihood of a June increase is pegged at 80% according to the futures market. This is now priced into the market and accordingly has caused the rate on the all important US Treasury 10 Year Bond to rise above 2.35%. Through June, I anticipate that the 10Year rate will stabilize where it now resides with only a slight upward bias.
Hands down, the most thoughtful interest rate commentator today is Jim Grant, publisher of Grant's Interest Rate Observer. He holds more sway with me than either Jeffrey Gundlach or Bill Gross the current and former Bond Kings. Unfortunately, Grant's publication is extremely expensive. But good news! Grant's son and colleague, Phil Grant, now publishes an almost daily blog appropriately entitled "Almost Daily Grant's." You can have it sent to you via email by simply subscribing free of charge. The posts do not contain in depth analysis, but they do provide a glimpse into what the Grants believe the future holds for interest rates. Moreover, their principled criticism of the Fed is worth the read alone.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
We are back from France. Here is our report. By the time you read this edition, France will have elected a new president. What a choice: a nationalist wing nut or a feckless bureaucrat. Sound familiar. As for France's economy, it is in the toilet. One of its major industries, tourism, experienced a disappointing 2016 and from what we could see, 2017 will not fare better. Labor unions are restless. And most importantly, like the rest of Europe, France is facing a demographic time bomb. That stated, the country is beautiful. Plus, the French eat, drink and love better than any people on earth. They truly embody "joie de vivre." So what do they care? Indeed, if I didn't have 4 wonderful daughters, 4 great sons in law and 9, soon to be 10, grandchildren stateside, I would spend all my energy convincing my bride to move to Provence. And it would not take much convincing.
In our absence, the markets did well. Perhaps a little too well according to the Shiller Cyclically Adjusted Price Earnings Ratio or CAPE which measures relative historic stock valuations. CAPE is at a near record high; a level not seen since 2004. Traditionally, this signals overvaluation. Indeed, despite an anemic 0.7% growth in GDP in the first quarter, year to date the Dow Jones Industrial Average is up over 6%, the S&P 500 is up over 7% and the NASDAQ (about which I report little) is up 13%. Why don't I spend more time with NASDAQ? The answer is simple. It is tech heavy, and as a rule tech stocks do not pay dividends. To me, dividends are the mother's milk of investing. Speaking of dividends, I did not miss any, even though I was out of the market for two weeks. Several of my favorite monthly payers are scheduled to go ex-dividend next week As a consequence, I started repurchasing. Unfortunately, some of the preferred closed end funds that I fancy now trade above their net asset value so they were off limits to me. All of these repurchased positions are interest rate sensitive so I waited until after the Fed's meeting this week (where it stood pat on rates) before buying. The likelihood of a June increase is pegged at 80% according to the futures market. This is now priced into the market and accordingly has caused the rate on the all important US Treasury 10 Year Bond to rise above 2.35%. Through June, I anticipate that the 10Year rate will stabilize where it now resides with only a slight upward bias.
Hands down, the most thoughtful interest rate commentator today is Jim Grant, publisher of Grant's Interest Rate Observer. He holds more sway with me than either Jeffrey Gundlach or Bill Gross the current and former Bond Kings. Unfortunately, Grant's publication is extremely expensive. But good news! Grant's son and colleague, Phil Grant, now publishes an almost daily blog appropriately entitled "Almost Daily Grant's." You can have it sent to you via email by simply subscribing free of charge. The posts do not contain in depth analysis, but they do provide a glimpse into what the Grants believe the future holds for interest rates. Moreover, their principled criticism of the Fed is worth the read alone.
Sunday, April 23, 2017
April 23, 2017 Exit
Risk/Reward Vol. 349
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
You don't have to be a Mensa member to notice that over the past several days the yield on the all important US Ten Year Treasury Bond has come to rest below 2.25%. Why has the bond market rallied recently? (Remember the value of bonds increases as the yield declines.) Is it a flight to safety occasioned by the uncertainties surrounding North Korea and the French presidential election? Perhaps. But more likely, it is due to Mrs. Bond's continued skepticism first reported at Vol. 341 (www.riskrewardblog.blogspot.com) that The Donald cannot deliver on his promised 3-4% growth in gross domestic product. This is the opinion of John Authers, senior commentator for the Financial Times, Guggenheim Partners' Scott Minerd and JPMorgan's Nick Gartside, all significant bond market thought leaders. Oh, and it is also this writer's opinion. This point notwithstanding, I do not see the yield on the 10Year decreasing much over the next few weeks.
So what does the above mean to me? It means that given my upcoming overseas assignment (see below), I am exiting the market once again. Allow me to explain why.
First let's recap my overall approach. As I wrote in Vol 343:
"I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity (the 10 Year) with movement by that singularity providing clarity on when to buy, hold or sell. I submit that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can achieve a 6% return with minimal risk. I do not buy the 10Year. Instead, I buy higher yielding securities that are very closely correlated to the 10Year. For example, through study and observation, I know that highly regarded preferred stocks maintain a roughly 320 basis point (3.2%) spread to the yield on the 10Year. Thus if the yield on the 10 Year remains stable at 2.5% one can achieve a 5.7% return by merely holding a basket of highly rated preferred stocks (such as found in the exchange traded fund PGX) and collecting dividends. If the yield on the 10 Year declines, in time, the yield on these preferred stocks will also decline ultimately reaching equilibrium at the aforementioned 320 bp spread. As a result, an investor will enjoy a capital gain. (Remember the price of an interest rate sensitive security increases as the yield declines.) If the yield on the 10Year increases or one reasonably can anticipate such an increase, one sells thereby retaining any accrued dividends and reaping the aforementioned capital gain. One then waits on the sidelines, safe and sound in cash, until stability returns to the 10Year and hopefully ahead of preferred stock equilibrium."
Next, remember that I most recently re-entered the market (March 16, 2017) when the yield on the 10Year was at or near 2.6%. So, as of the end of this past week, I saw a decent capital gain. Moreover, since I buy mostly monthly payers, I had already captured April's dividend. Lastly, as noted above, I do not foresee any more near term downward movement in the 10Year yield. So at a mere $7 a position in transaction costs, why not capture the gain, sit in cash for a while and enjoy my days in Provence sans souci (translated "without worries"). Given my approach, this was a no brainer. Moreover, exiting the small positions I have in the oil patch also made sense given the bad vibes emanating from that sector recently. (e.g. anxiety arising from the upcoming OPEC meeting)
Did you also notice that Black Rock now has $5.4trillion in assets under management (AUM)? Did you further notice, that most of its recent growth has been in low cost, low margin passive investment vehicles such as exchange traded funds? The proliferation of passive investment is the most significant event in recent times in the world of asset management. It also raises some interesting questions. All is fine and dandy so long as the indices do well, but what happens if and when they correct? Will all those index investors sink at the same time given there is no active manager to intercede? And what about the fact that the three largest asset management groups (Black Rock, Vanguard and Fidelity) now control over $11trillion. This is stunning considering that the total amount of AUM in the US is only $18trillion and the total worldwide is $78trillion. Talk about market power. Let's just say I am glad I manage most of my own money and maintain the above described flexibility.
As noted, Barb and I leave today on assignment to Provence. We will be assessing the impact of the French presidential election up-close and first hand. This is a sacrifice, we know, but it should be of benefit to you, our Readers. And that is all that matters to us. So, a bientot.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
You don't have to be a Mensa member to notice that over the past several days the yield on the all important US Ten Year Treasury Bond has come to rest below 2.25%. Why has the bond market rallied recently? (Remember the value of bonds increases as the yield declines.) Is it a flight to safety occasioned by the uncertainties surrounding North Korea and the French presidential election? Perhaps. But more likely, it is due to Mrs. Bond's continued skepticism first reported at Vol. 341 (www.riskrewardblog.blogspot.com) that The Donald cannot deliver on his promised 3-4% growth in gross domestic product. This is the opinion of John Authers, senior commentator for the Financial Times, Guggenheim Partners' Scott Minerd and JPMorgan's Nick Gartside, all significant bond market thought leaders. Oh, and it is also this writer's opinion. This point notwithstanding, I do not see the yield on the 10Year decreasing much over the next few weeks.
So what does the above mean to me? It means that given my upcoming overseas assignment (see below), I am exiting the market once again. Allow me to explain why.
First let's recap my overall approach. As I wrote in Vol 343:
"I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity (the 10 Year) with movement by that singularity providing clarity on when to buy, hold or sell. I submit that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can achieve a 6% return with minimal risk. I do not buy the 10Year. Instead, I buy higher yielding securities that are very closely correlated to the 10Year. For example, through study and observation, I know that highly regarded preferred stocks maintain a roughly 320 basis point (3.2%) spread to the yield on the 10Year. Thus if the yield on the 10 Year remains stable at 2.5% one can achieve a 5.7% return by merely holding a basket of highly rated preferred stocks (such as found in the exchange traded fund PGX) and collecting dividends. If the yield on the 10 Year declines, in time, the yield on these preferred stocks will also decline ultimately reaching equilibrium at the aforementioned 320 bp spread. As a result, an investor will enjoy a capital gain. (Remember the price of an interest rate sensitive security increases as the yield declines.) If the yield on the 10Year increases or one reasonably can anticipate such an increase, one sells thereby retaining any accrued dividends and reaping the aforementioned capital gain. One then waits on the sidelines, safe and sound in cash, until stability returns to the 10Year and hopefully ahead of preferred stock equilibrium."
Next, remember that I most recently re-entered the market (March 16, 2017) when the yield on the 10Year was at or near 2.6%. So, as of the end of this past week, I saw a decent capital gain. Moreover, since I buy mostly monthly payers, I had already captured April's dividend. Lastly, as noted above, I do not foresee any more near term downward movement in the 10Year yield. So at a mere $7 a position in transaction costs, why not capture the gain, sit in cash for a while and enjoy my days in Provence sans souci (translated "without worries"). Given my approach, this was a no brainer. Moreover, exiting the small positions I have in the oil patch also made sense given the bad vibes emanating from that sector recently. (e.g. anxiety arising from the upcoming OPEC meeting)
Did you also notice that Black Rock now has $5.4trillion in assets under management (AUM)? Did you further notice, that most of its recent growth has been in low cost, low margin passive investment vehicles such as exchange traded funds? The proliferation of passive investment is the most significant event in recent times in the world of asset management. It also raises some interesting questions. All is fine and dandy so long as the indices do well, but what happens if and when they correct? Will all those index investors sink at the same time given there is no active manager to intercede? And what about the fact that the three largest asset management groups (Black Rock, Vanguard and Fidelity) now control over $11trillion. This is stunning considering that the total amount of AUM in the US is only $18trillion and the total worldwide is $78trillion. Talk about market power. Let's just say I am glad I manage most of my own money and maintain the above described flexibility.
As noted, Barb and I leave today on assignment to Provence. We will be assessing the impact of the French presidential election up-close and first hand. This is a sacrifice, we know, but it should be of benefit to you, our Readers. And that is all that matters to us. So, a bientot.
Sunday, April 16, 2017
April 16, 2017 Gundlach Predicts
Risk/Reward Vol. 348
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
A spate of selling on Thursday brought the S&P 500 and the Dow Jones Industrial Average to their lowest close in two months. Whether the cause was the "Mother of All Bombs", the threat of another North Korean nuclear test or market fatigue in general is unclear. However, I see no reason for panic. Both indices are up over 3.5% year to date and continue to trade in a tight range. To me, the more interesting story is the yield on the US Ten Year Treasury Bond ("10Year"). On Thursday, the yield crept below 2.28% for the first time since November. At the same time, the spread between the 2Year Bond and the 10Year shrunk to a 5 month low. What this tells rate watchers like me is that Mrs. Bond expects a rise in short term rates but does not see significant economic growth in the medium or longer run---and certainly not growth in the 3-4% range touted by The Donald. This is consistent with my personal opinion (see Vol. 338 http://www.riskrewardblog.blogspot.com/ ) and my investment approach. Not surprisingly, my interest rate sensitive holdings did well this week.
Those who pay attention to interest rates also pay attention to the musings of the reigning Bond King, Jeffrey Gundlach. Far from shy and retiring, Mr. Gundlach shares his thoughts during periodic webcasts, replays of which are available online. During his most recent webcast (April 4th), Gundlach predicted that the yield on the 10Year will dip below 2.25% in the short term. He foresees rates increasing in the back half of the year, but does not see the 10Year hitting 3% in 2017. Gundlach predicts a bear bond market if the yield rises to that number. As noted in an earlier edition, erstwhile Bond King, Bill Gross, sees the bear bond market tipping point at any rate above 2.6% on a consistent basis. Personally, I am in Gross' camp on this one. Further, given the capital appreciation I have achieved recently, I plan on exiting my bond -like portfolio if and rilwhen a move toward 2.6% is confirmed.
Oil prices rose seven straight days before taking a breather at week's end. This win streak was the longest in the oil patch since 2012. News from OPEC that its members were likely to extend their production cut for another 6 months plus news that domestic oil supplies had shrunk contributed to the price increases. I was so encouraged I bought BP and Shell (RDS/B). My one disappointment this past week was HCLP which took back much of my double digit gains---for reasons which remain unexplained. Indeed, early in the week HCLP received some positive commentary so its tumble late in the week came as a surprise. This is one of the major downsides to investing in a stock that is not widely followed or covered. I remain in the green on both of my HCLP positions. I will not tolerate any movement into the red.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
A spate of selling on Thursday brought the S&P 500 and the Dow Jones Industrial Average to their lowest close in two months. Whether the cause was the "Mother of All Bombs", the threat of another North Korean nuclear test or market fatigue in general is unclear. However, I see no reason for panic. Both indices are up over 3.5% year to date and continue to trade in a tight range. To me, the more interesting story is the yield on the US Ten Year Treasury Bond ("10Year"). On Thursday, the yield crept below 2.28% for the first time since November. At the same time, the spread between the 2Year Bond and the 10Year shrunk to a 5 month low. What this tells rate watchers like me is that Mrs. Bond expects a rise in short term rates but does not see significant economic growth in the medium or longer run---and certainly not growth in the 3-4% range touted by The Donald. This is consistent with my personal opinion (see Vol. 338 http://www.riskrewardblog.blogspot.com/ ) and my investment approach. Not surprisingly, my interest rate sensitive holdings did well this week.
Those who pay attention to interest rates also pay attention to the musings of the reigning Bond King, Jeffrey Gundlach. Far from shy and retiring, Mr. Gundlach shares his thoughts during periodic webcasts, replays of which are available online. During his most recent webcast (April 4th), Gundlach predicted that the yield on the 10Year will dip below 2.25% in the short term. He foresees rates increasing in the back half of the year, but does not see the 10Year hitting 3% in 2017. Gundlach predicts a bear bond market if the yield rises to that number. As noted in an earlier edition, erstwhile Bond King, Bill Gross, sees the bear bond market tipping point at any rate above 2.6% on a consistent basis. Personally, I am in Gross' camp on this one. Further, given the capital appreciation I have achieved recently, I plan on exiting my bond -like portfolio if and rilwhen a move toward 2.6% is confirmed.
Oil prices rose seven straight days before taking a breather at week's end. This win streak was the longest in the oil patch since 2012. News from OPEC that its members were likely to extend their production cut for another 6 months plus news that domestic oil supplies had shrunk contributed to the price increases. I was so encouraged I bought BP and Shell (RDS/B). My one disappointment this past week was HCLP which took back much of my double digit gains---for reasons which remain unexplained. Indeed, early in the week HCLP received some positive commentary so its tumble late in the week came as a surprise. This is one of the major downsides to investing in a stock that is not widely followed or covered. I remain in the green on both of my HCLP positions. I will not tolerate any movement into the red.
Sunday, April 9, 2017
April 9, 2017 Balance Sheet
Risk/Reward Vol. 347
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Once again, both major indices ended the week where they began, a missile strike and a disappointing jobs report notwithstanding. That is not to suggest however that the week was without volatility. On Wednesday, a favorable ADP number caused the Dow Jones Industrial Average to gain triple digits in the morning only to be reversed and eclipsed that afternoon with the publication of unexpectedly hawkish minutes from the Fed's March meeting. Unexpected because the press release issued immediately after the March meeting gave no hint that downsizing the Fed's balance sheet had been hotly debated at the meeting. Hawkish because the consensus of the participants was that downsizing would begin this year and because some discussion was had on the merits of selling the entire bond portfolio at one time. A one time sale of over $2Trillion of Treasury securities (nearly 20% of the total amount of such securities available for sale) would undoubtedly deflate the value of the world's bond market, the prospect of which scared the h-e-double hockey sticks out of Mr. Market. This fear caused the stock market drop. Per usual, Mrs. Bond reacted more slowly. As the totality of the minutes were digested she came to realize (as did Mr. Market the next day) that the pace of bond reduction, if any, was dependent upon how the economy progressed and that market disruption would be taken into account. In short, the minutes were a trial balloon, the effect of which certainly was duly noted.
Because the bond market did not panic my interest rate sensitive holdings held their own for the week permitting me once again to harvest some dividends. This stability is both a good and a bad thing. Good because it provides some assurance that I will not be devastated by an overreaction. Bad because I suspect it is due, in part, to the ever lessening liquidity in the bond and bond related markets. As I have written in the past, until the passage of the Dodd Frank Act in 2010, major commercial banks maintained bond trading desks which literally served as bond market makers or buyers of last resort. Entities such as JP Morgan, Citigroup and Bank of America could absorb billions of dollars bonds and hold them until prices stabilized. After the most recent financial crisis, regulators deemed that function too risky for any FDIC insured institution and it was legislated away. In so doing, Congress may have created an even bigger problem because no substitute bond market safety valve has evolved. Meanwhile, as a result of low rates, more and more governments and corporations have issued and continue to issue more and more bonds. This brewing bottleneck is something to watch.
Instability in the Middle East is not good geopolitically, but it helps to support oil prices. Both Brent (international) and WTI (domestic) prices are now above $50/bbl. The domestic rig count continues to increase but is no where near its 2014 peak. My oil plays have done well with HCLP (the fracking sand miner) leading the way. It is up 15% since I purchased it on March 24th. I may not wait for it to re-establish a dividend before taking a profit. OKE and FPL are also doing nicely. I may increase my oil/gas patch exposure this week
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Once again, both major indices ended the week where they began, a missile strike and a disappointing jobs report notwithstanding. That is not to suggest however that the week was without volatility. On Wednesday, a favorable ADP number caused the Dow Jones Industrial Average to gain triple digits in the morning only to be reversed and eclipsed that afternoon with the publication of unexpectedly hawkish minutes from the Fed's March meeting. Unexpected because the press release issued immediately after the March meeting gave no hint that downsizing the Fed's balance sheet had been hotly debated at the meeting. Hawkish because the consensus of the participants was that downsizing would begin this year and because some discussion was had on the merits of selling the entire bond portfolio at one time. A one time sale of over $2Trillion of Treasury securities (nearly 20% of the total amount of such securities available for sale) would undoubtedly deflate the value of the world's bond market, the prospect of which scared the h-e-double hockey sticks out of Mr. Market. This fear caused the stock market drop. Per usual, Mrs. Bond reacted more slowly. As the totality of the minutes were digested she came to realize (as did Mr. Market the next day) that the pace of bond reduction, if any, was dependent upon how the economy progressed and that market disruption would be taken into account. In short, the minutes were a trial balloon, the effect of which certainly was duly noted.
Because the bond market did not panic my interest rate sensitive holdings held their own for the week permitting me once again to harvest some dividends. This stability is both a good and a bad thing. Good because it provides some assurance that I will not be devastated by an overreaction. Bad because I suspect it is due, in part, to the ever lessening liquidity in the bond and bond related markets. As I have written in the past, until the passage of the Dodd Frank Act in 2010, major commercial banks maintained bond trading desks which literally served as bond market makers or buyers of last resort. Entities such as JP Morgan, Citigroup and Bank of America could absorb billions of dollars bonds and hold them until prices stabilized. After the most recent financial crisis, regulators deemed that function too risky for any FDIC insured institution and it was legislated away. In so doing, Congress may have created an even bigger problem because no substitute bond market safety valve has evolved. Meanwhile, as a result of low rates, more and more governments and corporations have issued and continue to issue more and more bonds. This brewing bottleneck is something to watch.
Instability in the Middle East is not good geopolitically, but it helps to support oil prices. Both Brent (international) and WTI (domestic) prices are now above $50/bbl. The domestic rig count continues to increase but is no where near its 2014 peak. My oil plays have done well with HCLP (the fracking sand miner) leading the way. It is up 15% since I purchased it on March 24th. I may not wait for it to re-establish a dividend before taking a profit. OKE and FPL are also doing nicely. I may increase my oil/gas patch exposure this week
Sunday, April 2, 2017
April 2, 2017 Stalled
Risk/Reward Vol. 347
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Mr. Market was treading water in March. Both major indices ended the month within 75 basis points of where each began. The Trump rally has stalled as investors await the implementation and/or impact of The Donald's promises. He has acted on those that can be effected by executive order (e.g. regulations, energy, etc.) but those that require legislative action, like tax and health care reform, remain mired in Congress. Moreover, news on the economic front did little to inspire Mr. Market. Revisions to fourth quarter numbers reported this week did nothing to change the final 2016 growth in gross domestic product---an anemic 1.6%. How the President plans to reach GDP growth of 3-4% anytime soon is beyond me.
Anemic growth equates to low inflation which, in turn, justifies (at least in the minds of Fed officials) the Federal Reserve's continued dampening of interest rates. A report from the Bureau of Economic Analysis issued on Friday indicated that the core PCE Index (the Fed's favorite measure of inflation) rose 1.8% on an annualized basis in February. This is below the Fed's 2% target but is something to be monitored over the coming months. That said, Fed Vice Chair Stanley Fischer felt comfortable stating on CNBC that only two more interest rate increases this year seem appropriate. The yield on the all important (to me, at least) US Ten Year Treasury Bond ("10Year") traded in a tight range all week at or about 2.4%. As discussed in previous editions (Vol 34 www.riskrewardblog.blogspot.com) this is fine with me as I continue to harvest dividends each month.
In the portfolio that I personally manage, I am about 50% invested. I would like to deploy another 15-20%, but I am in no hurry. Although energy represents a small percentage of our current holdings, I remain fascinated by the sector. Several stories in the financial press this week reported how technology continues to reduce the cost of extracting domestic oil. If you have not done so, I suggest you read the story in Friday's Wall Street Journal entitled Fracking 2.0. It highlights EOG, the "Apple of the oil field." Its numbers are stunning. EOG produced the same amount of oil in 2016 as it did in 2014----at 1/3rd the cost! No wonder Saudi Arabia is shaking in its boots. I don't own EOG because of its tiny dividend, but I do own other companies/funds in the oil patch including HCLP, HEP and FPL. And speaking of energy, I initiated a position in Enviva Partners (EVA) the world's largest supplier of wood pellets to utilities. As a result of several environmental accords, utilities in Europe and Asia have pledged to use a higher percentage of bio-mass fuel in generating electricity. The easiest and cheapest form of bio-mass is wood pellets as supplied by EVA. Armed with several lucrative take-or-pay contracts, EVA has consistently met or exceeded its guidance. It currently is guiding an 8+% dividend this year which is right in my wheel house. If you are interested in EVA, I recommend that you read the transcript from its most recent analyst call. It's very impressive.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Mr. Market was treading water in March. Both major indices ended the month within 75 basis points of where each began. The Trump rally has stalled as investors await the implementation and/or impact of The Donald's promises. He has acted on those that can be effected by executive order (e.g. regulations, energy, etc.) but those that require legislative action, like tax and health care reform, remain mired in Congress. Moreover, news on the economic front did little to inspire Mr. Market. Revisions to fourth quarter numbers reported this week did nothing to change the final 2016 growth in gross domestic product---an anemic 1.6%. How the President plans to reach GDP growth of 3-4% anytime soon is beyond me.
Anemic growth equates to low inflation which, in turn, justifies (at least in the minds of Fed officials) the Federal Reserve's continued dampening of interest rates. A report from the Bureau of Economic Analysis issued on Friday indicated that the core PCE Index (the Fed's favorite measure of inflation) rose 1.8% on an annualized basis in February. This is below the Fed's 2% target but is something to be monitored over the coming months. That said, Fed Vice Chair Stanley Fischer felt comfortable stating on CNBC that only two more interest rate increases this year seem appropriate. The yield on the all important (to me, at least) US Ten Year Treasury Bond ("10Year") traded in a tight range all week at or about 2.4%. As discussed in previous editions (Vol 34 www.riskrewardblog.blogspot.com) this is fine with me as I continue to harvest dividends each month.
In the portfolio that I personally manage, I am about 50% invested. I would like to deploy another 15-20%, but I am in no hurry. Although energy represents a small percentage of our current holdings, I remain fascinated by the sector. Several stories in the financial press this week reported how technology continues to reduce the cost of extracting domestic oil. If you have not done so, I suggest you read the story in Friday's Wall Street Journal entitled Fracking 2.0. It highlights EOG, the "Apple of the oil field." Its numbers are stunning. EOG produced the same amount of oil in 2016 as it did in 2014----at 1/3rd the cost! No wonder Saudi Arabia is shaking in its boots. I don't own EOG because of its tiny dividend, but I do own other companies/funds in the oil patch including HCLP, HEP and FPL. And speaking of energy, I initiated a position in Enviva Partners (EVA) the world's largest supplier of wood pellets to utilities. As a result of several environmental accords, utilities in Europe and Asia have pledged to use a higher percentage of bio-mass fuel in generating electricity. The easiest and cheapest form of bio-mass is wood pellets as supplied by EVA. Armed with several lucrative take-or-pay contracts, EVA has consistently met or exceeded its guidance. It currently is guiding an 8+% dividend this year which is right in my wheel house. If you are interested in EVA, I recommend that you read the transcript from its most recent analyst call. It's very impressive.
Sunday, March 26, 2017
March 26, 2017 Petro Politics
Risk/Reward Vol. 346
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Mr. Market expressed displeasure at President Trump's inability to get health care reform passed. Both the major indices dropped 1.5% for the week. The most negative day was Tuesday when the White House hinted that if health care reform were not passed, tax reform was at risk. The S&P 500 tumbled 1.2% breaking a string of 109 trading days without a drop of 1% or more. A short lived flight to safety ensued with the yield on the US Ten Treasury Bond ("10Year") dropping below 2.4% for part of Wednesday. Despite this dip (which usually has a positive impact on interest rate sensitive securities), many of my favorites also sold off. I took the opportunity to purchase several more positions. By week's end, the yield on the 10Year stabilized around 2.4%. And the prices of my favorites (preferred stock closed end funds) re-correlated and rebounded. This was predictable, but pleasing nevertheless.
Although the vast majority of my investments/trades are in interest rate sensitive securities (preferred stock, leveraged closed end funds, REIT's, etc.), I remain fascinated by the oil patch. Less so from an investment perspective and more so as a study in what Bismarck termed "realpolitik". Petro-politics have dominated the world ever since "Peak Oil" was first predicted in the 1970's. Remember the oil shortages of 1973? How about 55 mph on all interstate highways to reduce gasoline consumption? Or that the first Iraqi war was precipitated by Saddam's move to capture Kuwait's oil fields. Does anyone believe that we would feign friendship with Saudi Arabia or be so heavily involved in the Middle East were it not for oil? We need to become energy independent. That is why innovation such as fracking is so important. Saudi Arabia recognized the threat and started a price war in 2015. US production fell 5.6%, but the price war also forced US drillers to become more efficient. So when Saudi Arabia and other OPEC nations recently agreed to limit production in a desperate attempt to raise prices again, US drillers ramped up. We will be producing more than 9million bbls/day by year end which is more than half our need. We are even exporting 1million bbls/day something that was prohibited for more than 40 years preceding the lifting of the ban in 2015. Add to that over 4million bbl/day imported from Canada and Mexico (and still rising) and we are very near to North American energy independence. Once that is reached you will see a decidedly different approach to the Middle East.
My favorite plays in the oil patch remain pipelines. I like two funds in that space KYN and JMF. I made significant profits on these between December 2016 and March, 2017 and they are looking tempting again. Another tempting stock is Hi Crush (HCLP). This is the fracking sand miner that I bought and sold several times a few years ago. When the Saudi price war began, sand miners were hit very hard, Indeed, HCLP (which at one time paid a double digit dividend) was forced to suspend all distributions. Understandably, the stock plummeted. With the resurgence of domestic production and the development of new fracking techniques that use more sand per well, HCLP is set to resume distributions. Recently the stock price again tumbled due to an unexpected secondary stock offering. At the current low price, the temptation to buy proved irresistible. I am starting small and slow, but I am starting.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Mr. Market expressed displeasure at President Trump's inability to get health care reform passed. Both the major indices dropped 1.5% for the week. The most negative day was Tuesday when the White House hinted that if health care reform were not passed, tax reform was at risk. The S&P 500 tumbled 1.2% breaking a string of 109 trading days without a drop of 1% or more. A short lived flight to safety ensued with the yield on the US Ten Treasury Bond ("10Year") dropping below 2.4% for part of Wednesday. Despite this dip (which usually has a positive impact on interest rate sensitive securities), many of my favorites also sold off. I took the opportunity to purchase several more positions. By week's end, the yield on the 10Year stabilized around 2.4%. And the prices of my favorites (preferred stock closed end funds) re-correlated and rebounded. This was predictable, but pleasing nevertheless.
Although the vast majority of my investments/trades are in interest rate sensitive securities (preferred stock, leveraged closed end funds, REIT's, etc.), I remain fascinated by the oil patch. Less so from an investment perspective and more so as a study in what Bismarck termed "realpolitik". Petro-politics have dominated the world ever since "Peak Oil" was first predicted in the 1970's. Remember the oil shortages of 1973? How about 55 mph on all interstate highways to reduce gasoline consumption? Or that the first Iraqi war was precipitated by Saddam's move to capture Kuwait's oil fields. Does anyone believe that we would feign friendship with Saudi Arabia or be so heavily involved in the Middle East were it not for oil? We need to become energy independent. That is why innovation such as fracking is so important. Saudi Arabia recognized the threat and started a price war in 2015. US production fell 5.6%, but the price war also forced US drillers to become more efficient. So when Saudi Arabia and other OPEC nations recently agreed to limit production in a desperate attempt to raise prices again, US drillers ramped up. We will be producing more than 9million bbls/day by year end which is more than half our need. We are even exporting 1million bbls/day something that was prohibited for more than 40 years preceding the lifting of the ban in 2015. Add to that over 4million bbl/day imported from Canada and Mexico (and still rising) and we are very near to North American energy independence. Once that is reached you will see a decidedly different approach to the Middle East.
My favorite plays in the oil patch remain pipelines. I like two funds in that space KYN and JMF. I made significant profits on these between December 2016 and March, 2017 and they are looking tempting again. Another tempting stock is Hi Crush (HCLP). This is the fracking sand miner that I bought and sold several times a few years ago. When the Saudi price war began, sand miners were hit very hard, Indeed, HCLP (which at one time paid a double digit dividend) was forced to suspend all distributions. Understandably, the stock plummeted. With the resurgence of domestic production and the development of new fracking techniques that use more sand per well, HCLP is set to resume distributions. Recently the stock price again tumbled due to an unexpected secondary stock offering. At the current low price, the temptation to buy proved irresistible. I am starting small and slow, but I am starting.
March 19, 2017 Repurchase
Risk/Reward Vol. 345
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
It came as no surprise to market watchers when the Federal Reserve raised short term rates on Wednesday. As noted in last week's short missive, I was focused on the "dot plot" (the Fed members' composite prognostication of future rate increases) and any indication that the Fed would reduce its $4.5 trillion balance sheet. In the press release and conference following the meeting, the Fed signaled three not four increases in 2017 and specifically eschewed the idea of reducing the balance sheet any time soon. This moderate stance caused the bond market to quicken and in turn the yield on the all important US Ten Year Treasury Bond ("10Year") fell from 2.6 to 2.5%. I expect that yield to trade in a tight range between 2.475 and 2.6% for the foreseeable future given the path described by the Fed.
On Thursday, I began repurchasing my favorites (mostly preferred stocks and preferred stock closed end funds) as the correlation in yields which I discussed at length in Vol. 343 (www.riskrewardblog.blogspot.com ) began to take shape. Due to the lack of volatility (discussed in the next paragraph), I do not expect much capital appreciation during this next holding period. But, if the quietude in rates lasts another 6 months, I can anticipate accruing an additional 3-4% in profits from the dividends alone.
Did you notice that in contrast to the panic experienced by Mr. Market lo these past 10 years anytime a rate increase was discussed let alone implemented (e.g. the Taper Tantrum of 2013 and the December, 2015 rate increase), the response to this week's move by the Fed was muted ? This fact certainly caught the eye of commentators. Many view this as the beginning of a return to normalcy; where markets are driven by fundamentals and economic policy, not by monetary policy formulated from on high by central bankers. Indeed, I predict when the economic history of the past decade is written it will be entitled "Benanke-Yellen's Folly." Artificially low rates set by the Fed have produced 10 years of sub-3% economic growth while at the same time the stock market has tripled in value. In other words, cheap debt resulted in stock price inflating buy backs with very little trickling down to Main Street.
And what about the poor American saver? You know, those who do not want to bet the farm on stocks, but merely want a safe return on guaranteed deposits and cd's. Good luck. Bank of America just reported that in 2016 it paid, on average, a whopping 0.04% in interest on all of the money it holds on deposit. And don't look for this to improve. In fact, money center banks which, post-Dodd Frank, now control most domestic banking have more money than they need. They have 65% more cash on deposit than they had 10 years ago and their loan to deposit ratio is down to 75% from 92% in 2007. There simply is no need to pay depositors when banks don't need (or want) their money.
I look for a quiet week ahead as Mr. Market awaits The Donald's promised reforms.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
It came as no surprise to market watchers when the Federal Reserve raised short term rates on Wednesday. As noted in last week's short missive, I was focused on the "dot plot" (the Fed members' composite prognostication of future rate increases) and any indication that the Fed would reduce its $4.5 trillion balance sheet. In the press release and conference following the meeting, the Fed signaled three not four increases in 2017 and specifically eschewed the idea of reducing the balance sheet any time soon. This moderate stance caused the bond market to quicken and in turn the yield on the all important US Ten Year Treasury Bond ("10Year") fell from 2.6 to 2.5%. I expect that yield to trade in a tight range between 2.475 and 2.6% for the foreseeable future given the path described by the Fed.
On Thursday, I began repurchasing my favorites (mostly preferred stocks and preferred stock closed end funds) as the correlation in yields which I discussed at length in Vol. 343 (www.riskrewardblog.blogspot.com ) began to take shape. Due to the lack of volatility (discussed in the next paragraph), I do not expect much capital appreciation during this next holding period. But, if the quietude in rates lasts another 6 months, I can anticipate accruing an additional 3-4% in profits from the dividends alone.
Did you notice that in contrast to the panic experienced by Mr. Market lo these past 10 years anytime a rate increase was discussed let alone implemented (e.g. the Taper Tantrum of 2013 and the December, 2015 rate increase), the response to this week's move by the Fed was muted ? This fact certainly caught the eye of commentators. Many view this as the beginning of a return to normalcy; where markets are driven by fundamentals and economic policy, not by monetary policy formulated from on high by central bankers. Indeed, I predict when the economic history of the past decade is written it will be entitled "Benanke-Yellen's Folly." Artificially low rates set by the Fed have produced 10 years of sub-3% economic growth while at the same time the stock market has tripled in value. In other words, cheap debt resulted in stock price inflating buy backs with very little trickling down to Main Street.
And what about the poor American saver? You know, those who do not want to bet the farm on stocks, but merely want a safe return on guaranteed deposits and cd's. Good luck. Bank of America just reported that in 2016 it paid, on average, a whopping 0.04% in interest on all of the money it holds on deposit. And don't look for this to improve. In fact, money center banks which, post-Dodd Frank, now control most domestic banking have more money than they need. They have 65% more cash on deposit than they had 10 years ago and their loan to deposit ratio is down to 75% from 92% in 2007. There simply is no need to pay depositors when banks don't need (or want) their money.
I look for a quiet week ahead as Mr. Market awaits The Donald's promised reforms.
Sunday, March 12, 2017
March 12, 2017 2.6%
Risk/Reward Vol. 344
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Having just returned from a week of skiing, this will be short.
. Both major indices took a slight breather last week, despite the economy showing continuing signs of improvement.
. I don't see any retrenchment in the equities market, but any significant increase from this point may be dependent upon progress by Congress on legislative initiatives such as tax reform and repealing and replacing Obamacare.
. Big news this week may come from the Federal Reserve. A rate increase is almost certain. However look for signs in the "dot plot" as to how many increases one can expect this year---3 or 4. Also look for any sign that the Fed will begin reducing the size of its massive balance sheet.
. Keep an eye on the Fed's impact on the US Ten Year Bond. Its yield spiked to over 2.6% on Thursday but fell below that barrier by week's end. A sustained rate in excess of 2.6% may signal the end of the decades long bond rally at least according to the erstwhile Bond King, Bill Gross. This is of great importance to me.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Having just returned from a week of skiing, this will be short.
. Both major indices took a slight breather last week, despite the economy showing continuing signs of improvement.
. I don't see any retrenchment in the equities market, but any significant increase from this point may be dependent upon progress by Congress on legislative initiatives such as tax reform and repealing and replacing Obamacare.
. Big news this week may come from the Federal Reserve. A rate increase is almost certain. However look for signs in the "dot plot" as to how many increases one can expect this year---3 or 4. Also look for any sign that the Fed will begin reducing the size of its massive balance sheet.
. Keep an eye on the Fed's impact on the US Ten Year Bond. Its yield spiked to over 2.6% on Thursday but fell below that barrier by week's end. A sustained rate in excess of 2.6% may signal the end of the decades long bond rally at least according to the erstwhile Bond King, Bill Gross. This is of great importance to me.
Monday, March 6, 2017
March 5, 2017 Approach Explained
Risk/Reward Vol. 343
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
I am publishing tonight because I am catching a morning flight to Colorado for a combination subscriber conference/ski trip.
Say what you will about The Donald, Mr. Market loves him. Rarely have we seen a day like the one following the State of the Union address. And no one has seen as rapid a 2000 point rise in the Dow Jones Industrial Average . The Dow hit 19,000 for the first time on November 22, 2016 and hit 21,000 on March1st.
To be fair, it may not all be attributable to President Trump. Also on Wednesday, several Federal Reserve governors reacted to the latest inflation numbers and proclaimed that it is time for a rate increase. Indeed, the likelihood of a March hike rose from 30% (as reported last week) to over 80%. Investors sold 2Year Treasury Bonds like they were going out of style. As a result, the yield on the 2Year reached 1.3% for the first time since 2009. And most of that money was plowed into equities. The yield on the all important US Ten Year Treasury Bond ("10Year") was slower to react but still rose to over 2.5% immediately following Fed Chair Yellen's hawkish speech on Friday.
The developments in the bond market midweek provided the impetus to sell the majority of my holdings. Most were interest rate sensitive such as preferred stocks and preferred stock closed end funds. I will await the conclusion of the Fed's March meeting before deciding if and when to re-enter. If a rate reset occurs and/or clarity as to future increases is provided I will buy.
So why sell when Mr. Market is going through the roof? Why, because I do not invest based upon stock prices. I am wholly guided by movement in the 10Year. Allow me to explain.
Over the years I have struggled with investments. I have hired and fired advisors. For a while, I adhered to Bill O'Neill's CANSLIM strategy. I even day traded for a while. Despite several missteps, including riding the dotcom roller coaster all the way to the bottom, I arrived in 2010 with enough accumulated capital that I could contemplate retirement. My goal was to do so without invading principal which was achievable if I earned an annual pretax return of 6% on the portion of our funds which I manage. More important than any return however was our mutual desire to minimize risk.
As I explained in June, 2010 (Volume 1 www.riskrewardblog.blogspot.com ), achieving a nearly risk free 6% return would have been a layup during most of my life. From 1969 through 1997, the yield on the 10Year (considered by investors world wide as the closest to a risk free investment) rarely fell below 6%. From 1980 through 1985, the yield did not fall below 10%. But since the 2008 financial crisis, the yield has rarely exceeded 3%, has often been below 2% and currently sits at 2.5%.
So how does one achieve a 6% pre tax return with the least amount of risk?
Why not buy and hold an S&P 500 index fund like SPY? After all, SPY is up 6.4% year to date and up over 19%% over the past 12 months. That's true, but if one looks further back into history one discovers that its recent performance notwithstanding, SPY has averaged a compound annual return of only a little over 7% these past 10 years. And lest we forget, SPY dropped over 35% in 2008. It has achieved that nice 10 year average only because of some healthy double digit years. In short, SPY is hardly risk free and certainly is volatile.
So, again, how can one achieve a 6% pre tax return with the least amount of risk?
I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity (the 10 Year) with movement by that singularity providing clarity on when to buy, hold or sell. I submit that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can achieve a 6% return with minimal risk. I do not buy the 10Year. Instead, I buy higher yielding securities that are very closely correlated to the 10Year. For example, through study and observation, I know that highly regarded preferred stocks maintain a roughly 320 basis point (3.2%) spread to the yield on the 10Year. Thus if the yield on the 10 Year remains stable at 2.5% one can achieve a 5.7% return by merely holding a basket of highly rated preferred stocks (such as found in the exchange traded fund PGX) and collecting dividends. If the yield on the 10 Year declines, in time, the yield on these preferred stocks will also decline ultimately reaching equilibrium at the aforementioned 320 bp spread. As a result, an investor will enjoy a capital gain. (Remember the price of an interest rate sensitive security increases as the yield declines.) If the yield on the 10Year increases or one reasonably can anticipate such an increase, one sells thereby retaining any accrued dividends and reaping the aforementioned capital gain. One then waits on the sidelines, safe and sound in cash, until stability returns to the 10Year and hopefully ahead of preferred stock equilibrium.
Here is a real life example. Anticipating a rate increase by the Federal Reserve back in December, I was on the sidelines in cash. When the increase was announced, the market overreacted as it invariably does. The yield on the benchmark 10 Year spiked to over 2.6% as its price tanked. (Remember the higher the yield on a bond the lower the price.) The price of correlated securities such as preferred stocks also tanked. I swept in and purchased them en masse at bargain prices. The rate on the 10Year ultimately stabilized below 2.5% and the above discussed equilibrium ensued thereby providing me a capital gain. I held tight until this past Wednesday when I sold in anticipation of an upcoming rate increase. Between principal appreciation and dividends I am up 5% on my invested capital in just over 2 months. Achieving another 1-2% this year should be a cake walk once stability returns to the bond market since the portfolio I will repurchase pays healthy dividends, many on a monthly basis.
I also invest in other interest rate sensitive securities such as exchange traded debt and certain leveraged closed end funds which are also correlated to the 10Year. The oil stocks I buy are correlated to the price of oil more than to the rate on the 10Year. I did not sell my oil stocks.
This approach reads more complicated than it is. In any event, it helps me sleep peacefully each and every night.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
I am publishing tonight because I am catching a morning flight to Colorado for a combination subscriber conference/ski trip.
Say what you will about The Donald, Mr. Market loves him. Rarely have we seen a day like the one following the State of the Union address. And no one has seen as rapid a 2000 point rise in the Dow Jones Industrial Average . The Dow hit 19,000 for the first time on November 22, 2016 and hit 21,000 on March1st.
To be fair, it may not all be attributable to President Trump. Also on Wednesday, several Federal Reserve governors reacted to the latest inflation numbers and proclaimed that it is time for a rate increase. Indeed, the likelihood of a March hike rose from 30% (as reported last week) to over 80%. Investors sold 2Year Treasury Bonds like they were going out of style. As a result, the yield on the 2Year reached 1.3% for the first time since 2009. And most of that money was plowed into equities. The yield on the all important US Ten Year Treasury Bond ("10Year") was slower to react but still rose to over 2.5% immediately following Fed Chair Yellen's hawkish speech on Friday.
The developments in the bond market midweek provided the impetus to sell the majority of my holdings. Most were interest rate sensitive such as preferred stocks and preferred stock closed end funds. I will await the conclusion of the Fed's March meeting before deciding if and when to re-enter. If a rate reset occurs and/or clarity as to future increases is provided I will buy.
So why sell when Mr. Market is going through the roof? Why, because I do not invest based upon stock prices. I am wholly guided by movement in the 10Year. Allow me to explain.
Over the years I have struggled with investments. I have hired and fired advisors. For a while, I adhered to Bill O'Neill's CANSLIM strategy. I even day traded for a while. Despite several missteps, including riding the dotcom roller coaster all the way to the bottom, I arrived in 2010 with enough accumulated capital that I could contemplate retirement. My goal was to do so without invading principal which was achievable if I earned an annual pretax return of 6% on the portion of our funds which I manage. More important than any return however was our mutual desire to minimize risk.
As I explained in June, 2010 (Volume 1 www.riskrewardblog.blogspot.com ), achieving a nearly risk free 6% return would have been a layup during most of my life. From 1969 through 1997, the yield on the 10Year (considered by investors world wide as the closest to a risk free investment) rarely fell below 6%. From 1980 through 1985, the yield did not fall below 10%. But since the 2008 financial crisis, the yield has rarely exceeded 3%, has often been below 2% and currently sits at 2.5%.
So how does one achieve a 6% pre tax return with the least amount of risk?
Why not buy and hold an S&P 500 index fund like SPY? After all, SPY is up 6.4% year to date and up over 19%% over the past 12 months. That's true, but if one looks further back into history one discovers that its recent performance notwithstanding, SPY has averaged a compound annual return of only a little over 7% these past 10 years. And lest we forget, SPY dropped over 35% in 2008. It has achieved that nice 10 year average only because of some healthy double digit years. In short, SPY is hardly risk free and certainly is volatile.
So, again, how can one achieve a 6% pre tax return with the least amount of risk?
I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity (the 10 Year) with movement by that singularity providing clarity on when to buy, hold or sell. I submit that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can achieve a 6% return with minimal risk. I do not buy the 10Year. Instead, I buy higher yielding securities that are very closely correlated to the 10Year. For example, through study and observation, I know that highly regarded preferred stocks maintain a roughly 320 basis point (3.2%) spread to the yield on the 10Year. Thus if the yield on the 10 Year remains stable at 2.5% one can achieve a 5.7% return by merely holding a basket of highly rated preferred stocks (such as found in the exchange traded fund PGX) and collecting dividends. If the yield on the 10 Year declines, in time, the yield on these preferred stocks will also decline ultimately reaching equilibrium at the aforementioned 320 bp spread. As a result, an investor will enjoy a capital gain. (Remember the price of an interest rate sensitive security increases as the yield declines.) If the yield on the 10Year increases or one reasonably can anticipate such an increase, one sells thereby retaining any accrued dividends and reaping the aforementioned capital gain. One then waits on the sidelines, safe and sound in cash, until stability returns to the 10Year and hopefully ahead of preferred stock equilibrium.
Here is a real life example. Anticipating a rate increase by the Federal Reserve back in December, I was on the sidelines in cash. When the increase was announced, the market overreacted as it invariably does. The yield on the benchmark 10 Year spiked to over 2.6% as its price tanked. (Remember the higher the yield on a bond the lower the price.) The price of correlated securities such as preferred stocks also tanked. I swept in and purchased them en masse at bargain prices. The rate on the 10Year ultimately stabilized below 2.5% and the above discussed equilibrium ensued thereby providing me a capital gain. I held tight until this past Wednesday when I sold in anticipation of an upcoming rate increase. Between principal appreciation and dividends I am up 5% on my invested capital in just over 2 months. Achieving another 1-2% this year should be a cake walk once stability returns to the bond market since the portfolio I will repurchase pays healthy dividends, many on a monthly basis.
I also invest in other interest rate sensitive securities such as exchange traded debt and certain leveraged closed end funds which are also correlated to the 10Year. The oil stocks I buy are correlated to the price of oil more than to the rate on the 10Year. I did not sell my oil stocks.
This approach reads more complicated than it is. In any event, it helps me sleep peacefully each and every night.
Sunday, February 26, 2017
February 26, 2017 Technical Trading
Risk/Reward Vol. 342
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Eleven straight days of record highs for the Dow Jones Industrial Average. It sounds like a broken record---but one stuck on a very pleasing note . Both major indices are up nearly 5.5% year to date. This week's impetus was a statement by Treasury Secretary Mnuchin that he foresees a very significant tax reform package from Congress before it recesses in August. Will the Trump Rally last? Should one buy? Hold? Sell? How is one to know?
I spent time with a subscriber this week who is in search of answers to these questions. He hopes to find them in technical analysis. Technical analysis is a method of forecasting the direction of future prices through the study of past market data, primarily price and volume. In its simplest from, it looks for signals to buy, hold or sell from historical stock charts. Technical analysis is available to anyone with a computer these days. Allow me to illustrate. One classic technical trading strategy is to track both the 20 day and the 200 day simple moving averages of a stock or exchange traded fund. One buys when the 20 crosses above the 200 and sells when it falls below. So open up Google Finance, type in SPY (the exchange trade fund for the S&P 500), adjust it to show the past 10years and add the 20 and 200 simple moving averages from the "technical" section. Voila. Note that had one followed this simple rule, one would have sold before the major dip in 2008 and would have brought back in mid 2010. In other words, one would have averted a major loss and would have reaped most of the gain achieved over the past seven years. Not bad.
As you know, I find my buy/hold/sell signals from movement in the 10 Year US Treasury Bond. This week, movement in the 10Year was influenced by the release of Fed's February meeting minutes. Phrases in the minutes such as "participants generally indicated that their economic forecasts had changed little since the December FOMC meeting" and rate increases could occur "fairly soon" led a consensus of Fed watchers to conclude that the odds of a rate hike in March are unlikely (30%), and that no more than three hikes can be expected this year. As a consequence, the yield on the 10Year came to rest at 2.315%, decidedly lower than last week. Concomitantly, my portfolio which is dominated by bond-like, interest rate sensitive securities (preferred stocks, preferred stock closed end funds, REIT's, etc.) rose this week. (Remember as interest rates decrease the prices of bonds and bond-like securities increase.)
No matter what strategy you follow, remember Warren Buffett's two rules of investing: #1 Never lose money; and #2 Never forget Rule #1. The importance of minimizing loss by selling losers sooner rather than later is stressed by every investing guru from William O'Neill (8% loss limit) to Chuck Hughes (5% loss limit) to all of the Market Wizards profiled by Jack Schwager (see Vol. 243 Riskrewardblog ). Yet, I bet almost everyone reading this email rode his/her stocks all the way to the floor during the crash of 2008-2009. If I am wrong please email me immediately. Why did you suffer those 25-40% losses? If it was inertia---that is a terrible reason. If it was adherence to a buy and hold strategy I suggest you rethink it---especially if you are a senior citizen such as yours truly. The next time you may not have the luxury of time to recover.
I read Warren Buffett's letter to his shareholders this weekend. Google and read it. As always, it is time well spent.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Eleven straight days of record highs for the Dow Jones Industrial Average. It sounds like a broken record---but one stuck on a very pleasing note . Both major indices are up nearly 5.5% year to date. This week's impetus was a statement by Treasury Secretary Mnuchin that he foresees a very significant tax reform package from Congress before it recesses in August. Will the Trump Rally last? Should one buy? Hold? Sell? How is one to know?
I spent time with a subscriber this week who is in search of answers to these questions. He hopes to find them in technical analysis. Technical analysis is a method of forecasting the direction of future prices through the study of past market data, primarily price and volume. In its simplest from, it looks for signals to buy, hold or sell from historical stock charts. Technical analysis is available to anyone with a computer these days. Allow me to illustrate. One classic technical trading strategy is to track both the 20 day and the 200 day simple moving averages of a stock or exchange traded fund. One buys when the 20 crosses above the 200 and sells when it falls below. So open up Google Finance, type in SPY (the exchange trade fund for the S&P 500), adjust it to show the past 10years and add the 20 and 200 simple moving averages from the "technical" section. Voila. Note that had one followed this simple rule, one would have sold before the major dip in 2008 and would have brought back in mid 2010. In other words, one would have averted a major loss and would have reaped most of the gain achieved over the past seven years. Not bad.
As you know, I find my buy/hold/sell signals from movement in the 10 Year US Treasury Bond. This week, movement in the 10Year was influenced by the release of Fed's February meeting minutes. Phrases in the minutes such as "participants generally indicated that their economic forecasts had changed little since the December FOMC meeting" and rate increases could occur "fairly soon" led a consensus of Fed watchers to conclude that the odds of a rate hike in March are unlikely (30%), and that no more than three hikes can be expected this year. As a consequence, the yield on the 10Year came to rest at 2.315%, decidedly lower than last week. Concomitantly, my portfolio which is dominated by bond-like, interest rate sensitive securities (preferred stocks, preferred stock closed end funds, REIT's, etc.) rose this week. (Remember as interest rates decrease the prices of bonds and bond-like securities increase.)
No matter what strategy you follow, remember Warren Buffett's two rules of investing: #1 Never lose money; and #2 Never forget Rule #1. The importance of minimizing loss by selling losers sooner rather than later is stressed by every investing guru from William O'Neill (8% loss limit) to Chuck Hughes (5% loss limit) to all of the Market Wizards profiled by Jack Schwager (see Vol. 243 Riskrewardblog ). Yet, I bet almost everyone reading this email rode his/her stocks all the way to the floor during the crash of 2008-2009. If I am wrong please email me immediately. Why did you suffer those 25-40% losses? If it was inertia---that is a terrible reason. If it was adherence to a buy and hold strategy I suggest you rethink it---especially if you are a senior citizen such as yours truly. The next time you may not have the luxury of time to recover.
I read Warren Buffett's letter to his shareholders this weekend. Google and read it. As always, it is time well spent.
Sunday, February 19, 2017
February 19, 2017 Authers
Risk/Reward Vol. 341
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Clearly, Mr. Market does not read the papers or watch the news. If he did, he would conclude that the current Administration is out of control and that we are heading, full throttle over a cliff. In such times, why would any rational investor up his/her stake? And yet, the Trump rally continues with the week ending on record highs. Why? Promised tax reform? Yes--- as discussed below. Deregulation? Most certainly. Look at bank stocks. With the promise and reality of relief from the Dodd-Frank Act, bank stocks as a group are up 27% since the election. Coal companies are back from the brink of bankruptcy now that executive orders neutralizing those of Obama have been signed. And master limited partnerships are doing well in a world that welcomes Keystone XL, Dakota and other major pipeline projects.
As for Mrs. Bond, she obviously reads the news, but does so with a healthy dose of skepticism. Fed Chair Janet Yellen took a decidedly hawkish tone this week in her testimony to Congress. She stated that a rate increase will be under consideration in March. Almost immediately the rate on the all important US 10 Treasury Bond rose to 2.5%. But by week's end, Mrs. Bond had digested other, less hawkish parts of Ms. Yellen's testimony including her statement that the Fed's bloated balance sheet will not be reduced any time soon. By Friday's close, the 10Year rate settled at 2.42% almost exactly where it had begun the week. My interest rate sensitive portfolio lost some ground following Yellen's testimony. That said, the stocks comprising it tend to lag movements in the 10Year so I look for them to recover next week.
So why is the bond market so stable while the stock market continues to rise? After all, the Trump rally immediately following his election saw the stock market gain at the expense of the bond market. Last November the rate on the Ten Year spiked from 1.8% to over 2.5% almost overnight. If the current rate stability is of interest to you (and it certainly is to me) I suggest you read John Authers' well reasoned article published in yesterday's Financial Times. It is available free of charge via a Google search. Authers submits that the two markets reflect opposite bets on the amount of tax and spending stimulus that Trump will be able to get from Congress. The stock market is betting a lot; the bond market not so much. I am with Mrs. Bond, at least in the short run. The next few months should be interesting. There will be winners, and there will be losers, at least according to Authers.
Stocks in the oil patch took a hit this week on news that gasoline consumption in the US fell to 8.2million barrels per day in January, a 4.4% year over year decline, and that a record 259million barrels remain in storage. Despite this, the domestic oil rig count grew to 597 last week, a major increase since this summer but still well below the 1609 oil rigs that were operating domestically in October 2014. Who would have thought just a few years ago that we would be talking about an oil glut? Thanks to fracking no one ever hears the phrase "peak oil" anymore. American ingenuity is marvelous.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Clearly, Mr. Market does not read the papers or watch the news. If he did, he would conclude that the current Administration is out of control and that we are heading, full throttle over a cliff. In such times, why would any rational investor up his/her stake? And yet, the Trump rally continues with the week ending on record highs. Why? Promised tax reform? Yes--- as discussed below. Deregulation? Most certainly. Look at bank stocks. With the promise and reality of relief from the Dodd-Frank Act, bank stocks as a group are up 27% since the election. Coal companies are back from the brink of bankruptcy now that executive orders neutralizing those of Obama have been signed. And master limited partnerships are doing well in a world that welcomes Keystone XL, Dakota and other major pipeline projects.
As for Mrs. Bond, she obviously reads the news, but does so with a healthy dose of skepticism. Fed Chair Janet Yellen took a decidedly hawkish tone this week in her testimony to Congress. She stated that a rate increase will be under consideration in March. Almost immediately the rate on the all important US 10 Treasury Bond rose to 2.5%. But by week's end, Mrs. Bond had digested other, less hawkish parts of Ms. Yellen's testimony including her statement that the Fed's bloated balance sheet will not be reduced any time soon. By Friday's close, the 10Year rate settled at 2.42% almost exactly where it had begun the week. My interest rate sensitive portfolio lost some ground following Yellen's testimony. That said, the stocks comprising it tend to lag movements in the 10Year so I look for them to recover next week.
So why is the bond market so stable while the stock market continues to rise? After all, the Trump rally immediately following his election saw the stock market gain at the expense of the bond market. Last November the rate on the Ten Year spiked from 1.8% to over 2.5% almost overnight. If the current rate stability is of interest to you (and it certainly is to me) I suggest you read John Authers' well reasoned article published in yesterday's Financial Times. It is available free of charge via a Google search. Authers submits that the two markets reflect opposite bets on the amount of tax and spending stimulus that Trump will be able to get from Congress. The stock market is betting a lot; the bond market not so much. I am with Mrs. Bond, at least in the short run. The next few months should be interesting. There will be winners, and there will be losers, at least according to Authers.
Stocks in the oil patch took a hit this week on news that gasoline consumption in the US fell to 8.2million barrels per day in January, a 4.4% year over year decline, and that a record 259million barrels remain in storage. Despite this, the domestic oil rig count grew to 597 last week, a major increase since this summer but still well below the 1609 oil rigs that were operating domestically in October 2014. Who would have thought just a few years ago that we would be talking about an oil glut? Thanks to fracking no one ever hears the phrase "peak oil" anymore. American ingenuity is marvelous.
Sunday, February 12, 2017
February 12, 2017 Aging
Risk/Reward Vol. 340
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What a week for firsts. For the first time on Friday, on the strength of The Donald's promised tax cut, the Dow Jones Industrial Average closed at 20,269, the S&P 500 at 2316 and the NASDAQ at 5734, all record highs. Last Sunday, for the first time a team overcame a 25 point deficit to win a Super Bowl. On Tuesday, for the first time, a vice president was called upon to break a tie vote for confirmation of a cabinet officer. Oh and here is first that didn't make the headlines. For the first time in HUMAN HISTORY, sometime this coming week (or next week or at least sometime this year) those aged 65 and older will outnumber those under 5 years of age. Not just in Japan, not just in Italy---but globally. Moreover, according to the same source (a US Census Report entitled "An Aging World"), by 2050 (my 100th year), those aged 65 and older will outnumber those under 5---two to one. To put this in perspective, the year I was born, there were nearly 3 times as many under age 5 globally as were 65 and older. And if those numbers weren't startling enough, take a look behind them, and you will find that the decline is disproportionately within the developed world---the segment that drives our economy. By 2050 ( a mere 33 years) the population of Africa will double becoming much younger than it is today. But even that fact is not enough to offset global aging.
So how are the economies of the developed world planning to grow with so many unproductive grey hairs? And how are they going to support their massive social programs which are geared to benefit the aged? Thirty years ain't that long. Perhaps Europe's decision to allow massive immigration is less motivated by humanitarian concerns than it is by economics. At least that is what is suggested by a paper issued by Germany's Federal Statistical Office (Destatis) which was reported this week in the German press. According to Destatis, the projected decline in German population has been stemmed by recent immigration from the Mideast. The paper goes on to stress the need to quickly integrate the migrants into the workforce so that they can begin to contribute money to the social welfare system. So far integration has been slow with many migrants too unskilled or otherwise unwilling to find work. Indeed, instead of alleviating the social burden, the migrants are adding to it. Understandably, one is now seeing a rise in nationalist political parties throughout Europe.
So what is the US's plan? Clearly, an open door is not in the cards under the current administration. Maybe tax breaks, infrastructure spending and the repatriation of overseas dollars will provide a sugar high---just like low rates did for a while. But from where is long term economic growth to come as the world ages? Don't expect it from China whose building boom almost singly saved the world's economy post 2008 (See Vol. 74 www.riskrewardblog.blogspot.com) . China faces its own demographic cliff thanks to its ill conceived (pun intended) One Child Policy. Everything points to several more years of slow to no growth---promises from The Donald notwithstanding.
So why do I fixate on demographics? Because a rapidly aging population equates to slow economic growth which in turn equates to low interest rates. And as I have explained ad nauseam I fixate on interest rates. They dictate my every investment move.
Thanks to a subscriber for giving me a head's up on BP's precipitous drop following a disappointing earnings call. The source of the disappointment was its Chair's admission that BP cannot meet its ambitious capital spending plan and also pay its healthy dividend without oil hitting $60/bbl by year end. I don't see the dividend suffering should that price not be met--- and it is the dividend that provides BP with price support. I added to my position.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What a week for firsts. For the first time on Friday, on the strength of The Donald's promised tax cut, the Dow Jones Industrial Average closed at 20,269, the S&P 500 at 2316 and the NASDAQ at 5734, all record highs. Last Sunday, for the first time a team overcame a 25 point deficit to win a Super Bowl. On Tuesday, for the first time, a vice president was called upon to break a tie vote for confirmation of a cabinet officer. Oh and here is first that didn't make the headlines. For the first time in HUMAN HISTORY, sometime this coming week (or next week or at least sometime this year) those aged 65 and older will outnumber those under 5 years of age. Not just in Japan, not just in Italy---but globally. Moreover, according to the same source (a US Census Report entitled "An Aging World"), by 2050 (my 100th year), those aged 65 and older will outnumber those under 5---two to one. To put this in perspective, the year I was born, there were nearly 3 times as many under age 5 globally as were 65 and older. And if those numbers weren't startling enough, take a look behind them, and you will find that the decline is disproportionately within the developed world---the segment that drives our economy. By 2050 ( a mere 33 years) the population of Africa will double becoming much younger than it is today. But even that fact is not enough to offset global aging.
So how are the economies of the developed world planning to grow with so many unproductive grey hairs? And how are they going to support their massive social programs which are geared to benefit the aged? Thirty years ain't that long. Perhaps Europe's decision to allow massive immigration is less motivated by humanitarian concerns than it is by economics. At least that is what is suggested by a paper issued by Germany's Federal Statistical Office (Destatis) which was reported this week in the German press. According to Destatis, the projected decline in German population has been stemmed by recent immigration from the Mideast. The paper goes on to stress the need to quickly integrate the migrants into the workforce so that they can begin to contribute money to the social welfare system. So far integration has been slow with many migrants too unskilled or otherwise unwilling to find work. Indeed, instead of alleviating the social burden, the migrants are adding to it. Understandably, one is now seeing a rise in nationalist political parties throughout Europe.
So what is the US's plan? Clearly, an open door is not in the cards under the current administration. Maybe tax breaks, infrastructure spending and the repatriation of overseas dollars will provide a sugar high---just like low rates did for a while. But from where is long term economic growth to come as the world ages? Don't expect it from China whose building boom almost singly saved the world's economy post 2008 (See Vol. 74 www.riskrewardblog.blogspot.com) . China faces its own demographic cliff thanks to its ill conceived (pun intended) One Child Policy. Everything points to several more years of slow to no growth---promises from The Donald notwithstanding.
So why do I fixate on demographics? Because a rapidly aging population equates to slow economic growth which in turn equates to low interest rates. And as I have explained ad nauseam I fixate on interest rates. They dictate my every investment move.
Thanks to a subscriber for giving me a head's up on BP's precipitous drop following a disappointing earnings call. The source of the disappointment was its Chair's admission that BP cannot meet its ambitious capital spending plan and also pay its healthy dividend without oil hitting $60/bbl by year end. I don't see the dividend suffering should that price not be met--- and it is the dividend that provides BP with price support. I added to my position.
Sunday, February 5, 2017
February 5, 2017 Seeking Alpha
Risk/Reward Vol. 339
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a downdraft earlier in the week, the major indices made a nice recovery at week's end. The Dow Jones Industrial Average is back above 20,000 and the S&P 500 is again flirting with 2300. Strong economic numbers including a better than expected jobs report contributed to the rebound. From my perspective however, the more important development was that the rise in the stock market was NOT at the expense of the bond market. Why? Because Wednesday afternoon, the Federal Reserve issued its post meeting press release which bespoke a "steady as she goes" approach. As usual it contained no firm commitments as to when any given rate increase may occur, but the professionals who interpret these press releases do not see any such move until June. Indeed, according to the futures market, the possibility of a rate increase in March is pegged at less than 20% while a hike in June is pegged at nearly 70%. The upshot is that the rate on the all important 10 Year Treasury Bond remained below 2.5% which in turn buoyed the value of much of my rate sensitive portfolio.
I bought more Shell this week despite its disappointing earnings report. More important to me was news that it had sold over $4billion of oil field holdings over the past several days. It has now sold more than $11 billion dollars of such assets and is well on its way to reducing its debt by $30billion this year. Shell borrowed over $54 billion to acquire BG last year as part of its commitment to reduce its reliance on oil and to increase natural gas production. The more Shell reduces its debt, the safer its outsized 6.5% dividend becomes. And it is this dividend that I find most attractive about Shell.
Speaking of natural gas, I initiated a position with Williams Partners (WPZ), a natural gas pipeline company this week. The past 18 months have not been kind to WPZ. It went to the alter twice only to be rebuffed by two different suitors at the last minute. A shake up at the board level now promises to deliver on what many have long believed to be its promise. Waiting for that to occur is made easier by its healthy 8+% dividend.
So how did I happen upon WPZ and any number of other investments I have made? Research. I read the Wall Street Journal and the Financial Times for macro investing trends, but for individual stock picks I find Investment Business Daily and especially Seeking Alpha helpful. IBD is a paid subscription, but Seeking Alpha is free, located at www.seekingalpha.com
I click on its Stock Ideas page and scroll through the articles until I find something of interest. Most of the articles are written by amateurs, but typically their research and analyses are spot on. I try to find at least two commentaries on a given security by different authors before acting on the information, but generally I have found the work reliable.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a downdraft earlier in the week, the major indices made a nice recovery at week's end. The Dow Jones Industrial Average is back above 20,000 and the S&P 500 is again flirting with 2300. Strong economic numbers including a better than expected jobs report contributed to the rebound. From my perspective however, the more important development was that the rise in the stock market was NOT at the expense of the bond market. Why? Because Wednesday afternoon, the Federal Reserve issued its post meeting press release which bespoke a "steady as she goes" approach. As usual it contained no firm commitments as to when any given rate increase may occur, but the professionals who interpret these press releases do not see any such move until June. Indeed, according to the futures market, the possibility of a rate increase in March is pegged at less than 20% while a hike in June is pegged at nearly 70%. The upshot is that the rate on the all important 10 Year Treasury Bond remained below 2.5% which in turn buoyed the value of much of my rate sensitive portfolio.
I bought more Shell this week despite its disappointing earnings report. More important to me was news that it had sold over $4billion of oil field holdings over the past several days. It has now sold more than $11 billion dollars of such assets and is well on its way to reducing its debt by $30billion this year. Shell borrowed over $54 billion to acquire BG last year as part of its commitment to reduce its reliance on oil and to increase natural gas production. The more Shell reduces its debt, the safer its outsized 6.5% dividend becomes. And it is this dividend that I find most attractive about Shell.
Speaking of natural gas, I initiated a position with Williams Partners (WPZ), a natural gas pipeline company this week. The past 18 months have not been kind to WPZ. It went to the alter twice only to be rebuffed by two different suitors at the last minute. A shake up at the board level now promises to deliver on what many have long believed to be its promise. Waiting for that to occur is made easier by its healthy 8+% dividend.
So how did I happen upon WPZ and any number of other investments I have made? Research. I read the Wall Street Journal and the Financial Times for macro investing trends, but for individual stock picks I find Investment Business Daily and especially Seeking Alpha helpful. IBD is a paid subscription, but Seeking Alpha is free, located at www.seekingalpha.com
I click on its Stock Ideas page and scroll through the articles until I find something of interest. Most of the articles are written by amateurs, but typically their research and analyses are spot on. I try to find at least two commentaries on a given security by different authors before acting on the information, but generally I have found the work reliable.
Sunday, January 29, 2017
January 29, 2017 Sustainability
Risk/Reward Vol. 338
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Where to begin? Week one of the The Donald's Presidency has produced a plethora of executive orders. Obviously, they pleased Mr. Market. The Dow Jones Industrial Average crashed through the 20,000 barrier above which it now comfortably sits. The S&P 500 continues to flirt with 2300 and the NASAQ is at nose bleed levels. So is this steady march upward sustainable? Currently, the major indices are trading at 21 times trailing twelve months' earnings---high by historic standards but not as frothy as in 1999 when they were at 24x. That said, in the end, it is corporate profits that drive stock prices. And corporate profits are dependent upon economic growth. On Friday, the US Bureau of Economic Analysis reported that the nation's gross domestic product grew at an annualized rate of only 1.6% in the fourth quarter and only at 1.9% for the entirety of 2016. This is a far cry from the 4% growth envisioned by President Trump. Indeed, the US has not seen even 3% in GDP growth (which is our post WWII average) since 2005 and last experienced 4% in 2000.
If we are to reach The Donald's desired level of GDP growth, it will be for reasons different from what has fueled growth in the past. Mr. Market's recent euphoria notwithstanding, we, as a society, still face a demographic cliff about which Harry Dent has written extensively. See Vol. 218 http://www.riskrewardblog.blogspot.com/
. Our home grown population is aging and shrinking, and no country in the history of mankind has experienced economic growth during a time of declining population. Is immigration, legal or illegal, the answer? Are trade wars, where we beggar our neighbors, the solution? Who knows? But no one can doubt that the middle and upper classes are not reproducing. Look around. Thursday evening, Barb and I (and an entire airplane) were "treated" to a family of seven returning from Florida. Their obnoxious behavior aside, what struck me is that one almost never sees a husband and wife and five children. When I was young such families were commonplace. Most Catholic families had five children at a minimum and Protestants and Jews had three. This observation prompted me to research the enrollment of my old school district, the Metropolitan School District of Washington Township, Marion County, Indiana. Despite affirmatively recruiting from other districts, Washington Township today has only 11,300 students in K-12. That is an average of less than 1000 students per class. My graduating high school class of 1969 was the smallest of those attending school at the time and numbered well over 1100. Assuming the average then to be 1250 per class (low I bet), the enrollment would have been 15,000 or so, a 33% increase over today's number. How does an economy grow when schools are being shuttered?
Not surprisingly, Dow 20,000 came, in part, at the expense of the bond market as many participants continued to rotate out of debt and into equities. The yield on the all important (to me at least) 10 Year US Treasury Bond again flirted with 2.5%, but encountered resistance at that level. I have no doubt that there will be several more foray's into that territory if the stock market continues to rise. Those foray's alone will not cause me to sell, however. My interest rate sensitive portfolio was purchased at very favorable prices when the "spread" between the yield on the 10Year and that available from my favories was wider than normal. Thus, I have a cushion well above 2.5%. My concern is not if the rate on the 10Year rises above 2.5%, but rather the velocity of that rise and whether it portends sustained rates above 2.75%. If so, I will harvest profits and reenter only when prices reset
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Where to begin? Week one of the The Donald's Presidency has produced a plethora of executive orders. Obviously, they pleased Mr. Market. The Dow Jones Industrial Average crashed through the 20,000 barrier above which it now comfortably sits. The S&P 500 continues to flirt with 2300 and the NASAQ is at nose bleed levels. So is this steady march upward sustainable? Currently, the major indices are trading at 21 times trailing twelve months' earnings---high by historic standards but not as frothy as in 1999 when they were at 24x. That said, in the end, it is corporate profits that drive stock prices. And corporate profits are dependent upon economic growth. On Friday, the US Bureau of Economic Analysis reported that the nation's gross domestic product grew at an annualized rate of only 1.6% in the fourth quarter and only at 1.9% for the entirety of 2016. This is a far cry from the 4% growth envisioned by President Trump. Indeed, the US has not seen even 3% in GDP growth (which is our post WWII average) since 2005 and last experienced 4% in 2000.
If we are to reach The Donald's desired level of GDP growth, it will be for reasons different from what has fueled growth in the past. Mr. Market's recent euphoria notwithstanding, we, as a society, still face a demographic cliff about which Harry Dent has written extensively. See Vol. 218 http://www.riskrewardblog.blogspot.com/
. Our home grown population is aging and shrinking, and no country in the history of mankind has experienced economic growth during a time of declining population. Is immigration, legal or illegal, the answer? Are trade wars, where we beggar our neighbors, the solution? Who knows? But no one can doubt that the middle and upper classes are not reproducing. Look around. Thursday evening, Barb and I (and an entire airplane) were "treated" to a family of seven returning from Florida. Their obnoxious behavior aside, what struck me is that one almost never sees a husband and wife and five children. When I was young such families were commonplace. Most Catholic families had five children at a minimum and Protestants and Jews had three. This observation prompted me to research the enrollment of my old school district, the Metropolitan School District of Washington Township, Marion County, Indiana. Despite affirmatively recruiting from other districts, Washington Township today has only 11,300 students in K-12. That is an average of less than 1000 students per class. My graduating high school class of 1969 was the smallest of those attending school at the time and numbered well over 1100. Assuming the average then to be 1250 per class (low I bet), the enrollment would have been 15,000 or so, a 33% increase over today's number. How does an economy grow when schools are being shuttered?
Not surprisingly, Dow 20,000 came, in part, at the expense of the bond market as many participants continued to rotate out of debt and into equities. The yield on the all important (to me at least) 10 Year US Treasury Bond again flirted with 2.5%, but encountered resistance at that level. I have no doubt that there will be several more foray's into that territory if the stock market continues to rise. Those foray's alone will not cause me to sell, however. My interest rate sensitive portfolio was purchased at very favorable prices when the "spread" between the yield on the 10Year and that available from my favories was wider than normal. Thus, I have a cushion well above 2.5%. My concern is not if the rate on the 10Year rises above 2.5%, but rather the velocity of that rise and whether it portends sustained rates above 2.75%. If so, I will harvest profits and reenter only when prices reset
Sunday, January 22, 2017
January 22, 2017 Volume
Risk/Reward Vol. 337
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And so it begins. Who would have thought that The Donald would be the 45th President of the United States? Whatever his presidency may be, it surely will be different. And that, Dear Readers, is as political as I will get.
Lost in the week's hullaballoo was the action in the bond pits. The rate on the all important US Treasury 10Year Bond jumped to nearly 2.5% following news that inflation in December, as measured by CPI, had reached 0.3% for the month and 2.1% year over year. This development prompted many to sell bonds in the belief that inflation in 2017 will accelerate forcing the Fed to raise short term interest rates 4 times as opposed to 3 times which heretofore has been the consensus view. I remain convinced that other forces (such as the paltry rates available overseas) will moderate domestic bond yields and thus took the opportunity to add to several bond related positions.
As loyal readers know, my bond related positions include several preferred stocks and preferred stock closed end funds. My fascination with these investment vehicles has prompted some to ask why their investment advisors do not buy them---indeed why they are rarely if ever discussed. The answer is simple----volume. If you Google "Wall Street Journal Preferred Stock Closing Table" and "CEFConnect" you will see that many of the names that I own trade, on average, 25,000 shares or less daily. I typically buy in lots of 1000 and rarely accumulate more than a few thousand shares of any issue. Why? Because I do not want to impact the price and buying or selling more than 1000 shares at a time can have an impact. Now imagine you are a money manager entrusted with 50 accounts. Even if one believed that preferred stocks 337otherwise made sense for one's clients, one could not buy 50 positions at a time without massively disrupting if not manipulating any given stock's market. So unless you, as an individual investor, order such a purchase it will not happen. Remember, money managers are under great pressure to treat their clients equally. Indeed, for a host of reasons it is more important for them to be consistent than to be right. This is not a criticism, but it is a fact.
The domestic oil and gas rig count continues to increase. It now numbers 694 compared with 480 in March, 2016. This is a testament to American ingenuity, a national trait that was sorely underestimated by Saudi Arabia when it began flooding the market with oil in 2014. At the time, conventional wisdom was that US frackers needed $60/bbl. in order to break even. That may have been true in 2014, but by 2017 advances in technology have reduced the break even to $40/bbl. with some producers capable of profiting at $30/bbl. In addition new fracking "cocktails" (mixture of water, sand and pressure) have resulted in each well producing 40% more oil than in 2014. I see opportunity in oil/gas in 2017 and recently have added to my holdings in KYN and JMF.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And so it begins. Who would have thought that The Donald would be the 45th President of the United States? Whatever his presidency may be, it surely will be different. And that, Dear Readers, is as political as I will get.
Lost in the week's hullaballoo was the action in the bond pits. The rate on the all important US Treasury 10Year Bond jumped to nearly 2.5% following news that inflation in December, as measured by CPI, had reached 0.3% for the month and 2.1% year over year. This development prompted many to sell bonds in the belief that inflation in 2017 will accelerate forcing the Fed to raise short term interest rates 4 times as opposed to 3 times which heretofore has been the consensus view. I remain convinced that other forces (such as the paltry rates available overseas) will moderate domestic bond yields and thus took the opportunity to add to several bond related positions.
As loyal readers know, my bond related positions include several preferred stocks and preferred stock closed end funds. My fascination with these investment vehicles has prompted some to ask why their investment advisors do not buy them---indeed why they are rarely if ever discussed. The answer is simple----volume. If you Google "Wall Street Journal Preferred Stock Closing Table" and "CEFConnect" you will see that many of the names that I own trade, on average, 25,000 shares or less daily. I typically buy in lots of 1000 and rarely accumulate more than a few thousand shares of any issue. Why? Because I do not want to impact the price and buying or selling more than 1000 shares at a time can have an impact. Now imagine you are a money manager entrusted with 50 accounts. Even if one believed that preferred stocks 337otherwise made sense for one's clients, one could not buy 50 positions at a time without massively disrupting if not manipulating any given stock's market. So unless you, as an individual investor, order such a purchase it will not happen. Remember, money managers are under great pressure to treat their clients equally. Indeed, for a host of reasons it is more important for them to be consistent than to be right. This is not a criticism, but it is a fact.
The domestic oil and gas rig count continues to increase. It now numbers 694 compared with 480 in March, 2016. This is a testament to American ingenuity, a national trait that was sorely underestimated by Saudi Arabia when it began flooding the market with oil in 2014. At the time, conventional wisdom was that US frackers needed $60/bbl. in order to break even. That may have been true in 2014, but by 2017 advances in technology have reduced the break even to $40/bbl. with some producers capable of profiting at $30/bbl. In addition new fracking "cocktails" (mixture of water, sand and pressure) have resulted in each well producing 40% more oil than in 2014. I see opportunity in oil/gas in 2017 and recently have added to my holdings in KYN and JMF.
Sunday, January 15, 2017
January 15, 2017 Rationale
Risk/Reward Vol. 336
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In Vol. 333 http://www.riskrewardblog.blogspot.com/ I explained my rationale for re-entering the market in mid December. In a nutshell, the decision was based upon the meteoric yield increase on the US Treasury 10 Year Bond; from 1.3% in July to 1.8% on election day to 2.6% on December 7th. I also outlined the reasons why I believed the rotation out of bonds and into equities would slow. I predicted that the rate on the 10Year would stabilize and remain stable for the foreseeable future. In the ensuing month, the rotation has not only slowed, it has reverse albeit marginally. Whether this reversal is a result of the outsized spread in yields between the 10Year and every other sovereign security available (especially the German bund) or simply reflective of a technical resistance to breaching Dow 20,000 is of no moment to me. The fact is that bond yields have fallen.
So how does this affect me? Remember, although I do not own a lot of bonds, I invest and trade in securities that are priced in relation to the 10Year, most notably preferred stocks and preferred stock closed end funds. Based upon several years of study, if the spread on the yield between an investment grade preferred and the 10Year exceeds 350 basis points and the price of the preferred falls below its redemption value (typically $25) it signals a "buy". Another buy signal for me is when the rate on the 10Year experiences a spike as occurred during the 2013 Taper Tantrum (see Vols. 211 and 172) and again recently after the election. It is a fact, that from time to time, Mr. Market is overly exuberant in rotating out of one asset (e.g. bonds) and into another (e.g. stocks); a situation I perceived existed with the Trump rally and the incredible, one month, 44% rise in the 10Year yield. With the yield on the 10Year currently at or below 2.4%, I am up over 3% on the portfolio that I purchased after December 19th. (Remember as yields fall, prices increase.) That portfolio averages over 6.5% in annual dividends. I am still 50% in cash, but will deploy more if stability persists.
The above notwithstanding, we live in interesting times. No one predicted the Trump Rally. And no one is offering predictions for 2017. The closest to a prediction that I have read is contained in Bill Gross's January Investment Outlook. It is available on Janus Capital Group's website and I recommend it to your attention. Therein he posits the question that addresses, foursquare, my concern: are equities over priced and bonds over yielded? He concludes that the stock market and bond yields are currently priced in anticipation of a 3% growth in gross domestic product this year, a number he does not believe is achievable. That said, he warns that if he is wrong and the yield on the 10Year exceeds 2.6% it could signal a bond bear market, something we have not experienced in 30 years. If I perceive that happening, I will be out of my bond correlated portfolio before you can say----.
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