Friday, December 16, 2022
“Space-time is doomed.” --- Nima Arkani-Hamed, physicist, Institute for Advanced Study, Princeton.
This admission from a world renowned physicist serves as a capstone to several years of studying physics. It is at once revelatory and liberating. Allow me to explain.
Four years ago, I decided to do a deep dive into the nature of reality. In today’s world, one is led to believe that reality can only be explained by the laws of physics. Reference to disciplines beyond (in Greek “meta”) physics places one in the world of superstition, or God forbid, religion.
Not having studied physics since high school, I leaped headlong into the world of video lectures, books and podcasts of which there are thousands in any area of study one wishes to pursue. I have been diligent and have come to understand particles, waves, fields, the Big Bang, the Standard Model, the elusive Theory of Everything, entanglement, the observation problem, Schrodinger’s Cat, Wigner’s Friend, special relativity, general relativity, Planck’s constant, Black Holes, anti De Sitter space, the holographic principle, Many Worlds, pilot waves, the irreconcilability of relativity and quantum mechanics, fundamental versus emergent---just to name a few concepts. Indeed, I went as deep into physics as a non-mathematician can go.
Along the way, I came to realize how little physics tells us about reality. For example, the laws of physics deal with only 5% of the known Universe. Up to 75% of the Universe is comprised of Dark Energy. Another 20% is comprised of Dark Matter. The former is a placeholder name for the energy that fuels the continued expansion of the Universe, and the latter is a placeholder name for the mass that prevents celestial bodies from colliding with each other. Virtually nothing is known of either. Indeed, they may not be energy or matter at all.
Moreover, what we do know of the remaining 5% is woefully incomplete. Take what physicists know about the Big Bang, the beginning of the Universe some 13.8 billion years ago when all of space and time arose from nothing. Don’t even think about asking a physicist what existed before the Big Bang or how the Big Bang came to be. If you were to ask the first question expect to be told that since time began after the Big Bang, temporal questions such as what existed “before” are silly and meaningless. As to who or what caused the Big Bang---expect crickets.
Perhaps the biggest physics fail of the past 75 years is the inability of anyone to reconcile quantum physics and relativity (both explained below) the two overarching laws upon which all of modern physics is based. Literally billions of dollars and countless careers have been wasted pursuing such a reconciliation, a Theory of Everything--- one, beautiful equation describing that from which all else emerges. Truth be told, we are no further along in this quest than we are in finding the Holy Grail. And don’t forget, the “Everything” referenced represents only 5% of the Universe
And then there is consciousness. Is it purely a function of the brain (albeit a very complex one) or is there some other source? Even the most ardent physicalists among physicists admit that consciousness is a “hard problem”.
So, what IS the proper role of physics? To me, the answer lies in the words of the three greatest physicists of the past century: Niels Bohr, the godfather of quantum physics, Albert Einstein of relativity (space-time) fame and Max Planck who inspired both. Each understood that physics is a tool to harness nature, not the source of nature. Bohr said: “It is wrong to think that the task of physics is to find out how Nature is. Physics concerns what we can say about Nature.” Einstein wrote: “Reality is merely an illusion, although a very persistent one.” Planck observed as follows: “I regard consciousness as fundamental. I regard matter as derivative from consciousness. Everything that we talk about, everything that we regard as existing, postulates consciousness.” In short, when it came to describing reality (as opposed to our perception of it), these three giants were metaphysicians. (Metaphysics—the philosophical study of the nature of reality)
So, why do 90% of physicists today reject the idea that metaphysics plays any role in describing reality? I believe the answer lies in the language they employ. The language of physics is mathematics. Today, if a theory cannot be expressed mathematically, it does not warrant consideration---full stop. This situation is discussed at length in Sabine Hassenfelder’s book “Lost in Math—How Beauty Leads Physics Astray.” Sadly, today’s physicists are not products of a liberal arts education. They are not philosophically sophisticated. Their predecessors were. For example, Schrodinger, who in 1925 derived the equation upon which quantum mechanics is based, was an ardent student of Eastern philosophy about which he wrote in his book “What is Life.” Addressing the many alternative outcomes inherent in the double split experiment, Schrodinger wrote: “There is obviously only one alternative, namely the unification of minds or consciousness. Their multiplicity is only apparent. In truth there is only one mind. This is the doctrine of the Upanishads.” Similarly, Heisenberg who in 1927 articulated the all-important uncertainty principle wrote: “What we observe is not nature itself, but nature exposed to our method of inquiry…. The first gulp from the glass of natural science will turn you into an atheist, but at the bottom of the glass God is waiting for you.”
I now return to the significance of Nima’s admission that “Space-time is doomed.”
As noted above, space-time is shorthand for Einstein’s theory of relativity. Relativity describes the interaction of matter from the size of an atom to the size of the Universe itself. It has proven useful time and time again (no pun intended). It guides our satellites, provides us GPS, and explains why apples fall from trees. It presumes that space is continuous and local. That is, it presumes that one can ascertain with precision an object’s location and velocity. Unfortunately, relativity simply does not work at the subatomic or quantum level. There, location and velocity cannot be ascertained with precision. Indeed, subatomic particles are in a superposition (many places at once). Thus, their location and velocity can only be expressed in probabilities. The quantum world is fuzzy and imprecise. That said, these very qualities have led to remarkable uses such as lasers and more importantly transistors and silicon chips. As noted above, to date no physicist has reconciled these two theories. This lack of a Theory of Everything is well known and often discussed.
What isn’t often discussed in physics and what Nima’s admission addresses is that at very, very small distances and at very, very short time frames NEITHER relativity (space-time) nor quantum physics have any relevance. The mathematics describing each simply doesn’t work. And these were precisely the conditions that existed immediately after the Big Bang during what is called the Planck Epoch. By definition, then, neither relativity nor quantum physics is fundamental. Both must have emerged from something else. They are not first principles and, as admitted by Nima, any attempt to prove them so is “doomed”. Given this and the fact that physicists are literally clueless as to how or from what space-time and quantum mechanics emerged, one is free to explore other possible foundations of reality even those grounded in metaphysics. Indeed, relying on physics to explain the nature of reality may be a waste of time---and space. And should one encounter any derision for so asserting, one need only point to the many limitations inherent in physics some of which I cataloged above. How revelatory! How liberating!
Sunday, March 3, 2019
March 3, 2019 A Jones
Risk/Reward Vol. 409
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Not much happened in the equity markets this week. They closed slightly negative but remain up double digits year to date and up 5% for the past 12 months. This annualized return is not spectacular given the performance of the past decade, but is approximately twice what one can achieve in short to medium term bonds. As loyal readers know, I remain disappointed in the returns available via bonds which have yielded very little over the past ten years. The average annual interest rate in US government securities was 6.6% in 2001. Today it is 2.5%. Despite some upward movement in 2018, rates appear destined to remain LESS THAN HALF their long term average for the foreseeable future.
Why, you ask?
As detailed previously, central banks world wide have taken extraordinary steps since the financial crisis of 2008 to suppress interest rates. They manipulated short term rates and then literally printed money which they used to outbid all other buyers of longer term bonds, mortgages and other debt instruments. (Remember, the higher the bid the lower the yield.) This unprecedented move, termed quantitative easing, crowded all other potential buyers out of these securities. After all, who wants a negative return on one's money, a situation that has persisted in Europe and Japan for several years. Cheap debt has been viewed traditionally as a short term means of spurring consumer spending and corporate investment. But cheap debt orchestrated on a massive scale and a coordinated fashion has proven addictive. We are now hooked.
Here are some facts. Total global debt (government, corporate and consumer) reached $244trillion in 2018 compared to total global income (GDP) of $85 trillion, a ration of 3 to 1. The US is even worse: $69trillion of total debt to income of $19.4 trillion or 3.6 to 1. From 1950 to 1980, our debt to equity ratio was 1.5. Not only is our government mired in debt, so are our corporations, where the debt load is up 50% since 2010, and our households. Can you imagine the drag on our economy should interest rates DOUBLE or TRIPLE to their long term averages? This is the real reason the Fed has curtailed its previously announced plan to return to normal rates. No one can afford it. God forbid we have a recession. We have little if any room to lower rates further. To paraphrase a line from the famous story of addiction, Manchild in the Promised Land, "We gotta a jones."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Not much happened in the equity markets this week. They closed slightly negative but remain up double digits year to date and up 5% for the past 12 months. This annualized return is not spectacular given the performance of the past decade, but is approximately twice what one can achieve in short to medium term bonds. As loyal readers know, I remain disappointed in the returns available via bonds which have yielded very little over the past ten years. The average annual interest rate in US government securities was 6.6% in 2001. Today it is 2.5%. Despite some upward movement in 2018, rates appear destined to remain LESS THAN HALF their long term average for the foreseeable future.
Why, you ask?
As detailed previously, central banks world wide have taken extraordinary steps since the financial crisis of 2008 to suppress interest rates. They manipulated short term rates and then literally printed money which they used to outbid all other buyers of longer term bonds, mortgages and other debt instruments. (Remember, the higher the bid the lower the yield.) This unprecedented move, termed quantitative easing, crowded all other potential buyers out of these securities. After all, who wants a negative return on one's money, a situation that has persisted in Europe and Japan for several years. Cheap debt has been viewed traditionally as a short term means of spurring consumer spending and corporate investment. But cheap debt orchestrated on a massive scale and a coordinated fashion has proven addictive. We are now hooked.
Here are some facts. Total global debt (government, corporate and consumer) reached $244trillion in 2018 compared to total global income (GDP) of $85 trillion, a ration of 3 to 1. The US is even worse: $69trillion of total debt to income of $19.4 trillion or 3.6 to 1. From 1950 to 1980, our debt to equity ratio was 1.5. Not only is our government mired in debt, so are our corporations, where the debt load is up 50% since 2010, and our households. Can you imagine the drag on our economy should interest rates DOUBLE or TRIPLE to their long term averages? This is the real reason the Fed has curtailed its previously announced plan to return to normal rates. No one can afford it. God forbid we have a recession. We have little if any room to lower rates further. To paraphrase a line from the famous story of addiction, Manchild in the Promised Land, "We gotta a jones."
Sunday, February 24, 2019
February 24, 2019 TINA Again
Risk Reward
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I have not published for 3 weeks. During that time I have attended subscriber events in South Haven, MI, Frisco, CO and Orlando, FL. Conditions favorable to equites have not changed. TINA is alive and well. The major indices are up double digits for the year and nearly 5% in the past 12 months. The Federal Reserve continues to skew dovish, a fact made more evident by meeting minutes published this week. Therein the Fed reiterated 1) that it will end its balance sheet reduction in 2019 and 2) it sees no need to lower the Fed Funds rate anytime soon. The cheap money punch bowl remains; the effect of which I described in detail in Vol. 407 redisplayed below.
Adding to the upward tilt of the exchanges is encouraging news that a long term trade deal with China could actually come to pass. Lastly, surprisingly, stocks remain undisturbed by the Democratic controlled House of Representatives which has not moved forward to impeach The Donald. Members must be awaiting the Mueller report which rumor has being completed in the near future. But with a new Attorney General in office some question whether the Mueller report, at least in its raw form, will see the light of day. This is causing my old law school professor (and Clinton crony) Walter Dellinger to flip out on Twitter. His paroxysms are worth a look. Stay tuned.
Risk/Reward Vol. 407
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL RELFECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Two news items rallied stocks on Friday resulting in the major indices remaining flat for the week. The first was the temporary settlement of the government shut down. That was inevitable. The second was less touted but will have a much more lasting impact on investors. In Friday's Wall Street Journal it was reported that the Federal Reserve is weighing an earlier than expected end to its portfolio reduction program. This is a disappointment for fixed income investors, such as yours truly. It signals that the era of cheap and plentiful credit may continue. If true, stock buy backs fueled by inexpensive borrowing will continue, much to the benefit of stockholders. TINA (There Is Not Alternative--to stocks) may be returning.
Why does the curtailment of the Fed's portfolio reduction program portend poorly for fixed income (bond) investors? A little history is in order. In the aftermath of the 2008 financial crisis, the Federal Reserve reduced short term (Fed Funds) interest rates to near zero with the dual purpose of reducing the cost of borrowing and discouraging savings. The intention was to spur consumer consumption and concomitantly economic growth. Believing that that effort was insufficient, the Fed also reduced longer term interest rates by literally printing more money, increasing its balance sheet from $800 billion to $4.5 trillion and outbidding virtually every other buyer of long term Treasury bonds and mortgages. This effort caused the interest rates borne by those securities to plummet. (Remember, the higher the bid price, the lower the interest rate.) The impact of this "Quantitative Easing" was monumental. The interest rate on the US Ten Year Bond plummeted from 4- 5% to well below 2%. It now rests at a meager 2.75%. Similar QE efforts around the world had an even greater impact with much of the world's sovereign debt yielding a NEGATIVE return (invest 100 Euros and get 98 back in ten years). In 2018, many central banks realized that government intervention via lowering short term rates and quantitative easing was not sustainable. Several such banks announced that overnight rates would gradually increase, that QE would end and that they would start selling their portfolio of bonds into the market. The obvious impact of these efforts would be and was a rise in interest rates across the board---a return to normalcy if you will.
But Friday's news story from the Fed (and a similar one reported earlier in regard the European Central Bank) plus a previously announced halt to short term rate increases in 2019 are nothing short of a reversal of the decisions made in 2018. With the economies of the world doing well, one is left to wonder why. The answer is obvious, if underreported. In cheapening the cost of money (lowering rates) and printing money this past decade, central banks have created a debt bubble of historic proportions. Global sovereign (government) debt is an astounding $66Trillion or 80% of global GNP. The situation in the US is just as bleak. In 2007 before the financial crisis and the Fed's financial engineering projects, the US national debt was $9Trillion which was serviced by income tax collections of $1.5Trillion. Currently, the US debt is $22Trillion (2 1/2 times what it was in 2007) serviced by $2.5Trillion in income tax collections of which nearly 15% is devoted to interest payments. If the interest rate on the US debt were to double (which it would if rates were normal), debt service would consume 30% of tax revenue. In other words, we couldn't service our debt and otherwise run our government. Duh! Given this upward spiral of debt, logic dictates that central banks will do even more to suppress rates. Bond holders may be lucky to get their principal back--- let alone any interest. Think not? Take a look at Puerto Rican bonds. Very depressing. I may have to rethink my fixed income strategy.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I have not published for 3 weeks. During that time I have attended subscriber events in South Haven, MI, Frisco, CO and Orlando, FL. Conditions favorable to equites have not changed. TINA is alive and well. The major indices are up double digits for the year and nearly 5% in the past 12 months. The Federal Reserve continues to skew dovish, a fact made more evident by meeting minutes published this week. Therein the Fed reiterated 1) that it will end its balance sheet reduction in 2019 and 2) it sees no need to lower the Fed Funds rate anytime soon. The cheap money punch bowl remains; the effect of which I described in detail in Vol. 407 redisplayed below.
Adding to the upward tilt of the exchanges is encouraging news that a long term trade deal with China could actually come to pass. Lastly, surprisingly, stocks remain undisturbed by the Democratic controlled House of Representatives which has not moved forward to impeach The Donald. Members must be awaiting the Mueller report which rumor has being completed in the near future. But with a new Attorney General in office some question whether the Mueller report, at least in its raw form, will see the light of day. This is causing my old law school professor (and Clinton crony) Walter Dellinger to flip out on Twitter. His paroxysms are worth a look. Stay tuned.
Risk/Reward Vol. 407
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL RELFECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Two news items rallied stocks on Friday resulting in the major indices remaining flat for the week. The first was the temporary settlement of the government shut down. That was inevitable. The second was less touted but will have a much more lasting impact on investors. In Friday's Wall Street Journal it was reported that the Federal Reserve is weighing an earlier than expected end to its portfolio reduction program. This is a disappointment for fixed income investors, such as yours truly. It signals that the era of cheap and plentiful credit may continue. If true, stock buy backs fueled by inexpensive borrowing will continue, much to the benefit of stockholders. TINA (There Is Not Alternative--to stocks) may be returning.
Why does the curtailment of the Fed's portfolio reduction program portend poorly for fixed income (bond) investors? A little history is in order. In the aftermath of the 2008 financial crisis, the Federal Reserve reduced short term (Fed Funds) interest rates to near zero with the dual purpose of reducing the cost of borrowing and discouraging savings. The intention was to spur consumer consumption and concomitantly economic growth. Believing that that effort was insufficient, the Fed also reduced longer term interest rates by literally printing more money, increasing its balance sheet from $800 billion to $4.5 trillion and outbidding virtually every other buyer of long term Treasury bonds and mortgages. This effort caused the interest rates borne by those securities to plummet. (Remember, the higher the bid price, the lower the interest rate.) The impact of this "Quantitative Easing" was monumental. The interest rate on the US Ten Year Bond plummeted from 4- 5% to well below 2%. It now rests at a meager 2.75%. Similar QE efforts around the world had an even greater impact with much of the world's sovereign debt yielding a NEGATIVE return (invest 100 Euros and get 98 back in ten years). In 2018, many central banks realized that government intervention via lowering short term rates and quantitative easing was not sustainable. Several such banks announced that overnight rates would gradually increase, that QE would end and that they would start selling their portfolio of bonds into the market. The obvious impact of these efforts would be and was a rise in interest rates across the board---a return to normalcy if you will.
But Friday's news story from the Fed (and a similar one reported earlier in regard the European Central Bank) plus a previously announced halt to short term rate increases in 2019 are nothing short of a reversal of the decisions made in 2018. With the economies of the world doing well, one is left to wonder why. The answer is obvious, if underreported. In cheapening the cost of money (lowering rates) and printing money this past decade, central banks have created a debt bubble of historic proportions. Global sovereign (government) debt is an astounding $66Trillion or 80% of global GNP. The situation in the US is just as bleak. In 2007 before the financial crisis and the Fed's financial engineering projects, the US national debt was $9Trillion which was serviced by income tax collections of $1.5Trillion. Currently, the US debt is $22Trillion (2 1/2 times what it was in 2007) serviced by $2.5Trillion in income tax collections of which nearly 15% is devoted to interest payments. If the interest rate on the US debt were to double (which it would if rates were normal), debt service would consume 30% of tax revenue. In other words, we couldn't service our debt and otherwise run our government. Duh! Given this upward spiral of debt, logic dictates that central banks will do even more to suppress rates. Bond holders may be lucky to get their principal back--- let alone any interest. Think not? Take a look at Puerto Rican bonds. Very depressing. I may have to rethink my fixed income strategy.
Sunday, January 27, 2019
January 27, 2019 Return of TINA
Risk/Reward Vol. 407
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL RELFECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Two news items rallied stocks on Friday resulting in the major indices remaining flat for the week. The first was the temporary settlement of the government shut down. That was inevitable. The second was less touted but will have a much more lasting impact on investors. In Friday's Wall Street Journal it was reported that the Federal Reserve is weighing an earlier than expected end to its portfolio reduction program. This is a disappointment for fixed income investors, such as yours truly. It signals that the era of cheap and plentiful credit may continue. If true, stock buy backs fueled by inexpensive borrowing will continue, much to the benefit of stockholders. TINA (There Is Not Alternative--to stocks) may be returning.
Why does the curtailment of the Fed's portfolio reduction program portend poorly for fixed income (bond) investors? A little history is in order. In the aftermath of the 2008 financial crisis, the Federal Reserve reduced short term (Fed Funds) interest rates to near zero with the dual purpose of reducing the cost of borrowing and discouraging savings. The intention was to spur consumer consumption and concomitantly economic growth. Believing that that effort was insufficient, the Fed also reduced longer term interest rates by literally printing more money, increasing its balance sheet from $800 billion to $4.5 trillion and outbidding virtually every other buyer of long term Treasury bonds and mortgages. This effort caused the interest rates borne by those securities to plummet. (Remember, the higher the bid price, the lower the interest rate.) The impact of this "Quantitative Easing" was monumental. The interest rate on the US Ten Year Bond plummeted from 4- 5% to well below 2%. It now rests at a meager 2.75%. Similar QE efforts around the world had an even greater impact with much of the world's sovereign debt yielding a NEGATIVE return (invest 100 Euros and get 98 back in ten years). In 2018, many central banks realized that government intervention via lowering short term rates and quantitative easing was not sustainable. Several such banks announced that overnight rates would gradually increase, that QE would end and that they would start selling their portfolio of bonds into the market. The obvious impact of these efforts would be and was a rise in interest rates across the board---a return to normalcy if you will.
But Friday's news story from the Fed (and a similar one reported earlier in regard the European Central Bank) plus a previously announced halt to short term rate increases in 2019 are nothing short of a reversal of the decisions made in 2018. With the economies of the world doing well, one is left to wonder why. The answer is obvious, if underreported. In cheapening the cost of money (lowering rates) and printing money this past decade, central banks have created a debt bubble of historic proportions. Global sovereign (government) debt is an astounding $66Trillion or 80% of global GNP. The situation in the US is just as bleak. In 2007 before the financial crisis and the Fed's financial engineering projects, the US national debt was $9Trillion which was serviced by income tax collections of $1.5Trillion. Currently, the US debt is $22Trillion (2 1/2 times what it was in 2007) serviced by $2.5Trillion in income tax collections of which nearly 15% is devoted to interest payments. If the interest rate on the US debt were to double (which it would if rates were normal), debt service would consume 30% of tax revenue. In other words, we couldn't service our debt and otherwise run our government. Duh! Given this upward spiral of debt, logic dictates that central banks will do even more to suppress rates. Bond holders may be lucky to get their principal back--- let alone any interest. Think not? Take a look at Puerto Rican bonds. Very depressing. I may have to rethink my fixed income strategy
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL RELFECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Two news items rallied stocks on Friday resulting in the major indices remaining flat for the week. The first was the temporary settlement of the government shut down. That was inevitable. The second was less touted but will have a much more lasting impact on investors. In Friday's Wall Street Journal it was reported that the Federal Reserve is weighing an earlier than expected end to its portfolio reduction program. This is a disappointment for fixed income investors, such as yours truly. It signals that the era of cheap and plentiful credit may continue. If true, stock buy backs fueled by inexpensive borrowing will continue, much to the benefit of stockholders. TINA (There Is Not Alternative--to stocks) may be returning.
Why does the curtailment of the Fed's portfolio reduction program portend poorly for fixed income (bond) investors? A little history is in order. In the aftermath of the 2008 financial crisis, the Federal Reserve reduced short term (Fed Funds) interest rates to near zero with the dual purpose of reducing the cost of borrowing and discouraging savings. The intention was to spur consumer consumption and concomitantly economic growth. Believing that that effort was insufficient, the Fed also reduced longer term interest rates by literally printing more money, increasing its balance sheet from $800 billion to $4.5 trillion and outbidding virtually every other buyer of long term Treasury bonds and mortgages. This effort caused the interest rates borne by those securities to plummet. (Remember, the higher the bid price, the lower the interest rate.) The impact of this "Quantitative Easing" was monumental. The interest rate on the US Ten Year Bond plummeted from 4- 5% to well below 2%. It now rests at a meager 2.75%. Similar QE efforts around the world had an even greater impact with much of the world's sovereign debt yielding a NEGATIVE return (invest 100 Euros and get 98 back in ten years). In 2018, many central banks realized that government intervention via lowering short term rates and quantitative easing was not sustainable. Several such banks announced that overnight rates would gradually increase, that QE would end and that they would start selling their portfolio of bonds into the market. The obvious impact of these efforts would be and was a rise in interest rates across the board---a return to normalcy if you will.
But Friday's news story from the Fed (and a similar one reported earlier in regard the European Central Bank) plus a previously announced halt to short term rate increases in 2019 are nothing short of a reversal of the decisions made in 2018. With the economies of the world doing well, one is left to wonder why. The answer is obvious, if underreported. In cheapening the cost of money (lowering rates) and printing money this past decade, central banks have created a debt bubble of historic proportions. Global sovereign (government) debt is an astounding $66Trillion or 80% of global GNP. The situation in the US is just as bleak. In 2007 before the financial crisis and the Fed's financial engineering projects, the US national debt was $9Trillion which was serviced by income tax collections of $1.5Trillion. Currently, the US debt is $22Trillion (2 1/2 times what it was in 2007) serviced by $2.5Trillion in income tax collections of which nearly 15% is devoted to interest payments. If the interest rate on the US debt were to double (which it would if rates were normal), debt service would consume 30% of tax revenue. In other words, we couldn't service our debt and otherwise run our government. Duh! Given this upward spiral of debt, logic dictates that central banks will do even more to suppress rates. Bond holders may be lucky to get their principal back--- let alone any interest. Think not? Take a look at Puerto Rican bonds. Very depressing. I may have to rethink my fixed income strategy
Sunday, January 20, 2019
January 20, 2019 BuzzFeed
Risk/Reward Vol. 406
Positive corporate reports, encouraging news on the China negotiation front, continued expressions of rate-hike timidity by the Fed and a healthy labor market caused the indices to register their fourth consecutive week of gains. Year to date the major indices are up on average over 6% although they lag where they were a year ago by a similar percentage. This performance comes despite a continued government shut-down which the Fed has warned may negatively impact overall growth this year by as much as a half of a percent. Look for a spike if and when the standoff ends.
On the fixed income front, rates on the 10 Year continue to languish below 2.8% while bonds of durations 6 months and less continue to hold steady between 2.4 and 2.5%. This is hardly surprising considering that the Fed funds overnight rate (the shortest and ostensibly the lowest available) is between 2.25 and 2.5%. Unfortunately, I don't foresee any event that is going to cause the rates of longer duration bonds to increase. Typically, one would expect the recent stock market rally to cause rates to rise, but that has not happened this time. And for reasons discussed in the next paragraph I don't foresee the bond market becoming less attractive and thus providing a better yield. (Remember as bond prices fall, bond yields--rates--increase.)
The rattling of sabers aimed at The Donald's head continues unabated. The bombshell this week was a report issued by BuzzFeed (a Washington insider tattle sheet) that the President's former attorney, Michael Cohen (he of Stormy Daniels fame), told the Special Prosecutor that Trump instructed him to lie to Congress as to when negotiations for a Moscow Trump Tower ceased. This expose caused such a furor the Special Prosecutor's office issued a statement specifically refuting the BuzzFeed report. Nevertheless, look for Congress (specifically the Democrat controlled House) to chase this and every other allegation of Trump wrongdoing. Let's hope that Mr. Market can rise above this partisan bickering. I fear he cannot.
Positive corporate reports, encouraging news on the China negotiation front, continued expressions of rate-hike timidity by the Fed and a healthy labor market caused the indices to register their fourth consecutive week of gains. Year to date the major indices are up on average over 6% although they lag where they were a year ago by a similar percentage. This performance comes despite a continued government shut-down which the Fed has warned may negatively impact overall growth this year by as much as a half of a percent. Look for a spike if and when the standoff ends.
On the fixed income front, rates on the 10 Year continue to languish below 2.8% while bonds of durations 6 months and less continue to hold steady between 2.4 and 2.5%. This is hardly surprising considering that the Fed funds overnight rate (the shortest and ostensibly the lowest available) is between 2.25 and 2.5%. Unfortunately, I don't foresee any event that is going to cause the rates of longer duration bonds to increase. Typically, one would expect the recent stock market rally to cause rates to rise, but that has not happened this time. And for reasons discussed in the next paragraph I don't foresee the bond market becoming less attractive and thus providing a better yield. (Remember as bond prices fall, bond yields--rates--increase.)
The rattling of sabers aimed at The Donald's head continues unabated. The bombshell this week was a report issued by BuzzFeed (a Washington insider tattle sheet) that the President's former attorney, Michael Cohen (he of Stormy Daniels fame), told the Special Prosecutor that Trump instructed him to lie to Congress as to when negotiations for a Moscow Trump Tower ceased. This expose caused such a furor the Special Prosecutor's office issued a statement specifically refuting the BuzzFeed report. Nevertheless, look for Congress (specifically the Democrat controlled House) to chase this and every other allegation of Trump wrongdoing. Let's hope that Mr. Market can rise above this partisan bickering. I fear he cannot.
Sunday, January 13, 2019
January 13, 2019 Fed Speak
Risk/Reward Vol. 405
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a flat close on Friday, the year to date has been very good for Mr. Market. The Dow is up over 2.8%. The S&P is up over 3.5% and the NASDAQ is doing even better. Part of the impetus upward undoubtedly arises from improved prospects for a deal with China, but clearly the major stimulus has been indications from the Federal Reserve and its individual board members that the Fed will tread lightly in 2019 when it comes to raising interest rates. Mr. Market turned bullish on Thursday when the Fed's December minutes were released. Therein, the Fed stated that with inflation posing little threat, it could afford to be patient with rate increases. Moreover, given the upheaval in the market experienced as 2018 closed, the Fed admitted that its path for normalizing rates was less clear than it had been in October.
As it now stands, the Fed futures are predicting NO interest rate hikes at all in 2019. Thus those investors counting on higher rates in the coming months (read, me) may be disappointed. As a consequence it is not surprising that money flows have weighed heavily on the equity side these past several days. That said, it is hard for me to conclude that there will be no rate hikes given that the dot plot issued on the same day that the December Fed meeting was held showed a consensus of two rate hikes in 2019. Huh? Maybe the Fed should just hold its tongue and let its actions speak.
Even if rates do not increase, it is difficult for me to see how the stock market is going to provide much of a return this year. Led by Apple, 72 of the S&P 500 companies issued earnings warnings, twice as may as have issued positive guidance. And then there is the matter of The Donald and his enemies in the House of Representatives. God only knows where that will lead. Time will tell. Both the Dow and the S&P sit 6.5% lower than they did last year at this time which indicates to me that despite a good couple of weeks, winter is upon us
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a flat close on Friday, the year to date has been very good for Mr. Market. The Dow is up over 2.8%. The S&P is up over 3.5% and the NASDAQ is doing even better. Part of the impetus upward undoubtedly arises from improved prospects for a deal with China, but clearly the major stimulus has been indications from the Federal Reserve and its individual board members that the Fed will tread lightly in 2019 when it comes to raising interest rates. Mr. Market turned bullish on Thursday when the Fed's December minutes were released. Therein, the Fed stated that with inflation posing little threat, it could afford to be patient with rate increases. Moreover, given the upheaval in the market experienced as 2018 closed, the Fed admitted that its path for normalizing rates was less clear than it had been in October.
As it now stands, the Fed futures are predicting NO interest rate hikes at all in 2019. Thus those investors counting on higher rates in the coming months (read, me) may be disappointed. As a consequence it is not surprising that money flows have weighed heavily on the equity side these past several days. That said, it is hard for me to conclude that there will be no rate hikes given that the dot plot issued on the same day that the December Fed meeting was held showed a consensus of two rate hikes in 2019. Huh? Maybe the Fed should just hold its tongue and let its actions speak.
Even if rates do not increase, it is difficult for me to see how the stock market is going to provide much of a return this year. Led by Apple, 72 of the S&P 500 companies issued earnings warnings, twice as may as have issued positive guidance. And then there is the matter of The Donald and his enemies in the House of Representatives. God only knows where that will lead. Time will tell. Both the Dow and the S&P sit 6.5% lower than they did last year at this time which indicates to me that despite a good couple of weeks, winter is upon us
Sunday, December 30, 2018
December 30, 2018 Dead Cat Bounce?
Risk/Reward Vol. 404
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Down 600 points on Monday. Closed on Tuesday. Up 1000 points on Wednesday. An 800 point swing from negative 600 to positive 200 on Thursday. And on Friday a slightly negative close after 19 direction changes. At the close the Dow Jones Industrial Average was up 2.5% for the week. Action in the S&P 500 was similar. NASDAQ did a little better. To characterize the week's market as a roller coaster would be an understatement. The bond market was less volatile, but see-sawed its way to lower yields by the close on Friday.
What does this all mean? Most commentators remained silent. The most interesting article was in Thursday's Investor Business Daily, following Wednesday's record setting 1000 point jump in the Dow. Terming the outsized one day price gain a possible "dead cat bounce", IBD noted that the nine biggest percentage gains in the history of the DJIA occurred in the midst of a bear market. In 1930, the Dow rose 12.3% in one day (Wednesday's bump was 4.5%) then fell 30% over the next 2 weeks. In 2008, the NASDAQ posted a one day rise of 11.8% only to fall 31% over the next five weeks. In 1932, the Dow jumped 11% only to fall 34% over the next several weeks. In 2000, the NASDAQ rose 10% in one day just before plummeting 46.5% over the ensuing 4 months.
Was this week a dead cat bounce or a legitimate first step in a recovery? Time will tell. Consistent with my thesis that politics dominates the market, I note that the day the Dow rose 1000 points The Donald was in Iraq and unable to tweet. No matter what Mr. Market experiences, may you and yours enjoy a healthy and prosperous 2019. On New Year's Eve, Barb and I are headed to the mountains of Colorado for some skiing with daughter Abby and her family. There may not be an edition next week.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Down 600 points on Monday. Closed on Tuesday. Up 1000 points on Wednesday. An 800 point swing from negative 600 to positive 200 on Thursday. And on Friday a slightly negative close after 19 direction changes. At the close the Dow Jones Industrial Average was up 2.5% for the week. Action in the S&P 500 was similar. NASDAQ did a little better. To characterize the week's market as a roller coaster would be an understatement. The bond market was less volatile, but see-sawed its way to lower yields by the close on Friday.
What does this all mean? Most commentators remained silent. The most interesting article was in Thursday's Investor Business Daily, following Wednesday's record setting 1000 point jump in the Dow. Terming the outsized one day price gain a possible "dead cat bounce", IBD noted that the nine biggest percentage gains in the history of the DJIA occurred in the midst of a bear market. In 1930, the Dow rose 12.3% in one day (Wednesday's bump was 4.5%) then fell 30% over the next 2 weeks. In 2008, the NASDAQ posted a one day rise of 11.8% only to fall 31% over the next five weeks. In 1932, the Dow jumped 11% only to fall 34% over the next several weeks. In 2000, the NASDAQ rose 10% in one day just before plummeting 46.5% over the ensuing 4 months.
Was this week a dead cat bounce or a legitimate first step in a recovery? Time will tell. Consistent with my thesis that politics dominates the market, I note that the day the Dow rose 1000 points The Donald was in Iraq and unable to tweet. No matter what Mr. Market experiences, may you and yours enjoy a healthy and prosperous 2019. On New Year's Eve, Barb and I are headed to the mountains of Colorado for some skiing with daughter Abby and her family. There may not be an edition next week.
Sunday, December 23, 2018
December 23, 2018 Pow(ell) Wow
Risk Reward Vol. 403
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
At its meeting this week, the Federal Reserve raised the overnight rate of interest and indicated that two more upward moves were likely in 2019. Moreover, in his Wednesday afternoon press conference, Fed Chair Jerome Powell stated that the Fed would continue to reduce its balance sheet at a previously announced pace. As predicted last week, Mr. Market reacted negatively to the news. The Dow Jones Industrial Average fell 350 points that day. Thursday was even worse, and the bloodbath continued Friday. When the closing bell rang, Mr. Market had suffered his worst week since October, 2008. The Dow and the S&P 500 were down more than 6% for the week and 9% year to date. The NASDAQ was down over 8% for the week wiping out all of its year to date gains.
OK, so the news from the Fed understandably caused some negativity, but why has it persisted? In my humble opinion, the answer is obvious. It is so obvious I am surprised that the financial press does not emphasize it. Here is my take. The decision to invest is, to a large extent, a psychological one. When one feels good about the future, one wants a piece of it and is willing to bet on equities. On the other hand, when the future looks gloomy, one flees to the safety of government bonds or cash. With another shut down underway and the prospect of impeachment looming, who feels upbeat about anything political. Indeed, if you are not depressed by the current state of things, you are sick in the head. No wonder Mr. Market is rotating out of equities.
Is this negativity warranted? Based purely on economics, no. Indeed, lost in this week's gloom and doom was news that the economy expanded at a respectable 3.4% annualized rate in the third quarter. But if you haven't noticed, everything is politics these days. Politics is the new, universal unholy religion. It not only impacts the zeitgeist, IT IS the zeitgeist. Today politics dominates the 24 hour news cycle and social media. Politics is on everyone’s mind and lips. It splits families and ends lifelong friendships. And as I have stated for more than six months, it will only get worse once the House transitions in January. Literally and figuratively, winter has arrived.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
At its meeting this week, the Federal Reserve raised the overnight rate of interest and indicated that two more upward moves were likely in 2019. Moreover, in his Wednesday afternoon press conference, Fed Chair Jerome Powell stated that the Fed would continue to reduce its balance sheet at a previously announced pace. As predicted last week, Mr. Market reacted negatively to the news. The Dow Jones Industrial Average fell 350 points that day. Thursday was even worse, and the bloodbath continued Friday. When the closing bell rang, Mr. Market had suffered his worst week since October, 2008. The Dow and the S&P 500 were down more than 6% for the week and 9% year to date. The NASDAQ was down over 8% for the week wiping out all of its year to date gains.
OK, so the news from the Fed understandably caused some negativity, but why has it persisted? In my humble opinion, the answer is obvious. It is so obvious I am surprised that the financial press does not emphasize it. Here is my take. The decision to invest is, to a large extent, a psychological one. When one feels good about the future, one wants a piece of it and is willing to bet on equities. On the other hand, when the future looks gloomy, one flees to the safety of government bonds or cash. With another shut down underway and the prospect of impeachment looming, who feels upbeat about anything political. Indeed, if you are not depressed by the current state of things, you are sick in the head. No wonder Mr. Market is rotating out of equities.
Is this negativity warranted? Based purely on economics, no. Indeed, lost in this week's gloom and doom was news that the economy expanded at a respectable 3.4% annualized rate in the third quarter. But if you haven't noticed, everything is politics these days. Politics is the new, universal unholy religion. It not only impacts the zeitgeist, IT IS the zeitgeist. Today politics dominates the 24 hour news cycle and social media. Politics is on everyone’s mind and lips. It splits families and ends lifelong friendships. And as I have stated for more than six months, it will only get worse once the House transitions in January. Literally and figuratively, winter has arrived.
Monday, December 17, 2018
December 16, 2018 Negative Returns
Risk/Reward Vol. 402
THIS IS NOT INVESMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
This will be a shortened edition. We have everyone (except Bill) in town this weekend for an early Christmas celebration.
Another week, another roller coaster ride. The Dow and the S&P made valiant efforts to break into the green, but just couldn't get there. They are not alone. According to Deutsche Bank, 90% of the 70 world-wide asset classes that it tracks (e.g. domestic equities, emerging market debt, emerging market equities, domestic real estate, commodities, corporate bonds, sovereign debt, etc.) are negative year to date. This is the largest percentage of negative returns in the past 100 years. The previous high (actually low) was in 1920 when 84% of 37 asset classes were negative. Last year, just 1% of asset classes delivered negative returns. Mr. Market simply is in the dumps---and in the end, the value of any and all financial assets is wholly dependent upon his state of mind.
Look for Mr. Market's reaction to the Fed meeting next week. In particular, keep your eyes peeled on the dot-plot; to wit, each voting member's prognostication of where interests will be over the next several months. If the consensus is that fewer than 2 rate increases are warranted in 2019, I predict an upward pop in equity prices. Mr. Market loves an accommodating Fed. If the consensus remains as it was in September, however, I see a negative impact on stock prices.
THIS IS NOT INVESMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
This will be a shortened edition. We have everyone (except Bill) in town this weekend for an early Christmas celebration.
Another week, another roller coaster ride. The Dow and the S&P made valiant efforts to break into the green, but just couldn't get there. They are not alone. According to Deutsche Bank, 90% of the 70 world-wide asset classes that it tracks (e.g. domestic equities, emerging market debt, emerging market equities, domestic real estate, commodities, corporate bonds, sovereign debt, etc.) are negative year to date. This is the largest percentage of negative returns in the past 100 years. The previous high (actually low) was in 1920 when 84% of 37 asset classes were negative. Last year, just 1% of asset classes delivered negative returns. Mr. Market simply is in the dumps---and in the end, the value of any and all financial assets is wholly dependent upon his state of mind.
Look for Mr. Market's reaction to the Fed meeting next week. In particular, keep your eyes peeled on the dot-plot; to wit, each voting member's prognostication of where interests will be over the next several months. If the consensus is that fewer than 2 rate increases are warranted in 2019, I predict an upward pop in equity prices. Mr. Market loves an accommodating Fed. If the consensus remains as it was in September, however, I see a negative impact on stock prices.
Sunday, December 9, 2018
December 9, 2018 Inversion
Risk/Reward Vol. 401
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
An inverted yield curve, a reduced likelihood of a China deal, the re-emergence of Mr. Mueller and a disappointing jobs report combined to send all three major indices into the red for the week. The S&P 500 and the Dow Jones Industrial Average are at net losses for the year, and the NASDAQ is barely positive. Indeed the tech heavy NASDAQ which had been so bullish for much of the year has lost nearly 8% in the past month and nearly 12% in the last three. For the reasons stated below, I don't see any relief in sight---not even a traditional Santa Claus rally.
The most significant downward impetus this week was the inversion of the yield curve. Allow me to explain. The different yields demanded by bond investors along a duration span say a lot about how they view the US economy. If there is a big positive difference between short and long term bond rates---for example a steep yield curve as durations lengthen from 2 to a 10 Year bond---investors expect robust future economic growth and concomitant inflation. But if that difference declines---that is, if the curve flattens---it indicates that investors believe growth and inflation will be slow. If the yield curve inverts---that is, short term rates are higher than longer term rates---it indicates that investors believe the economy will actually contract and the Fed will have to cut rates. This week the yield on the 5 year US Treasury Bond fell below that of the 2Year; to wit, it inverted. This signaled to the equity markets that future growth and thus future profits may disappoint. Future profits are the "mother's milk" of stock prices. No wonder the market dropped. In addition, the downward momentum caused option traders to reduce the likelihood of a rate increase in December from 83% to 72% and the likelihood of two increases in 2019 from 58% a month ago to 28% as of the close on Friday. This is not good news for fixed income investors such as yours truly.
With Mr. Mueller heating up again and The Donald going ape on Twitter, I see a lot of upheaval on the horizon. Add to this a subpoena happy Democrat controlled House of Representatives and all one can do is switch to Netflix and hunker down for some very troubled times. Mr. Market abhors troubled times. I have said it before but it bears repeating. Winter is coming.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
An inverted yield curve, a reduced likelihood of a China deal, the re-emergence of Mr. Mueller and a disappointing jobs report combined to send all three major indices into the red for the week. The S&P 500 and the Dow Jones Industrial Average are at net losses for the year, and the NASDAQ is barely positive. Indeed the tech heavy NASDAQ which had been so bullish for much of the year has lost nearly 8% in the past month and nearly 12% in the last three. For the reasons stated below, I don't see any relief in sight---not even a traditional Santa Claus rally.
The most significant downward impetus this week was the inversion of the yield curve. Allow me to explain. The different yields demanded by bond investors along a duration span say a lot about how they view the US economy. If there is a big positive difference between short and long term bond rates---for example a steep yield curve as durations lengthen from 2 to a 10 Year bond---investors expect robust future economic growth and concomitant inflation. But if that difference declines---that is, if the curve flattens---it indicates that investors believe growth and inflation will be slow. If the yield curve inverts---that is, short term rates are higher than longer term rates---it indicates that investors believe the economy will actually contract and the Fed will have to cut rates. This week the yield on the 5 year US Treasury Bond fell below that of the 2Year; to wit, it inverted. This signaled to the equity markets that future growth and thus future profits may disappoint. Future profits are the "mother's milk" of stock prices. No wonder the market dropped. In addition, the downward momentum caused option traders to reduce the likelihood of a rate increase in December from 83% to 72% and the likelihood of two increases in 2019 from 58% a month ago to 28% as of the close on Friday. This is not good news for fixed income investors such as yours truly.
With Mr. Mueller heating up again and The Donald going ape on Twitter, I see a lot of upheaval on the horizon. Add to this a subpoena happy Democrat controlled House of Representatives and all one can do is switch to Netflix and hunker down for some very troubled times. Mr. Market abhors troubled times. I have said it before but it bears repeating. Winter is coming.
Sunday, December 2, 2018
December 2, 2018 R Star
Risk/Reward Vol. 400
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All three major indices experienced a huge rebound this week, jumping 5% on average and going positive again for the year. The impetus was a comment by Fed Chair Jerome Powell on Wednesday that interest rates were "just below" the Fed's estimate of "neutral". The neutral rate (also called the natural rate, r-star or r*) is the short term interest rate that prevails when the economy is at full employment and inflation is stable. In other words it is the rate that neither accommodates nor restricts economic growth. As loyal readers of this publication know, the Fed has maintained "accommodative" rates for more than a decade. Powell's comment was interpreted to be a walk-back from his statement in October that these very same rates were "a long way" from the neutral one. Mr. Market, for one, believed it to be. Although the smart money still believes a rate increase is a certainty in December, it now pegs the probability of two rate increases in 2019 at only 29%. Before Powell's comment this week, many had speculated there would be three increases in 2019. .
So why did Powell's comment cause the bulls to run? Lower Fed funds rates translate into cheaper short term money for corporations all of which rely on this type of financing for working capital. Cheaper working capital lowers cost which in turn raises profits. Higher profits mean higher stock prices. No wonder Mr. Market leaped for joy. Also, lower rates make bonds less attractive thus causing investment flows into equities. So does Powell's comment really signal a change in Fed policy? Some wags cautioned not, but their views went unheeded. The proof will be found in the "dot plot" issued after the Fed's upcoming December meeting. It tracks where each Fed member sees rates headed over the next several months.
Also adding to the uptick in stocks this week was the prospect of Presidents Trump and Xi resolving the Sino-American trade war that is brewing. I wrote this edition before any news on this front was forthcoming. Keep your eyes and ears peeled.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All three major indices experienced a huge rebound this week, jumping 5% on average and going positive again for the year. The impetus was a comment by Fed Chair Jerome Powell on Wednesday that interest rates were "just below" the Fed's estimate of "neutral". The neutral rate (also called the natural rate, r-star or r*) is the short term interest rate that prevails when the economy is at full employment and inflation is stable. In other words it is the rate that neither accommodates nor restricts economic growth. As loyal readers of this publication know, the Fed has maintained "accommodative" rates for more than a decade. Powell's comment was interpreted to be a walk-back from his statement in October that these very same rates were "a long way" from the neutral one. Mr. Market, for one, believed it to be. Although the smart money still believes a rate increase is a certainty in December, it now pegs the probability of two rate increases in 2019 at only 29%. Before Powell's comment this week, many had speculated there would be three increases in 2019. .
So why did Powell's comment cause the bulls to run? Lower Fed funds rates translate into cheaper short term money for corporations all of which rely on this type of financing for working capital. Cheaper working capital lowers cost which in turn raises profits. Higher profits mean higher stock prices. No wonder Mr. Market leaped for joy. Also, lower rates make bonds less attractive thus causing investment flows into equities. So does Powell's comment really signal a change in Fed policy? Some wags cautioned not, but their views went unheeded. The proof will be found in the "dot plot" issued after the Fed's upcoming December meeting. It tracks where each Fed member sees rates headed over the next several months.
Also adding to the uptick in stocks this week was the prospect of Presidents Trump and Xi resolving the Sino-American trade war that is brewing. I wrote this edition before any news on this front was forthcoming. Keep your eyes and ears peeled.
Sunday, November 25, 2018
November 25, 2018 Red Zone
Risk/Reward Vol. 399
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last weekend I was in deer camp. Undisturbed by ruminants, I ruminated.
Both the S&P 500 and the Dow Jones Industrial Index are negative for the year, and the NASDAQ is barely green. Last week saw a 4% drop across the board. Once again the reportage as to the cause(s) was unrevealing. The two most frequently cited tropes: the Fed raising rates too quickly and the threat of a trade war, just don't fit. They have been in the wind for most of the year. While it is true that many companies are projecting slower growth in 2019, that too has long been expected. I put the cause on politics. In anticipation of a series of debilitating investigations run by a Democrat controlled House of Representative, I see Mr. Market taking profits accumulated since The Donald's election and rotating out of equities.
Why politics? Because like all of us, Mr. Market is not immune to them. If The Donald's election can boost a market, his downfall can diminish it. And let there be no doubt, the underlying purpose of the upcoming investigations is to destroy Donald Trump and his presidency. Moreover, given his predilection to overreact, the President will likely be his own worst enemy. Add to this the hard left turn of the Democrats as they select a candidate, and I foresee more turmoil (yes, that is possible) and increased uncertainty. And Mr. Market abhors uncertainty.
Has a rotation begun? Sadly, I think so. Take a look at bond yields. Given the Fed raising rates at the shorter end of the yield curve (Fed Funds or overnight rates) and given the supply of bonds increasing because of 1) the Fed selling its portfolio of longer term duration bonds as part of its balance sheet reduction and 2) the Treasury issuing more bonds to cover a larger than expected deficit, one would expect yields to increase. Remember an increase in the supply of bonds should lower their price which in turn should increase their yield. And yet bonds are selling like hot cakes, and yields/rates have plummeted. It is this drop which saddens me. The Ten Year which was consistently yielding 3.25% just two weeks ago is now trading at 3.05%. The Two Year was at 2.95% and now has fallen to 2.81%. This counterintuitive downward march in rates indicates that many investors are not just "raising cash" in order to re-enter the equity market when valuations are cheaper. Rather they are abandoning equities and buying bonds. Given the huge runup in stocks over the past several years and given the increase in interest rates to an almost rational level (3%), they have determined to take a profit and rest comfortably in bonds . Once out, I don't see many (especially Baby Boomers) coming back.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last weekend I was in deer camp. Undisturbed by ruminants, I ruminated.
Both the S&P 500 and the Dow Jones Industrial Index are negative for the year, and the NASDAQ is barely green. Last week saw a 4% drop across the board. Once again the reportage as to the cause(s) was unrevealing. The two most frequently cited tropes: the Fed raising rates too quickly and the threat of a trade war, just don't fit. They have been in the wind for most of the year. While it is true that many companies are projecting slower growth in 2019, that too has long been expected. I put the cause on politics. In anticipation of a series of debilitating investigations run by a Democrat controlled House of Representative, I see Mr. Market taking profits accumulated since The Donald's election and rotating out of equities.
Why politics? Because like all of us, Mr. Market is not immune to them. If The Donald's election can boost a market, his downfall can diminish it. And let there be no doubt, the underlying purpose of the upcoming investigations is to destroy Donald Trump and his presidency. Moreover, given his predilection to overreact, the President will likely be his own worst enemy. Add to this the hard left turn of the Democrats as they select a candidate, and I foresee more turmoil (yes, that is possible) and increased uncertainty. And Mr. Market abhors uncertainty.
Has a rotation begun? Sadly, I think so. Take a look at bond yields. Given the Fed raising rates at the shorter end of the yield curve (Fed Funds or overnight rates) and given the supply of bonds increasing because of 1) the Fed selling its portfolio of longer term duration bonds as part of its balance sheet reduction and 2) the Treasury issuing more bonds to cover a larger than expected deficit, one would expect yields to increase. Remember an increase in the supply of bonds should lower their price which in turn should increase their yield. And yet bonds are selling like hot cakes, and yields/rates have plummeted. It is this drop which saddens me. The Ten Year which was consistently yielding 3.25% just two weeks ago is now trading at 3.05%. The Two Year was at 2.95% and now has fallen to 2.81%. This counterintuitive downward march in rates indicates that many investors are not just "raising cash" in order to re-enter the equity market when valuations are cheaper. Rather they are abandoning equities and buying bonds. Given the huge runup in stocks over the past several years and given the increase in interest rates to an almost rational level (3%), they have determined to take a profit and rest comfortably in bonds . Once out, I don't see many (especially Baby Boomers) coming back.
Sunday, November 11, 2018
November 11, 2018 The War to End War
Risk/Reward Vol. 398
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
OK, Mr. Wise Guy, the Democrats took the House of Representatives. So why did the bulls run wild on Wednesday and why are the two major indices up over 2% for the week? Winter isn't coming, is it. Well, Dear Readers, don't be so quick in concluding that all is hunky dory. None of these new members takes office until January. More importantly, the committee chairs do not rotate until then. When they do is when one should fret. Have you read the Mollie Hemmingway article describing Rep. Jerry Nadler's overheard telephone conversation of last Wednesday? In that call, Nadler, the presumptive chair of the all powerful House Judiciary Committee, vowed to re-open the Trump-Russia probe and to impeach Kavanaugh. Moreover, on the Senate side, the claimed gain in Florida and the presumed victory in Arizona may not be. Fifty three Republican seats claimed on Election Night may become 51 in very short order. Indeed, Wednesday's 500+ gain in the Dow merely proved my point: to wit, Mr. Market is highly responsive to politics. The euphoria of that day was an expression of relief because in normal times a split in control of Congress is good for the stock market. But these are not normal times. I still see winter, and it starts in January, 2019.
Due to the election, there was little fanfare following this week's Federal Reserve meeting. The Fed Funds rate remained unchanged as is the norm for meetings after which the Chair does not hold a press conference. But that will change next year as each of the eight Fed meetings will be "live" : concluded with a press conference and thus one at which rates may change or other significant events could occur. As for action this week in the bond market, it appears that the rate on the 10 Year is finding a home in a narrow range around 3.2%. The rate on the 2Year has found traction around 2.95, and the one month is near 2.2%. Just 13 months ago the 2 Year struggled to get above 1.3%, and the one month was below 1%. Quite a welcome change for those interested in fixed income.
I continue to marvel at our domestic oil industry. It is a testament to the power of free enterprise and her twin sister innovation.. Just ten years ago, US oil production was 5million bbls/day and on a downward trajectory. Today, thanks to incredible technological advances in fracking and billions of dollars of private risk capital, the US produces over 11million bbls/day and is on its way to 12million in 2019. To put that in perspective, the US now is number one in the world in oil production surpassing both Saudi Arabia and Russia this year. Moreover, we are fast approaching actual energy independence. This allows us great flexibility in international relations. When was the last time you read anything about Kuwait or Iraq?
Monday, November 5, 2018
November 4, 2018 Farewell Authers
Risk/Reward Vol. 397
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last week I foresaw "several more days of roller coaster rides (in the equity market) with an overall downward trajectory." I was wrong. All three of the major indices were up 2.5% or so for the week apparently on the back of excellent quarterly reports and generally good economic news. Of particular interest to me was the news on Friday that wages grew at an annual rate of 3.1% in October, the most in over 9 years. This virtually guarantees a Fed funds rate increase in December and makes more certain the anticipated additional rate increases in 2019. If these increases occur, the overnight (Fed funds) rate should be 3-3.25% by year end 2019. If current spreads hold (N.B., in normal times the longer the maturity the higher the interest rate), two year treasuries will be paying 4%. This will allow me to lengthen my bond ladder which currently is very short term.
Why this week was overall positive in the equity markets eludes me. It just goes to show that no one is better than Mr. Market at humbling prognosticators. That said, I remain convinced that even Mr. Market is not immune to politics. Syllogistically, Trump has been very good for Mr. Market. A Democrat controlled House will be bad for Trump. Ergo, a Democrat controlled House will be bad for Mr. Market. Have those who own bank stocks read Maxine Waters' "pay back" quotes from her stump speech this week? And remember she is slated to become the Chair of the Financial Services Committee. How about Adam Schiff's pledge to reopen the Russian influence hearings if he becomes Chair of the House Intelligence Committee which he is in line to do? Or how about presumptive Speaker Pelosi's pledge to use subpoena power over the President as a negotiation tool? Undoubtedly, the President will resist every effort to unwind what he views as progress. Moreover, there is no doubt he will thumb his nose at Congressional subpoenas. This could result in an unprecedented Constitutional standoff. The rancor will be horrible.
As you may recall, my favorite financial reporter in recent times has been John Authers of the Financial Times. Recently he left FT for Bloomberg. I still follow him on Twitter but so far his reporting has lacked the depth I have come to admire. His former colleague at FT, Nicole Bullock, has filled the gap admirably. Her two pieces in yesterday's (11/3/18) FT were excellent. She reported on the possible impact of the election on stocks and on the record withdrawal from bond funds. Call it confirmation bias (since these have been two of my points of interest lately), but I do like her reportage. By the way, she and I do not agree on the election impact.
I hope I am wrong. But I still believe that winter is coming.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last week I foresaw "several more days of roller coaster rides (in the equity market) with an overall downward trajectory." I was wrong. All three of the major indices were up 2.5% or so for the week apparently on the back of excellent quarterly reports and generally good economic news. Of particular interest to me was the news on Friday that wages grew at an annual rate of 3.1% in October, the most in over 9 years. This virtually guarantees a Fed funds rate increase in December and makes more certain the anticipated additional rate increases in 2019. If these increases occur, the overnight (Fed funds) rate should be 3-3.25% by year end 2019. If current spreads hold (N.B., in normal times the longer the maturity the higher the interest rate), two year treasuries will be paying 4%. This will allow me to lengthen my bond ladder which currently is very short term.
Why this week was overall positive in the equity markets eludes me. It just goes to show that no one is better than Mr. Market at humbling prognosticators. That said, I remain convinced that even Mr. Market is not immune to politics. Syllogistically, Trump has been very good for Mr. Market. A Democrat controlled House will be bad for Trump. Ergo, a Democrat controlled House will be bad for Mr. Market. Have those who own bank stocks read Maxine Waters' "pay back" quotes from her stump speech this week? And remember she is slated to become the Chair of the Financial Services Committee. How about Adam Schiff's pledge to reopen the Russian influence hearings if he becomes Chair of the House Intelligence Committee which he is in line to do? Or how about presumptive Speaker Pelosi's pledge to use subpoena power over the President as a negotiation tool? Undoubtedly, the President will resist every effort to unwind what he views as progress. Moreover, there is no doubt he will thumb his nose at Congressional subpoenas. This could result in an unprecedented Constitutional standoff. The rancor will be horrible.
As you may recall, my favorite financial reporter in recent times has been John Authers of the Financial Times. Recently he left FT for Bloomberg. I still follow him on Twitter but so far his reporting has lacked the depth I have come to admire. His former colleague at FT, Nicole Bullock, has filled the gap admirably. Her two pieces in yesterday's (11/3/18) FT were excellent. She reported on the possible impact of the election on stocks and on the record withdrawal from bond funds. Call it confirmation bias (since these have been two of my points of interest lately), but I do like her reportage. By the way, she and I do not agree on the election impact.
I hope I am wrong. But I still believe that winter is coming.
October 28, 2018 Bond Funds
Risk/Reward Vol. 396
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I subscribe to three daily financial publications and read several online financial columns. No where did I read a cogent explanation for what occurred in the equity markets this week. Bomb threats? The caravan? Trump excoriating Fed governors? Draghi ending bond buying in the ECB? I don't think so. The only comment that made any sense was uttered by Larry Kudlow. He said the volatility was in anticipation of the Democrats winning the House. I think he is right. If he is, we should see several more days of roller coaster rides with an overall downward trajectory. As reiterated last week, the midterms are the reason that I have rotated into bonds. For the first time in a decade, bonds are paying a small albeit acceptable rate of return.
Last week's column spurred several comments and questions from subscribers. A few inquired whether I buy bonds or bond funds. I buy bonds. Conventional wisdom is that in times of increasing interest rates one should eschew buying bond funds. Why? Remember, bond funds never mature. They hold a portfolio of bonds which they continually rollover. As rates increase, lower paying bonds are sold and replaced. This is good in theory, but has a downside. Bonds with lower yields trade at reduced principal prices. Generally bond fund portfolios lose principal value quicker than the rates increase. Indeed, a simple look at major bond funds shows that they are in the red year to date. Individual bonds, on the other hand, held to maturity do not lose principal. Assuming the underlying issuer (e.g. the US Government) is solvent, one will receive one's principal and accrued interest on maturity. A more fulsome explanation is beyond the scope of this publication. Google "bond versus bond fund" for elucidation.
Another question was where do I buy the bonds. I buy them on bond exchanges sponsored by TD Ameritrade and Charles Schwab, two brokerage houses where I have on line accounts. Unlike in times past, I do not need the assistance of a broker to effect a purchase. The trade is closed as quickly as an equity buy. Given that this is a private exchange, the number and variety of bonds is limited but to date the offerings have been sufficient to satisfy me.
Winter is coming.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I subscribe to three daily financial publications and read several online financial columns. No where did I read a cogent explanation for what occurred in the equity markets this week. Bomb threats? The caravan? Trump excoriating Fed governors? Draghi ending bond buying in the ECB? I don't think so. The only comment that made any sense was uttered by Larry Kudlow. He said the volatility was in anticipation of the Democrats winning the House. I think he is right. If he is, we should see several more days of roller coaster rides with an overall downward trajectory. As reiterated last week, the midterms are the reason that I have rotated into bonds. For the first time in a decade, bonds are paying a small albeit acceptable rate of return.
Last week's column spurred several comments and questions from subscribers. A few inquired whether I buy bonds or bond funds. I buy bonds. Conventional wisdom is that in times of increasing interest rates one should eschew buying bond funds. Why? Remember, bond funds never mature. They hold a portfolio of bonds which they continually rollover. As rates increase, lower paying bonds are sold and replaced. This is good in theory, but has a downside. Bonds with lower yields trade at reduced principal prices. Generally bond fund portfolios lose principal value quicker than the rates increase. Indeed, a simple look at major bond funds shows that they are in the red year to date. Individual bonds, on the other hand, held to maturity do not lose principal. Assuming the underlying issuer (e.g. the US Government) is solvent, one will receive one's principal and accrued interest on maturity. A more fulsome explanation is beyond the scope of this publication. Google "bond versus bond fund" for elucidation.
Another question was where do I buy the bonds. I buy them on bond exchanges sponsored by TD Ameritrade and Charles Schwab, two brokerage houses where I have on line accounts. Unlike in times past, I do not need the assistance of a broker to effect a purchase. The trade is closed as quickly as an equity buy. Given that this is a private exchange, the number and variety of bonds is limited but to date the offerings have been sufficient to satisfy me.
Winter is coming.
Sunday, October 21, 2018
October 21, 2018 TARA
Risk/Reward Vol. 395
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Below are my two most recent missives sent last summer. I stand by both.
I continue to rotate into short term bonds (mostly Treasuries) in anticipation of more rate increases by the Fed. The September dot plot indicates that the Fed will raise Fed funds (overnight lending) rates once more this year and three times next year. Thus, overnight rates should be 3-3.25% by year end 2019. If current rate spreads hold, one should receive nearly 4% on 2 Year Treasuries at that time. TINA (There Is No Alternative to stocks) no longer rules supreme. There Are Real Alternatives! (TARA?) Predicting yields on longer duration bonds is more difficult given that they respond to stimuli in addition to overnight rates such as inflation, economic growth, foreign spreads, etc.
Second, I do believe that "Winter is Coming" in the form of the midterm elections. If you believe as I do that the Democrats will secure a majority in the House of Representatives, then I predict that we are in for a very rough ride. If they are comfortable besmirching Kavanaugh, just imagine what Democrats can and will do to Trump once the inevitable impeachment proceedings begin---and they will begin. Moreover, I foresee Trump resisting Congressional subpoenas thereby forcing the judiciary's involvement. If that weren't crazy enough, I see the need for judicial involvement triggering an impeachment proceeding against Kavanaugh if he does not recuse himself.
Is my "Winter is Coming" scenario farfetched? Will Mr. Market even care if it comes to pass? Who knows? But at age 67 I see no reason to be at risk. I am ensconced in the safest income producing haven possible---U.S. Treasuries.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Below are my two most recent missives sent last summer. I stand by both.
I continue to rotate into short term bonds (mostly Treasuries) in anticipation of more rate increases by the Fed. The September dot plot indicates that the Fed will raise Fed funds (overnight lending) rates once more this year and three times next year. Thus, overnight rates should be 3-3.25% by year end 2019. If current rate spreads hold, one should receive nearly 4% on 2 Year Treasuries at that time. TINA (There Is No Alternative to stocks) no longer rules supreme. There Are Real Alternatives! (TARA?) Predicting yields on longer duration bonds is more difficult given that they respond to stimuli in addition to overnight rates such as inflation, economic growth, foreign spreads, etc.
Second, I do believe that "Winter is Coming" in the form of the midterm elections. If you believe as I do that the Democrats will secure a majority in the House of Representatives, then I predict that we are in for a very rough ride. If they are comfortable besmirching Kavanaugh, just imagine what Democrats can and will do to Trump once the inevitable impeachment proceedings begin---and they will begin. Moreover, I foresee Trump resisting Congressional subpoenas thereby forcing the judiciary's involvement. If that weren't crazy enough, I see the need for judicial involvement triggering an impeachment proceeding against Kavanaugh if he does not recuse himself.
Is my "Winter is Coming" scenario farfetched? Will Mr. Market even care if it comes to pass? Who knows? But at age 67 I see no reason to be at risk. I am ensconced in the safest income producing haven possible---U.S. Treasuries.
Sunday, June 3, 2018
June 3, 2018 Fixed Income
Risk/Reward Vol. 394
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
It has been a few weeks since last I published and for the next several weeks, publications will be irregular. It is summertime after all, and the livin' should be easy.
More yeah/boo in the stock markets as the S&P and the Dow continue to trade, year to date, within a plus or minus 2% range. The NASDAQ, fueled by some great tech companies (Apple, Alphabet, Netflix, Amazon, etc), is up nearly 10%. This week a great jobs report (unemployment now at 3.8%) helped salvage a market that was hammered by some disturbing news from Europe---the failure of Italy to form a government. But as I have preached over the past few months, keep your eye on The Donald. As he goes, so goes the market. It has been true since the day he was elected. Frankly, Trump's unpredictable nature has made equity investing unappealing to me.
What has appealed to me has been short term fixed income. I continue to look for insured or investment grade fixed income securities (CD's, US Bonds, agency bonds and/or highly rated corporate bonds) with durations from 6 months to 2 years. My average yield is over 2.5% with the 2 years at 2.8% or above. Barb has locked into some three years that are paying at least 3%. I would join her but for my belief that interest rates will be heading up. This belief took a hit this week as the Italian political crisis and reports that several huge European banks remain undercapitalized caused a flight to the safety of US Treasury securities. Such flights increase bond prices and depress their yields. The US Ten Year is now yielding below the psychologically important 3% level and the 2Year has dropped below 2.5%. And not even the stellar jobs report of last Friday could increase the odds that a fourth Fed Funds rate increase will occur this year. That likelihood is now below 40% after having been as high as 55%. That said, with the economy hitting on all cylinders, the need for more government debt to fill an anticipated revenue shortfall and the Fed no longer serving as the bond buyer of first resort, one would expect interest rates to go up. If they do, Barb and I will be buyers.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
It has been a few weeks since last I published and for the next several weeks, publications will be irregular. It is summertime after all, and the livin' should be easy.
More yeah/boo in the stock markets as the S&P and the Dow continue to trade, year to date, within a plus or minus 2% range. The NASDAQ, fueled by some great tech companies (Apple, Alphabet, Netflix, Amazon, etc), is up nearly 10%. This week a great jobs report (unemployment now at 3.8%) helped salvage a market that was hammered by some disturbing news from Europe---the failure of Italy to form a government. But as I have preached over the past few months, keep your eye on The Donald. As he goes, so goes the market. It has been true since the day he was elected. Frankly, Trump's unpredictable nature has made equity investing unappealing to me.
What has appealed to me has been short term fixed income. I continue to look for insured or investment grade fixed income securities (CD's, US Bonds, agency bonds and/or highly rated corporate bonds) with durations from 6 months to 2 years. My average yield is over 2.5% with the 2 years at 2.8% or above. Barb has locked into some three years that are paying at least 3%. I would join her but for my belief that interest rates will be heading up. This belief took a hit this week as the Italian political crisis and reports that several huge European banks remain undercapitalized caused a flight to the safety of US Treasury securities. Such flights increase bond prices and depress their yields. The US Ten Year is now yielding below the psychologically important 3% level and the 2Year has dropped below 2.5%. And not even the stellar jobs report of last Friday could increase the odds that a fourth Fed Funds rate increase will occur this year. That likelihood is now below 40% after having been as high as 55%. That said, with the economy hitting on all cylinders, the need for more government debt to fill an anticipated revenue shortfall and the Fed no longer serving as the bond buyer of first resort, one would expect interest rates to go up. If they do, Barb and I will be buyers.
Sunday, May 13, 2018
May 13, 2018 Ned Stark
Risk/Reward Vol. 393
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What a wonderful week for Mr. Market. Seven green days in a row for the Dow. All the major indices rose approximately 2.5% for the week. The Dow and the S&P are now positive for the year and the NASDAQ is up over 7%. Moreover, volatility subsided as nice gains were achieved virtually every day. How come and how come now?
Some have suggested it was because the recent earnings season went so well. I think not. First, most of the earnings were reported in previous weeks---weeks which saw great volatility and had a definite negative bias. Second, going into last Monday, 80% of reporting companies had beaten estimates, but only 46% had seen positive price action. So to repeat, I don't think it was earnings.
Others have suggested that it was due to unprecedented stock buy backs. As this readership knows, stock buyback campaigns are designed to buoy stock prices; the thought of the boards that adopt them being that the stock of their own company is so undervalued as to be a good investment. The wisdom of this kind of investment is questionable, but these campaigns are now quite the vogue. In the first quarter of 2018, S&P 500 companies bought back at least $158billion of their own stock and are on pace to set new records. These same companies are also raising dividends. These moves have been fueled by the new tax law which has freed up cash and encouraged repatriation of foreign profits. But given that these purchases have been made steadily through the first quarter and given that such purchases generally are not made while stock prices are escalating, I do not see this as a reason for last week being so cheery.
I go back to my often articulated premise: as goes Mr.Trump so goes Mr. Market. Showing bold leadership, The Donald followed through with a campaign pledge to exit the Iran agreement. Other than a few flag burnings in Tehran, the Iranian response has been muted. Understandably, oil prices rose which was welcomed news in that market sector. This week also saw the return of three Americans held hostage by North Korea. The entire world watches in disbelief as the Kim-Trump love affair unfolds. In addition, Mr. Mueller was silent for the most part, and the Storm that is Ms. Daniels has become just another example of our President's well known and heretofore accepted amorality. But remember Dear Readers, that which rises with Mr. Trump falls with him as well. And to quote Ned Stark as he looked out upon the mid term elections, "Winter is coming."
I am attending a subscriber conference in Florida next week so do not expect an edition.
Sunday, May 6, 2018
May 6, 2018 Jock Jams
Risk/Reward Vol. 392
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In what has been described as the oddest earnings call in recent history, Elon Musk of Tesla fame stated the following on Wednesday: "I think that if people are concerned about volatility they should definitely not buy our stock.... Do not buy it if volatility is scary." The same words could have application to the market in general if the future mirrors this week's activity. Talk about a pogo stick. Moves of 300 and 400 points in and out of green and red characterized Monday, Wednesday and Thursday. A negative 125 point opening on Friday was wiped out in a matter of minutes, and the day closed up 332! Bulls chased bears and bears chased bulls. The talking heads on CNBC, FBN and Bloomberg changed tunes quicker than a Jock Jams Dance Mix.
What happens day to day or even week to week is of less concern to me than what happens in November. As I have written in the past, I believe the greatest threat to Mr. Market is a change of control in the House. I have no doubt that should that occur, impeachment proceedings will ensue forthwith. God only knows what Mr. Mueller has compiled during his investigation, but it can't be good. And The Donald's threats aimed at the Special Prosecutor and the Justice Department are not helping his cause. Should he make a move against either, Mr. Market surely will swoon.
Of more interest to me (no pun intended) is the bond market. As reported this week, consumer prices as measured by the Fed's favorite gauge, the PCE Index, hit the magical 2% number in April. If we see this number continue and or increase in coming months, look for the Fed to raise rates 4 times this year. Indeed, this week's report caused the future's market to place a 50% probability on this occurring. Meanwhile, CD rates continue to inch upward with insured two years paying as high as 2.75%. C'mon baby!
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In what has been described as the oddest earnings call in recent history, Elon Musk of Tesla fame stated the following on Wednesday: "I think that if people are concerned about volatility they should definitely not buy our stock.... Do not buy it if volatility is scary." The same words could have application to the market in general if the future mirrors this week's activity. Talk about a pogo stick. Moves of 300 and 400 points in and out of green and red characterized Monday, Wednesday and Thursday. A negative 125 point opening on Friday was wiped out in a matter of minutes, and the day closed up 332! Bulls chased bears and bears chased bulls. The talking heads on CNBC, FBN and Bloomberg changed tunes quicker than a Jock Jams Dance Mix.
What happens day to day or even week to week is of less concern to me than what happens in November. As I have written in the past, I believe the greatest threat to Mr. Market is a change of control in the House. I have no doubt that should that occur, impeachment proceedings will ensue forthwith. God only knows what Mr. Mueller has compiled during his investigation, but it can't be good. And The Donald's threats aimed at the Special Prosecutor and the Justice Department are not helping his cause. Should he make a move against either, Mr. Market surely will swoon.
Of more interest to me (no pun intended) is the bond market. As reported this week, consumer prices as measured by the Fed's favorite gauge, the PCE Index, hit the magical 2% number in April. If we see this number continue and or increase in coming months, look for the Fed to raise rates 4 times this year. Indeed, this week's report caused the future's market to place a 50% probability on this occurring. Meanwhile, CD rates continue to inch upward with insured two years paying as high as 2.75%. C'mon baby!
Sunday, April 29, 2018
April 29, 2017 Q1
Risk/Reward Vol. 391
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Corporate America is well on its way to a record earnings season. Profits are up on average 25% over Q1 2017, and more than 80% of reporting companies have beaten forecasts. Some market leaders such as Boeing and Amazon have dazzled. Moreover, the economy grew at a respectable 2.3% in the first quarter, and peace on the Korean peninsula seems possible for the first time in nearly 70 years. Nonetheless, all three averages finished the week lower than last. How can this be? Perhaps what John Authers saw a few weeks ago is coming to pass: to wit, the favorable impact of tax reform has already been baked into stock prices. Whatever the reason, one is at a loss as to what if anything can spur this market.
Meanwhile, Mr. Market seems to be warming to a 3% yield on the US Ten Year Bond and a nearly 2.5% yield on the 2Year. Although I never thought Barb and I would find such paltry returns attractive, we have decided to park some cash in one year CD's yielding 2.2%. We are not alone. I have it on good authority that some other subscribers are making similar moves. Rumor has it one has started a short bond ladder. Frankly the older I get the more attractive these meager returns look. Moreover for a host of reasons including the differential between domestic and ECB rates and the futures market now pricing a 50% probability of four Fed hikes this year, I don't see yields increasing much more in the near term.
One factoid in Friday's Financial Times I found troubling. According to Gillian Tett (whose reporting I find credible), the quality of commercial loans in the United States is deteriorating. She noted that in 2007 Single B (risky) loans represented 25% of US lending portfolios. Now more than 65% of loans are rated Single B. Moreover, over 75% of loans have "lite" covenants which means that lenders have limited tools with which to collect. This is a natural byproduct of a decade of easy money and subsidized rates. Fortunately the percentage of these risky loans held by non traditional lenders (not banks) has also increased which should lessen the effect should defaults increase. Nevertheless, this is something to watch.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Corporate America is well on its way to a record earnings season. Profits are up on average 25% over Q1 2017, and more than 80% of reporting companies have beaten forecasts. Some market leaders such as Boeing and Amazon have dazzled. Moreover, the economy grew at a respectable 2.3% in the first quarter, and peace on the Korean peninsula seems possible for the first time in nearly 70 years. Nonetheless, all three averages finished the week lower than last. How can this be? Perhaps what John Authers saw a few weeks ago is coming to pass: to wit, the favorable impact of tax reform has already been baked into stock prices. Whatever the reason, one is at a loss as to what if anything can spur this market.
Meanwhile, Mr. Market seems to be warming to a 3% yield on the US Ten Year Bond and a nearly 2.5% yield on the 2Year. Although I never thought Barb and I would find such paltry returns attractive, we have decided to park some cash in one year CD's yielding 2.2%. We are not alone. I have it on good authority that some other subscribers are making similar moves. Rumor has it one has started a short bond ladder. Frankly the older I get the more attractive these meager returns look. Moreover for a host of reasons including the differential between domestic and ECB rates and the futures market now pricing a 50% probability of four Fed hikes this year, I don't see yields increasing much more in the near term.
One factoid in Friday's Financial Times I found troubling. According to Gillian Tett (whose reporting I find credible), the quality of commercial loans in the United States is deteriorating. She noted that in 2007 Single B (risky) loans represented 25% of US lending portfolios. Now more than 65% of loans are rated Single B. Moreover, over 75% of loans have "lite" covenants which means that lenders have limited tools with which to collect. This is a natural byproduct of a decade of easy money and subsidized rates. Fortunately the percentage of these risky loans held by non traditional lenders (not banks) has also increased which should lessen the effect should defaults increase. Nevertheless, this is something to watch.
Sunday, April 22, 2018
April 22, 2018 Authers Continued
Risk/Reward Vol. 390
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Rumors that Cohen will cop a plea, another mistress ready to publish, a series of Comey interviews, the release of FBI memos, McCabe referred for possible criminal prosecution and the DNC suing Russia and The Donald's campaign---actually a pretty tame week in Trumpland. That said, not even continued strong earnings from money center banks and from recent market laggard GE inspired Mr. Market as the major indices closed essentially flat for the week. The biggest drag on stocks appeared to be the continuing rise in short term rates and the spike in the 10 Year U S Treasury yield. Indeed, rates/yields loom so important they warrant a deeper look.
Exactly one year ago the 2Year US Bond yielded 1.176%. It closed Friday yielding 2.45%. In fact it is trading where it did in August, 2008: a time before the collapse of Lehman Brothers, a time before the Great Recession and a time when the 10Year was yielding nearly 4%. On Tuesday, before its spike later in the week, the 10Year yield was a mere 41 basis points above that of the 2 Year, considerably below the long term average of 1% and the lowest spread to the 2Year in a decade. Historically, when the yield on the 2 year is less than the yield on the 10 Year (termed an "inverted yield curve") a recession is signaled. Thus, the sudden jump in the 10Year yield later in the week to 2.95% was viewed with relief by some economists even if not by Mr. Market. His enthusiasm was tempered by words from noted market bull Jeremy Siegel who is convinced that a 10Year rate of 3.25% this year will be bad for stocks.
So why is the 2Year rate escalating, John Boy ? (One of my nicknames in law school; despite never being a fan of The Waltons) Because unlike the 10Year, the 2Year is closely correlated to the Fed Funds (overnight) rate. And even though wags were convinced after March's Fed meeting that only 3 Fed Funds rate increases were in the ,cards for 2018, I pointed out that that opinion was based upon the vote of 8 of 15 members and that a switch by any one member could result in 4 increases this year. (See Vol. 386 http://www.riskrewardblog.blogspot.com/ ). Given the presence of inflation-creep (note the report from the Philly Fed this past week), the futures market is now pricing in a 44% probability that 2018 will indeed see four rate increases in 2018. The 2Year is merely reflecting that sentiment.
PS. I drafted this edition Friday afternoon after the close of the market. I should have waited and not wasted my time. Saturday morning's edition of The Financial Times has a column entitled "The Long View" written by my favorite financial reporter, John Authers. It is a much better explanation than mine of what is happening in the all-important US government bond market. In a word, the article is elegant. It can be found here: https://www.blogpvan.org/main/investors-cannot-ignore-the-message-of-the-us-bond-market/ I recommend it to your attention.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Rumors that Cohen will cop a plea, another mistress ready to publish, a series of Comey interviews, the release of FBI memos, McCabe referred for possible criminal prosecution and the DNC suing Russia and The Donald's campaign---actually a pretty tame week in Trumpland. That said, not even continued strong earnings from money center banks and from recent market laggard GE inspired Mr. Market as the major indices closed essentially flat for the week. The biggest drag on stocks appeared to be the continuing rise in short term rates and the spike in the 10 Year U S Treasury yield. Indeed, rates/yields loom so important they warrant a deeper look.
Exactly one year ago the 2Year US Bond yielded 1.176%. It closed Friday yielding 2.45%. In fact it is trading where it did in August, 2008: a time before the collapse of Lehman Brothers, a time before the Great Recession and a time when the 10Year was yielding nearly 4%. On Tuesday, before its spike later in the week, the 10Year yield was a mere 41 basis points above that of the 2 Year, considerably below the long term average of 1% and the lowest spread to the 2Year in a decade. Historically, when the yield on the 2 year is less than the yield on the 10 Year (termed an "inverted yield curve") a recession is signaled. Thus, the sudden jump in the 10Year yield later in the week to 2.95% was viewed with relief by some economists even if not by Mr. Market. His enthusiasm was tempered by words from noted market bull Jeremy Siegel who is convinced that a 10Year rate of 3.25% this year will be bad for stocks.
So why is the 2Year rate escalating, John Boy ? (One of my nicknames in law school; despite never being a fan of The Waltons) Because unlike the 10Year, the 2Year is closely correlated to the Fed Funds (overnight) rate. And even though wags were convinced after March's Fed meeting that only 3 Fed Funds rate increases were in the ,cards for 2018, I pointed out that that opinion was based upon the vote of 8 of 15 members and that a switch by any one member could result in 4 increases this year. (See Vol. 386 http://www.riskrewardblog.blogspot.com/ ). Given the presence of inflation-creep (note the report from the Philly Fed this past week), the futures market is now pricing in a 44% probability that 2018 will indeed see four rate increases in 2018. The 2Year is merely reflecting that sentiment.
PS. I drafted this edition Friday afternoon after the close of the market. I should have waited and not wasted my time. Saturday morning's edition of The Financial Times has a column entitled "The Long View" written by my favorite financial reporter, John Authers. It is a much better explanation than mine of what is happening in the all-important US government bond market. In a word, the article is elegant. It can be found here: https://www.blogpvan.org/main/investors-cannot-ignore-the-message-of-the-us-bond-market/ I recommend it to your attention.
Sunday, April 15, 2018
April 15, 2018 Syria
Risk/Reward Vol. 389
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Economic and investing fundamentals be damned. I remain of the opinion that this market is about Donald Trump. Except for Friday (discussed below) Trump dominated every day this week. On Monday a bullish market plummeted in the last hour of trading on news that the FBI had raided The Donald's lawyer's office. Tuesday stocks rose as The Donald's tough language seemed to soften China's position on auto imports and patent protection. Stocks fell on Wednesday as our President taunted Syria and Russia to "get ready" for air strikes, and a Trump-frustrated Paul Ryan announced his retirement. Thursday's market rose on a Presidential tweet that the air strikes were not imminent. Mr. Market has become Mr. Trump---unpredictable and mercurial. In fact, although the Dow and the S&P remain within 2% of where each began the year, the Dow has made triple digit moves (some up, some down) in 21 of its last 25 trading days. Exhausting, isn't it.
Given the move against Syria on Friday night, it is likely that market fundamentals will be overshadowed once again by The Donald. But if that is not the case, Friday may be a harbinger. Despite record earnings reported by JP Morgan Chase and others, banks took a big hit with JPM down 2.7% and Wells Fargo down 3%. Officially beating The Street's estimates, they nevertheless disappointed Mr. Market who was looking for considerably more loan growth. This reaction caused John Authers to write in Saturday's Financial Times that any favorable impact that tax reform has had on earnings may already be baked into stock prices. Thus even blockbuster profits may not be enough to spark a rally. Time will tell as earnings season is in full swing next week.
Having spent the past week nursing my mother and her broken wrist instead of vacationing in Sicily, my attitude may be a little darker than usual. But concern is justified. Short term, Paul Ryan's resignation cannot be viewed as good for the equity markets. Clearly, Ryan sees the Democrats taking control of the House (and maybe the Senate) come November. If that occurs, impeachment proceedings likely will ensue plummeting the country and the world into a period of grave uncertainty. And as we all know, Mr. Market abhors uncertainty. Longer term doesn't look so great either. The Pew Research Center just reported that 33% of all 25-29 year olds in the US live with their parents or grandparents---three times as many as in 1970. I leave to you to debate the reasons. But the fact that so many have failed to launch does not portend well for a population that is already demographically challenged.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Economic and investing fundamentals be damned. I remain of the opinion that this market is about Donald Trump. Except for Friday (discussed below) Trump dominated every day this week. On Monday a bullish market plummeted in the last hour of trading on news that the FBI had raided The Donald's lawyer's office. Tuesday stocks rose as The Donald's tough language seemed to soften China's position on auto imports and patent protection. Stocks fell on Wednesday as our President taunted Syria and Russia to "get ready" for air strikes, and a Trump-frustrated Paul Ryan announced his retirement. Thursday's market rose on a Presidential tweet that the air strikes were not imminent. Mr. Market has become Mr. Trump---unpredictable and mercurial. In fact, although the Dow and the S&P remain within 2% of where each began the year, the Dow has made triple digit moves (some up, some down) in 21 of its last 25 trading days. Exhausting, isn't it.
Given the move against Syria on Friday night, it is likely that market fundamentals will be overshadowed once again by The Donald. But if that is not the case, Friday may be a harbinger. Despite record earnings reported by JP Morgan Chase and others, banks took a big hit with JPM down 2.7% and Wells Fargo down 3%. Officially beating The Street's estimates, they nevertheless disappointed Mr. Market who was looking for considerably more loan growth. This reaction caused John Authers to write in Saturday's Financial Times that any favorable impact that tax reform has had on earnings may already be baked into stock prices. Thus even blockbuster profits may not be enough to spark a rally. Time will tell as earnings season is in full swing next week.
Having spent the past week nursing my mother and her broken wrist instead of vacationing in Sicily, my attitude may be a little darker than usual. But concern is justified. Short term, Paul Ryan's resignation cannot be viewed as good for the equity markets. Clearly, Ryan sees the Democrats taking control of the House (and maybe the Senate) come November. If that occurs, impeachment proceedings likely will ensue plummeting the country and the world into a period of grave uncertainty. And as we all know, Mr. Market abhors uncertainty. Longer term doesn't look so great either. The Pew Research Center just reported that 33% of all 25-29 year olds in the US live with their parents or grandparents---three times as many as in 1970. I leave to you to debate the reasons. But the fact that so many have failed to launch does not portend well for a population that is already demographically challenged.
Sunday, April 8, 2018
April 8, 2018 Liquidity
Risk/Reward Vol. 388
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Another week, another roller coaster ride. This time it was talk of a trade war. Monday's downdraft was stemmed and reversed by the calming voice of Larry Kudlow. But saber rattling later in the week reinvigorated the bears. Tariffs may have been the topic this week, but at its core, the insanity in the market lays at the feet of (or more accurately at the mouth of ) The Donald. Not even a very interesting jobs report on Friday (discussed below) moved the needle. Next week it will be a government shake up or another mistress or a Mueller revelation or an improvident Tweet. Let's face it folks, he loves controversy. If none exists, even for a moment, either he or his detractors will create some. What a way to live.
Although lost in the tariff kerfuffle, the jobs report on Friday was a curious one. The number of new jobs fell short of expectation, but the unemployment rate remained at historic lows. Of more importance was the higher than expected growth in wages. Although still short of signaling the arrival of inflation, the trend is such that the Fed may have to act more aggressively should the Holy Grail of 2% inflation be exceeded any time soon. Remember, although the commentators proclaimed that only three rate increases are to be expected in 2018, they did so based upon the fact that 8 of 15 voting members of the FOMC so indicated on their March "dot plots." Seven indicated that four raises would be appropriate. Should inflation spike, that narrow majority could dissolve. Should the Fed be more aggressive in rate hikes it would have an adverse effect on equities. So heads up.
And speaking of heads up, I recommend that you Google and read Jamie Dimon's letter to the JPMorgan Chase stockholders. It is a comprehensive overview from an extremely knowledgeable man. He addresses a wide range of topics, but highlighting lack of liquidity (set forth below) about which I have written in the past is particularly noteworthy. Lack of liquidity creates a bottleneck which in turn promotes volatility which can lead to panics. Remember the Taper Tantrum of 2013.
Far more money than before (about $9 trillion of assets, which represents about 30% of total mutual fund long-term assets) is managed passively in index funds or ETFs (both of which are very easy to get out of). Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation.
Market making is dramatically smaller than in the past (e.g., aggregate primary dealer positions of bonds — including Treasury and agency securities, mortgage-backed securities and corporates — averaged $530 billion in 2007 vs. an average of $179 billion today). While in the past that total may have been too high, virtually every asset manager says today it is much harder to buy and sell securities, particularly the less liquid securities.
Liquidity requirements, while much higher, now have an element of rigidity built in that did not exist before. Banks will be unable to use that liquidity when they most need to do so — to make loans or intermediate markets. They have a “red line” they cannot cross (they are required to maintain hard and fast liquidity requirements). As clients demand more liquidity from their banks, the banks essentially will be unable to provide it.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Another week, another roller coaster ride. This time it was talk of a trade war. Monday's downdraft was stemmed and reversed by the calming voice of Larry Kudlow. But saber rattling later in the week reinvigorated the bears. Tariffs may have been the topic this week, but at its core, the insanity in the market lays at the feet of (or more accurately at the mouth of ) The Donald. Not even a very interesting jobs report on Friday (discussed below) moved the needle. Next week it will be a government shake up or another mistress or a Mueller revelation or an improvident Tweet. Let's face it folks, he loves controversy. If none exists, even for a moment, either he or his detractors will create some. What a way to live.
Although lost in the tariff kerfuffle, the jobs report on Friday was a curious one. The number of new jobs fell short of expectation, but the unemployment rate remained at historic lows. Of more importance was the higher than expected growth in wages. Although still short of signaling the arrival of inflation, the trend is such that the Fed may have to act more aggressively should the Holy Grail of 2% inflation be exceeded any time soon. Remember, although the commentators proclaimed that only three rate increases are to be expected in 2018, they did so based upon the fact that 8 of 15 voting members of the FOMC so indicated on their March "dot plots." Seven indicated that four raises would be appropriate. Should inflation spike, that narrow majority could dissolve. Should the Fed be more aggressive in rate hikes it would have an adverse effect on equities. So heads up.
And speaking of heads up, I recommend that you Google and read Jamie Dimon's letter to the JPMorgan Chase stockholders. It is a comprehensive overview from an extremely knowledgeable man. He addresses a wide range of topics, but highlighting lack of liquidity (set forth below) about which I have written in the past is particularly noteworthy. Lack of liquidity creates a bottleneck which in turn promotes volatility which can lead to panics. Remember the Taper Tantrum of 2013.
Far more money than before (about $9 trillion of assets, which represents about 30% of total mutual fund long-term assets) is managed passively in index funds or ETFs (both of which are very easy to get out of). Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation.
Market making is dramatically smaller than in the past (e.g., aggregate primary dealer positions of bonds — including Treasury and agency securities, mortgage-backed securities and corporates — averaged $530 billion in 2007 vs. an average of $179 billion today). While in the past that total may have been too high, virtually every asset manager says today it is much harder to buy and sell securities, particularly the less liquid securities.
Liquidity requirements, while much higher, now have an element of rigidity built in that did not exist before. Banks will be unable to use that liquidity when they most need to do so — to make loans or intermediate markets. They have a “red line” they cannot cross (they are required to maintain hard and fast liquidity requirements). As clients demand more liquidity from their banks, the banks essentially will be unable to provide it.
Sunday, April 1, 2018
April 1, 2018 Easter
Risk/Reward Vol. 387
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The holiday shortened week ended better than the one before, but it sure wasn't a smooth or pleasant ride. I am certain that high frequency traders are enjoying this volatility, but it is wreaking havoc on the rest of us. The two major indices are down for the quarter experiencing their worst three month stretch since 2015. As far as what to expect next quarter---honestly I haven't a clue. Who knows what The Donald will visit upon us in the coming days---heck in the coming hours.
Frankly, I spent this past week more attuned to the bond market which has been at once predictible and confounding. On the short end, rates have escalated with the US One Year Bond now yielding nearly 2.1%. Less than a year ago that same instrument was yielding below 1%. This rise was to be expected given the Fed's past and anticipated future hikes in the overnight interest rate (Fed funds). Activity on the longer end, particularly in the bellwether US Ten Year Bond, has been another matter. Because the Fed is no longer as active a bond bidder as it was during the height of quantitative easing and because more bonds are being issued and sold to compensate for the anticipated revenue shortfall attendant to the tax cut, one would think that the demand for bonds would lessen and thus yields would go up. (Remember, rates/yields are inverse to price/demand. That is as the price/demand of a bond goes down the yield/rate goes up). Just the opposite has occurred however. Indeed, the rate on the 10Year ended the week below 2.75% as low as it has been since January. As such, the 10Year is signaling that Mr. Market does not anticipate much inflation or economic growth. And he may be right. Despite record low unemployment and jobless claims, wage increases have been modest and inflation as measured by the Federal Reserve's favorite yardstick, the PCE Index, remains well below the Holy Grail of 2% (1.8% headline inflation, 1.6% core inflation---minus food and energy prices). This past week, Mohamed El Erian wrote a thought provoking piece on why the rate on the 10Year is so stubbornly low, and I recommend it to you. https://www.bloomberg.com/view/articles/2018-03-29/why-10-year-treasury-yields-continue-to-defy-conventional-wisdom
And so I close. Gut Yomtov and Happy Easter.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The holiday shortened week ended better than the one before, but it sure wasn't a smooth or pleasant ride. I am certain that high frequency traders are enjoying this volatility, but it is wreaking havoc on the rest of us. The two major indices are down for the quarter experiencing their worst three month stretch since 2015. As far as what to expect next quarter---honestly I haven't a clue. Who knows what The Donald will visit upon us in the coming days---heck in the coming hours.
Frankly, I spent this past week more attuned to the bond market which has been at once predictible and confounding. On the short end, rates have escalated with the US One Year Bond now yielding nearly 2.1%. Less than a year ago that same instrument was yielding below 1%. This rise was to be expected given the Fed's past and anticipated future hikes in the overnight interest rate (Fed funds). Activity on the longer end, particularly in the bellwether US Ten Year Bond, has been another matter. Because the Fed is no longer as active a bond bidder as it was during the height of quantitative easing and because more bonds are being issued and sold to compensate for the anticipated revenue shortfall attendant to the tax cut, one would think that the demand for bonds would lessen and thus yields would go up. (Remember, rates/yields are inverse to price/demand. That is as the price/demand of a bond goes down the yield/rate goes up). Just the opposite has occurred however. Indeed, the rate on the 10Year ended the week below 2.75% as low as it has been since January. As such, the 10Year is signaling that Mr. Market does not anticipate much inflation or economic growth. And he may be right. Despite record low unemployment and jobless claims, wage increases have been modest and inflation as measured by the Federal Reserve's favorite yardstick, the PCE Index, remains well below the Holy Grail of 2% (1.8% headline inflation, 1.6% core inflation---minus food and energy prices). This past week, Mohamed El Erian wrote a thought provoking piece on why the rate on the 10Year is so stubbornly low, and I recommend it to you. https://www.bloomberg.com/view/articles/2018-03-29/why-10-year-treasury-yields-continue-to-defy-conventional-wisdom
And so I close. Gut Yomtov and Happy Easter.
Sunday, March 25, 2018
March 25, 2018 Stormy
Risk/Reward Vol. 386
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last edition I predicted that the Federal Reserve's March meeting would dominate markets this week. I was wrong. Oh, the Fed's hawkish prediction of three rate hikes in 2019 and a year end 2020 Fed funds rate of a "modestly restrictive" 3.25 to 3.5% did cause the market to turn slightly negative on Wednesday. But that news was NOTHING compared to the bombshells that hit hourly on Thursday. First, Trump's lead counsel in the Mueller investigation resigned, then Trump announced a $60 billion tariff on Chinese imports, then China retaliated, then John Bolton was named the new National Security Advisor. The tumult continued on Friday as we waited out the Kabuki theater "government shutdown" threat for the umpteenth time. The result? A 1100+ point, two day drop in the Dow (which now is in correction territory), the S&P 500 going negative for the year and the NASDAQ dropping 6.5% in one week. Once again, politics Trumped everything (pun intended)
And let me correct myself. I don't mean politics. I mean Trump. I have followed the national news in general and politics in particular since the 1960 election when the youths of America (yes I was once young) were captivated by JFK and the whole Camelot thing. Unequivocally, I can state that never in that 58 year span have I seen anything like the phenomenon that is Donald Trump. Liked by some, hated by many, ignored by no one, his narcissism is something to behold. ( And believe me, I know something about narcissism). If he is not dominating the news for even a millisecond, he tweets something outrageous just to grab attention. Challenging Joe Biden to a fight, taunting Robert Mueller, belittling Jeff Sessions, humping Stormy Daniels, congratulating Vladimir Putin, reconciling with Kim Jong UN, beheading courtiers faster than the Red Queen and threatening a government shutdown are all in a day's work for him. His modus operandi is to keep everyone off guard and on edge, two positions Mr. Market detests. Consequently, one is left scratching one's head as to where to, or even whether to, invest.
I am exhausted. And the maelstrom has just begun. Can you imagine the campaign this fall and what is looking like the inevitable Democrat landslide? What will the "tweetstorm" look like then? How about next year when impeachment proceedings begin ? How do you think Mr. Market will react? As I have written many times, a profit is not a profit unless and until one sells. If the events of the past few weeks have not flashed some sell signs to you, I suggest the elections this fall will. If you manage your own money, what is your loss tolerance? Will you hold no matter what? If not, practice your exit strategy. Sell something, anything, for a profit---now. If you don't manage your own money, what will your investment professional do should a significant downturn occur? Sell at some point or hold indefinitely. Shouldn't you at least ask? The Dow has lost 3000 points (12%) in the past two months. We are still 5000 points ahead of election day 2016, but I don't like the direction. Indeed, I don't see anything on the horizon that is going to cause a market rebound. Do you? If so, please write me immediately. As longtime readers know, I am not a doomsayer. I am not predicting 2008 will be repeated. All I am saying is you don't have to be a Boy Scout to "Be Prepared."
Trump's dominance notwithstanding some interesting developments occurred this past week. First, despite "consensus" by Fed watchers that only three rate hikes will occur this year, a closer examination of the "dot plot" shows that 7 of 15 FOMC members favored four hikes. Watch this as 2018 progresses. Four hikes is certainly not out of the picture. Second, the projected year end 2020 Fed funds rate of 3.25-3.5% is above the "neutral interest rate" (the hypothetical rate of interest that neither promotes nor impedes GDP growth and/or employment). As such, the Fed is predicting that it will need to cool the economy in 2020 in order to curb inflation. This is startling considering the Fed has been highly accommodative to economic growth for a decade. Third, despite the two facts just cited, the rate on the all important 10 Year Treasury went down this week, at one time on Thursday dipping below 2.8%. (Remember: a dip in yield means an increase in price/demand.) Why? Clearly, Trump's unpredictability caused a temporary flight to safety and a bond buying spree. But I suspect something secular is afoot. I think the bond market questions the Fed's belief that the economy will grow as projected or that 2+% inflation as foreseen will ensue. As Karen Ward wrote in the Financial Times this week, economies don't prosper and inflation does not arise in countries facing demographic cliffs. With 27% of Japan's population now over the age of 65 (soon to be 40%) and with Europe and the US aging as well, spurring economic growth and a desired rate of inflation anywhere in the developed world will be a challenge.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Last edition I predicted that the Federal Reserve's March meeting would dominate markets this week. I was wrong. Oh, the Fed's hawkish prediction of three rate hikes in 2019 and a year end 2020 Fed funds rate of a "modestly restrictive" 3.25 to 3.5% did cause the market to turn slightly negative on Wednesday. But that news was NOTHING compared to the bombshells that hit hourly on Thursday. First, Trump's lead counsel in the Mueller investigation resigned, then Trump announced a $60 billion tariff on Chinese imports, then China retaliated, then John Bolton was named the new National Security Advisor. The tumult continued on Friday as we waited out the Kabuki theater "government shutdown" threat for the umpteenth time. The result? A 1100+ point, two day drop in the Dow (which now is in correction territory), the S&P 500 going negative for the year and the NASDAQ dropping 6.5% in one week. Once again, politics Trumped everything (pun intended)
And let me correct myself. I don't mean politics. I mean Trump. I have followed the national news in general and politics in particular since the 1960 election when the youths of America (yes I was once young) were captivated by JFK and the whole Camelot thing. Unequivocally, I can state that never in that 58 year span have I seen anything like the phenomenon that is Donald Trump. Liked by some, hated by many, ignored by no one, his narcissism is something to behold. ( And believe me, I know something about narcissism). If he is not dominating the news for even a millisecond, he tweets something outrageous just to grab attention. Challenging Joe Biden to a fight, taunting Robert Mueller, belittling Jeff Sessions, humping Stormy Daniels, congratulating Vladimir Putin, reconciling with Kim Jong UN, beheading courtiers faster than the Red Queen and threatening a government shutdown are all in a day's work for him. His modus operandi is to keep everyone off guard and on edge, two positions Mr. Market detests. Consequently, one is left scratching one's head as to where to, or even whether to, invest.
I am exhausted. And the maelstrom has just begun. Can you imagine the campaign this fall and what is looking like the inevitable Democrat landslide? What will the "tweetstorm" look like then? How about next year when impeachment proceedings begin ? How do you think Mr. Market will react? As I have written many times, a profit is not a profit unless and until one sells. If the events of the past few weeks have not flashed some sell signs to you, I suggest the elections this fall will. If you manage your own money, what is your loss tolerance? Will you hold no matter what? If not, practice your exit strategy. Sell something, anything, for a profit---now. If you don't manage your own money, what will your investment professional do should a significant downturn occur? Sell at some point or hold indefinitely. Shouldn't you at least ask? The Dow has lost 3000 points (12%) in the past two months. We are still 5000 points ahead of election day 2016, but I don't like the direction. Indeed, I don't see anything on the horizon that is going to cause a market rebound. Do you? If so, please write me immediately. As longtime readers know, I am not a doomsayer. I am not predicting 2008 will be repeated. All I am saying is you don't have to be a Boy Scout to "Be Prepared."
Trump's dominance notwithstanding some interesting developments occurred this past week. First, despite "consensus" by Fed watchers that only three rate hikes will occur this year, a closer examination of the "dot plot" shows that 7 of 15 FOMC members favored four hikes. Watch this as 2018 progresses. Four hikes is certainly not out of the picture. Second, the projected year end 2020 Fed funds rate of 3.25-3.5% is above the "neutral interest rate" (the hypothetical rate of interest that neither promotes nor impedes GDP growth and/or employment). As such, the Fed is predicting that it will need to cool the economy in 2020 in order to curb inflation. This is startling considering the Fed has been highly accommodative to economic growth for a decade. Third, despite the two facts just cited, the rate on the all important 10 Year Treasury went down this week, at one time on Thursday dipping below 2.8%. (Remember: a dip in yield means an increase in price/demand.) Why? Clearly, Trump's unpredictability caused a temporary flight to safety and a bond buying spree. But I suspect something secular is afoot. I think the bond market questions the Fed's belief that the economy will grow as projected or that 2+% inflation as foreseen will ensue. As Karen Ward wrote in the Financial Times this week, economies don't prosper and inflation does not arise in countries facing demographic cliffs. With 27% of Japan's population now over the age of 65 (soon to be 40%) and with Europe and the US aging as well, spurring economic growth and a desired rate of inflation anywhere in the developed world will be a challenge.
Sunday, March 18, 2018
March 18, 2018 Tillerson/Kudlow
Risk/Reward Vol. 385
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Cohn and Tillerson are out. Kudlow and Pompeo are in. Are Kelly and McMaster in or out? Lamb turns a red district blue. Mueller subpoenas Trump's campaign records. Uncertainty rules in DC, and as we all know, Mr. Market abhors uncertainty. Think not? Look at this week's market activity. Despite muted inflation numbers and generally good economic news, all major indices were down. Heck, the Dow Jones is virtually flat year to date. Accordingly, I continue to believe that the greatest threat to a healthy stock market is politics. How that plays out in the near term is a day to day phenomenon. Longer term, I see a Democrat landslide in November. Whether that is good or bad for the country as a general matter I leave for you to decide. I predict, however, that it will have a negative impact on the stock market. If the Democrats gain control of the House (looking ever more likely), I have no doubt that impeachment proceedings will commence. Talk about uncertainty! The fabled "Trump Bump" in stock prices will reverse, and we will see a major correction. Be prepared.
In the short run, look for news from the Fed to dominate market activity next week. The first FOMC meeting under the chairmanship of Mr. Powell takes place on Tuesday and Wednesday followed by his first news conference. A quarter point rate hike is expected. Hopefully, Powell will be more careful in his presentation than he was in his recent appearance before Congress. (See Vol 383 http://www.riskrewardblog.blogspot.com/ ). Powell's comments notwithstanding look for Mr.Market to react once the "dot plot" is published. That graph tracks each FOMC voting member's prediction of future interest rate movements. There has been some speculation that the "hawks" are desirous of four rate increases this year as opposed the three that most market watchers anticipate. Mid afternoon Wednesday should make for some interesting stock chart watching.
The subscriber conference this past week was most enlightening. Populated by "men of a certain age", laments about the sorry state of fixed income investments dominated the conversation. Since fixed income instruments (primarily bonds) are sensitive to inflation, I spent time upon my return revisiting what factors most influence inflation. Many economists believe that wage growth is the single most important factor and as such place great faith in the Phillips Curve (the alleged impact that low unemployment has upon wage growth and concomitantly upon inflation). Despite recent criticism of its application, the Phillips Curve informed much of what Fed Chairs Bernanke and Yellen believed and did. Look for what Chair Powell has to say about it if anything.
PS. For more on the Phillips Curve read John Authers' article entitled "Powell's View on Phillips Curve Will Shape Rate Debate" found in Saturday's Financial Times.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Cohn and Tillerson are out. Kudlow and Pompeo are in. Are Kelly and McMaster in or out? Lamb turns a red district blue. Mueller subpoenas Trump's campaign records. Uncertainty rules in DC, and as we all know, Mr. Market abhors uncertainty. Think not? Look at this week's market activity. Despite muted inflation numbers and generally good economic news, all major indices were down. Heck, the Dow Jones is virtually flat year to date. Accordingly, I continue to believe that the greatest threat to a healthy stock market is politics. How that plays out in the near term is a day to day phenomenon. Longer term, I see a Democrat landslide in November. Whether that is good or bad for the country as a general matter I leave for you to decide. I predict, however, that it will have a negative impact on the stock market. If the Democrats gain control of the House (looking ever more likely), I have no doubt that impeachment proceedings will commence. Talk about uncertainty! The fabled "Trump Bump" in stock prices will reverse, and we will see a major correction. Be prepared.
In the short run, look for news from the Fed to dominate market activity next week. The first FOMC meeting under the chairmanship of Mr. Powell takes place on Tuesday and Wednesday followed by his first news conference. A quarter point rate hike is expected. Hopefully, Powell will be more careful in his presentation than he was in his recent appearance before Congress. (See Vol 383 http://www.riskrewardblog.blogspot.com/ ). Powell's comments notwithstanding look for Mr.Market to react once the "dot plot" is published. That graph tracks each FOMC voting member's prediction of future interest rate movements. There has been some speculation that the "hawks" are desirous of four rate increases this year as opposed the three that most market watchers anticipate. Mid afternoon Wednesday should make for some interesting stock chart watching.
The subscriber conference this past week was most enlightening. Populated by "men of a certain age", laments about the sorry state of fixed income investments dominated the conversation. Since fixed income instruments (primarily bonds) are sensitive to inflation, I spent time upon my return revisiting what factors most influence inflation. Many economists believe that wage growth is the single most important factor and as such place great faith in the Phillips Curve (the alleged impact that low unemployment has upon wage growth and concomitantly upon inflation). Despite recent criticism of its application, the Phillips Curve informed much of what Fed Chairs Bernanke and Yellen believed and did. Look for what Chair Powell has to say about it if anything.
PS. For more on the Phillips Curve read John Authers' article entitled "Powell's View on Phillips Curve Will Shape Rate Debate" found in Saturday's Financial Times.
Saturday, March 17, 2018
March 12, 2018 Goldilocks
Risk/Reward Vol. 384
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All three of the major indices rose at least 3% this week with the NASDAQ hitting an all time high on Friday. But as has been the case this past month, the path was anything but smooth. Gary Cohn's resignation over the Trump tariff proposal sent shivers through Mr. Market who temporarily headed for the door mid week. But a "Goldilocks" jobs report on Friday salvaged the week with the Dow rising over 400 points that day. As detailed in the last edition, job figures promised to have an outsized impact on the market because last month's reported spike in wages spread inflation fears, caused a jump in interest rates and precipitated a true (although short) market correction from which we have yet to fully recover. Why Goldilocks? Because it was not too hot and not too cold. Not too hot because wage growth moderated thereby cooling inflation fears, and not too cold because 330,000 jobs were added as job participation rates improved.
So what do I see in the coming days? Given that February saw record withdrawals from equity funds and that the Dow and the S&P are still 3-4% below their January highs, I see room for market improvement. But it likely will not be a smooth ride. I started this publication eight years ago, and I have never seen any time like this. The markets don't swing weekly or even daily anymore; they swing hourly. Blame it on our unpredictable President, blame it on an "on the hour every hour" news cycle, blame it on the Special Prosecutor, heck "Blame It On the Rain" (remember Milli Vanilli?). Cause notwithstanding, volatility is upon us. For the foreseeable future, investing will not be for the faint of heart.
Well that's it Folks. Sorry for the shortened edition, but am boarding a flight to a subscriber conference in Beaver Creek, CO. Given its attendance list and its seriousness of purpose, I have no doubt that I will return ever more enlightened. P.S. Never book a flight that boards at 5:15 am the morning of Daylight Saving's "move forward."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All three of the major indices rose at least 3% this week with the NASDAQ hitting an all time high on Friday. But as has been the case this past month, the path was anything but smooth. Gary Cohn's resignation over the Trump tariff proposal sent shivers through Mr. Market who temporarily headed for the door mid week. But a "Goldilocks" jobs report on Friday salvaged the week with the Dow rising over 400 points that day. As detailed in the last edition, job figures promised to have an outsized impact on the market because last month's reported spike in wages spread inflation fears, caused a jump in interest rates and precipitated a true (although short) market correction from which we have yet to fully recover. Why Goldilocks? Because it was not too hot and not too cold. Not too hot because wage growth moderated thereby cooling inflation fears, and not too cold because 330,000 jobs were added as job participation rates improved.
So what do I see in the coming days? Given that February saw record withdrawals from equity funds and that the Dow and the S&P are still 3-4% below their January highs, I see room for market improvement. But it likely will not be a smooth ride. I started this publication eight years ago, and I have never seen any time like this. The markets don't swing weekly or even daily anymore; they swing hourly. Blame it on our unpredictable President, blame it on an "on the hour every hour" news cycle, blame it on the Special Prosecutor, heck "Blame It On the Rain" (remember Milli Vanilli?). Cause notwithstanding, volatility is upon us. For the foreseeable future, investing will not be for the faint of heart.
Well that's it Folks. Sorry for the shortened edition, but am boarding a flight to a subscriber conference in Beaver Creek, CO. Given its attendance list and its seriousness of purpose, I have no doubt that I will return ever more enlightened. P.S. Never book a flight that boards at 5:15 am the morning of Daylight Saving's "move forward."
Sunday, March 4, 2018
March 5, 2018 Tariff
Risk/Reward Vol 383
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All major indices lost ground this week with the Dow now negative for the year, the S&P 500 barely positive and the NASDAQ up 5% but still well below its January highs. Two factors were to blame for this week's negative vibe. The first was predictable; the second came out of left field. As you may recall from last week's edition, I highlighted as a threat to market stability the Fed's decision to raise rates at the short end of the bond curve while simultaneously reducing its holdings on the longer end. Former Chair Yellen's ability to explain this policy in soothing economic double speak heretofore had lessened market jitters even as the cheap money punchbowl was slowly withdrawn. Not so her successor. Frankly, Chair Powell's first appearance before Congress on Tuesday was a disaster. He eschewed double speak and intimated that the Fed may raise rates four times this year instead of the universally expected three times. Mr. Market freaked at this surprise testimony and headed to the door. The Dow dropped over 390 points from its intraday high. And speaking of surprises, Thursday brought something no one anticipated. Against the wishes of most of his advisors and catching his communication team completely off guard, The Donald announced 25% and 10% tariffs on steel and aluminum respectively. The Dow shed over 550 points from its high that day. What these tariffs mean in the longer run is yet to be determined.
Despite turbulence in the stock market, the bond market has remained remarkably stable. The all important 10 Year US Treasury Bond closed the week within a tight range of where it has been for a month. The fear of impending inflation which sparked the sudden rise in rates in early February has lessened. The bond futures "breakeven" numbers indicates that inflation over the next 5 to 10 years will remain below 2.5%. Since a majority of economists believe that the number one contributing factor to inflation is wage growth one should keep an eye on the jobs report scheduled to be issued March 9th. Recall (vol. 379 http://www.riskrewardblog.blogspot.com/ ) that it was last month's reported hourly wage increase of 2.9% that has caused much of the market turmoil we have been experiencing recently. I expect continued choppiness but this time hopefully with an upward tilt.
Trigger warning: soap box. As I have noted before, the popularity of passive investing has resulted in a massive increase in the assets managed by the three major sponsors of passive investing vehicles: BlackRock, Vanguard and State Street. Together they are the largest shareholders in over 90% of the companies comprising the S&P 500. That means of course that they are the largest shareholders in companies that directly compete with each other---every airline, every major bank, every player in every industry. Let that fact sink in, Dear Reader. Until now each of these companies has taken pains to be passive in regard the management of these corporations. They have done so to avoid antitrust scrutiny. Note I said until now. With the tragedy at Parkland in constant focus, BlackRock, Vanguard and State Street have all indicated that they intend to "engage" the management of the largest gun manufactures (in which not surprisingly these three behemoths hold the largest block of shares) as to their intentions toward reducing gun violence. As well intentioned as one may think this new activism is, it portends a great threat. Suppose these Big Three come to dislike the robust debate occurring on our news channels and "engage" the management of Disney (ABC), TimeWarner (CNN), Comcast (MSNBC, CNBC, NBC) and other outlets in which they hold the largest blocks importuning them to tone down or even slant their rhetoric? Would this be healthy? No way! I would rather face Russian interference in our political process (BTW have you ever seen such amateurish propaganda?) than have all of our major news outlets controlled by an oligarchy, the danger of which is clear and present. Just sayin'
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
All major indices lost ground this week with the Dow now negative for the year, the S&P 500 barely positive and the NASDAQ up 5% but still well below its January highs. Two factors were to blame for this week's negative vibe. The first was predictable; the second came out of left field. As you may recall from last week's edition, I highlighted as a threat to market stability the Fed's decision to raise rates at the short end of the bond curve while simultaneously reducing its holdings on the longer end. Former Chair Yellen's ability to explain this policy in soothing economic double speak heretofore had lessened market jitters even as the cheap money punchbowl was slowly withdrawn. Not so her successor. Frankly, Chair Powell's first appearance before Congress on Tuesday was a disaster. He eschewed double speak and intimated that the Fed may raise rates four times this year instead of the universally expected three times. Mr. Market freaked at this surprise testimony and headed to the door. The Dow dropped over 390 points from its intraday high. And speaking of surprises, Thursday brought something no one anticipated. Against the wishes of most of his advisors and catching his communication team completely off guard, The Donald announced 25% and 10% tariffs on steel and aluminum respectively. The Dow shed over 550 points from its high that day. What these tariffs mean in the longer run is yet to be determined.
Despite turbulence in the stock market, the bond market has remained remarkably stable. The all important 10 Year US Treasury Bond closed the week within a tight range of where it has been for a month. The fear of impending inflation which sparked the sudden rise in rates in early February has lessened. The bond futures "breakeven" numbers indicates that inflation over the next 5 to 10 years will remain below 2.5%. Since a majority of economists believe that the number one contributing factor to inflation is wage growth one should keep an eye on the jobs report scheduled to be issued March 9th. Recall (vol. 379 http://www.riskrewardblog.blogspot.com/ ) that it was last month's reported hourly wage increase of 2.9% that has caused much of the market turmoil we have been experiencing recently. I expect continued choppiness but this time hopefully with an upward tilt.
Trigger warning: soap box. As I have noted before, the popularity of passive investing has resulted in a massive increase in the assets managed by the three major sponsors of passive investing vehicles: BlackRock, Vanguard and State Street. Together they are the largest shareholders in over 90% of the companies comprising the S&P 500. That means of course that they are the largest shareholders in companies that directly compete with each other---every airline, every major bank, every player in every industry. Let that fact sink in, Dear Reader. Until now each of these companies has taken pains to be passive in regard the management of these corporations. They have done so to avoid antitrust scrutiny. Note I said until now. With the tragedy at Parkland in constant focus, BlackRock, Vanguard and State Street have all indicated that they intend to "engage" the management of the largest gun manufactures (in which not surprisingly these three behemoths hold the largest block of shares) as to their intentions toward reducing gun violence. As well intentioned as one may think this new activism is, it portends a great threat. Suppose these Big Three come to dislike the robust debate occurring on our news channels and "engage" the management of Disney (ABC), TimeWarner (CNN), Comcast (MSNBC, CNBC, NBC) and other outlets in which they hold the largest blocks importuning them to tone down or even slant their rhetoric? Would this be healthy? No way! I would rather face Russian interference in our political process (BTW have you ever seen such amateurish propaganda?) than have all of our major news outlets controlled by an oligarchy, the danger of which is clear and present. Just sayin'
Sunday, February 25, 2018
February 25, 2018 Jitters
Risk/Reward Vol. 382
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
By week's end the tale of the tape was positive. But the fact that the Dow and the S&P 500 were up around a half of a percent, that the NASDAQ did even better and that the rate on the 10 Year Treasury Bond closed unchanged from the previous Friday belies the volatility of the week. Tuesday following the holiday started on a sour note as Walmart reported disappointing earnings. As one of only 30 companies comprising the Dow, Walmart's immediate 10% drop walloped that index. In what has become a lockstep, the other indices followed suit. Wednesday saw a nice recovery in the morning only to experience a quick mid day reversal after the release of the Federal Reserve's January meeting minutes. Investors freaked over the Fed's use of the phrase "further gradual adjustments" to describe future rate increases. Both the stock and bond markets plummeted with the rate on the 10Year spiking over 2.94%. (Remember the higher to rate/yield the lower the price.) The week was salvaged by a massive upward move on Friday.
So why the jitters? I see a few reasons. First, we remain in a polarized political powder keg the importance of which should not be discounted. Second, anytime a major player like Walmart disappoints it sends negative vibes. And third, since 2008 Mr. Market has been buoyed by seemingly ever increasingly accommodative monetary policies. First, zero bound overnight interest rates and then several waves of quantitative easing the result of which was to push investors out of savings, cd's and bonds and into stocks and real estate. These moves contributed to what many believe is a stock market bubble. So naturally when recently the Fed elected to reverse the course of these accommodative policies ( e.g. gradually raising rates and slowly reducing its bond and mortgage portfolio), it raised the specter of that bubble bursting. Although heretofore both the actual and anticipated speed of the reversal has been very slow and although corporate profits have risen to almost justify the elevated stock prices, any hint that the trajectory of the reversal may increase causes a negative market reaction. Indeed Wednesday's precipitous drop was remindful of the "taper tantrum" of 2013 (see Vol. 175 www.riskrewardblog.blogspot. com) a repeat of which the Fed so desperately wants to avoid. Time will tell if the Fed can engineer what Mohamed El Erian has termed "a beautiful normalization." of rates. I think it can. And even with rates on the rise, I believe that TINA will persist for some time. Therefore, on the dip I added to my index ETF positions, bought Walmart and added a utility (SO) and a healthcare REIT (VTR) both of which IMHO are significantly undervalued.
Trigger warning: a soapbox moment. Recently, the Center for Disease Control and Prevention reported that as of September, 2017 the total US fertility rate is now 1.77 lifetime births per woman; down 16.4% since 2007 . This rate is lower than many European countries and is coming ever so close to that of Japan. Hey kids, the replacement rate is 2.1. The bottom line is that the effects of our demographic time bomb of which I have written in the past (see vol. 218) will soon be upon us, if not already. We ain't birthin' 'em so we need to import them. We can chose how many and from where, but let's get on with it. Debates about DACA, Dreamers, Walls, sh#tholes aside, we need people. No country has ever grown an economy while experiencing depopulation. To reiterate, we need an intelligent immigration policy. Can our deeply partisan and feckless Congress provide us one?
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
By week's end the tale of the tape was positive. But the fact that the Dow and the S&P 500 were up around a half of a percent, that the NASDAQ did even better and that the rate on the 10 Year Treasury Bond closed unchanged from the previous Friday belies the volatility of the week. Tuesday following the holiday started on a sour note as Walmart reported disappointing earnings. As one of only 30 companies comprising the Dow, Walmart's immediate 10% drop walloped that index. In what has become a lockstep, the other indices followed suit. Wednesday saw a nice recovery in the morning only to experience a quick mid day reversal after the release of the Federal Reserve's January meeting minutes. Investors freaked over the Fed's use of the phrase "further gradual adjustments" to describe future rate increases. Both the stock and bond markets plummeted with the rate on the 10Year spiking over 2.94%. (Remember the higher to rate/yield the lower the price.) The week was salvaged by a massive upward move on Friday.
So why the jitters? I see a few reasons. First, we remain in a polarized political powder keg the importance of which should not be discounted. Second, anytime a major player like Walmart disappoints it sends negative vibes. And third, since 2008 Mr. Market has been buoyed by seemingly ever increasingly accommodative monetary policies. First, zero bound overnight interest rates and then several waves of quantitative easing the result of which was to push investors out of savings, cd's and bonds and into stocks and real estate. These moves contributed to what many believe is a stock market bubble. So naturally when recently the Fed elected to reverse the course of these accommodative policies ( e.g. gradually raising rates and slowly reducing its bond and mortgage portfolio), it raised the specter of that bubble bursting. Although heretofore both the actual and anticipated speed of the reversal has been very slow and although corporate profits have risen to almost justify the elevated stock prices, any hint that the trajectory of the reversal may increase causes a negative market reaction. Indeed Wednesday's precipitous drop was remindful of the "taper tantrum" of 2013 (see Vol. 175 www.riskrewardblog.blogspot. com) a repeat of which the Fed so desperately wants to avoid. Time will tell if the Fed can engineer what Mohamed El Erian has termed "a beautiful normalization." of rates. I think it can. And even with rates on the rise, I believe that TINA will persist for some time. Therefore, on the dip I added to my index ETF positions, bought Walmart and added a utility (SO) and a healthcare REIT (VTR) both of which IMHO are significantly undervalued.
Trigger warning: a soapbox moment. Recently, the Center for Disease Control and Prevention reported that as of September, 2017 the total US fertility rate is now 1.77 lifetime births per woman; down 16.4% since 2007 . This rate is lower than many European countries and is coming ever so close to that of Japan. Hey kids, the replacement rate is 2.1. The bottom line is that the effects of our demographic time bomb of which I have written in the past (see vol. 218) will soon be upon us, if not already. We ain't birthin' 'em so we need to import them. We can chose how many and from where, but let's get on with it. Debates about DACA, Dreamers, Walls, sh#tholes aside, we need people. No country has ever grown an economy while experiencing depopulation. To reiterate, we need an intelligent immigration policy. Can our deeply partisan and feckless Congress provide us one?
Sunday, February 18, 2018
February 18, 2018 TINA Returns
Risk/Reward Vol. 381
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Friday's action notwithstanding (discussed below), this week was a welcome relief from the roller coaster ride which characterized the previous two. The Dow went green on 5 straight days rising 4.3% in its biggest one week percentage gain since November 2016. The S&P 500 also gained 4.3% in its best week since January, 2013 while the NASDAQ rose 5.3%, its best performance since December, 2011. That said, at current levels the Dow is 5.3%, the S&P 500 4.9% and the NASDAQ 3.6% below the records each set last month. So if TINA (There Is No Alternative) is still in effect and I believe it is, I see very few obstacles to regaining if not surpassing those levels in the near future. So why did the market correct? Once again, few have offered any explanation, and none has offered one that is definitive. The best one I read defaulted to Occam's Razor, the philosophical concept positing that when multiple explanations are advanced, use the simplest. Simply stated, lots of sellers sold for no particular reason other than others were selling.
So what obstacles do I see to continued upward movement? I foresee profit forecasts as good, monetary policy as stable and inflation within predictable bounds. Interest rates could be problematic if the rate on the US 10 Year Bond spikes above 3%, but as each day passes with the 10Year hovering at or near 2.9% the shock value recedes. The most recent inflation numbers are in check, with the all important core inflation (strips out volatile oil and food prices) holding at 1.8%. A major confrontation in Syria between Turkey, Russia and the US could cause a market panic although the incidents occurring there these past two weeks have received less news coverage than Kim Jo Yong's snarky side glance thrown toward Vice President Pence. (Excuse my digression, but do you realize that the comely lass is the North Korean Minister of Propaganda and has a long list of human rights violations? Jeez, folks, giving her any props is like fawning over Joseph Goebbels at the 1936 Olympics.) No, I stand by what I wrote a few editions ago. The major threat to Mr. Market is political. If you doubt me, review the hour by hour tape of Friday's action. The Dow was up nearly 230 points before Mueller released the 13 indictments. Within minutes the Dow lost all of its gain and finished a paltry 19 points to the positive. Having read the indictment, I do not see any spill over onto Trump (although Mueller is not finished). So all things being equal, the move upward should continue, albeit with the same amount of jitters we saw this week, unless and until another political bomb is dropped.
And how about those interest rates? I must admit that the rate on the US Ten Year has increased faster than I anticipated. The question is how soon will it reach then breach the 3% barrier. That barrier is significant because many commentators have speculated that at that level some investors may rotate out of stocks and into bonds. In other words, the TINA effect would be over. First, I don't believe 3% is attractive to any investor other than institutions that are required to hold a percentage of assets in bonds and foreign buyers who face even more depressed rates domestically. Second, the Ten Year rate is still suppressed by the overhang of quantitative easing as the Fed continues to be one of its largest buyers. Third, even in the absence of QE, the 10Year correlates to the rate of inflation which as noted above has remained steady. And lastly, the securities I like during a period of steady rates, preferred stocks, have not nose dived as one would have expected given the recent rate spike. Do those guys know something we don't? Who knows, but as always, the 10 Year is worth watching.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Friday's action notwithstanding (discussed below), this week was a welcome relief from the roller coaster ride which characterized the previous two. The Dow went green on 5 straight days rising 4.3% in its biggest one week percentage gain since November 2016. The S&P 500 also gained 4.3% in its best week since January, 2013 while the NASDAQ rose 5.3%, its best performance since December, 2011. That said, at current levels the Dow is 5.3%, the S&P 500 4.9% and the NASDAQ 3.6% below the records each set last month. So if TINA (There Is No Alternative) is still in effect and I believe it is, I see very few obstacles to regaining if not surpassing those levels in the near future. So why did the market correct? Once again, few have offered any explanation, and none has offered one that is definitive. The best one I read defaulted to Occam's Razor, the philosophical concept positing that when multiple explanations are advanced, use the simplest. Simply stated, lots of sellers sold for no particular reason other than others were selling.
So what obstacles do I see to continued upward movement? I foresee profit forecasts as good, monetary policy as stable and inflation within predictable bounds. Interest rates could be problematic if the rate on the US 10 Year Bond spikes above 3%, but as each day passes with the 10Year hovering at or near 2.9% the shock value recedes. The most recent inflation numbers are in check, with the all important core inflation (strips out volatile oil and food prices) holding at 1.8%. A major confrontation in Syria between Turkey, Russia and the US could cause a market panic although the incidents occurring there these past two weeks have received less news coverage than Kim Jo Yong's snarky side glance thrown toward Vice President Pence. (Excuse my digression, but do you realize that the comely lass is the North Korean Minister of Propaganda and has a long list of human rights violations? Jeez, folks, giving her any props is like fawning over Joseph Goebbels at the 1936 Olympics.) No, I stand by what I wrote a few editions ago. The major threat to Mr. Market is political. If you doubt me, review the hour by hour tape of Friday's action. The Dow was up nearly 230 points before Mueller released the 13 indictments. Within minutes the Dow lost all of its gain and finished a paltry 19 points to the positive. Having read the indictment, I do not see any spill over onto Trump (although Mueller is not finished). So all things being equal, the move upward should continue, albeit with the same amount of jitters we saw this week, unless and until another political bomb is dropped.
And how about those interest rates? I must admit that the rate on the US Ten Year has increased faster than I anticipated. The question is how soon will it reach then breach the 3% barrier. That barrier is significant because many commentators have speculated that at that level some investors may rotate out of stocks and into bonds. In other words, the TINA effect would be over. First, I don't believe 3% is attractive to any investor other than institutions that are required to hold a percentage of assets in bonds and foreign buyers who face even more depressed rates domestically. Second, the Ten Year rate is still suppressed by the overhang of quantitative easing as the Fed continues to be one of its largest buyers. Third, even in the absence of QE, the 10Year correlates to the rate of inflation which as noted above has remained steady. And lastly, the securities I like during a period of steady rates, preferred stocks, have not nose dived as one would have expected given the recent rate spike. Do those guys know something we don't? Who knows, but as always, the 10 Year is worth watching.
Sunday, February 11, 2018
February 11, 2018 Correction
Risk/Reward Vol. 380
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In just two weeks the major indices have gone from record highs to correction territory (down 10% or more). On Monday, the downdraft discussed last week became a storm as the Dow Jones Industrial Average lost over 1000 points in a single day for the first time ever; only to repeat the feat on Thursday. Mid day Friday saw a 12% trough until an afternoon rally helped turn the markets positive for the day. As the sun set, a survey of the damage showed that the S&P and the Dow were down over 5% for the week and over 2% year to date. That said despite non-stop jeremiads from the talking heads on CNBC, Bloomberg and Fox Business News, the damage was hardly record breaking. Indeed, corrections are the norm in bull markets. Thirty seven drops of 10% or more have occurred since World War II. We just have not seen one in a while. And although a 1000 point drop in the Dow had not occurred until this week, neither of those days ranks in the list of the 100 worst days in the market on a percentage basis. I am not minimizing the devastation. In today's vernacular, I am just "providing context." (Don't you just hate that phrase?)
What IS unusual about this correction are the questions surrounding its cause. Unlike previous drops it is not attributable to bad economic news or to the threat of war or to any exogenous event for that matter. It has been wholly caused by the market itself. But beyond that rather unsatisfying explanation, its etiology remains a mystery. Early in the week a few synthetic exchange traded notes tied to the VIX ( itself a synthetic measure of volatility) were the scapegoats. But c'mon talking heads, how can two funds totaling a few billion dollars cause such a move in the broader markets? Some blame the threat of a government shut down. But we faced that toothless tiger two weeks ago and laughed it off. Some blame the rich compromise which averted the shutdown but at the cost of adding to our mounting debt. Was this really a surprise? Others blame the specter of higher interest rates. But the 10Year ended the week almost exactly where it was the previous Friday. The most persuasive explanation attributes the correction to a stampede by the holders of index exchange traded funds with record outflows for the week being reported. Indeed, with the popularity of ETF's like SPY, DIA and QQQ (check your portfolio and I bet most of you own one or more of these) one can buy or sell entire market indices in the blink of an eye. Indices now trade like stocks, a fact that sends ripples through the underlying shares as the ETF sponsors (Vanguard, Black Rock, State Street, etc.) buy and sell in order to maintain adequate levels of liquidity. Lastly, perhaps the cause is my readership heeding my advice of last week to practice selling for a profit. Improbable, perhaps, but even a tiny pebble can cause a ripple in an unusually calm ocean.
I will leave it to others to determine the cause. My concern is what to do now. As a frequent profit taker and constant loss minimizer, I have lots of cash on the sideline. I spent much of Friday compiling my buy list. I do believe the above named ETF's will recover and I will deploy some there. But as loyal readers know, my favorites produce juicy dividends. Dividends not only produce income, they serve as a backstop against precipitous falls. Once I am convinced that a bottom has been reached, I will be a buyer.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In just two weeks the major indices have gone from record highs to correction territory (down 10% or more). On Monday, the downdraft discussed last week became a storm as the Dow Jones Industrial Average lost over 1000 points in a single day for the first time ever; only to repeat the feat on Thursday. Mid day Friday saw a 12% trough until an afternoon rally helped turn the markets positive for the day. As the sun set, a survey of the damage showed that the S&P and the Dow were down over 5% for the week and over 2% year to date. That said despite non-stop jeremiads from the talking heads on CNBC, Bloomberg and Fox Business News, the damage was hardly record breaking. Indeed, corrections are the norm in bull markets. Thirty seven drops of 10% or more have occurred since World War II. We just have not seen one in a while. And although a 1000 point drop in the Dow had not occurred until this week, neither of those days ranks in the list of the 100 worst days in the market on a percentage basis. I am not minimizing the devastation. In today's vernacular, I am just "providing context." (Don't you just hate that phrase?)
What IS unusual about this correction are the questions surrounding its cause. Unlike previous drops it is not attributable to bad economic news or to the threat of war or to any exogenous event for that matter. It has been wholly caused by the market itself. But beyond that rather unsatisfying explanation, its etiology remains a mystery. Early in the week a few synthetic exchange traded notes tied to the VIX ( itself a synthetic measure of volatility) were the scapegoats. But c'mon talking heads, how can two funds totaling a few billion dollars cause such a move in the broader markets? Some blame the threat of a government shut down. But we faced that toothless tiger two weeks ago and laughed it off. Some blame the rich compromise which averted the shutdown but at the cost of adding to our mounting debt. Was this really a surprise? Others blame the specter of higher interest rates. But the 10Year ended the week almost exactly where it was the previous Friday. The most persuasive explanation attributes the correction to a stampede by the holders of index exchange traded funds with record outflows for the week being reported. Indeed, with the popularity of ETF's like SPY, DIA and QQQ (check your portfolio and I bet most of you own one or more of these) one can buy or sell entire market indices in the blink of an eye. Indices now trade like stocks, a fact that sends ripples through the underlying shares as the ETF sponsors (Vanguard, Black Rock, State Street, etc.) buy and sell in order to maintain adequate levels of liquidity. Lastly, perhaps the cause is my readership heeding my advice of last week to practice selling for a profit. Improbable, perhaps, but even a tiny pebble can cause a ripple in an unusually calm ocean.
I will leave it to others to determine the cause. My concern is what to do now. As a frequent profit taker and constant loss minimizer, I have lots of cash on the sideline. I spent much of Friday compiling my buy list. I do believe the above named ETF's will recover and I will deploy some there. But as loyal readers know, my favorites produce juicy dividends. Dividends not only produce income, they serve as a backstop against precipitous falls. Once I am convinced that a bottom has been reached, I will be a buyer.
Sunday, February 4, 2018
February 5, 2018 (665)
Risk/Reward Vol. 379
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Holy smokes! If you were not tempted to sell when the Dow Jones Industrial Average sank 540 points on Monday and Tuesday, you probably were tempted come Friday afternoon. Is this the beginning of the end of the bull run? Is a correction around the corner? Who knows? No one. If you think otherwise, replay the evening telecasts this week of the Stock Prognosticator in Chief, Jim Cramer and listen to equivocation at its best. Like everyone else peddling advice, he talks almost exclusively about how to identify a good buying opportunity. Hey, Cramer how about spending 50% or even 10% of your time on identifying when to sell? Because remember, Dear Reader, a profit is not a profit until it is harvested. So again I ask, how many times have you sold a stock for a profit? You would be surprised to learn how few people have ever done so. Do yourself a favor. Just do it. Just sell something at a profit. Just so you know how and just so you know how good it feels. Because this week may not have been the catalyst for you to sell, but someday some impetus will be.
So what caused the downdraft? Well, I read the three most popular financial dailies every day and not one could muster a decent answer. Interest rate escalation emanating from heightened inflation forecasts was the most often cited. I would agree that interest rate news caused the volatility on Wednesday and Thursday. But Monday and Tuesday's drama? I don't buy it. I think the action on those two days was concern on what the President would say during the State of the Union or more importantly how it would be received. I am no Trumpeter, but viewed objectively (see the CBS Poll) he knocked that speech out of the park. So why didn't the markets skyrocket on Wednesday? Well they did until the Fed issued its press release at 1pm. Slightly hawkish language therein caused an already jittery market to lose most of its gains for the day. On Thursday a nascent recovery was squelched by interest rate news once again---the yield on the 30 Year Treasury went above 3% for the first time in nearly a year and the 10Year hit 2.78%, territory not seen for more than 3 years. The thought is that higher interest rates will make corporations less profitable as they refinance their record level of debt (1.5 times earnings on average for the S&P500) while simultaneously investors will forsake equities for bonds as rates increase. So how does one explain Friday when the yield on the 10 Year leaped to close at an eye popping 2.84% and the Dow Jones Industrial Average fell an astounding 665 points (-2.54%)? To a certain extent, it was a tale of two markets. The morning's stumble was in part a reaction to news that wages grew at an annualized rate of 2.9% last month which signaled that inflation was approaching more quickly than expected. This was reflected in the spike in the rate in the 10Year which is influenced heavily by inflation expectations. But the big drop, no doubt was motivated by politics just as I prognosticated last week and just as I reiterate this week. Check the hourly charts and you will see an otherwise bad day turn horrible as soon as the Nunez memo was released. Mr. Market's fear is that the memo could give Trump cover to fire Rod Rosenstein of the Justice Department, the man who named Robert Mueller as the special prosecutor and who heretofore has resisted entreaties from many to fire Mueller. Firing of Rosenstein, replacing him with someone who would in turn fire Mueller would result in a political melee the likes of which have not been seen since the famous "Saturday Night Massacre" during the Nixon administration. If such a crisis did arise the markets would tumble. Let's see how this plays out.
Lost in all the volatility and politics is appreciation for what we have achieved on the energy front. The U. S. Department of Energy reported this week that at over 10million bbls/day the US is positioned to surpass both Saudi Arabia and Russian to become the world's largest producer of oil. Thank you fracking! As a result of the further development of this technology, the US has DOUBLED, yes doubled oil production since 2008! And frankly the end of this march to energy independence is nowhere in sight. Also this week, Exxon Mobil announced that it now is focusing its investment on domestic production. It plans to invest billions into Texas' Permian Basin with the expectation that over the next few years it will add another 500,000 bbls/day to the US total. The dividends from energy independence are 'uge! It means that we can now threaten and implement sanctions in the Mideast that we would never have dreamed possible just a few years ago. It means that if we so choose we can leave that God forsaken part of the world to its own devices. In the future, we need not become entangled in Gulf Wars which we all know were about oil and not Weapons of Mass Destruction. You doubt me about the cause? Google and then read the April, 2001 "Strategic Policy Challenges of the 21st Century" prepared by the Baker Institute and the Council on Foreign Relations at the behest of Vice President Cheney. Or simply watch "Three Days of the Condor" a hauntingly prescient 1975 movie starring Robert Redford and Faye Dunaway and co-starring two of my favorite character actors, John Houseman and Max Von Sydow. A true classic that holds up well even today.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
Holy smokes! If you were not tempted to sell when the Dow Jones Industrial Average sank 540 points on Monday and Tuesday, you probably were tempted come Friday afternoon. Is this the beginning of the end of the bull run? Is a correction around the corner? Who knows? No one. If you think otherwise, replay the evening telecasts this week of the Stock Prognosticator in Chief, Jim Cramer and listen to equivocation at its best. Like everyone else peddling advice, he talks almost exclusively about how to identify a good buying opportunity. Hey, Cramer how about spending 50% or even 10% of your time on identifying when to sell? Because remember, Dear Reader, a profit is not a profit until it is harvested. So again I ask, how many times have you sold a stock for a profit? You would be surprised to learn how few people have ever done so. Do yourself a favor. Just do it. Just sell something at a profit. Just so you know how and just so you know how good it feels. Because this week may not have been the catalyst for you to sell, but someday some impetus will be.
So what caused the downdraft? Well, I read the three most popular financial dailies every day and not one could muster a decent answer. Interest rate escalation emanating from heightened inflation forecasts was the most often cited. I would agree that interest rate news caused the volatility on Wednesday and Thursday. But Monday and Tuesday's drama? I don't buy it. I think the action on those two days was concern on what the President would say during the State of the Union or more importantly how it would be received. I am no Trumpeter, but viewed objectively (see the CBS Poll) he knocked that speech out of the park. So why didn't the markets skyrocket on Wednesday? Well they did until the Fed issued its press release at 1pm. Slightly hawkish language therein caused an already jittery market to lose most of its gains for the day. On Thursday a nascent recovery was squelched by interest rate news once again---the yield on the 30 Year Treasury went above 3% for the first time in nearly a year and the 10Year hit 2.78%, territory not seen for more than 3 years. The thought is that higher interest rates will make corporations less profitable as they refinance their record level of debt (1.5 times earnings on average for the S&P500) while simultaneously investors will forsake equities for bonds as rates increase. So how does one explain Friday when the yield on the 10 Year leaped to close at an eye popping 2.84% and the Dow Jones Industrial Average fell an astounding 665 points (-2.54%)? To a certain extent, it was a tale of two markets. The morning's stumble was in part a reaction to news that wages grew at an annualized rate of 2.9% last month which signaled that inflation was approaching more quickly than expected. This was reflected in the spike in the rate in the 10Year which is influenced heavily by inflation expectations. But the big drop, no doubt was motivated by politics just as I prognosticated last week and just as I reiterate this week. Check the hourly charts and you will see an otherwise bad day turn horrible as soon as the Nunez memo was released. Mr. Market's fear is that the memo could give Trump cover to fire Rod Rosenstein of the Justice Department, the man who named Robert Mueller as the special prosecutor and who heretofore has resisted entreaties from many to fire Mueller. Firing of Rosenstein, replacing him with someone who would in turn fire Mueller would result in a political melee the likes of which have not been seen since the famous "Saturday Night Massacre" during the Nixon administration. If such a crisis did arise the markets would tumble. Let's see how this plays out.
Lost in all the volatility and politics is appreciation for what we have achieved on the energy front. The U. S. Department of Energy reported this week that at over 10million bbls/day the US is positioned to surpass both Saudi Arabia and Russian to become the world's largest producer of oil. Thank you fracking! As a result of the further development of this technology, the US has DOUBLED, yes doubled oil production since 2008! And frankly the end of this march to energy independence is nowhere in sight. Also this week, Exxon Mobil announced that it now is focusing its investment on domestic production. It plans to invest billions into Texas' Permian Basin with the expectation that over the next few years it will add another 500,000 bbls/day to the US total. The dividends from energy independence are 'uge! It means that we can now threaten and implement sanctions in the Mideast that we would never have dreamed possible just a few years ago. It means that if we so choose we can leave that God forsaken part of the world to its own devices. In the future, we need not become entangled in Gulf Wars which we all know were about oil and not Weapons of Mass Destruction. You doubt me about the cause? Google and then read the April, 2001 "Strategic Policy Challenges of the 21st Century" prepared by the Baker Institute and the Council on Foreign Relations at the behest of Vice President Cheney. Or simply watch "Three Days of the Condor" a hauntingly prescient 1975 movie starring Robert Redford and Faye Dunaway and co-starring two of my favorite character actors, John Houseman and Max Von Sydow. A true classic that holds up well even today.
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