April 6, 2013 The TINA Factor

Risk/Reward Vol. 164

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

"Big wheel keep on turning/Proud Mary keep on burning
And we're rollin', rollin'/Rollin' down the river."---lyrics from "Proud Mary" sung by TINA Turner

"Heh, ho they love the way I do it
Heh, ho there's really nothing to it
But, heh I'm big in Japan, I'm big in Japan"---lyrics from "Big in Japan" by Tom Waits

"Branch water and tomato wine/Creosote and turpentine
Sour mash and new moonshine/Down on the copperline."---lyrics from "Copperline" by James Taylor

After reaching an all time high on Tuesday, the Dow Jones Industrial Average (DJIA) experienced two body blows this week. On Wednesday it suffered a triple digit drop on disappointing unemployment claim numbers, a fall in the purchasing manager's index and war-like rumblings from North Korea. On Friday, the monthly jobs report fell far below expectations; so low in fact that former Obama Administration chief economist Austan Goolsbee likened it to a "punch to the gut". After an ugly opening, the DJIA closed down Friday, but only 41 points for the day and only 13 points for the week. In light of these bad economic reports, one wonders whether the "big wheel" that is the stock market can "keep on turning, keep on burning, rollin', rollin', rollin' down the river?" Many commentators answer yes, and in so doing quote Lady Thatcher who several years ago, in response to a question on why she supported free market capitalism, said "There Is No Alternative"; a quote that the tabloids of the day transformed into the TINA Factor. Where, other than stocks and stock like investments, can one achieve any meaningful return today? In an era where central banks have depressed to near zero the return on treasury securites and instruments priced in relation thereto (e.g. investment grade bonds, certificates of deposit, money market accounts, etc.) "There Is No Alternative" to equity or equity like investments. In a very real sense, today, investing is all about getting some return; risk be damned. Monetary policy now holds sway over the stock market with investment fundamentals relegated to the back burner.

If you doubt how monetary policy now dominates stock markets, focus on what happened this past Thursday in Japan. That day, the Bank of Japan (BoJ) (the equivalent to our central bank, the Federal Reserve) in its most aggressive move yet to encourage industrial investment and to spur exports by devaluing the yen, announced its intention to increase the money supply in Japan by doubling its balance sheet in two years through the purchase of $70billion of newly issued Japanese treasury bonds---each month. Talk about quantitative easing and "loving the way we do it." The reaction was swift and "big in Japan." Within minutes of the announcement, a tsunami of money flowed into the Nikkei (the Japanese stock index) causing it to rise 2%, and the yen fell 2% in value versus the U.S. dollar. Oh, and as for creating a disincentive for anyone other than the BoJ to purchase those new treasury bonds, "there's really nothing to it"---literally. The yield on the 10 year Japanese bond is now hovering at or below 0.5%. That's right--- ZERO (which apparently is no longer just the name of a WWII fighter-bomber in Japan.) The reaction was also big here with my holdings in DXJ, the dollar hedged Japanese exchange traded fund that tracks the broader Japanese stock market, spiking 7.5% in one day!

And if you doubt the current disconnect between the stock market and investing fundamentals, note the depressed prices of virtually every industrial commodity--including many that have been directly correlated to the stock market for several years. Even the greatest bellwether of all, copper, is diverging from the stock market, with copper prices hitting multi month lows. Name the industrial commodity: iron ore, oil, natural gas, corn, "branch water, creosote, turpentine" (but maybe not "sour mash and moonshine") and note that the demand therefor and thus the prices thereof are following the "copperline"--- downward. Understandably, inventories in these commodities are building which indicates that economic activity is slowin'---and yet, contrary to investing fundamentals, the stock market keeps on rollin'. Again, the reason: central banks, the entities that set monetary policy throughout the world, believe that to kick start their economies (read, grow jobs) they must increase the supply of money in an effort to devalue their currency and thus promote exports. Simultaneously, they discourage investment in safe instruments that create no jobs like treasury bonds and c.d.'s and encourage investment in riskier job creating enterprises. With more money chasing a limited number of industrial stocks, prices of those stocks naturally rise. In short, the TINA Factor. Time will tell whether the ploy actually kick starts those economies (which this week's employment numbers belie) or it merely results in over inflated stock prices.

And so it goes. Remember, dear Readers, remain vigilant and nimble. A stock market that inflates with little regard for underlying investment fundamentals can turn on a dime---and perhaps that turn has begun. No matter what---do not fall in love with the stock market. It is merely a means to achieve a return. Indeed, when it comes to achieving any return on investment, recall the admonition of MY favorite TINA (Turner, that is)

"What's love got to do with it?"

P.S. During the big drop on Wednesday I bought more ARCC, my favorite business development company which had the misfortune of pricing its secondary offering that day. I took advantage of the situation and bought in a trough. Its dividend rate in my hands is nearly 9%. I wish I had bought more DXJ that day as well.