September 27, 2014 Ball of Confusion

Risk/Reward Vol. 237

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

“Round and around and around we go
Where the world’s heading/Nobody knows
Great googalooga/Can’t you hear me talking to you
Just a ball of confusion.”---lyrics from “Ball of Confusion” sung by The Temptations

“Don’t you know things can change
Can you hold on for one more day
Things’ll go your way.”---lyrics from “Hold On” sung by Wilson Phillips

“Give me that old time religion
It’s good enough for me.”---lyrics from “Old Time Religion” sung by Everyone

“Round and around and around we go/Where the market’s heading/Nobody knows.” This week The Dow Jones Industrial Average was down triple digits, down triple digits, up triple digits, down triple digits, up triple digits. Is the stock market just a roulette wheel; “just a ball of confusion”? At first glance the answer appears to be “yes”; but a deeper look reveals that the market’s confusion is justified. Domestically, Mr. Market is struggling to digest the impact of an improving economy and the prospect of interest rates rising as early as Q1 2015. Meanwhile, he must consider the fact that economies elsewhere; notably in China and the Eurozone are staring at sluggish growth in one instance (weak domestic demand for goods and slowing exports in China) and recession in the other (Euro at multi-year low versus the dollar). In response, their central banks are adopting ever more accommodative monetary policies. In short, Mr. Market must determine if the US can continue to prosper and to tighten its monetary policy if the rest of the world’s economies continue to struggle and their banks continue to loosen their purse strings.

The cross currents buffeting the broader market also were felt this week in the income sectors that I fancy. Action on the 5Year Treasury Note exemplified this. On Wednesday, the 5Year experienced a weak auction with low coverage and a low bid, both facts signaling a belief that interest rates likely will increase sooner rather than later. This followed news earlier in the week that the spread on the 5Year Treasury Inflation Protected Note (TIP) was at a multi-year low signaling Mr. Market’s belief (that day at least) that inflation would average only 1.6% annually over the next five years; a situation that augurs against any interest rate increases. Huh? Adding to the confusion in the fixed income world was the shocking resignation on Friday of the Bond King, Bill Gross, from PIMCO, the company that he founded. Much disruption in the fixed income sector is possible in the days ahead as billions of dollars may follow him to his new home at Janus---or not. Through it all, the yield on the 10Year Treasury, to which I attach great significance, traded in a tight range---essentially holding pat; as did I. I bought very little this week. “You know that if you hold on (to your cash) for one more day/Things can change.” Indeed, “they may even go your way.”

In times like this, I seek guidance in “old time religion/It’s good enough for me.” So this week, I re-read portions of Benjamin Graham’s books Security Analysis (first published in 1934) and The Intelligent Investor (first published in 1949). And am I glad that I did. Ben Graham is considered the father of value investing and is remembered as Warren Buffett’s mentor and guru. But he is so much more than either of those sobriquets. If you have not read these, I suggest that you do (and if only one, make it The Intelligent Investor). The distinction he draws between investors and speculators, with the former’s insistence upon the receipt of regular and consistent income, reinforces the conviction I have in my approach. In a world of suppressed interest rates, balance sheets bloated by retained earnings and a love affair with share buy backs, it has become difficult to find solid streams of income. But, the difficulty of the search only makes the discovery more rewarding.


In editing this edition, it reads too didactic. I will resist The Temptation for “store front preachin’” in the future. That said, you may not hear from me for two weeks. I am heading to Italy with “My Girl.” And it is likely that

“I won’t have time to think about money
Or what it can buy
I’ll be a fella
With a one, a one track mind
And if it comes to thinkin’ about
Anything but my baby
I just won’t have the time.”