Risk/Reward Vol. 234
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“You can go your own way
Go your own way."---lyrics from “Go Your Own Way” sung by Fleetwood Mac
“Come on people. Can you do it, can you do it, can you do it
Can you do it, can you do it, can you do it
Can you do it, can you do it”---lyrics from “Cool Jerk” sung by The Capitols
“My boyfriend’s back/He’s gonna save my reputation
If I were you/I’d take a permanent vacation.”---lyrics from ‘My Boyfriend’s Back” sung by The Angels
On Thursday, as expected the ECB embarked on a new round of quantitative easing (QE) announcing that it will purchase asset backed securities and covered bonds (bonds with an added layer of security). In a bit of a surprise, the ECB also lowered the rates at which it lends to its member banks and raised the penalty for parking money that it holds on deposit for those same institutions. The ECB is doing all of this in order to spur economic activity in the economically moribund Eurozone which is spiraling toward recession and deflation. In so doing, the ECB is "going its own way/its own way" at least in comparison to the U.S. Federal Reserve. With the US economy showing continued improvement, the Fed is winding down its QE program which is scheduled to end in October. Moreover, it has pledged to raise short term interest rates if future data points reveal steady job growth and increased momentum toward its goal for inflation of 2%. The personal consumption expenditure index (PCE), the Fed's preferred inflation measuring stick, is currently at 1.6%.
With the above central bank divergence now a reality, the hypothetical I posited last week (“Can the Fed expect to increase the 10Year Treasury rate by tightening its short term interest rate reins if the European Central Bank loosens its belt and embarks on a new round of quantitative easing?” www.riskrewardblog.blogspot.com ) has become a real question. “ Can you do it, can you do it, can you do it/ Can you do it, can you do it, can you do it/ Can you do it, can you do it” So far, the answer is unclear with the 10 Year yield rising this week but coming to rest well below 2.5% at the close. The disappointing job numbers reported on Friday lessened the likelihood that the Fed will signal any acceleration in its decisional timetable at this month's meeting which is scheduled for Sept. 16-17. Still, I remain cautious; 2/3rds in cash. The stock markets are also digesting the impact of this divergence. Both the S&P 500 and the Dow Jones Industrial Average traded flat for most of the week, but ended with a flair, obviously adopting the adage that bad news (job numbers) is good news at least when it comes to keeping interest rates low and stock prices high.
Those that invest in the oil patch likely have encountered Kevin Kaiser, the energy sector analyst for Hedgeye. Hedgeye describes itself as “a bold, trusted, no-excuses provider of actionable investment research.” In times past, Kaiser has bashed Kinder Morgan and Linn Energy only to be proven wrong. Despite this, Hedgeye has not sent Kaiser on a “permanent vacation.” And now he has attacked Vanguard Resources (VNR) which he states is “worth (only)a small fraction of its current price.” (Small fraction? Really?) Kaiser’s track record notwithstanding, VNR’s stock has plummeted 12% since July 29th. Admittedly, VNR’s dividend is not sustainable at its current coverage ratio, but its outlook is good, and management is on record that its 8.5% yield is not in jeopardy. That said, until VNR’s “boyfriend” or some defender other than management emerges to “save its reputation”, its price likely will continue to languish. I see this as a buying opportunity.
This week, one of my favorite market mavens (see Vol. 173 www.riskrewardblog.blogspot.com), Howard Marks of Oaktree Capital Management, published his latest memo. It can be found at www.oaktreecapital.com and I recommend it to your attention. Therein, he discusses various market risks. One risk he identifies is FOMO, the fear of missing out. FOMO is a silly reason to invest, but a real one nonetheless. Having booked a 7% return so far this year, I wonder if my foray back into the market is driven less by intellect and more by FOMO. I would hate like hell to have my year devolve into a pathetic Fleetwood Mac lyric:
“I climbed a mountain and I turned around
And I saw my reflection in the snow-covered hills
Till the landslide brought me down”
I don’t think FOMO is the reason I am back in the market, but it is something against which I must guard.
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