Risk/Reward Vol. 249
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Can’t undo a fall like this
Cause love don’t know what distance is
Yeah, I know it’s crazy.”---lyrics from “I Want Crazy” sung by Hunter Hayes
“I’m down/I’m really down
I’m down/Down on the ground.”---lyrics from “I’m Down” sung by The Beatles
“Rescue me/Take me in your arms
Rescue me/I want your tender charms.”---lyrics from “Rescue Me” sung by Fontella Bass
At one time during the trading day on Tuesday, the Dow Jones Industrial Average (DJIA) hit 17,262; more than 570 points below its close the previous Friday. This drop caused many talking heads to predict that 2015 would be the year of the Bear; that Mr. Market “can’t undo a fall like this.” After all, the price of oil, the fuel upon which the entire world runs, had fallen below $50/bbl. But by Thursday’s close the DJIA had gained 645 points, ending 3.7% higher than where it had been just two days previous. "Yeah, I know it's crazy." Friday saw some profit taking and some negative reaction to last month’s reported average wage decrease. But the week ended at 17,737 just 0.5% below where it ended last week.
So what is an investor to make of this roller coaster market? Down 3% one day, up 4 % the next with the VIX (which measure market volatility) itself trading wildly. How is one to interpret Friday’s jobs report which has US unemployment at 5.6% yet wages continuing to fall? Does the fact that the Eurozone is now in a state of deflation (with consumer prices having fallen 0.2% year to year as of December, 2014) pose a threat to our economy? Is oil at $47/bbl. indicative of an economic slowdown or will cheap oil boost consumer spending? Where can one look for guidance? I, for one, pay little heed to these conflicting signs and continue my laser focus on the benchmark US 10 Year Treasury. And “its yield is down/it’s really down/it’s down/Down on the ground” finishing the week at 1.97%.
So what does a low yield on the 10Year mean to me? It means that the rest of the world has capitulated. Investors worldwide are looking to the US to “Rescue me/Take me in your arms/Rescue me/I want your tender charms.” Capital is flowing stateside. And why not? The German 10 Year Bund is yielding 0.49%, the Spanish 10 Year 1.71%, the French 10 Year 0.78%----this as the European Central Bank (ECB) is contemplating a round of quantitative easing (purchasing sovereign and corporate debt) which will only depress yields further. The resultant global search for yield combined with a concern for safety (which events in France this week only heightened) should equate to continued market appreciation here in the US. Moreover, the strengthening of the dollar versus every other currency in the world will put a damper on the Federal Reserve’s appetite to raise short term interest rates ( whose impact on longer term rates such as that on the 10Year is questionable anyhow--- see last week’s edition discussing same www.riskrewardblog.blogspot.com ). The easy money punch bowl provided by the Fed very well may continue into the third quarter of 2015. In sum I see favorable conditions for US- centric equities in general (other than those in the oil patch), and US-centric income securities (real estate investment trusts, municipal bond funds, preferred stock, etc.) in particular.
The world’s economy is struggling just as that of the US is turning the corner. As discussed above, this likely is good news for the US stock market in the short to intermediate run, but may drag all financial assets down in time. I see the Federal Reserve paying closer attention to foreign affairs in the coming months as suggested in its December meeting minutes released this week. I can hear Mario Draghi of the ECB on the telephone with Fed Chair Yellen even now, quoting the following Beatles refrain:
“Help me if you can, I'm feeling down
And I do appreciate you being 'round
Help me get my feet back on the ground
Won't you please, please help me”
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