January 31, 2015 They Can't Take That Away

Risk/Reward Vol. 252

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

“The way you haunt my dreams.
No, no - they can't take that away from me”---lyrics from “Can’t Take That Away From Me” sung (originally) by Fred Astaire

“You got my cellphone number
Make that call”---lyrics from “Cell Phone #” sung by The Plain White T’s

“The world that we’re livin’ in
People keep on giving in
Making wrong decisions
Only visions of the dividend”---lyrics from “Where Is The Love” sung by Black Eyed Peas

Volatility continued this week. The Dow Jones Industrial Average had positive and negative triple digit days, closing down 508 points. The S&P 500 closed down 57 points. January saw each drop more than 3%. Clearly, we are in the throes of what market guru Mohamed El Erian terms “divergence.” Good job growth and encouraging earning reports in the US are trumped by continuing problems in Europe and Asia. As an example, the Eurozone’s economic powerhouse, Germany, this week reported that it is in a state deflation. The composite price of goods and services there has fallen 0.3% year to year as of January. And then there is Greece. Adding to the uncertainty this week was the enigmatic press release issued by the Federal Reserve at the conclusion of its mid week meeting. Some interpreted the statement as signaling that short term interest rates will rise as soon as June. Others read it to mean no rate increase until 2016. So which is it? We must not forget that Janet Yellen is a student of the Great Depression. As such, her “dreams are haunted” by the Fed’s decision to raise rates in 1937, just as the country was emerging from the Depression’s trough. That premature move caused the economy to tumble again. With inflation still far below the Fed’s target of 2% and with gross domestic product growth languishing below 3%, I simply don’t see the Fed raising rates anytime soon---especially when every other central bank is cutting rates. My prediction---the Fed “won’t take that (low rates) away from me” until September, at the earliest. Even then, any increase will be modest and likely will not adversely affect my bellwether, the 10 Year US Treasury Bond. (10Year) (By the way, "Can't Take It Away From Me" was #3 on the 1937 Hit Parade.)

Whatever challenges face global economies generally, they do not affect Apple. Did you see the “cellphone number” it reported this week? In the first quarter alone (Apple’s fiscal year began October 1, 2014), Apple sold 74 million iPhones---that’s 34,000 iPhones per hour, 24 hours per day, seven days per week. That incredible performance translated into $3.08 of profit per share---for the quarter. Despite paying a decent dividend and sponsoring the largest share buyback in history (Apple reduced its share count by 10% last year), Apple still has $175 billion of cash and marketable securities on its books. To put that in perspective, there are only 46 companies in the world that Apple could not buy----using only its excess cash and cash equivalents. If it so desired, without any debt, Apple could buy Disney, Visa, Amazon, Citigroup or countless others. And yet, Apple trades at only 13 times its forward price/earnings ratio (much less if you subtract its cash)--- well below the market’s average. If you don’t own Apple, you should give serious consideration to “making that call” to your broker.

In the volatile “world we’re livin’ in”, “people keep giving in” to their fears. As a consequence, they “make the wrong decisions.” They sell everything: even income producing (read, dividend paying) securities which are a safe harbor in a low interest rate environment. And that is where we are today. The interest rate on the 10Year ended the week at 1.67%, its lowest close in nearly 2 years. For those who have a “vision for dividends” such as yours truly, sell-offs of income producers provide excellent buying opportunities. Two cases in point arose this week. ETP, one of my favorite pipeline master limited partnerships, announced an acquisition which many viewed negatively due to its short term cost. ETP’s stock plummeted below $59, a buy signal to me. Under no foreseeable circumstance will the acquisition negatively impact ETP’s juicy dividend. By Friday, ETP was back over $61 despite the general market’s downward trajectory. On Friday, SO one of my favorite utilities reported cost overruns on one of its major projects. The stock fell 4% in one day. I’m betting that it will recover fully by the end of next week, buoyed by its consistent and attractive dividend.

For many, stock market volatility is like a Black Eyed Peas’ greatest hit album. Some days you feel “love drunk” as the market moves up the “Hump.” Other days you get pummeled---"Boom, Boom, Pow." But for me, volatility is a side show. My focus remains the 10Year yield; the lower it goes, the better I do. Times have been very good recently. And the good times will keep on rollin' so long as forces do not cause the yield on the 10Year to spike. So Janet, don't cause rates to rise. Once you “Get It Started", I may have to exit.