Risk/Reward Vol. 262
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“More and more each day
It's not supposed to hurt this way
Tell me, why”---lyrics from “Why” sung by Avril Lavigne
“This is out of our reach
Out of our reach
Negative creep”---lyrics from “Negative Creep” sung by Nirvana
“I got my bubble, hey, I got my bubble, hey hey
I got my bubble, yeah, I make my bubble pop”---lyrics from “Bubble Pop” sung by Rihanna
Contrary to last week's prediction, the stock markets this week were calm with both of the major US indices gaining nearly 1.5%. Their movement was steady, and with the exception of Tuesday, stocks rose “more and more each day.” So, Mr. Know-It-All, “tell me why?” “Tell me why” we are approaching record highs on both the S&P 500 and the Dow Jones Industrial Average when the consensus is that corporate earnings will disappoint this quarter? “Tell me why” the CAC 40 (France), the DAX (Germany) and the FTSE 100 (Great Britain) are at multiyear highs when Europe continues its march toward deflation? “Tell me why” this is occurring when the Chinese economy is now predicted to grow at less than a 7% clip, and the emerging markets are struggling? “Tell me why?”
As demonstrated week after week, my powers of prognostication are questionable at best. Knowing what will happen is clearly “out of my reach/Out of my reach.” But here is my take on where we are. Those of you fully invested in the market are continuing to enjoy the fruits of worldwide quantitative easing (QE). Although our Federal Reserve stopped printing money to buy assets last October, it continues to suppress interest rates and to encourage more risk by rolling over its massive $4.5 trillion balance sheet and by keeping short term yields near zero. In addition, this year the European Central Bank embarked on its own QE-buying spree purchasing 60billionEuro’s worth of sovereign debt every month for the foreseeable future. The impact is obvious. With short to medium duration bonds throughout Europe doing a “negative creep”, with the German 10 Year Bund yielding only 0.15%, the French 10Year bond yielding 0.43% and the Spanish 10Year bond yielding only 1.22%, investors in search of a return have few choices: buy US debt (US 10Year yielding a mere 1.9% and investment grade corporate bonds only 2.9%) or buy progressively more expensive equities in the hope that they will continue to appreciate.
With stocks trading at record multiples of earnings, are we “in a bubble, hey/a bubble hey”? Don’t rely on me for an answer. Read Larry Fink’s letter to shareholders. For those who don't know, Mr. Fink is the founder and chairman of BlackRock, the world's largest asset manager with $4.5trillion (yes, that's trillion) under management. The letter can be found at www.blackrock.com . In pertinent part, it reads: “The mix of growing assets and shrinking yields is creating a dangerous imbalance. Yet monetary policy makers (read: central bankers) seem insufficiently attuned to the conundrum their actions are creating for investors: reach for yield and continue to fuel the expanding bubble or remain on the sidelines...” Fink calls the search for yield the “greatest source of prudential risk in the financial system.” How close are we to having the “bubble pop?” I don’t know. I do know that one of my favorite market guru’s, Mohamed El Erian, said last week that he is now mostly invested in cash because "asset prices have been pushed by central bankers to very elevated levels.” I too remain overweighted in cash.
And so, two weeks in a row this publication bears a negative tone while the markets continue to rise. Come to your own conclusions, and share them with me. Maybe I am too much like Rihanna. Instead of pleading "Please don't stop the music", I am living in “Disturbia”, opening an “Umbrella” and “Taking a Bow.” I can't help it. I am uneasy. Thus I am cautious. “Sticks and stones may break my bones”, but I am not “just gonna stand there and watch my nest egg burn.”
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