May 31, 2015 So Excited (Not)

Risk/Reward Vol. 268

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

“I'm so excited

And I just can't hide it

I'm about to lose control
And I think I like it”---lyrics from “Excited” sung by The Pointer Sisters


“Nothin like the old school
Ain't nuttin like the old school”---lyrics from “Old School” sung by 2Pac

“And I'm bringing you a love that's true.
So get ready, so get ready”---lyrics from “Get Ready” sung by The Temptations

When it comes to this year's stock market, have you heard anyone say “I’m so excited/And I just can’t hide it?” Has anyone exclaimed that “I’m about to lose control?” Or even “I like it?” I have not, and with the news on Friday that the nation’s economy shrank 0.7% in the first quarter, I don’t see a lot of excitement forthcoming. Experts now predict that the economy will grow about 2% for the year, consistent with the sluggish pace experienced over the past few years. With no new monetary stimulus at play (QE3 is over, and short term interest rates cannot go much lower), the stock market remains in a tight trading range. Year to date, the Dow Jones Industrial Average is up only 1.05%, and the S&P 500 is up 2.36%.

The performance of these indices would be much worse if not for an avalanche of share buy backs and dividend raises. Between these two shareholder-friendly moves, corporations comprising the S&P 500 will return a record $1Trillion to shareholders in 2015. Buybacks (which reduce the denominator in eps calculations) alone will raise earnings per share at least 4% for more than 100 companies this year. Exemplifying this is Pfizer (PFE) which is up 11% year to date notwithstanding fourteen consecutive quarters of diminishing sales and three straight quarters of earnings declines. Despite this poor performance, the pharma giant known for Lipitor, Viagra and Lyrica has kept its stock buoyed by coupling earnings announcements with huge buybacks and dividend increases. Is this bad? I don’t think so. Through the 1960’s, publicly traded corporations on average returned more than 50% of their earnings to shareholders primarily via dividends. That percentage fell dramatically in subsequent years. Indeed, dividends were considered passe during the dot.com era. Their return and that of their step sister, share buybacks, should be welcomed by income seekers of a certain age (e.g. yours truly). Like 2Pac, I say “Nothin like old school/Ain’t nuttin’ like old school.”

So far this year, I have not been penalized by sitting on a pile of cash. The DJIA and S&P’s paltry returns have not warranted taking much risk. I have not sat idly, however. I am “gettin’ ready/gettin’ ready” for my chosen moment to buy. As reported previously, that will be when the timing of the Fed’s decision to raise short term interest rates becomes clearer. Based upon the Fed Funds futures and the current yield on the bellwether 10Year Treasury (2.12%), most market participants are looking for the first rate increase in December. I am hoping that it occurs before then (say, September), that it sends a shock through the markets and that it thereby creates a significant buying opportunity. A good shopping list can be had by going to Google Finance’s stock screener, selecting a minimum dividend rate (e.g 3.5%) and sorting by market cap. There you will find "a love that's true." You will see some great, blue chip companies, many of which will be hammered once rates increase--- if only for a short while.

Like it or not, great buying opportunities arise when stock markets drop. And the next rain on the current bull market's parade likely will occur when the Federal Reserve raises interest rates. We all know it is going to happen, so get on with it, Janet. Bring on the storm. Until then, I will continue to invoke The Temptations:

“Sunshine, blue skies, please go away
I know to you it might sound strange

But I wish it would rain
How I wish that it would rain”