Risk/Reward Vol. 326 (correct version)
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I apologize for not advising you in advance, but I was at an invitation-only subscriber's conference in Florida last week and was unable to publish.
I concluded the last edition by stating that if one wanted a 6-7% return today, one needed to find a strategy other than "buy and hold". I stand by that statement, but I also note that "buy and hold", particularly buying and holding index stock funds, may be the safest play if one is looking for a lesser return. Here is the reasoning behind this statement. According to the Security and Exchange Commission, 67% of US stocks are owned by institutional investors: that is, pension funds, captive 401k's, insurance companies, sovereign funds, etc. Traditionally, institutional investors have employed a variety of experts such as hedge funds, fee based investment advisors, etc. in order to achieve returns better than the market in general. In recent times, over 70% these expensive experts have fallen short in comparison to inexpensive index funds. For this reason and because no return can be obtained in bonds these days and in response to new Federal regulations which mandate that institutional investors justify the fees they pay, many large players are now firing their experts, exiting bonds and buying index stock funds. Indeed, an article in last week's Wall Street Journal reported that in the past 3 years institutional investors have added $1.3 trillion into passive mutual funds (including ETF's) while removing $250billion from active management. Just a few days ago, Norway's huge sovereign fund ($880billion) announced it was increasing its stock holdings from 60 to 70% of its portfolio. In 2007, that sovereign fund was only 40% invested in stocks with 60% in bonds. Moreover, last week BlackRock, the world's largest investment company, announced that it now manages over $5trillion in assets (yes, that’s trillion), the lion's share of which are now housed in passive, indexed based exchange trade funds. With so much money pouring into index stock funds, it only makes sense that they will continue to hold value. In the minds of those who control the money, there simply is no alternative.
This fact has kept the two major indices reasonably stable over the past several months despite lower corporate earnings and despite an impending Federal Funds rate increase. Not so with the bond market and those securities that are correlated thereto. The yield on the all important US Ten Year Treasury has spiked to over 1.8%, its highest point since June as the bond market begins to "sell off" in advance of December's Federal Reserve meeting. This is true even though Mr. Market is still only assigning a 70% likelihood of the Fed increasing rates in December. Look for some signals out of next week's Fed meeting as to the likelihood of a move by year end---and moves beyond that date. If developments occur as expected, I likely will repeat what I did last December. I will buy en masse interest rate sensitive securities such as preferred stock closed end funds in the days after the Fed announces the rate increase. Why? Because Mr. Market invariably overreacts to such negative stimuli. I should see a few percentage point rebound in the succeeding weeks and months while enjoying healthy monthly dividend pay-outs. One factor that could impact any such gain would be the Fed raising rates again before June, 2017, the likelihood of which is currently pegged very low.
Also keep a watchful eye on oil. OPEC is scheduled to meet in November. If it votes to limit production, oil could be a very good play once again. The price continues to hover around $50/bbl., but could rise if a deal is cut. The stocks of oil companies are not reflecting confidence that a deal will be reached. Also weighing oil company stock prices down is the rise in the value of the dollar. Here is why. The dollar increases in value when US interest rates increase. This is because money is fungible and moves from low interest rate environments (e.g Europe) to higher rate environments (US). To effect this transfer one sheds Euros and acquires dollars. This is occurring even as I write. The Euro was worth $1.12 when Barb and I were in France earlier this month and now converts at $1.09. Since oil is priced in US dollars worldwide, an increase in the value of the dollar lowers the demand for oil (since by virtue of the exchange rate alone it is more expensive) and thus depresses its price.
I remain on the sidelines but am anxiously awaiting the results of OPEC's meeting in November and the December meeting of the Federal Reserve.
No comments:
Post a Comment