Risk/Reward Vol. 331
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Here are some observations.
The Trump Stock Rally continues. Each day the major indices flirt with record highs. More importantly, Mr. Market is not slavishly following and reacting to the every word of the Federal Reserve. Monetary policy no longer rules the roost. The prospect of fiscal stimuli in the form of repatriation of overseas dollars, tax reform and infrastructure spending has spurred a rotation out of bonds and equities.
Assisting the Rally was news this week that OPEC agreed to limit production to 32.5million barrels/day, a 4.5% reduction. The reaction was immediate. Heretofore see-sawing oil prices spiked 10% and now have found stability above $50/bbl. This is a key level for oil company profitability. Accordingly, worldwide oil stocks soared with personal favorites BP gaining, 3.5%, RDS (Shell) gaining 3.8% and PAA gaining 4% this week alone. These huge gains notwithstanding many oil companies are still inexpensive. RDS's and BP's dividends are both near 7%. I am looking to buy on any pull back.
The Trump Stock Rally is also the Trump Bond Rout. As of Thursday, the yield on the 10YearUS Treasury Bond had spiked 36% since the election (2.45%-1.80%= 65bp/180bp=36%). (REMEMBER: higher yields mean lower prices.) Friday saw this moderate a bit, but not enough to reverse the trend. November was the worst performing month for U S Treasury bonds since 1990. And it was not much better for municipal bonds. They experienced their worst month since 2008 when Mr. Market feared several cities would declare bankruptcy.
The move away from globalization and toward nationalism which started with Brexit and accelerated with Trump's election may not be running out of steam. Little noticed this past week in the US was the victory in France's presidential primary achieved by Francois Fillon. Fillon is a staunch conservative who fancies himself the new Margaret Thatcher. He promises to reduce France's bloated bureaucracy, to protect its borders, to raise the retirement age to 65 and to govern consistent with France's traditional, Catholic values. His victory means that the two most likely frontrunners will be him and Marine LePen who is so far right she is deemed a neo-Fascist by much of the world's press. Couple this development with what could be a disruptive referendum to be held today in Italy and the future of the Eurozone becomes very cloudy. Keep your eye on the Euro which is now at $1.06.
Have you been following the excoriation of Justin Trudeau since he tweeted his encomium to Fidel Castro last Sunday? If not , I suggest you read some very acerbic cuts at # trudeaueulogies and similar Twitter communities. HIs comeuppance at the hand of the Twittersphere is just one more example of how powerful social media is and how irrelevant the fawning main stream press has become. Think not? Just ask Donald Trump. I write about Canada's Prince Charming Prime Minister not to add to his humiliation, but to note how even he knows where is bread is buttered. Pretending to be a climate protector, this week he approved two massive pipeline projects which will nearly double the export of oil from Alberta. Alberta's oil is deemed the least climate friendly source of petroleum in the world, a fact which has held up the Keystone pipeline in the US since the beginning of the Obama presidency. Clearly, even Justin recognizes the need for North American energy independence, something our Fearless Leader has failed to pursue despite having the means to do so. This should be a Day 1 priority for DT.
So what does this all mean? I see the US stock market maintaining its gains if not adding to them. I see the rotation out of bonds and into equities abating with some stability returning to bonds and other interest rate sensitive securities . A key indicator of this will be the market's reaction to the Federal Reserve's now certain rate increase set for later this month and what is contained in its post meeting press release. Likely, that will be the time I re-enter in force. I have my list of preferred stocks, closed end funds and REIT's already selected for my tax deferred accounts. For my taxable account, I have a long list of leveraged municipal bond closed end funds queued for purchase. This sector has been decimated recently and looks very inviting.
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