March 19, 2017 Repurchase

Risk/Reward Vol. 345
 
THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN

It came as no surprise to market watchers when the Federal Reserve raised short term rates on Wednesday.  As noted in last week's short missive, I was focused on the "dot plot" (the Fed members' composite prognostication of future rate increases) and any indication that the Fed would reduce its $4.5 trillion balance sheet.  In the press release and conference following the meeting, the Fed signaled three not four increases in 2017 and specifically eschewed the idea of reducing the balance sheet any time soon.  This moderate stance caused the bond market to quicken and in turn the yield on the all important US Ten Year Treasury Bond ("10Year") fell from 2.6 to 2.5%.  I expect that yield to trade in a tight range between 2.475 and 2.6% for the foreseeable future given the path described by the Fed.

On Thursday, I began repurchasing my favorites (mostly preferred stocks and preferred stock closed end funds) as the correlation in yields which I discussed at length in Vol. 343 (www.riskrewardblog.blogspot.com ) began to take shape.  Due to the lack of volatility (discussed in the next paragraph), I do not expect much capital appreciation during this next holding period.  But, if the quietude in rates lasts another 6 months, I can anticipate accruing an additional 3-4% in profits from the dividends alone.

Did you notice that in contrast to the panic experienced by Mr. Market lo these past 10 years anytime a rate increase was discussed let alone implemented (e.g. the Taper Tantrum of 2013 and the December, 2015 rate increase), the response to this week's move by the Fed was muted ?  This fact certainly caught the eye of commentators.  Many view this as the beginning of a return to normalcy; where markets are driven by fundamentals and economic policy, not by monetary policy formulated from on high by central bankers.  Indeed, I predict when the economic history of the past decade is written it will be entitled "Benanke-Yellen's Folly."  Artificially low rates set by the Fed have produced 10 years of sub-3% economic growth while at the same time the stock market has tripled in value.  In other words, cheap debt resulted in stock price inflating buy backs with very little trickling down to Main Street.

And what about the poor American saver?   You know, those who do not want to bet the farm on stocks, but merely want a safe return on guaranteed deposits and cd's.  Good luck.  Bank of America just reported that in 2016 it paid, on average, a whopping 0.04% in interest on all of the money it holds on deposit.  And don't look for this to improve.  In fact, money center banks which, post-Dodd Frank, now control most domestic banking have more money than they need.  They have 65% more cash on deposit than they had 10 years ago and their loan to deposit ratio is down to 75% from 92% in 2007.  There simply is no need to pay depositors when banks don't need (or want) their money.

I look for a quiet week ahead as Mr. Market awaits The Donald's promised reforms.