Risk/Reward Vol. 350
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
We are back from France. Here is our report. By the time you read this edition, France will have elected a new president. What a choice: a nationalist wing nut or a feckless bureaucrat. Sound familiar. As for France's economy, it is in the toilet. One of its major industries, tourism, experienced a disappointing 2016 and from what we could see, 2017 will not fare better. Labor unions are restless. And most importantly, like the rest of Europe, France is facing a demographic time bomb. That stated, the country is beautiful. Plus, the French eat, drink and love better than any people on earth. They truly embody "joie de vivre." So what do they care? Indeed, if I didn't have 4 wonderful daughters, 4 great sons in law and 9, soon to be 10, grandchildren stateside, I would spend all my energy convincing my bride to move to Provence. And it would not take much convincing.
In our absence, the markets did well. Perhaps a little too well according to the Shiller Cyclically Adjusted Price Earnings Ratio or CAPE which measures relative historic stock valuations. CAPE is at a near record high; a level not seen since 2004. Traditionally, this signals overvaluation. Indeed, despite an anemic 0.7% growth in GDP in the first quarter, year to date the Dow Jones Industrial Average is up over 6%, the S&P 500 is up over 7% and the NASDAQ (about which I report little) is up 13%. Why don't I spend more time with NASDAQ? The answer is simple. It is tech heavy, and as a rule tech stocks do not pay dividends. To me, dividends are the mother's milk of investing. Speaking of dividends, I did not miss any, even though I was out of the market for two weeks. Several of my favorite monthly payers are scheduled to go ex-dividend next week As a consequence, I started repurchasing. Unfortunately, some of the preferred closed end funds that I fancy now trade above their net asset value so they were off limits to me. All of these repurchased positions are interest rate sensitive so I waited until after the Fed's meeting this week (where it stood pat on rates) before buying. The likelihood of a June increase is pegged at 80% according to the futures market. This is now priced into the market and accordingly has caused the rate on the all important US Treasury 10 Year Bond to rise above 2.35%. Through June, I anticipate that the 10Year rate will stabilize where it now resides with only a slight upward bias.
Hands down, the most thoughtful interest rate commentator today is Jim Grant, publisher of Grant's Interest Rate Observer. He holds more sway with me than either Jeffrey Gundlach or Bill Gross the current and former Bond Kings. Unfortunately, Grant's publication is extremely expensive. But good news! Grant's son and colleague, Phil Grant, now publishes an almost daily blog appropriately entitled "Almost Daily Grant's." You can have it sent to you via email by simply subscribing free of charge. The posts do not contain in depth analysis, but they do provide a glimpse into what the Grants believe the future holds for interest rates. Moreover, their principled criticism of the Fed is worth the read alone.
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