Risk/Reward Vol. 355
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Does anyone feel good about what happened on Thursday? Who won in the Comey matter? The President claims "victory" but do you agree? Most commentators believe that the Donald avoided any serious threat of impeachment, but that the Comey revelations further weakened the President politically. Hope of any significant legislation this year is fading fast. In the UK, Prime Minister May received a shellacking at the polls thereby losing her gambit to strengthen the Tory's erstwhile majority. And the ECB, Europe's central bank, issued a statement indicating it would not cut rates further, but gave no indication of its future course. Indeed, I have encountered only one person who feels good about Thursday. Mr. Market. Friday's profit taking in the NASDAQ notwithstanding, Mr. Market continues to reach new highs on an almost daily basis. How come?
As discussed previously, I believe that the answer lies with two of Mr. Market's girlfriends: Goldilocks and Tina. As I reported two years ago (see Vol. 266 http://www.riskrewardblog.blogspot.com/) there are few things that Mr. Market likes better than predictability. He likes when the political and economic landscape is "not too hot" and "not too cold" ; just like Goldilock's porridge. And that condition certainly applies today. Mr. Market knows that with the economy running at 2% growth and the prospect of any stimulus fading, the Federal Reserve will likely not raise rates prospectively more than twice this calendar year. Knowing this causes the yields available in the bond market and the securities that trade in relation thereto (a/k/a the fixed income market) to depress and stabilize at the same time. This in turn causes fixed income investors to chase yield futher and further up the risk curve. Indicative of this is the fact that the yield spread between junk bonds and Treasuries fell to a 10 year low this week. At some point (like now) the return on risky fixed income becomes too great and investors are forced to buy stocks if they want any return. In other words, There Is No Alternative to stocks or TINA.
The spikes in stock prices have not been uniform however. Until Friday's rotation out of tech and into industrials and oil, stocks in the petroleum sector have been laggards. This is small wonder when reporting is so bad in the oil patch. News that is supposed to go one way (e.g. anticipated reduction in gasoline inventory) goes wildly the other way---as happened this past week. Moreover I am just not comfortable with oil stocks when the price of crude is below $50 and when it is directionally heading downward. Thus I sold my oil positions early in the week and took a small loss. I was otherwise a buyer however. As I presaged in the last edition, I bought several positions in municipal bond closed end funds. As I noted last week, this sector took a beating after the election in anticipation of tax reform that would make them less appealing. The prospect of any such reform in light of current DC politics is slim. And although muni's have made a decent recovery, there is still room for appreciation. Moreover, the tax free 5.5% income amortized and paid monthly is an added bonus.
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