Risk/Reward Vol. 363
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
They may not have been to Texas or Florida, but Harvey and Irma were a relief to Mr. Market. So much so, the Dow Jones Industrial Average and the S&P 500 both hit new highs this week. A relief? Well, yes. The current damage estimates are 50 to 75% lower than first thought. Oil and gas are beginning to flow out of Texas, and the power rangers are at work restoring electricity in Florida. For reasons that I have explained ad nauseam (most prominently TINA or There Is No Alternative), the stock market just keeps on rising. It seems as though nothing, not the political mess in Washington, not the threat of a nuclear attack, not even back to back enormous storms can stop the stock market juggernaut.
Although most of you probably have concluded that my travels are merely for pleasure, they are not. Last weekend was spent on Lake Burton, GA in the company of subscribers and an investment professional. Like most of us, the subscribers wondered how long the upward march of equities would last and whether they were overpaying for professional money management. The professional was just that---professional. He listened to the concerns and opined only when pressed. It is his belief that given the current interest rate environment, the huge amount of money still on the sidelines and continued improvement in earnings per share (admittedly due in large part to buy backs), the stock market has more room to run. More importantly, he does not see any event that will cause a precipitous decline. As loyal readers know, I agree. That said, my portfolio is designed with 2000-01 and 2008-9 in mind. I am ready for a massive correction even if one is not readily apparent.
For those who watch interest rates (and all of us should), there were several developments this week. Most importantly, the Labor Department released Consumer Price Index numbers on Thursday. Prices rose 1.9% on an annualized basis in August, higher than expected. This level of inflation undoubtedly will provide the Federal Reserve the backbone to begin reducing its $4.5 trillion balance sheet as early as next week's Fed meeting. It also may be close enough to the Fed's desired inflation rate of 2% (measured by PCE, a more conservative gauge than CPI) to justify a 25 basis point interest rate hike in December. The odds of this occurring rose above 50% Thursday afternoon. Also on Thursday, the Bank of England gave guidance that it may soon raise short term rates. Add to this, the European Central Bank's pledge to end quantitative easing soon and one can see a world wide effort to "normalize" interest rates. As a consequence, the rate on the all important US 10 Year Treasury Bond rose from a fear-of-hurricane-induced low of less 2.05% last week to over 2.20% at this week's end. This is quite a jump. I am still comfortable in my interest rate holdings, but should this pace continue I will need to reconsider my positions.
Continuing my quest for knowledge, next week Barb and I head to France for three weeks. We have taken an apartment in Cassis, a small seaside town in Provence. I will be focused particularly on the cost of wine, bread, cheese and fine dining. If I miss a week or two or three, please know that it is only because of my dedication to research--- and to you, my Dear Readers.
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