October 29, 2017 Exit Redux

Risk/Reward Vol. 368

THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN

In Vol. 365 published at the beginning of this month I wrote the following:

"I do not see the stock market rally ending.  As for interest rate sensitive securities (my favorites) caution is in the wind.  The shine came off of these a bit again this week with the 10Year yield spiking, but not so much as to warrant any move.  The monthly dividends that I receive far outweigh the slight hit to capital that I suffered these past two weeks.  And with the futures now anticipating a December hike, all should be peaceful for the next 3 months.  Should be, but may not be.  That is because in the next few weeks The Donald is going to name a new Federal Reserve chair.  Indeed, this week he interviewed Kevin Warsh for the job.  As noted previously, Warsh has been critical of Bernanke/Yellen's easy money approach and is deemed a rate hawk.  If he is the chosen one, it may cause rates to jump.  Consequently, I may collect one more month's dividends and then sell while rates climb to a new "Warsh" normal."

How prophetic!  This week those who support a hawkish approach to interest rates received a boost when The Donald took a straw poll of Republican Senators as to who the next Fed Chair should be and John Taylor won.  He of the famous "Taylor Rule" is even more hawkish on rates than Kevin Warsh.  The increased likelihood that Taylor would be named caused the yield on the US Ten Year Bond to spike above 2.45% on Wednesday, its highest yield in seven months. (Remember:  the higher the yield the lower the price.) This sudden move was the signal I needed to exit my interest rate sensitive portfolio and to take a seat on the sidelines. Later in the week the yield fell a bit on rumors that Powell was still in the running.  That move in turn was moderated by hawkish news that for the second quarter in a row gross domestic product exceeded 3% on an annualized basis.  Given this volatility, I will let the dust settle and let rates stabilize (and hopefully overshoot) before re-entering.  I may not be out too long given that the President now plans to announce his Fed Chair nominee next week. In retrospect I should have exited a few days earlier and indeed thought of so doing.  But I was out of town and otherwise occupied.  It cost me a few shekels, but the fun I had in the sun more than compensated for the small reduction in profits.  

As for those of you who are index investors, the party continues.  At dinner the other night I was asked whether the current rally is in anticipation of the passage of the President's tax plan and whether failure to pass it would result in a pull back.  I have no doubt that the prospect of tax reform has played some role in the spurt, but even if it does not pass I do not see a sell off.  Indeed, given recent positive corporate earnings reports, I foresee even market fundamentalists continuing to buy.  Lastly, as I have written in the past, until there is an alternative investment that promises some meaningful return, stocks are the only game in town.