Risk/Reward Vol. 167
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I guess all is fair in love and war/Someone wins
But someone wins more/You never know what time will do
All I know is I've got some good news/I've got some bad news."---lyrics from "Good News/Bad News" by George Strait
"Stop in the name of love/Before you break my heart
Think it over/Think it over."---lyrics from "Stop In The Name of Love" sung by The Supremes
"Come round you rovin' gamblers/And a story I will tell
About the greatest gambler/You all should know him well."---lyrics from "Ramblin' Gamblin' Willie" by Bob Dylan
In what at first blush appeared to be an illogical twist, the Dow Jones Industrial Average (DJIA) rose 165 points this week despite lackluster earnings reports and bad economic data from around the globe: lower purchasing manager indices (signaling a slowdown) from both the U. S. and China and news that the recession in the Eurozone has worsened to the point of infecting Germany. Why hasn't the stock market tanked? The answer is simple: when stock prices are influenced more by monetary and fiscal policies than by economic fundamentals, "bad news" is indeed "good news" because "bad news" holds the prospect of more easy-money measures and government stimuli. Indeed, although "you never know what time will do", the prevailing wisdom is that because the Eurozone is in such bad shape, the European Central Bank (ECB) will lower its discount rate (the rate at which commercial banks borrow from central banks) from 0.75% to 0.50% at its meeting next Thursday. In addition, as proof that "all is fair in love and war", the austerity measures put in place throughout the Eurozone a few months ago as an inflation safeguard may soon be abandoned in favor of more government stimulus. As discussed previously (www.riskrewardblog.blogspot.com Vol. 126), easy money policies and government stimuli may have detrimental long term effects, but in the short run they are very good for stocks.
The market's overall strength notwithstanding, it did suffer a precipitous if ephemeral drop on Tuesday in response to a fake AP Tweet that the White House had been attacked and the President injured. In the span of a few minutes, the DJIA lost and then recovered 1%. Due to the Flash Crash of 2010 and the prospect of incidents such as this, I no longer rely on automatic sell orders. If you do, "think it over/ think it over." If you persist, then "in the name of love" be sure to use "stop"-limit orders, not "stop" orders. I leave it to you to ascertain the difference, but it is significant. Use of the former lessens the chance that such an event "will break your heart."
If the ECB lowers the discount rate and austerity in the Eurozone is abandoned, look for Eurozone stocks to rise and the Euro to fall in relation to the dollar. This is what happened to the Japanese stock market and the yen earlier this year when similar measures were announced in Japan. So "come round you rovin' gamblers/And a story I will tell." At that time I purchased a dollar hedged, exchange traded fund (ETF) holding a basket of Japanese stocks (DXJ) which has appreciated 27% since I acquired it January 9, 2013. I certainly am not "the greatest gambler", but next week I am contemplating buying HEDJ, a dollar hedged ETF holding a basket of Eurozone stocks. Maybe lightning will strike twice.
When "bad news" is "good news", when a fake Tweet can crash the stock market and when austerity is trumped by stimulus, one is left to wonder if fundamentals are now irrelevant. In such times, I resort to the advice of that noted investor, Bob Dylan
"The answer my friend is blowin' in the wind/The answer is blowin' in the wind."
P.S. This week, Linn Energy (LINE) and its affiliate Linco (LNCO) announced a monthly dividend policy making them ever more attractive to me.
P.S.S. I am comfortably ahead of my full year goal. That said, as of today, I do not intend to "sell in May." I hope I do not regret this decision. What are your intentions?
Saturday, April 27, 2013
Saturday, April 20, 2013
April 20, 2013 Rain Check
Risk/Reward Vol. 166
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Slow down, you move too fast
You've got to make the morning last."---lyrics from "Feeling Groovy (59th St. Bridge Song)" by Simon and Garfunkel
"Right to the top/Don't look back
Turning the rags/Giving commodities a rain check."---lyrics from "It's Time" by Imagine Dragons and as performed on "Glee"
"We'll count the hugs and the kisses
When dividends are due
'Cause I'm in the market for you."---lyrics from "I'm In The Market For You"---by Louis Armstrong
With Monday opening on disappointing growth numbers from China and closing with the terrorist attack in Boston, the stock market "slowed down." The market recovered on Tuesday, but fell again on Wednesday and limped through Thursday and Friday, with the Dow Jones Industrial Average closing down 318 points for the week. Having "moved too fast", stocks were bound to correct. It is unfortunate that one catalyst this week was "mourning."
But is the drop merely a temporary correction or is the stock market now priced "right to the top"? Will we "look back" on this week as the one during which riches "turned to rags"? Of course, no one knows for sure, but there are signs that the world's economy is slowing despite massive infusions of capital compliments of quantitative easing here and abroad. Prominent among these signs is the "rain check" on the demand for commodities. The international price of oil (Brent) fell below $100/bbl. for the first time since July, 2012. Copper prices are at their lowest point since October, 2011. On a broader scale, CFD, an exchange traded fund which tracks a host of commodities futures (oil, natural gas, copper, soybeans, corn, cattle, wheat, etc.) is at multi-year lows. Participants in this week's Global Commodities Conference in Switzerland predicted that commodity prices will likely continue their slide. And as for gold, "rain check" doesn't begin to describe its precipitous fall. With the emergence of the commodity-driven Chinese economy as a major influence on stock prices and with the financialization of commodities in general (via ETF's), the correlation between commodity demand and the stock market is no longer debatable. A sustained drop in commodity prices (read, demand) is a negative signal to the stock market.
So what did I do this week? I kept my eye on investments that held steady during the two days of triple digit declines. And two that warranted "hugs and kisses" were PGF and PGX, exchange traded funds that own a variety of preferred stocks. I bought more: PGX in my 401K because half of its holdings pay dividends that do not qualify for preferential tax treatment and PGF in my personal account because all of its holdings pay qualified dividends. Although neither of these has appreciated during the huge stock run of 2013, neither has fallen in price. Both pay monthly dividends, and both yield over 6% annually. And 6% is all that "I'm in the market for."
Next week should give some visibility on whether this swoon is a temporary correction or an early beginning to the summer doldrums which have characterized the past few years. In either event, I will continue my search for steady monthly payors like PGX and PGF (and their slightly more volatile closed end fund cousins, JPI, JPC and HPF), stocks that in times like this
"Ease my mind/Like a bridge over troubled waters."
P.S. And as for the year to date 30% decline of Apple---unless and until it deploys its pile of cash ($130bn) in a shareholder friendly way (say, a significant dividend increase or a massive buy back campaign), I am keeping my distance. Apparently, I am not alone.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Slow down, you move too fast
You've got to make the morning last."---lyrics from "Feeling Groovy (59th St. Bridge Song)" by Simon and Garfunkel
"Right to the top/Don't look back
Turning the rags/Giving commodities a rain check."---lyrics from "It's Time" by Imagine Dragons and as performed on "Glee"
"We'll count the hugs and the kisses
When dividends are due
'Cause I'm in the market for you."---lyrics from "I'm In The Market For You"---by Louis Armstrong
With Monday opening on disappointing growth numbers from China and closing with the terrorist attack in Boston, the stock market "slowed down." The market recovered on Tuesday, but fell again on Wednesday and limped through Thursday and Friday, with the Dow Jones Industrial Average closing down 318 points for the week. Having "moved too fast", stocks were bound to correct. It is unfortunate that one catalyst this week was "mourning."
But is the drop merely a temporary correction or is the stock market now priced "right to the top"? Will we "look back" on this week as the one during which riches "turned to rags"? Of course, no one knows for sure, but there are signs that the world's economy is slowing despite massive infusions of capital compliments of quantitative easing here and abroad. Prominent among these signs is the "rain check" on the demand for commodities. The international price of oil (Brent) fell below $100/bbl. for the first time since July, 2012. Copper prices are at their lowest point since October, 2011. On a broader scale, CFD, an exchange traded fund which tracks a host of commodities futures (oil, natural gas, copper, soybeans, corn, cattle, wheat, etc.) is at multi-year lows. Participants in this week's Global Commodities Conference in Switzerland predicted that commodity prices will likely continue their slide. And as for gold, "rain check" doesn't begin to describe its precipitous fall. With the emergence of the commodity-driven Chinese economy as a major influence on stock prices and with the financialization of commodities in general (via ETF's), the correlation between commodity demand and the stock market is no longer debatable. A sustained drop in commodity prices (read, demand) is a negative signal to the stock market.
So what did I do this week? I kept my eye on investments that held steady during the two days of triple digit declines. And two that warranted "hugs and kisses" were PGF and PGX, exchange traded funds that own a variety of preferred stocks. I bought more: PGX in my 401K because half of its holdings pay dividends that do not qualify for preferential tax treatment and PGF in my personal account because all of its holdings pay qualified dividends. Although neither of these has appreciated during the huge stock run of 2013, neither has fallen in price. Both pay monthly dividends, and both yield over 6% annually. And 6% is all that "I'm in the market for."
Next week should give some visibility on whether this swoon is a temporary correction or an early beginning to the summer doldrums which have characterized the past few years. In either event, I will continue my search for steady monthly payors like PGX and PGF (and their slightly more volatile closed end fund cousins, JPI, JPC and HPF), stocks that in times like this
"Ease my mind/Like a bridge over troubled waters."
P.S. And as for the year to date 30% decline of Apple---unless and until it deploys its pile of cash ($130bn) in a shareholder friendly way (say, a significant dividend increase or a massive buy back campaign), I am keeping my distance. Apparently, I am not alone.
Saturday, April 13, 2013
April 13, 2012 The Silver Hammer
Risk/Reward Vol. 165
THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Bang, bang, Maxwell's silver hammer/Came down on her head
Clang, clang Maxwells silver hammer/Made sure that she was dead."---lyrics from "Maxwell's Silver Hammer" by The Beatles
"The prettiest people do the ugliest things/For the road to riches and diamond rings
We shine because they hate us/Floss cause they degrade us
We trying to buy back our 40 acres"---lyrics from "All Falls Down" by Kanye West
"When you started off with nothing/ And you're proud that you're a self made man
Yes, I 'm stuck in the middle with you."---lyrics from "Stuck in the Middle" sung by the Stealers Wheel
"Bang, bang!" Another week, another record high for the Dow Jones Industrial Average and the S&P 500...and another two gurus join the list of those gravely concerned by the impact of quantitative easing here (QE3) and abroad (Japan). Sam Zell, the founder of several real estate investment trusts and known as the nation's largest landlord, likened the QE3-juiced stock market to the real estate bubble of 2006. He is convinced that it will burst, but like everyone else he doesn't know when. And Rick Rieder, the head of BlackRock's $752billion fixed income portfolio described QE3 as a "large, dull hammer" "Clang, clang!" Sooner or later, the "silver hammer" will "come down on our heads". Ask yourself, what will happen to interest rates once the Federal Reserve stops buying $45billion worth of Treasury securities and $40billion worth of home mortgages each month (which equates to 64% of all net Treasury debt and 34% of all home mortgages) ? Frankly, we are in uncharted waters, and no one knows. However, many gurus fear that quantitative easing has perverted our credit markets and that its inevitable cessation will cause a negative ripple throughout the financial world. In other words, unless we are nimble, our gains could "for sure be dead."
But, hey, while QE3 lasts, "we shine"! One consequence of QE3's cheap debt financing is the proliferation of stock "buy backs". Properly played they can provide a "road to riches and diamond rings." Allow me to explain. The classic means of valuing a stock is to apply a multiplier to a stock's projected earnings on a per share basis. If a company has projected earnings of say, $4 per share (determined by dividing the projected annual earnings by the number of shares outstanding) and the company trades at the S&P 500 average multiple of 15 times earnings, the stock will be valued at $60. A company can increase its share value in three ways: by increasing its total earnings; by aggressively growing its business (which typically results in the market applying a higher than average earnings multiple); or by reducing its share count. During times of low interest rates (like now thanks to QE3), corporations often borrow money and use it to repurchase their shares. This lowers the share count which increases earnings per share which in turn results in higher stock prices. For example, over the past 12 months, AT&T has borrowed more than $5billion at rates as low as 1.5% which it has used to repurchase shares carrying a 5% dividend. This 3.5% interest rate/dividend arbitrage has been a win/win for shareholders. In the past year, AT%T's stock price has risen 26% (while increasing its dividend) even though its projected earnings multiple is only the market average of 15, typical of a company experiencing only moderate growth. Look for massive buy backs as a signal to buy.
As the search for yield becomes more difficult, give consideration to buying business development company (BDC) stocks. As discussed in earlier editions, the primary business of BDC's is providing senior and mezzanine financing to companies that are "stuck in the middle" market: typically entrepreneurial entities run by "proud, self made men who started off with nothing"; but entities that are still too small to be deemed credit worthy by the public markets. Since the financial crisis of 2008, banks, the traditional funding source for the "middle market" have shied away from lending to these enterprises. That lending void has been filled in part by BDC's. I like them because in order to maintain their pass-through tax status, BDC's must distribute 90% of their earnings to their shareholders. Despite their outsized yields, BDC's have trailed the general market significantly so far this year, and thus they may present a buying opportunity. As noted last week, my favorite is ARCC. I also like the closed end fund FGB, which holds positions in several BDC's. A recently launched exchange traded fund, BDCS, is also worth a look.
Several times over the past few weeks, I have been contacted by Readers inquiring whether it is time to exit the market. I have no special insight on this, but I do listen to The Beatles. Ms. Market has "done right by me" even if "I don't know why she is riding so high." And although someday "I think I'm goin' to be sad", I "don't think it's today." So, I'm stickin' with her so long as she appears to have "a Ticket to Ride.".
THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Bang, bang, Maxwell's silver hammer/Came down on her head
Clang, clang Maxwells silver hammer/Made sure that she was dead."---lyrics from "Maxwell's Silver Hammer" by The Beatles
"The prettiest people do the ugliest things/For the road to riches and diamond rings
We shine because they hate us/Floss cause they degrade us
We trying to buy back our 40 acres"---lyrics from "All Falls Down" by Kanye West
"When you started off with nothing/ And you're proud that you're a self made man
Yes, I 'm stuck in the middle with you."---lyrics from "Stuck in the Middle" sung by the Stealers Wheel
"Bang, bang!" Another week, another record high for the Dow Jones Industrial Average and the S&P 500...and another two gurus join the list of those gravely concerned by the impact of quantitative easing here (QE3) and abroad (Japan). Sam Zell, the founder of several real estate investment trusts and known as the nation's largest landlord, likened the QE3-juiced stock market to the real estate bubble of 2006. He is convinced that it will burst, but like everyone else he doesn't know when. And Rick Rieder, the head of BlackRock's $752billion fixed income portfolio described QE3 as a "large, dull hammer" "Clang, clang!" Sooner or later, the "silver hammer" will "come down on our heads". Ask yourself, what will happen to interest rates once the Federal Reserve stops buying $45billion worth of Treasury securities and $40billion worth of home mortgages each month (which equates to 64% of all net Treasury debt and 34% of all home mortgages) ? Frankly, we are in uncharted waters, and no one knows. However, many gurus fear that quantitative easing has perverted our credit markets and that its inevitable cessation will cause a negative ripple throughout the financial world. In other words, unless we are nimble, our gains could "for sure be dead."
But, hey, while QE3 lasts, "we shine"! One consequence of QE3's cheap debt financing is the proliferation of stock "buy backs". Properly played they can provide a "road to riches and diamond rings." Allow me to explain. The classic means of valuing a stock is to apply a multiplier to a stock's projected earnings on a per share basis. If a company has projected earnings of say, $4 per share (determined by dividing the projected annual earnings by the number of shares outstanding) and the company trades at the S&P 500 average multiple of 15 times earnings, the stock will be valued at $60. A company can increase its share value in three ways: by increasing its total earnings; by aggressively growing its business (which typically results in the market applying a higher than average earnings multiple); or by reducing its share count. During times of low interest rates (like now thanks to QE3), corporations often borrow money and use it to repurchase their shares. This lowers the share count which increases earnings per share which in turn results in higher stock prices. For example, over the past 12 months, AT&T has borrowed more than $5billion at rates as low as 1.5% which it has used to repurchase shares carrying a 5% dividend. This 3.5% interest rate/dividend arbitrage has been a win/win for shareholders. In the past year, AT%T's stock price has risen 26% (while increasing its dividend) even though its projected earnings multiple is only the market average of 15, typical of a company experiencing only moderate growth. Look for massive buy backs as a signal to buy.
As the search for yield becomes more difficult, give consideration to buying business development company (BDC) stocks. As discussed in earlier editions, the primary business of BDC's is providing senior and mezzanine financing to companies that are "stuck in the middle" market: typically entrepreneurial entities run by "proud, self made men who started off with nothing"; but entities that are still too small to be deemed credit worthy by the public markets. Since the financial crisis of 2008, banks, the traditional funding source for the "middle market" have shied away from lending to these enterprises. That lending void has been filled in part by BDC's. I like them because in order to maintain their pass-through tax status, BDC's must distribute 90% of their earnings to their shareholders. Despite their outsized yields, BDC's have trailed the general market significantly so far this year, and thus they may present a buying opportunity. As noted last week, my favorite is ARCC. I also like the closed end fund FGB, which holds positions in several BDC's. A recently launched exchange traded fund, BDCS, is also worth a look.
Several times over the past few weeks, I have been contacted by Readers inquiring whether it is time to exit the market. I have no special insight on this, but I do listen to The Beatles. Ms. Market has "done right by me" even if "I don't know why she is riding so high." And although someday "I think I'm goin' to be sad", I "don't think it's today." So, I'm stickin' with her so long as she appears to have "a Ticket to Ride.".
Saturday, April 6, 2013
April 6, 2013 The TINA Factor
Risk/Reward Vol. 164
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Big wheel keep on turning/Proud Mary keep on burning
And we're rollin', rollin'/Rollin' down the river."---lyrics from "Proud Mary" sung by TINA Turner
"Heh, ho they love the way I do it
Heh, ho there's really nothing to it
But, heh I'm big in Japan, I'm big in Japan"---lyrics from "Big in Japan" by Tom Waits
"Branch water and tomato wine/Creosote and turpentine
Sour mash and new moonshine/Down on the copperline."---lyrics from "Copperline" by James Taylor
After reaching an all time high on Tuesday, the Dow Jones Industrial Average (DJIA) experienced two body blows this week. On Wednesday it suffered a triple digit drop on disappointing unemployment claim numbers, a fall in the purchasing manager's index and war-like rumblings from North Korea. On Friday, the monthly jobs report fell far below expectations; so low in fact that former Obama Administration chief economist Austan Goolsbee likened it to a "punch to the gut". After an ugly opening, the DJIA closed down Friday, but only 41 points for the day and only 13 points for the week. In light of these bad economic reports, one wonders whether the "big wheel" that is the stock market can "keep on turning, keep on burning, rollin', rollin', rollin' down the river?" Many commentators answer yes, and in so doing quote Lady Thatcher who several years ago, in response to a question on why she supported free market capitalism, said "There Is No Alternative"; a quote that the tabloids of the day transformed into the TINA Factor. Where, other than stocks and stock like investments, can one achieve any meaningful return today? In an era where central banks have depressed to near zero the return on treasury securites and instruments priced in relation thereto (e.g. investment grade bonds, certificates of deposit, money market accounts, etc.) "There Is No Alternative" to equity or equity like investments. In a very real sense, today, investing is all about getting some return; risk be damned. Monetary policy now holds sway over the stock market with investment fundamentals relegated to the back burner.
If you doubt how monetary policy now dominates stock markets, focus on what happened this past Thursday in Japan. That day, the Bank of Japan (BoJ) (the equivalent to our central bank, the Federal Reserve) in its most aggressive move yet to encourage industrial investment and to spur exports by devaluing the yen, announced its intention to increase the money supply in Japan by doubling its balance sheet in two years through the purchase of $70billion of newly issued Japanese treasury bonds---each month. Talk about quantitative easing and "loving the way we do it." The reaction was swift and "big in Japan." Within minutes of the announcement, a tsunami of money flowed into the Nikkei (the Japanese stock index) causing it to rise 2%, and the yen fell 2% in value versus the U.S. dollar. Oh, and as for creating a disincentive for anyone other than the BoJ to purchase those new treasury bonds, "there's really nothing to it"---literally. The yield on the 10 year Japanese bond is now hovering at or below 0.5%. That's right--- ZERO (which apparently is no longer just the name of a WWII fighter-bomber in Japan.) The reaction was also big here with my holdings in DXJ, the dollar hedged Japanese exchange traded fund that tracks the broader Japanese stock market, spiking 7.5% in one day!
And if you doubt the current disconnect between the stock market and investing fundamentals, note the depressed prices of virtually every industrial commodity--including many that have been directly correlated to the stock market for several years. Even the greatest bellwether of all, copper, is diverging from the stock market, with copper prices hitting multi month lows. Name the industrial commodity: iron ore, oil, natural gas, corn, "branch water, creosote, turpentine" (but maybe not "sour mash and moonshine") and note that the demand therefor and thus the prices thereof are following the "copperline"--- downward. Understandably, inventories in these commodities are building which indicates that economic activity is slowin'---and yet, contrary to investing fundamentals, the stock market keeps on rollin'. Again, the reason: central banks, the entities that set monetary policy throughout the world, believe that to kick start their economies (read, grow jobs) they must increase the supply of money in an effort to devalue their currency and thus promote exports. Simultaneously, they discourage investment in safe instruments that create no jobs like treasury bonds and c.d.'s and encourage investment in riskier job creating enterprises. With more money chasing a limited number of industrial stocks, prices of those stocks naturally rise. In short, the TINA Factor. Time will tell whether the ploy actually kick starts those economies (which this week's employment numbers belie) or it merely results in over inflated stock prices.
And so it goes. Remember, dear Readers, remain vigilant and nimble. A stock market that inflates with little regard for underlying investment fundamentals can turn on a dime---and perhaps that turn has begun. No matter what---do not fall in love with the stock market. It is merely a means to achieve a return. Indeed, when it comes to achieving any return on investment, recall the admonition of MY favorite TINA (Turner, that is)
"What's love got to do with it?"
P.S. During the big drop on Wednesday I bought more ARCC, my favorite business development company which had the misfortune of pricing its secondary offering that day. I took advantage of the situation and bought in a trough. Its dividend rate in my hands is nearly 9%. I wish I had bought more DXJ that day as well.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Big wheel keep on turning/Proud Mary keep on burning
And we're rollin', rollin'/Rollin' down the river."---lyrics from "Proud Mary" sung by TINA Turner
"Heh, ho they love the way I do it
Heh, ho there's really nothing to it
But, heh I'm big in Japan, I'm big in Japan"---lyrics from "Big in Japan" by Tom Waits
"Branch water and tomato wine/Creosote and turpentine
Sour mash and new moonshine/Down on the copperline."---lyrics from "Copperline" by James Taylor
After reaching an all time high on Tuesday, the Dow Jones Industrial Average (DJIA) experienced two body blows this week. On Wednesday it suffered a triple digit drop on disappointing unemployment claim numbers, a fall in the purchasing manager's index and war-like rumblings from North Korea. On Friday, the monthly jobs report fell far below expectations; so low in fact that former Obama Administration chief economist Austan Goolsbee likened it to a "punch to the gut". After an ugly opening, the DJIA closed down Friday, but only 41 points for the day and only 13 points for the week. In light of these bad economic reports, one wonders whether the "big wheel" that is the stock market can "keep on turning, keep on burning, rollin', rollin', rollin' down the river?" Many commentators answer yes, and in so doing quote Lady Thatcher who several years ago, in response to a question on why she supported free market capitalism, said "There Is No Alternative"; a quote that the tabloids of the day transformed into the TINA Factor. Where, other than stocks and stock like investments, can one achieve any meaningful return today? In an era where central banks have depressed to near zero the return on treasury securites and instruments priced in relation thereto (e.g. investment grade bonds, certificates of deposit, money market accounts, etc.) "There Is No Alternative" to equity or equity like investments. In a very real sense, today, investing is all about getting some return; risk be damned. Monetary policy now holds sway over the stock market with investment fundamentals relegated to the back burner.
If you doubt how monetary policy now dominates stock markets, focus on what happened this past Thursday in Japan. That day, the Bank of Japan (BoJ) (the equivalent to our central bank, the Federal Reserve) in its most aggressive move yet to encourage industrial investment and to spur exports by devaluing the yen, announced its intention to increase the money supply in Japan by doubling its balance sheet in two years through the purchase of $70billion of newly issued Japanese treasury bonds---each month. Talk about quantitative easing and "loving the way we do it." The reaction was swift and "big in Japan." Within minutes of the announcement, a tsunami of money flowed into the Nikkei (the Japanese stock index) causing it to rise 2%, and the yen fell 2% in value versus the U.S. dollar. Oh, and as for creating a disincentive for anyone other than the BoJ to purchase those new treasury bonds, "there's really nothing to it"---literally. The yield on the 10 year Japanese bond is now hovering at or below 0.5%. That's right--- ZERO (which apparently is no longer just the name of a WWII fighter-bomber in Japan.) The reaction was also big here with my holdings in DXJ, the dollar hedged Japanese exchange traded fund that tracks the broader Japanese stock market, spiking 7.5% in one day!
And if you doubt the current disconnect between the stock market and investing fundamentals, note the depressed prices of virtually every industrial commodity--including many that have been directly correlated to the stock market for several years. Even the greatest bellwether of all, copper, is diverging from the stock market, with copper prices hitting multi month lows. Name the industrial commodity: iron ore, oil, natural gas, corn, "branch water, creosote, turpentine" (but maybe not "sour mash and moonshine") and note that the demand therefor and thus the prices thereof are following the "copperline"--- downward. Understandably, inventories in these commodities are building which indicates that economic activity is slowin'---and yet, contrary to investing fundamentals, the stock market keeps on rollin'. Again, the reason: central banks, the entities that set monetary policy throughout the world, believe that to kick start their economies (read, grow jobs) they must increase the supply of money in an effort to devalue their currency and thus promote exports. Simultaneously, they discourage investment in safe instruments that create no jobs like treasury bonds and c.d.'s and encourage investment in riskier job creating enterprises. With more money chasing a limited number of industrial stocks, prices of those stocks naturally rise. In short, the TINA Factor. Time will tell whether the ploy actually kick starts those economies (which this week's employment numbers belie) or it merely results in over inflated stock prices.
And so it goes. Remember, dear Readers, remain vigilant and nimble. A stock market that inflates with little regard for underlying investment fundamentals can turn on a dime---and perhaps that turn has begun. No matter what---do not fall in love with the stock market. It is merely a means to achieve a return. Indeed, when it comes to achieving any return on investment, recall the admonition of MY favorite TINA (Turner, that is)
"What's love got to do with it?"
P.S. During the big drop on Wednesday I bought more ARCC, my favorite business development company which had the misfortune of pricing its secondary offering that day. I took advantage of the situation and bought in a trough. Its dividend rate in my hands is nearly 9%. I wish I had bought more DXJ that day as well.
Saturday, March 30, 2013
March 30, 2013 Biddy Biddy Bum
Risk/Reward Vol. 163
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"If I were a rich man/All day long I'd biddy biddy bum
If I were a wealthy man."---lyrics from "Fiddler on the Roof" sung by Tevya
"Headline-breadline/Blow my mind
And now this deadline/Eviction--or pay rent."---lyrics from "Rent "from Rent the Musical
"Don't count me out/At the start of the bout
I'm just doing the secondary waltz."---lyrics from "Secondary Waltz" by Mark Knopfler
Happy Easter and Brilliant First Quarter!
If you, like Tevya, were from Russia and "you were a rich man", you would not want any of your money deposited in Cyprus. Biddy, biddy bum, indeed! To resolve the banking crisis there, the Cyprus government (at the insistence of the Eurozone Troika of which I wrote last week) has frozen all bank deposits in excess of 100,000Euros (which is the upper limit of Eurozone depository insurance). Cyprus intends to appropriate funds from each account above that amount sufficient to recapitalize its ailing banks. The brunt of this haircut (estimated to be as much as 40% of said excess) will fall on "wealthy" Russians who have used Cyprus as a banking haven since the fall of communism. This new depositor funded "bail in" approach stands in stark contrast to government funded bank "bail outs" (e.g. TARP) that have been in fashion in the U.S. and elsewhere over the past few years. Cyprus may serve as a model for future bank crises---even in the United States. "Too big to fail" may become passe; replaced by "depositor beware." So take heed. Keep on deposit at any one bank no more than the FDIC insured amount. For more information on this topic go to www.fdic.gov/edie/fdic_info.html . And for those that keep substantial cash deposits in brokerage accounts, make sure that your broker distributes those funds into enough different banks to assure FDIC coverage when your money is not invested in stocks. Also, talk to your IRA and 401k administrators about FDIC protection for cash accounts that you have in your portfolio including money market accounts. You may be unpleasantly surprised by what you learn.
On Tuesday, the Dow Jones Industrial Average (DJIA) reached its all time high (which it eclipsed on Thursday). Tuesday's high came on the "blow your mind headline" that single family house prices are rising at their fastest pace in six years. But this time, the catalyst for escalating prices is different than in times past. According to the Wall Street Journal, the single family house market is not being driven by individual home buyers, but by large institutional investors that are purchasing houses as if on a "deadline"; with the intent of converting them to rental properties. Institutional investors now represent as much as 30% of all home purchasers in hot markets. Blackstone, the large hedge fund, alone has purchased 20,000 homes in the past year, investing $3.5 billion so far. Twelve percent of U.S. households currently rent single family homes, up from 9% in 2004. Foreclosure is no longer the issue for many home bodies. It is "eviction--or pay rent." I cite these statistics not as a cause of concern, but as an opportunity. As the income from these investments normalizes, look for hedge funds to capitalize these income streams by creating real estate investment trusts ("REIT"), units of which they will sell to the public. One such REIT has already been formed, Silver Bay Realty Trust (SBY), but it is too early for me to tell if it can sustain the type of cash flow one expects from a REIT.
One reason to keep cash available in your brokerage account is to take advantage of opportunities that present. And one did this week. Recall (See Vol. 102 www.riskrewardblog.blogspot.com ) that untaxed entities such as master limited partnerships, business development companies and REITs cannot accumulate earnings because they are required to distribute 90% of them to their shareholders in oder to maintain their pass-through status. Since they cannot accumulate earnings, they must either borrow money or issue new stock via a secondary offering if they wish to grow. When they do a "Secondary Waltz", they typically price the stock below the then current market price in order to assure that all of the new stock is sold. Although this causes a temporary drop in the stock price, "don't count these stocks out at the start of the bout." Their prices usually rise to pre-offering levels within a few days. Thus, I view secondary offerings as great buying opportunities, and that is why I bought more Calumet Specialty Products Partners (CLMT) this week after it priced its secondary offering 4% below its previous closing price. My favorite niche refinery, CLMT has already begun to climb, all the while carrying a healthy 7% dividend.
With both the S&P 500 and the DJIA setting record highs this week, the sun just keeps on shining. My only question is the same that Tevya posed:
"Sunrise / Sunset?"
P.S. I am up 6.13% for the quarter. This is the return on the funds under my direct management and available for investment as of the close on 12/31/12 and does not count additions made via personal savings or 401k contributions since that date. For the same period, the DJIA is up 11.25%, the S&P 500 is up 10.03% and NADAQ is up 8.21%. Considering that this portfolio was all cash (and thus risk free) on January 1st due to Fiscal Cliff concerns, considering the diversification in this portfolio (equities, foreign and domestic bonds, senior notes, partnerships, cash, commodities, hedges etc.) and considering that my average annual yield is above 7% (compared to 2.3% for the DJIA, 2% for the S&P 500 and virtually nothing for the NASDAQ), I am quite pleased.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"If I were a rich man/All day long I'd biddy biddy bum
If I were a wealthy man."---lyrics from "Fiddler on the Roof" sung by Tevya
"Headline-breadline/Blow my mind
And now this deadline/Eviction--or pay rent."---lyrics from "Rent "from Rent the Musical
"Don't count me out/At the start of the bout
I'm just doing the secondary waltz."---lyrics from "Secondary Waltz" by Mark Knopfler
Happy Easter and Brilliant First Quarter!
If you, like Tevya, were from Russia and "you were a rich man", you would not want any of your money deposited in Cyprus. Biddy, biddy bum, indeed! To resolve the banking crisis there, the Cyprus government (at the insistence of the Eurozone Troika of which I wrote last week) has frozen all bank deposits in excess of 100,000Euros (which is the upper limit of Eurozone depository insurance). Cyprus intends to appropriate funds from each account above that amount sufficient to recapitalize its ailing banks. The brunt of this haircut (estimated to be as much as 40% of said excess) will fall on "wealthy" Russians who have used Cyprus as a banking haven since the fall of communism. This new depositor funded "bail in" approach stands in stark contrast to government funded bank "bail outs" (e.g. TARP) that have been in fashion in the U.S. and elsewhere over the past few years. Cyprus may serve as a model for future bank crises---even in the United States. "Too big to fail" may become passe; replaced by "depositor beware." So take heed. Keep on deposit at any one bank no more than the FDIC insured amount. For more information on this topic go to www.fdic.gov/edie/fdic_info.html . And for those that keep substantial cash deposits in brokerage accounts, make sure that your broker distributes those funds into enough different banks to assure FDIC coverage when your money is not invested in stocks. Also, talk to your IRA and 401k administrators about FDIC protection for cash accounts that you have in your portfolio including money market accounts. You may be unpleasantly surprised by what you learn.
On Tuesday, the Dow Jones Industrial Average (DJIA) reached its all time high (which it eclipsed on Thursday). Tuesday's high came on the "blow your mind headline" that single family house prices are rising at their fastest pace in six years. But this time, the catalyst for escalating prices is different than in times past. According to the Wall Street Journal, the single family house market is not being driven by individual home buyers, but by large institutional investors that are purchasing houses as if on a "deadline"; with the intent of converting them to rental properties. Institutional investors now represent as much as 30% of all home purchasers in hot markets. Blackstone, the large hedge fund, alone has purchased 20,000 homes in the past year, investing $3.5 billion so far. Twelve percent of U.S. households currently rent single family homes, up from 9% in 2004. Foreclosure is no longer the issue for many home bodies. It is "eviction--or pay rent." I cite these statistics not as a cause of concern, but as an opportunity. As the income from these investments normalizes, look for hedge funds to capitalize these income streams by creating real estate investment trusts ("REIT"), units of which they will sell to the public. One such REIT has already been formed, Silver Bay Realty Trust (SBY), but it is too early for me to tell if it can sustain the type of cash flow one expects from a REIT.
One reason to keep cash available in your brokerage account is to take advantage of opportunities that present. And one did this week. Recall (See Vol. 102 www.riskrewardblog.blogspot.com ) that untaxed entities such as master limited partnerships, business development companies and REITs cannot accumulate earnings because they are required to distribute 90% of them to their shareholders in oder to maintain their pass-through status. Since they cannot accumulate earnings, they must either borrow money or issue new stock via a secondary offering if they wish to grow. When they do a "Secondary Waltz", they typically price the stock below the then current market price in order to assure that all of the new stock is sold. Although this causes a temporary drop in the stock price, "don't count these stocks out at the start of the bout." Their prices usually rise to pre-offering levels within a few days. Thus, I view secondary offerings as great buying opportunities, and that is why I bought more Calumet Specialty Products Partners (CLMT) this week after it priced its secondary offering 4% below its previous closing price. My favorite niche refinery, CLMT has already begun to climb, all the while carrying a healthy 7% dividend.
With both the S&P 500 and the DJIA setting record highs this week, the sun just keeps on shining. My only question is the same that Tevya posed:
"Sunrise / Sunset?"
P.S. I am up 6.13% for the quarter. This is the return on the funds under my direct management and available for investment as of the close on 12/31/12 and does not count additions made via personal savings or 401k contributions since that date. For the same period, the DJIA is up 11.25%, the S&P 500 is up 10.03% and NADAQ is up 8.21%. Considering that this portfolio was all cash (and thus risk free) on January 1st due to Fiscal Cliff concerns, considering the diversification in this portfolio (equities, foreign and domestic bonds, senior notes, partnerships, cash, commodities, hedges etc.) and considering that my average annual yield is above 7% (compared to 2.3% for the DJIA, 2% for the S&P 500 and virtually nothing for the NASDAQ), I am quite pleased.
Saturday, March 23, 2013
March 23, 2013 What's Going On
Risk/Reward Vol. 162
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Let the world around us just fall apart
Baby we can make it if we're heart to heart."---lyrics from "Nothing's Gonna Stop Us Now" sung by Starship
"If you do want me, gimme little sugar
If you don't want me, don't lead me on, girl
Just gimme some kind of sign, girl."---lyrics from "Gimme Little Sign" sung by Brenton Wood
"Picket lines and picket signs/Don't punish me with brutality
Talk to me/ So you can see/What's going on"---lyrics from "What's Going On" by Marvin Gaye
Last weekend, the world learned that as a condition to receiving financial aid from the International Monetary Fund, the European Central Bank and the European Commission (the "Troika"), the government of Cyprus ordered its banks closed and announced that it would tax (ahem, confiscate) up to 9.9% of every depository account banked on that island. Understandably, the citizens took to the streets resulting in the Cypriot government reconsidering its intentions. In the interim, the banks remain closed. The news from Cyprus has caused huge "heart to heart" concern throughout the rest of the Eurozone. After all, if the Troika can insist upon such drastic measures from Cyprus, it can do the same from the other countries that are dependent on the Troika's financial assistance such as Italy, Spain, Greece and Portugal. Last year, such news would have sent the Dow Jones Industrial Average (DJIA) into a sustained tailspin. But, consistent with its recent "Nothing's Gonna Stop Us Now" attitude, the DJIA experienced only a mild correction on Monday (down 62 points) and rose 3 points on Tuesday. "Let the world around us fall apart", we Americans just keep investing in stocks.
Then, talk about withholding "a little sugar." Talk about "not leading you on". And talk about "some kind of sign, girl." On Wednesday, economic bellwethers Caterpillar and Fed Ex reported disappointing results and warned of challenges in the months ahead. On the same day, the purchasing managers of Europe reported a worsening of the slowdown in the Eurozone. Also that day, the two commodities most correlated with economic growth in China, copper and iron ore, fell to multi-month lows portending a possible slowing of that economy. In times past, the combination of bad news about the U.S, Europe and China on the same day would have sunk the market, Instead the DJIA rose 56 points. On Thursday, the DJIA fell 90 points on disappointing results from tech giant Oracle and continued turmoil in Cyprus, but it rebounded 91points on Friday, closing down only 2 points for the week.
One is left to wonder "What's going on?" With "picket lines and picket signs" still blocking the streets of Cyprus and no good news from the rest of the world, why isn't the market "punishing me with brutality?" The answer is---once again---Ben Bernanke and the Federal Reserve. On Wednesday, when nothing but depressing news was otherwise on the wires, Chairman Ben announced that the Fed would continue quantitative easing (QE3): to wit; would continue to keep interest rates on debt low by purchasing $45billion of Treasury securities and $40billion of mortgages each month until unemployment reached 6.5% or until inflation gets out of control. Obviously, for now, the U.S. stock market finds the continuation of cheap credit more compelling than any other factor. This, I suggest, should be a cause of concern for all of us. Ostensibly, QE3 is to serve as a catalyst for the entire economy, a function at which it is failing if the reports from Caterpillar and Fed Ex are to be believed. In the real economy (as opposed to Wall Street), the only sector benefiting from QE3 is housing to which the Fed has a single minded devotion. ( Can you imagine what the tech sector would be like if the Fed purchased $40billion dollars of software each month as opposed to home mortgages?) Indeed other than subsidizing housing, all QE3 appears to be doing is causing a bubble in progressively risky investments such as junk bonds and equities as investors seek returns that are no longer available in investment grade securities, the yields on which the Fed continues to depress.
In regard this latter point, on Friday noted investor Wilbur Ross joined the chorus (Druckenmiller, Blinder, Dalio, etc.) in warning that the bond market is inflated by at least 25% and when the current bull run on bonds ends, it will end badly. So enjoy these times, dear Readers. I am. But remain diligent and nimble. Then, if a bond market fade causes stock prices to fall, you and I, like Marvin Gaye:
"Won't be dog gone
We'll be long gone."
P.S. My speculative play of the week was buying Apple at 451.98. This is the first anniversary of the announcement of Apple's dividend. I am hoping the dividend will be increased and/or a massive stock buyback will be announced sometime soon. If not, I will sell---again.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Let the world around us just fall apart
Baby we can make it if we're heart to heart."---lyrics from "Nothing's Gonna Stop Us Now" sung by Starship
"If you do want me, gimme little sugar
If you don't want me, don't lead me on, girl
Just gimme some kind of sign, girl."---lyrics from "Gimme Little Sign" sung by Brenton Wood
"Picket lines and picket signs/Don't punish me with brutality
Talk to me/ So you can see/What's going on"---lyrics from "What's Going On" by Marvin Gaye
Last weekend, the world learned that as a condition to receiving financial aid from the International Monetary Fund, the European Central Bank and the European Commission (the "Troika"), the government of Cyprus ordered its banks closed and announced that it would tax (ahem, confiscate) up to 9.9% of every depository account banked on that island. Understandably, the citizens took to the streets resulting in the Cypriot government reconsidering its intentions. In the interim, the banks remain closed. The news from Cyprus has caused huge "heart to heart" concern throughout the rest of the Eurozone. After all, if the Troika can insist upon such drastic measures from Cyprus, it can do the same from the other countries that are dependent on the Troika's financial assistance such as Italy, Spain, Greece and Portugal. Last year, such news would have sent the Dow Jones Industrial Average (DJIA) into a sustained tailspin. But, consistent with its recent "Nothing's Gonna Stop Us Now" attitude, the DJIA experienced only a mild correction on Monday (down 62 points) and rose 3 points on Tuesday. "Let the world around us fall apart", we Americans just keep investing in stocks.
Then, talk about withholding "a little sugar." Talk about "not leading you on". And talk about "some kind of sign, girl." On Wednesday, economic bellwethers Caterpillar and Fed Ex reported disappointing results and warned of challenges in the months ahead. On the same day, the purchasing managers of Europe reported a worsening of the slowdown in the Eurozone. Also that day, the two commodities most correlated with economic growth in China, copper and iron ore, fell to multi-month lows portending a possible slowing of that economy. In times past, the combination of bad news about the U.S, Europe and China on the same day would have sunk the market, Instead the DJIA rose 56 points. On Thursday, the DJIA fell 90 points on disappointing results from tech giant Oracle and continued turmoil in Cyprus, but it rebounded 91points on Friday, closing down only 2 points for the week.
One is left to wonder "What's going on?" With "picket lines and picket signs" still blocking the streets of Cyprus and no good news from the rest of the world, why isn't the market "punishing me with brutality?" The answer is---once again---Ben Bernanke and the Federal Reserve. On Wednesday, when nothing but depressing news was otherwise on the wires, Chairman Ben announced that the Fed would continue quantitative easing (QE3): to wit; would continue to keep interest rates on debt low by purchasing $45billion of Treasury securities and $40billion of mortgages each month until unemployment reached 6.5% or until inflation gets out of control. Obviously, for now, the U.S. stock market finds the continuation of cheap credit more compelling than any other factor. This, I suggest, should be a cause of concern for all of us. Ostensibly, QE3 is to serve as a catalyst for the entire economy, a function at which it is failing if the reports from Caterpillar and Fed Ex are to be believed. In the real economy (as opposed to Wall Street), the only sector benefiting from QE3 is housing to which the Fed has a single minded devotion. ( Can you imagine what the tech sector would be like if the Fed purchased $40billion dollars of software each month as opposed to home mortgages?) Indeed other than subsidizing housing, all QE3 appears to be doing is causing a bubble in progressively risky investments such as junk bonds and equities as investors seek returns that are no longer available in investment grade securities, the yields on which the Fed continues to depress.
In regard this latter point, on Friday noted investor Wilbur Ross joined the chorus (Druckenmiller, Blinder, Dalio, etc.) in warning that the bond market is inflated by at least 25% and when the current bull run on bonds ends, it will end badly. So enjoy these times, dear Readers. I am. But remain diligent and nimble. Then, if a bond market fade causes stock prices to fall, you and I, like Marvin Gaye:
"Won't be dog gone
We'll be long gone."
P.S. My speculative play of the week was buying Apple at 451.98. This is the first anniversary of the announcement of Apple's dividend. I am hoping the dividend will be increased and/or a massive stock buyback will be announced sometime soon. If not, I will sell---again.
Saturday, March 16, 2013
March 16, 2012 Embrace The Obvious
Risk/Reward Vol. 161
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Bubble, Pop, Electric
Take it to the back seat
Run it like a track meet."---lyrics from "Bubble, Pop, Electric" by Gwen Stefani
"And I feel/Like I've been here before
Feel /Like I've been here before "---lyrics from "Deja Vu" by Crosby Stills & Nash
"This opportunity comes once in a lifetime, yo
You better lose yourself in the music, the moment
You own it, You better never let it go.'---lyrics from "Lose Yourself" by Eminem
In June, 2005, I sat on the board of a company that derived a significant percentage of its revenues and profits from the real estate/construction sector of the economy. And, man, real estate back then was red hot--"on a run like a track meet." But by that time, those who cared to look could see that the sector was a "Bubble" that could "Pop": a bubble inflated and perpetuated by the Federal Reserve's (then chaired by Alan Greenspan) low interest rate policy. Recognition of the bubble notwithstanding, the board faced a quandary. Real estate was still such a profitable part of the business, no rational person could simply "take it to the back seat." As a consequence, the board tasked a bright business development person with developing a real estate risk assessment tool we called the "RE Risk Report". The board received updated reports frequently, and the risk of real estate was discussed extensively at each of our monthly meetings. For us, the good times in real estate lasted well into 2006 at which time we determine that it was time to reduce exposure to that sector. Thank God we did.
To repeat, we on the board recognized the real estate bubble in June, 2005. This is what Ben Bernanke said in October, 2005 as then reported by the Washington Post:
"Ben Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next Chairman of the Federal Reserve."
"And I feel like I've been here before/Like I've been here before." These days, Chairman Bernanke proclaims with equal confidence that quantitative easing (QE3) is not creating an asset "bubble that is about to burst". Yesterday (in what can only be described as the kiss of death) Alan Greenspan concurred with Bernanke in an interview on CNBC. Yet, those who care to look (e.g. Druckenmiller, Dalio and this week Alan Blinder) predict that it is just a matter of time before the QE3-induced bond and stock market bubbles burst. We are in the "moment", fellow investors, facing a quandary just like my fellow board members did back in 2005. It would have been folly for that company to exit real estate in 2005 just as it would be folly for us to exit the stock market today. If one needs a reminder of this, please note that the Dow Jones Industrial Average (DJIA) continued its impressive climb this week, closing up 117 points. But what risk assessment tools can we investors employ? When will it be time for us to exit?
If anyone can answer those two questions, definitively, please send him/her my way. For "the moment", in regard the stock market "I own it." That is not to say, that "I will never let it go." I will not "lose myself in the music" that Benanke is playing. As Stanley Druckenmiller said last week, the asset bubble will end badly---we just don't know when. Bubbles always do. Take a look at the five year chart back to 2008. If one had exited down 8-10% from the Lehman Brother's fiasco that began September 15, 2008 and re-entered half way up the spike that occurred during any of the several days following the March 9, 2009 confirmed bottom, one would have enjoyed an investment "opportunity that comes once in a lifetime." Except, I don't believe it was a "once in a lifetime." I believe we will see it again in the not too distant future. This time I will be ready "yo". I will short Treasury bonds once that market collapses (and that will occur no later than the end of QE3--if it ever ends). I will exit any stock if it tumbles below my 8% loss limit, and I will short the DJIA and the S&P if they collapse as precipitously as they did in 2008.
You and I cannot impact monetary policy. But we can observe the obvious: QE3 and similar easy money policies adopted by central banks throughout the world are inflating an asset bubble and are creating a circumstance that likely will result in a crash. Why not enthusiastically embrace the obvious and prosper if and when that crash occurs? After all, the magnificent stock market run that we have experienced since 2009 was made possible only by the crash of 2007-2008. As those noted investment advisors, Crosby, Stills & Nash preach:
"The darkest hour/Is always just before the dawn.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Bubble, Pop, Electric
Take it to the back seat
Run it like a track meet."---lyrics from "Bubble, Pop, Electric" by Gwen Stefani
"And I feel/Like I've been here before
Feel /Like I've been here before "---lyrics from "Deja Vu" by Crosby Stills & Nash
"This opportunity comes once in a lifetime, yo
You better lose yourself in the music, the moment
You own it, You better never let it go.'---lyrics from "Lose Yourself" by Eminem
In June, 2005, I sat on the board of a company that derived a significant percentage of its revenues and profits from the real estate/construction sector of the economy. And, man, real estate back then was red hot--"on a run like a track meet." But by that time, those who cared to look could see that the sector was a "Bubble" that could "Pop": a bubble inflated and perpetuated by the Federal Reserve's (then chaired by Alan Greenspan) low interest rate policy. Recognition of the bubble notwithstanding, the board faced a quandary. Real estate was still such a profitable part of the business, no rational person could simply "take it to the back seat." As a consequence, the board tasked a bright business development person with developing a real estate risk assessment tool we called the "RE Risk Report". The board received updated reports frequently, and the risk of real estate was discussed extensively at each of our monthly meetings. For us, the good times in real estate lasted well into 2006 at which time we determine that it was time to reduce exposure to that sector. Thank God we did.
To repeat, we on the board recognized the real estate bubble in June, 2005. This is what Ben Bernanke said in October, 2005 as then reported by the Washington Post:
"Ben Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next Chairman of the Federal Reserve."
"And I feel like I've been here before/Like I've been here before." These days, Chairman Bernanke proclaims with equal confidence that quantitative easing (QE3) is not creating an asset "bubble that is about to burst". Yesterday (in what can only be described as the kiss of death) Alan Greenspan concurred with Bernanke in an interview on CNBC. Yet, those who care to look (e.g. Druckenmiller, Dalio and this week Alan Blinder) predict that it is just a matter of time before the QE3-induced bond and stock market bubbles burst. We are in the "moment", fellow investors, facing a quandary just like my fellow board members did back in 2005. It would have been folly for that company to exit real estate in 2005 just as it would be folly for us to exit the stock market today. If one needs a reminder of this, please note that the Dow Jones Industrial Average (DJIA) continued its impressive climb this week, closing up 117 points. But what risk assessment tools can we investors employ? When will it be time for us to exit?
If anyone can answer those two questions, definitively, please send him/her my way. For "the moment", in regard the stock market "I own it." That is not to say, that "I will never let it go." I will not "lose myself in the music" that Benanke is playing. As Stanley Druckenmiller said last week, the asset bubble will end badly---we just don't know when. Bubbles always do. Take a look at the five year chart back to 2008. If one had exited down 8-10% from the Lehman Brother's fiasco that began September 15, 2008 and re-entered half way up the spike that occurred during any of the several days following the March 9, 2009 confirmed bottom, one would have enjoyed an investment "opportunity that comes once in a lifetime." Except, I don't believe it was a "once in a lifetime." I believe we will see it again in the not too distant future. This time I will be ready "yo". I will short Treasury bonds once that market collapses (and that will occur no later than the end of QE3--if it ever ends). I will exit any stock if it tumbles below my 8% loss limit, and I will short the DJIA and the S&P if they collapse as precipitously as they did in 2008.
You and I cannot impact monetary policy. But we can observe the obvious: QE3 and similar easy money policies adopted by central banks throughout the world are inflating an asset bubble and are creating a circumstance that likely will result in a crash. Why not enthusiastically embrace the obvious and prosper if and when that crash occurs? After all, the magnificent stock market run that we have experienced since 2009 was made possible only by the crash of 2007-2008. As those noted investment advisors, Crosby, Stills & Nash preach:
"The darkest hour/Is always just before the dawn.
Saturday, March 9, 2013
March 9, 2013 Good News/Short People
Risk/Reward Vol. 160
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Good news is blowin' in your window/Good news is knockin' on your door
Good news is comin' round the corner/Good news is rollin' round your floor."---lyrics from "Good News" by Randy Newman
"Now Peter Piper picked peppers/But Run rocked rhymes
Humpty Dumpty fell down/That's his hard time
Jack B. Nimble/And he was quick."---lyrics from "Peter Piper" by Run DMC
"I'm gonna give you 30 days to get back home
I done talked to the gypsy woman on the telephone
She gonna sent out a world wide hoo-doo
That'll be the thing to suit you."---lyrics from "30 Days" by Chuck Berry
When it comes to stocks, "good news is blowin' in your window and knockin' on your door!" In fact, a series of "good news" reports this week, culminating in encouraging jobs numbers on Friday, catapulted the Dow Jones Industrial Average (DJIA) to four consecutive all time high closings. The DJIA ended the week up 308 points and is up 9.9% year to date! Talk about "Good news comin' round the corner and rollin' round your floor." The predictions of doom surrounding Sequestration have had as much impact on the stock market as those surrounding the Mayan calendar apocalypse.
But how long will it last? Will one's ability to pick winning stocks (which year to date has been as easy as "Peter Piper pickin' peppers) end like "Humpty Dumpty"---"fallen down and on hard times?" Valuable insight on this was provided by billionaire hedge fund guru, Stanley Druckenmiller (George Soros's former partner), during an interview on CNBC last Monday morning. A link to a related article and part of the interview is provided here: www.cnbc.com/id/100522303 It is worth reading and watching. In Druckenmiller's opinion, we are in the 7th or 8th inning of an equity bull run that will end badly. As he sees it, the Federal Reserve's low interest/easy money policy (QE3) has depressed investment grade yields so severely that conservative investors have been forced to accept unprecedented levels of risk. Equities are the only place left since bonds yields are so low. He cited as an example a Zambian government bond in such demand by investors that it is paying only 5% in interest. (No kidding--I checked.) As he said, do you really think the risk of regime change in Zambia over the next 20 years warrants only a 5% yield? According to Druckenmiller, the inevitable result will be a "malinvestment bust" (e.g. defaults on these risky investments), rampant inflation of asset values or both. Druckenmiller's advice is to be like Jack--stay nimble and be ready to exit investments "quickly". Obviously, one can accomplish this only by remaining diligent.
But how will an investor, even a diligent one, know when the time is right to exit? Is there something available other than "talking to the gypsy woman or sending out a world wide hoo-doo.?" I think so. First, I monitor developments in junk bond and senior loan funds like a hawk. In this regard, note that shorting (betting that a stock will fall in value) in the two largest junk bond exchange traded funds (HYG and JNK) has spiked recently. I'm not pushing a panic button, but it is something to watch. Second, I own some modest short positions (e.g. TBT) and a volatility position (VXX) to help me monitor negative sentiment in the market. . Third, I own substantial amounts of stocks and funds that pay MONTHLY dividends. Monthly dividends provide a steady and predictable income, result in lower stock volatility and require great discipline on the part of business managers. After all, those managers must generate sufficient revenue to pay a dividend every "30 days." It is in this respect that monthly dividend stocks serve as canaries in the mindshaft. I do not wait an entire quarter to learn whether a company is meeting its objectives. Each month, if there is even a hint of a dividend cut, I exit immediately. For those interested, a partial list of monthly payers can be found here: www.dividenddetective.com/monthly-dividends.htm
And so the market continues its climb upward. I am enjoying the ride. But, I remain vigilant and nimble. At some point, Mr. Market, like the great Randy Newman himself, inevitably will change his tune and instead of crooning "Good News", he will be singing:
"Short!, People"
P.S. Did you act on last week's stock tip? Throughout Monday morning, Citigroup was available for $42.25. Later in the week, it passed the Fed's stress test with flying colors. It closed Friday at 46.68--- a 10% gain in 4 1/2 days.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Good news is blowin' in your window/Good news is knockin' on your door
Good news is comin' round the corner/Good news is rollin' round your floor."---lyrics from "Good News" by Randy Newman
"Now Peter Piper picked peppers/But Run rocked rhymes
Humpty Dumpty fell down/That's his hard time
Jack B. Nimble/And he was quick."---lyrics from "Peter Piper" by Run DMC
"I'm gonna give you 30 days to get back home
I done talked to the gypsy woman on the telephone
She gonna sent out a world wide hoo-doo
That'll be the thing to suit you."---lyrics from "30 Days" by Chuck Berry
When it comes to stocks, "good news is blowin' in your window and knockin' on your door!" In fact, a series of "good news" reports this week, culminating in encouraging jobs numbers on Friday, catapulted the Dow Jones Industrial Average (DJIA) to four consecutive all time high closings. The DJIA ended the week up 308 points and is up 9.9% year to date! Talk about "Good news comin' round the corner and rollin' round your floor." The predictions of doom surrounding Sequestration have had as much impact on the stock market as those surrounding the Mayan calendar apocalypse.
But how long will it last? Will one's ability to pick winning stocks (which year to date has been as easy as "Peter Piper pickin' peppers) end like "Humpty Dumpty"---"fallen down and on hard times?" Valuable insight on this was provided by billionaire hedge fund guru, Stanley Druckenmiller (George Soros's former partner), during an interview on CNBC last Monday morning. A link to a related article and part of the interview is provided here: www.cnbc.com/id/100522303 It is worth reading and watching. In Druckenmiller's opinion, we are in the 7th or 8th inning of an equity bull run that will end badly. As he sees it, the Federal Reserve's low interest/easy money policy (QE3) has depressed investment grade yields so severely that conservative investors have been forced to accept unprecedented levels of risk. Equities are the only place left since bonds yields are so low. He cited as an example a Zambian government bond in such demand by investors that it is paying only 5% in interest. (No kidding--I checked.) As he said, do you really think the risk of regime change in Zambia over the next 20 years warrants only a 5% yield? According to Druckenmiller, the inevitable result will be a "malinvestment bust" (e.g. defaults on these risky investments), rampant inflation of asset values or both. Druckenmiller's advice is to be like Jack--stay nimble and be ready to exit investments "quickly". Obviously, one can accomplish this only by remaining diligent.
But how will an investor, even a diligent one, know when the time is right to exit? Is there something available other than "talking to the gypsy woman or sending out a world wide hoo-doo.?" I think so. First, I monitor developments in junk bond and senior loan funds like a hawk. In this regard, note that shorting (betting that a stock will fall in value) in the two largest junk bond exchange traded funds (HYG and JNK) has spiked recently. I'm not pushing a panic button, but it is something to watch. Second, I own some modest short positions (e.g. TBT) and a volatility position (VXX) to help me monitor negative sentiment in the market. . Third, I own substantial amounts of stocks and funds that pay MONTHLY dividends. Monthly dividends provide a steady and predictable income, result in lower stock volatility and require great discipline on the part of business managers. After all, those managers must generate sufficient revenue to pay a dividend every "30 days." It is in this respect that monthly dividend stocks serve as canaries in the mindshaft. I do not wait an entire quarter to learn whether a company is meeting its objectives. Each month, if there is even a hint of a dividend cut, I exit immediately. For those interested, a partial list of monthly payers can be found here: www.dividenddetective.com/monthly-dividends.htm
And so the market continues its climb upward. I am enjoying the ride. But, I remain vigilant and nimble. At some point, Mr. Market, like the great Randy Newman himself, inevitably will change his tune and instead of crooning "Good News", he will be singing:
"Short!, People"
P.S. Did you act on last week's stock tip? Throughout Monday morning, Citigroup was available for $42.25. Later in the week, it passed the Fed's stress test with flying colors. It closed Friday at 46.68--- a 10% gain in 4 1/2 days.
Saturday, March 2, 2013
March 2, 2013 Volatility
Risk/Reward Vol. 159
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I needed the money/Cause I had none
I fought the law/And the law won."---lyrics from "I Fought the Law" sung by the Bobby Fuller Four
"I be takin' notes on you/Like you be a test
Roll the purple blunt up/So I won't stress."---lyrics from "After That" sung by Brandy
"The static of your arms/It is the catalyst
You're a chemical that burns/There is nothing like this
It's the purest element/But it's so volatile."---lyrics from "Strangeness & Charm" sung by Florence + The Machine
With apologies to the Bobby Fuller Four, if you "need money", don't "fight the Fed, cause the Fed will win." Recall that just last week, minutes from the Federal Reserve's January meeting (hinting that the Fed's monthly purchases of $85billion of mortgages and Treasury securities ("QE3") may end before anticipated) caused the Dow Jones Industrial Average (DJIA) to drop 108 points in one day. This week, in two separate hearings before Congress, Fed Chair Bernanke proclaimed that QE3 was still needed, was still effective and would not end soon. The DJIA skyrocketed 116 points one day and 175 points the next, recovering from a 216 point drop on Monday caused by the indecisive Italian election. As for Sequestration, it appears the stock market cares little, if at all. The DJIA was up 89 points for the week.
With the stock market nearing all time highs, where should one invest? If you are not afraid of a little speculation, take a look at Citigroup (C). Over the past 4 years, with the possible exception of Bank of America (BAC), C has been more closely regulated than any corporation in the US, has been mandated to raise huge amounts of capital and has been precluded from returning any significant cash to shareholders. C pays less than a 1% dividend, and trades at about 60% of book value. Normally banks trade at 100% of book or higher. Next week the Fed will release the results of its most recent "stress test", and on March 14th the Fed will announce which banks can raise dividends and/or engage in share buy backs. If "you be takin' notes" and your research reveals that C will be allowed to raise dividends, buy back shares or both, an investment may be in order. If you are right, "roll a purple blunt" and celebrate. If you want to speculate even more, look at BAC even though it had a great run in 2012.
Speaking of banks, say what you will about Dodd-Frank, but that heavy handed legislation has served as a "catalyst" for making banks more stable and for making banking an investment-worthy sector. My preferred investment in the sector is preferred stock, and my preferred vehicles ( the "purest elements", if you will) are the exchange traded funds, PGX an PGF. "There is nothing like these." Each pays a 6+% dividend, and each has low "volatility". Volatility measures risk. The lower the volatility, the more "static"the stock and the lower the risk. Volatility is expressed as a percentage. For example, PGX's volatility is 4.5% which means that 68.2% of the time (one standard deviation for you statisticians), PGX trades in a range-- plus or minus-- 4.5% of its annual average (mean) price. This level of volatility is comparable to that of investment grade bonds (LQD) which yield significantly less. Their low volatility and the fact that they pay their dividends on a monthly basis make PGX and PGF excellent places to park money---a modern day passbook savings account---well, not quite that secure. The largest ETF in this space is PFF, but it yields less than 6% . For those who want more of a yield in this sector, look at JPC and JPI, two closed end funds which also hold preferred shares but which assume extra risk via leverage.
So far, the stock market has taken Sequestration in stride. Can it be that Mr. Market believes that so long as credit remains easy (QE3) economic recovery will continue, Sequestration notwithstanding? Can it be that Florence + The Machine concur with Goldman Sach's Abby Joseph Cohen and that
"The dog days are gone/The horses are coming"?
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I needed the money/Cause I had none
I fought the law/And the law won."---lyrics from "I Fought the Law" sung by the Bobby Fuller Four
"I be takin' notes on you/Like you be a test
Roll the purple blunt up/So I won't stress."---lyrics from "After That" sung by Brandy
"The static of your arms/It is the catalyst
You're a chemical that burns/There is nothing like this
It's the purest element/But it's so volatile."---lyrics from "Strangeness & Charm" sung by Florence + The Machine
With apologies to the Bobby Fuller Four, if you "need money", don't "fight the Fed, cause the Fed will win." Recall that just last week, minutes from the Federal Reserve's January meeting (hinting that the Fed's monthly purchases of $85billion of mortgages and Treasury securities ("QE3") may end before anticipated) caused the Dow Jones Industrial Average (DJIA) to drop 108 points in one day. This week, in two separate hearings before Congress, Fed Chair Bernanke proclaimed that QE3 was still needed, was still effective and would not end soon. The DJIA skyrocketed 116 points one day and 175 points the next, recovering from a 216 point drop on Monday caused by the indecisive Italian election. As for Sequestration, it appears the stock market cares little, if at all. The DJIA was up 89 points for the week.
With the stock market nearing all time highs, where should one invest? If you are not afraid of a little speculation, take a look at Citigroup (C). Over the past 4 years, with the possible exception of Bank of America (BAC), C has been more closely regulated than any corporation in the US, has been mandated to raise huge amounts of capital and has been precluded from returning any significant cash to shareholders. C pays less than a 1% dividend, and trades at about 60% of book value. Normally banks trade at 100% of book or higher. Next week the Fed will release the results of its most recent "stress test", and on March 14th the Fed will announce which banks can raise dividends and/or engage in share buy backs. If "you be takin' notes" and your research reveals that C will be allowed to raise dividends, buy back shares or both, an investment may be in order. If you are right, "roll a purple blunt" and celebrate. If you want to speculate even more, look at BAC even though it had a great run in 2012.
Speaking of banks, say what you will about Dodd-Frank, but that heavy handed legislation has served as a "catalyst" for making banks more stable and for making banking an investment-worthy sector. My preferred investment in the sector is preferred stock, and my preferred vehicles ( the "purest elements", if you will) are the exchange traded funds, PGX an PGF. "There is nothing like these." Each pays a 6+% dividend, and each has low "volatility". Volatility measures risk. The lower the volatility, the more "static"the stock and the lower the risk. Volatility is expressed as a percentage. For example, PGX's volatility is 4.5% which means that 68.2% of the time (one standard deviation for you statisticians), PGX trades in a range-- plus or minus-- 4.5% of its annual average (mean) price. This level of volatility is comparable to that of investment grade bonds (LQD) which yield significantly less. Their low volatility and the fact that they pay their dividends on a monthly basis make PGX and PGF excellent places to park money---a modern day passbook savings account---well, not quite that secure. The largest ETF in this space is PFF, but it yields less than 6% . For those who want more of a yield in this sector, look at JPC and JPI, two closed end funds which also hold preferred shares but which assume extra risk via leverage.
So far, the stock market has taken Sequestration in stride. Can it be that Mr. Market believes that so long as credit remains easy (QE3) economic recovery will continue, Sequestration notwithstanding? Can it be that Florence + The Machine concur with Goldman Sach's Abby Joseph Cohen and that
"The dog days are gone/The horses are coming"?
Saturday, February 23, 2013
February 23, 2012 Sugar Pie
Risk/Reward Vol. 158
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Sugar Pie, Honey Bunch
You know that I love you
I can't help myself/I love you and nobody else."---lyrics from "I Can't Help Myself"sung by the Four Tops
"Sometimes there's no hope in/In chasing opium
I'd like to love you/But I'm not sure what's in your eyes
Mm, Shanghai surprise"---lyrics from "Shanghai Surprise" by George Harrison
"Well, I'm livin' in a foreign country/But I'm bound to cross the line...
"Come in " she said "I'll give you shelter from the storm."---lyrics from "Shelter from the Storm" by Bob Dylan
Back in December, the Federal Reserve announced the continuation and expansion of quantitative easing (QE) in the form of $40 billion of mortgage purchases and $45billion of Treasury securities purchases EACH MONTH until unemployment falls below 6.5% or until inflation becomes a concern. (See Vol 148 http://www.riskrewardblog.blogspot.com/ ) The stock market rose at the time in reaction to this "Sugar Pie, Honey Bunch"--which, in effect, is a guarantee by the Fed of cheap and plentiful credit until one of those benchmarks is achieved. The upward surge from this "I love you gesture" intensified when the Fiscal Cliff threat dissipated at year end. Since then the stock market "couldn't help itself" and has continued to rise---that is, until this Wednesday. On Wednesday, the Federal Reserve released the minutes of its January meeting at which many members expressed a new concern about the current QE program, even though unemployment still hovers near 8% and inflation is in check. This new concern arises from the belief that the prolonged period of low interest rates fostered by QE has resulted in an unhealthy credit bubble. This bubble has been exacerbated by investors such as pension plans, insurance companies and yours truly in search of yields greater than those available in investment grade securities. We, collectively, have been gobbling up riskier and riskier instruments such as junk bonds and senior loans as soon as they are marketed. (See last week's post) The result is an economy flush with cheap (and risky) debt; one susceptible to a hiccup that could cause a flood of credit defaults reminiscent of 2008. That said, the possibility that the Fed would halt cheap credit (upon which the stock market has come to rely) for a reason and on a timetable other than that articulated in December caused the Dow Jones Industrial Average (DJIA) to drop 108 points that day.
On Thursday, the Chinese Central Bank, facing its own bubble, ordered the removal of $146billion worth of credit from the Chinese banking system. That "Shanghai Surprise" caused the Chinese Composite Stock Index to fall 3%, its sharpest decline in 14 months. Clearly, Chinese stocks like their American counterparts have been buoyed by the "opium" of cheap credit. In reaction to that decline, the DJIA, which tracks many companies that "like to love" China, fell another 47 points.
Friday morning, James Bullard of the Fed gave assurance that the current version of QE will continue for quite some time. Assuaged, the DJIA rose 119 points closing up 19 points for the week. Keep your eyes and ears on Congress next Tuesday when Fed Chair Bernanke is scheduled to speak. Undoubtedly, the future of QE will be discussed, and what he says will impact the market.
Switching gears, two subscribers recently returned from the 7th Annual Inside ETF Conference held in Hollywood, Fla. where they hobnobbed with such investing luminaries as Mebane Faber and James Grant. At this stage in my life, this conference is a hotter ticket than a luxury box at the Super Bowl, and is a "can't miss" for me next year. Their take away was that it's time to "cross the line"---to become more internationally oriented and to embrace the "shelter from the storm" that investing in a "foreign county" may afford. Certainly, the 8.8% rise in the FTSE 100 (London) in the past 3 months and the 12% rise in the DAX (German stock market) in the past year, both of which went virtually unnoticed by me, are reasons enough to look overseas for better returns. Although my study as to where and how to best invest in foreign markets has just begun, I am encouraged by my 10% gain in the Japanese market ETF (DXJ) which I bought on January 9th.
In closing, remember that I enjoy hearing from each of you. Investing can test one's mettle, with this week's roller coaster being just one example. Please know that if your investing "life is filled with confusion/And (investing) happiness is just an illusion","Reach out for me" and like the Four Tops, "I'll be there."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Sugar Pie, Honey Bunch
You know that I love you
I can't help myself/I love you and nobody else."---lyrics from "I Can't Help Myself"sung by the Four Tops
"Sometimes there's no hope in/In chasing opium
I'd like to love you/But I'm not sure what's in your eyes
Mm, Shanghai surprise"---lyrics from "Shanghai Surprise" by George Harrison
"Well, I'm livin' in a foreign country/But I'm bound to cross the line...
"Come in " she said "I'll give you shelter from the storm."---lyrics from "Shelter from the Storm" by Bob Dylan
Back in December, the Federal Reserve announced the continuation and expansion of quantitative easing (QE) in the form of $40 billion of mortgage purchases and $45billion of Treasury securities purchases EACH MONTH until unemployment falls below 6.5% or until inflation becomes a concern. (See Vol 148 http://www.riskrewardblog.blogspot.com/ ) The stock market rose at the time in reaction to this "Sugar Pie, Honey Bunch"--which, in effect, is a guarantee by the Fed of cheap and plentiful credit until one of those benchmarks is achieved. The upward surge from this "I love you gesture" intensified when the Fiscal Cliff threat dissipated at year end. Since then the stock market "couldn't help itself" and has continued to rise---that is, until this Wednesday. On Wednesday, the Federal Reserve released the minutes of its January meeting at which many members expressed a new concern about the current QE program, even though unemployment still hovers near 8% and inflation is in check. This new concern arises from the belief that the prolonged period of low interest rates fostered by QE has resulted in an unhealthy credit bubble. This bubble has been exacerbated by investors such as pension plans, insurance companies and yours truly in search of yields greater than those available in investment grade securities. We, collectively, have been gobbling up riskier and riskier instruments such as junk bonds and senior loans as soon as they are marketed. (See last week's post) The result is an economy flush with cheap (and risky) debt; one susceptible to a hiccup that could cause a flood of credit defaults reminiscent of 2008. That said, the possibility that the Fed would halt cheap credit (upon which the stock market has come to rely) for a reason and on a timetable other than that articulated in December caused the Dow Jones Industrial Average (DJIA) to drop 108 points that day.
On Thursday, the Chinese Central Bank, facing its own bubble, ordered the removal of $146billion worth of credit from the Chinese banking system. That "Shanghai Surprise" caused the Chinese Composite Stock Index to fall 3%, its sharpest decline in 14 months. Clearly, Chinese stocks like their American counterparts have been buoyed by the "opium" of cheap credit. In reaction to that decline, the DJIA, which tracks many companies that "like to love" China, fell another 47 points.
Friday morning, James Bullard of the Fed gave assurance that the current version of QE will continue for quite some time. Assuaged, the DJIA rose 119 points closing up 19 points for the week. Keep your eyes and ears on Congress next Tuesday when Fed Chair Bernanke is scheduled to speak. Undoubtedly, the future of QE will be discussed, and what he says will impact the market.
Switching gears, two subscribers recently returned from the 7th Annual Inside ETF Conference held in Hollywood, Fla. where they hobnobbed with such investing luminaries as Mebane Faber and James Grant. At this stage in my life, this conference is a hotter ticket than a luxury box at the Super Bowl, and is a "can't miss" for me next year. Their take away was that it's time to "cross the line"---to become more internationally oriented and to embrace the "shelter from the storm" that investing in a "foreign county" may afford. Certainly, the 8.8% rise in the FTSE 100 (London) in the past 3 months and the 12% rise in the DAX (German stock market) in the past year, both of which went virtually unnoticed by me, are reasons enough to look overseas for better returns. Although my study as to where and how to best invest in foreign markets has just begun, I am encouraged by my 10% gain in the Japanese market ETF (DXJ) which I bought on January 9th.
In closing, remember that I enjoy hearing from each of you. Investing can test one's mettle, with this week's roller coaster being just one example. Please know that if your investing "life is filled with confusion/And (investing) happiness is just an illusion","Reach out for me" and like the Four Tops, "I'll be there."
Saturday, February 16, 2013
February 16, 2013 Floating
Risk/Reward Vol. 157
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"War, it ain't nothing but a heart breaker
War, it's got one friend/That's the undertaker."---lyrics from "War" sung by Edwin Starr
"Say what you say/We're floating away
Now I see the solemn horizons/Now I think I'll be OK"---lyrics from "Floating Away" by John Legend
"Oh, if I'd only known/What your heart cost
Oh, can we call it a loan/And a debt that I owe on a bet I lost"---lyrics from "Call It A Loan" by Jackson Browne
Finance ministers from the twenty largest economies ( the "G20") met this week in Moscow. In the corridors, a topic of great interest was the prospect of a global currency war. As discussed last week, this topic was brought to the fore by Japan's overt pledge to devalue the yen in order to address the "heartbreak" of fifteen years of deflation and to promote sagging exports. Publicly, Japan's position has not found "one friend" as virtually all of the finance ministers repeated the orthodoxy that governments should not use their currencies as economic weapons, but instead should let market forces determine exchange rates. As demonstrated by the Federal Reserve's massive increase in the supply of dollars via quantitative easing, this orthodoxy is honored in the breach. And speaking of currency wars, the diplomatic niceties in Moscow had no impact on Venezuela. That currency "undertaker" announced early in the week that it was devaluing the bolivar by 30%! In other word, a bolivar worth $0.23 in exchange last week is now worth $0.16. Companies such as P&G, Colgate Palmolive, Halliburton and Merck which have a big presence in Venezuela (and thus large sums of bolivars) anticipate huge losses as a result. Venezuela's conduct even hurt me. As I reported in Vol 152 ( www.riskrewardblog.blogspot.com ) I own ESD, a closed end fund comprised of emerging market sovereign debt including that of Venezuela. Even though ESD is hedged against just such a currency devaluation (it buys bonds that pay interest in dollars not bolivars), the move caused a sell off, thus reducing the premium that I was enjoying. Even the best hedge cannot trump market sentiment.
Those that can "see the solemn horizon" predict that interest rates will rise this year, a prediction that appears valid in light of the excellent performance of TBT, a double short on Treasuries that I own. Consequently, as reported in both the Wall Street Journal and The Financial Times this week, money is flowing out of fixed interest securities such as high yield bonds and into "floating" rate senior loans. ($1.3bn last week alone) "Say what you say", but I have said for some time (See e.g. Vol 154) that everyone should have some senior loan exposure in his/her portfolio. As the name suggests, the interest rate on these securities "float" in relation to some benchmark such as the London Interbank Offered Rate or LIBOR. (e.g. interest is reset each month at 3% above LIBOR). If LIBOR rises, so does the rate on the loan.
The vehicles that I use for floating rate senior loan exposure include two closed end funds managed by Nuveen: JFR and JQC. "If only I had known" that JFR in particular would perform so well year to date, I would have purchased a larger position. As stated previously, I like closed end funds because they use leverage. Many investors however prefer exchange traded funds (ETF's) which generally avoid the risk of leverage and the high management fees associated with closed end funds. BKLN and SNLN are ETF's in the floating rate loan space. For those that have the "heart" and are not afraid of a "bet lost", exposure to a riskier and higher yielding mix of floating rate senior loans and more junior forms of debt (such as mezzanine loans) can be accomplished via business development companies (BDC's) that specialize in this space such as Solar Senior Capital (SUNS) or Pennant Park Floating Rate Capital (PFLT).
Having constructed a portfolio that is primarily dependent on dividends for a return on investment, I do not mind the respite that the stock market is currently experiencing. The Dow Jones Industrial Average fell only 9 points for the week. We are in this game for the long haul so remember the words of Jackson Browne
"Take it easy/Take it easy
Don't let the sound of your own wheels
Drive you crazy."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"War, it ain't nothing but a heart breaker
War, it's got one friend/That's the undertaker."---lyrics from "War" sung by Edwin Starr
"Say what you say/We're floating away
Now I see the solemn horizons/Now I think I'll be OK"---lyrics from "Floating Away" by John Legend
"Oh, if I'd only known/What your heart cost
Oh, can we call it a loan/And a debt that I owe on a bet I lost"---lyrics from "Call It A Loan" by Jackson Browne
Finance ministers from the twenty largest economies ( the "G20") met this week in Moscow. In the corridors, a topic of great interest was the prospect of a global currency war. As discussed last week, this topic was brought to the fore by Japan's overt pledge to devalue the yen in order to address the "heartbreak" of fifteen years of deflation and to promote sagging exports. Publicly, Japan's position has not found "one friend" as virtually all of the finance ministers repeated the orthodoxy that governments should not use their currencies as economic weapons, but instead should let market forces determine exchange rates. As demonstrated by the Federal Reserve's massive increase in the supply of dollars via quantitative easing, this orthodoxy is honored in the breach. And speaking of currency wars, the diplomatic niceties in Moscow had no impact on Venezuela. That currency "undertaker" announced early in the week that it was devaluing the bolivar by 30%! In other word, a bolivar worth $0.23 in exchange last week is now worth $0.16. Companies such as P&G, Colgate Palmolive, Halliburton and Merck which have a big presence in Venezuela (and thus large sums of bolivars) anticipate huge losses as a result. Venezuela's conduct even hurt me. As I reported in Vol 152 ( www.riskrewardblog.blogspot.com ) I own ESD, a closed end fund comprised of emerging market sovereign debt including that of Venezuela. Even though ESD is hedged against just such a currency devaluation (it buys bonds that pay interest in dollars not bolivars), the move caused a sell off, thus reducing the premium that I was enjoying. Even the best hedge cannot trump market sentiment.
Those that can "see the solemn horizon" predict that interest rates will rise this year, a prediction that appears valid in light of the excellent performance of TBT, a double short on Treasuries that I own. Consequently, as reported in both the Wall Street Journal and The Financial Times this week, money is flowing out of fixed interest securities such as high yield bonds and into "floating" rate senior loans. ($1.3bn last week alone) "Say what you say", but I have said for some time (See e.g. Vol 154) that everyone should have some senior loan exposure in his/her portfolio. As the name suggests, the interest rate on these securities "float" in relation to some benchmark such as the London Interbank Offered Rate or LIBOR. (e.g. interest is reset each month at 3% above LIBOR). If LIBOR rises, so does the rate on the loan.
The vehicles that I use for floating rate senior loan exposure include two closed end funds managed by Nuveen: JFR and JQC. "If only I had known" that JFR in particular would perform so well year to date, I would have purchased a larger position. As stated previously, I like closed end funds because they use leverage. Many investors however prefer exchange traded funds (ETF's) which generally avoid the risk of leverage and the high management fees associated with closed end funds. BKLN and SNLN are ETF's in the floating rate loan space. For those that have the "heart" and are not afraid of a "bet lost", exposure to a riskier and higher yielding mix of floating rate senior loans and more junior forms of debt (such as mezzanine loans) can be accomplished via business development companies (BDC's) that specialize in this space such as Solar Senior Capital (SUNS) or Pennant Park Floating Rate Capital (PFLT).
Having constructed a portfolio that is primarily dependent on dividends for a return on investment, I do not mind the respite that the stock market is currently experiencing. The Dow Jones Industrial Average fell only 9 points for the week. We are in this game for the long haul so remember the words of Jackson Browne
"Take it easy/Take it easy
Don't let the sound of your own wheels
Drive you crazy."
Saturday, February 9, 2013
February 9, 2013 Apple Bottom
Risk/Reward Vol. 156
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"When our old age pension check comes to our door
We won't have to dread the poorhouse any more."---lyrics from "Old Age Pension" by Roy Acuff
"You've got me turning up/I'm turning down
I'm turning in/I'm turning 'round
I'm turning Japanese."---lyrics from "Turning Japanese" by The Vapors
"Shawty had them Apple Bottom Jeans
Boots with fur/The whole club
Was watching her."---lyrics from "Apple Bottom Jeans" by T-Pain
This week the Dow Jones Industrial Average (DJIA) showed increased volatility which is to be expected in light of recent gains. It closed down a modest 17 points for the week, but is up 6.8% year to date and up 9% since its post election swoon.
According to the actuarial firm Towers Watson, as late as 1998, 90 of the Fortune 100 companies offered salaried employees a defined benefit pension plan. Today that number is 30. Indeed, the odds today that any employer will offer such a benefit (which guarantees a set income in retirement for life) are about the same as Roy Acuff recording a new hit---and he died in 1992. Today employees must rely upon defined contribution plans (e.g. 401k's and IRA's) for retirement. These plans place the responsiblity ON THE EMPLOYEE to invest wisely year in and year out. Thus, I was shocked to read that only 2% of individual retirement account participants and only 4% of 401k participants take advantage of self direction options. Leaving the management of one's portfolio to an employer-controlled investment adviser (who has little if any liability for bad investment advice) seems imprudent to me. So if you "dread the poorhouse" like always have, I recommend that you investigate self direction and that you take advantage of it.
As discussed in Vol. 152 (www.riskrewardblog.blogspot.com ), in an attempt to "turn 'round" its sluggish economy, Japan is overtly "turning down" the value of the yen thus making its products and services more attractive globally. It is axiomatic that a devalued currency facilitates exporting. This week, in response to his countries' falling exports, French President Hollande recommended that the European Central Bank (ECB) target a Euro exchange rate tied to the world's other major currencies and inflate (devalue) the Euro accordingly. In what can only be characterized as a disingenuous rebuff, ECB President Draghi rejected the idea, reaffirming the charade that central bankers should not "turn in" to politicians and that central banks should avoid currency wars. Come, come now Mr. Draghi. For the past four years, Ben Bernanke and you have employed bond buying and other forms of quantitative easing to debase your respective currencies to the disadvantage of a host of other countries. In this regard, we are all "turning Japanese."
On Thursday, noted hedge fund manager (Milwaukees' own) David Einhorn raised some "fur", claiming that Apple (AAPL) has breached its duty to shareholders by sitting on $140billion in cash. You will recall (see Vol. 116 ) that this has been my complaint against AAPL for a long time. Since Apple doesn't need the money to grow organically and since (apparently) no acquisition candidate meets AAPL's standards, AAPL should return capital to its shareholders in the form of increased dividends (currently 2.3%), a preferred stock dividend (as recommended by Einhorn) or an aggressive share buy back, each of which is proven means of increasing share value. To this point, compare the stock performance of AAPL (known for giving the "boot" to shareholder concerns) and Tupperware (TUP), a company wholly dedicated to shareholder value. Since September 19, 2012 when AAPL reached its all time high of $702, AAPL has done nothing but build cash. TUP on the other hand announced a 70% increase in its dividend and a very aggressive share buy back program. AAPL is down 30% since then hovering near its recent " Apple bottom", and TUP is up 35%. Shockingly, with "the whole club watching", AAPL responded to Einhorn's comments by acknowledging that it has more cash than it needs and by stating that the board is investigating ways to enhance shareholder value. Instead of "shawtin'" the stock, I bought a small position.
I reiterate. If your plan permits, take control of your retirement account through self direction. By doing so, you improve the odds that upon retirement, you can rap (like T-Pain and Yung Joc) that
"I got money in the bank
Shawty, what you think 'bout that!
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"When our old age pension check comes to our door
We won't have to dread the poorhouse any more."---lyrics from "Old Age Pension" by Roy Acuff
"You've got me turning up/I'm turning down
I'm turning in/I'm turning 'round
I'm turning Japanese."---lyrics from "Turning Japanese" by The Vapors
"Shawty had them Apple Bottom Jeans
Boots with fur/The whole club
Was watching her."---lyrics from "Apple Bottom Jeans" by T-Pain
This week the Dow Jones Industrial Average (DJIA) showed increased volatility which is to be expected in light of recent gains. It closed down a modest 17 points for the week, but is up 6.8% year to date and up 9% since its post election swoon.
According to the actuarial firm Towers Watson, as late as 1998, 90 of the Fortune 100 companies offered salaried employees a defined benefit pension plan. Today that number is 30. Indeed, the odds today that any employer will offer such a benefit (which guarantees a set income in retirement for life) are about the same as Roy Acuff recording a new hit---and he died in 1992. Today employees must rely upon defined contribution plans (e.g. 401k's and IRA's) for retirement. These plans place the responsiblity ON THE EMPLOYEE to invest wisely year in and year out. Thus, I was shocked to read that only 2% of individual retirement account participants and only 4% of 401k participants take advantage of self direction options. Leaving the management of one's portfolio to an employer-controlled investment adviser (who has little if any liability for bad investment advice) seems imprudent to me. So if you "dread the poorhouse" like always have, I recommend that you investigate self direction and that you take advantage of it.
As discussed in Vol. 152 (www.riskrewardblog.blogspot.com ), in an attempt to "turn 'round" its sluggish economy, Japan is overtly "turning down" the value of the yen thus making its products and services more attractive globally. It is axiomatic that a devalued currency facilitates exporting. This week, in response to his countries' falling exports, French President Hollande recommended that the European Central Bank (ECB) target a Euro exchange rate tied to the world's other major currencies and inflate (devalue) the Euro accordingly. In what can only be characterized as a disingenuous rebuff, ECB President Draghi rejected the idea, reaffirming the charade that central bankers should not "turn in" to politicians and that central banks should avoid currency wars. Come, come now Mr. Draghi. For the past four years, Ben Bernanke and you have employed bond buying and other forms of quantitative easing to debase your respective currencies to the disadvantage of a host of other countries. In this regard, we are all "turning Japanese."
On Thursday, noted hedge fund manager (Milwaukees' own) David Einhorn raised some "fur", claiming that Apple (AAPL) has breached its duty to shareholders by sitting on $140billion in cash. You will recall (see Vol. 116 ) that this has been my complaint against AAPL for a long time. Since Apple doesn't need the money to grow organically and since (apparently) no acquisition candidate meets AAPL's standards, AAPL should return capital to its shareholders in the form of increased dividends (currently 2.3%), a preferred stock dividend (as recommended by Einhorn) or an aggressive share buy back, each of which is proven means of increasing share value. To this point, compare the stock performance of AAPL (known for giving the "boot" to shareholder concerns) and Tupperware (TUP), a company wholly dedicated to shareholder value. Since September 19, 2012 when AAPL reached its all time high of $702, AAPL has done nothing but build cash. TUP on the other hand announced a 70% increase in its dividend and a very aggressive share buy back program. AAPL is down 30% since then hovering near its recent " Apple bottom", and TUP is up 35%. Shockingly, with "the whole club watching", AAPL responded to Einhorn's comments by acknowledging that it has more cash than it needs and by stating that the board is investigating ways to enhance shareholder value. Instead of "shawtin'" the stock, I bought a small position.
I reiterate. If your plan permits, take control of your retirement account through self direction. By doing so, you improve the odds that upon retirement, you can rap (like T-Pain and Yung Joc) that
"I got money in the bank
Shawty, what you think 'bout that!
Saturday, February 2, 2013
February 2, 2013 Bubbly
Risk/Reward Vol. 155
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I've been awake for a while now/You've got me feelin' like a child now
Cause every time I see your bubbly face/I get the tingles in a silly place."---lyrics from "Bubbly" by Colbie Caillat
"Sha-shake with every boom/Involuntary muscle contraction
Ignoring/And drinking musical gas fueled euphoria."---lyrics from "And One" by Linkin Park
"Downtown people on the corner watching other people play
And while the people watch them play
The players watch the people/On a Wall Street kind of day."---lyrics from "Wall Street Village Day" by the Four Seasons
Talk about "Bubbly!" Having reached heights in January not attained since 2007, the Dow Jones Industrial Average (DJIA) started February "feelin' like a child now", closing Friday at 14,009 (a 149 point gain), up 6.91% year to date! That performance causes me to have "tingles in a silly place." What makes it even more special is that it occurred in the "face" of non "bubbly" news like the fact that the nation's gross domestic product actually shrunk in the last quarter of 2012 and the fact that the unemployment rate remains at 7.9%. Clearly, the market's animal spirit has "been awake for a while now." Let's hope it continues.
But will it? Or will it like "every boom" experience an "involuntary contraction" which in turn will "Sha-shake" investor confidence? I think not. At worst, I see short, shallow and expected corrections occurring periodically absent, of course, some exogenous event (i.e.Israel, Syria and Iran). The recent market "euphoria" is "fueled" by inexpensive domestic "gas" and oil, tranquility on the domestic political front, stability in Europe and growth in China---a concatenation of stabilizing events we have not experienced for quite some time. Moreover, where is an investor to go for a decent return, other than the stock market? With the above described stability prevailing and thus no reason for a flight to safety, no rational investor should accept a 2% yield from 10 year Treasuries, a fact that is confirmed by the 6.6% increase in my TBT (Treasury double short) since I purchased it on January 18th. As exuberant as the past month has been, the broad market as measured by the S&P 500 Index still is trading at only 17 times 2012 earnings, and at only 13 times projected 2013 earnings. Thus, it has more room to run before reaching its normative level of 15 times earnings. So let's keep "ignoring" the naysayers and keep on "drinking" the good news.
With the broad market (S&P 500 and DJIA) doing so well, how does one "play" "Wall Street" in its entirety? Thanks to exchange traded funds (ETF's) individual investors are no longer relegated to "watching other people play." Now they can have "other people", even those on "Wall Street" "watch them play". Many players, including yours truly, use a combination of IWB and IWM which gives exposure to the 3000 large, mid and small cap companies found on the Russell 2000 and Russell 1000 indices. I also own DIA which tracks the DJIA and QQQ which tracks the NASDAQ. The largest and oldest ETF is SPY which tracks the S&P500 index. Had you invested in these at the dawning of 2013 you would be up 6% or more YTD already.
What a difference five weeks make--from handwringing over the Fiscal Cliff to a 14,000 Dow---"sad rags into glad rags" for sure. But, Mr. Market, pray answer Frankie Valli
"Is this a lasting treasure/Or just a moment's pleasure
Can I believe the magic of your sight/Will you still love me tomorrow?"
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I've been awake for a while now/You've got me feelin' like a child now
Cause every time I see your bubbly face/I get the tingles in a silly place."---lyrics from "Bubbly" by Colbie Caillat
"Sha-shake with every boom/Involuntary muscle contraction
Ignoring/And drinking musical gas fueled euphoria."---lyrics from "And One" by Linkin Park
"Downtown people on the corner watching other people play
And while the people watch them play
The players watch the people/On a Wall Street kind of day."---lyrics from "Wall Street Village Day" by the Four Seasons
Talk about "Bubbly!" Having reached heights in January not attained since 2007, the Dow Jones Industrial Average (DJIA) started February "feelin' like a child now", closing Friday at 14,009 (a 149 point gain), up 6.91% year to date! That performance causes me to have "tingles in a silly place." What makes it even more special is that it occurred in the "face" of non "bubbly" news like the fact that the nation's gross domestic product actually shrunk in the last quarter of 2012 and the fact that the unemployment rate remains at 7.9%. Clearly, the market's animal spirit has "been awake for a while now." Let's hope it continues.
But will it? Or will it like "every boom" experience an "involuntary contraction" which in turn will "Sha-shake" investor confidence? I think not. At worst, I see short, shallow and expected corrections occurring periodically absent, of course, some exogenous event (i.e.Israel, Syria and Iran). The recent market "euphoria" is "fueled" by inexpensive domestic "gas" and oil, tranquility on the domestic political front, stability in Europe and growth in China---a concatenation of stabilizing events we have not experienced for quite some time. Moreover, where is an investor to go for a decent return, other than the stock market? With the above described stability prevailing and thus no reason for a flight to safety, no rational investor should accept a 2% yield from 10 year Treasuries, a fact that is confirmed by the 6.6% increase in my TBT (Treasury double short) since I purchased it on January 18th. As exuberant as the past month has been, the broad market as measured by the S&P 500 Index still is trading at only 17 times 2012 earnings, and at only 13 times projected 2013 earnings. Thus, it has more room to run before reaching its normative level of 15 times earnings. So let's keep "ignoring" the naysayers and keep on "drinking" the good news.
With the broad market (S&P 500 and DJIA) doing so well, how does one "play" "Wall Street" in its entirety? Thanks to exchange traded funds (ETF's) individual investors are no longer relegated to "watching other people play." Now they can have "other people", even those on "Wall Street" "watch them play". Many players, including yours truly, use a combination of IWB and IWM which gives exposure to the 3000 large, mid and small cap companies found on the Russell 2000 and Russell 1000 indices. I also own DIA which tracks the DJIA and QQQ which tracks the NASDAQ. The largest and oldest ETF is SPY which tracks the S&P500 index. Had you invested in these at the dawning of 2013 you would be up 6% or more YTD already.
What a difference five weeks make--from handwringing over the Fiscal Cliff to a 14,000 Dow---"sad rags into glad rags" for sure. But, Mr. Market, pray answer Frankie Valli
"Is this a lasting treasure/Or just a moment's pleasure
Can I believe the magic of your sight/Will you still love me tomorrow?"
Saturday, January 26, 2013
January 26, 2013 Hello Dalio
Risk/Reward Vol. 154
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Hello, Dolly/Well, hello Dolly
It's so nice to have you back where you belong
You're still glowin'/You're still crowin'
You're still goin' strong."---lyrics from "Hello Dolly" by Jerry Herman
"What you goin' do with all that junk?
All that junk inside your trunk?"---lyrics from "My Humps" by The Black Eyed Peas
"After all I am forever in your debt/And woman I will try to express
My inner feelings and thoughtfulness/For showing me
The meaning of success."---lyrics from "Woman" by John Lennon
With stability in the Eurozone, growth in China and relief (albeit temporary) from the debt ceiling crisis here in the U. S., the Dow Jones Industrial Average is "still glowin'", "still crowin'" and "still goin' strong." It is up over 6% year to date and nearing its all time high. "It's so nice to be back (in the market) where I belong!" So, how long can it last? Some insight on this was provided by Ray "Hello Dalio", the founder of Bridgewater Associates (the best performing hedge fund of all time) during an interview conducted by CNBC Thursday from the World Economic Forum in Davos, Switzerland. Dalio gave a remarkable thirty minute tutorial on investing that I recommend to your attention ( www.cnbc.com/id/100403678 ) during which he opined that 2013 would be a year of transition away from the constraints of deleveraging (e.g. austerity, cash hoarding, sovereign bond investing,etc.) and into riskier capital allocations. (equities, commodities, corporate debt). In essence, he described in economic terms the concept of the Great Rotation about which I reported last week. ( For past editions go to www.riskrewardblog.blogspot.com )
As further explained by Dalio, the expansion of corporate (as opposed to sovereign) debt is a good thing. Indeed, without readily available debt, companies cannot transact business at all, let alone contemplate growth. Sources of corporate debt financing run the gamut from simple bank loans to investment grade bonds. Between those two extremes are a plethora of other vehicles including high yield bonds, convertible bonds, asset backed financing, senior floating rate loans and collateralized debt obligations. These vehicles usually are not of investment grade and are thus termed (unfortunately) "junk." But, like it or not, the only decent returns that one can achieve these days in debt investing are in these riskier forms. So I for one have a lot of "junk inside my trunk." "What you goin' do?"
Accordingly, "allow me to show you the meaning of success" by sharing "my inner feelings." about junk. After much "thoughtfulness", I have purchased the following. In the junk bond arena, I like HYT, HYV and CYE, three closed end funds managed by BlackRock that have received a Bronze rating by Morningstar. These funds achieve an 8% return through a leveraged approach to bond buying, and they achieve diversity by holding debt in several hundred companies. In the arena of floating rate senior loan financing, I like JFR and JQC, two closed end funds sponsored by Nuveen, that also are Bronze rated and yield more than 8%. Further, I like business development companies (BDC's) which offer a variety of investment options (senior debt, mezzanine debt, and even some equity) to middle market companies looking to expand or to reorganize. In this space I like FGB, a closed end fund that holds investments in a variety of BDC's, and I like ARCC as a stand alone BDC stock. To round out my portfolio, I like BTZ which holds a variety of debt instruments in many companies.
As a new year begins, I am all-in and bullish. "You may say I'm a dreamer/But I am not the only one." In his guarded way, Ray Dalio is also bullish, and that, to me, is "Instant Karma."
P.S. Is anyone else contemplating buying AAPL at this low entry point?
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Hello, Dolly/Well, hello Dolly
It's so nice to have you back where you belong
You're still glowin'/You're still crowin'
You're still goin' strong."---lyrics from "Hello Dolly" by Jerry Herman
"What you goin' do with all that junk?
All that junk inside your trunk?"---lyrics from "My Humps" by The Black Eyed Peas
"After all I am forever in your debt/And woman I will try to express
My inner feelings and thoughtfulness/For showing me
The meaning of success."---lyrics from "Woman" by John Lennon
With stability in the Eurozone, growth in China and relief (albeit temporary) from the debt ceiling crisis here in the U. S., the Dow Jones Industrial Average is "still glowin'", "still crowin'" and "still goin' strong." It is up over 6% year to date and nearing its all time high. "It's so nice to be back (in the market) where I belong!" So, how long can it last? Some insight on this was provided by Ray "Hello Dalio", the founder of Bridgewater Associates (the best performing hedge fund of all time) during an interview conducted by CNBC Thursday from the World Economic Forum in Davos, Switzerland. Dalio gave a remarkable thirty minute tutorial on investing that I recommend to your attention ( www.cnbc.com/id/100403678 ) during which he opined that 2013 would be a year of transition away from the constraints of deleveraging (e.g. austerity, cash hoarding, sovereign bond investing,etc.) and into riskier capital allocations. (equities, commodities, corporate debt). In essence, he described in economic terms the concept of the Great Rotation about which I reported last week. ( For past editions go to www.riskrewardblog.blogspot.com )
As further explained by Dalio, the expansion of corporate (as opposed to sovereign) debt is a good thing. Indeed, without readily available debt, companies cannot transact business at all, let alone contemplate growth. Sources of corporate debt financing run the gamut from simple bank loans to investment grade bonds. Between those two extremes are a plethora of other vehicles including high yield bonds, convertible bonds, asset backed financing, senior floating rate loans and collateralized debt obligations. These vehicles usually are not of investment grade and are thus termed (unfortunately) "junk." But, like it or not, the only decent returns that one can achieve these days in debt investing are in these riskier forms. So I for one have a lot of "junk inside my trunk." "What you goin' do?"
Accordingly, "allow me to show you the meaning of success" by sharing "my inner feelings." about junk. After much "thoughtfulness", I have purchased the following. In the junk bond arena, I like HYT, HYV and CYE, three closed end funds managed by BlackRock that have received a Bronze rating by Morningstar. These funds achieve an 8% return through a leveraged approach to bond buying, and they achieve diversity by holding debt in several hundred companies. In the arena of floating rate senior loan financing, I like JFR and JQC, two closed end funds sponsored by Nuveen, that also are Bronze rated and yield more than 8%. Further, I like business development companies (BDC's) which offer a variety of investment options (senior debt, mezzanine debt, and even some equity) to middle market companies looking to expand or to reorganize. In this space I like FGB, a closed end fund that holds investments in a variety of BDC's, and I like ARCC as a stand alone BDC stock. To round out my portfolio, I like BTZ which holds a variety of debt instruments in many companies.
As a new year begins, I am all-in and bullish. "You may say I'm a dreamer/But I am not the only one." In his guarded way, Ray Dalio is also bullish, and that, to me, is "Instant Karma."
P.S. Is anyone else contemplating buying AAPL at this low entry point?
Saturday, January 19, 2013
January 19, 2013 You Say You Want a Revolution
Risk/Reward Vol. 153
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Old school, when I ride, forever sky high
Workin' wood wheel with the sun outside
I'm just rotating my tires, rotating my tires."---lyrics from "Rotation" by Big Krit
"You say you want a revolution/Well, you know
We all want to change the world
You tell me that it's evolution/Well you know"---lyrics from "Revolution" by the Beatles
"Drilling for oil/Mining for gold
Looking for a love/That never gets old"---lyrics from "Oil and Gold" by Sophie Madelaine
Even though the debt crisis still looms and there were no blockbuster earnings reports, the Dow Jones Industrial Average closed up 172 points for the week, is up 4% year to date and is at its highest point since December, 2007. How can that be? Some savants suggest that we are in the early stages of a Great "Rotation": out of fixed income (read, Treasury securities) and into equities. Indeed, during the first full trading week of 2013, more money was invested in stock mutual funds than at any time since 2008. Remember those "old school" days when the "sun" shone brightly on the stock market? Those days may be returning. With the cost of Treasury securites (and the instruments priced in relation thereto such as certificates of deposit and corporate bonds) "sky high" and everyone "tired" of their low returns, maybe "rotating" really has begun. If so, that is good news for the stock market. More money chasing the same amount of stock means higher prices. I, for one, am heavily weighted toward equities anyway, and I shorted Treasuries (TBT) just in case the market is actually "rotating its tires".
Do you ever stop to marvel at the energy "revolution" that we are currently enjoying? Fracking in the United States is literally "changing the world" at a "revolutionary" not "evolutionary" pace. Here are some statistics. BP estimates that the United States will be 99% energy independent by 2030. In 2008, The United States produced 6.9 million bbls/day of oil; in 2012, 8 million bbls/day; and by 2020 we will produce over 11 million bbls/day, making us the largest oil producing country in the world. Natural gas costs 1/3rd what it did in 2008. The cost of feedstock is so low, world wide petrochemical production is moving back to the United States. Why here, you ask? Clearly, the combination of bountiful resources, flexible capital markets and excellent infrastructure contributes. But the main reason is often overlooked. In the United States, surface land holders own the subsurface minerals--- including oil. Virtually everywhere else in the world, subsurface mineral rights are owned by the state. So, when an oil company approaches a rancher in North Dakota about siting an ugly oil rig on his property, the rancher does not hesitate to assent, knowing that a gusher will make him a multimillionaire a la Jed Clampett. What incentive does a farmer in Poland, France or Germany have to grant drilling rights when all of the proceeds from any oil or gas discovery will go to the state? Nothing drives progress like the prospect of personal profit---pure and simple.
So how have I invested in the domestic oil and gas revolution? The easiest and surest way to "mine for gold" is pipelines. Pipelines are like toll roads. The more the oil and gas flows, the more the revenue; and that formula "never gets old.". I like AMLP, an exchange traded fund that holds shares in all of the major pipeline master limited partnerships and that pays a 6% dividend.. For tax reasons, AMLP may not be suitable for retirement accounts so you may wish to investigate JMF, a closed end fund which likely is suitable for such accounts. (WARNING: check with your own tax advisor!) My favorite domestic oil exploration and production (E&P) company (the one "drilling for oil") is Linn Energy (symbol LINE as a partnership; symbol LINCO as a corporation suitable for retirement account investing). Linn's production is 50% natural gas and 50% oil. It hedges both to ensure a steady 7.5+% dividend at its current price. I gain exposure to other domestic E&P companies via NDP, a closed end fund which owns stock in every major player and which enhances its return through leverage and call option writing. On the refinery side, one "looking for love" need not look beyond Indianapolis favorite, Calumet Specialty Refining (CLMT), controlled by NCHS Class of '69 grad Fred Fehsenfeld and its nearly 8% dividend. I am not currently invested directly in fertilizer or chemical companies, but they too should prosper in a world of plentiful and cheap natural gas.
Next week, earnings reports from tech stocks dominate. Expectations are low so let's hope for a surprise to the upside. Nothing would "please, please me, whoa yeah" more than that.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Old school, when I ride, forever sky high
Workin' wood wheel with the sun outside
I'm just rotating my tires, rotating my tires."---lyrics from "Rotation" by Big Krit
"You say you want a revolution/Well, you know
We all want to change the world
You tell me that it's evolution/Well you know"---lyrics from "Revolution" by the Beatles
"Drilling for oil/Mining for gold
Looking for a love/That never gets old"---lyrics from "Oil and Gold" by Sophie Madelaine
Even though the debt crisis still looms and there were no blockbuster earnings reports, the Dow Jones Industrial Average closed up 172 points for the week, is up 4% year to date and is at its highest point since December, 2007. How can that be? Some savants suggest that we are in the early stages of a Great "Rotation": out of fixed income (read, Treasury securities) and into equities. Indeed, during the first full trading week of 2013, more money was invested in stock mutual funds than at any time since 2008. Remember those "old school" days when the "sun" shone brightly on the stock market? Those days may be returning. With the cost of Treasury securites (and the instruments priced in relation thereto such as certificates of deposit and corporate bonds) "sky high" and everyone "tired" of their low returns, maybe "rotating" really has begun. If so, that is good news for the stock market. More money chasing the same amount of stock means higher prices. I, for one, am heavily weighted toward equities anyway, and I shorted Treasuries (TBT) just in case the market is actually "rotating its tires".
Do you ever stop to marvel at the energy "revolution" that we are currently enjoying? Fracking in the United States is literally "changing the world" at a "revolutionary" not "evolutionary" pace. Here are some statistics. BP estimates that the United States will be 99% energy independent by 2030. In 2008, The United States produced 6.9 million bbls/day of oil; in 2012, 8 million bbls/day; and by 2020 we will produce over 11 million bbls/day, making us the largest oil producing country in the world. Natural gas costs 1/3rd what it did in 2008. The cost of feedstock is so low, world wide petrochemical production is moving back to the United States. Why here, you ask? Clearly, the combination of bountiful resources, flexible capital markets and excellent infrastructure contributes. But the main reason is often overlooked. In the United States, surface land holders own the subsurface minerals--- including oil. Virtually everywhere else in the world, subsurface mineral rights are owned by the state. So, when an oil company approaches a rancher in North Dakota about siting an ugly oil rig on his property, the rancher does not hesitate to assent, knowing that a gusher will make him a multimillionaire a la Jed Clampett. What incentive does a farmer in Poland, France or Germany have to grant drilling rights when all of the proceeds from any oil or gas discovery will go to the state? Nothing drives progress like the prospect of personal profit---pure and simple.
So how have I invested in the domestic oil and gas revolution? The easiest and surest way to "mine for gold" is pipelines. Pipelines are like toll roads. The more the oil and gas flows, the more the revenue; and that formula "never gets old.". I like AMLP, an exchange traded fund that holds shares in all of the major pipeline master limited partnerships and that pays a 6% dividend.. For tax reasons, AMLP may not be suitable for retirement accounts so you may wish to investigate JMF, a closed end fund which likely is suitable for such accounts. (WARNING: check with your own tax advisor!) My favorite domestic oil exploration and production (E&P) company (the one "drilling for oil") is Linn Energy (symbol LINE as a partnership; symbol LINCO as a corporation suitable for retirement account investing). Linn's production is 50% natural gas and 50% oil. It hedges both to ensure a steady 7.5+% dividend at its current price. I gain exposure to other domestic E&P companies via NDP, a closed end fund which owns stock in every major player and which enhances its return through leverage and call option writing. On the refinery side, one "looking for love" need not look beyond Indianapolis favorite, Calumet Specialty Refining (CLMT), controlled by NCHS Class of '69 grad Fred Fehsenfeld and its nearly 8% dividend. I am not currently invested directly in fertilizer or chemical companies, but they too should prosper in a world of plentiful and cheap natural gas.
Next week, earnings reports from tech stocks dominate. Expectations are low so let's hope for a surprise to the upside. Nothing would "please, please me, whoa yeah" more than that.
Saturday, January 12, 2013
January 12, 2013 Pitbull's World
Risk/Reward Vol. 152
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Ridin' high/Winter nights/Warm and dry
You've earned your space, buddy"---lyrics from "Boomtown Blues" by Bob Seger
"Say O.P.P.(O-P-P), I like to say it with pride
Now when you do it, do it well and make sure it counts
You're now down with a discount."---lyrics from "O.P.P." sung by Naughty by Nature
"There's not a place/That your love don't affect me, baby
So I don't ever change/I crossed the globe when I'm with you, baby."---lyrics from "International Love" sung by Pitbull
With the tax rate crisis over and with some time (albeit short) before sequestration and debt ceiling negotiations again dominate the news, the stock market has been "ridin' high"so far in 2013, "warm and dry" as it closes each "winter night". The Dow Jones Industrial Average (DJIA) is up 2.8%, and the S&P 500 (S&P) is up 3% year to date. Let's hope that companies have "earned this space", an answer we will soon learn as the earnings (and more importantly the guidance) season begins for real next week. Alcoa kicked off fourth quarter earnings reports this week with better than expected numbers. That said, expectations for most companies are modest. Thus, any earnings or guidance disappointments will reverberate more than any news to the upside. I don't expect many surprises.
Although my portfolio of closed end and exchange traded funds is focused on achieving an average annualized dividend payment of 8.5% (not capital appreciation) and although I missed a day or two of this year's rise, I, too, am up 2.25% Thus , I can "say with pride" that "I did well," having matched "O.P.P." (other people's portfolios), even those in index funds. My results reflect the fact that I was able to buy my positions at a greater than normal "discount" to net asset value, thanks to Fiscal Cliff crisis overhang.
This week I discuss my exposure to "International" investments.
My most direct international play is DJX, an exchange traded fund that mirrors the performance of 800 dividend paying stocks listed on the Tokyo Stock Exchange. Shinzo Abe, the recently elected Japanese prime minister, is spearheading an effort to spur economic growth in Japan. This effort includes a stimulus package and yen devaluation. Abe wants Japanese products to once again "cross the globe" so that there is "not a place" on earth that Japan cannot compete. Japanese stocks should do well in such an environment. I chose DJX over the more popular NKY (which mirrors the performance of the Nikkei 225) because DJX is hedged to perform better if the yen falls in comparison to the dollar.
I also achieve "International" exposure via ESD, a closed end fund with 75% of its assets invested in the sovereign debt of South America and Eastern Europe (primarily Mexico, Brazil and Russia). Although none of these is "a place" where I have invested previously, the track record of ESD's sponsor, Western Assets, in these regions has been stellar over the past several years which is why Morningstar gives ESD a Silver rating. "I don't want" this past performance to "ever change." As of today, ESD is no longer trading at a discount to its net asset value, but it still yields a 6.5% dividend. I achieve exposure to other countries in a similar fashion via my positon in AWD.
I achieve exposure to European dividend paying stocks via IGD which, despite a rebound in European stocks last year, continues to trade at significant discount to net asset value and pays an11+% dividend while maintaining a Bronze rating from Morningstar.
Lastly, I achieve "International Love" via BCF, a closed end fund investing in international mining and natural resource companies such as BHP, Rio Tinto, Caterpillar, Vale, etc. If the Chinese economy quickens, this fund should do very well. It currently trades at a healthy discount to net asset value and pays an 8.5% dividend.
I intend to allocate more funds to international exposure. Any suggestions would be appreciated.
The New Year is off to a good start. Let's hope the earnings season does not disappoint. In the words of that force of nature, Pitbull, "Que no pare la fiesta, Don't stop the party," Dah-ling!
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Ridin' high/Winter nights/Warm and dry
You've earned your space, buddy"---lyrics from "Boomtown Blues" by Bob Seger
"Say O.P.P.(O-P-P), I like to say it with pride
Now when you do it, do it well and make sure it counts
You're now down with a discount."---lyrics from "O.P.P." sung by Naughty by Nature
"There's not a place/That your love don't affect me, baby
So I don't ever change/I crossed the globe when I'm with you, baby."---lyrics from "International Love" sung by Pitbull
With the tax rate crisis over and with some time (albeit short) before sequestration and debt ceiling negotiations again dominate the news, the stock market has been "ridin' high"so far in 2013, "warm and dry" as it closes each "winter night". The Dow Jones Industrial Average (DJIA) is up 2.8%, and the S&P 500 (S&P) is up 3% year to date. Let's hope that companies have "earned this space", an answer we will soon learn as the earnings (and more importantly the guidance) season begins for real next week. Alcoa kicked off fourth quarter earnings reports this week with better than expected numbers. That said, expectations for most companies are modest. Thus, any earnings or guidance disappointments will reverberate more than any news to the upside. I don't expect many surprises.
Although my portfolio of closed end and exchange traded funds is focused on achieving an average annualized dividend payment of 8.5% (not capital appreciation) and although I missed a day or two of this year's rise, I, too, am up 2.25% Thus , I can "say with pride" that "I did well," having matched "O.P.P." (other people's portfolios), even those in index funds. My results reflect the fact that I was able to buy my positions at a greater than normal "discount" to net asset value, thanks to Fiscal Cliff crisis overhang.
This week I discuss my exposure to "International" investments.
My most direct international play is DJX, an exchange traded fund that mirrors the performance of 800 dividend paying stocks listed on the Tokyo Stock Exchange. Shinzo Abe, the recently elected Japanese prime minister, is spearheading an effort to spur economic growth in Japan. This effort includes a stimulus package and yen devaluation. Abe wants Japanese products to once again "cross the globe" so that there is "not a place" on earth that Japan cannot compete. Japanese stocks should do well in such an environment. I chose DJX over the more popular NKY (which mirrors the performance of the Nikkei 225) because DJX is hedged to perform better if the yen falls in comparison to the dollar.
I also achieve "International" exposure via ESD, a closed end fund with 75% of its assets invested in the sovereign debt of South America and Eastern Europe (primarily Mexico, Brazil and Russia). Although none of these is "a place" where I have invested previously, the track record of ESD's sponsor, Western Assets, in these regions has been stellar over the past several years which is why Morningstar gives ESD a Silver rating. "I don't want" this past performance to "ever change." As of today, ESD is no longer trading at a discount to its net asset value, but it still yields a 6.5% dividend. I achieve exposure to other countries in a similar fashion via my positon in AWD.
I achieve exposure to European dividend paying stocks via IGD which, despite a rebound in European stocks last year, continues to trade at significant discount to net asset value and pays an11+% dividend while maintaining a Bronze rating from Morningstar.
Lastly, I achieve "International Love" via BCF, a closed end fund investing in international mining and natural resource companies such as BHP, Rio Tinto, Caterpillar, Vale, etc. If the Chinese economy quickens, this fund should do very well. It currently trades at a healthy discount to net asset value and pays an 8.5% dividend.
I intend to allocate more funds to international exposure. Any suggestions would be appreciated.
The New Year is off to a good start. Let's hope the earnings season does not disappoint. In the words of that force of nature, Pitbull, "Que no pare la fiesta, Don't stop the party," Dah-ling!
Saturday, January 5, 2013
January 5, 2013 Back in Black
Risk/Reward Vol. 151
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"What a friend we have in Congress/Who will guard our every shore
Spend three quarters of our taxes/Getting ready for a war."---lyrics from "What a Friend We Have in Congress" by John Denver
"Back in black/I hit the sack
I've been too long/I'm glad to be back"---lyrics from "Back in Black" by AC/DC
"He's making a list/And checking it twice
Gonna find out who's naughty and nice."---lyrics from "Santa Claus Is Coming To Town" by Coots and Gillespie
Can you believe it--- 20% maximum capital gains and dividend tax rates! "What a friend we have in Congress." I "shore" didn't think that investors would fare this well under the 11th hour tax plan (the "Deal"). The only real question is if, by postponing the sequestration and debt ceiling issues, the Republicans are merely "getting ready for a war." I think not. The Deal passed 89-8 in the Senate and 257-167 in the House, and both chambers are "bluer" this term. And clearly the stock market thinks not as well. The S&P 500 closed the week at its highest level in five years, and the VIX (which measures volatility) fell more than 40%. Oh, we will see some choppiness in the coming weeks, but I do not expect to exit again.
Yes, I'm "back" and hopefully soon "in the black." "I've been gone too long/I'm glad to be back." Once again, Mr. Market showed his wisdom. He did not overreact to the Fiscal Cliff threat, and he has started the New Year in stride. As for me, I did not fare too badly either. I exited with the Dow Jones Industrial Average at 13,500, and I am re-entering at 13,400. The portfolio that I sold in October has yet to fully recover--so I am ahead of the game. Moreover, I was risk free from October through December, and as a consequence I slept soundly.
So how did I engineer my re-entry? As I have written previously, I spent my three month sojourn on the sidelines studying. I "made a list" and "checked it many more times than twice." I have known what I wanted to buy, in what amounts and below what prices for weeks. On Wednesday morning, after the Deal was cut, I entered limit orders on approximately half of my desired positions. In setting the limit price, I took into consideration the 200 point rise at the open. I then went about my work. When I checked at the close, many of my orders were filled thanks to a mid day dip which also allowed me to catch some of the upward momentum experienced in late afternoon trading. I repeated the process on Thursday and again on Friday. By virtue of the normal "naughty and nice" moments given to investors during any given day, 75% of my investable capital is now in the market.
What did I buy? As I discussed in Vol.149 ( www.riskrewardblog.blogspot.com ), I decided to re-enter primarily via closed end and exchange traded funds. I like the instant diversification and stability they afford. I selected funds from the following sectors: preferred stocks, business development companies, high yield bonds, investment grade bonds, convertible bonds, emerging market debt, real estate investment trusts, commodities, indices, tech, value, commodities (including oil), small cap and large cap, the last one with an emphasis on covered calls. I looked for funds that pay on average an 8% yield (preferably on a monthly basis), that trade at or below net asset value and that are rated at least a Bronze by Morningstar. Not all of my choices meet the criteria, but most do.
Over the next few editions I will discuss each sector. This week's sector is large cap/covered call funds. The term "large cap" means companies with large capitalizations (e.g. those listed in the Fortune 100, DJIA, etc.). These funds enhance their returns by selling call options for a premium on the large cap stocks they hold (cover). This creates a steady income flow, although it lessens the opportunity for a home run on any given stock because if the strike price on the option is reached the stock will be called or sold. These funds also enhance returns by using leverage (borrowed money), a practice which is lucrative in times of low interest rates like today. In this sector, I like BOE, EOI, CII and IGD, each of which has recently traded below its net asset value and each of which yields better than 9%. Learn more about these funds at www.CEFConnect.com .
And so the Deal is sealed. As an investor, I am pleased. As an American, however, I am disappointed in Congress which once again demonstrated that is only capable of "Dirty Deeds Done Dirt Cheap."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"What a friend we have in Congress/Who will guard our every shore
Spend three quarters of our taxes/Getting ready for a war."---lyrics from "What a Friend We Have in Congress" by John Denver
"Back in black/I hit the sack
I've been too long/I'm glad to be back"---lyrics from "Back in Black" by AC/DC
"He's making a list/And checking it twice
Gonna find out who's naughty and nice."---lyrics from "Santa Claus Is Coming To Town" by Coots and Gillespie
Can you believe it--- 20% maximum capital gains and dividend tax rates! "What a friend we have in Congress." I "shore" didn't think that investors would fare this well under the 11th hour tax plan (the "Deal"). The only real question is if, by postponing the sequestration and debt ceiling issues, the Republicans are merely "getting ready for a war." I think not. The Deal passed 89-8 in the Senate and 257-167 in the House, and both chambers are "bluer" this term. And clearly the stock market thinks not as well. The S&P 500 closed the week at its highest level in five years, and the VIX (which measures volatility) fell more than 40%. Oh, we will see some choppiness in the coming weeks, but I do not expect to exit again.
Yes, I'm "back" and hopefully soon "in the black." "I've been gone too long/I'm glad to be back." Once again, Mr. Market showed his wisdom. He did not overreact to the Fiscal Cliff threat, and he has started the New Year in stride. As for me, I did not fare too badly either. I exited with the Dow Jones Industrial Average at 13,500, and I am re-entering at 13,400. The portfolio that I sold in October has yet to fully recover--so I am ahead of the game. Moreover, I was risk free from October through December, and as a consequence I slept soundly.
So how did I engineer my re-entry? As I have written previously, I spent my three month sojourn on the sidelines studying. I "made a list" and "checked it many more times than twice." I have known what I wanted to buy, in what amounts and below what prices for weeks. On Wednesday morning, after the Deal was cut, I entered limit orders on approximately half of my desired positions. In setting the limit price, I took into consideration the 200 point rise at the open. I then went about my work. When I checked at the close, many of my orders were filled thanks to a mid day dip which also allowed me to catch some of the upward momentum experienced in late afternoon trading. I repeated the process on Thursday and again on Friday. By virtue of the normal "naughty and nice" moments given to investors during any given day, 75% of my investable capital is now in the market.
What did I buy? As I discussed in Vol.149 ( www.riskrewardblog.blogspot.com ), I decided to re-enter primarily via closed end and exchange traded funds. I like the instant diversification and stability they afford. I selected funds from the following sectors: preferred stocks, business development companies, high yield bonds, investment grade bonds, convertible bonds, emerging market debt, real estate investment trusts, commodities, indices, tech, value, commodities (including oil), small cap and large cap, the last one with an emphasis on covered calls. I looked for funds that pay on average an 8% yield (preferably on a monthly basis), that trade at or below net asset value and that are rated at least a Bronze by Morningstar. Not all of my choices meet the criteria, but most do.
Over the next few editions I will discuss each sector. This week's sector is large cap/covered call funds. The term "large cap" means companies with large capitalizations (e.g. those listed in the Fortune 100, DJIA, etc.). These funds enhance their returns by selling call options for a premium on the large cap stocks they hold (cover). This creates a steady income flow, although it lessens the opportunity for a home run on any given stock because if the strike price on the option is reached the stock will be called or sold. These funds also enhance returns by using leverage (borrowed money), a practice which is lucrative in times of low interest rates like today. In this sector, I like BOE, EOI, CII and IGD, each of which has recently traded below its net asset value and each of which yields better than 9%. Learn more about these funds at www.CEFConnect.com .
And so the Deal is sealed. As an investor, I am pleased. As an American, however, I am disappointed in Congress which once again demonstrated that is only capable of "Dirty Deeds Done Dirt Cheap."
Saturday, December 29, 2012
December 29, 2012 Look at Me
Risk/Reward Vol. 150
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I will always be hoping, hoping/You will always be holding, holding
My hand in your hand/I will understand."---lyrics from "Hope of Deliverance" by Paul McCartney
"There is someone/Watching your footsteps
Turn around/Look at me."---lyrics from "Turn Around, Look at Me" sung by the Vogues
"Trying to convince myself/ I've found one
Making the mistake/I never learned from."---lyrics from "Same Mistake" by Drake
Talk about "hoping, hoping!" Clearly, Mr. Market is "holding, holding" on to the "Hope of a Deliverance", with Dow Jones Industrial Average (DJIA) still hovering near 13,000 and the S&:P remaining above 1400. I don't "understand" this hope in light of continued Congressional gridlock on Fiscal Cliff issues and Secretary Geithner's announcement on Thursday that we will reach the debt ceiling on December 31st. Thus, I remain on the sidelines.
As my loyal readers know, I write this newsletter so that "someone is watching my footsteps" as I try to achieve the goal that I set in 2010 and that I announced in Vol. 1 of Risk/Reward (available at http://www.riskrewardblog.blogsopot.com/ ). At that time I stated as follows:
"I am in search of a 6%, pre tax return. Throughout most of my life, this would have been a layup. From 1969 through 1997, the 10 year Treasuries rarely fell below 6%. From 1980 through 1985, they never fell below 10%. So, at this stage in my life all I need is a little inflation. Indeed, right now 90% of my money is parked, waiting for that to happen. Unfortunately, it looks like we are into a prolonged period of stagflation and perhaps deflation. So, Barb and I decided to get off our duffs, and to become more active money managers."
So, let's "turn around and look at me" to ascertain how I did this year. On the capital that I had available to invest on January 1, 2012 ( I do not count the money that Barb mandates that I keep in cash or the additions that I make throughout the year via pension contributions and/or savings), I made a 6.8% pre-tax return from realized gains and dividends or interest. Not bad, considering I was out of the market all together from mid May through mid July and from mid October through the present (a total of 5 months). If I had kept the portfolio that I sold in May intact through today, I would have seen a 12% pre-tax return for the year. If I had kept the portfolio I sold in October intact through today, I would have seen only a 2.4% pre-tax return for the year even considering the profits I took in May..
Did I "make a mistake" in leaving the market in May? I say no---but in so saying, am I "trying to convince myself" that "I've found one" formula that works--at least for me? Should I have "learned from" the sale in May that I exited too quickly? I do not know the answer to that one. I do know that this year, I was very comfortable with my decisions and that I slept better as a result---and never so well as last night. And so, I continue my quest fully realizing that my learning curve is more like a "long and winding road."
May all of you have a happy, healthy and prosperous NewYear!
P.S. How did you do?
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I will always be hoping, hoping/You will always be holding, holding
My hand in your hand/I will understand."---lyrics from "Hope of Deliverance" by Paul McCartney
"There is someone/Watching your footsteps
Turn around/Look at me."---lyrics from "Turn Around, Look at Me" sung by the Vogues
"Trying to convince myself/ I've found one
Making the mistake/I never learned from."---lyrics from "Same Mistake" by Drake
Talk about "hoping, hoping!" Clearly, Mr. Market is "holding, holding" on to the "Hope of a Deliverance", with Dow Jones Industrial Average (DJIA) still hovering near 13,000 and the S&:P remaining above 1400. I don't "understand" this hope in light of continued Congressional gridlock on Fiscal Cliff issues and Secretary Geithner's announcement on Thursday that we will reach the debt ceiling on December 31st. Thus, I remain on the sidelines.
As my loyal readers know, I write this newsletter so that "someone is watching my footsteps" as I try to achieve the goal that I set in 2010 and that I announced in Vol. 1 of Risk/Reward (available at http://www.riskrewardblog.blogsopot.com/ ). At that time I stated as follows:
"I am in search of a 6%, pre tax return. Throughout most of my life, this would have been a layup. From 1969 through 1997, the 10 year Treasuries rarely fell below 6%. From 1980 through 1985, they never fell below 10%. So, at this stage in my life all I need is a little inflation. Indeed, right now 90% of my money is parked, waiting for that to happen. Unfortunately, it looks like we are into a prolonged period of stagflation and perhaps deflation. So, Barb and I decided to get off our duffs, and to become more active money managers."
So, let's "turn around and look at me" to ascertain how I did this year. On the capital that I had available to invest on January 1, 2012 ( I do not count the money that Barb mandates that I keep in cash or the additions that I make throughout the year via pension contributions and/or savings), I made a 6.8% pre-tax return from realized gains and dividends or interest. Not bad, considering I was out of the market all together from mid May through mid July and from mid October through the present (a total of 5 months). If I had kept the portfolio that I sold in May intact through today, I would have seen a 12% pre-tax return for the year. If I had kept the portfolio I sold in October intact through today, I would have seen only a 2.4% pre-tax return for the year even considering the profits I took in May..
Did I "make a mistake" in leaving the market in May? I say no---but in so saying, am I "trying to convince myself" that "I've found one" formula that works--at least for me? Should I have "learned from" the sale in May that I exited too quickly? I do not know the answer to that one. I do know that this year, I was very comfortable with my decisions and that I slept better as a result---and never so well as last night. And so, I continue my quest fully realizing that my learning curve is more like a "long and winding road."
May all of you have a happy, healthy and prosperous NewYear!
P.S. How did you do?
Saturday, December 22, 2012
December 22, 2012 Chain of Fools
Risk/Reward Vol. 149
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You lift me up/When I'm on the ground
But as soon as I get up top/You send me tumblin' down
Your love is like a see saw."---lyrics from "See Saw" as sung by Aretha Franklin
"I can see clearly now/The rain is gone
I can see all obstacles in my way
It's gonna be a bright, bright sun shiny day"---lyrics from "I Can See Clearly Now" sung by Johnny Nash
"It's crazy to hold on/When you won't open
So now I'm closed for love."---lyrics from "Closed for Love" sung by Ellie Goulding
Again this week, the Fiscal Cliff negotiations (or lack thereof) turned the stock market into a "see saw". Early in the week, news "on the ground" of a possible deal "lifted up" the Dow Jones Industrial Average (DJIA) more than 200 points, only to "send us tumblin' down" Wednesday on news that the House Republicans were opting for Plan B, a measure the President would not accept. Thursday's modest gains were eliminated on Friday with news that Speaker Boehner had lost control of his caucus and that even the modest tax increases in Plan B were unacceptable to the House. The DJIA closed up 55 points for the week, but was directionally negative.
That said, come the New Year, we SHOULD "see clearly." The "rain SHOULD be gone", and we SHOULD "see all obstacles in our way." The clarity of just knowing the consequences--1) of a deal or 2) of no deal and a leap over the Cliff-- SHOULD bring "a bright, bright sun shiny day." And once again I SHOULD be off the sidelines and in the market, enjoying a decent return. Unless of course, our collective pain is extended by a minor and temporary legislative kick-of-the-can as suggested by the President after Friday's close. Thus, my use of SHOULD.
As indicated previously, my re-entry, when it occurs, will include a heavy dose of closed end funds (CEF's). My "love for closed" end funds comes after much study and investment therein over the past two years . Like their cousins mutual funds and exchange traded funds (ETF's), CEF's offer instant diversification. As a consequence, I will not go "crazy trying to hold on" to or to track individual stocks. A CEF is created via an intial public offering of a set number of shares. The proceeds from the offering are invested by fund sponsors (e.g. BlackRock, Nuveen, Legg Mason, etc.) into assets that are consistent with the particular fund's stated purpose (e.g. investment in large cap stocks or corporate bonds or senior loans, etc. ). After the initial offering, the fund is "closed" to further investment and "won't open". Thereafter, the shares of the closed end fund itself are traded on the stock exchange. The price of a CEF share varies from day to day depending on a variety of factors. Unlike its cousins, mutual funds and ETF's, CEF's can trade above or below their net asset value. Most closed end funds are income oriented which makes them very appealing to me-- an inveterate yield hunter. Income is generated from dividends/interest paid by the securities owned by the fund, from capital gains from selling those securities and/or from premiums from selling covered calls. CEFs are particularly attractive in times of low interest rates (like now) because they can employ leverage (borrowed funds) to enhance returns---something that mutual funds and ETF's cannot do. Read more about CEF's at www.CEFConnect.com , an excellent educational and research source. Over the next several editions, I will be discussing my choices in detail. Each of them has an excellent track record, and most hold at least a Bronze rating by Morningstar, a highly regarded financial reporting company, to which I subscribe, that tracks thousands of funds.
Within a few days, we SHOULD be unfettered---like Aretha, released from the "chain, chain, chains" of Fiscal Cliff uncertainty . Having been "treated mean" and been "treated cruel" by the "chain of fools" that populate our government, the unknown SHOULD be known, and fundamentals SHOULD dictate market performance. Please, Washington, if for no reason other than R-E-S-P-E-C-T for your constituents, next week either do a deal or don't. Do not prolong the agony.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You lift me up/When I'm on the ground
But as soon as I get up top/You send me tumblin' down
Your love is like a see saw."---lyrics from "See Saw" as sung by Aretha Franklin
"I can see clearly now/The rain is gone
I can see all obstacles in my way
It's gonna be a bright, bright sun shiny day"---lyrics from "I Can See Clearly Now" sung by Johnny Nash
"It's crazy to hold on/When you won't open
So now I'm closed for love."---lyrics from "Closed for Love" sung by Ellie Goulding
Again this week, the Fiscal Cliff negotiations (or lack thereof) turned the stock market into a "see saw". Early in the week, news "on the ground" of a possible deal "lifted up" the Dow Jones Industrial Average (DJIA) more than 200 points, only to "send us tumblin' down" Wednesday on news that the House Republicans were opting for Plan B, a measure the President would not accept. Thursday's modest gains were eliminated on Friday with news that Speaker Boehner had lost control of his caucus and that even the modest tax increases in Plan B were unacceptable to the House. The DJIA closed up 55 points for the week, but was directionally negative.
That said, come the New Year, we SHOULD "see clearly." The "rain SHOULD be gone", and we SHOULD "see all obstacles in our way." The clarity of just knowing the consequences--1) of a deal or 2) of no deal and a leap over the Cliff-- SHOULD bring "a bright, bright sun shiny day." And once again I SHOULD be off the sidelines and in the market, enjoying a decent return. Unless of course, our collective pain is extended by a minor and temporary legislative kick-of-the-can as suggested by the President after Friday's close. Thus, my use of SHOULD.
As indicated previously, my re-entry, when it occurs, will include a heavy dose of closed end funds (CEF's). My "love for closed" end funds comes after much study and investment therein over the past two years . Like their cousins mutual funds and exchange traded funds (ETF's), CEF's offer instant diversification. As a consequence, I will not go "crazy trying to hold on" to or to track individual stocks. A CEF is created via an intial public offering of a set number of shares. The proceeds from the offering are invested by fund sponsors (e.g. BlackRock, Nuveen, Legg Mason, etc.) into assets that are consistent with the particular fund's stated purpose (e.g. investment in large cap stocks or corporate bonds or senior loans, etc. ). After the initial offering, the fund is "closed" to further investment and "won't open". Thereafter, the shares of the closed end fund itself are traded on the stock exchange. The price of a CEF share varies from day to day depending on a variety of factors. Unlike its cousins, mutual funds and ETF's, CEF's can trade above or below their net asset value. Most closed end funds are income oriented which makes them very appealing to me-- an inveterate yield hunter. Income is generated from dividends/interest paid by the securities owned by the fund, from capital gains from selling those securities and/or from premiums from selling covered calls. CEFs are particularly attractive in times of low interest rates (like now) because they can employ leverage (borrowed funds) to enhance returns---something that mutual funds and ETF's cannot do. Read more about CEF's at www.CEFConnect.com , an excellent educational and research source. Over the next several editions, I will be discussing my choices in detail. Each of them has an excellent track record, and most hold at least a Bronze rating by Morningstar, a highly regarded financial reporting company, to which I subscribe, that tracks thousands of funds.
Within a few days, we SHOULD be unfettered---like Aretha, released from the "chain, chain, chains" of Fiscal Cliff uncertainty . Having been "treated mean" and been "treated cruel" by the "chain of fools" that populate our government, the unknown SHOULD be known, and fundamentals SHOULD dictate market performance. Please, Washington, if for no reason other than R-E-S-P-E-C-T for your constituents, next week either do a deal or don't. Do not prolong the agony.
Saturday, December 15, 2012
December 15, 2012 Get Back, Loretta
Risk/Reward Vol. 148
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Baby, I'm a man/And maybe I'm a lonely man"
Who's in the middle of something/That he really doesn't understand."---lyrics from "Maybe I'm Amazed" by Paul McCartney
"It's hard enough to wake up after awhile
And even though I say I'm feeling fine
I'm locked up, loaded down, short a try."---lyrics from "Short a Try" by O.A R.
"Big man, huh?/But just understand Uncle Sam knows the scam
Couldn't fool me long/I got it goin' on
I'm independent."---lyrics from "Independent" by Salt N Pepa
"Baby, I'm amazed!" On Monday and Tuesday when the only news story reported by the financial press was disappointment in the Fiscal Cliff negotiations, the Dow Jones Industrual Average (DJIA) advanced 93 points. On Wednesday, when the dominant story was the Federal Reserve's decision to extend quantitative easing (QE4), the type of news that one would expect to drive the DJIA higher, the index fell---and continued to fall through Friday even in the face of encouraging employment numbers. What gives with this? But then, what gives with the DJIA remaining above 13,000 points with no Fiscal Cliff resolution in sight? Clearly, "we're in the middle of something that I don't really understand." "Maybe I'm a lonely man" on the sidelines, but I am a content one.
In another attempt to spur economic growth, the Federal Reserve (Fed), with QE4, has commited to bid upon and to purchase $40billion worth of mortgages and $45billion worth of Treasury bonds EACH MONTH until unemployment (currently at 7.8%) falls below 6.5% or until inflation becomes a concern---whichever occurs first. Achieving that unemployment rate could take a very long time with all of the downward pressure on hiring (e.g. increased taxes, Affordable Care Act obligations, etc.). By printing $85billion of new money each month to pay for this up bidding exercise (see "Picasso Auction" Vol. 113 at www.riskrewardblog.blogspot.com for an explanation of this process) the Federal Reserve's balance sheet will exceed $4trillion by year end 2013. This is astounding considering its balance sheet did not reach $1trillion until September, 2008! QE4's resultant higher bond/mortgage prices and concomitant lower bond/mortgage interest rates (remember, higher asset prices means lower yields/interest) may make us "feel fine" for now, but necessarily we will "wake up after awhile" to find that we are "loaded down" with debt. The eventuality of this realization prompted Ray Dalio, the most successful hedge fund manager in history, to opine on Wednesday that his greatest profit opportunity in the future will come from "short(ing)" Treasury bonds. He is planning to do so come year end 2013 when he predicts that inflation will cause the Fed to stop QE. At that time, according to Dalio, the price of Treasury bonds will plummet. I will buy TBT, PST and/or TBF if and when it's time to short Treasuries. In the "shorter" run, I will be keep my exposure to agency morgage real estate investment trusts (e.g. NLY, AGNC, ARR) low. They simply cannot purchase mortgages profitably with the Fed using $40billion of newly printed money each month to keep mortgage bids high and mortgage interest rates low.
Almost unnoticed in this week's Fiscal Cliff fog was a report from the U.S. Energy Information Administration that in 2012, the United States will increase its crude oil production by 760,000 barrels/day (the largest annual increase in history), and that by year end 2013 U.S. crude oil production will exceed 7,000,000 barrels/day (the highest production since 1992). 'Uncle Sam knows the scam" that OPEC has visited upon us over the years, and should want to escape it. Thanks to cheap natural gas and crude oil from advancments in technology (fracking), we can become the economic "Big Man" again if regulations do not impede us. Until new pipelines are in place, which should allow us to really "get it goin' on", there will be supply and pricing inequities that may depress the stock of some domestic producers temporarily. But ultimately these plays will be big winners---and the U.S. should be energy "independent". ETF's and CEF's that play in this space are high on my re-entry list.
The DJIA remains surprisingly (to me) buoyant, dropping only 20 points this week. I continue to believe that the stock market will experience downward pressure until more clarity on the Fiscal Cliff is achieved. Whether that clarity is provided by a negotiated resolution or a plunge into the abyss, the time for clarity is fast approaching. Once clarity--good or bad---is achieved, I will reenter. Then, Loretta, in the words of Sir Paul, I will "get back to where I once belonged.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Baby, I'm a man/And maybe I'm a lonely man"
Who's in the middle of something/That he really doesn't understand."---lyrics from "Maybe I'm Amazed" by Paul McCartney
"It's hard enough to wake up after awhile
And even though I say I'm feeling fine
I'm locked up, loaded down, short a try."---lyrics from "Short a Try" by O.A R.
"Big man, huh?/But just understand Uncle Sam knows the scam
Couldn't fool me long/I got it goin' on
I'm independent."---lyrics from "Independent" by Salt N Pepa
"Baby, I'm amazed!" On Monday and Tuesday when the only news story reported by the financial press was disappointment in the Fiscal Cliff negotiations, the Dow Jones Industrual Average (DJIA) advanced 93 points. On Wednesday, when the dominant story was the Federal Reserve's decision to extend quantitative easing (QE4), the type of news that one would expect to drive the DJIA higher, the index fell---and continued to fall through Friday even in the face of encouraging employment numbers. What gives with this? But then, what gives with the DJIA remaining above 13,000 points with no Fiscal Cliff resolution in sight? Clearly, "we're in the middle of something that I don't really understand." "Maybe I'm a lonely man" on the sidelines, but I am a content one.
In another attempt to spur economic growth, the Federal Reserve (Fed), with QE4, has commited to bid upon and to purchase $40billion worth of mortgages and $45billion worth of Treasury bonds EACH MONTH until unemployment (currently at 7.8%) falls below 6.5% or until inflation becomes a concern---whichever occurs first. Achieving that unemployment rate could take a very long time with all of the downward pressure on hiring (e.g. increased taxes, Affordable Care Act obligations, etc.). By printing $85billion of new money each month to pay for this up bidding exercise (see "Picasso Auction" Vol. 113 at www.riskrewardblog.blogspot.com for an explanation of this process) the Federal Reserve's balance sheet will exceed $4trillion by year end 2013. This is astounding considering its balance sheet did not reach $1trillion until September, 2008! QE4's resultant higher bond/mortgage prices and concomitant lower bond/mortgage interest rates (remember, higher asset prices means lower yields/interest) may make us "feel fine" for now, but necessarily we will "wake up after awhile" to find that we are "loaded down" with debt. The eventuality of this realization prompted Ray Dalio, the most successful hedge fund manager in history, to opine on Wednesday that his greatest profit opportunity in the future will come from "short(ing)" Treasury bonds. He is planning to do so come year end 2013 when he predicts that inflation will cause the Fed to stop QE. At that time, according to Dalio, the price of Treasury bonds will plummet. I will buy TBT, PST and/or TBF if and when it's time to short Treasuries. In the "shorter" run, I will be keep my exposure to agency morgage real estate investment trusts (e.g. NLY, AGNC, ARR) low. They simply cannot purchase mortgages profitably with the Fed using $40billion of newly printed money each month to keep mortgage bids high and mortgage interest rates low.
Almost unnoticed in this week's Fiscal Cliff fog was a report from the U.S. Energy Information Administration that in 2012, the United States will increase its crude oil production by 760,000 barrels/day (the largest annual increase in history), and that by year end 2013 U.S. crude oil production will exceed 7,000,000 barrels/day (the highest production since 1992). 'Uncle Sam knows the scam" that OPEC has visited upon us over the years, and should want to escape it. Thanks to cheap natural gas and crude oil from advancments in technology (fracking), we can become the economic "Big Man" again if regulations do not impede us. Until new pipelines are in place, which should allow us to really "get it goin' on", there will be supply and pricing inequities that may depress the stock of some domestic producers temporarily. But ultimately these plays will be big winners---and the U.S. should be energy "independent". ETF's and CEF's that play in this space are high on my re-entry list.
The DJIA remains surprisingly (to me) buoyant, dropping only 20 points this week. I continue to believe that the stock market will experience downward pressure until more clarity on the Fiscal Cliff is achieved. Whether that clarity is provided by a negotiated resolution or a plunge into the abyss, the time for clarity is fast approaching. Once clarity--good or bad---is achieved, I will reenter. Then, Loretta, in the words of Sir Paul, I will "get back to where I once belonged.
Saturday, December 8, 2012
December 8, 2012 Who Knew
Risk/Reward Vol. 147
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Don't ask me why/No more questions
Just accept it for the way it is"---lyrics from "Words" by Pink
"He got that super bass/Boom da boom boom
Boom da boom boom bass
Yeah that's that super bass"---lyrics from "Super Bass" by Nicki Minaj
"It's a pain in my gas/It's killin' me so fast
All my hard earned money just thrown away
Blame Bin Laden or Sudan, Iraq or Iran"---lyrics from "Pain in the Gas" sung by Billy Ray Cyrus
This week Mr. Market showed significant support for the President. On Wednesday, within minutes of the President's comments that the Fiscal Cliff could be resolved in one week if the Republicans accepted that the upper two tax brackets will be increased, the Dow Jones Industrial Average (DJIA) went from negative to positive, ending the day up 86 points. There were "no more questions" regarding this claim. "Don't ask me why." Mr. Market "just accepted it for the way it is." Indeed, thereafter stocks moved steadily upward aided by a favorable employment report on Friday. The DJIA is now only 2.5 % below where I exited in October.
This week Goldman Sachs opined that, contrary to what others have said, the "super" cycle in "bass (base)" metals will continue. For those unfamiliar with the "supercycle", much of the three year "boom da boom" experienced by emerging markets has been driven by demand (primarily from China) for base metals (e.g. copper, zinc, iron ore) mined in emerging market countries (e.g. Chile, Brazil, Australia, etc.). With the political change in China complete and a commitment from the new regime to promote development, Goldman Sachs believes that the "boom da boom" in "bass" metals will experience a renaissance. Goldman's statement notwithstanding, one of world's major copper miners, Freeport-McMoRan (FCX) took a different tack this week by making two large acquisitions (PXP and MMR) in the natural gas exploration and transportation sector. The stock market punished FCX for uncoupling from copper, but its foray into natural gas may make sense for the reason set forth below.
Mid-week, the Department of Energy (DOE) issued a report that advocates an expansion of natural gas exports. As loyal readers know, thanks to hydraulic fracturing ("fracking") and horizontal drilling, the United States has gone from being an importer of natural gas at $12/mmBTU in 2008 ("a pain in my gas") to being bloated with it. Indeed, natural gas traded below $2/mmBTU earlier this year before production was curtailed. Energy independence could be ours at last if we support natural gas usage in service vehicles and semis and if regulation doesn't "kill it so fast.". If we don't achieve energy independence, don't "Blame Bin Laden or Sudan, Iraq or Iran." Blame ourselves. Despite a surplusage of natural gas, heretofore only one company, Cheniere Energy (LNG), has been granted permission by the DOE to construct a natural gas exporting facility. This week's report should benefit other companies interested in exporting this abundant resource, most notably Dominion Resources (D).
Gauged by the market's recent move upward, I may be the last person who believes that plunging over the Fiscal Cliff is still a possibility---and/or that a plunge will result in a significant market drop. But recall, if you will, a mere 16 months ago. Mr. Market believed that the Debt Ceiling crisis would be resolved before the August 2, 2011 default date and that a debt downgrade would be avoided. It was not worth the risk to me, so on July 29, 2011 I liquidated when the DJIA was at 12,240. (See Vol 78 www.riskrewardblog.blogspot.com). Washington played brinksmanship over the succeeding few days and a week or so after my liquidation, the DJIA closed at 10,2019---a 12% drop from my exit point. Lest we forget, this is the same President and the same Congress that caused that fiasco. Consequently, I am biding my time---on the sidelines. I know what I want to buy and am eager to do so, but I am in cash until a Cliff resolution is reached.
Please, Washington, listen to Pink, and:
"Get this party started."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Don't ask me why/No more questions
Just accept it for the way it is"---lyrics from "Words" by Pink
"He got that super bass/Boom da boom boom
Boom da boom boom bass
Yeah that's that super bass"---lyrics from "Super Bass" by Nicki Minaj
"It's a pain in my gas/It's killin' me so fast
All my hard earned money just thrown away
Blame Bin Laden or Sudan, Iraq or Iran"---lyrics from "Pain in the Gas" sung by Billy Ray Cyrus
This week Mr. Market showed significant support for the President. On Wednesday, within minutes of the President's comments that the Fiscal Cliff could be resolved in one week if the Republicans accepted that the upper two tax brackets will be increased, the Dow Jones Industrial Average (DJIA) went from negative to positive, ending the day up 86 points. There were "no more questions" regarding this claim. "Don't ask me why." Mr. Market "just accepted it for the way it is." Indeed, thereafter stocks moved steadily upward aided by a favorable employment report on Friday. The DJIA is now only 2.5 % below where I exited in October.
This week Goldman Sachs opined that, contrary to what others have said, the "super" cycle in "bass (base)" metals will continue. For those unfamiliar with the "supercycle", much of the three year "boom da boom" experienced by emerging markets has been driven by demand (primarily from China) for base metals (e.g. copper, zinc, iron ore) mined in emerging market countries (e.g. Chile, Brazil, Australia, etc.). With the political change in China complete and a commitment from the new regime to promote development, Goldman Sachs believes that the "boom da boom" in "bass" metals will experience a renaissance. Goldman's statement notwithstanding, one of world's major copper miners, Freeport-McMoRan (FCX) took a different tack this week by making two large acquisitions (PXP and MMR) in the natural gas exploration and transportation sector. The stock market punished FCX for uncoupling from copper, but its foray into natural gas may make sense for the reason set forth below.
Mid-week, the Department of Energy (DOE) issued a report that advocates an expansion of natural gas exports. As loyal readers know, thanks to hydraulic fracturing ("fracking") and horizontal drilling, the United States has gone from being an importer of natural gas at $12/mmBTU in 2008 ("a pain in my gas") to being bloated with it. Indeed, natural gas traded below $2/mmBTU earlier this year before production was curtailed. Energy independence could be ours at last if we support natural gas usage in service vehicles and semis and if regulation doesn't "kill it so fast.". If we don't achieve energy independence, don't "Blame Bin Laden or Sudan, Iraq or Iran." Blame ourselves. Despite a surplusage of natural gas, heretofore only one company, Cheniere Energy (LNG), has been granted permission by the DOE to construct a natural gas exporting facility. This week's report should benefit other companies interested in exporting this abundant resource, most notably Dominion Resources (D).
Gauged by the market's recent move upward, I may be the last person who believes that plunging over the Fiscal Cliff is still a possibility---and/or that a plunge will result in a significant market drop. But recall, if you will, a mere 16 months ago. Mr. Market believed that the Debt Ceiling crisis would be resolved before the August 2, 2011 default date and that a debt downgrade would be avoided. It was not worth the risk to me, so on July 29, 2011 I liquidated when the DJIA was at 12,240. (See Vol 78 www.riskrewardblog.blogspot.com). Washington played brinksmanship over the succeeding few days and a week or so after my liquidation, the DJIA closed at 10,2019---a 12% drop from my exit point. Lest we forget, this is the same President and the same Congress that caused that fiasco. Consequently, I am biding my time---on the sidelines. I know what I want to buy and am eager to do so, but I am in cash until a Cliff resolution is reached.
Please, Washington, listen to Pink, and:
"Get this party started."
Saturday, December 1, 2012
December 1, 2012 Hostage
Risk/Reward Vol. 146
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It's quarter to three
There's no one in the place except you and me
So set 'em up Joe
I got a little story you oughta know."---lyrics from "One for My Baby" sung by Frank Sinatra
"I can change your life, make it so new
Make you never want to go back to the old you
Ciroc and lime, give it a lil' time
And she gonna transform like Optimus Prime"---lyrics from "I Can Transform Ya" by Chris Brown
"Can you guess my name?/And can you guess my trade
Well, I won't rest before the world is made
Arm in arm the angels fly/Keep me falling from the sky
Steel Monkey"---lyrics from "Steel Monkey" by Jethro Tull
The stock market is a hostage of the Fiscal Cliff rumor mill. This week's stock chart tells a "little story you oughta know". At noon on Tuesday, the market was trading in positive territory, "set up" by good housing and consumer confidence news---the type of information that should drive market action. Two hours later, Senator Harry Reid held a press conference where he stated little if any progress had been made in resolving the Fiscal Cliff. By "quarter to three"(EST), the market had dropped over 60 points and ended the day down 86. The next day the market continued downward until President Obama stated that prospects looked good for a resolution. The stock market rose on the news and continued generally upward until Friday when Speaker Boehner flattened it by stating that Fiscal Cliff discussions were going nowhere. Honestly, when it comes to D.C. its seems "there is no one in the place" who is looking out for "you and me".
The Dow Jones Industrial Average ended the week up 16 points. But, I remain on the sidelines. I have read nothing that makes me believe that either side is ready to compromise on Cliff issues. The President has stated that an increase in the top two tax brackets is a sine qua non of any resolution. He has remained steadfast on this point for more than a year. I don't see him relenting. Politically it would be foolish for him to do so. Keep in mind that Barack Obama sees himself as a "transformative" President. With Democrats controlling both houses of Congress during his first two years in office, he was a veritable "Optimus", passage of the Obamacare being a "Prime" example. "Give it a lil' time" and you will see how Obamacare has "changed your life." Going forward, he will not be satisfied unless and until he transforms how wealth is distributed in this country. But, as the past two years have shown, he can do nothing with a Republican controlled House. So how best to rid himself of those pests? Either make them abandon their "no tax increase" pledge and thereby incur the wrath of their Tea Party base or have them commit political suicide by holding fast to that pledge and vaulting the country over the Cliff for the sake of the wealthy that populate the upper two tax brackets. The President wins and the Republicans lose---either way. As I said, prospects for compromise don't look promising.
When I do reenter, I won't be a "Steel Money". World steel production capacity is currently 1.8 trillion tons with 350 million tons of additional capacity coming on line in 2013. Worldwide consumption is only 1.5 trillion tons, 46% of which is consumed by China which naturally has a preference for using domestically produced steel. Steel production overcapacity was highlighted this week as France threatened to nationalize one of Arcelor Mittal's French steel mills scheduled to be closed as redundant. Seeing itself as an "angel", the French government does not want employment to "keep falling", even if steel prices do.
Despite my recent dire predictions, the stock market has remained remarkably steady; now down only 3.6% from when I exited in October. I may have overreacted, and frankly nothing would please me more should that be the case. I would have preserved my desired profit level for the year and lost only one quarter's dividends in return for sleeping well for three months. To me that would be a satisfactory result. That said, I continue to believe that we stand a 50/50 chance that our lame duck Congress will send us over the Fiscal Cliff and into unchartered waters. Should that occur, the market will surely plummet, but I will be kept afloat by my cash position. If the worst occurs, I will not be grasping for air through some "Aqualung", "feeling like a dead duck, spitting out pieces of broken luck." (Jethro Tull)
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It's quarter to three
There's no one in the place except you and me
So set 'em up Joe
I got a little story you oughta know."---lyrics from "One for My Baby" sung by Frank Sinatra
"I can change your life, make it so new
Make you never want to go back to the old you
Ciroc and lime, give it a lil' time
And she gonna transform like Optimus Prime"---lyrics from "I Can Transform Ya" by Chris Brown
"Can you guess my name?/And can you guess my trade
Well, I won't rest before the world is made
Arm in arm the angels fly/Keep me falling from the sky
Steel Monkey"---lyrics from "Steel Monkey" by Jethro Tull
The stock market is a hostage of the Fiscal Cliff rumor mill. This week's stock chart tells a "little story you oughta know". At noon on Tuesday, the market was trading in positive territory, "set up" by good housing and consumer confidence news---the type of information that should drive market action. Two hours later, Senator Harry Reid held a press conference where he stated little if any progress had been made in resolving the Fiscal Cliff. By "quarter to three"(EST), the market had dropped over 60 points and ended the day down 86. The next day the market continued downward until President Obama stated that prospects looked good for a resolution. The stock market rose on the news and continued generally upward until Friday when Speaker Boehner flattened it by stating that Fiscal Cliff discussions were going nowhere. Honestly, when it comes to D.C. its seems "there is no one in the place" who is looking out for "you and me".
The Dow Jones Industrial Average ended the week up 16 points. But, I remain on the sidelines. I have read nothing that makes me believe that either side is ready to compromise on Cliff issues. The President has stated that an increase in the top two tax brackets is a sine qua non of any resolution. He has remained steadfast on this point for more than a year. I don't see him relenting. Politically it would be foolish for him to do so. Keep in mind that Barack Obama sees himself as a "transformative" President. With Democrats controlling both houses of Congress during his first two years in office, he was a veritable "Optimus", passage of the Obamacare being a "Prime" example. "Give it a lil' time" and you will see how Obamacare has "changed your life." Going forward, he will not be satisfied unless and until he transforms how wealth is distributed in this country. But, as the past two years have shown, he can do nothing with a Republican controlled House. So how best to rid himself of those pests? Either make them abandon their "no tax increase" pledge and thereby incur the wrath of their Tea Party base or have them commit political suicide by holding fast to that pledge and vaulting the country over the Cliff for the sake of the wealthy that populate the upper two tax brackets. The President wins and the Republicans lose---either way. As I said, prospects for compromise don't look promising.
When I do reenter, I won't be a "Steel Money". World steel production capacity is currently 1.8 trillion tons with 350 million tons of additional capacity coming on line in 2013. Worldwide consumption is only 1.5 trillion tons, 46% of which is consumed by China which naturally has a preference for using domestically produced steel. Steel production overcapacity was highlighted this week as France threatened to nationalize one of Arcelor Mittal's French steel mills scheduled to be closed as redundant. Seeing itself as an "angel", the French government does not want employment to "keep falling", even if steel prices do.
Despite my recent dire predictions, the stock market has remained remarkably steady; now down only 3.6% from when I exited in October. I may have overreacted, and frankly nothing would please me more should that be the case. I would have preserved my desired profit level for the year and lost only one quarter's dividends in return for sleeping well for three months. To me that would be a satisfactory result. That said, I continue to believe that we stand a 50/50 chance that our lame duck Congress will send us over the Fiscal Cliff and into unchartered waters. Should that occur, the market will surely plummet, but I will be kept afloat by my cash position. If the worst occurs, I will not be grasping for air through some "Aqualung", "feeling like a dead duck, spitting out pieces of broken luck." (Jethro Tull)
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