Risk/Reward Vol. 175
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You think that I don't even mean a single word I say
It's only words/And words are all I have
To take your heart away."---lyrics from "Words" by the BeeGees
"We're caught in a trap/I can't walk out
Because I love you too much baby
Why can't you see/What you're doing to me---lyrics from "Suspicious Minds" sung by Elvis Presley
"It's your thing /Do what you wanna do
I can't tell you/Who to sock it to"---lyrics from "It's Your Thing" by the Isley Brothers
"It's only words" that Federal Reserve Chairman Ben Bernanke spoke on June 19th, but they "took the market's heart away." In what I believe to be a calculated moment of transparency, Bernanke stated that, should the economy continue to improve, the Federal Reserve's $85billion/month Treasury bond and mortgage purchase program known as QE3 would begin to taper this fall and would end as early as next June. Markets worldwide reacted immediately. Appreciating that the impact of QE3 has been to inflate prices across the risk spectrum (and in some instances such as junk bonds to create asset bubbles), frontrunners began to sell assets of all types (but most prominently U.S. Treasury Bonds) as soon as Bernanke uttered this definitive timetable. Within four trading days, Treasury bond prices plummeted as did the price of almost every financial asset around the globe. The Dow Jones Industrial Average (DJIA) dropped nearly 5%. (Recall that virtually all securities are priced in relation to the safest security in the world---the 10 Year US Treasury Bond; if it falls in price so does everything else---see vol. 172 www.riskrewardblog.blogspot.com ) This reaction was predictable unless Bernanke "didn't mean a single word he said."
Could it be that Bernanke and the Federal Reserve's Open Market Committee (FMOC), which administers QE3 and which authorized the statement, "did not see what they were doing to me (and the rest of the market)?" I think not. For the past several weeks every financial commentator has remarked that "we're caught in a (QE3) trap and can't walk out." That is, the markets "love QE3 too much, baby;" so much so that they rise on bad economic news and fall on good news because the former means that it is more likely that QE3 will continue. You think not? Then explain why the DJIA spiked 150 points on Wednesday on news that the gross domestic product grew only 1.8% instead of the previously reported 2.4%. In normal (not QE3 dominated) times the reaction to such disappointing news would be exactly the opposite. Moreover, Wednesday's rise was sandwiched between two thinly disguised attempts by the Fed to clarify Bernanke's timetable (both of which caused market gains) with two Fed governors stating on Tuesday and Thursday that the timing of any QE3 tapering should be driven by events, in particular a reduction in unemployment, and not by a calendar as suggested on June 19th by Uncle Ben. But, Friday saw the DJIA drop triple digits as Fed member Jeremy Stein muddied the waters further by stating that although any decision will be data driven, tapering could begin in September. If and how long QE3 lasts is the largest factor moving markets today---and as the above chronology demonstrates that revelation is not merely the product of my "Suspicious Mind." I believe the FOMC is purposefully sending mixed messages about QE3 tapering to wean the market from this dependence.
What should one do, trapped in a world so dominated by QE3? "It's your thing/Do what you wanna do. I can't tell you/ Who to sock it to". But I remain as uneasy as the markets themselves. One day the markets may tire of reacting to the FOMC's messaging at which time they will do "Their Own Thing." To me, the key indicator of this occurring will be the yield on the 10 Year Treasury Bond. If it stays at or below 2.5% for a sustained period it will indicate to me that the frontrunners are standing pat---at least for a while. If so, I likely will repurchase high yielding monthly dividend paying closed end funds to recapture some of the gains I lost during my short foray into "second level thinking." ( See Vol. 174 http://www.riskrewardblog.blogspot.com/ ). But even then, I will be prepared to exit should those yields rise above 2.5% (meaning the bond prices are falling). These past two weeks have given us a preview of how asset prices will deflate if and when Treasury bond prices begin to fall. I do not want to be holding stocks or bonds when they do.
Had I not been in cash, the triple digit daily volatility of the DJIA over the past two weeks would have caused me to "Twist and Shout" like an Isley Brother. And so, my profits and I remain on the sidelines, surveying the situation; all the while determined to "work it on out."
P.S. Thanks for all the warm congratulations on our 40th annivesary. I am a lucky man.
Saturday, June 29, 2013
Saturday, June 15, 2013
June 15, 2013 Patience
Risk/Reward Vol. 174
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Could use some patience/Gotta have some patience
All it takes is patience/Just a little patience."---lyrics from "Patience" by Guns N' Roses
And so its true/Pride comes before a fall
I'm telling you/So that you won't lose it all
I'm a loser/And I am not what I appear to be."---lyrics from "Loser" by The Beatles
"Now I'll be bold as well as strong
And use my head along side my heart
And I will wait/I will wait for you."---lyrics from "I Will Wait" by Mumford and Sons
I "could use some patience. Gotta have some patience. All it takes is patience. Just a little patience." Get the point. As reported last week, I was so proud of my Second Level Thinking, I bought several positions--- without considering other factors . On Tuesday and Wednesday as the bond market continued to deteriorate, bond like assets (such as those that I bought) were punished as well. Note to self: Second Level Thinking is not a substitute for patience. Clearly, I jumped too soon. I am not good at timing a market bottom, and Tuesday,Wednesday and Friday showed me that we may not be there yet. I have not and do not profit by buying at the bottom or selling at the top. I play the middle zone-- but that takes patience. Let the market for bond-like securities (e.g. those that pay predictable dividends such as REITS, preferred stock, exchange traded debt, utilities, etc.) find its equilibrium and buy on the way up---that's my game.
"And so it's true. Pride comes before a fall." As a consequence, "I'm a loser" this week. For those that hailed me as a victor for my exit in May, "I am not what I appear to be." But, I did not lose much because I was less than 20% invested and because I set my loss limit (a mental one not a stop/loss order) very close to my entry price. If positions reached that level, I sold. Had I stayed put, I would have recovered most of my losses on Thursday as the market rallied on a report by Jon Hilsenrath of the Wall Street Journal that Federal Reserve Chairman Bernanke likely will give guidance next week that QE3 will not end soon. Thursday's rise notwithstanding, my mistake was not in selling on Wednesday, but in buying in the first place. There is no dishonor in cutting losses and no second guessing in rules based selling. According to all that I have read (and I have read a lot on the subject), the number one rule for most successful investors is to cut losses and to let winners run. "I am telling you (my story)/So that you won't lose it all."
But rest assured, once there is confirmation of stablization in the market in general and in bond prices/yields in particular, I "will be bold as well as strong" in my buying. Unlike last week, however, "I will wait, I will wait" for that confirmation--- which will not come earlier than Bernanke's press conference on Wednesday. This time I will "use my head along side my heart." And I have some juicy prospects under consideration. They include some that I sold this week (just because I was premature in my buying doesn't make them bad selections). Also, take a look at the WSJ Closing Table for Preferred Stock and Exchange Traded Debt ( http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html?mod=mdc_h_usshl#C ), a sector that has been hit unmercifully since the release of the Federal Reserves minutes on May 22nd ( Vol 171 http://www.riskrewardblog.blogspot.com/ ). There you will see a wonderland of potential selections for a yield hunter like me. For those with a taste for more speculation, look at the mineral/mining sector. Rio Tinto (RIO) hasn't traded this low since 2009, a time when iron ore was selling for $60/ton not $112/ton like today---and it pays a 4% dividend while you wait for the price to recover. The same can be said for CLF and BHP. Don't buy any of these without further study, but at first blush they are either woefully underpriced, or the world is headed for a major contraction. Iron ore=steel, steel=manufacturing, manufacturing=economic growth. The opposite is true as well.
I am convinced that the current market volatility is creating excellent buying opportunities and will reward the "Patient" with a trip to:
"Paradise City/ Where the grass is green/ And the girls are pretty."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Could use some patience/Gotta have some patience
All it takes is patience/Just a little patience."---lyrics from "Patience" by Guns N' Roses
And so its true/Pride comes before a fall
I'm telling you/So that you won't lose it all
I'm a loser/And I am not what I appear to be."---lyrics from "Loser" by The Beatles
"Now I'll be bold as well as strong
And use my head along side my heart
And I will wait/I will wait for you."---lyrics from "I Will Wait" by Mumford and Sons
I "could use some patience. Gotta have some patience. All it takes is patience. Just a little patience." Get the point. As reported last week, I was so proud of my Second Level Thinking, I bought several positions--- without considering other factors . On Tuesday and Wednesday as the bond market continued to deteriorate, bond like assets (such as those that I bought) were punished as well. Note to self: Second Level Thinking is not a substitute for patience. Clearly, I jumped too soon. I am not good at timing a market bottom, and Tuesday,Wednesday and Friday showed me that we may not be there yet. I have not and do not profit by buying at the bottom or selling at the top. I play the middle zone-- but that takes patience. Let the market for bond-like securities (e.g. those that pay predictable dividends such as REITS, preferred stock, exchange traded debt, utilities, etc.) find its equilibrium and buy on the way up---that's my game.
"And so it's true. Pride comes before a fall." As a consequence, "I'm a loser" this week. For those that hailed me as a victor for my exit in May, "I am not what I appear to be." But, I did not lose much because I was less than 20% invested and because I set my loss limit (a mental one not a stop/loss order) very close to my entry price. If positions reached that level, I sold. Had I stayed put, I would have recovered most of my losses on Thursday as the market rallied on a report by Jon Hilsenrath of the Wall Street Journal that Federal Reserve Chairman Bernanke likely will give guidance next week that QE3 will not end soon. Thursday's rise notwithstanding, my mistake was not in selling on Wednesday, but in buying in the first place. There is no dishonor in cutting losses and no second guessing in rules based selling. According to all that I have read (and I have read a lot on the subject), the number one rule for most successful investors is to cut losses and to let winners run. "I am telling you (my story)/So that you won't lose it all."
But rest assured, once there is confirmation of stablization in the market in general and in bond prices/yields in particular, I "will be bold as well as strong" in my buying. Unlike last week, however, "I will wait, I will wait" for that confirmation--- which will not come earlier than Bernanke's press conference on Wednesday. This time I will "use my head along side my heart." And I have some juicy prospects under consideration. They include some that I sold this week (just because I was premature in my buying doesn't make them bad selections). Also, take a look at the WSJ Closing Table for Preferred Stock and Exchange Traded Debt ( http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html?mod=mdc_h_usshl#C ), a sector that has been hit unmercifully since the release of the Federal Reserves minutes on May 22nd ( Vol 171 http://www.riskrewardblog.blogspot.com/ ). There you will see a wonderland of potential selections for a yield hunter like me. For those with a taste for more speculation, look at the mineral/mining sector. Rio Tinto (RIO) hasn't traded this low since 2009, a time when iron ore was selling for $60/ton not $112/ton like today---and it pays a 4% dividend while you wait for the price to recover. The same can be said for CLF and BHP. Don't buy any of these without further study, but at first blush they are either woefully underpriced, or the world is headed for a major contraction. Iron ore=steel, steel=manufacturing, manufacturing=economic growth. The opposite is true as well.
I am convinced that the current market volatility is creating excellent buying opportunities and will reward the "Patient" with a trip to:
"Paradise City/ Where the grass is green/ And the girls are pretty."
Saturday, June 8, 2013
June 8, 2013 Second Level
Risk/Reward Vol. 173
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I heard the news today, oh boy/About a lucky man who made the grade
And though the news was rather sad/Well, I had to laugh."---lyrics from "A Day in the Life" by The Beatles
"Everybody get to putting up your lighter now
Baby girl you see me shining much brighter now
Let's go to the next level."---lyrics from "Next Level" sung by Mary J. Blige featuring Busta Rhymes
"Where are you going now my love/Where will you be tomorrow
Will you bring me happiness/Will you bring me sorrow
On the questions of a thousand dreams/What you do and what you see
Lover, can you talk to me?"---lyrics from "Carry On" by Crosby, Stills and Nash
"Oh boy." On Monday and Tuesday, as "I heard the news each day", I accurately predicted the direction of the market. And it was not because I am "a lucky man who made the grade." On Monday, I simply recognized that "though the news was rather sad" (disappointing PMI numbers), the market would rise--- because, as noted last week, bad economic news increased the likelihood that the Federal Reserve will continue quantitative easing (QE3). On Tuesday, "I had to laugh" when I accurately predicted that the morning's good news (trade deficit numbers better than expected) would result in a market decline--- because that news lessened the prospect for continuing QE3. By Wednesday, however, whether the news was good or bad did not matter. Predictability gave way, as the uncertain future of QE3 dragged the Dow Jones Industrial Average (DJIA) down triple digits. Thursday's action was a roller coaster in advance of Friday's much anticipated jobs report--- which hit the sweet spot, 175,000 new jobs---high enough to indicate moderate economic growth, but not so high as to warrant tapering, at least not in the minds of the investing public. As a consequence, the DJIA skyrocketed, to end the week up 133 points. Curiously, it did so at the same time that the price of the 10 year Treasury Bond hit a 14 month low. As discussed over the past two weeks, recently, falling bond prices have resulted in lower stock prices across the board---but not on Friday. This uncoupling of bond and stock prices promises more unpredictability next week. How quickly markets change!
Unpredictability aside, recent market volatility has revealed some massively mis-priced assets; "babies" thrown out with the bath water. This situation is discussed at length in the book I just finished entitled "The Most Important Thing" written by noted investment advisor/billionaire Howard Marks of Oaktree Management. Marks' thesis is that turbulent times such as these produce opportunities that can be exploited if one can think on the "second level." Here is how the thesis works in real life. First level thinking led to the conclusion that I drew two weeks ago: to wit, because 10 year Treasury bond prices were falling quickly, income producing assets priced in relation thereto such as mortgage real estate investment trusts, junk bonds, and high dividend stocks would likewise decline quickly and should be sold if one wished to capture year to date profits. (Note: this correlation held true even yesterday as mortgage REITS, junk bond funds and business development companies continued to lose ground and utilities (VPU) traded 9% below where they were just two weeks ago--- even as the DJIA spiked.) Since income producing assets are among my favorites, I sold most of my holdings last week. Thinking on the "next (second) level" led to the observation this week that some of those disfavored assets would be oversold and thus mis-priced. Thinking on this level caused me to search for such opportunities and on Tuesday to buy FFC, a closed end fund that was massively underpriced. It is "shining much brighter now" and even rose on Wednesday while the rest of the market tanked. I used "second level" thinking on Thursday to locate and to purchase JPI, HPS and DUC. "Everybody get to putting up your lighter now!" (Email me if you want a more detailed description of my second level thought process.)
Even with the "second level" purchases discussed above, I am still 80% in cash which is where I likely will remain until there is more clarity on interest rates and/or QE3. Mr. Bernanke, "where are you going now, my love/where will you be tomorrow?" Will QE3 continue unabated or will tapering begin? I have "questions on a thousand dreams, what you do and what you see/Lover, can you talk to me?" And I am not alone. On Tuesday, Bill Gross, the founder of PIMCO and nicknamed by those in-the-know as the "Bond King," published his monthly Investment Outlook (available on PIMCO's webpage) in which he criticized QE3 and its unprecedented suppression of yields. According to Gross, its initial stabilizing aspects notwithstanding, QE3 now is negatively impacting investor appetite to "carry" risk. Even if risk is correctly priced on a RELATIVE basis (e.g. an appropriate spread between the yields on say, Treasury bonds and junk bonds), all yields are too low on an ABSOLUTE basis. Junk below 5% simply is not worth the risk; nor is committing $1000 for one year in a Treasury note for a paltry 0.14%; nor is buying a utility stock for a 3% return---especially when each can lose 10% or more of its value within a few trading sessions if and when the yield on the benchmark 10 Year Treasury Bond spikes (and its price drops) like it did in May. To quote Gross, "... never have investors received less for the risk they are taking." On Friday, former Fed Chair Alan Greenspan joined Gross' chorus and called for QE3 tapering to begin. Otherwise, according to Greenspan, other market participants may decide to abandon Treasury Bonds-- tapering or no tapering. If that happens, the Fed could lose sway over interest rates altogether which Greenspan believes would add further uncertainty to our fragile economy and more unpredictability to markets. Friday's drop in the price of the 10 year Treasury Bond despite the market's belief that QE3 will continue may portend this happening already. Keep your eye on Ray Dalio and his fellow Treasury shorts (discussed in last week's edition) who you can track by following TBT and PST!
And so I have concluded that except for an occasional purchase of massively mis-priced assets or a Treasury short, I am better off in cash. As more of us who favor high yielding instruments migrate there (junk bond funds experienced record outflows this week), maybe the Fed will conclude that QE3 has outlived its usefulness. Perhaps it is time for the Fed to start an orderly (albeit painful) taper while it still holds sway in the bond market, sway that Greenspan fears may be at an end. As Crosby Stills and Nash know, when it comes to tapering:
"It's been a long time comin', and it's goin' to be a long time gone."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I heard the news today, oh boy/About a lucky man who made the grade
And though the news was rather sad/Well, I had to laugh."---lyrics from "A Day in the Life" by The Beatles
"Everybody get to putting up your lighter now
Baby girl you see me shining much brighter now
Let's go to the next level."---lyrics from "Next Level" sung by Mary J. Blige featuring Busta Rhymes
"Where are you going now my love/Where will you be tomorrow
Will you bring me happiness/Will you bring me sorrow
On the questions of a thousand dreams/What you do and what you see
Lover, can you talk to me?"---lyrics from "Carry On" by Crosby, Stills and Nash
"Oh boy." On Monday and Tuesday, as "I heard the news each day", I accurately predicted the direction of the market. And it was not because I am "a lucky man who made the grade." On Monday, I simply recognized that "though the news was rather sad" (disappointing PMI numbers), the market would rise--- because, as noted last week, bad economic news increased the likelihood that the Federal Reserve will continue quantitative easing (QE3). On Tuesday, "I had to laugh" when I accurately predicted that the morning's good news (trade deficit numbers better than expected) would result in a market decline--- because that news lessened the prospect for continuing QE3. By Wednesday, however, whether the news was good or bad did not matter. Predictability gave way, as the uncertain future of QE3 dragged the Dow Jones Industrial Average (DJIA) down triple digits. Thursday's action was a roller coaster in advance of Friday's much anticipated jobs report--- which hit the sweet spot, 175,000 new jobs---high enough to indicate moderate economic growth, but not so high as to warrant tapering, at least not in the minds of the investing public. As a consequence, the DJIA skyrocketed, to end the week up 133 points. Curiously, it did so at the same time that the price of the 10 year Treasury Bond hit a 14 month low. As discussed over the past two weeks, recently, falling bond prices have resulted in lower stock prices across the board---but not on Friday. This uncoupling of bond and stock prices promises more unpredictability next week. How quickly markets change!
Unpredictability aside, recent market volatility has revealed some massively mis-priced assets; "babies" thrown out with the bath water. This situation is discussed at length in the book I just finished entitled "The Most Important Thing" written by noted investment advisor/billionaire Howard Marks of Oaktree Management. Marks' thesis is that turbulent times such as these produce opportunities that can be exploited if one can think on the "second level." Here is how the thesis works in real life. First level thinking led to the conclusion that I drew two weeks ago: to wit, because 10 year Treasury bond prices were falling quickly, income producing assets priced in relation thereto such as mortgage real estate investment trusts, junk bonds, and high dividend stocks would likewise decline quickly and should be sold if one wished to capture year to date profits. (Note: this correlation held true even yesterday as mortgage REITS, junk bond funds and business development companies continued to lose ground and utilities (VPU) traded 9% below where they were just two weeks ago--- even as the DJIA spiked.) Since income producing assets are among my favorites, I sold most of my holdings last week. Thinking on the "next (second) level" led to the observation this week that some of those disfavored assets would be oversold and thus mis-priced. Thinking on this level caused me to search for such opportunities and on Tuesday to buy FFC, a closed end fund that was massively underpriced. It is "shining much brighter now" and even rose on Wednesday while the rest of the market tanked. I used "second level" thinking on Thursday to locate and to purchase JPI, HPS and DUC. "Everybody get to putting up your lighter now!" (Email me if you want a more detailed description of my second level thought process.)
Even with the "second level" purchases discussed above, I am still 80% in cash which is where I likely will remain until there is more clarity on interest rates and/or QE3. Mr. Bernanke, "where are you going now, my love/where will you be tomorrow?" Will QE3 continue unabated or will tapering begin? I have "questions on a thousand dreams, what you do and what you see/Lover, can you talk to me?" And I am not alone. On Tuesday, Bill Gross, the founder of PIMCO and nicknamed by those in-the-know as the "Bond King," published his monthly Investment Outlook (available on PIMCO's webpage) in which he criticized QE3 and its unprecedented suppression of yields. According to Gross, its initial stabilizing aspects notwithstanding, QE3 now is negatively impacting investor appetite to "carry" risk. Even if risk is correctly priced on a RELATIVE basis (e.g. an appropriate spread between the yields on say, Treasury bonds and junk bonds), all yields are too low on an ABSOLUTE basis. Junk below 5% simply is not worth the risk; nor is committing $1000 for one year in a Treasury note for a paltry 0.14%; nor is buying a utility stock for a 3% return---especially when each can lose 10% or more of its value within a few trading sessions if and when the yield on the benchmark 10 Year Treasury Bond spikes (and its price drops) like it did in May. To quote Gross, "... never have investors received less for the risk they are taking." On Friday, former Fed Chair Alan Greenspan joined Gross' chorus and called for QE3 tapering to begin. Otherwise, according to Greenspan, other market participants may decide to abandon Treasury Bonds-- tapering or no tapering. If that happens, the Fed could lose sway over interest rates altogether which Greenspan believes would add further uncertainty to our fragile economy and more unpredictability to markets. Friday's drop in the price of the 10 year Treasury Bond despite the market's belief that QE3 will continue may portend this happening already. Keep your eye on Ray Dalio and his fellow Treasury shorts (discussed in last week's edition) who you can track by following TBT and PST!
And so I have concluded that except for an occasional purchase of massively mis-priced assets or a Treasury short, I am better off in cash. As more of us who favor high yielding instruments migrate there (junk bond funds experienced record outflows this week), maybe the Fed will conclude that QE3 has outlived its usefulness. Perhaps it is time for the Fed to start an orderly (albeit painful) taper while it still holds sway in the bond market, sway that Greenspan fears may be at an end. As Crosby Stills and Nash know, when it comes to tapering:
"It's been a long time comin', and it's goin' to be a long time gone."
Saturday, June 1, 2013
June 1, 2013 Domino
Risk/Reward Vol. 172
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I don't ask for much/I only want your trust
And I know it don't come easy."---lyrics from "It Don't Come Easy" by Ringo Starr
"Oh oh Domino/Roll me over Romeo
There you go/Lord have mercy
I said oh oh Domino"---lyrics from "Domino" by Van Morrison
"Helter skelter in a summer swelter
The birds flew off with a fall out shelter
The players tried a forward pass
With the jester on the sidelines in a cast."---lyrics from "American Pie" by Don MacLean
The action in the bond and stock markets this week reminded me of the comments made last December by Ray Dalio, the most successful hedge fund manager in history. ( www.riskrewardblog.blogspot.com Vol. 148). Back then, Dalio boldly stated that the best profit making opportunity of his life had yet to arrive. According to Dalio, that opportunity would come when he sensed an end to QE3 at which time he would short Treasury Bonds and assets correlated thereto. (A short seller is one who borrows a security from another --usually a long term holder like a pension fund---in exchange for a small premium promising to return it on a date certain in the future. The borrower then sells the security at the current market price believing the price will fall before he is required to buy it back and return it. He profits from the difference in those prices. The more the price falls before the repurchase the more the profit.) I sense that Dalio has begun his move this week, and he looks like a prophet (or is that "profit").
An understanding of Dalio's opportunity "don't come easy." "I don't ask for much. I only want your trust" that I can explain it. So here goes. #1 Start from the premise that most income producing assets (e.g. bonds and high dividend paying stocks) are priced in relation to the safest fixed income investment in the world which currently is the 10 year U.S. Treasury Bond, behind which stands the full faith and credit of the United States. Given the choice between a Treasury Bond paying a 2% yield and a corporate bond paying 2%, a rational person will choose the Treasury because a corporation could default on its bond obligation (e.g. Lehman Brothers) while it is almost certain that the United States will not. #2 Consequently, corporate bonds generally pay a higher yield than Treasury bonds. Otherwise no one would buy them. Dividend paying stocks, which unlike bonds have no claim to assets in a liquidation scenario, must promise an even higher yield or the prospect of price appreciation. Again, these ascending rates of return are necessary in order to compensate investors for the corresponding increase in risk associated with each asset class as one proceeds up the risk curve. That curve ascends from Treasury bonds to investment grade corporate bonds to high yield or junk bonds to preferred stocks to common stocks a/k/a equities. #3 Understand that stock and bond prices rise or fall inversely to their yield. That is, the higher the price of the stock or bond, the lower the yield. For example, if a stock priced at $100 pays a dividend of $5 annually it has a 5% yield. If the price of that stock goes up to $120, it has a 4.17% yield ($5/$120= 4.17%) #4 Appreciate that many investors do not hold bonds to maturity. They buy and sell them based on the then prevailing interest rate. For example, a 10 year Treasury Bond purchased for $1000 and paying $40 in interest (or 4%) will continue to be worth $1000 so long as the prevailing rate is 4%. If the prevailing interest rate falls to, say 3.5%, that 4% bond will be worth $1142 ($40/$1142=3.5%). Conversely, if the prevailing interest rate increases over the 4% rate, the bond price will fall. # 5 Under QE3, the Federal Reserve has been up-bidding the price of longer term Treasury Bonds, buying $45 billion worth of each month's issuance (roughly 60% of the long term bonds available to be purchased) thereby depressing the yield on the 10 year Treasury Bond to 2% or below. For context, historically, 10 year Treasury Bonds have yielded 4-6%. #6 Due to this low yield (once again caused by the Fed bidding up the price), 10 year Treasury Bonds currently are not attractive to many investors (like me) who need a higher return. As a consequence, people (like me) who normally would have a large percentage of their assets in Treasury Bonds are forced to move up the risk curve to corporate bonds, junk bonds and/or stocks. Indeed this is the intended purpose of QE3---to force more private investment in corporations thus spurring the economy and creating jobs. With more people buying those riskier assets, their prices, in turn, have been bid up and their yields correspondingly lowered. For example, junk bonds yielding 10% last year, yield less than 6% this year, an historic low. #7 If and when the Fed slows or quits its $45 billion monthly buying spree, the price of the 10 year Treasury Bond will fall like a rock since the participant which has been buying 60% of the offerings (the Fed) will have left the market. Income producing assets described above, priced in relation to Treasuries, will also fall in value. Investors who time the sale of their bond and/or income producing assets in front of that fall will do well. And short sellers like Dalio will make out like bandits.
So how does the above tutorial relate to today's bond and stock markets, "Romeo"? As reported last week, the minutes of the May Federal Reserve meeting released 10 days ago indicated that, due to an improved economy and concerns about long term inflation, QE3 purchases may taper off as early as June. In response, many significant holders and/or borrowers of Treasury Bonds (perhaps Mr. Dalio) sold them, capturing profits in front of any tapering. The selling continued this week as 10 year Treasury Bond prices plummeted. Inversely, their yields spiked from 1.6% in early May to 2.23% on Wednesday, a rise of 37%! "Lord have mercy." This front running Treasury Bond selling caused a "Domino" effect up the risk curve. With the interest rates on 10 year Treasury Bonds rising, the historic low yields on assets such as junk bonds and dividend stocks are suddenly less appealing and thus worth less. As noted last week, the first to fall in price were those investments directly correlated to low Treasury rates such as mortgage real estate investment trusts (RQI, a closed end fund comprised of mREITS fell 14% in 7 trading days), and business development companies (FGD, a closed end fund comprised of BDC's fell 6% in the same time period). Over that period, bond-like stocks such as utilities and blue chip dividend payers have taken it on the chin with both NGG and JNJ falling 5%. So "there you go." As Van Morrison says, "oh, oh Domino"
So how does this impact me? In advance of the "summer swelter", with the stock market in general going "helter skelter" and with my favorite niche, dividend stocks, suffering declines greater than the general market, I decided to sell most of my positions, thereby capturing profits and raising cash. In addition to selling my REITS, BDC's and leveraged funds on Tuesday (as I wrote that I would last week), I also sold junk bond funds and those dividend payers that had run up nicely over the past few months. By Wednesday afternoon, I had sold all but PGF, PGX, CTY and GSTpA. My ground game is fine. I don't need to complete a "forward pass". My annual benchmark is 6% pre tax, and I am well above that now with 7 months to go. So, this "jester is on the sidelines" for a while, content to see what happens. Rest assured, I will be back, and maybe sooner rather than later. I am not "in a cast." I may even join Mr. Dalio on the short side. But, when good economic news (home price increases) is bad for the stock market (see Wednesday's action), and when bad economic news (rise in jobless claims) is good for the stock market (see Thursday's action)---all because the former means a quicker end to QE3---it's time for me to kick back, to switch on some Van Morrison and to do some chill-axin' with my "Brown Eyed Girl."
P.S. Oh, and as for Friday's last minute sell off, I have heard several excuses: reaction to the threat of tapering, month end rebalancing, panic, etc.---but no solid explanation. All the more reason to have sold.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I don't ask for much/I only want your trust
And I know it don't come easy."---lyrics from "It Don't Come Easy" by Ringo Starr
"Oh oh Domino/Roll me over Romeo
There you go/Lord have mercy
I said oh oh Domino"---lyrics from "Domino" by Van Morrison
"Helter skelter in a summer swelter
The birds flew off with a fall out shelter
The players tried a forward pass
With the jester on the sidelines in a cast."---lyrics from "American Pie" by Don MacLean
The action in the bond and stock markets this week reminded me of the comments made last December by Ray Dalio, the most successful hedge fund manager in history. ( www.riskrewardblog.blogspot.com Vol. 148). Back then, Dalio boldly stated that the best profit making opportunity of his life had yet to arrive. According to Dalio, that opportunity would come when he sensed an end to QE3 at which time he would short Treasury Bonds and assets correlated thereto. (A short seller is one who borrows a security from another --usually a long term holder like a pension fund---in exchange for a small premium promising to return it on a date certain in the future. The borrower then sells the security at the current market price believing the price will fall before he is required to buy it back and return it. He profits from the difference in those prices. The more the price falls before the repurchase the more the profit.) I sense that Dalio has begun his move this week, and he looks like a prophet (or is that "profit").
An understanding of Dalio's opportunity "don't come easy." "I don't ask for much. I only want your trust" that I can explain it. So here goes. #1 Start from the premise that most income producing assets (e.g. bonds and high dividend paying stocks) are priced in relation to the safest fixed income investment in the world which currently is the 10 year U.S. Treasury Bond, behind which stands the full faith and credit of the United States. Given the choice between a Treasury Bond paying a 2% yield and a corporate bond paying 2%, a rational person will choose the Treasury because a corporation could default on its bond obligation (e.g. Lehman Brothers) while it is almost certain that the United States will not. #2 Consequently, corporate bonds generally pay a higher yield than Treasury bonds. Otherwise no one would buy them. Dividend paying stocks, which unlike bonds have no claim to assets in a liquidation scenario, must promise an even higher yield or the prospect of price appreciation. Again, these ascending rates of return are necessary in order to compensate investors for the corresponding increase in risk associated with each asset class as one proceeds up the risk curve. That curve ascends from Treasury bonds to investment grade corporate bonds to high yield or junk bonds to preferred stocks to common stocks a/k/a equities. #3 Understand that stock and bond prices rise or fall inversely to their yield. That is, the higher the price of the stock or bond, the lower the yield. For example, if a stock priced at $100 pays a dividend of $5 annually it has a 5% yield. If the price of that stock goes up to $120, it has a 4.17% yield ($5/$120= 4.17%) #4 Appreciate that many investors do not hold bonds to maturity. They buy and sell them based on the then prevailing interest rate. For example, a 10 year Treasury Bond purchased for $1000 and paying $40 in interest (or 4%) will continue to be worth $1000 so long as the prevailing rate is 4%. If the prevailing interest rate falls to, say 3.5%, that 4% bond will be worth $1142 ($40/$1142=3.5%). Conversely, if the prevailing interest rate increases over the 4% rate, the bond price will fall. # 5 Under QE3, the Federal Reserve has been up-bidding the price of longer term Treasury Bonds, buying $45 billion worth of each month's issuance (roughly 60% of the long term bonds available to be purchased) thereby depressing the yield on the 10 year Treasury Bond to 2% or below. For context, historically, 10 year Treasury Bonds have yielded 4-6%. #6 Due to this low yield (once again caused by the Fed bidding up the price), 10 year Treasury Bonds currently are not attractive to many investors (like me) who need a higher return. As a consequence, people (like me) who normally would have a large percentage of their assets in Treasury Bonds are forced to move up the risk curve to corporate bonds, junk bonds and/or stocks. Indeed this is the intended purpose of QE3---to force more private investment in corporations thus spurring the economy and creating jobs. With more people buying those riskier assets, their prices, in turn, have been bid up and their yields correspondingly lowered. For example, junk bonds yielding 10% last year, yield less than 6% this year, an historic low. #7 If and when the Fed slows or quits its $45 billion monthly buying spree, the price of the 10 year Treasury Bond will fall like a rock since the participant which has been buying 60% of the offerings (the Fed) will have left the market. Income producing assets described above, priced in relation to Treasuries, will also fall in value. Investors who time the sale of their bond and/or income producing assets in front of that fall will do well. And short sellers like Dalio will make out like bandits.
So how does the above tutorial relate to today's bond and stock markets, "Romeo"? As reported last week, the minutes of the May Federal Reserve meeting released 10 days ago indicated that, due to an improved economy and concerns about long term inflation, QE3 purchases may taper off as early as June. In response, many significant holders and/or borrowers of Treasury Bonds (perhaps Mr. Dalio) sold them, capturing profits in front of any tapering. The selling continued this week as 10 year Treasury Bond prices plummeted. Inversely, their yields spiked from 1.6% in early May to 2.23% on Wednesday, a rise of 37%! "Lord have mercy." This front running Treasury Bond selling caused a "Domino" effect up the risk curve. With the interest rates on 10 year Treasury Bonds rising, the historic low yields on assets such as junk bonds and dividend stocks are suddenly less appealing and thus worth less. As noted last week, the first to fall in price were those investments directly correlated to low Treasury rates such as mortgage real estate investment trusts (RQI, a closed end fund comprised of mREITS fell 14% in 7 trading days), and business development companies (FGD, a closed end fund comprised of BDC's fell 6% in the same time period). Over that period, bond-like stocks such as utilities and blue chip dividend payers have taken it on the chin with both NGG and JNJ falling 5%. So "there you go." As Van Morrison says, "oh, oh Domino"
So how does this impact me? In advance of the "summer swelter", with the stock market in general going "helter skelter" and with my favorite niche, dividend stocks, suffering declines greater than the general market, I decided to sell most of my positions, thereby capturing profits and raising cash. In addition to selling my REITS, BDC's and leveraged funds on Tuesday (as I wrote that I would last week), I also sold junk bond funds and those dividend payers that had run up nicely over the past few months. By Wednesday afternoon, I had sold all but PGF, PGX, CTY and GSTpA. My ground game is fine. I don't need to complete a "forward pass". My annual benchmark is 6% pre tax, and I am well above that now with 7 months to go. So, this "jester is on the sidelines" for a while, content to see what happens. Rest assured, I will be back, and maybe sooner rather than later. I am not "in a cast." I may even join Mr. Dalio on the short side. But, when good economic news (home price increases) is bad for the stock market (see Wednesday's action), and when bad economic news (rise in jobless claims) is good for the stock market (see Thursday's action)---all because the former means a quicker end to QE3---it's time for me to kick back, to switch on some Van Morrison and to do some chill-axin' with my "Brown Eyed Girl."
P.S. Oh, and as for Friday's last minute sell off, I have heard several excuses: reaction to the threat of tapering, month end rebalancing, panic, etc.---but no solid explanation. All the more reason to have sold.
Saturday, May 25, 2013
May 25, 2013 Rolling In The Deep
Risk/Reward Vol 171
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I can see clearly now/The rain is gone
I can see all obstacles/In my way
I think I can make it now/The pain is gone
All of the bad feelings have disappeared."---lyrics from "I Can See Clearly Now" sung by Johnny Nash
"This is the end
Hold your breath/And count to ten
Feel the earth/And then
Hear my heart burst again."---lyrics from "Skyfall" sung by Adele
"Live a simple life/In a quiet town
Steady as she goes/Steady as she goes."---lyrics from "Steady as She Goes" sung by Adele
Thanks to conflicting reports from the Federal Reserve, "I can see clearly now" what likely will happen once the Fed actually decides to taper quantitative easing. Wednesday morning, Fed Chair Ben Bernanke testified that it was too early to consider any tapering of the $85billion monthly asset purchase program known as QE3. Proving that the current market rally is driven largely by the Fed's monetary policy (read, QE3), the Dow Jones Industrial Average (DJIA) soared 151 points on Bernanke's confirmatory remarks. Later in the day, however, minutes of a Fed meeting held earlier this month were released. Those minutes indicated that some Fed members were in favor of tapering sooner than indicated by the Chair, even as early as June. On that news, the DJIA quickly plunged 258 points, ending down 80 points (0.6%) for the day. On Thursday, that drop in the DJIA coupled with disappointing news from China caused the Japanese market to crater 7%--- in just one day! Back home, Thursday traded down and Friday closed flat. Ouch, those three days hurt! But with the weekend upon us, "the pain is gone" and even "the rain is gone" (which is a miracle here in Michigan). "The bad feelings have disappeared." Indeed, with the weekend's calm has come some valuable insight.
Wednesday was an omen. Once the Fed signals that "This is the end" of QE3, the "Sky (will) fall" on any leveraged investment; that is, any investment that is highly dependent on QE3-induced inexpensive debt for profits. One need not "hold your breath and count to ten" to presage this. Indeed, I have known it all along. But nothing could serve as a better reminder than the dropkick I received on Wednesday. In my portfolio, the holdings most dependent on a continuation of inexpensive debt (and thus the ones most at risk come "the end" of QE3) are real estate investment trusts (particularly mortgage REITs), business development companies and leveraged closed end funds. Stocks that held their own on Wednesday were unlevered dividend plays like PGX and PGF and those stocks hedged against interest rate increases like floating rate loan funds. Oil was a mixed bag, although my recent purchase of GSTpA (thanks to loyal reader, WCJ) did very well in the storm.
If I don't want to " hear my heart burst again", how do I position the portfolio for the end of QE3? First, I find stocks that were "steady as she goes" during Wednesday's crash. And second, I acknowledge that the marginal gain available via leveraged investments is not worth the risk. If that translates into a portfolio that yields dividends that are 100-200 basis points (100 basis points =1%) lower than my current average, so be it. Year to date, I have profited sufficiently from principle appreciation to compensate for the difference. I can afford a "simple life in a quiet town" at least through 2013. Over the next few days, I will sell the leveraged positions on upticks and redeploy the proceeds into "steadier" fare.
And so the week ends with a lesson re-learned: because I hold a large number of leveraged assets my declines were greater than those of the broader market. This is not acceptable to me, Adele. I don't need to go "Rolling in the Deep" risk pool. "Rumor Has It" that is where I have been.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I can see clearly now/The rain is gone
I can see all obstacles/In my way
I think I can make it now/The pain is gone
All of the bad feelings have disappeared."---lyrics from "I Can See Clearly Now" sung by Johnny Nash
"This is the end
Hold your breath/And count to ten
Feel the earth/And then
Hear my heart burst again."---lyrics from "Skyfall" sung by Adele
"Live a simple life/In a quiet town
Steady as she goes/Steady as she goes."---lyrics from "Steady as She Goes" sung by Adele
Thanks to conflicting reports from the Federal Reserve, "I can see clearly now" what likely will happen once the Fed actually decides to taper quantitative easing. Wednesday morning, Fed Chair Ben Bernanke testified that it was too early to consider any tapering of the $85billion monthly asset purchase program known as QE3. Proving that the current market rally is driven largely by the Fed's monetary policy (read, QE3), the Dow Jones Industrial Average (DJIA) soared 151 points on Bernanke's confirmatory remarks. Later in the day, however, minutes of a Fed meeting held earlier this month were released. Those minutes indicated that some Fed members were in favor of tapering sooner than indicated by the Chair, even as early as June. On that news, the DJIA quickly plunged 258 points, ending down 80 points (0.6%) for the day. On Thursday, that drop in the DJIA coupled with disappointing news from China caused the Japanese market to crater 7%--- in just one day! Back home, Thursday traded down and Friday closed flat. Ouch, those three days hurt! But with the weekend upon us, "the pain is gone" and even "the rain is gone" (which is a miracle here in Michigan). "The bad feelings have disappeared." Indeed, with the weekend's calm has come some valuable insight.
Wednesday was an omen. Once the Fed signals that "This is the end" of QE3, the "Sky (will) fall" on any leveraged investment; that is, any investment that is highly dependent on QE3-induced inexpensive debt for profits. One need not "hold your breath and count to ten" to presage this. Indeed, I have known it all along. But nothing could serve as a better reminder than the dropkick I received on Wednesday. In my portfolio, the holdings most dependent on a continuation of inexpensive debt (and thus the ones most at risk come "the end" of QE3) are real estate investment trusts (particularly mortgage REITs), business development companies and leveraged closed end funds. Stocks that held their own on Wednesday were unlevered dividend plays like PGX and PGF and those stocks hedged against interest rate increases like floating rate loan funds. Oil was a mixed bag, although my recent purchase of GSTpA (thanks to loyal reader, WCJ) did very well in the storm.
If I don't want to " hear my heart burst again", how do I position the portfolio for the end of QE3? First, I find stocks that were "steady as she goes" during Wednesday's crash. And second, I acknowledge that the marginal gain available via leveraged investments is not worth the risk. If that translates into a portfolio that yields dividends that are 100-200 basis points (100 basis points =1%) lower than my current average, so be it. Year to date, I have profited sufficiently from principle appreciation to compensate for the difference. I can afford a "simple life in a quiet town" at least through 2013. Over the next few days, I will sell the leveraged positions on upticks and redeploy the proceeds into "steadier" fare.
And so the week ends with a lesson re-learned: because I hold a large number of leveraged assets my declines were greater than those of the broader market. This is not acceptable to me, Adele. I don't need to go "Rolling in the Deep" risk pool. "Rumor Has It" that is where I have been.
Saturday, May 18, 2013
May 18, 2013 The Big Payback
Risk/Reward Vol. 170
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Now, you're pumped/You gotta get ready
For the big payback/That's where I am, the big payback."---lyrics from "The Payback" by James Brown
"Ben, the two of us need look no more
We both found what we were looking for"---lyrics from "Ben" sung by Michael Jackson
"I want a man with slow hands/I want a lover with an easy touch
I want somebody who will spend some time/Not come and go in a heated rush."---lyrics from "Slow Hands" sung by the Pointer Sisters
On Tuesday morning, billionaire hedge fund manager David Tepper advised those watching CNBC's "Squawk Box" that "you gotta get ready" for a continuation of the bull market. Tepper believes that the stock market will be "pumped" even higher by "the big payback" underway thanks to Sequestration and increased tax revenues. Those two drivers have shrunk the projected 2013 U.S. budget deficit from $850billion to $642billion which means that there will be at least $200 billion less in Treasury securities available to purchase. According to Tepper, this $200 billion can be a catalyst for continued stock investment. That money will be invested somewhere and according to Tepper there is no better alternative than U.S. equities. To put $200billion into perspective, the massive increase in the stock market in the first quarter of this year was fueled in large part by a net inflow of only $60 billion into equity mutual and exchange traded funds. Is Tepper right? It's not smart to bet against him. He has a real feel for the impact of macro economic developments on the stock market. (See discussion at Vol. 59 www.riskrewardblog.blogspot.com ) His fund has averaged a 30% return since its founding in 1993. Last year he made $2.2billion---personally.
Congratulations to "Ben" Stein and those who adhere to his belief that buying index funds such as DIA (the Dow Jones Industrial Average Exchanged Traded Fund) and SPY (the ETF for the Standard & Poor's 500 Index) is superior to buying individual stocks. And as for hiring an asset manager, according to Ben, one "need look no more." He asserts that unmanaged index funds are "what we should be looking for." He may be right. Year to date DIA and SPY are both up over 17%.
But index fund investing is not always "an easy touch". Despite their spectacular rise of late, both DIA and SPY lost half their value between March, 2008 and March, 2009, and SPY has only achieved a 5.15% compounded annual return (half of which is from reinvested dividends) over the past 5 years--- even less over the past 6 years. I, for one, have no appetite for investments that "come and go in such a heated rush," and, as loyal readers know, I will not tolerate such huge losses. Consequently, Sisters, I do not follow Ben's Pointers. Instead, I "am a man with slow hands." "I am somebody who will spend some time" locating and vetting investments that emphasize dividends and stability over capital appreciation---and shedding those that disappoint. If the market simply trades flat for the remainder of the year, I should see a total return in excess of 15%, well above my 6% benchmark (See Vol. 1 www.riskrewardblog.blogspot.com )---a benchmark I eclipsed weeks ago.
With the DJIA and the S&P 500 ending the week at record highs, perhaps David Tepper's prognostication is correct, and the bulls have more room to run. Nevertheless, I remain ever vigilant. As evidenced by Thursday's dip on the suggestion that the Federal Reserve may taper QE3 this fall, this market remains driven by monetary policy and not fundamentals. I like my year-to-date profits, and I do not intend to lose them At any confirmed sign of a significant downturn, I will make like Michael Jackson and "Beat It
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Now, you're pumped/You gotta get ready
For the big payback/That's where I am, the big payback."---lyrics from "The Payback" by James Brown
"Ben, the two of us need look no more
We both found what we were looking for"---lyrics from "Ben" sung by Michael Jackson
"I want a man with slow hands/I want a lover with an easy touch
I want somebody who will spend some time/Not come and go in a heated rush."---lyrics from "Slow Hands" sung by the Pointer Sisters
On Tuesday morning, billionaire hedge fund manager David Tepper advised those watching CNBC's "Squawk Box" that "you gotta get ready" for a continuation of the bull market. Tepper believes that the stock market will be "pumped" even higher by "the big payback" underway thanks to Sequestration and increased tax revenues. Those two drivers have shrunk the projected 2013 U.S. budget deficit from $850billion to $642billion which means that there will be at least $200 billion less in Treasury securities available to purchase. According to Tepper, this $200 billion can be a catalyst for continued stock investment. That money will be invested somewhere and according to Tepper there is no better alternative than U.S. equities. To put $200billion into perspective, the massive increase in the stock market in the first quarter of this year was fueled in large part by a net inflow of only $60 billion into equity mutual and exchange traded funds. Is Tepper right? It's not smart to bet against him. He has a real feel for the impact of macro economic developments on the stock market. (See discussion at Vol. 59 www.riskrewardblog.blogspot.com ) His fund has averaged a 30% return since its founding in 1993. Last year he made $2.2billion---personally.
Congratulations to "Ben" Stein and those who adhere to his belief that buying index funds such as DIA (the Dow Jones Industrial Average Exchanged Traded Fund) and SPY (the ETF for the Standard & Poor's 500 Index) is superior to buying individual stocks. And as for hiring an asset manager, according to Ben, one "need look no more." He asserts that unmanaged index funds are "what we should be looking for." He may be right. Year to date DIA and SPY are both up over 17%.
But index fund investing is not always "an easy touch". Despite their spectacular rise of late, both DIA and SPY lost half their value between March, 2008 and March, 2009, and SPY has only achieved a 5.15% compounded annual return (half of which is from reinvested dividends) over the past 5 years--- even less over the past 6 years. I, for one, have no appetite for investments that "come and go in such a heated rush," and, as loyal readers know, I will not tolerate such huge losses. Consequently, Sisters, I do not follow Ben's Pointers. Instead, I "am a man with slow hands." "I am somebody who will spend some time" locating and vetting investments that emphasize dividends and stability over capital appreciation---and shedding those that disappoint. If the market simply trades flat for the remainder of the year, I should see a total return in excess of 15%, well above my 6% benchmark (See Vol. 1 www.riskrewardblog.blogspot.com )---a benchmark I eclipsed weeks ago.
With the DJIA and the S&P 500 ending the week at record highs, perhaps David Tepper's prognostication is correct, and the bulls have more room to run. Nevertheless, I remain ever vigilant. As evidenced by Thursday's dip on the suggestion that the Federal Reserve may taper QE3 this fall, this market remains driven by monetary policy and not fundamentals. I like my year-to-date profits, and I do not intend to lose them At any confirmed sign of a significant downturn, I will make like Michael Jackson and "Beat It
Saturday, May 11, 2013
May 11, 2013 Sign, Sign
Risk/Reward Vol 169
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Sign, sign everywhere a sign
Blockin' out the scenery/Breakin' my mind
Do this/Don't do that
Can't you read the sign?"---lyrics from "Signs" sung by The Five Man Electrical Band
"My heart is telling me to be different/It's about time for me to move on
Swallow everything that I've heard/I'm at a point of no return."---lyrics from "No Return" by Eminem
"It's a narrow margin/Just room enough for regret
In the inch and a half between 'Hey, how ya been?'
And 'Can I kiss you yet?' "---lyrics from "Providence" by Ani Difranco
As the Dow Jones Industrial Average (DJIA) and the S&P500 (S&P) reached new highs again this week, I continued my search for a "sign, sign" that the bubble is about to burst. Market mavens are advising "do this/don't do that." Nevertheless, their noise is not "blockin' out the scenery" nor is it "breakin' my mind". If one cares to look, "everywhere there's a sign" that the market may be topping. "Can't you read the signs?"
What signs you ask? Consider the following:
1) Hedge funds, run by very savvy people who fixate, first and foremost, on managing risk, averaged a 4.6% year to date return through April 30, 2013. For the same time period, the DJIA and the S&P returned nearly 14%. Does this mean that I should "swallow everthing that I've learned" about the sagacity of hedge fund managers? No, to the contrary, "my heart is telling me different." It's telling me that the markets are very risky at present, and that although we are "not at a point of no return", perhaps "it's about time to move on."
2) On Monday, in a master stroke of British understatement, the Financial Times reported: "Demand for yield has become the main driver of investor behavior." In this regard, note that junk bonds rated CCC ("extremely speculative") now yield a record low 6.77%. Last year at this time, they yielded 10.13% In fact, the average yield across the entire junk bond spectrum (bonds rated BB+ through D) fell below 5% this week---a record low. Talk about a "narrow(ing) margin!" In addition, the yield on the sovereign debt of emerging market countries is near a record low: 5.5% Remember, lower yields mean higher bond prices. These record low yields are signs that risk is out pacing reward.
3) The New York Stock Exchange reported on Thursday that margin debt (the amount of money borrowed with brokerage accounts as collateral) is within an "inch and a half" of its all time high which was reached just weeks before the markets started to reverse in 2007. This is significant because it indicates exuberance in the market--perhaps even over confidence. Understand, that if the markets reverse, even temporarily, brokerage houses that have lent money on margin will demand more collateral and/or a repayment of loans---a situation that in the past has compounded losses and accelerated declines. Does this mean that there is "just enough room" to exit "before regret?" or can I continue to "kiss the market?"
4) A story ran in this morning's (Saturday's) Wall Street Journal reporting that the Federal Reserve has mapped an exit from its quantitative easing program (QE3). Rumors of this story caused a large intraday drop on Thursday. If the stock market's recent spectacular performance is truly just a QE3 induced bubble, this story could have a substantial negative impact come Monday. Keep a watchful eye open.
Hold or sell---this is a tough question for which there is no certain answer. For now, I remain invested. But, I will exit if I perceive that the market is turning. I am not "Just gonna stand there, and watch (my profits) burn/That's not alright/ Because I don't like the way it hurts."
P.S. This week, an unfavorable report from Barron's and an attack by short sellers caused me to exit LINE and LNCO. In the long run, I believe this family of oil producing companies will do well, but I don't need to fight the market---particularly when there are suitable alternatives available such as VNR.
P.S.S. With the exchange rate falling below 100 Yen/$1, I upped my exposure to the Japanese stock market via the dollar hedged exchange traded fund, DXJ ( see discussion at www.riskrewardblog.blogspot.com Vol. 152). DXJ has gained 33%
since I first bought it on January 9, 2013.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Sign, sign everywhere a sign
Blockin' out the scenery/Breakin' my mind
Do this/Don't do that
Can't you read the sign?"---lyrics from "Signs" sung by The Five Man Electrical Band
"My heart is telling me to be different/It's about time for me to move on
Swallow everything that I've heard/I'm at a point of no return."---lyrics from "No Return" by Eminem
"It's a narrow margin/Just room enough for regret
In the inch and a half between 'Hey, how ya been?'
And 'Can I kiss you yet?' "---lyrics from "Providence" by Ani Difranco
As the Dow Jones Industrial Average (DJIA) and the S&P500 (S&P) reached new highs again this week, I continued my search for a "sign, sign" that the bubble is about to burst. Market mavens are advising "do this/don't do that." Nevertheless, their noise is not "blockin' out the scenery" nor is it "breakin' my mind". If one cares to look, "everywhere there's a sign" that the market may be topping. "Can't you read the signs?"
What signs you ask? Consider the following:
1) Hedge funds, run by very savvy people who fixate, first and foremost, on managing risk, averaged a 4.6% year to date return through April 30, 2013. For the same time period, the DJIA and the S&P returned nearly 14%. Does this mean that I should "swallow everthing that I've learned" about the sagacity of hedge fund managers? No, to the contrary, "my heart is telling me different." It's telling me that the markets are very risky at present, and that although we are "not at a point of no return", perhaps "it's about time to move on."
2) On Monday, in a master stroke of British understatement, the Financial Times reported: "Demand for yield has become the main driver of investor behavior." In this regard, note that junk bonds rated CCC ("extremely speculative") now yield a record low 6.77%. Last year at this time, they yielded 10.13% In fact, the average yield across the entire junk bond spectrum (bonds rated BB+ through D) fell below 5% this week---a record low. Talk about a "narrow(ing) margin!" In addition, the yield on the sovereign debt of emerging market countries is near a record low: 5.5% Remember, lower yields mean higher bond prices. These record low yields are signs that risk is out pacing reward.
3) The New York Stock Exchange reported on Thursday that margin debt (the amount of money borrowed with brokerage accounts as collateral) is within an "inch and a half" of its all time high which was reached just weeks before the markets started to reverse in 2007. This is significant because it indicates exuberance in the market--perhaps even over confidence. Understand, that if the markets reverse, even temporarily, brokerage houses that have lent money on margin will demand more collateral and/or a repayment of loans---a situation that in the past has compounded losses and accelerated declines. Does this mean that there is "just enough room" to exit "before regret?" or can I continue to "kiss the market?"
4) A story ran in this morning's (Saturday's) Wall Street Journal reporting that the Federal Reserve has mapped an exit from its quantitative easing program (QE3). Rumors of this story caused a large intraday drop on Thursday. If the stock market's recent spectacular performance is truly just a QE3 induced bubble, this story could have a substantial negative impact come Monday. Keep a watchful eye open.
Hold or sell---this is a tough question for which there is no certain answer. For now, I remain invested. But, I will exit if I perceive that the market is turning. I am not "Just gonna stand there, and watch (my profits) burn/That's not alright/ Because I don't like the way it hurts."
P.S. This week, an unfavorable report from Barron's and an attack by short sellers caused me to exit LINE and LNCO. In the long run, I believe this family of oil producing companies will do well, but I don't need to fight the market---particularly when there are suitable alternatives available such as VNR.
P.S.S. With the exchange rate falling below 100 Yen/$1, I upped my exposure to the Japanese stock market via the dollar hedged exchange traded fund, DXJ ( see discussion at www.riskrewardblog.blogspot.com Vol. 152). DXJ has gained 33%
since I first bought it on January 9, 2013.
Saturday, May 4, 2013
May 4, 2013 Soros
Risk/Reward Vol. 168
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Cause you're fallible/Yeah, you're fallible
And we hold up a mirror/And we hate what we see."---lyrics from "Fallible" by Blues Traveler
"Oh the reflex, what a game/He's hiding all the cards
The reflex is in charge/Of finding treasure in the dark."---lyrics from "The Reflex" by Duran Duran
"Yeah, Rwanda, Rwanda
They said 'Many are called and few are chosen.'
But I wish some wasn't chosen."---lyrics from "A Million Voices" (from the "Hotel Rwanda" soundtrack) by Wyclef Jean
In conservative circles, it is an article of faith to believe that billionaire George Soros is a meddling, left wing crackpot and a failed philosopher. Conservatives "hate what they see.". Having recently read his book, "The Crash of 2008", I concur: 1) that Soros is a philosopher, but his success or failure has yet to be determined; 2) that he is a meddler who believes that because humans are "fallible", regulation is necessary; and 3) that he is most certainly a billionaire---many times over. But a crackpot, he is not. In his book (which is more a philosophical tract than a history), he asserts that "cause you're fallible", the application of scientific principles to human endeavors, especially economics, is fallacious. Accordingly, he rejects economic principles such as the efficient market hypothesis ("EMH"), equilibrium and market fundamentalism. Since each can be manipulated, he reasons, none can be a principle.
If one agrees, one should consider Soros' central thesis---reflexivity: the notion that since humans are fallible, human institutions like stock markets can be and often are "gamed" by those "in charge" who wittingly or otherwise "hide all the cards." Since they are reflexive, markets, contrary to conventional wisdom, are not inherently efficient. They are just as likely to create bubbles as they are to find equilibrium. As demonstrated by his own successes, Soros believes that one can reap rewards far in excess of the mean without accepting above average risk. He looks for asset bubbles, rides them for a while, exits them in time---and then, bets against them as they burst. Soros has made billions in doing so, most notably on his famous bet against the British pound and most recently on his bet against the yen.
Soros, along with a host of other market mavens (e.g. El-Erian, Druckenmiller, Dalio, Zell) believes that currently, the world is in the midst of a massive and unprecedented asset bubble created by central bankers who through quantitative easing (QE) have forced investors into progressively risky assets by keeping investment grade returns near zero. C'mon folks, does anyone reading this email doubt that today's stock and bond markets are bubbles? Do the past performances and future prospects of the underlying companies warrant all time high stock valuations? Has the risk profile of Spain with its record high 27% unemployment rate really improved so dramatically as to warrant its 10 year bonds yielding a mere 4% when just last summer they yielded over 7%? Absolutely not! Forget Lebron James, start collecting the bobbleheads (rather, bubbleheads) of Mario Draghi, Ben Bernanke and other central bankers..
Clearly QE and the search for yield have led many to make risky investments : ones they "will wish weren't chosen." A case in point is this week's sale of $400million worth of 10 year Rwanda bonds. "Yeah, Rwanda, Rwanda"---you remember, the genocidal nation featured in the movie "Hotel Rwanda". That bond issue was oversubscribed and the bidding drove the bonds down to a 6.625% interest rate---roughly the same yield one would get from the tax advantaged preferred shares of an A rated insurance company or of the Royal Bank of Scotland. But is this irrational? No. With central banks buying the lion's share of developed country bonds via QE, there are fewer bonds available and those that are pay a paltry yield. Bond funds (even ones you hold) and pension managers are awash in cash which they need to invest at some return. Literally there is a scarcity of product so when any new bonds are issued they are snapped up----even 10 year Rwanda bonds. You think not? Next quarter, check the SEC filings that list the holdings of any international bond fund you hold .
Recognition of this bubble notwithstanding, is it time to liquidate? I say no. With the rest of the world in even worse shape, U.S. debt and equities continue to be in demand. Indeed, it was reported on Tuesday that foreign investment in U.S. securities is at an all time high. This demand continues to drive prices higher in what PIMCO's CEO Mohamed El-Erian terms "the most unloved rally" of all time. Just look at what happened this week. Buoyed by Thursday's interest rate reduction in Europe and Friday's marginally improved U.S. job numbers report, both the Dow Jones Industrial Average and the S&P 500 set new records at the close on Friday. In addition, junk bonds are at historic high prices (and thus historic low yields). The bubble continues to inflate. So long as central banks keep printing money and keep inflating assets, I will continue to be in the market knowing full well that once these banks signal that the printing presses are slowing, the 'unloved rally" will end quickly---and badly. For now, that risk be damned. Yield hunters like Duran Duran and me are still
"Hungry, hungry like the wolf."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Cause you're fallible/Yeah, you're fallible
And we hold up a mirror/And we hate what we see."---lyrics from "Fallible" by Blues Traveler
"Oh the reflex, what a game/He's hiding all the cards
The reflex is in charge/Of finding treasure in the dark."---lyrics from "The Reflex" by Duran Duran
"Yeah, Rwanda, Rwanda
They said 'Many are called and few are chosen.'
But I wish some wasn't chosen."---lyrics from "A Million Voices" (from the "Hotel Rwanda" soundtrack) by Wyclef Jean
In conservative circles, it is an article of faith to believe that billionaire George Soros is a meddling, left wing crackpot and a failed philosopher. Conservatives "hate what they see.". Having recently read his book, "The Crash of 2008", I concur: 1) that Soros is a philosopher, but his success or failure has yet to be determined; 2) that he is a meddler who believes that because humans are "fallible", regulation is necessary; and 3) that he is most certainly a billionaire---many times over. But a crackpot, he is not. In his book (which is more a philosophical tract than a history), he asserts that "cause you're fallible", the application of scientific principles to human endeavors, especially economics, is fallacious. Accordingly, he rejects economic principles such as the efficient market hypothesis ("EMH"), equilibrium and market fundamentalism. Since each can be manipulated, he reasons, none can be a principle.
If one agrees, one should consider Soros' central thesis---reflexivity: the notion that since humans are fallible, human institutions like stock markets can be and often are "gamed" by those "in charge" who wittingly or otherwise "hide all the cards." Since they are reflexive, markets, contrary to conventional wisdom, are not inherently efficient. They are just as likely to create bubbles as they are to find equilibrium. As demonstrated by his own successes, Soros believes that one can reap rewards far in excess of the mean without accepting above average risk. He looks for asset bubbles, rides them for a while, exits them in time---and then, bets against them as they burst. Soros has made billions in doing so, most notably on his famous bet against the British pound and most recently on his bet against the yen.
Soros, along with a host of other market mavens (e.g. El-Erian, Druckenmiller, Dalio, Zell) believes that currently, the world is in the midst of a massive and unprecedented asset bubble created by central bankers who through quantitative easing (QE) have forced investors into progressively risky assets by keeping investment grade returns near zero. C'mon folks, does anyone reading this email doubt that today's stock and bond markets are bubbles? Do the past performances and future prospects of the underlying companies warrant all time high stock valuations? Has the risk profile of Spain with its record high 27% unemployment rate really improved so dramatically as to warrant its 10 year bonds yielding a mere 4% when just last summer they yielded over 7%? Absolutely not! Forget Lebron James, start collecting the bobbleheads (rather, bubbleheads) of Mario Draghi, Ben Bernanke and other central bankers..
Clearly QE and the search for yield have led many to make risky investments : ones they "will wish weren't chosen." A case in point is this week's sale of $400million worth of 10 year Rwanda bonds. "Yeah, Rwanda, Rwanda"---you remember, the genocidal nation featured in the movie "Hotel Rwanda". That bond issue was oversubscribed and the bidding drove the bonds down to a 6.625% interest rate---roughly the same yield one would get from the tax advantaged preferred shares of an A rated insurance company or of the Royal Bank of Scotland. But is this irrational? No. With central banks buying the lion's share of developed country bonds via QE, there are fewer bonds available and those that are pay a paltry yield. Bond funds (even ones you hold) and pension managers are awash in cash which they need to invest at some return. Literally there is a scarcity of product so when any new bonds are issued they are snapped up----even 10 year Rwanda bonds. You think not? Next quarter, check the SEC filings that list the holdings of any international bond fund you hold .
Recognition of this bubble notwithstanding, is it time to liquidate? I say no. With the rest of the world in even worse shape, U.S. debt and equities continue to be in demand. Indeed, it was reported on Tuesday that foreign investment in U.S. securities is at an all time high. This demand continues to drive prices higher in what PIMCO's CEO Mohamed El-Erian terms "the most unloved rally" of all time. Just look at what happened this week. Buoyed by Thursday's interest rate reduction in Europe and Friday's marginally improved U.S. job numbers report, both the Dow Jones Industrial Average and the S&P 500 set new records at the close on Friday. In addition, junk bonds are at historic high prices (and thus historic low yields). The bubble continues to inflate. So long as central banks keep printing money and keep inflating assets, I will continue to be in the market knowing full well that once these banks signal that the printing presses are slowing, the 'unloved rally" will end quickly---and badly. For now, that risk be damned. Yield hunters like Duran Duran and me are still
"Hungry, hungry like the wolf."
Saturday, April 27, 2013
April 27, 2013 Good News/Bad News
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?
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 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!
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