Risk/Reward Vol. 342
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Eleven straight days of record highs for the Dow Jones Industrial Average. It sounds like a broken record---but one stuck on a very pleasing note . Both major indices are up nearly 5.5% year to date. This week's impetus was a statement by Treasury Secretary Mnuchin that he foresees a very significant tax reform package from Congress before it recesses in August. Will the Trump Rally last? Should one buy? Hold? Sell? How is one to know?
I spent time with a subscriber this week who is in search of answers to these questions. He hopes to find them in technical analysis. Technical analysis is a method of forecasting the direction of future prices through the study of past market data, primarily price and volume. In its simplest from, it looks for signals to buy, hold or sell from historical stock charts. Technical analysis is available to anyone with a computer these days. Allow me to illustrate. One classic technical trading strategy is to track both the 20 day and the 200 day simple moving averages of a stock or exchange traded fund. One buys when the 20 crosses above the 200 and sells when it falls below. So open up Google Finance, type in SPY (the exchange trade fund for the S&P 500), adjust it to show the past 10years and add the 20 and 200 simple moving averages from the "technical" section. Voila. Note that had one followed this simple rule, one would have sold before the major dip in 2008 and would have brought back in mid 2010. In other words, one would have averted a major loss and would have reaped most of the gain achieved over the past seven years. Not bad.
As you know, I find my buy/hold/sell signals from movement in the 10 Year US Treasury Bond. This week, movement in the 10Year was influenced by the release of Fed's February meeting minutes. Phrases in the minutes such as "participants generally indicated that their economic forecasts had changed little since the December FOMC meeting" and rate increases could occur "fairly soon" led a consensus of Fed watchers to conclude that the odds of a rate hike in March are unlikely (30%), and that no more than three hikes can be expected this year. As a consequence, the yield on the 10Year came to rest at 2.315%, decidedly lower than last week. Concomitantly, my portfolio which is dominated by bond-like, interest rate sensitive securities (preferred stocks, preferred stock closed end funds, REIT's, etc.) rose this week. (Remember as interest rates decrease the prices of bonds and bond-like securities increase.)
No matter what strategy you follow, remember Warren Buffett's two rules of investing: #1 Never lose money; and #2 Never forget Rule #1. The importance of minimizing loss by selling losers sooner rather than later is stressed by every investing guru from William O'Neill (8% loss limit) to Chuck Hughes (5% loss limit) to all of the Market Wizards profiled by Jack Schwager (see Vol. 243 Riskrewardblog ). Yet, I bet almost everyone reading this email rode his/her stocks all the way to the floor during the crash of 2008-2009. If I am wrong please email me immediately. Why did you suffer those 25-40% losses? If it was inertia---that is a terrible reason. If it was adherence to a buy and hold strategy I suggest you rethink it---especially if you are a senior citizen such as yours truly. The next time you may not have the luxury of time to recover.
I read Warren Buffett's letter to his shareholders this weekend. Google and read it. As always, it is time well spent.
Sunday, February 26, 2017
Sunday, February 19, 2017
February 19, 2017 Authers
Risk/Reward Vol. 341
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Clearly, Mr. Market does not read the papers or watch the news. If he did, he would conclude that the current Administration is out of control and that we are heading, full throttle over a cliff. In such times, why would any rational investor up his/her stake? And yet, the Trump rally continues with the week ending on record highs. Why? Promised tax reform? Yes--- as discussed below. Deregulation? Most certainly. Look at bank stocks. With the promise and reality of relief from the Dodd-Frank Act, bank stocks as a group are up 27% since the election. Coal companies are back from the brink of bankruptcy now that executive orders neutralizing those of Obama have been signed. And master limited partnerships are doing well in a world that welcomes Keystone XL, Dakota and other major pipeline projects.
As for Mrs. Bond, she obviously reads the news, but does so with a healthy dose of skepticism. Fed Chair Janet Yellen took a decidedly hawkish tone this week in her testimony to Congress. She stated that a rate increase will be under consideration in March. Almost immediately the rate on the all important US 10 Treasury Bond rose to 2.5%. But by week's end, Mrs. Bond had digested other, less hawkish parts of Ms. Yellen's testimony including her statement that the Fed's bloated balance sheet will not be reduced any time soon. By Friday's close, the 10Year rate settled at 2.42% almost exactly where it had begun the week. My interest rate sensitive portfolio lost some ground following Yellen's testimony. That said, the stocks comprising it tend to lag movements in the 10Year so I look for them to recover next week.
So why is the bond market so stable while the stock market continues to rise? After all, the Trump rally immediately following his election saw the stock market gain at the expense of the bond market. Last November the rate on the Ten Year spiked from 1.8% to over 2.5% almost overnight. If the current rate stability is of interest to you (and it certainly is to me) I suggest you read John Authers' well reasoned article published in yesterday's Financial Times. It is available free of charge via a Google search. Authers submits that the two markets reflect opposite bets on the amount of tax and spending stimulus that Trump will be able to get from Congress. The stock market is betting a lot; the bond market not so much. I am with Mrs. Bond, at least in the short run. The next few months should be interesting. There will be winners, and there will be losers, at least according to Authers.
Stocks in the oil patch took a hit this week on news that gasoline consumption in the US fell to 8.2million barrels per day in January, a 4.4% year over year decline, and that a record 259million barrels remain in storage. Despite this, the domestic oil rig count grew to 597 last week, a major increase since this summer but still well below the 1609 oil rigs that were operating domestically in October 2014. Who would have thought just a few years ago that we would be talking about an oil glut? Thanks to fracking no one ever hears the phrase "peak oil" anymore. American ingenuity is marvelous.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Clearly, Mr. Market does not read the papers or watch the news. If he did, he would conclude that the current Administration is out of control and that we are heading, full throttle over a cliff. In such times, why would any rational investor up his/her stake? And yet, the Trump rally continues with the week ending on record highs. Why? Promised tax reform? Yes--- as discussed below. Deregulation? Most certainly. Look at bank stocks. With the promise and reality of relief from the Dodd-Frank Act, bank stocks as a group are up 27% since the election. Coal companies are back from the brink of bankruptcy now that executive orders neutralizing those of Obama have been signed. And master limited partnerships are doing well in a world that welcomes Keystone XL, Dakota and other major pipeline projects.
As for Mrs. Bond, she obviously reads the news, but does so with a healthy dose of skepticism. Fed Chair Janet Yellen took a decidedly hawkish tone this week in her testimony to Congress. She stated that a rate increase will be under consideration in March. Almost immediately the rate on the all important US 10 Treasury Bond rose to 2.5%. But by week's end, Mrs. Bond had digested other, less hawkish parts of Ms. Yellen's testimony including her statement that the Fed's bloated balance sheet will not be reduced any time soon. By Friday's close, the 10Year rate settled at 2.42% almost exactly where it had begun the week. My interest rate sensitive portfolio lost some ground following Yellen's testimony. That said, the stocks comprising it tend to lag movements in the 10Year so I look for them to recover next week.
So why is the bond market so stable while the stock market continues to rise? After all, the Trump rally immediately following his election saw the stock market gain at the expense of the bond market. Last November the rate on the Ten Year spiked from 1.8% to over 2.5% almost overnight. If the current rate stability is of interest to you (and it certainly is to me) I suggest you read John Authers' well reasoned article published in yesterday's Financial Times. It is available free of charge via a Google search. Authers submits that the two markets reflect opposite bets on the amount of tax and spending stimulus that Trump will be able to get from Congress. The stock market is betting a lot; the bond market not so much. I am with Mrs. Bond, at least in the short run. The next few months should be interesting. There will be winners, and there will be losers, at least according to Authers.
Stocks in the oil patch took a hit this week on news that gasoline consumption in the US fell to 8.2million barrels per day in January, a 4.4% year over year decline, and that a record 259million barrels remain in storage. Despite this, the domestic oil rig count grew to 597 last week, a major increase since this summer but still well below the 1609 oil rigs that were operating domestically in October 2014. Who would have thought just a few years ago that we would be talking about an oil glut? Thanks to fracking no one ever hears the phrase "peak oil" anymore. American ingenuity is marvelous.
Sunday, February 12, 2017
February 12, 2017 Aging
Risk/Reward Vol. 340
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What a week for firsts. For the first time on Friday, on the strength of The Donald's promised tax cut, the Dow Jones Industrial Average closed at 20,269, the S&P 500 at 2316 and the NASDAQ at 5734, all record highs. Last Sunday, for the first time a team overcame a 25 point deficit to win a Super Bowl. On Tuesday, for the first time, a vice president was called upon to break a tie vote for confirmation of a cabinet officer. Oh and here is first that didn't make the headlines. For the first time in HUMAN HISTORY, sometime this coming week (or next week or at least sometime this year) those aged 65 and older will outnumber those under 5 years of age. Not just in Japan, not just in Italy---but globally. Moreover, according to the same source (a US Census Report entitled "An Aging World"), by 2050 (my 100th year), those aged 65 and older will outnumber those under 5---two to one. To put this in perspective, the year I was born, there were nearly 3 times as many under age 5 globally as were 65 and older. And if those numbers weren't startling enough, take a look behind them, and you will find that the decline is disproportionately within the developed world---the segment that drives our economy. By 2050 ( a mere 33 years) the population of Africa will double becoming much younger than it is today. But even that fact is not enough to offset global aging.
So how are the economies of the developed world planning to grow with so many unproductive grey hairs? And how are they going to support their massive social programs which are geared to benefit the aged? Thirty years ain't that long. Perhaps Europe's decision to allow massive immigration is less motivated by humanitarian concerns than it is by economics. At least that is what is suggested by a paper issued by Germany's Federal Statistical Office (Destatis) which was reported this week in the German press. According to Destatis, the projected decline in German population has been stemmed by recent immigration from the Mideast. The paper goes on to stress the need to quickly integrate the migrants into the workforce so that they can begin to contribute money to the social welfare system. So far integration has been slow with many migrants too unskilled or otherwise unwilling to find work. Indeed, instead of alleviating the social burden, the migrants are adding to it. Understandably, one is now seeing a rise in nationalist political parties throughout Europe.
So what is the US's plan? Clearly, an open door is not in the cards under the current administration. Maybe tax breaks, infrastructure spending and the repatriation of overseas dollars will provide a sugar high---just like low rates did for a while. But from where is long term economic growth to come as the world ages? Don't expect it from China whose building boom almost singly saved the world's economy post 2008 (See Vol. 74 www.riskrewardblog.blogspot.com) . China faces its own demographic cliff thanks to its ill conceived (pun intended) One Child Policy. Everything points to several more years of slow to no growth---promises from The Donald notwithstanding.
So why do I fixate on demographics? Because a rapidly aging population equates to slow economic growth which in turn equates to low interest rates. And as I have explained ad nauseam I fixate on interest rates. They dictate my every investment move.
Thanks to a subscriber for giving me a head's up on BP's precipitous drop following a disappointing earnings call. The source of the disappointment was its Chair's admission that BP cannot meet its ambitious capital spending plan and also pay its healthy dividend without oil hitting $60/bbl by year end. I don't see the dividend suffering should that price not be met--- and it is the dividend that provides BP with price support. I added to my position.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What a week for firsts. For the first time on Friday, on the strength of The Donald's promised tax cut, the Dow Jones Industrial Average closed at 20,269, the S&P 500 at 2316 and the NASDAQ at 5734, all record highs. Last Sunday, for the first time a team overcame a 25 point deficit to win a Super Bowl. On Tuesday, for the first time, a vice president was called upon to break a tie vote for confirmation of a cabinet officer. Oh and here is first that didn't make the headlines. For the first time in HUMAN HISTORY, sometime this coming week (or next week or at least sometime this year) those aged 65 and older will outnumber those under 5 years of age. Not just in Japan, not just in Italy---but globally. Moreover, according to the same source (a US Census Report entitled "An Aging World"), by 2050 (my 100th year), those aged 65 and older will outnumber those under 5---two to one. To put this in perspective, the year I was born, there were nearly 3 times as many under age 5 globally as were 65 and older. And if those numbers weren't startling enough, take a look behind them, and you will find that the decline is disproportionately within the developed world---the segment that drives our economy. By 2050 ( a mere 33 years) the population of Africa will double becoming much younger than it is today. But even that fact is not enough to offset global aging.
So how are the economies of the developed world planning to grow with so many unproductive grey hairs? And how are they going to support their massive social programs which are geared to benefit the aged? Thirty years ain't that long. Perhaps Europe's decision to allow massive immigration is less motivated by humanitarian concerns than it is by economics. At least that is what is suggested by a paper issued by Germany's Federal Statistical Office (Destatis) which was reported this week in the German press. According to Destatis, the projected decline in German population has been stemmed by recent immigration from the Mideast. The paper goes on to stress the need to quickly integrate the migrants into the workforce so that they can begin to contribute money to the social welfare system. So far integration has been slow with many migrants too unskilled or otherwise unwilling to find work. Indeed, instead of alleviating the social burden, the migrants are adding to it. Understandably, one is now seeing a rise in nationalist political parties throughout Europe.
So what is the US's plan? Clearly, an open door is not in the cards under the current administration. Maybe tax breaks, infrastructure spending and the repatriation of overseas dollars will provide a sugar high---just like low rates did for a while. But from where is long term economic growth to come as the world ages? Don't expect it from China whose building boom almost singly saved the world's economy post 2008 (See Vol. 74 www.riskrewardblog.blogspot.com) . China faces its own demographic cliff thanks to its ill conceived (pun intended) One Child Policy. Everything points to several more years of slow to no growth---promises from The Donald notwithstanding.
So why do I fixate on demographics? Because a rapidly aging population equates to slow economic growth which in turn equates to low interest rates. And as I have explained ad nauseam I fixate on interest rates. They dictate my every investment move.
Thanks to a subscriber for giving me a head's up on BP's precipitous drop following a disappointing earnings call. The source of the disappointment was its Chair's admission that BP cannot meet its ambitious capital spending plan and also pay its healthy dividend without oil hitting $60/bbl by year end. I don't see the dividend suffering should that price not be met--- and it is the dividend that provides BP with price support. I added to my position.
Sunday, February 5, 2017
February 5, 2017 Seeking Alpha
Risk/Reward Vol. 339
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a downdraft earlier in the week, the major indices made a nice recovery at week's end. The Dow Jones Industrial Average is back above 20,000 and the S&P 500 is again flirting with 2300. Strong economic numbers including a better than expected jobs report contributed to the rebound. From my perspective however, the more important development was that the rise in the stock market was NOT at the expense of the bond market. Why? Because Wednesday afternoon, the Federal Reserve issued its post meeting press release which bespoke a "steady as she goes" approach. As usual it contained no firm commitments as to when any given rate increase may occur, but the professionals who interpret these press releases do not see any such move until June. Indeed, according to the futures market, the possibility of a rate increase in March is pegged at less than 20% while a hike in June is pegged at nearly 70%. The upshot is that the rate on the all important 10 Year Treasury Bond remained below 2.5% which in turn buoyed the value of much of my rate sensitive portfolio.
I bought more Shell this week despite its disappointing earnings report. More important to me was news that it had sold over $4billion of oil field holdings over the past several days. It has now sold more than $11 billion dollars of such assets and is well on its way to reducing its debt by $30billion this year. Shell borrowed over $54 billion to acquire BG last year as part of its commitment to reduce its reliance on oil and to increase natural gas production. The more Shell reduces its debt, the safer its outsized 6.5% dividend becomes. And it is this dividend that I find most attractive about Shell.
Speaking of natural gas, I initiated a position with Williams Partners (WPZ), a natural gas pipeline company this week. The past 18 months have not been kind to WPZ. It went to the alter twice only to be rebuffed by two different suitors at the last minute. A shake up at the board level now promises to deliver on what many have long believed to be its promise. Waiting for that to occur is made easier by its healthy 8+% dividend.
So how did I happen upon WPZ and any number of other investments I have made? Research. I read the Wall Street Journal and the Financial Times for macro investing trends, but for individual stock picks I find Investment Business Daily and especially Seeking Alpha helpful. IBD is a paid subscription, but Seeking Alpha is free, located at www.seekingalpha.com
I click on its Stock Ideas page and scroll through the articles until I find something of interest. Most of the articles are written by amateurs, but typically their research and analyses are spot on. I try to find at least two commentaries on a given security by different authors before acting on the information, but generally I have found the work reliable.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a downdraft earlier in the week, the major indices made a nice recovery at week's end. The Dow Jones Industrial Average is back above 20,000 and the S&P 500 is again flirting with 2300. Strong economic numbers including a better than expected jobs report contributed to the rebound. From my perspective however, the more important development was that the rise in the stock market was NOT at the expense of the bond market. Why? Because Wednesday afternoon, the Federal Reserve issued its post meeting press release which bespoke a "steady as she goes" approach. As usual it contained no firm commitments as to when any given rate increase may occur, but the professionals who interpret these press releases do not see any such move until June. Indeed, according to the futures market, the possibility of a rate increase in March is pegged at less than 20% while a hike in June is pegged at nearly 70%. The upshot is that the rate on the all important 10 Year Treasury Bond remained below 2.5% which in turn buoyed the value of much of my rate sensitive portfolio.
I bought more Shell this week despite its disappointing earnings report. More important to me was news that it had sold over $4billion of oil field holdings over the past several days. It has now sold more than $11 billion dollars of such assets and is well on its way to reducing its debt by $30billion this year. Shell borrowed over $54 billion to acquire BG last year as part of its commitment to reduce its reliance on oil and to increase natural gas production. The more Shell reduces its debt, the safer its outsized 6.5% dividend becomes. And it is this dividend that I find most attractive about Shell.
Speaking of natural gas, I initiated a position with Williams Partners (WPZ), a natural gas pipeline company this week. The past 18 months have not been kind to WPZ. It went to the alter twice only to be rebuffed by two different suitors at the last minute. A shake up at the board level now promises to deliver on what many have long believed to be its promise. Waiting for that to occur is made easier by its healthy 8+% dividend.
So how did I happen upon WPZ and any number of other investments I have made? Research. I read the Wall Street Journal and the Financial Times for macro investing trends, but for individual stock picks I find Investment Business Daily and especially Seeking Alpha helpful. IBD is a paid subscription, but Seeking Alpha is free, located at www.seekingalpha.com
I click on its Stock Ideas page and scroll through the articles until I find something of interest. Most of the articles are written by amateurs, but typically their research and analyses are spot on. I try to find at least two commentaries on a given security by different authors before acting on the information, but generally I have found the work reliable.
Sunday, January 29, 2017
January 29, 2017 Sustainability
Risk/Reward Vol. 338
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Where to begin? Week one of the The Donald's Presidency has produced a plethora of executive orders. Obviously, they pleased Mr. Market. The Dow Jones Industrial Average crashed through the 20,000 barrier above which it now comfortably sits. The S&P 500 continues to flirt with 2300 and the NASAQ is at nose bleed levels. So is this steady march upward sustainable? Currently, the major indices are trading at 21 times trailing twelve months' earnings---high by historic standards but not as frothy as in 1999 when they were at 24x. That said, in the end, it is corporate profits that drive stock prices. And corporate profits are dependent upon economic growth. On Friday, the US Bureau of Economic Analysis reported that the nation's gross domestic product grew at an annualized rate of only 1.6% in the fourth quarter and only at 1.9% for the entirety of 2016. This is a far cry from the 4% growth envisioned by President Trump. Indeed, the US has not seen even 3% in GDP growth (which is our post WWII average) since 2005 and last experienced 4% in 2000.
If we are to reach The Donald's desired level of GDP growth, it will be for reasons different from what has fueled growth in the past. Mr. Market's recent euphoria notwithstanding, we, as a society, still face a demographic cliff about which Harry Dent has written extensively. See Vol. 218 http://www.riskrewardblog.blogspot.com/
. Our home grown population is aging and shrinking, and no country in the history of mankind has experienced economic growth during a time of declining population. Is immigration, legal or illegal, the answer? Are trade wars, where we beggar our neighbors, the solution? Who knows? But no one can doubt that the middle and upper classes are not reproducing. Look around. Thursday evening, Barb and I (and an entire airplane) were "treated" to a family of seven returning from Florida. Their obnoxious behavior aside, what struck me is that one almost never sees a husband and wife and five children. When I was young such families were commonplace. Most Catholic families had five children at a minimum and Protestants and Jews had three. This observation prompted me to research the enrollment of my old school district, the Metropolitan School District of Washington Township, Marion County, Indiana. Despite affirmatively recruiting from other districts, Washington Township today has only 11,300 students in K-12. That is an average of less than 1000 students per class. My graduating high school class of 1969 was the smallest of those attending school at the time and numbered well over 1100. Assuming the average then to be 1250 per class (low I bet), the enrollment would have been 15,000 or so, a 33% increase over today's number. How does an economy grow when schools are being shuttered?
Not surprisingly, Dow 20,000 came, in part, at the expense of the bond market as many participants continued to rotate out of debt and into equities. The yield on the all important (to me at least) 10 Year US Treasury Bond again flirted with 2.5%, but encountered resistance at that level. I have no doubt that there will be several more foray's into that territory if the stock market continues to rise. Those foray's alone will not cause me to sell, however. My interest rate sensitive portfolio was purchased at very favorable prices when the "spread" between the yield on the 10Year and that available from my favories was wider than normal. Thus, I have a cushion well above 2.5%. My concern is not if the rate on the 10Year rises above 2.5%, but rather the velocity of that rise and whether it portends sustained rates above 2.75%. If so, I will harvest profits and reenter only when prices reset
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Where to begin? Week one of the The Donald's Presidency has produced a plethora of executive orders. Obviously, they pleased Mr. Market. The Dow Jones Industrial Average crashed through the 20,000 barrier above which it now comfortably sits. The S&P 500 continues to flirt with 2300 and the NASAQ is at nose bleed levels. So is this steady march upward sustainable? Currently, the major indices are trading at 21 times trailing twelve months' earnings---high by historic standards but not as frothy as in 1999 when they were at 24x. That said, in the end, it is corporate profits that drive stock prices. And corporate profits are dependent upon economic growth. On Friday, the US Bureau of Economic Analysis reported that the nation's gross domestic product grew at an annualized rate of only 1.6% in the fourth quarter and only at 1.9% for the entirety of 2016. This is a far cry from the 4% growth envisioned by President Trump. Indeed, the US has not seen even 3% in GDP growth (which is our post WWII average) since 2005 and last experienced 4% in 2000.
If we are to reach The Donald's desired level of GDP growth, it will be for reasons different from what has fueled growth in the past. Mr. Market's recent euphoria notwithstanding, we, as a society, still face a demographic cliff about which Harry Dent has written extensively. See Vol. 218 http://www.riskrewardblog.blogspot.com/
. Our home grown population is aging and shrinking, and no country in the history of mankind has experienced economic growth during a time of declining population. Is immigration, legal or illegal, the answer? Are trade wars, where we beggar our neighbors, the solution? Who knows? But no one can doubt that the middle and upper classes are not reproducing. Look around. Thursday evening, Barb and I (and an entire airplane) were "treated" to a family of seven returning from Florida. Their obnoxious behavior aside, what struck me is that one almost never sees a husband and wife and five children. When I was young such families were commonplace. Most Catholic families had five children at a minimum and Protestants and Jews had three. This observation prompted me to research the enrollment of my old school district, the Metropolitan School District of Washington Township, Marion County, Indiana. Despite affirmatively recruiting from other districts, Washington Township today has only 11,300 students in K-12. That is an average of less than 1000 students per class. My graduating high school class of 1969 was the smallest of those attending school at the time and numbered well over 1100. Assuming the average then to be 1250 per class (low I bet), the enrollment would have been 15,000 or so, a 33% increase over today's number. How does an economy grow when schools are being shuttered?
Not surprisingly, Dow 20,000 came, in part, at the expense of the bond market as many participants continued to rotate out of debt and into equities. The yield on the all important (to me at least) 10 Year US Treasury Bond again flirted with 2.5%, but encountered resistance at that level. I have no doubt that there will be several more foray's into that territory if the stock market continues to rise. Those foray's alone will not cause me to sell, however. My interest rate sensitive portfolio was purchased at very favorable prices when the "spread" between the yield on the 10Year and that available from my favories was wider than normal. Thus, I have a cushion well above 2.5%. My concern is not if the rate on the 10Year rises above 2.5%, but rather the velocity of that rise and whether it portends sustained rates above 2.75%. If so, I will harvest profits and reenter only when prices reset
Sunday, January 22, 2017
January 22, 2017 Volume
Risk/Reward Vol. 337
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And so it begins. Who would have thought that The Donald would be the 45th President of the United States? Whatever his presidency may be, it surely will be different. And that, Dear Readers, is as political as I will get.
Lost in the week's hullaballoo was the action in the bond pits. The rate on the all important US Treasury 10Year Bond jumped to nearly 2.5% following news that inflation in December, as measured by CPI, had reached 0.3% for the month and 2.1% year over year. This development prompted many to sell bonds in the belief that inflation in 2017 will accelerate forcing the Fed to raise short term interest rates 4 times as opposed to 3 times which heretofore has been the consensus view. I remain convinced that other forces (such as the paltry rates available overseas) will moderate domestic bond yields and thus took the opportunity to add to several bond related positions.
As loyal readers know, my bond related positions include several preferred stocks and preferred stock closed end funds. My fascination with these investment vehicles has prompted some to ask why their investment advisors do not buy them---indeed why they are rarely if ever discussed. The answer is simple----volume. If you Google "Wall Street Journal Preferred Stock Closing Table" and "CEFConnect" you will see that many of the names that I own trade, on average, 25,000 shares or less daily. I typically buy in lots of 1000 and rarely accumulate more than a few thousand shares of any issue. Why? Because I do not want to impact the price and buying or selling more than 1000 shares at a time can have an impact. Now imagine you are a money manager entrusted with 50 accounts. Even if one believed that preferred stocks 337otherwise made sense for one's clients, one could not buy 50 positions at a time without massively disrupting if not manipulating any given stock's market. So unless you, as an individual investor, order such a purchase it will not happen. Remember, money managers are under great pressure to treat their clients equally. Indeed, for a host of reasons it is more important for them to be consistent than to be right. This is not a criticism, but it is a fact.
The domestic oil and gas rig count continues to increase. It now numbers 694 compared with 480 in March, 2016. This is a testament to American ingenuity, a national trait that was sorely underestimated by Saudi Arabia when it began flooding the market with oil in 2014. At the time, conventional wisdom was that US frackers needed $60/bbl. in order to break even. That may have been true in 2014, but by 2017 advances in technology have reduced the break even to $40/bbl. with some producers capable of profiting at $30/bbl. In addition new fracking "cocktails" (mixture of water, sand and pressure) have resulted in each well producing 40% more oil than in 2014. I see opportunity in oil/gas in 2017 and recently have added to my holdings in KYN and JMF.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And so it begins. Who would have thought that The Donald would be the 45th President of the United States? Whatever his presidency may be, it surely will be different. And that, Dear Readers, is as political as I will get.
Lost in the week's hullaballoo was the action in the bond pits. The rate on the all important US Treasury 10Year Bond jumped to nearly 2.5% following news that inflation in December, as measured by CPI, had reached 0.3% for the month and 2.1% year over year. This development prompted many to sell bonds in the belief that inflation in 2017 will accelerate forcing the Fed to raise short term interest rates 4 times as opposed to 3 times which heretofore has been the consensus view. I remain convinced that other forces (such as the paltry rates available overseas) will moderate domestic bond yields and thus took the opportunity to add to several bond related positions.
As loyal readers know, my bond related positions include several preferred stocks and preferred stock closed end funds. My fascination with these investment vehicles has prompted some to ask why their investment advisors do not buy them---indeed why they are rarely if ever discussed. The answer is simple----volume. If you Google "Wall Street Journal Preferred Stock Closing Table" and "CEFConnect" you will see that many of the names that I own trade, on average, 25,000 shares or less daily. I typically buy in lots of 1000 and rarely accumulate more than a few thousand shares of any issue. Why? Because I do not want to impact the price and buying or selling more than 1000 shares at a time can have an impact. Now imagine you are a money manager entrusted with 50 accounts. Even if one believed that preferred stocks 337otherwise made sense for one's clients, one could not buy 50 positions at a time without massively disrupting if not manipulating any given stock's market. So unless you, as an individual investor, order such a purchase it will not happen. Remember, money managers are under great pressure to treat their clients equally. Indeed, for a host of reasons it is more important for them to be consistent than to be right. This is not a criticism, but it is a fact.
The domestic oil and gas rig count continues to increase. It now numbers 694 compared with 480 in March, 2016. This is a testament to American ingenuity, a national trait that was sorely underestimated by Saudi Arabia when it began flooding the market with oil in 2014. At the time, conventional wisdom was that US frackers needed $60/bbl. in order to break even. That may have been true in 2014, but by 2017 advances in technology have reduced the break even to $40/bbl. with some producers capable of profiting at $30/bbl. In addition new fracking "cocktails" (mixture of water, sand and pressure) have resulted in each well producing 40% more oil than in 2014. I see opportunity in oil/gas in 2017 and recently have added to my holdings in KYN and JMF.
Sunday, January 15, 2017
January 15, 2017 Rationale
Risk/Reward Vol. 336
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
In Vol. 333 http://www.riskrewardblog.blogspot.com/ I explained my rationale for re-entering the market in mid December. In a nutshell, the decision was based upon the meteoric yield increase on the US Treasury 10 Year Bond; from 1.3% in July to 1.8% on election day to 2.6% on December 7th. I also outlined the reasons why I believed the rotation out of bonds and into equities would slow. I predicted that the rate on the 10Year would stabilize and remain stable for the foreseeable future. In the ensuing month, the rotation has not only slowed, it has reverse albeit marginally. Whether this reversal is a result of the outsized spread in yields between the 10Year and every other sovereign security available (especially the German bund) or simply reflective of a technical resistance to breaching Dow 20,000 is of no moment to me. The fact is that bond yields have fallen.
So how does this affect me? Remember, although I do not own a lot of bonds, I invest and trade in securities that are priced in relation to the 10Year, most notably preferred stocks and preferred stock closed end funds. Based upon several years of study, if the spread on the yield between an investment grade preferred and the 10Year exceeds 350 basis points and the price of the preferred falls below its redemption value (typically $25) it signals a "buy". Another buy signal for me is when the rate on the 10Year experiences a spike as occurred during the 2013 Taper Tantrum (see Vols. 211 and 172) and again recently after the election. It is a fact, that from time to time, Mr. Market is overly exuberant in rotating out of one asset (e.g. bonds) and into another (e.g. stocks); a situation I perceived existed with the Trump rally and the incredible, one month, 44% rise in the 10Year yield. With the yield on the 10Year currently at or below 2.4%, I am up over 3% on the portfolio that I purchased after December 19th. (Remember as yields fall, prices increase.) That portfolio averages over 6.5% in annual dividends. I am still 50% in cash, but will deploy more if stability persists.
The above notwithstanding, we live in interesting times. No one predicted the Trump Rally. And no one is offering predictions for 2017. The closest to a prediction that I have read is contained in Bill Gross's January Investment Outlook. It is available on Janus Capital Group's website and I recommend it to your attention. Therein he posits the question that addresses, foursquare, my concern: are equities over priced and bonds over yielded? He concludes that the stock market and bond yields are currently priced in anticipation of a 3% growth in gross domestic product this year, a number he does not believe is achievable. That said, he warns that if he is wrong and the yield on the 10Year exceeds 2.6% it could signal a bond bear market, something we have not experienced in 30 years. If I perceive that happening, I will be out of my bond correlated portfolio before you can say----.
Saturday, December 31, 2016
December 31, 2016 Old Year
RiskReward Vol. 335
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I am at the Denver airport awaiting the arrival of my son in law. We are headed to the mountains for a few days of skiing. This will be short.
Eight weeks ago, who predicted that the two major indices would experience double digit returns for the year? Up to election day, no one. I repeat no one. It is this unpredictability which several years ago gave rise to the 60/40 Rule---60% stocks and 40% bonds until retirement and then a reversal of the ratio. But with only paltry returns available in bonds these past eight years, most investors have abandoned this formula in favor of an all stock portfolio, often indexed. Those who chose that route have been rewarded handsomely as the Dow Jones Industrial Average has tripled since hitting a trough in March, 2009.
But is this a wise strategy going forward? Maybe, but not for me. Predictability is far more important for one who got burned in the DotCom crash and who avoided the 2008-2009 downdraft---mostly by luck. At age 65, I just cannot stomach another equity roller coaster ride. That is why, lo these past six years, I have been working on a more predictable strategy. As explained in the past, I have come to believe that one can achieve an acceptable return by focusing, singularly, on the yield on the 10Year US Treasury Bond (the nearest to a risk-free investment) and trading or investing in securities that are priced in relation thereto. My favorite correlates are preferred stocks and preferred stock closed end funds. This is how the strategy unfolded in the latter half of the year. The election notwithstanding, it was predictable, as early as this summer, that the yield on the 10Year would increase come December when the Federal Reserve met. Accordingly, when the yield on the 10Year dropped to near record lows causing those securities correlated thereto to reach near record highs (remember when the yields on bonds and those correlated thereto fall, their prices increase) , I sold, reaped a profit and awaited the re-pricing that inevitably would follow any rate increase. This gamut was explained at the time I sold back in July. See Vol. 316 Riskrewardblog . The anticipated re-pricing occurred in spades as Trump's election combined with the Fed's rate hike caused the yield on the 10Year to spike over 40%. I then re-entered. As I now sit, I will achieve an acceptable (6+%) return if 1) the yield on the 10Year remains in its current range or 2) that rate falls. I lose only if the yield increases significantly which is unlikely given its recent meteoric rise and the downward pressure from foreign sovereign bonds which I described in Vol. 333. If the yield does begin to increase, I will sell well before experiencing any significant loss.
Sorry this is so dense. I have little time to edit but wanted to capture my year end thoughts.
Happy New Year.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I am at the Denver airport awaiting the arrival of my son in law. We are headed to the mountains for a few days of skiing. This will be short.
Eight weeks ago, who predicted that the two major indices would experience double digit returns for the year? Up to election day, no one. I repeat no one. It is this unpredictability which several years ago gave rise to the 60/40 Rule---60% stocks and 40% bonds until retirement and then a reversal of the ratio. But with only paltry returns available in bonds these past eight years, most investors have abandoned this formula in favor of an all stock portfolio, often indexed. Those who chose that route have been rewarded handsomely as the Dow Jones Industrial Average has tripled since hitting a trough in March, 2009.
But is this a wise strategy going forward? Maybe, but not for me. Predictability is far more important for one who got burned in the DotCom crash and who avoided the 2008-2009 downdraft---mostly by luck. At age 65, I just cannot stomach another equity roller coaster ride. That is why, lo these past six years, I have been working on a more predictable strategy. As explained in the past, I have come to believe that one can achieve an acceptable return by focusing, singularly, on the yield on the 10Year US Treasury Bond (the nearest to a risk-free investment) and trading or investing in securities that are priced in relation thereto. My favorite correlates are preferred stocks and preferred stock closed end funds. This is how the strategy unfolded in the latter half of the year. The election notwithstanding, it was predictable, as early as this summer, that the yield on the 10Year would increase come December when the Federal Reserve met. Accordingly, when the yield on the 10Year dropped to near record lows causing those securities correlated thereto to reach near record highs (remember when the yields on bonds and those correlated thereto fall, their prices increase) , I sold, reaped a profit and awaited the re-pricing that inevitably would follow any rate increase. This gamut was explained at the time I sold back in July. See Vol. 316 Riskrewardblog . The anticipated re-pricing occurred in spades as Trump's election combined with the Fed's rate hike caused the yield on the 10Year to spike over 40%. I then re-entered. As I now sit, I will achieve an acceptable (6+%) return if 1) the yield on the 10Year remains in its current range or 2) that rate falls. I lose only if the yield increases significantly which is unlikely given its recent meteoric rise and the downward pressure from foreign sovereign bonds which I described in Vol. 333. If the yield does begin to increase, I will sell well before experiencing any significant loss.
Sorry this is so dense. I have little time to edit but wanted to capture my year end thoughts.
Happy New Year.
Saturday, December 24, 2016
December 24, 2016 Back In The Saddle
Risk/Reward Vol. 334
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Given tomorrow's schedule, I decided to publish one day early.
As noted each week, this publication does not render tax advice. That said, on Tuesday I was reminded, via a telephone conversation with the most successful fixed income investor I know, that tax considerations can and should come into play when purchasing fixed income securities. I purchase most of these in our tax deferred retirement accounts of which Barb and I have several. Since these accounts are tax deferred, I pay little attention to how the distributions from each are characterized. However, were one to own these in a taxable account, one may wish to prioritize the purchase of those securities paying "qualified dividends" (such as bank preferreds) since generally they are taxed at a lesser rate than ordinary income. The distributions from non-qualified securities (such as the preferred stocks of real estate investment trusts, closed end preferred stock funds and any exchange traded debt) are taxed at one's marginal rate. A quick way to ascertain if a distribution is qualified is to read the precis of its prospectus found at www.quantumonline.com
Speaking of taxable accounts Barb and I have five. Two are for cash and legacy holdings. Two are in the hands of two investment advisors. And I manage one. The one I manage is reserved for cash, for tax advantaged securities (municipal bond funds, primarily) and for those investments that are unsuited for retirement accounts (e.g. master limited partnerships). This last category can be a sticky wicket. That is why I recommend retaining a knowledgeable tax consultant/preparer to anyone wishing to play the game as I do.
As foretold in the last edition, I entered the market in force this week. I deployed a third of the funds that I manage. I concentrated on preferred stocks and exchange traded debt. Each averages annual distributions in excess of 6%, and all were purchased below par. In addition, I bought leveraged closed end funds yielding above 8% but trading below net asset value. I also bought oil company stocks. I was asked whether I foresaw holding any of these for a prolonged period. My response was consistent with my philosophy: to wit, I seek a 6% annual return with the least amount of risk. If I achieve that return via capital appreciation in a matter of a few weeks or months (as I did last year), I will sell. Or if I perceive a marked downturn in the value of what I bought, I will sell. Frankly, for the reasons stated last week (in particular the forces that should moderate further upward movement in the yield on 10Year US Treasury Bond) I see a period of stability in the securities I now own. If that is the case, I will hold them indefinitely and harvest my 6% return via distributions (and not capital appreciation).
The most speculative purchases I made this week were some closed end municipal bond funds. I say speculative, not because of any underlying credit risk, but due to the uncertainty surrounding President-elect Trump' s plans for income taxes. Any significant decrease in the individual marginal rate traditionally decreases the value of muni's. That said, they just seem oversold. Getting a 6% tax preferred return on a portfolio of bonds trading well below their net asset value was too good to resist. Helping me make the decision was a well reasoned article from Columbia Threadneedle which I follow on Twitter. For those of you who do not tweet, I highly recommend opening an account and following your favorite investment gurus (in addition to PEOTUS). In addition to Twitter, I derive a great deal of investment news across a variety of social media outlets such as my CNBC and Seeking Alpha apps.
For those who observe, Merry Christmas and/or Happy Hanukkah. To all others, enjoy your holiday
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Given tomorrow's schedule, I decided to publish one day early.
As noted each week, this publication does not render tax advice. That said, on Tuesday I was reminded, via a telephone conversation with the most successful fixed income investor I know, that tax considerations can and should come into play when purchasing fixed income securities. I purchase most of these in our tax deferred retirement accounts of which Barb and I have several. Since these accounts are tax deferred, I pay little attention to how the distributions from each are characterized. However, were one to own these in a taxable account, one may wish to prioritize the purchase of those securities paying "qualified dividends" (such as bank preferreds) since generally they are taxed at a lesser rate than ordinary income. The distributions from non-qualified securities (such as the preferred stocks of real estate investment trusts, closed end preferred stock funds and any exchange traded debt) are taxed at one's marginal rate. A quick way to ascertain if a distribution is qualified is to read the precis of its prospectus found at www.quantumonline.com
Speaking of taxable accounts Barb and I have five. Two are for cash and legacy holdings. Two are in the hands of two investment advisors. And I manage one. The one I manage is reserved for cash, for tax advantaged securities (municipal bond funds, primarily) and for those investments that are unsuited for retirement accounts (e.g. master limited partnerships). This last category can be a sticky wicket. That is why I recommend retaining a knowledgeable tax consultant/preparer to anyone wishing to play the game as I do.
As foretold in the last edition, I entered the market in force this week. I deployed a third of the funds that I manage. I concentrated on preferred stocks and exchange traded debt. Each averages annual distributions in excess of 6%, and all were purchased below par. In addition, I bought leveraged closed end funds yielding above 8% but trading below net asset value. I also bought oil company stocks. I was asked whether I foresaw holding any of these for a prolonged period. My response was consistent with my philosophy: to wit, I seek a 6% annual return with the least amount of risk. If I achieve that return via capital appreciation in a matter of a few weeks or months (as I did last year), I will sell. Or if I perceive a marked downturn in the value of what I bought, I will sell. Frankly, for the reasons stated last week (in particular the forces that should moderate further upward movement in the yield on 10Year US Treasury Bond) I see a period of stability in the securities I now own. If that is the case, I will hold them indefinitely and harvest my 6% return via distributions (and not capital appreciation).
The most speculative purchases I made this week were some closed end municipal bond funds. I say speculative, not because of any underlying credit risk, but due to the uncertainty surrounding President-elect Trump' s plans for income taxes. Any significant decrease in the individual marginal rate traditionally decreases the value of muni's. That said, they just seem oversold. Getting a 6% tax preferred return on a portfolio of bonds trading well below their net asset value was too good to resist. Helping me make the decision was a well reasoned article from Columbia Threadneedle which I follow on Twitter. For those of you who do not tweet, I highly recommend opening an account and following your favorite investment gurus (in addition to PEOTUS). In addition to Twitter, I derive a great deal of investment news across a variety of social media outlets such as my CNBC and Seeking Alpha apps.
For those who observe, Merry Christmas and/or Happy Hanukkah. To all others, enjoy your holiday
Sunday, December 18, 2016
December 18, 2016 Re-entry
Risk/Reward Vol. 333
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And so the Trump Rally continues as both major stock indices are up double digits year to date. But for me the stunning movement in Treasury securities, in particular movement in the 10 Year US Treasury Bond (10Year), is where I see opportunity. As loyal readers know, I invest based upon signals emanating from the 10Year. Its movement since the election has been nothing short of spectacular. Its yield has skyrocketed 44% since early November which in turn has caused a massive reset of myriad securities priced in relation thereto. With Mr. Market's rotation out of bonds and into stocks slowing, with the Fed funds rate increase on Wednesday and with the Fed signaling, via its "dot plot", three 25 basis point raises next year, one can anticipate that the rate on the 10Year will stabilize between 2.5 and 2.75% for the foreseeable future. Adding stability is the massive 230 basis point spread between the yield on the 10Year and the yield on the German Bund, a gulf that has not been seen since the fall of the Berlin Wall in 1989. I foresee a prolonged period where foreign investors will seek better returns by buying US Treasury securities thus dampening yield increases. (Remember the more demand for a bond the higher the price and the lower the yield.). This move already has begun as indicated by the dollar/Euro exchange rate (which now sits at $1.04) as investors sell Euro bonds, buy dollars and invest in Treasuries. This combination of events is what I have been awaiting and had it not been for a day spent earning CLE credits, I would have entered in force on Friday. I will buy on Monday.
So is my re-entry wholly dependent upon the rate on the 10Year stabilizing? No, Why not? Harken back to June, 2010, Vol. 1 www.riskrewarblog.blogspot.com . Therein I wrote the following:
"...I am in search of a 6%, pre tax return. Throughout most of my life, this would have been a layup. From 1969 through 1997, the 10 Treasury rarely fell below 6%. From 1980 through 1985, it never fell below 10%. So, at this stage in my life all I need is a little inflation. Indeed, right now 90% of my money is parked, waiting for that to happen. Unfortunately, it looks like we are into a prolonged period of stagflation and perhaps deflation. So, Barb and I decided to get off our duffs, and to become more active money managers..."
I have achieved that goal since, but only through trial and error and darting in and out of the market. Now, with the Federal Reserve raising rates for only the second time in ten years, with the prospect of the heavy foot of regulation off of the throats of financial institutions, with unemployment below 5%, with re-inflation a real possibility and with the stock market hitting record highs, reasonably safe 6% returns are available for the first time in several years. The repricing of securities which I noted above has resulted in the availability of investment grade or near investment grade bond like securities issued by reputable (some blue chip) institutions at or below par. Most are preferred stocks or exchange traded debt instruments. Check out SOJB, KYYPP, COFF COFP, AXSD, AHTG, ACGLP, AHLD, ASBD, BACD, CTBB, CTY, WFCW , and the exchange traded fund PGX just to name a few. They are listed daily on the Wall Street Journal Preferred Stock Closing Table, available free of charge. This means I can now enjoy a 6+% annual return from very safe investments without the fear that they will be redeemed at a price less than what I paid (such securities are redeemable, but at par, not below). For an even better return, I plan to purchase some leveraged closed end preferred stock funds such as HPF, HPS, HPI, JPC and DFP. For more information on these take a look at CEF Connect at www.cefconnect.com . In my opinion several are very oversold. Currently, they yield in excess of 8%. Due to the leverage employed (each borrows up to 30% of net asset value which is used to reinvest in additional preferred issues), they are more rate sensitive than individual preferred issues or unleveraged funds. However, they are currently on sale at deep discount which provides a layer of downside protection. Several real estate investment trusts also have repriced into zones that are very appealing. And for my taxable account, several municipal bond closed end funds are ripe for the picking. In sum, in the span of one month I have gone from wanting no securities to desiring more than I can manage.
I will also buy oil companies next week. OPEC's decision to limit production ten days ago plus Russia's unilateral decision to impose production limits will redound to the benefit of both domestic and international producers. I have not decided on which but included will be Shell. The stabilization of oil prices has contributed mightily to the safety of its nearly 7% dividend.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And so the Trump Rally continues as both major stock indices are up double digits year to date. But for me the stunning movement in Treasury securities, in particular movement in the 10 Year US Treasury Bond (10Year), is where I see opportunity. As loyal readers know, I invest based upon signals emanating from the 10Year. Its movement since the election has been nothing short of spectacular. Its yield has skyrocketed 44% since early November which in turn has caused a massive reset of myriad securities priced in relation thereto. With Mr. Market's rotation out of bonds and into stocks slowing, with the Fed funds rate increase on Wednesday and with the Fed signaling, via its "dot plot", three 25 basis point raises next year, one can anticipate that the rate on the 10Year will stabilize between 2.5 and 2.75% for the foreseeable future. Adding stability is the massive 230 basis point spread between the yield on the 10Year and the yield on the German Bund, a gulf that has not been seen since the fall of the Berlin Wall in 1989. I foresee a prolonged period where foreign investors will seek better returns by buying US Treasury securities thus dampening yield increases. (Remember the more demand for a bond the higher the price and the lower the yield.). This move already has begun as indicated by the dollar/Euro exchange rate (which now sits at $1.04) as investors sell Euro bonds, buy dollars and invest in Treasuries. This combination of events is what I have been awaiting and had it not been for a day spent earning CLE credits, I would have entered in force on Friday. I will buy on Monday.
So is my re-entry wholly dependent upon the rate on the 10Year stabilizing? No, Why not? Harken back to June, 2010, Vol. 1 www.riskrewarblog.blogspot.com . Therein I wrote the following:
"...I am in search of a 6%, pre tax return. Throughout most of my life, this would have been a layup. From 1969 through 1997, the 10 Treasury rarely fell below 6%. From 1980 through 1985, it never fell below 10%. So, at this stage in my life all I need is a little inflation. Indeed, right now 90% of my money is parked, waiting for that to happen. Unfortunately, it looks like we are into a prolonged period of stagflation and perhaps deflation. So, Barb and I decided to get off our duffs, and to become more active money managers..."
I have achieved that goal since, but only through trial and error and darting in and out of the market. Now, with the Federal Reserve raising rates for only the second time in ten years, with the prospect of the heavy foot of regulation off of the throats of financial institutions, with unemployment below 5%, with re-inflation a real possibility and with the stock market hitting record highs, reasonably safe 6% returns are available for the first time in several years. The repricing of securities which I noted above has resulted in the availability of investment grade or near investment grade bond like securities issued by reputable (some blue chip) institutions at or below par. Most are preferred stocks or exchange traded debt instruments. Check out SOJB, KYYPP, COFF COFP, AXSD, AHTG, ACGLP, AHLD, ASBD, BACD, CTBB, CTY, WFCW , and the exchange traded fund PGX just to name a few. They are listed daily on the Wall Street Journal Preferred Stock Closing Table, available free of charge. This means I can now enjoy a 6+% annual return from very safe investments without the fear that they will be redeemed at a price less than what I paid (such securities are redeemable, but at par, not below). For an even better return, I plan to purchase some leveraged closed end preferred stock funds such as HPF, HPS, HPI, JPC and DFP. For more information on these take a look at CEF Connect at www.cefconnect.com . In my opinion several are very oversold. Currently, they yield in excess of 8%. Due to the leverage employed (each borrows up to 30% of net asset value which is used to reinvest in additional preferred issues), they are more rate sensitive than individual preferred issues or unleveraged funds. However, they are currently on sale at deep discount which provides a layer of downside protection. Several real estate investment trusts also have repriced into zones that are very appealing. And for my taxable account, several municipal bond closed end funds are ripe for the picking. In sum, in the span of one month I have gone from wanting no securities to desiring more than I can manage.
I will also buy oil companies next week. OPEC's decision to limit production ten days ago plus Russia's unilateral decision to impose production limits will redound to the benefit of both domestic and international producers. I have not decided on which but included will be Shell. The stabilization of oil prices has contributed mightily to the safety of its nearly 7% dividend.
Sunday, December 11, 2016
December 11, 2016 Fortune 100
Risk/Reward Vol. 332
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And the beat goes on! Since Donald Trump's election, the Dow Jones Industrial Average is up a stunning 6.28% and the S&P 500 is up 4.5%. Year to date they are up 13.4% and 10.5% respectively. So, John, how does it feel to be on the sidelines? I am reminded of George Gobel's most famous line: "Did you ever get the feeling that the world was a tuxedo and you were a pair of brown shoes?" Well, that is how I feel. That said, this incredible run was predicted by no one. Indeed, as previously reported here, most financial mavens were predicting a market decline if Trump were elected. Is Mr. Market's reaction completely emotional or are there fundamental changes afoot which justify this upward move? I know that emotion plays some role in every human endeavor, but I would like to think Mr. Market is also rational. And I believe he is. Think about it. If you had invested several years and several billion dollars in a 1200 mile pipeline, consulted and reached agreement with 50 separate Indian tribes, been vetted and approved by several environmental agencies, overcome two major court challenges only to find that your President would not approve the last 1100 feet because a few hundred protestors objected to it crossing underneath a river that already has dozens of pipelines operating beneath it, wouldn't you think twice about building another? Well, that won't happen to ETP or any other company under Trump. Nor will a national minimum wage of $15, nor a Clean Air Act override of state air quality regulations. Maybe, just maybe "Making America Great Again" is not a white nationalist paen. Maybe it is intended to evoke images of a stronger Navy capable of maintaining order in the South China Sea. Maybe is about upgrading our roads and airports. Maybe it is about jawboning Carrier to keep jobs in America. Maybe the Department of Defense should be headed by a man whose nickname is "Mad Dog" instead of one named---what's that guy's name? Anyway, I am beginning to believe that Mr. Markets' enthusiasm is not only justified, but sustainable.
So why didn't American industrial leaders support Trump during the election? Well, this Dear Reader is the most underreported story of the post election stock boom. The reason is obvious to me. If you thought HRC was going to win and that Elizabeth Warren would control the Senate, you would have been a fool to support their opponents. What chance if any would the CEO of any major bank have to moderate the heavy regulations emanating from the Dodd-Frank Act if he/she supported a losing Trump? You think I am wrong? Check Fortune Magazine's report in October of this year. NOT ONE CEO OF A FORTUNE 100 COMPANY CONTRIBUTED TO TRUMP'S CAMPAIGN. NOT ONE. In 2012, Romney garnered the support of 33 of them. In 2016, HRC received contributions from more than twice the number that supported Obama in 2012. What do you think they think of Trump now? Freeing companies from the tyranny of regulation alone could be responsible for this tremendous gain. Who knew? More importantly, who reported it? Most importantly, why not? No wonder the main stream media is losing its influence.
The above notwithstanding, I am not going to chase Mr. Market. I remain resolute in my oft described strategy. It will not result in the spectacular return that equity index investors have seen these past four weeks, but it is predictable. And as so often written here, predictability is what I seek at this stage in my investing career. This is a big week for me. The Federal Reserve meets December 13 and 14 with a press release and news conference to follow. A rate increase is a virtual certainty. What I will be watching is the dot plot, the predictions of each FOMC member as to where interest rates will be over the next several months. In September (the last time the dot plot was published), the consensus was that there would only be two 25 basis point raises in 2017. I suspect this will be revised to 4 quarterly raises. Either way, I will await its announcement and then begin my re-entry. I have my selections picked and am anxious to return. I may even buy some oil related stocks as the price has stabilized above $50/bbl.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
And the beat goes on! Since Donald Trump's election, the Dow Jones Industrial Average is up a stunning 6.28% and the S&P 500 is up 4.5%. Year to date they are up 13.4% and 10.5% respectively. So, John, how does it feel to be on the sidelines? I am reminded of George Gobel's most famous line: "Did you ever get the feeling that the world was a tuxedo and you were a pair of brown shoes?" Well, that is how I feel. That said, this incredible run was predicted by no one. Indeed, as previously reported here, most financial mavens were predicting a market decline if Trump were elected. Is Mr. Market's reaction completely emotional or are there fundamental changes afoot which justify this upward move? I know that emotion plays some role in every human endeavor, but I would like to think Mr. Market is also rational. And I believe he is. Think about it. If you had invested several years and several billion dollars in a 1200 mile pipeline, consulted and reached agreement with 50 separate Indian tribes, been vetted and approved by several environmental agencies, overcome two major court challenges only to find that your President would not approve the last 1100 feet because a few hundred protestors objected to it crossing underneath a river that already has dozens of pipelines operating beneath it, wouldn't you think twice about building another? Well, that won't happen to ETP or any other company under Trump. Nor will a national minimum wage of $15, nor a Clean Air Act override of state air quality regulations. Maybe, just maybe "Making America Great Again" is not a white nationalist paen. Maybe it is intended to evoke images of a stronger Navy capable of maintaining order in the South China Sea. Maybe is about upgrading our roads and airports. Maybe it is about jawboning Carrier to keep jobs in America. Maybe the Department of Defense should be headed by a man whose nickname is "Mad Dog" instead of one named---what's that guy's name? Anyway, I am beginning to believe that Mr. Markets' enthusiasm is not only justified, but sustainable.
So why didn't American industrial leaders support Trump during the election? Well, this Dear Reader is the most underreported story of the post election stock boom. The reason is obvious to me. If you thought HRC was going to win and that Elizabeth Warren would control the Senate, you would have been a fool to support their opponents. What chance if any would the CEO of any major bank have to moderate the heavy regulations emanating from the Dodd-Frank Act if he/she supported a losing Trump? You think I am wrong? Check Fortune Magazine's report in October of this year. NOT ONE CEO OF A FORTUNE 100 COMPANY CONTRIBUTED TO TRUMP'S CAMPAIGN. NOT ONE. In 2012, Romney garnered the support of 33 of them. In 2016, HRC received contributions from more than twice the number that supported Obama in 2012. What do you think they think of Trump now? Freeing companies from the tyranny of regulation alone could be responsible for this tremendous gain. Who knew? More importantly, who reported it? Most importantly, why not? No wonder the main stream media is losing its influence.
The above notwithstanding, I am not going to chase Mr. Market. I remain resolute in my oft described strategy. It will not result in the spectacular return that equity index investors have seen these past four weeks, but it is predictable. And as so often written here, predictability is what I seek at this stage in my investing career. This is a big week for me. The Federal Reserve meets December 13 and 14 with a press release and news conference to follow. A rate increase is a virtual certainty. What I will be watching is the dot plot, the predictions of each FOMC member as to where interest rates will be over the next several months. In September (the last time the dot plot was published), the consensus was that there would only be two 25 basis point raises in 2017. I suspect this will be revised to 4 quarterly raises. Either way, I will await its announcement and then begin my re-entry. I have my selections picked and am anxious to return. I may even buy some oil related stocks as the price has stabilized above $50/bbl.
Sunday, December 4, 2016
December 4, 2016 Trudeau
Risk/Reward Vol. 331
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Here are some observations.
The Trump Stock Rally continues. Each day the major indices flirt with record highs. More importantly, Mr. Market is not slavishly following and reacting to the every word of the Federal Reserve. Monetary policy no longer rules the roost. The prospect of fiscal stimuli in the form of repatriation of overseas dollars, tax reform and infrastructure spending has spurred a rotation out of bonds and equities.
Assisting the Rally was news this week that OPEC agreed to limit production to 32.5million barrels/day, a 4.5% reduction. The reaction was immediate. Heretofore see-sawing oil prices spiked 10% and now have found stability above $50/bbl. This is a key level for oil company profitability. Accordingly, worldwide oil stocks soared with personal favorites BP gaining, 3.5%, RDS (Shell) gaining 3.8% and PAA gaining 4% this week alone. These huge gains notwithstanding many oil companies are still inexpensive. RDS's and BP's dividends are both near 7%. I am looking to buy on any pull back.
The Trump Stock Rally is also the Trump Bond Rout. As of Thursday, the yield on the 10YearUS Treasury Bond had spiked 36% since the election (2.45%-1.80%= 65bp/180bp=36%). (REMEMBER: higher yields mean lower prices.) Friday saw this moderate a bit, but not enough to reverse the trend. November was the worst performing month for U S Treasury bonds since 1990. And it was not much better for municipal bonds. They experienced their worst month since 2008 when Mr. Market feared several cities would declare bankruptcy.
The move away from globalization and toward nationalism which started with Brexit and accelerated with Trump's election may not be running out of steam. Little noticed this past week in the US was the victory in France's presidential primary achieved by Francois Fillon. Fillon is a staunch conservative who fancies himself the new Margaret Thatcher. He promises to reduce France's bloated bureaucracy, to protect its borders, to raise the retirement age to 65 and to govern consistent with France's traditional, Catholic values. His victory means that the two most likely frontrunners will be him and Marine LePen who is so far right she is deemed a neo-Fascist by much of the world's press. Couple this development with what could be a disruptive referendum to be held today in Italy and the future of the Eurozone becomes very cloudy. Keep your eye on the Euro which is now at $1.06.
Have you been following the excoriation of Justin Trudeau since he tweeted his encomium to Fidel Castro last Sunday? If not , I suggest you read some very acerbic cuts at # trudeaueulogies and similar Twitter communities. HIs comeuppance at the hand of the Twittersphere is just one more example of how powerful social media is and how irrelevant the fawning main stream press has become. Think not? Just ask Donald Trump. I write about Canada's Prince Charming Prime Minister not to add to his humiliation, but to note how even he knows where is bread is buttered. Pretending to be a climate protector, this week he approved two massive pipeline projects which will nearly double the export of oil from Alberta. Alberta's oil is deemed the least climate friendly source of petroleum in the world, a fact which has held up the Keystone pipeline in the US since the beginning of the Obama presidency. Clearly, even Justin recognizes the need for North American energy independence, something our Fearless Leader has failed to pursue despite having the means to do so. This should be a Day 1 priority for DT.
So what does this all mean? I see the US stock market maintaining its gains if not adding to them. I see the rotation out of bonds and into equities abating with some stability returning to bonds and other interest rate sensitive securities . A key indicator of this will be the market's reaction to the Federal Reserve's now certain rate increase set for later this month and what is contained in its post meeting press release. Likely, that will be the time I re-enter in force. I have my list of preferred stocks, closed end funds and REIT's already selected for my tax deferred accounts. For my taxable account, I have a long list of leveraged municipal bond closed end funds queued for purchase. This sector has been decimated recently and looks very inviting.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Here are some observations.
The Trump Stock Rally continues. Each day the major indices flirt with record highs. More importantly, Mr. Market is not slavishly following and reacting to the every word of the Federal Reserve. Monetary policy no longer rules the roost. The prospect of fiscal stimuli in the form of repatriation of overseas dollars, tax reform and infrastructure spending has spurred a rotation out of bonds and equities.
Assisting the Rally was news this week that OPEC agreed to limit production to 32.5million barrels/day, a 4.5% reduction. The reaction was immediate. Heretofore see-sawing oil prices spiked 10% and now have found stability above $50/bbl. This is a key level for oil company profitability. Accordingly, worldwide oil stocks soared with personal favorites BP gaining, 3.5%, RDS (Shell) gaining 3.8% and PAA gaining 4% this week alone. These huge gains notwithstanding many oil companies are still inexpensive. RDS's and BP's dividends are both near 7%. I am looking to buy on any pull back.
The Trump Stock Rally is also the Trump Bond Rout. As of Thursday, the yield on the 10YearUS Treasury Bond had spiked 36% since the election (2.45%-1.80%= 65bp/180bp=36%). (REMEMBER: higher yields mean lower prices.) Friday saw this moderate a bit, but not enough to reverse the trend. November was the worst performing month for U S Treasury bonds since 1990. And it was not much better for municipal bonds. They experienced their worst month since 2008 when Mr. Market feared several cities would declare bankruptcy.
The move away from globalization and toward nationalism which started with Brexit and accelerated with Trump's election may not be running out of steam. Little noticed this past week in the US was the victory in France's presidential primary achieved by Francois Fillon. Fillon is a staunch conservative who fancies himself the new Margaret Thatcher. He promises to reduce France's bloated bureaucracy, to protect its borders, to raise the retirement age to 65 and to govern consistent with France's traditional, Catholic values. His victory means that the two most likely frontrunners will be him and Marine LePen who is so far right she is deemed a neo-Fascist by much of the world's press. Couple this development with what could be a disruptive referendum to be held today in Italy and the future of the Eurozone becomes very cloudy. Keep your eye on the Euro which is now at $1.06.
Have you been following the excoriation of Justin Trudeau since he tweeted his encomium to Fidel Castro last Sunday? If not , I suggest you read some very acerbic cuts at # trudeaueulogies and similar Twitter communities. HIs comeuppance at the hand of the Twittersphere is just one more example of how powerful social media is and how irrelevant the fawning main stream press has become. Think not? Just ask Donald Trump. I write about Canada's Prince Charming Prime Minister not to add to his humiliation, but to note how even he knows where is bread is buttered. Pretending to be a climate protector, this week he approved two massive pipeline projects which will nearly double the export of oil from Alberta. Alberta's oil is deemed the least climate friendly source of petroleum in the world, a fact which has held up the Keystone pipeline in the US since the beginning of the Obama presidency. Clearly, even Justin recognizes the need for North American energy independence, something our Fearless Leader has failed to pursue despite having the means to do so. This should be a Day 1 priority for DT.
So what does this all mean? I see the US stock market maintaining its gains if not adding to them. I see the rotation out of bonds and into equities abating with some stability returning to bonds and other interest rate sensitive securities . A key indicator of this will be the market's reaction to the Federal Reserve's now certain rate increase set for later this month and what is contained in its post meeting press release. Likely, that will be the time I re-enter in force. I have my list of preferred stocks, closed end funds and REIT's already selected for my tax deferred accounts. For my taxable account, I have a long list of leveraged municipal bond closed end funds queued for purchase. This sector has been decimated recently and looks very inviting.
Sunday, November 27, 2016
November 27, 2016 Predictability
Risk/Reward Vol. 330
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The Trump Rally continues. In the three weeks since the election, the Dow Jones Industrial Average has gained 4.5% and is up nearly 10% year to date. The S&P 500 is up over 3% this month and over 8% year to date. And of course EVERYONE predicted this should Trump win. NOT. Google the following phrase: "what will stock market do if Trump wins" and read the pre-election predictions from Market Watch, CNBC, CNN, Goldman Sachs and any number of market gurus. Can you say Armageddon? Now browse the reports after the election and find me one cogent article on why Mr. Market is go giddy? You won't find one. So what lesson is an investor to take from this? Most would say: "See, you cannot time the market." and/or "Buy the index because history tells us it delivers on average a 7+% annual return." These shibboleths are not explanations. They are articles of faith. And faith is not a sufficient rationale for me--not when it comes to investing. Remember, the world was flat---until it wasn't. And all swans were white---until Australia was discovered.
To reiterate, I am not troubled by their failure to predict the intensity of the move, but I am bothered that virtually all market prognosticators were directionally wrong. Am I the only one of us who is? And as for the index buyers and the "buy and hold" crowd, I direct your attention to the time period 1929-1954. It took the Dow Jones Industrial Average more than 25 years to reach the level it achieved before "The Crash of 1929". So where can one find predictability? Although nothing is foolproof, I believe predictability can be found in the bond market; more particularly in the market for the 10Year US Treasury. The election notwithstanding, all indications were that interest rates would increase, and they have (although no one saw the intensity of the increase). Given this level of certainty, one could prepare by selling interest rate sensitive securities, raising cash and awaiting a signal to re-enter.
I believe the signal to re-enter will come after next month's Federal Reserve meeting. I am looking for indications as to the number and size of the rate increases for 2017 with a rate increase in December of this year now a foregone conclusion. I have my list of purchases lined up, and I am ready to execute. Again patience is my greatest challenge. Having jumped the gun in the past, hopefully I can resist even as those holding index funds prosper. And prosper they have---predictability be damned.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The Trump Rally continues. In the three weeks since the election, the Dow Jones Industrial Average has gained 4.5% and is up nearly 10% year to date. The S&P 500 is up over 3% this month and over 8% year to date. And of course EVERYONE predicted this should Trump win. NOT. Google the following phrase: "what will stock market do if Trump wins" and read the pre-election predictions from Market Watch, CNBC, CNN, Goldman Sachs and any number of market gurus. Can you say Armageddon? Now browse the reports after the election and find me one cogent article on why Mr. Market is go giddy? You won't find one. So what lesson is an investor to take from this? Most would say: "See, you cannot time the market." and/or "Buy the index because history tells us it delivers on average a 7+% annual return." These shibboleths are not explanations. They are articles of faith. And faith is not a sufficient rationale for me--not when it comes to investing. Remember, the world was flat---until it wasn't. And all swans were white---until Australia was discovered.
To reiterate, I am not troubled by their failure to predict the intensity of the move, but I am bothered that virtually all market prognosticators were directionally wrong. Am I the only one of us who is? And as for the index buyers and the "buy and hold" crowd, I direct your attention to the time period 1929-1954. It took the Dow Jones Industrial Average more than 25 years to reach the level it achieved before "The Crash of 1929". So where can one find predictability? Although nothing is foolproof, I believe predictability can be found in the bond market; more particularly in the market for the 10Year US Treasury. The election notwithstanding, all indications were that interest rates would increase, and they have (although no one saw the intensity of the increase). Given this level of certainty, one could prepare by selling interest rate sensitive securities, raising cash and awaiting a signal to re-enter.
I believe the signal to re-enter will come after next month's Federal Reserve meeting. I am looking for indications as to the number and size of the rate increases for 2017 with a rate increase in December of this year now a foregone conclusion. I have my list of purchases lined up, and I am ready to execute. Again patience is my greatest challenge. Having jumped the gun in the past, hopefully I can resist even as those holding index funds prosper. And prosper they have---predictability be damned.
Sunday, November 20, 2016
November 20, 2016 Fed Grip Ends
Risk/Reward Vol. 329
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
I am hunting this weekend. But, I could not let the week pass without some comment.
Another week beyond the election and another flirtation with record highs for the major stock indices. But to me the headline is "Fed Loses Grip on Mr. Market." Ever since I started Risk/Reward (2010), THE dominant market force has been the Federal Reserve. Harken back to the times leading up to and immediately after any Fed meeting or a Ben Bernanke/Janet Yellen speech. Huge swings resulted. Remember the Taper Tantrum in 2013 or more recently the 300 point swing in the Dow during Yellen's speech in April? (see Vol. 302 http://www.riskrewardblog.blogspot.com/). Her speech before Congress this week was a non event. Moreover, the Fed's power has been perverse. Contrary to how markets traditionally operate, for much of the past eight years bonds and stocks traded in unison, and good economic news caused equity prices to fall. (See Vol. 167) Why? Because the entire economic ecosystem became dependent upon ultra low interest rates. In the blink of an eye (or more accurately when PA went for Trump), that all changed. Since election day, bonds have tanked while stocks have skyrocketed. This is the natural order of things, Dear Readers.
I repeat, without any prompting from the Fed, investors have sold bonds and bought equities. Why? Because equities look inviting based upon fundamentals; not because of cheap debt-induced stock buybacks. For the first time in eight years, the repatriation of the trillions of dollars held overseas is a real possibility. Tax reform is in the air. And most importantly, the crushing burden of heavy regulation may end. This latter point cannot be overemphasized. Anyone who has run a business or advised those that do knows how heavy the yoke of regulation can be. Having someone at the top who has chafed under that burden and is dedicated to relieving it is unprecedented in my lifetime.
So will this cause me to recalibrate and become a buy and hold equity index investor? No. I applaud what is happening with these indices, but many of the headwinds of which I have written in the past (e.g. lower demand due to changing demographics) are still with us. Moreover, the strengthening of the dollar (which we are now experiencing) presents as many challenges as it does opportunities. My strategy remains the same: wait for the bond bloodbath to quiet and then buy mispriced interest rate sensitive securities. This approach has worked well for me in the past and is currently setting up nicely.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
I am hunting this weekend. But, I could not let the week pass without some comment.
Another week beyond the election and another flirtation with record highs for the major stock indices. But to me the headline is "Fed Loses Grip on Mr. Market." Ever since I started Risk/Reward (2010), THE dominant market force has been the Federal Reserve. Harken back to the times leading up to and immediately after any Fed meeting or a Ben Bernanke/Janet Yellen speech. Huge swings resulted. Remember the Taper Tantrum in 2013 or more recently the 300 point swing in the Dow during Yellen's speech in April? (see Vol. 302 http://www.riskrewardblog.blogspot.com/). Her speech before Congress this week was a non event. Moreover, the Fed's power has been perverse. Contrary to how markets traditionally operate, for much of the past eight years bonds and stocks traded in unison, and good economic news caused equity prices to fall. (See Vol. 167) Why? Because the entire economic ecosystem became dependent upon ultra low interest rates. In the blink of an eye (or more accurately when PA went for Trump), that all changed. Since election day, bonds have tanked while stocks have skyrocketed. This is the natural order of things, Dear Readers.
I repeat, without any prompting from the Fed, investors have sold bonds and bought equities. Why? Because equities look inviting based upon fundamentals; not because of cheap debt-induced stock buybacks. For the first time in eight years, the repatriation of the trillions of dollars held overseas is a real possibility. Tax reform is in the air. And most importantly, the crushing burden of heavy regulation may end. This latter point cannot be overemphasized. Anyone who has run a business or advised those that do knows how heavy the yoke of regulation can be. Having someone at the top who has chafed under that burden and is dedicated to relieving it is unprecedented in my lifetime.
So will this cause me to recalibrate and become a buy and hold equity index investor? No. I applaud what is happening with these indices, but many of the headwinds of which I have written in the past (e.g. lower demand due to changing demographics) are still with us. Moreover, the strengthening of the dollar (which we are now experiencing) presents as many challenges as it does opportunities. My strategy remains the same: wait for the bond bloodbath to quiet and then buy mispriced interest rate sensitive securities. This approach has worked well for me in the past and is currently setting up nicely.
Sunday, November 13, 2016
Novermber 13, 2016 Reflation
Risk/Reward Vol.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Wow. Were you watching the futures market election night? Talk about volatility. Late Tuesday night, the race was so close, a Year 2000 fiasco (remember the "hanging chad") became a possibility. Understandably the Dow Jones Industrial Average futures plummeted 800 points. Much of that was recovered by the end of the night when a winner was declared. Then, once the markets digested the news, all time highs were achieved in the DJIA. So why didn't Wall Street support Trump during the election? That's easy. No one thought he could win. Mr. Market does not support losers especially when Elizabeth Warren is on the other side. But once victory was assured, the prospect of de-regulation, infrastructure spending and tax reform caused the green lights to shine. Will the averages continue to appreciate and if so why?
They just might, and the reason can be found in the bond market. Allow me to explain. Although financial news reports invariably focus on the equity markets, the real action starts and ends in the bond market. Why? As explained by Warren Buffet (and as discussed in Vol. 207 http://www.riskrewardblog.blogspot.com), the rates of return that investors need from an investment are directly tied to the risk free rate of return. There is no "risk free" security in the real world, but the 10Year US Treasury Bond is the closest. Simply put, if one can achieve, say, a 6% return from the 10Year, why would one accept a lesser return from a riskier investment? Conversely, if one is only achieving a 1.7% return from the 10Year, but one perceives that a significantly higher one will be achieved from a solid, albeit "riskier" investment such a blue chip stock, a rational investor will sell the bond and buy the stock. And that is what is happening. The increased likelihood of infrastructure spending and other fiscal stimuli promised by Trump is very good news for heavy industrials which dominate the Dow. So Mr. Market has sold bonds and bought blue chips. As a consequence, behemoths like GM and Caterpillar are up more than 10% just since the election. Add to this Mr. Trump's desire that the Federal Reserve stop depressing yields on bonds and one has both fiscal and monetary policies aimed at raising rates: a perfect storm for reflation. Think not? Look at the yield on the 10Year. It has gone from 1.77 to 2.12 in one week---that's a 20% increase! Bond King Jeffrey Gundlach sees the yield rising another 40 basis points near term. Who am I to disagree?
So what does this mean to you and me? For the buy and hold equity index crowd it means an above average year at least for the Dow. For me it presents a great buying opportunity. For those who obsess on interest rates (such as yours truly) there is no time better to be in cash than when rates are escalating. And I am in cash. Moreover, I am expecting a road map of rate increases to be announced at the Fed's December meeting. After that, I will repurchase a host of my longtime favorite income producing securities, many of which are currently in the tank due to Mr. Market's overreaction to the reflation discussed above. I see a win/win: increased yields purchased at bargain prices. (Remember the higher the yield, the lower the price.) I just need to be patient.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Wow. Were you watching the futures market election night? Talk about volatility. Late Tuesday night, the race was so close, a Year 2000 fiasco (remember the "hanging chad") became a possibility. Understandably the Dow Jones Industrial Average futures plummeted 800 points. Much of that was recovered by the end of the night when a winner was declared. Then, once the markets digested the news, all time highs were achieved in the DJIA. So why didn't Wall Street support Trump during the election? That's easy. No one thought he could win. Mr. Market does not support losers especially when Elizabeth Warren is on the other side. But once victory was assured, the prospect of de-regulation, infrastructure spending and tax reform caused the green lights to shine. Will the averages continue to appreciate and if so why?
They just might, and the reason can be found in the bond market. Allow me to explain. Although financial news reports invariably focus on the equity markets, the real action starts and ends in the bond market. Why? As explained by Warren Buffet (and as discussed in Vol. 207 http://www.riskrewardblog.blogspot.com), the rates of return that investors need from an investment are directly tied to the risk free rate of return. There is no "risk free" security in the real world, but the 10Year US Treasury Bond is the closest. Simply put, if one can achieve, say, a 6% return from the 10Year, why would one accept a lesser return from a riskier investment? Conversely, if one is only achieving a 1.7% return from the 10Year, but one perceives that a significantly higher one will be achieved from a solid, albeit "riskier" investment such a blue chip stock, a rational investor will sell the bond and buy the stock. And that is what is happening. The increased likelihood of infrastructure spending and other fiscal stimuli promised by Trump is very good news for heavy industrials which dominate the Dow. So Mr. Market has sold bonds and bought blue chips. As a consequence, behemoths like GM and Caterpillar are up more than 10% just since the election. Add to this Mr. Trump's desire that the Federal Reserve stop depressing yields on bonds and one has both fiscal and monetary policies aimed at raising rates: a perfect storm for reflation. Think not? Look at the yield on the 10Year. It has gone from 1.77 to 2.12 in one week---that's a 20% increase! Bond King Jeffrey Gundlach sees the yield rising another 40 basis points near term. Who am I to disagree?
So what does this mean to you and me? For the buy and hold equity index crowd it means an above average year at least for the Dow. For me it presents a great buying opportunity. For those who obsess on interest rates (such as yours truly) there is no time better to be in cash than when rates are escalating. And I am in cash. Moreover, I am expecting a road map of rate increases to be announced at the Fed's December meeting. After that, I will repurchase a host of my longtime favorite income producing securities, many of which are currently in the tank due to Mr. Market's overreaction to the reflation discussed above. I see a win/win: increased yields purchased at bargain prices. (Remember the higher the yield, the lower the price.) I just need to be patient.
Sunday, November 6, 2016
November 6, 2016 Hot Mess
Risk/Reward Vol. 327
THIS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Recently, both major indices have been in the red. The S&P 500 closed down on Friday, its ninth day in a row. It has not had nine consecutive losing days in 36 years. Moreover, both indices dropped through major resistance barriers on Wednesday: the Dow Jones Industrial Average closed below 18,000 and the S&P 500 closed below 2100. That said, the losses remain in a tight range with DJIA down only 1.5% and the S&P down only 3% over the past month. Consistent with the premise of last week's edition, both remain positive year to date. The consensus reason for the negativity is the uncertainty associated with the election. Mr. Market abhors uncertainty. Trump is a wild card as is a Democratic sweep of the presidency and both houses of Congress. Neither result is likely, but the possibility of either occurring has Mr. Market flummoxed. If the status quo prevails (Democrat president, Republican Congress) look for the markets to quickly reflate, less so if the Democrats gain control of the Senate. If either wild card scenario occurs look for a significant downdraft in the markets. It is no mystery why so many are heavily in cash.
While the indices remain reasonably flat, interest rate sensitive securities are undergoing a major re-pricing in advance of the Federal Reserve's anticipated rate increase come December. And make no mistake, a rate increase is coming. The press release following the conclusion of the Fed's meeting on Wednesday indicated that if just "some further evidence of continued progress" toward re-inflation occurs, a rate increase is likely. Many market mavens interpreted the use of "some" to many "any", and the requisite evidence likely appeared with Friday's employment report. The annualized wage rate increase came in at 2.8%, more inflationary than expected. Absent an international "black swan" or a wild card election result, a rate increase in December is a lock. In anticipation of that increase, bond funds are experiencing record withdrawals. Bond--like stocks such as telecoms, REIT's, preferred stocks, etc. are at low levels not seen since February. With the futures market still assigning only a 72% likelihood of a December increase, I believe that room remains for these sectors (my favorites) to go lower. In any event, I see no reason to buy in advance of the actual rate increase announcement which should come December 14th.
Oil prices and concomitantly oil stocks remain a hot mess. Mixed messages are coming from Iran and Saudi Arabia in advance of the much anticipated OPEC meeting scheduled this month. Are the talks, aimed at limiting production, on course or have they been derailed? Adding to the madness was news on Thursday that US oil inventories grew by 14.4million barrels during the week ending October 28th, their largest build ever. Oil prices now are in the mid $40's/bbl. well below where they were two weeks ago. Where is oil going? Who knows? All I know is that I am waiting until OPEC meets before buying despite some very tempting prices and yields available with my old standby's BP, RDS and a host of domestic pipeline companies.
Recently, I was asked why Risk/Reward is so heavily weighted to interest rates and oil. The answer is that I am a one trick pony (interest rates) with a fixation on horse of a different color (oil). (Sorry for mixing equine metaphors.) I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity; the yield on the 10Year US Treasury Bond, with movement by that singularity providing clarity as when to buy, hold or sell. This approach requires daily vigilance, adherence to rules (e.g 8% loss limit) and fearing not buying and/or selling some or all of one's portfolio in short order. My approach is explained in more detail in Vol. 221 www.riskrewardblog.blogspot.com . This approach has made me a trader/market timer, but has reduced my anxiety in these uncertain times. That said, if ever again I see the 10Year paying 5%, I will buy all that I can and gladly abandon my approach.
THIS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Recently, both major indices have been in the red. The S&P 500 closed down on Friday, its ninth day in a row. It has not had nine consecutive losing days in 36 years. Moreover, both indices dropped through major resistance barriers on Wednesday: the Dow Jones Industrial Average closed below 18,000 and the S&P 500 closed below 2100. That said, the losses remain in a tight range with DJIA down only 1.5% and the S&P down only 3% over the past month. Consistent with the premise of last week's edition, both remain positive year to date. The consensus reason for the negativity is the uncertainty associated with the election. Mr. Market abhors uncertainty. Trump is a wild card as is a Democratic sweep of the presidency and both houses of Congress. Neither result is likely, but the possibility of either occurring has Mr. Market flummoxed. If the status quo prevails (Democrat president, Republican Congress) look for the markets to quickly reflate, less so if the Democrats gain control of the Senate. If either wild card scenario occurs look for a significant downdraft in the markets. It is no mystery why so many are heavily in cash.
While the indices remain reasonably flat, interest rate sensitive securities are undergoing a major re-pricing in advance of the Federal Reserve's anticipated rate increase come December. And make no mistake, a rate increase is coming. The press release following the conclusion of the Fed's meeting on Wednesday indicated that if just "some further evidence of continued progress" toward re-inflation occurs, a rate increase is likely. Many market mavens interpreted the use of "some" to many "any", and the requisite evidence likely appeared with Friday's employment report. The annualized wage rate increase came in at 2.8%, more inflationary than expected. Absent an international "black swan" or a wild card election result, a rate increase in December is a lock. In anticipation of that increase, bond funds are experiencing record withdrawals. Bond--like stocks such as telecoms, REIT's, preferred stocks, etc. are at low levels not seen since February. With the futures market still assigning only a 72% likelihood of a December increase, I believe that room remains for these sectors (my favorites) to go lower. In any event, I see no reason to buy in advance of the actual rate increase announcement which should come December 14th.
Oil prices and concomitantly oil stocks remain a hot mess. Mixed messages are coming from Iran and Saudi Arabia in advance of the much anticipated OPEC meeting scheduled this month. Are the talks, aimed at limiting production, on course or have they been derailed? Adding to the madness was news on Thursday that US oil inventories grew by 14.4million barrels during the week ending October 28th, their largest build ever. Oil prices now are in the mid $40's/bbl. well below where they were two weeks ago. Where is oil going? Who knows? All I know is that I am waiting until OPEC meets before buying despite some very tempting prices and yields available with my old standby's BP, RDS and a host of domestic pipeline companies.
Recently, I was asked why Risk/Reward is so heavily weighted to interest rates and oil. The answer is that I am a one trick pony (interest rates) with a fixation on horse of a different color (oil). (Sorry for mixing equine metaphors.) I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity; the yield on the 10Year US Treasury Bond, with movement by that singularity providing clarity as when to buy, hold or sell. This approach requires daily vigilance, adherence to rules (e.g 8% loss limit) and fearing not buying and/or selling some or all of one's portfolio in short order. My approach is explained in more detail in Vol. 221 www.riskrewardblog.blogspot.com . This approach has made me a trader/market timer, but has reduced my anxiety in these uncertain times. That said, if ever again I see the 10Year paying 5%, I will buy all that I can and gladly abandon my approach.
Sunday, October 30, 2016
October 30, 2016 Index Funds
Risk/Reward Vol. 326 (correct version)
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I apologize for not advising you in advance, but I was at an invitation-only subscriber's conference in Florida last week and was unable to publish.
I concluded the last edition by stating that if one wanted a 6-7% return today, one needed to find a strategy other than "buy and hold". I stand by that statement, but I also note that "buy and hold", particularly buying and holding index stock funds, may be the safest play if one is looking for a lesser return. Here is the reasoning behind this statement. According to the Security and Exchange Commission, 67% of US stocks are owned by institutional investors: that is, pension funds, captive 401k's, insurance companies, sovereign funds, etc. Traditionally, institutional investors have employed a variety of experts such as hedge funds, fee based investment advisors, etc. in order to achieve returns better than the market in general. In recent times, over 70% these expensive experts have fallen short in comparison to inexpensive index funds. For this reason and because no return can be obtained in bonds these days and in response to new Federal regulations which mandate that institutional investors justify the fees they pay, many large players are now firing their experts, exiting bonds and buying index stock funds. Indeed, an article in last week's Wall Street Journal reported that in the past 3 years institutional investors have added $1.3 trillion into passive mutual funds (including ETF's) while removing $250billion from active management. Just a few days ago, Norway's huge sovereign fund ($880billion) announced it was increasing its stock holdings from 60 to 70% of its portfolio. In 2007, that sovereign fund was only 40% invested in stocks with 60% in bonds. Moreover, last week BlackRock, the world's largest investment company, announced that it now manages over $5trillion in assets (yes, that’s trillion), the lion's share of which are now housed in passive, indexed based exchange trade funds. With so much money pouring into index stock funds, it only makes sense that they will continue to hold value. In the minds of those who control the money, there simply is no alternative.
This fact has kept the two major indices reasonably stable over the past several months despite lower corporate earnings and despite an impending Federal Funds rate increase. Not so with the bond market and those securities that are correlated thereto. The yield on the all important US Ten Year Treasury has spiked to over 1.8%, its highest point since June as the bond market begins to "sell off" in advance of December's Federal Reserve meeting. This is true even though Mr. Market is still only assigning a 70% likelihood of the Fed increasing rates in December. Look for some signals out of next week's Fed meeting as to the likelihood of a move by year end---and moves beyond that date. If developments occur as expected, I likely will repeat what I did last December. I will buy en masse interest rate sensitive securities such as preferred stock closed end funds in the days after the Fed announces the rate increase. Why? Because Mr. Market invariably overreacts to such negative stimuli. I should see a few percentage point rebound in the succeeding weeks and months while enjoying healthy monthly dividend pay-outs. One factor that could impact any such gain would be the Fed raising rates again before June, 2017, the likelihood of which is currently pegged very low.
Also keep a watchful eye on oil. OPEC is scheduled to meet in November. If it votes to limit production, oil could be a very good play once again. The price continues to hover around $50/bbl., but could rise if a deal is cut. The stocks of oil companies are not reflecting confidence that a deal will be reached. Also weighing oil company stock prices down is the rise in the value of the dollar. Here is why. The dollar increases in value when US interest rates increase. This is because money is fungible and moves from low interest rate environments (e.g Europe) to higher rate environments (US). To effect this transfer one sheds Euros and acquires dollars. This is occurring even as I write. The Euro was worth $1.12 when Barb and I were in France earlier this month and now converts at $1.09. Since oil is priced in US dollars worldwide, an increase in the value of the dollar lowers the demand for oil (since by virtue of the exchange rate alone it is more expensive) and thus depresses its price.
I remain on the sidelines but am anxiously awaiting the results of OPEC's meeting in November and the December meeting of the Federal Reserve.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I apologize for not advising you in advance, but I was at an invitation-only subscriber's conference in Florida last week and was unable to publish.
I concluded the last edition by stating that if one wanted a 6-7% return today, one needed to find a strategy other than "buy and hold". I stand by that statement, but I also note that "buy and hold", particularly buying and holding index stock funds, may be the safest play if one is looking for a lesser return. Here is the reasoning behind this statement. According to the Security and Exchange Commission, 67% of US stocks are owned by institutional investors: that is, pension funds, captive 401k's, insurance companies, sovereign funds, etc. Traditionally, institutional investors have employed a variety of experts such as hedge funds, fee based investment advisors, etc. in order to achieve returns better than the market in general. In recent times, over 70% these expensive experts have fallen short in comparison to inexpensive index funds. For this reason and because no return can be obtained in bonds these days and in response to new Federal regulations which mandate that institutional investors justify the fees they pay, many large players are now firing their experts, exiting bonds and buying index stock funds. Indeed, an article in last week's Wall Street Journal reported that in the past 3 years institutional investors have added $1.3 trillion into passive mutual funds (including ETF's) while removing $250billion from active management. Just a few days ago, Norway's huge sovereign fund ($880billion) announced it was increasing its stock holdings from 60 to 70% of its portfolio. In 2007, that sovereign fund was only 40% invested in stocks with 60% in bonds. Moreover, last week BlackRock, the world's largest investment company, announced that it now manages over $5trillion in assets (yes, that’s trillion), the lion's share of which are now housed in passive, indexed based exchange trade funds. With so much money pouring into index stock funds, it only makes sense that they will continue to hold value. In the minds of those who control the money, there simply is no alternative.
This fact has kept the two major indices reasonably stable over the past several months despite lower corporate earnings and despite an impending Federal Funds rate increase. Not so with the bond market and those securities that are correlated thereto. The yield on the all important US Ten Year Treasury has spiked to over 1.8%, its highest point since June as the bond market begins to "sell off" in advance of December's Federal Reserve meeting. This is true even though Mr. Market is still only assigning a 70% likelihood of the Fed increasing rates in December. Look for some signals out of next week's Fed meeting as to the likelihood of a move by year end---and moves beyond that date. If developments occur as expected, I likely will repeat what I did last December. I will buy en masse interest rate sensitive securities such as preferred stock closed end funds in the days after the Fed announces the rate increase. Why? Because Mr. Market invariably overreacts to such negative stimuli. I should see a few percentage point rebound in the succeeding weeks and months while enjoying healthy monthly dividend pay-outs. One factor that could impact any such gain would be the Fed raising rates again before June, 2017, the likelihood of which is currently pegged very low.
Also keep a watchful eye on oil. OPEC is scheduled to meet in November. If it votes to limit production, oil could be a very good play once again. The price continues to hover around $50/bbl., but could rise if a deal is cut. The stocks of oil companies are not reflecting confidence that a deal will be reached. Also weighing oil company stock prices down is the rise in the value of the dollar. Here is why. The dollar increases in value when US interest rates increase. This is because money is fungible and moves from low interest rate environments (e.g Europe) to higher rate environments (US). To effect this transfer one sheds Euros and acquires dollars. This is occurring even as I write. The Euro was worth $1.12 when Barb and I were in France earlier this month and now converts at $1.09. Since oil is priced in US dollars worldwide, an increase in the value of the dollar lowers the demand for oil (since by virtue of the exchange rate alone it is more expensive) and thus depresses its price.
I remain on the sidelines but am anxiously awaiting the results of OPEC's meeting in November and the December meeting of the Federal Reserve.
Sunday, October 16, 2016
October 16, 2016 Demographics
Risk/Reward Vol. 325
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREI
Barb and I (read Barb) spent the past several days caring for two of our grandchildren (ages 4 1/2 years and 6 months) while their parents vacationed in Italy. Hey, raising kids is hard work. Barb is exhausted (but happily so), and I have never logged more office hours at my hobby job. Indeed, demographic data suggests that child rearing may be too hard, or at least too inconvenient, for today's young adults. As noted in previous editions, the fertility rate in the US is below replacement levels. And the fertility rate in other developed countries is even worse. Japan is already suffering a net decrease in population, and Germany is on pace to lose up to 10% of its population by 2050. This demographic train wreck has finally caught the notice of the economists at the Federal Reserve. Earlier this month, the St. Louis Fed published a report entitled "Understanding the New Normal: The Role of Demographics." Therein, the authors conclude that the New Normal (slow growth and low interest rates) likely will persist for decades because of the economic downdraft associated with the aging baby boomers and a declining replacement population. Duh! The Fed could have saved some time and effort if it had just read Harry Dent Jr.'s book "The Demographic Cliff" about which I wrote in Vol. 218 (www.riskrewardblog.blogspot.com). As I noted at the time, this book contains some serious scholarship done by an author who historically has not been taken seriously.
So what does this mean to me? I don't see the return of 3+% domestic annual economic growth any time soon---if at all. And I am not alone. The International Monetary Fund has lowered its projections for US economic growth in the coming year from 2.2% to 1.6%. Slower growth means lower revenues which in time means lower profits. This maxim was on full display this week as the earnings season began. Mr. Market is expecting a fifth consecutive quarter of lower gross revenues and lower profits from our major corporations. This in combination with an expected interest rate increase come December caused both the Dow Jones Industrial Average and the S&P 500 to experience a 1% decline this week. Both are now up only 4% year to date.
I make these observations and draw these conclusions not to depress you. My purpose is simply to expose the obvious. Look--- my logic is simple. People drive demand. Demand drives growth. Growth drives profits. Profits drive stock prices. By definition, if the number of people shrinks, stock prices in time will decline. Moreover,that decline will accelerate if the easy money available to corporations at low interest rates disappears. Why? Because much of the appreciation that stocks have enjoyed these past few years has been a byproduct of corporations borrowing money cheaply and buying back their stock thereby propping up their stock's price. Apparently, that Ponzi scheme is nearing an end. In other words, one cannot embrace the New Normal and believe that the S&P 500 will appreciate on average 7% per annum as it has since 1960. If you agree and need or want a 6+% return, then you will need to adopt a strategy other than buy and hold. I have and Risk/Reward is my attempt to explain it.
As noted last week, I remain on the sidelines in regard interest rate sensitive securities (my favorites) until I conclude that the US Ten Year Bond fully reflects the impact of future increases. The likelihood of a 25 basis point increase in December is very high with 14 of 17 FOMC members of the mind that an increase will occur sometime in 2016. This information was gleaned from the FOMC's September meeting minutes released this past week. I may not have to wait until the increase is officially adopted. I will await investment in the oil patch (another favorite) until after the OPEC meeting in November.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREI
Barb and I (read Barb) spent the past several days caring for two of our grandchildren (ages 4 1/2 years and 6 months) while their parents vacationed in Italy. Hey, raising kids is hard work. Barb is exhausted (but happily so), and I have never logged more office hours at my hobby job. Indeed, demographic data suggests that child rearing may be too hard, or at least too inconvenient, for today's young adults. As noted in previous editions, the fertility rate in the US is below replacement levels. And the fertility rate in other developed countries is even worse. Japan is already suffering a net decrease in population, and Germany is on pace to lose up to 10% of its population by 2050. This demographic train wreck has finally caught the notice of the economists at the Federal Reserve. Earlier this month, the St. Louis Fed published a report entitled "Understanding the New Normal: The Role of Demographics." Therein, the authors conclude that the New Normal (slow growth and low interest rates) likely will persist for decades because of the economic downdraft associated with the aging baby boomers and a declining replacement population. Duh! The Fed could have saved some time and effort if it had just read Harry Dent Jr.'s book "The Demographic Cliff" about which I wrote in Vol. 218 (www.riskrewardblog.blogspot.com). As I noted at the time, this book contains some serious scholarship done by an author who historically has not been taken seriously.
So what does this mean to me? I don't see the return of 3+% domestic annual economic growth any time soon---if at all. And I am not alone. The International Monetary Fund has lowered its projections for US economic growth in the coming year from 2.2% to 1.6%. Slower growth means lower revenues which in time means lower profits. This maxim was on full display this week as the earnings season began. Mr. Market is expecting a fifth consecutive quarter of lower gross revenues and lower profits from our major corporations. This in combination with an expected interest rate increase come December caused both the Dow Jones Industrial Average and the S&P 500 to experience a 1% decline this week. Both are now up only 4% year to date.
I make these observations and draw these conclusions not to depress you. My purpose is simply to expose the obvious. Look--- my logic is simple. People drive demand. Demand drives growth. Growth drives profits. Profits drive stock prices. By definition, if the number of people shrinks, stock prices in time will decline. Moreover,that decline will accelerate if the easy money available to corporations at low interest rates disappears. Why? Because much of the appreciation that stocks have enjoyed these past few years has been a byproduct of corporations borrowing money cheaply and buying back their stock thereby propping up their stock's price. Apparently, that Ponzi scheme is nearing an end. In other words, one cannot embrace the New Normal and believe that the S&P 500 will appreciate on average 7% per annum as it has since 1960. If you agree and need or want a 6+% return, then you will need to adopt a strategy other than buy and hold. I have and Risk/Reward is my attempt to explain it.
As noted last week, I remain on the sidelines in regard interest rate sensitive securities (my favorites) until I conclude that the US Ten Year Bond fully reflects the impact of future increases. The likelihood of a 25 basis point increase in December is very high with 14 of 17 FOMC members of the mind that an increase will occur sometime in 2016. This information was gleaned from the FOMC's September meeting minutes released this past week. I may not have to wait until the increase is officially adopted. I will await investment in the oil patch (another favorite) until after the OPEC meeting in November.
Sunday, October 9, 2016
October 9, 2016 Revolution
Risk/Reward Vol. 324
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What follows is a window into how my brain functions.
Having just spent eight days in Paris, I continue to marvel at how well ordered and uniform it is. Broad boulevards stretch for miles, all lined with beautiful five story limestone façade buildings capped with mansard roofs. But it was not always this way. Indeed until the 1850's, Paris was a medieval city, a patchwork of narrow, winding streets. After the Revolution of 1848, Louis Napoleon a/k/a Napoleon III (who was swept into power as a result of that revolution) ordered the destruction and reconstruction of much of the city. Why? Well, in large part to prevent another revolution. Broad boulevards are much more difficult to block than narrow passageways thus enabling those in power to deploy troops more quickly to quell nascent civil unrest.
France was just one of 50 countries that experienced revolution in 1848. A few years of bad economic conditions (e.g. the potato blight in Ireland, disappointing harvests on the Continent and rising unemployment attendant to the budding industrial revolution) caused ad hoc coalitions of reformers, farmers and workers in scores of countries to rise up against the entrenched and feckless empowered class. These upheavals resulted in large migrations (my great grandfather and great grandmother emigrated from Switzerland and Germany at this time) which in turn spawned anti-immigrant, nativist movements such as the Know Nothing Party in the United States.
Does this sound familiar? Are we not revisiting this same phenomenon? Clearly, the hangover from the Great Recession remains. Moreover, the entrenched, empowered class has proven feckless. As a result, ad hoc and disruptive coalitions have arisen. How else can one explain Brexit or Feel the Bern or Trump or Marine LePen or Colombia's no vote on the FARC plebiscite or the rise of trade protectionism or the emergence of nativist political parties throughout the world? Doesn't it seem that everyone is thinking if not shouting Howard Beale's line: "We're mad as hell, and we're not going to take this anymore."
So what does this have to do with investing? A lot, frankly, especially when it comes to being frustrated by and with the empowered class. In this regard, I recommend that you read Bill Gross' (the erstwhile Bond King) most recent Investment Outlook which can be found at http://www.janus.com/. Therein, he accuses the world's central bankers of employing a Martingale strategy; that is, doubling down continually on losing bets until one of them hits Such a strategy can succeed only if one has unlimited resources and as Gross notes, not even central banks have those. In the end, they must answer to the body politic which, as discussed above, is growing ever more restless with ineffective monetary parlor games such as negative interest rates. He concludes that at some point, investors, weary of choosing between receiving near zero returns on their money or taking outsized risks may abandon the standard financial complex altogether. The Bond King has already. Gross advocates selling stocks and bonds and buying gold and raw land. Now that's revolutionary.
My two areas of interest continue to move. The yield on the US Ten Year Bond rose steadily this week in advance of what most believe will be a rate increase in December. I will wait for this movement to slow before buying interest rate sensitive securities. And domestic oil hit $50/bbl for the first time since June. The latter is enticing but is based mostly on an a still-uncertain OPEC production freeze come the end of November. For now, I remain on the sidelines awaiting a more certain path to profitability.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
What follows is a window into how my brain functions.
Having just spent eight days in Paris, I continue to marvel at how well ordered and uniform it is. Broad boulevards stretch for miles, all lined with beautiful five story limestone façade buildings capped with mansard roofs. But it was not always this way. Indeed until the 1850's, Paris was a medieval city, a patchwork of narrow, winding streets. After the Revolution of 1848, Louis Napoleon a/k/a Napoleon III (who was swept into power as a result of that revolution) ordered the destruction and reconstruction of much of the city. Why? Well, in large part to prevent another revolution. Broad boulevards are much more difficult to block than narrow passageways thus enabling those in power to deploy troops more quickly to quell nascent civil unrest.
France was just one of 50 countries that experienced revolution in 1848. A few years of bad economic conditions (e.g. the potato blight in Ireland, disappointing harvests on the Continent and rising unemployment attendant to the budding industrial revolution) caused ad hoc coalitions of reformers, farmers and workers in scores of countries to rise up against the entrenched and feckless empowered class. These upheavals resulted in large migrations (my great grandfather and great grandmother emigrated from Switzerland and Germany at this time) which in turn spawned anti-immigrant, nativist movements such as the Know Nothing Party in the United States.
Does this sound familiar? Are we not revisiting this same phenomenon? Clearly, the hangover from the Great Recession remains. Moreover, the entrenched, empowered class has proven feckless. As a result, ad hoc and disruptive coalitions have arisen. How else can one explain Brexit or Feel the Bern or Trump or Marine LePen or Colombia's no vote on the FARC plebiscite or the rise of trade protectionism or the emergence of nativist political parties throughout the world? Doesn't it seem that everyone is thinking if not shouting Howard Beale's line: "We're mad as hell, and we're not going to take this anymore."
So what does this have to do with investing? A lot, frankly, especially when it comes to being frustrated by and with the empowered class. In this regard, I recommend that you read Bill Gross' (the erstwhile Bond King) most recent Investment Outlook which can be found at http://www.janus.com/. Therein, he accuses the world's central bankers of employing a Martingale strategy; that is, doubling down continually on losing bets until one of them hits Such a strategy can succeed only if one has unlimited resources and as Gross notes, not even central banks have those. In the end, they must answer to the body politic which, as discussed above, is growing ever more restless with ineffective monetary parlor games such as negative interest rates. He concludes that at some point, investors, weary of choosing between receiving near zero returns on their money or taking outsized risks may abandon the standard financial complex altogether. The Bond King has already. Gross advocates selling stocks and bonds and buying gold and raw land. Now that's revolutionary.
My two areas of interest continue to move. The yield on the US Ten Year Bond rose steadily this week in advance of what most believe will be a rate increase in December. I will wait for this movement to slow before buying interest rate sensitive securities. And domestic oil hit $50/bbl for the first time since June. The latter is enticing but is based mostly on an a still-uncertain OPEC production freeze come the end of November. For now, I remain on the sidelines awaiting a more certain path to profitability.
Sunday, October 2, 2016
October 2, 2016 La France
Risk/Reward Vol. 323
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
We have just returned from Paris . If the world is relying upon France to jump start its economy, fuggitaboutit. Ten percent of France's gross domestic product derives from tourism. That of Paris is even more tourist dependent with over 500,000 people directly employed in that industry. Thanks to the threat of terrorism and squabbles with Russia tourism is down over 12% with foreign tourists staying away in droves. There has been a 46% decline in the number of Japanese tourists, 35% decline in Russian tourists and a 20% decline in Chinese tourists. Talk to any cabbie or tour guide about it, and their faces drop. What did it mean for Barb and me? How about a round trip ticket Chicago to Paris, taxes included, for $494? How about a half empty plane on the way home so that we could stretch out even in steerage? How about a "small group tour" that was so small it was only Barb and me? How about waiting in line only once to see a major historical site? How about dinner reservations anywhere we wanted? How about a one bedroom apartment on the "Fifth Avenue" of Paris (Rue St. Honore, one block from the Tuilerie gardens) for $290/night, all in? We spent more on air tickets and on a per diem basis for our trip to Philadelphia last fall. Let's see, you choose-- Paris or Philly?
I will publish a more fulsome edition next week. I do note however that the markets had a nice finish to the week and to the quarter. The Dow Jones Industrial Average is up 5% and the S&P 500 up 6% year to date. Moreover, oil caught a tail wind with news that OPEC may actually curtail production below 33million barrels/day. If true, this level would start to drain inventories as early as next year. The devil is in the details which are to be agreed, if at all, at OPEC's November 30th meeting. Some speculate that OPEC may rethink this strategy given that domestic US producers, who have become more efficient during the oil price decline, stand to be big winners if OPEC production is cut.
We had a great time in France, but are glad to be home.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
We have just returned from Paris . If the world is relying upon France to jump start its economy, fuggitaboutit. Ten percent of France's gross domestic product derives from tourism. That of Paris is even more tourist dependent with over 500,000 people directly employed in that industry. Thanks to the threat of terrorism and squabbles with Russia tourism is down over 12% with foreign tourists staying away in droves. There has been a 46% decline in the number of Japanese tourists, 35% decline in Russian tourists and a 20% decline in Chinese tourists. Talk to any cabbie or tour guide about it, and their faces drop. What did it mean for Barb and me? How about a round trip ticket Chicago to Paris, taxes included, for $494? How about a half empty plane on the way home so that we could stretch out even in steerage? How about a "small group tour" that was so small it was only Barb and me? How about waiting in line only once to see a major historical site? How about dinner reservations anywhere we wanted? How about a one bedroom apartment on the "Fifth Avenue" of Paris (Rue St. Honore, one block from the Tuilerie gardens) for $290/night, all in? We spent more on air tickets and on a per diem basis for our trip to Philadelphia last fall. Let's see, you choose-- Paris or Philly?
I will publish a more fulsome edition next week. I do note however that the markets had a nice finish to the week and to the quarter. The Dow Jones Industrial Average is up 5% and the S&P 500 up 6% year to date. Moreover, oil caught a tail wind with news that OPEC may actually curtail production below 33million barrels/day. If true, this level would start to drain inventories as early as next year. The devil is in the details which are to be agreed, if at all, at OPEC's November 30th meeting. Some speculate that OPEC may rethink this strategy given that domestic US producers, who have become more efficient during the oil price decline, stand to be big winners if OPEC production is cut.
We had a great time in France, but are glad to be home.
Sunday, September 18, 2016
September 18, 2016 Timing
Risk/Reward Vol. 322
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Earlier this week, I enjoyed a glass of wine with a subscriber. He told me that at the time I first published Risk/Reward (2010) he began investing in index funds (e.g. SPY or DIA). So far he has doubled his investment thus exceeding my performance by a good measure. I congratulated him as I do all who have stayed the course and held index funds since that time. As I reflected further upon his accomplishment, I was reminded of two painful lessons that I have learned. First, no gain is achieved until the underlying security is sold. And second, TIMING is everything. Allow me to elaborate.
In 2000, I was heavily invested in tech stocks (the so called dot com world). On paper I had more than doubled my invested capital in very short order. I had no intention of selling---even when the dot com world began to crater. I was convinced that I was smarter than Mr. Market. Each day I awoke believing that "today, he would see it my way", and that the tech world would recover. He didn't, and the stocks I owned never did recover. (Indeed it took the tech index, NASDAQ, 15 years to reach year 2000 levels.) Things got so bad that I stopped looking. My paper profits eroded and became huge, crushing losses. I swore that if I ever got back "on top", I would not ride the market down again. This oath (and a few strokes of dumb luck) helped me recover and kept me from losing money in the 2008-2009 market swoon. As I have written previously, my approach today is informed first and foremost by the dot com fiasco and the Great Recession. I do not know when the next crash will occur, but history tells me it will. Every move I make is in anticipation of that event. At age 65, I could not withstand what happened to me in 2000-2001. That is why I mitigate loss and take profits---two things one cannot do unless one sells. It's true that I have not caught the full measure of the 2009-2016 "buy and hold" flood tide. But I missed the 2008-2009 ebb tide and am preparing to avoid the next tsunami. Are you? If so, please let me know how.
The obvious rejoinder to my approach is the fact that over the past 20 years the S&P 500 Index (available for purchase via the ETF, SPY) has averaged, with reinvested dividends, an 8.2% annual return. This is true, but leads to the second lesson I have learned. One's return is dependent upon one's starting and ending points in TIME. For example, if one had invested in the S&P 500 in December, 2007 (when it was at 1500) one would not have seen a profit until February, 2013, more than five years later. Worse, for more than 16 months of that TIME one's investment would have been down more than 33% and for a short TIME would have been worth half. With the luxury of unlimited TIME, buying and holding equities may make sense. But I am 65. I don't have the TIME to wait out another stock market crash. Thus I am a trader. I may be running out of TIME. But, I'll be damned if I am going to run out of money.
Did you notice the impact of Fed member Lael Brainerd's speech on Monday? As mentioned in last week's edition, several market participants feared that she was becoming a rate hawk. Any such concerns were put to rest on Monday. In advance of her very dovish speech, the S&P 500 was in the negative. Afterward, it rose 2% as the odds for a September rate increase fell sharply. The companies comprising the S&P have a total market capitalization of $20 trillion so her soothing words resulted in increasing Mr. Market's net worth $400 billion ($20 trillion x 0.02= $400 billion). Now that is market power my friends---exercised by just one junior member of the Federal Reserve. And you say that this is not a Fed dominated stock market? Remember, what Janet Yellen gives, Janet Yellen can take away.
As usual, my focus remains on the 10 Year US Treasury, the security against which most other income securities are measured ("spread"). Its yield continued to hover around 1.7% which tells me that Mr. Bond believes that a September rate increase is off the table, but a December one is more than likely. Indeed, the odds of a December bump now are at 60%. Keep your eyes on the Fed meeting this week. It should be illuminating.
Barb and I are on assignment in Paris next week. We will be assisting Mr. Draghi in his attempt to spur European economic growth
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Earlier this week, I enjoyed a glass of wine with a subscriber. He told me that at the time I first published Risk/Reward (2010) he began investing in index funds (e.g. SPY or DIA). So far he has doubled his investment thus exceeding my performance by a good measure. I congratulated him as I do all who have stayed the course and held index funds since that time. As I reflected further upon his accomplishment, I was reminded of two painful lessons that I have learned. First, no gain is achieved until the underlying security is sold. And second, TIMING is everything. Allow me to elaborate.
In 2000, I was heavily invested in tech stocks (the so called dot com world). On paper I had more than doubled my invested capital in very short order. I had no intention of selling---even when the dot com world began to crater. I was convinced that I was smarter than Mr. Market. Each day I awoke believing that "today, he would see it my way", and that the tech world would recover. He didn't, and the stocks I owned never did recover. (Indeed it took the tech index, NASDAQ, 15 years to reach year 2000 levels.) Things got so bad that I stopped looking. My paper profits eroded and became huge, crushing losses. I swore that if I ever got back "on top", I would not ride the market down again. This oath (and a few strokes of dumb luck) helped me recover and kept me from losing money in the 2008-2009 market swoon. As I have written previously, my approach today is informed first and foremost by the dot com fiasco and the Great Recession. I do not know when the next crash will occur, but history tells me it will. Every move I make is in anticipation of that event. At age 65, I could not withstand what happened to me in 2000-2001. That is why I mitigate loss and take profits---two things one cannot do unless one sells. It's true that I have not caught the full measure of the 2009-2016 "buy and hold" flood tide. But I missed the 2008-2009 ebb tide and am preparing to avoid the next tsunami. Are you? If so, please let me know how.
The obvious rejoinder to my approach is the fact that over the past 20 years the S&P 500 Index (available for purchase via the ETF, SPY) has averaged, with reinvested dividends, an 8.2% annual return. This is true, but leads to the second lesson I have learned. One's return is dependent upon one's starting and ending points in TIME. For example, if one had invested in the S&P 500 in December, 2007 (when it was at 1500) one would not have seen a profit until February, 2013, more than five years later. Worse, for more than 16 months of that TIME one's investment would have been down more than 33% and for a short TIME would have been worth half. With the luxury of unlimited TIME, buying and holding equities may make sense. But I am 65. I don't have the TIME to wait out another stock market crash. Thus I am a trader. I may be running out of TIME. But, I'll be damned if I am going to run out of money.
Did you notice the impact of Fed member Lael Brainerd's speech on Monday? As mentioned in last week's edition, several market participants feared that she was becoming a rate hawk. Any such concerns were put to rest on Monday. In advance of her very dovish speech, the S&P 500 was in the negative. Afterward, it rose 2% as the odds for a September rate increase fell sharply. The companies comprising the S&P have a total market capitalization of $20 trillion so her soothing words resulted in increasing Mr. Market's net worth $400 billion ($20 trillion x 0.02= $400 billion). Now that is market power my friends---exercised by just one junior member of the Federal Reserve. And you say that this is not a Fed dominated stock market? Remember, what Janet Yellen gives, Janet Yellen can take away.
As usual, my focus remains on the 10 Year US Treasury, the security against which most other income securities are measured ("spread"). Its yield continued to hover around 1.7% which tells me that Mr. Bond believes that a September rate increase is off the table, but a December one is more than likely. Indeed, the odds of a December bump now are at 60%. Keep your eyes on the Fed meeting this week. It should be illuminating.
Barb and I are on assignment in Paris next week. We will be assisting Mr. Draghi in his attempt to spur European economic growth
Sunday, September 11, 2016
September 11, 2016 Head Fake
Risk/Reward Vol. 321
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
As discussed last week, with interest rates world wide at zero or below the only game in town has been stocks. This remains true even though the performance of the underlying businesses does not warrant current valuations. The resultant bubble in stock prices has not gone unnoticed by market commentators who have increased their criticism of the Federal Reserve's refusal to raise rates. Mindful of this criticism and of the inflation of stock prices, heretofore rate dove Eric Rosengren of the Fed spoke on Friday of a possible rate increase as early as September. Mr. Market was unprepared for such a switch and began to sell. The rate of selling increased Friday afternoon when the Fed announced that uber rate dove Lael Brainerd will speak on Monday fueling rumors that she, too, will become more hawkish. By the close, both major indices had fallen over 2% experiencing their worst day in months. Not surprisingly, the bond market also tanked with the rate on the bellwether US Ten Year spiking above 1.6% (Remember, the higher the rate the lower the value.)
So what do I make of this? As I wrote last week, in my humble opinion, these hawkish teases are nothing but head fakes to address criticism of the Fed and to keep stock prices from hitting ridiculous new highs. Indeed, despite Friday's action, the futures market is still assessing only a 24% probability of a rate increase in September. Do I think that the Fed would do the unexpected in September and raise rates, a move that would cause a massive sell-off in the bond and stock markets as presaged on Friday? No way. This would seriously wound the candidate who advocates a hands-off approach to the Fed (Clinton) and play into the hands of the candidate who wants to audit the entire operation (Trump). That said, I remain comfortably on the sidelines and will await the Fed's next meeting scheduled for September 21 before deciding to buy---or not.
And speaking of central banks, earlier in the week the European Central Bank announced that it would stand pat in its asset buying program. It purchases 80billion Euro worth of sovereign and corporate bonds per month and will continue the program through March, 2017. The ECB may have trouble doing so, however, because it is running out of bonds to buy. It now owns 1/7th of the government debt of all of the Eurozone countries and is quickly absorbing all available corporate debt. Indeed, for the FIRST TIME IN THE HISTORY of corporate finance two companies, Sanofi and Henkel, issued negative interest rate bonds last week. That's right, you read that correctly. Sanofi borrowed 1billion Euros last week via a 3 1/2 year bond. During the life of the bond, Sanofi will pay no interest and 3 1/2 years from now will return less principal to the bondholder than it borrowed. In effect and in fact, Sanofi is being paid to borrow money. Does anyone think this is sustainable?
I don't, but I haven't a clue as to when it will end. I am reminded of 2005 when I sat on the board of a company where over 50% of its revenue came from real estate related sales. We were mindful of the real estate bubble even then and instituted a "canary in the mine shaft" early warning system to help us predict when the bubble would burst. We had about a 90 day window which helped us reduce exposure when the bubble began to deflate. But, there was no way we or anyone else could predict how disastrous that burst became. I have deja vu---all over again. That said, I cannot afford to sit in cash forever. I am sure that I will make several more forays into the stock market before it crashes. But these forays will be strategic and short lived. Indeed, I see one forming now. Unnoticed in Friday's furor was the fact that oil prices rose 5%. Nevertheless, oil stocks fell with the market in general. I am not buying now, but these type of events present profitable opportunities.
By nature, I am not a pessimist. But I am a realist. I do not know how anyone can be sanguine about the world's financial situation. Ceding so much power to central banks, as we did in the wake of the 2008 financial crisis, is proving a mistake. The value of every financial asset worldwide is now dictated by a handful of unelected central bankers. This policy has worked to the decided disadvantage of those without substantial assets thereby exacerbating the wealth gap and dampening the demand for goods and services. Add to this the aging demographic time bomb that exists in every developed economy and one must conclude that we are in for a rough ride. What can one do? I, for one, have become a trader. My buy/sell signals come from correlating the yield on the US Ten Year to other assets. I take profits often and mitigate against loss by selling losers early and maintaining a large cash position at all times. What can you do? How about showing this email to your financial advisor and asking if he/she agrees with its central premise (to wit, the value all financial assets is now largely dependent on the whims of a few central bankers). If he/she does agree, then ask what his/her plans are for your portfolio if and when central bankers begin to raise rates in earnest. If he/she does not agree, well.... Either way, please share the answers with me
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
As discussed last week, with interest rates world wide at zero or below the only game in town has been stocks. This remains true even though the performance of the underlying businesses does not warrant current valuations. The resultant bubble in stock prices has not gone unnoticed by market commentators who have increased their criticism of the Federal Reserve's refusal to raise rates. Mindful of this criticism and of the inflation of stock prices, heretofore rate dove Eric Rosengren of the Fed spoke on Friday of a possible rate increase as early as September. Mr. Market was unprepared for such a switch and began to sell. The rate of selling increased Friday afternoon when the Fed announced that uber rate dove Lael Brainerd will speak on Monday fueling rumors that she, too, will become more hawkish. By the close, both major indices had fallen over 2% experiencing their worst day in months. Not surprisingly, the bond market also tanked with the rate on the bellwether US Ten Year spiking above 1.6% (Remember, the higher the rate the lower the value.)
So what do I make of this? As I wrote last week, in my humble opinion, these hawkish teases are nothing but head fakes to address criticism of the Fed and to keep stock prices from hitting ridiculous new highs. Indeed, despite Friday's action, the futures market is still assessing only a 24% probability of a rate increase in September. Do I think that the Fed would do the unexpected in September and raise rates, a move that would cause a massive sell-off in the bond and stock markets as presaged on Friday? No way. This would seriously wound the candidate who advocates a hands-off approach to the Fed (Clinton) and play into the hands of the candidate who wants to audit the entire operation (Trump). That said, I remain comfortably on the sidelines and will await the Fed's next meeting scheduled for September 21 before deciding to buy---or not.
And speaking of central banks, earlier in the week the European Central Bank announced that it would stand pat in its asset buying program. It purchases 80billion Euro worth of sovereign and corporate bonds per month and will continue the program through March, 2017. The ECB may have trouble doing so, however, because it is running out of bonds to buy. It now owns 1/7th of the government debt of all of the Eurozone countries and is quickly absorbing all available corporate debt. Indeed, for the FIRST TIME IN THE HISTORY of corporate finance two companies, Sanofi and Henkel, issued negative interest rate bonds last week. That's right, you read that correctly. Sanofi borrowed 1billion Euros last week via a 3 1/2 year bond. During the life of the bond, Sanofi will pay no interest and 3 1/2 years from now will return less principal to the bondholder than it borrowed. In effect and in fact, Sanofi is being paid to borrow money. Does anyone think this is sustainable?
I don't, but I haven't a clue as to when it will end. I am reminded of 2005 when I sat on the board of a company where over 50% of its revenue came from real estate related sales. We were mindful of the real estate bubble even then and instituted a "canary in the mine shaft" early warning system to help us predict when the bubble would burst. We had about a 90 day window which helped us reduce exposure when the bubble began to deflate. But, there was no way we or anyone else could predict how disastrous that burst became. I have deja vu---all over again. That said, I cannot afford to sit in cash forever. I am sure that I will make several more forays into the stock market before it crashes. But these forays will be strategic and short lived. Indeed, I see one forming now. Unnoticed in Friday's furor was the fact that oil prices rose 5%. Nevertheless, oil stocks fell with the market in general. I am not buying now, but these type of events present profitable opportunities.
By nature, I am not a pessimist. But I am a realist. I do not know how anyone can be sanguine about the world's financial situation. Ceding so much power to central banks, as we did in the wake of the 2008 financial crisis, is proving a mistake. The value of every financial asset worldwide is now dictated by a handful of unelected central bankers. This policy has worked to the decided disadvantage of those without substantial assets thereby exacerbating the wealth gap and dampening the demand for goods and services. Add to this the aging demographic time bomb that exists in every developed economy and one must conclude that we are in for a rough ride. What can one do? I, for one, have become a trader. My buy/sell signals come from correlating the yield on the US Ten Year to other assets. I take profits often and mitigate against loss by selling losers early and maintaining a large cash position at all times. What can you do? How about showing this email to your financial advisor and asking if he/she agrees with its central premise (to wit, the value all financial assets is now largely dependent on the whims of a few central bankers). If he/she does agree, then ask what his/her plans are for your portfolio if and when central bankers begin to raise rates in earnest. If he/she does not agree, well.... Either way, please share the answers with me
Sunday, September 4, 2016
September 4, 2016 Zero Bound
Risk/Reward Vol. 320
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I have said it before (see Vols. 172 and 173 www.riskrewardblog.blogspot.com), and I will say it again: in today's bizzaro financial world, tepid, even bad, economic news is good for the stock market. The answer as to why is simple and has been the same for the past several years: namely, bad economic news lessens the likelihood that the Federal Reserve will raise interest rates. With interest rates at or near zero, the only game in town is stocks. So people keep buying, and stock prices keep rising. No better example of this occurred on Friday. In advance of the jobs report, the Dow Jones Industrial Average (DJIA) and S&P 500 futures were negative. Once the disappointing numbers were announced, the indices spiked into positive territory where they remained from opening through closing. Both the DJIA and the S&P 500 now sit within an eyelash of all time record highs. They would be even higher if Federal Reserve Governor Lacker had not suggested mid day Friday that a rate increase at the Fed's upcoming September 20-21 meeting was still a possibility. This was a head fake, believe me. As I have written previously, the Fed, comprised mostly of DC insiders, is not going to jeopardize Ms. Clinton's chances of election by surprising Mr. Market with a September rate increase. Indeed, Mr. Market is placing the odds of such an event at less than 20%.
If you doubt the outsized impact that the Federal Reserve has on the stock market, I suggest you Google "Kevin Warsh and S&P 500" and read his August 24, 2016 article in the Wall Street Journal. Mr. Warsh, a former Federal Reserve governor, is highly critical of his former employer especially its influence on every aspect of the financial markets. In that regard he observes "a simple troubling fact: from the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of the Federal Open Market Committee decisions." Re-read that quote, and then tell me there won't be a rude awakening in the stock market if and when the FOMC raises rates in earnest. Of course, that presupposes that it will. The Bank of Japan has not for more than 20 years. We may be in for more of the same.
Have you noticed that more and more commentators are losing patience with central bankers? Larry Kudlow went so far as to suggest in a tweet that "Fed needs to be leveled & start over. Get rid of phd's failed models" Jim Grant, among the world's most respected students of interest rates, recently observed that in over 5000 years of government borrowing this is the first time that a significant percentage of sovereign debt ( $16tn/$64tn=25%) has had a negative yield. The situation is unprecedented and central banks appear clueless on what to do next.
But enough negativity. There is nothing that this writer can do to change events, and I do not see any change on the horizon. Besides, the stock market is booming---so what the hell. After the upcoming Fed meeting and OPEC conference both scheduled for September, I may re-enter myself. I have a list at the ready.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I have said it before (see Vols. 172 and 173 www.riskrewardblog.blogspot.com), and I will say it again: in today's bizzaro financial world, tepid, even bad, economic news is good for the stock market. The answer as to why is simple and has been the same for the past several years: namely, bad economic news lessens the likelihood that the Federal Reserve will raise interest rates. With interest rates at or near zero, the only game in town is stocks. So people keep buying, and stock prices keep rising. No better example of this occurred on Friday. In advance of the jobs report, the Dow Jones Industrial Average (DJIA) and S&P 500 futures were negative. Once the disappointing numbers were announced, the indices spiked into positive territory where they remained from opening through closing. Both the DJIA and the S&P 500 now sit within an eyelash of all time record highs. They would be even higher if Federal Reserve Governor Lacker had not suggested mid day Friday that a rate increase at the Fed's upcoming September 20-21 meeting was still a possibility. This was a head fake, believe me. As I have written previously, the Fed, comprised mostly of DC insiders, is not going to jeopardize Ms. Clinton's chances of election by surprising Mr. Market with a September rate increase. Indeed, Mr. Market is placing the odds of such an event at less than 20%.
If you doubt the outsized impact that the Federal Reserve has on the stock market, I suggest you Google "Kevin Warsh and S&P 500" and read his August 24, 2016 article in the Wall Street Journal. Mr. Warsh, a former Federal Reserve governor, is highly critical of his former employer especially its influence on every aspect of the financial markets. In that regard he observes "a simple troubling fact: from the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of the Federal Open Market Committee decisions." Re-read that quote, and then tell me there won't be a rude awakening in the stock market if and when the FOMC raises rates in earnest. Of course, that presupposes that it will. The Bank of Japan has not for more than 20 years. We may be in for more of the same.
Have you noticed that more and more commentators are losing patience with central bankers? Larry Kudlow went so far as to suggest in a tweet that "Fed needs to be leveled & start over. Get rid of phd's failed models" Jim Grant, among the world's most respected students of interest rates, recently observed that in over 5000 years of government borrowing this is the first time that a significant percentage of sovereign debt ( $16tn/$64tn=25%) has had a negative yield. The situation is unprecedented and central banks appear clueless on what to do next.
But enough negativity. There is nothing that this writer can do to change events, and I do not see any change on the horizon. Besides, the stock market is booming---so what the hell. After the upcoming Fed meeting and OPEC conference both scheduled for September, I may re-enter myself. I have a list at the ready.
Sunday, August 21, 2016
August 21, 2016 2%
Risk/Reward Vol. 319
May I recommend an enlightening article by James Mackintosh in Tuesday's Wall Street Journal. Therein he observes that "In 1999, wild enthusiasm was elevating the market...Investors punished dividend payers for not having enough ways to spend money...The contrary is true this year. Wild pessimism...has led investors to chase dividend payments, demand buybacks and punish companies that invest." How can pessimism be a catalyst for new record highs? According to Mackintosh, the new highs reflect a belief by investors that the world economy is weak enough to keep central banks pumping out free money, but not so weak that company profits will plummet. This belief, which I share, found further support this week from the July meeting minutes released by the Federal Reserve. A fair reading of those indicates that the Fed will not raise rates until December at the earliest.
The above notwithstanding, the market looks very frothy to me. The S&P 500 is trading at 18 times projected earnings, much higher than its historic average. (N.B. Stock price/earnings per share= stock multiple. The higher the multiple the more "expensive" the stock.) Am I advocating that any of you exit? No. Why should you? I see nothing in the near or medium term that runs counter to Mr. Mackintosh's observations. Personally, my exit last month was motivated by my having achieved my goal for the year and by my desire to capture those profits---not by any great fear. That said, I am not anxious to re-enter at this point. I will await the inevitable pull back to begin buying again. Another opportunity may present after next month's OPEC meeting. Statements by Saudi Arabia's oil minister that his country may be amenable to limiting production have caused the price of Brent oil to reach $50/bbl. again. Whether a limit on production comes to pass or not, clarity from that meeting should provide me with enough visibility to buy. I have my list at the ready.
Gold continues to do well---and why not? If commercial banks in Europe and Japan follow through with their threat to pass negative rates onto depositors ( Remember, a negative rate on your savings account would require you to pay the bank for keeping your money on deposit), a very rational response is to buy gold. Gold is now viewed as an alternative currency and is much easier to store than cash. But even cash hoarding may be next. In Tuesday's Financial Times, it was reported that several European banks are considering expanding their vaults to accommodate mountains of cash instead of paying the European Central Bank negative interest to keep funds in ECB reserve accounts as they do presently
The Federal Reserve received some disappointing news this week as the consumer price index (CPI) rose only 0.8% on an annualized basis in July, far below the Fed's targeted 2% inflation rate. Have you ever wondered why the Fed targets 2% inflation? Here is the answer--as silly as it may be. Economists at the Fed contend that consumers are much more likely to purchase, even needed goods and services, if they believe that those goods and services will be more expensive in the future. Stated alternatively, the Fed economists assert that if consumers come to believe that the refrigerator or automobile or service they need will be the same price or cheaper in the future they will defer buying it. Really? Only an economist would believe such drivel. No consumer thinks that way. If a consumer needs a new refrigerator and can afford it, he/she will buy it irrespective of what the CPI registers. But that article of faith, namely the 2% inflation target, is one of the two major drivers of our monetary policy. Jeez!
And speaking of monetary policy take a look at reports out of Japan this week. Why? Because absent a change in Fed direction or a miraculous turnaround in demographics, Japan is our future. And that future includes a central bank program that purchases not only government bonds (as is done in the US now) but also corporate bonds (as the ECB does) and stocks These purchases are done to prop up a nose-diving economy born (no pun intended) of an aging and declining population. As a result, Japan's central bank, the Bank of Japan, not only owns more than 30% of all government debt but also is a top 10 shareholder in 90% of the companies in the Nikkei 225 stock average and at the current buying pace will be the largest shareholder in 55 of those companies by year end. In the short run this is good news for stocks, but ponder what it means longer term. Under the guise of monetary policy, Japan is nationalizing all of its major companies. And there is nothing preventing that from happening in Europe or, ultimately, here. Ponder that indeed.
May I recommend an enlightening article by James Mackintosh in Tuesday's Wall Street Journal. Therein he observes that "In 1999, wild enthusiasm was elevating the market...Investors punished dividend payers for not having enough ways to spend money...The contrary is true this year. Wild pessimism...has led investors to chase dividend payments, demand buybacks and punish companies that invest." How can pessimism be a catalyst for new record highs? According to Mackintosh, the new highs reflect a belief by investors that the world economy is weak enough to keep central banks pumping out free money, but not so weak that company profits will plummet. This belief, which I share, found further support this week from the July meeting minutes released by the Federal Reserve. A fair reading of those indicates that the Fed will not raise rates until December at the earliest.
The above notwithstanding, the market looks very frothy to me. The S&P 500 is trading at 18 times projected earnings, much higher than its historic average. (N.B. Stock price/earnings per share= stock multiple. The higher the multiple the more "expensive" the stock.) Am I advocating that any of you exit? No. Why should you? I see nothing in the near or medium term that runs counter to Mr. Mackintosh's observations. Personally, my exit last month was motivated by my having achieved my goal for the year and by my desire to capture those profits---not by any great fear. That said, I am not anxious to re-enter at this point. I will await the inevitable pull back to begin buying again. Another opportunity may present after next month's OPEC meeting. Statements by Saudi Arabia's oil minister that his country may be amenable to limiting production have caused the price of Brent oil to reach $50/bbl. again. Whether a limit on production comes to pass or not, clarity from that meeting should provide me with enough visibility to buy. I have my list at the ready.
Gold continues to do well---and why not? If commercial banks in Europe and Japan follow through with their threat to pass negative rates onto depositors ( Remember, a negative rate on your savings account would require you to pay the bank for keeping your money on deposit), a very rational response is to buy gold. Gold is now viewed as an alternative currency and is much easier to store than cash. But even cash hoarding may be next. In Tuesday's Financial Times, it was reported that several European banks are considering expanding their vaults to accommodate mountains of cash instead of paying the European Central Bank negative interest to keep funds in ECB reserve accounts as they do presently
The Federal Reserve received some disappointing news this week as the consumer price index (CPI) rose only 0.8% on an annualized basis in July, far below the Fed's targeted 2% inflation rate. Have you ever wondered why the Fed targets 2% inflation? Here is the answer--as silly as it may be. Economists at the Fed contend that consumers are much more likely to purchase, even needed goods and services, if they believe that those goods and services will be more expensive in the future. Stated alternatively, the Fed economists assert that if consumers come to believe that the refrigerator or automobile or service they need will be the same price or cheaper in the future they will defer buying it. Really? Only an economist would believe such drivel. No consumer thinks that way. If a consumer needs a new refrigerator and can afford it, he/she will buy it irrespective of what the CPI registers. But that article of faith, namely the 2% inflation target, is one of the two major drivers of our monetary policy. Jeez!
And speaking of monetary policy take a look at reports out of Japan this week. Why? Because absent a change in Fed direction or a miraculous turnaround in demographics, Japan is our future. And that future includes a central bank program that purchases not only government bonds (as is done in the US now) but also corporate bonds (as the ECB does) and stocks These purchases are done to prop up a nose-diving economy born (no pun intended) of an aging and declining population. As a result, Japan's central bank, the Bank of Japan, not only owns more than 30% of all government debt but also is a top 10 shareholder in 90% of the companies in the Nikkei 225 stock average and at the current buying pace will be the largest shareholder in 55 of those companies by year end. In the short run this is good news for stocks, but ponder what it means longer term. Under the guise of monetary policy, Japan is nationalizing all of its major companies. And there is nothing preventing that from happening in Europe or, ultimately, here. Ponder that indeed.
Sunday, August 14, 2016
August 14, 2016 Duh!
Risk/Reward Vol. 318
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HERE
Here are some observations from this week.
1) An article in Tuesday's Wall Street Journal reported that central bankers are surprised that lower rates have spurred excessive savings as opposed to more borrowing and more consumption. Really? Are you kidding? Sorry, bankers, but most people recognize that they are personally responsible for their own well being---including saving for retirement. Unlike central banks, they cannot print more money. When low interest rates rob savers of a decent return, the only rational response is to save more----not spend more. Savings rates in Germany for example are their highest since 1995. The financial world is beginning to awaken to the idea that central banks may have it wrong. I recommend to your attention the opinion piece written by author and hedge fund manager Eric Lonergan in Saturday's Financial Times. Here are three quotes: "Central bank models assume that, when real interest rates fall, consumer spending rises." "This assumed relationship has little empirical support and there are good reasons, particularly when rates are extremely low or negative, to doubt it." "The relationship of spending to lower interest rates may well be the reverse of that assumed by policymakers." And here are some quotes from an article by James Dorn of the Cato Institute in Saturday's Investor's Business Daily. "The manipulation of interest rates by central bankers to support asset prices and fund government debt is a recipe for disaster....Central bankers have too much power and too little humility regarding the limits of monetary policy." Are our central bankers and the economists they employ really just a bunch of unthinking, blind following the blind sheep leading us down a wrong path? I think so.
2) Many commentators are surprised that the price of gold has appreciated 26% year to date given that inflation is near zero? Really? Gold operates not only as a hedge against inflation but also as a hedge against currency debasement. Take a look at the British Pound. As a result of Brexit and the newest round of quantitative easing (discussed below), the pound has fallen 12% against the dollar so far this year and 17% against the Euro. If a Brit had owned gold instead of pounds on January 1st, he/she would have seen an additional commensurate gain since gold prices are denominated in dollars.
3) And speaking of the UK, the Bank of England had an inauspicious beginning to its ambitious bond buying program (quantitative easing) on Tuesday. It could not find enough government bonds (gilts) to buy! That's right, despite a willingness to pay almost any price, it could not catch an ask. Why? Because the current holders either are required to own gilts (eg. pension funds or insurance companies) or they are holding out for even higher bids. In any event, the 10Year gilt hit an all time high that day meaning that it set a record low yield, 0.5%, and the yield on the 2year gilt went negative. Britain's experience is emblematic of the limits of quantitative easing. Already, the BOE owns 25% of all of Britain's sovereign debt. The Bank of Japan owns 1/3rd of Japan's sovereign debt and the ECB owns 25% of Eurozone sovereign debt. No ordinary citizen would be caught dead owning a bond with a negative or nearly negative yield. Can anyone say Ponzi---only this time governments are cheating themselves (or should I say their citizens). Think of the loss each central bank would take if interest rates increase and they try to unload these pigs?
4) Tandem Investment Advisors is one of the investment managers that Barb and I employ for a portion of the money that I do not manage personally. From time to time, Tandem issues investment letters. I highly recommend reading its most recent one which can be found here. http://tandemadvisors.com/wp-content/uploads/2016/07/The-TANDEM-Report-July-2016.pdf Therein it compares the amount of risk that an investor needed to take to achieve a 7.5% return in 1995 (nearly none) to the amount of risk needed to achieve such a return today (almost not worth it). Why? Because of what I have been harping about for lo these past months and years---suppression of rates by central bankers. As noted by Tandem, people like me who should be mostly in bonds cannot get a decent return and are forced to own equities or other like instruments. This causes the stock market bubble to be even more engorged. With all three major indices hitting record highs this week, Tandem's advice is very timely: "We love rising stock prices. But...be mindful of the fact that the higher stock prices go the less the margin of error becomes. Enjoy the party, but stay close to the exit." I always do.
5) Oil prices dipped on Wednesday only to recover nicely on Thursday. The cause of the fall was a report that Saudi Arabia pumped a record 11million barrels/day in July and that both Iraq and Iran are ramping up their production. The rise resulted from comments from the Saudi oil minister that he was open to price stabilization talks at next months OPEC meeting. This insane volatility may last for a while---at least until the Saudi's get closer to selling a portion of their state owned oil company to the public. Then look for some stability.
6) On Thursday, the former head demographer for the United Nations issued a report that by 2030, fifty six (56) countries will have more people over the age of 65 than under the age of 15. And economists still think we can achieve 3+% growth consistently? They have been wrong with their predictions for more than 8 years. What makes them (or you) think they will get it right now? Read Ben Bernanke's Brookings Institute blog issued last week which can be found here. The Fed’s shifting perspective on the economy and its implications for monetary policy | Brookings Institution . Even he doubts the Fed's prognosticating skills.
7) I am still in cash, and happily so.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HERE
Here are some observations from this week.
1) An article in Tuesday's Wall Street Journal reported that central bankers are surprised that lower rates have spurred excessive savings as opposed to more borrowing and more consumption. Really? Are you kidding? Sorry, bankers, but most people recognize that they are personally responsible for their own well being---including saving for retirement. Unlike central banks, they cannot print more money. When low interest rates rob savers of a decent return, the only rational response is to save more----not spend more. Savings rates in Germany for example are their highest since 1995. The financial world is beginning to awaken to the idea that central banks may have it wrong. I recommend to your attention the opinion piece written by author and hedge fund manager Eric Lonergan in Saturday's Financial Times. Here are three quotes: "Central bank models assume that, when real interest rates fall, consumer spending rises." "This assumed relationship has little empirical support and there are good reasons, particularly when rates are extremely low or negative, to doubt it." "The relationship of spending to lower interest rates may well be the reverse of that assumed by policymakers." And here are some quotes from an article by James Dorn of the Cato Institute in Saturday's Investor's Business Daily. "The manipulation of interest rates by central bankers to support asset prices and fund government debt is a recipe for disaster....Central bankers have too much power and too little humility regarding the limits of monetary policy." Are our central bankers and the economists they employ really just a bunch of unthinking, blind following the blind sheep leading us down a wrong path? I think so.
2) Many commentators are surprised that the price of gold has appreciated 26% year to date given that inflation is near zero? Really? Gold operates not only as a hedge against inflation but also as a hedge against currency debasement. Take a look at the British Pound. As a result of Brexit and the newest round of quantitative easing (discussed below), the pound has fallen 12% against the dollar so far this year and 17% against the Euro. If a Brit had owned gold instead of pounds on January 1st, he/she would have seen an additional commensurate gain since gold prices are denominated in dollars.
3) And speaking of the UK, the Bank of England had an inauspicious beginning to its ambitious bond buying program (quantitative easing) on Tuesday. It could not find enough government bonds (gilts) to buy! That's right, despite a willingness to pay almost any price, it could not catch an ask. Why? Because the current holders either are required to own gilts (eg. pension funds or insurance companies) or they are holding out for even higher bids. In any event, the 10Year gilt hit an all time high that day meaning that it set a record low yield, 0.5%, and the yield on the 2year gilt went negative. Britain's experience is emblematic of the limits of quantitative easing. Already, the BOE owns 25% of all of Britain's sovereign debt. The Bank of Japan owns 1/3rd of Japan's sovereign debt and the ECB owns 25% of Eurozone sovereign debt. No ordinary citizen would be caught dead owning a bond with a negative or nearly negative yield. Can anyone say Ponzi---only this time governments are cheating themselves (or should I say their citizens). Think of the loss each central bank would take if interest rates increase and they try to unload these pigs?
4) Tandem Investment Advisors is one of the investment managers that Barb and I employ for a portion of the money that I do not manage personally. From time to time, Tandem issues investment letters. I highly recommend reading its most recent one which can be found here. http://tandemadvisors.com/wp-content/uploads/2016/07/The-TANDEM-Report-July-2016.pdf Therein it compares the amount of risk that an investor needed to take to achieve a 7.5% return in 1995 (nearly none) to the amount of risk needed to achieve such a return today (almost not worth it). Why? Because of what I have been harping about for lo these past months and years---suppression of rates by central bankers. As noted by Tandem, people like me who should be mostly in bonds cannot get a decent return and are forced to own equities or other like instruments. This causes the stock market bubble to be even more engorged. With all three major indices hitting record highs this week, Tandem's advice is very timely: "We love rising stock prices. But...be mindful of the fact that the higher stock prices go the less the margin of error becomes. Enjoy the party, but stay close to the exit." I always do.
5) Oil prices dipped on Wednesday only to recover nicely on Thursday. The cause of the fall was a report that Saudi Arabia pumped a record 11million barrels/day in July and that both Iraq and Iran are ramping up their production. The rise resulted from comments from the Saudi oil minister that he was open to price stabilization talks at next months OPEC meeting. This insane volatility may last for a while---at least until the Saudi's get closer to selling a portion of their state owned oil company to the public. Then look for some stability.
6) On Thursday, the former head demographer for the United Nations issued a report that by 2030, fifty six (56) countries will have more people over the age of 65 than under the age of 15. And economists still think we can achieve 3+% growth consistently? They have been wrong with their predictions for more than 8 years. What makes them (or you) think they will get it right now? Read Ben Bernanke's Brookings Institute blog issued last week which can be found here. The Fed’s shifting perspective on the economy and its implications for monetary policy | Brookings Institution . Even he doubts the Fed's prognosticating skills.
7) I am still in cash, and happily so.
Sunday, August 7, 2016
August 7, 2016 Secular Stagnation
Risk/Reward Vol. 317
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I do not blame Barack Obama any more than I blame Xi Jinping, Shinzo Abe, David Cameron, Angela Merkel, Mario Renzi or Francois Hollande for what I discuss below.
The disappointing gross domestic product (GDP) numbers reported last week guarantee that Barack Obama will be the first president in history to fail to have even one year of 3% growth in GDP. For context, between 1948 and 2007, the GDP grew at an average of 3.5%. The anemic performance over the past eight years occurred despite doubling the national debt, deploying $800 billion in stimulus, and the Federal Reserve purchasing $4.5 trillion of Treasury bonds and mortgages (QE) and maintaining interest rates at historic lows. The result of all of this stimulus has been to inflate bond and stock prices to record highs. (Remember record low bond yields mean record high bond prices.) However, it has done little to spur the "real" economy which struggles to grow more than 1-2% per year. Without growth, wages stagnate. And one wonders why those with financial assets ("the rich") get richer, and the working class gets poorer?
So why not blame Barack Obama and the others? Because not even they can fight demographics. The population of those who actively participate in the economies of the developed world (including the United States) is aging and shrinking. And their birthrate is well below replacement levels. One need look only at Japan to see our future. For more than 20 years, Japan has had low interest rates, economic stimulus, quantitative easing, in short, all of the "goodies" we have deployed since 2008. And still Japan cannot spur its economy. Why? There is an ever shrinking demand for goods and services. This is hardly surprising given that its citizens purchase more adult than baby diapers, and that by 2060 it will have 1/3rd fewer people than it does today. It does not take an economist to comprehend that no economy can grow with a shrinking population of earners and consumers.
And yet the central bankers here and elsewhere cling to the belief that more and more monetary stimulus (low rates, bond buying, etc.) will somehow spur growth in the real economy. They believe this (or at least profess that they do) despite proven failure these past several years and despite the fact that low rates are a major contributor to wealth inequality. Indeed, just last Thursday, the Bank of England lowered interest rates once again and launched another round of bond buying (quantitative easing) ostensibly to spur growth. Japan is even contemplating distributing "helicopter money". Google that term and it will shock you. Yes, Japan is thinking about giving every man, woman and child some extra cash with no obligation other than to spend it---figuratively dropping cash out of a helicopter. So I ask you, given our poor economic performance and given that other central bankers are doubling down on "easy money", how can the Federal Reserve raise interest rates in September or December, Friday's speculation that it will notwithstanding? It can't---pure and simple. If it did it would send shock waves through the markets. Take a look at what happened this week in Japan when its central bank did not lower rates further into the negative. Bondholders got clobbered, as Mr. Market-san, feared that the bond bubble was beginning to burst.
So what does this mean to investors? As I wrote last week, I see the Federal Reserve continuing to prop up financial assets with low interest rates. Clearly, Mr. Market is on edge so more volatility can be expected. That said, absent a black swan, I do not foresee a major collapse . As indicated by Friday's jobs report, our economy will continue to plod along. But do not expect significant growth here or anywhere in the world. The building boom in China which spurred economic growth in commodity rich emerging markets (Remember the BRIC's?) back in 2008-2010 will not be repeated. Due to its disastrous one child policy, China faces its own demographic cliff. For me, the state of things means the following. In the short run, with spreads on some assets (e.g. preferred stock closed end funds, a few real estate investment trusts, and a smattering of other dividend payers) still priced as if a rate increase is likely this year, I may pick up some on the cheap. Longer term I see the current oversupply of oil balancing, an event which may present another opportunity to garner profits.
I write this edition not as a commentary on social issues, but to explain why we are in for a prolonged period of "more of the same." In sum, I do not see a turn around in the real economy. The reason is simple, but rarely discussed because there is no quick fix. A decrease in buyers means a decrease in demand which equates to slow to no growth---no matter how cheap or plentiful the available credit. The simple truth is that no matter how well-to-do one may be or how much one may be able to borrow, one neither needs nor wants a house or to shop at Krogers or to buy onesies, trikes or birthday cakes if one does not have children. And that is the circumstance for a large percentage of the child-producing-age population in the developed world---including the United States. So if you are like me and rely upon investments for a living, you need a market strategy that takes into account a prolonged period of slow to no growth. As explained previously, mine involves correlating interest rates and income producing securities, locating mispriced assets and taking profits frequently. In addition, I mitigate against the downside by maintaining a large cash position and cutting losses early. Welcome to secular stagnation.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I do not blame Barack Obama any more than I blame Xi Jinping, Shinzo Abe, David Cameron, Angela Merkel, Mario Renzi or Francois Hollande for what I discuss below.
The disappointing gross domestic product (GDP) numbers reported last week guarantee that Barack Obama will be the first president in history to fail to have even one year of 3% growth in GDP. For context, between 1948 and 2007, the GDP grew at an average of 3.5%. The anemic performance over the past eight years occurred despite doubling the national debt, deploying $800 billion in stimulus, and the Federal Reserve purchasing $4.5 trillion of Treasury bonds and mortgages (QE) and maintaining interest rates at historic lows. The result of all of this stimulus has been to inflate bond and stock prices to record highs. (Remember record low bond yields mean record high bond prices.) However, it has done little to spur the "real" economy which struggles to grow more than 1-2% per year. Without growth, wages stagnate. And one wonders why those with financial assets ("the rich") get richer, and the working class gets poorer?
So why not blame Barack Obama and the others? Because not even they can fight demographics. The population of those who actively participate in the economies of the developed world (including the United States) is aging and shrinking. And their birthrate is well below replacement levels. One need look only at Japan to see our future. For more than 20 years, Japan has had low interest rates, economic stimulus, quantitative easing, in short, all of the "goodies" we have deployed since 2008. And still Japan cannot spur its economy. Why? There is an ever shrinking demand for goods and services. This is hardly surprising given that its citizens purchase more adult than baby diapers, and that by 2060 it will have 1/3rd fewer people than it does today. It does not take an economist to comprehend that no economy can grow with a shrinking population of earners and consumers.
And yet the central bankers here and elsewhere cling to the belief that more and more monetary stimulus (low rates, bond buying, etc.) will somehow spur growth in the real economy. They believe this (or at least profess that they do) despite proven failure these past several years and despite the fact that low rates are a major contributor to wealth inequality. Indeed, just last Thursday, the Bank of England lowered interest rates once again and launched another round of bond buying (quantitative easing) ostensibly to spur growth. Japan is even contemplating distributing "helicopter money". Google that term and it will shock you. Yes, Japan is thinking about giving every man, woman and child some extra cash with no obligation other than to spend it---figuratively dropping cash out of a helicopter. So I ask you, given our poor economic performance and given that other central bankers are doubling down on "easy money", how can the Federal Reserve raise interest rates in September or December, Friday's speculation that it will notwithstanding? It can't---pure and simple. If it did it would send shock waves through the markets. Take a look at what happened this week in Japan when its central bank did not lower rates further into the negative. Bondholders got clobbered, as Mr. Market-san, feared that the bond bubble was beginning to burst.
So what does this mean to investors? As I wrote last week, I see the Federal Reserve continuing to prop up financial assets with low interest rates. Clearly, Mr. Market is on edge so more volatility can be expected. That said, absent a black swan, I do not foresee a major collapse . As indicated by Friday's jobs report, our economy will continue to plod along. But do not expect significant growth here or anywhere in the world. The building boom in China which spurred economic growth in commodity rich emerging markets (Remember the BRIC's?) back in 2008-2010 will not be repeated. Due to its disastrous one child policy, China faces its own demographic cliff. For me, the state of things means the following. In the short run, with spreads on some assets (e.g. preferred stock closed end funds, a few real estate investment trusts, and a smattering of other dividend payers) still priced as if a rate increase is likely this year, I may pick up some on the cheap. Longer term I see the current oversupply of oil balancing, an event which may present another opportunity to garner profits.
I write this edition not as a commentary on social issues, but to explain why we are in for a prolonged period of "more of the same." In sum, I do not see a turn around in the real economy. The reason is simple, but rarely discussed because there is no quick fix. A decrease in buyers means a decrease in demand which equates to slow to no growth---no matter how cheap or plentiful the available credit. The simple truth is that no matter how well-to-do one may be or how much one may be able to borrow, one neither needs nor wants a house or to shop at Krogers or to buy onesies, trikes or birthday cakes if one does not have children. And that is the circumstance for a large percentage of the child-producing-age population in the developed world---including the United States. So if you are like me and rely upon investments for a living, you need a market strategy that takes into account a prolonged period of slow to no growth. As explained previously, mine involves correlating interest rates and income producing securities, locating mispriced assets and taking profits frequently. In addition, I mitigate against the downside by maintaining a large cash position and cutting losses early. Welcome to secular stagnation.
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