Thursday, June 5, 2014

Watch Out for the Stock Buy-Back Taper

Back in the year 2000 I got a call from a broker wanting me to take a look at particular large cap financial stock.  The pitch was “the company has lagged its peer group, but it has announced a major share re-purchase program.”  I asked what the company plans were for growth.  Awkward silence was evident on the other end of the line.  I then said, “So you are asking me to buy-out certain shareholders who don’t want to own the company anymore because the management team is struggling to find ways to invest?”  Needless to say, I did not invest in the company.  But I did follow it.  Sure enough it did rise in the following months, only to be cut in half within the next 2 years.

I tell this story because I have always been wary of common stock buy-back plans.  Not because they are all bad.  Many companies have a disciplined approach of returning capital through this process rather than paying dividends.  However, when the buy-backs are not backed up by fundamental growth in the company, they turn into little more than the company entering the debt market to finance dividends, or worse, robbing from needed capital investment to maintain future cash flow.

Tuesday, May 27, 2014

Quantitative Easing – Is it Inflationary or Deflationary?

On May 15, 2014 the CPI index was published in the U.S. which showed general price increases as measured by the BLS were a meager 2% annually.  This was after a year of massive bond buying by the Federal Reserve.  During the same year over year period, the Fed added $1.162 Trillion dollars of liquidity into the worldwide economy. 

What exactly is going on?  The population has been led to believe that when the Federal Reserve “prints” money, the economic result is inflation.  Chances are that the current path taken will result in a similar outcome.  However, if you are looking at the present financial market and believe the Fed may have found the Golden bullet on how to tame inflation – simply lower interest rates to zero percent and flood the market with cash – think again.  Why?  It is actually very simple.  It depends on where all the cash, goes.  And eventually, the Fed is not in total control of where the excess money goes.

Monday, May 19, 2014

Nervous Investors Move to Bonds just like Belgium?

I have run across data that belongs in the category of strange and unusual in the May 15th publication of the TIC data (Treasury International Capital Report).

The strange aspect of the data is that in the published figures, the tiny country of Belgium with a GDP of only $509B, somehow managed to purchase $40.2B in Treasury securities in the month of March.  The purchases follow a six month barrage of purchases by Belgium in which $214.6B in Treasuries were added to security accounts held in the country.  Based on the data, Belgium has escalated to third, behind only Japan and China (mainland) in the rankings of foreign countries which hold the most U.S. Treasury reserves.

Wednesday, May 14, 2014

Theory of Financial Relativity: Powerful New Book Helps Protect Investments, Exposing Framework for Predicting Market Trends.

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Everything is showcased in ‘Theory of Financial Relativity’ by Daniel Moore. Hailed as “the most interesting man in the financial world,” Moore has spent hundreds of hours combing over seventy years worth of market trends to expose a game-changing and predictable pattern.


Wednesday, May 7, 2014

Fed Cornered by QE Program – Reverse Repo Path Being Considered

In Fed Chair Janet Yellen’s testimony to the Senate Banking committee on May 7, 2014 there were many questions about when the Fed would “normalize” its interest rate policy, specifically the Fed Funds rate.  She stuck to the party line, saying it is expected to be a “considerable time” before the Fed will raise short term interest rates.  When pressed for a definition of “considerable”, she did a political dance and left the definition to “it depends on economic circumstances”.  In other words, it depends on what will do the least amount of damage to the political party in charge.

One path to actually raise interest rates, but escape the consequences that raising the Fed Funds rate entails, is to use a technique known as the Reverse Repo.  The "experiment" that the Fed is currently actively

Tuesday, May 6, 2014

Market Winds are Shifting – Time to Assess the Signals

On Friday, May 2nd the April jobs report was published by the U.S. Bureau of Labor Statistics showing that 288,000 new non-farm payroll jobs were created in the month.  It was the strongest month to month growth since January of 2012.  In addition the unemployment rate fell to 6.3%, with 138.252 million people estimated to be employed during the month.  This is the highest total number of employed people since March of 2008 and is on the verge of becoming an all-time high in terms of total employment.

The information was published a day after both the DOW and S&P500 (DIA) (SPY) set new all-time highs.  The immediate response by the market when the jobs information was released was a jump higher.  However, by mid-day the market was slightly down, seemingly unimpressed by the job figures, and ended the day on a down tick.  Why?  Research has shown that while jobs are of course an important economic indicator, they are always a trailing indicator.  Anyone trading stocks on the jobs report is searching for fools gold.  The more important aspect of the jobs report is whether the data causes an unexpected change in the expected direction of market influential factors that do impact stock valuations.

Thursday, April 10, 2014

Emerging Market Debt Options to Hedge Fed Taper and Stock Volatility

Managing money in the current financial market is beginning to resemble the game of musical chairs I played years ago in grade school.  Last year, at virtually the same moment in the year, the market “forces” decided that the music would stop and the debt market, primarily the longer duration bond market as well as high dividend paying stocks such as utilities (VPU), telecom (VZ) (T) and REITs (VNQ), would not have a seat at the table.  Municipal bonds (MUB) last summer were also ostracized from the game, with the fears of bankruptcies in Detroit and Puerto Rico looming large and investors warned to stay away as the market was far too risky for entry.

The T-Bond (TLT) (TLH) (IEF) route moved the 10 year from around 2% in early 2013 to a high touching 3% precisely at year end.  The longer duration securities such as the 30 year also traded down in value, up in yield in 2013, about 90 basis points to end the year at almost 4%.  All the related interest-sensitive markets were beaten into submission going into year end.  Opportunities for savvy income investors were plentiful – for a brief moment.

Market Dancing to a Different Tune in 2014

Since the beginning of 2014, however, the music has been noticeably different.


Tuesday, April 1, 2014

Stock Market Ends Q1 2014 on an Uptick on Charitable Rate Fed Speak – Buyers Beware

On March 31, 2014, the last trading day of the quarter, the stock market moved higher allowing the S&P500 to eke out a gain of 1.6% YTD, while the DOW shows a YTD loss of -.7%.  Fed Chair Janet Yellen took center stage giving a heart wrenching speech about the lack of work for the under employed and her perspective that excessive slack remains in the economy.  It sounded more like a speech by for the head of a charitable organization like the Red Cross than the head of the most the most powerful central bank on the planet.

The extremely “dovish” speech by Chair Yellen should come as no surprise to anyone.  Investors, however, should not be lulled into a false sense of safety by the recent Fed talk.  The current market has been run up by a large diversion in the flow of funds driven by the over $1T QE3 program at the Fed which began in January 2013.  This program is scheduled to be wound down over the remainder of 2014.  What should be a concern for investors is that the market stood virtually at a standstill in Q1 despite what continued to be extraordinary bond purchase levels by the Federal Reserve. During the quarter the purchase rate was reduced by $10B per month, having been maintained at $85B throughout 2013.  Based on this trend alone, stock investors should be cautious when setting new positions.  But there are other measurable signals which show cracks in the current market valuation.