Where Do the Markets Go From Here?

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It is amazing that we would even ponder the question of “Where Do the Markets Go From Here”?  There has generally been no crystal ball that can ‘call the market’ on a week to week basis–when you believe the stock market should head lower, it doesn’t and when you think interest rates should head one direction or the other, they do the opposite. This goes to show that thinking we are going to guess directions is just a waste of our time-although we do have an opinion, just not one that is actionable.

We are heading into the heart of earnings season and for the 1 simple fact that the dollar has been exceedingly strong earnings gains should be very modest if there is any gain at all.  Everyone knows this–so in theory prices have built in this fact.  Whether this changes is anyones guess and we plan to not react this week to anything related to earnings.

Interest rates would seemingly be stable to a bit lower–economic data is pretty weak and the last employment report was a disaster. On the other hand here in Minnesota there is a lot of economic activity and there are plenty of jobs available (jobs–not necessarily good jobs)  For instance Walmart is opening a distribution center in Mankato just south of us and they are hiring 600 people at starting wages of $16–this is a damned good wage in a rural area for unskilled labor and puts a lot of wage pressure on other local employers.  Of course at the same time Target has laid off 7,000 headquarters jobs in Minneapolis–so whether we are gaining much is up for debate.  Official stats in MN have unemployment at 3.6% or something like that–there is wage pressure.

We are reading that Europe is recovering–show me the money!!  We aren’t going to get too excited about a European recovery–they have been in the shitter so long they don’t even know what a recovery is at this point in time.

Oil prices are acting like they are stable at $50/barrel.  At this price I think there is $5-$10- barrel war premium in the price because of Yemen.  I mean now for the first time in many, many years we have the Saudi’s making air strikes in Yemen–this is damned dangerous and everyone knows it (well except maybe not the Obama administration). We think this is making the purchase of some preferreds on upstream MLP’s a less risky proposition–but we will wait another week and re-evaluate.  Even though those shares are perpetual, when you can get 10-12% maybe perpetual is ok? We have mixed feelings.

Our portfolios are all doing very, very well.  Our2015 Blended Model is up 3.04% YTD (even with the 1/2% penalty we incurred because of the late purchase of the portfolio) against the S&P500 being up 2.09% and general bonds are up 1.03%.  Our best lesson this year has been that by resisting our urges to trade this issue or that issue we have likely upped our performance–simply put thinking you are smarter than the market is normally balony so save your commission dollars.

Looking over some sectors we believe that REITs continue to look weak–we haven’t decided if this is just some harvesting of profits or if this is a bigger story.  The REIT sector is off 8% from their 52 week highs and anytime we get a little pop in interest rates REITs fall off 1-2% (and then gain part of it back over the course of the next couple of days). It wouldn’t hurt our feelings if quality REITs fell by 10% more–then we would buy some more, but we don’t feel compelled to chase a sector that is still valued richly.

MLP’s (upstream) have performed better–we own none, but believe the worse is yet to come (further distribution cuts). Whether this is priced in to shares prices is anyones guess.  Our guess is that the cuts that will be coming yet (as hedges roll off the books) are NOT priced into share prices.  For sure there is no production data on crude oil that justifies higher prices yet and after last weeks 12 million barrel investory build we wonder how long it will take for production to start falling.  Rig counts are very low–in the Bakken counts are less than 50% of what they were 2 years ago

Have you noticed how well variable rate MLP Alliance Bernstein (ticker:AB) has been doing? We are holding a 25% gain in AB for 3 1/2 months–how can you not be happy with that kind of gain?  We had written a while back how well we liked the variable rate (quarter to quarter distributions can and do vary significantly) MLP’s.  We ‘harvested’ great gains in CVR Refining (ticker:CVRR) and are now waiting for a downdraft so we can re-enter a position.

We continue to operate with a 9-10% cash cushion and only modest exposure to perpetual preferreds (10%).  If we see a new debt issue with medium duration or a bargain in other areas like REITs we will deploy this cash–otherwise we don’t feel we should make changes to a portfolio that is performing well.

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