Market Tremors

March 15, 2015

As of  Monday,  March 2, we were breezing along with the  December 30, 2011 SPY trade 803 days old, ahead 74.37% and everything rosy.

SPY ( a basket of the S & P 500 stocks trading as one stock ) representing the USA stock market, and the USA economy ,was 5.07% ahead since  Nov 1.,  ( half way to May ), with all engines humming.

Then, came the whispers about the Fed  intending to raise interest rates in June.  Since the price of money (  interest yield  ) competes with the price of equities ( earnings yield ) for new money. there should be no doubt whatsoever that investors perceptions of what happens to interest rates is the  major underpinning for this market.   Trouble is,  its really easy to over simplify this issue .  The Fed is at zero !  Which  interest rate percentage,   relative to earnings yield percentage, will be the tipping point, and how fast it will get there, will be the real drivers for equity re-valuation.

What is happening now is equivalent to jet  passengers enjoying the reverie of cruising soundlessly at  30,000 feet suddenly feeling a bit of  wind turbulence.  Grab an an armrest and squeeze !  Now ….. silence.   Hear anything ?,  Feel  anything ?  OK,  back to serenity ! Whew !

Last week you could have had $1 million invested in stocks but still close Friday with a profit or loss of just $ 159 for the week.!   ( In fact,  SPY did close down 1% for the week ( $10,000 loss  on a $ million ).  My portfolio would have closed down only $159 for the week.  Why the different result ?  Read on .

By Friday, the Monday whisper about a June interest rate rise was undercut by economic data sufficiently weak to give rise to the thought the Fed would never consider  a June interest rate hike after digesting the weak data released. Bad news to the rescue ! Whew !

It seems Europe is starting to react positively to the stimulus package.  That means not as much new European money will be arriving at our shores and the EURO will find a bottom.   And, that is good for  the USA.  Nobody ever said the Dollar needed to crush the EURO and the YEN.  We want stable currency rates that allow for measured investment and sales planning. !  We want balance, not a tilt !

At present the dollar is still strong enough to drastically shrink the size of profits that are needed to contribute  profits on the global income statements of USA companies doing business overseas.  My reaction is to give a wide berth to USA equities  that rely on exports or profits generated in overseas markets.  Since SPY contains our largest companies, you can assume that  the still strong dollar creates headwinds for their profits.

My reaction is to choose USA stock  indexes such as IJR which contain small cap companies and are less likely to export or manufacture overseas. Since November 1,” IJR”  ( I Shares Small Cap 600 Index ) is ahead 4.41% while SPY  ( I Shares S&P 500 Big Cap Index  ) is ahead 2.01%.  The almost 2.5%  difference  shows what can happen over a short time frame ( say one quarter ) when you just sit with SPY versus  working through the logic of finding an alternative and acting on it. Hopefully I will be back in SPY with a profit from IJR  in my purse by the time the logic changes.

Conversely,  I am investing in European and Japanese stocks able to export because of the  strong dollar.  I am investing via index funds which hedge the strong dollar risk out of portfolio profits .  Examples are HEDJ ( Wisdom  Tree Europe Hedged Equity ETF ) , up 15.8%  and DXJ  ( Wisdom Tree Japan Hedged Equity ETF  )  up 0.75% since November 1.

At this point, my only exposure to SPY is the May 15 , $199 SPY Put which I sold on March 4 for $2.27.  If  it expires worthless May 15 , my profit will be $2.27 per share…..approximately 6.84% per annum. Not exactly money market rates.  The risk….SPY gets assigned to me at its current 200 day moving average level..$199. I’m prepared to own SPY at $199 and then write more Puts.

I am 60 % invested and ready to purchase more shares of  companies I already  own such as AAPL , CVS,  UNH, UA, DIS,  TWX, GLW, BX, SWHC, DLTR, ORLY ….if prices weaken – ( because I’ve done my ” internals ”  homework ) ….( Or ),

More shares of the following Sector ETFs :  FBT, ITA, XLV, HEDJ,  XHB, QQEW,  DXJ, if prices weaken, because logic tells me that these positions should prosper given the present macro economic conditions. These positions are not as ” iron clad ” as my equity positions because Sector conditions  can change much more quickly.

This is where I say ” I’ll be back.”

Richard Maurice Gore



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