WASHINGTON, September 20, 2016 – The Maven spent a long weekend up in Deep Purple Ohio, his old home state. It’s perhaps this year’s most closely watched election battleground state, and one that’s allegedly begun to trend in The Donald’s direction. Indeed, there was convincing anecdotal evidence for this as we got off the turnpike.
Heading for suburban Toledo, where we attended a Saturday wedding celebration, we saw exactly one “Trump/Pence” sign on the lawn of a rural farmhouse. And exactly zero Hillary signs (or Trump signs for that matter) anywhere else. Interpret that one any way you like. Like, maybe people don’t want their houses egged? Or worse? It’s what all that “hope and change” has come to in 2016.
While on the road, we watched Friday’s market action when we could, and it essentially wound up the way Monday and Tuesday’s action did as well—more or less flat on the day. All three major averages closed up a fraction of a point, with the Dow up a whopping 9.79 points. (We are being ironic here.) Tomorrow is Fed day (again) and no one, it seems, wants to make massive bets on whether or not these reluctant Washington fiscal gurus will do the dirty deed on interest rates: i.e., increasing them an eensy, weensy bit.
I read a columnist somewhere over the weekend, however, who had an interesting take on this whole interest rate brouhaha: Whatever the Fed does Wednesday has been made largely irrelevant by the markets themselves.
Good point. The dollar has once again shown at least some strength against the euro. Interest rates have ticked up rather firmly from their August lows and seem happy to stay there, not really high, but higher than August. And stocks, aside from a couple of horrible September trading days, have essentially been flat, flat, flat.
The scary thing here is that in the Maven’s opinion and in the opinions of many others, stocks are way overpriced. That either means that at some point, they get repriced in a monstrous 2008-2009-style crash; or they trade essentially flat. Maybe for years. Neither scenario is very attractive for investors.
Let’s just say this: Consensus as of Tuesday’s market close is 20 percent—max—in favor of the Fed choosing to raise interest rates 0.25 percent. Which likely means that if they actually defy odds and do it… well, none of us, least of all the Maven, want to be around for the selling tsunami. On the other hand, if the Fed tracks with the current street opinion and holds fast—possibly even indicating a likely December hike—the market might rally for a day or two. And then go flat again. There’s simply nothing exciting in the air right now, nothing compelling to cause stocks to rise significantly.
We’ve been wrong, of course, before. If the HFTs and algo’s decide to goose this moribund market for fun and profit, it could be off to the moon with prices, at least for a while. But on the whole, no one, save the usual perma-bears, seems willing to pony up to buy stocks at this level.
We really weren’t able to do a thing while we were on the road. But, unfortunately, we sat here helpless as our large position in Allergan preferred (AGN/PRA, your symbol may vary) got a surprise right hook to the jaw and went down for the count, off nearly 18 points at the close (-2.05 percent) as it sprawled on the mat, out for the count at $842.11 per share.
The irrational reason? Once again, as during the Big Disappointment over the U.S. Government-thwarted takeover of Allergan (AGN) by pharma giant Pfizer (PFE), another big fiscal move was in the offing, as Allergan massively overpaid—for the second time this month—to acquire another biotech with a very promising but speculative drug in the development pipeline.
Suddenly convinced that Allergan’s CEO and Board of Directors are going slap happy with all the cash they got from the Pfizer deal breakup, plus an even bigger payday from the company’s sale of its generics business to Teva (TEVA), investors apparently concluded that the company was, and is, eager to squander $40 billion (with a B) in cash on… whatever. So they sold the common stock down. Except that they sold the term-preferred stock down just as hard if not harder.
Aside from sheer malfeasance on the part of its top executive guns, Allergan’s term-preferred stock, aka AGN/PRA, is about as safe as you can get and is set to be redeemed in March of 2018 at par value, or $1,000 per share. AGN/PRA’s dividends are senior to the common (which doesn’t pay them anyway) so why drive these shares down so violently, since its 6.5+ percent dividend is going to be paid anyway, hell or high water, until AGN/PRA is closed out at par?
Alas, we think we have enough of these shares now, or we’d buy more. What’s going on with today’s pummeling is just another one of these increasingly infrequent outbursts of nonsense you rarely see in today’s computer driven markets. So we’re just taking advantage by holding our current position. Yet potential new investors might get interested in today’s AGN/PRA share price swan dive. Just not us. We have enough shares now.
As for everything else, we’re still slowly acquiring shares of Schwab’s SCHH ETF, even though they haven’t impressed lately. As financials separate from purely real estate owning REITs (as opposed to mortgage REITS), both groups should slowly improve in 2017. But we’ll just have to wait and see how quickly index funds and their fellow travelers alter their portfolios to match the emergence of real estate-owning companies as their own S&P sector.
Otherwise, here, we’re just holding a fair bit of cash. In environments like this one, nearly every move will be a wrong one until the Federal Reserve smokescreen begins to clear.