November – 2018 Newsletter

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We made the following swap for October:

• Purchased: National Fuel Gas Co- NFG 4.75% 9/1/28 (Baa3/BBB) @ $98.204/ 4.98%

Sold one of the following for the buy:

• Sold: Mosaic Co – MOS 4.25% 11/15/23 (Baa3/BBB-) @ $100.545/ 4.12%
• Sold: Viacom Inc – VIA 4.25% 9/1/23 (Baa3/BBB-) @ $100.25/ 4.18%
• Sold: Arrow Electronics – ARW 3.50% 4/1/22 (Baa3/BBB-) @ $97.89/ 4.16%

Yield pick up of at least 0.80%

Markets

October marked the return of major some major volatility to the stock market for the first time since late Spring. Over two dramatic days, on October 10th & 11th, the Dow shed over 1,300 points, while both the S&P 500 and Nasdaq suffered similar losses.* Volatility continued over the next several weeks, and by October 26th the Dow Jones Industrial Average was down 9% from its record high for the year, while both the Nasdaq and S&P 500 were down more than 10% and officially in correction territory.**

Even as the markets were sinking in the final full week of the month, third quarter earnings reports were coming in and most were strong. On the same Friday that all three major indexes were either in or near correction, the Bureau of Economic Analysis reported that GDP growth

hit a healthy 3.5% in the third quarter. That was down from 4.2% in the second quarter, but still indicates a strong, growing economy fueled by the Trump Administration’s massive tax cuts.

While the stock market rebounded slightly to end the month, it certainly didn’t exhibit the kind of optimism one might expect based on all the positive third quarter data. But that shouldn’t be surprising; I’ve been explaining for years that the reckless overuse of quantitative easing by the Federal Reserve has created a disconnect between market performance and economic fundamentals. Just as the stock market soared for all those years (thanks to artificial stimuli) while the economy was slow and sluggish, investors shouldn’t be surprised now to see the market struggling while the economy is—by many indicators—actually booming.

The reality is, Wall Street is well aware that the current boom could, as many analysts believe, be a temporary “sugar high” from the Trump tax cuts, and that growth could be further undermined by the intensifying trade dispute with China, worries over interest rates, inflation and numerous other factors.

As for interest rates, long-term rates continued to exhibit a strong resistance level at right around 3%, just as I forecast early in the year. The yield on the 10-Year Treasury rate opened the month at 3.06% and finished at 3.14%.*** I believe this resistance level will continue to remain in place for a variety of reasons.

Portfolio Transactions:

When managing your portfolio at SIS, we look for one of four possible “enhancement” trades while reviewing securities and possible transactions. Income generation is our primary goal for our clients, and we consider the following four portfolio enhancements before transacting: current yield, yield to worst (minimum projected annualized total return), interest rate risk, and default risk. The intents of these transactions are categorized as follows:

• Pay Me Now – Enhancing current yield
• Pay Me Later – Enhancing yield to worst
• Cover My Assets I. – Managing interest rate risk
• Cover My Assets II. – Managing default risk

We evaluate the transactions by determining whether they meet one, two, three, or all four enhancements. A baseball analogy for this: SINGLES, DOUBLES, TRIPLES, and HOME RUNS.

*“Another Wild Selloff; Dow Sinks 546 Points,” CNN Business, Oct. 11, 2018

**“S&P Joins Nasdaq and the Russell 2000 in Correction Mode,” Nasdaq.com, Oct. 26, 2018

***Macrotrends.com