October 25, 2014 Come Back, Baby

Risk/Reward Vol. 239

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

“Like a rubber ball
I’ll come bouncing back to you.”---lyrics from “Rubber Ball” sung by Bobby Vee

“Buy a bag of balloons with the money we’ve got
Set them free at the break of dawn
‘Til one by one they were gone.”---lyrics “99 Red Balloons” sung by Nena

“I’m gonna let you pass/And I’ll go last
Then time will tell just who has fell
And who’s been left behind
When you go your way and I go mine.”---lyrics “Go Your Own Way and I’ll Go Mine” sung by Bob Dylan

“Like a rubber ball” the major stock indices came “bouncing back”, experiencing their best week of the year. The Dow Jones Industrial Average gained 425 points and the S&P 500 rose 4%. In large part, the bounce came from oil prices stabilizing and a spate of strong earnings reports. The positive price action gave me the confidence to buy several new positions. In particular, I expect a nice bounce from a host of general equity closed end funds ( e.g. EOI, CHY, CHI), especially GAB, Mario Gabelli’s flagship CEF which floated a price-deflating rights offering (See Vol. 236 www.riskrewardblog.blogspot.com ) just as the market swooned earlier this month. It currently trades substantially below its net asset value which is unusual for this fund thus presenting an excellent buying opportunity.

Another source of the uptick was the European Central Bank (ECB) which this week began its own version of quantitative easing in the form of covered bond and asset backed security purchases. In effect, the ECB is buying commercial loan portfolios from Eurozone banks (like the portfolios of mortgages that our Federal Reserve purchased during QE3) in an effort to spur additional lending which it hopes leads to economic development. In other words, the ECB is “buying a bag of balloons with the money it prints and/Setting them free” The ECB is also contemplating buying corporate bonds, an aggressive move that not even the Fed attempted during QE. What will the ECB do with these newly acquired assets once the program ends? Sell them “one by one til they are gone?” Or like the Fed, keep them until maturity. Will it work? Did QE 1, 2 or 3? The jury is still out. But, the ECB’s action is at least an attempt to combat the very real threat of recession in the Eurozone, and that attempt was rewarded with a rise in European stocks which in turn helped to boost equity prices in the US.

The impact of the ECB’s actions on our domestic markets highlights the fact that the world’s economies (and by extension its markets) are becoming progressively intertwined. Today, can a single economy, even one as large as ours, “go last/and let the others pass?” Can one country simply decide to let “others go their way and I go mine?” Can one or more be “left behind” or will they all rise or “fall” together. There is no doubt that the economies of emerging markets are heavily dependent on China’s demand for natural resources. In turn, China’s economy is heavily dependent on consumer demand in the US. The question we face today is whether the US can achieve its targeted 3% growth in gross domestic product as growth in the rest of the world slows. We will have an answer very soon.

Like Bobby Vee, I have decided to “Come Back, Baby” albeit slowly and with some trepidation. In times past, my “wide-eyed innocence/Has really messed up my mind.” So if you too re-enter do so of your own volition. Don’t rely on me. “I’d rather you get your very next heartache not from me, but/Somewhere else along the line.”

October 18, 2014 Welcome Back

Risk/Reward Vol. 238

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

“Those dreams have remained/And they’ve turned around
Welcome back/Welcome back/Welcome back.”---lyrics from “Welcome Back” sung by John Sebastian

“I’ll never look up/Never give up
And if it gets rough/It’s time to get rough
But now, falling, falling, falling.”---lyrics from “Falling” sung by Haim

“Please forgive me for rambling
I just wanted y’all to know/That I don’t know it all
Don’t be surprised.”---lyrics from “Surprise” sung by Gnarls Barkley (Cee-lo)

“Welcome back/Welcome back/Welcome back” from Italy---NOT. Holy Cannoli! I leave for two weeks, and the stock market yo-yo’s then drops like a rock. And as for my “dreams” of a nice, gentle ride into the end of the year, “they’ve turned around.” I am glad that I left the country 2/3rd’s in cash. That said, I suffered like the rest of you on the remaining 1/3rd. I found the task of managing my investments difficult while basking in the sun on Capri or touring in Rome; a task made even more difficult by the fact that I had a seven hour head start on cocktail hour (um, make that a nine, no more like a twelve hour head start). Oh well, I still am ahead of the game and have already compiled my “ buy” list if and when I am comfortable that a bottom has been reached. Cash is a very nice commodity to own right now.

Leading the “falling, falling, falling” has been the oil patch. Talk about “getting rough!” One month ago WTI crude traded at $95/bbl. On Thursday morning it traded below $80/bbl before rebounding. The reason: who knows? It could be that Saudi Arabia is trying to drive higher cost producers (e.g. U.S. frackers) out of business; it could be a slack in world wide demand; or it could be that several refineries around the world are shuttered for routine maintenance reducing daily demand by as much as 3million bbls/day. Whatever the reason(s), this precipitous drop began just before I left and caused me to exit BBEP as I was boarding the plane. I reduced my LNCO position by half upon my return. Nevertheless, I am ready to buy both back once I perceive some price stability. Indeed, at present, oil and natural gas stocks are so cheap, I am finding it difficult not to buy, with crude trading at what I perceive to be the bottom ($80/bbl). That said I have been Kardashianed (definition---fooled by a false bottom) in the past. I don’t need to buy at the nadir and will await a confirmed rally before re-entering. In addition to LNCO, I am still holding VNR, BBEPP, VNRBP and FEI each of which experienced a much needed spike on Thursday and Friday.

The one place that I found some relief these past two weeks was in fixed income; those securities most directly correlated to the yield on the 10 Year U.S Treasury Bond. This of course is the bellwether about which I have been “rambling” for more than a year (“Please forgive me.”). Just last month I predicted that the yield on the 10Year would be range bound for the remainder of the year between 2.45% and 2.75% ( See Vol. 236 www.riskrewardblog.blogspot.com ) As proof that “I don’t know it all”, during my sojourn in Italy, the yield plummeted from 2.45% to 2.09% at the close on Wednesday. It finished the week at 2.19%. “I just want y’all to know” that I was as “Surprised” by this as anyone. In any event, it kept the value of the fixed income portion of my holdings (e.g. FFC, DSL, OXLCO, MVF, HPF, EIM, VGM, HPS ) from falling (remember price goes up as yield goes down) even during the worst of the sell-off. This drop in rates results directly from a flight to safety caused by fear: fear that China will not meet even its reduced target of a 7.5% growth in gross domestic product; fear of deflation in the Eurozone; fear of ebola; fear of ISIS; fear of fear itself; fear that seems overblown in light of several good corporate earnings reports this week.

I am hopeful that the market’s action on Thursday and Friday signals that a bottom has been reached in both the value of equities and the price of crude oil. If this is confirmed next week, I see myself becoming an aggressive buyer. Unlike John Sebastian, I won’t have to be a “daydreamin' boy” when it comes to profits or to otherwise “Believe in Magic.” A confirmed rally will provide me with a reason “to have to make up my mind/To say yes to some and leave some others behind.”