October 25, 2015 Whim

Reward Vol. 281

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

I was invited to a small, exclusive subscriber conference in Florida this week and therefore will not be publishing a regular edition.

Wow, what a run the bulls had at the end of the week! In response to an announcement from the European Central Bank that it is considering even more quantitative easing (including extending or increasing its $68billion monthly purchase of sovereign bonds), the Dow Jones Industrial Average skyrocketed 321 points on Thursday. The S&P 500 experienced a similar percentage rise. Friday saw another 150+ bump in the Dow on news that China’s Central Bank cut rates 50 basis points and reduced its bank reserve requirement. And so the easy money parade continues overseas and places pressure on the Federal Reserve to postpone any interest rate increase stateside. Since their nadir at the end of September, both major indices have rallied approximately 8% and now both are even for the year.

As good as the week was for the markets in general, the oil patch disappointed. Leading the way down was Kinder Morgan which sent shock waves by announcing that it was planning an unanticipated equity raise. Mr. Market hates surprises and even more when the surprise comes in a sector (oil in general and pipelines in particular) that has already been rocked. Kinder’s shocker hit other pipeline companies including ETP. Large oil companies also faltered as bench mark oil prices fell. Indeed, my week was rescued from this oil patch fiasco by some outsized gains by GM and several REIT’s.


This week serves as a reminder that at present Mr. Market is most influenced by the whims of a handful of central bankers. The lower the rates and the easier the money, the better Mr. Market likes it. But relying on whims is risky. By definition, whims can change inexplicably and without notice. The wise investor must remain vigilant and nimble.

October 18, 2015 Dry Powder

Risk/Reward Vol. 280

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

“While you've been saving your neck

I've been breaking mine for ya'

The power is on, the guillotine hums

My back's to the wall - go on, let it fall

Make up your mind”---lyrics from “Make Up Your Mind” sung by Florence + The Machine

“Don't wait keep right on

But be aware

Don't take too long

The time just seems to fly

Just keep your powder dry”---lyrics from “Keep Your Powder Dry” sung by Motorhead

“This land is your land
This land is my land

From California to the New York island

From the red wood forest to the Gulf Stream waters

This land was made for you and Me”---lyrics from “This Land Is Your Land” sung by Woodie Guthrie

Volatility again prevailed in the stock market this week. And why not. Disappointing retail sales prompted two of Janet Yellen’s closest allies on the FOMC (Fed Governors Tarullo and Brainerd) to speculate that it may not be appropriate to raise rates in 2015. How does this square with Chair Yellen’s commitment to raise rates absent a significant downturn; a downturn that has not materialized? These mixed messages prompted Larry Fink, the founder and CEO of BlackRock the world’s largest asset management firm, to blast the Fed. He accused it of destabilizing financial markets worldwide when its mission should be to promote stability. Mr. Market finds himself in Florence’s shoes: “While Janet’s been saving her neck/He’s been breaking his/The power is on, the guillotine hums/His back’s to the wall- go on, let it fall/Make up your mind!”

But volatility need not be bad---at least not for those who "kept their powder dry.” Having plenty of cash on hand going into September’s swoon has proven a year-saver for me, at least so far. Capturing the double digit gains reported in last week’s edition (See Vol. 279 www.riskrewardblog.blogspot.com ) as well as others (e.g. a 12% gain in HQH to which a subscriber/fellow ski bum led me) has yours truly on track for a profitable 2015 even as the indices remain in the red. But one does not acquire powder without selling---hopefully at a profit. Paraphrasing Bernard Baruch, I've never lost money taking a profit. I need to keep this in mind and to “be aware/Don’t take too long (to sell)/The time just seems to fly.”

If the Fed does not raise rates in 2015 or even if it does but signals that it is a “one and done”, interest rate sensitive stocks including two of my favorite sectors, preferred stocks and real estate investment trusts (REIT’s), will continue to hold value and to pay handsome dividends. Both have done well recently with FFC (a preferred stock closed end fund) up 9% and two REIT’s, OHI and O, up 9% and 7.5% respectively, since I bought them at the beginning of September. Bargains may be difficult to find going forward, but a stable interest rate environment is always good for real estate. Make “this land/your land/From California to the New York island/From the redwood forest to the Gulf Stream waters/This land’s worth owning by you and me.”

Buy and hold has been an uninspiring strategy this year. The profit I will make in 2015, assuming I do, will come from adherence to my loss limit rule then re-entering in September at the bottom of a trough. The question remains will I sell in time to avoid another downturn. This has been an issue for me in the past. In any event, being nimble has been key this year, and may well be for years to come as economic growth remains sluggish worldwide. Florence’s lyrics may provide a path to success in the future:


“Run fast for your mother, run fast for your father

Run for your children, for your sisters and brothers

Leave all your love and your longing behind

You can't carry it with you if you want to survive”

October 11, 2015 Putin--On the Ritz

Risk/Reward Vol. 279

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

"Dressed up like a million dollar trooper

Trying hard to look like Gary Cooper
Perfect fits
Puttin’ on the Ritz"---lyrics from “Puttin’ on the Ritz” sung by Fred Astaire

“Tell me why
Is it so
That I never can say goodbye, no, no, no, no, now

Never can say goodbye”---“Never Can Say Goodbye” sung by the Jackson 5

“I'm scared, I'm scared, I'm scared
I'm scared, so scared
I'm scared, I'm scared, I'm scared”---lyrics from “Scared” sung by John Lennon

The price of oil rose 9% this week, a welcomed development for me. One reason for the rise was the continuing drop in domestic production. The US rig count stood at 795 at week’s end compared to 1930 this time last year. A second reason was the uncertainty stemming from Vladimir Putin’s ever growing presence in the Middle East. Last week, he brought his air force into the region. This week he launched a cruise missile attack on Syrian rebels, the same rebels that the US has been arming these past several months. The missiles were fired from a ship in the Caspian Sea and traveled 900 miles without detection, hugging the terrain through Iran and Iraq then into Syria. Just as easily, those missiles could have been used to disrupt shipping lanes out of Saudi Arabia. The man who Boone Pickens calls “the new sheriff in town” looms over the Mideast “dressed up like a million dollar trooper/Trying hard to look like Gary Cooper/Perfect fits/It’s Vladimir---Putin on the Ritz.”

My ability to find joy in the oil patch is because I abandoned it many months ago and returned to it only recently. The KMI and ETP that I purchased on September 30th are up 17% and 19% respectively. The VNRBP that I bought on Wednesday is up over 4%. That said, had I stayed in those stocks from my penultimate foray into the oil patch in the summer of 2014, I would still be down 20% on KMI, 25% on ETP and 29% on VNRBP. My adherence to an 8% loss limit saved me from that fate. Why people buy and hold in the face of such dramatic drops is beyond my comprehension. Somebody “tell me why/Is it so/That they never can say goodbye, no, no, no, no now/Never can say goodbye.”

Release of the minutes from the Federal Reserve’s meeting of September 16-17 lent support to those who believe no interest rate hike will occur this year. As I have written in the past, I believe that this is bad policy. But I have no influence on policy. My concern is the interest rate on the US Ten Year Treasury Bond off which many of my investments are priced. As an investor, I don’t care at what level the 10Year trades. I just want rate stability, something that alludes us as long as the Fed’s guessing game continues. The confidence I had that Chair Yellen would be a woman of her word and would raise rates at least once in 2015 has been eroded. The released minutes bespeak the following refrain: “I’m scared, I’m scared, I’m scared/I’m scared, so scared/I’m scared, I’m scared, I’m scared.” Scared of what, you ask, with unemployment at only 5% and inflation in check? Apparently scared of Mr. Market or Mr. Draghi or Mr. Xi---who knows. Again, Janet, just do it.

And so we head into the final quarter of the year with little certainty as to the course of our monetary policy. I don’t know about you, but I am tired of the Fed’s “Mind Games.” With each Fed meeting, Fed speech and/or Fed minute release, it’s like “Starting Over.” “Imagine” a financial world where the whims of central bankers do not hold sway. In recognition of what would have been John Lennon's 75th birthday, we implore you, Federal Reserve, do (or don’t do) something---definitively. “Give (monetary policy) Peace a Chance.”

October 4, 2015 Sexy Back

Risk/Reward Vol. 278

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

“How can I listen to my mind

Without breaking my heart

I'm so confused

What should I do”---lyrics from “Confused” sung by Justin Timberlake

“In and out of love 

Hear what I'm sayin'

In and out of love

It's the way that we're playing”---lyrics from “In and Out of Love” sung by Bon Jovi

“Arabian nights, 'neath Arabian moons

A fool off his guard

Could fall and fall hard

Out there on the dunes”---lyrics from “Arabian Nights” from “Aladdin”

Did you follow the Dow Jones Industrial Index’s mercurial, 469 point ride on Friday? Clearly, Mr. Market was “Confused” on how to interpret the disappointing jobs number reported Friday morning. Was the bad news actually bad news as indicated by the market’s drop in the morning or was it good news (at least in regard to postponing an interest rate increase) as some interpreted the afternoon rise? Saturday morning’s reportage shed little light on what to make of the data. Like Mr. Market, “How can I listen to my mind/Without breaking my heart/I’m so confused/What should I do?”

Although more dramatic, Friday’s action mirrored that which has been occurring for some time. Just look at the 300 point drop on Monday and the recovery had on Wednesday. That action caused me to sell BX, KMI and ETP per my 8% loss rule only to repurchase them one day later. “In and out of love/Hear what I’m sayin’/In and out of love/It’s the way that I’m playing.” Although still in a loss position, as of Friday’s close I am down less than 4% on each of these favorites. The transactional cost: $7 in, $7 out and forfeiture of a wash sale tax loss. Cheap insurance, in my opinion. Is this yo-yo-ing what we can expect? I am afraid so, at least until we get a clearer read on when and what the Fed will do with interest rates.

The big news of the week may have been lost in the hubbub of the jobs number. And that news is about oil. Domestically, the Keystone pipeline is dead. Moreover, the number of active US crude oil rigs fell by 26 last week and now stands at 614, the lowest number since 2010. On that news alone, the price of domestic crude rose 1.8% on Friday. Internationally, crude prices face significant upward price pressure from a variety of forces. One is the threat posed by the sudden appearance of the Russian air force in Syria with air rights granted by both Iran and Iraq. Russia, the economy of which is dependent upon oil exports and thus has been decimated by declining prices, is now within striking distance of every major oil route out of the Mideast. A second upward force is the toll that the oil price war has had on its instigator, Saudi Arabia. Earlier this year, the Saudi’s literally opened the spigot in an attempt to run US oil producers out of business by having the price of oil fall below the US’s cost of production. As evidenced by the drop in the rig count noted above, the move has been partially successful, but at a tremendous cost. In order to shoulder its expensive welfare state and to fund its various military adventures in Yemen and elsewhere, the Saudis need oil prices of $100/bbl. Thus for several months the Kingdom has had to liquidate its foreign reserves to subsidize the $50 delta between current international oil prices and this social cost. At a $10 billion per month burn rate, even the Saudi’s substantial $700 billion reserve is not inexhaustible. This is a tricky gambit they are running. “Arabian nights ‘neath Arabian moons/A fool off his guard/Could fall and fall hard/Out there on the dunes.” What does this mean to me ? I see oil prices stabilizing, even rising. I am not alone in this view. The BP that I bought last week is up 8%. The KMI that I repurchased on Wednesday is up 7%. And the ETP that I repurchased that same day is up 10%.

My five year, daily study of the stock market has led me to believe, like Justin Timberlake, that “What Goes Around/Comes Around.” The secret is being “N Sync” with Mr. Market. Anytime I am not, I “Cry Me a River.” But when I am (which I think I am in regard oil), it’s like bringing “Sexy Back.”