Risk/Reward Vol. 285
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Where have all the young girls gone?
Where have all the husbands gone?
Where have all the soldiers gone?
Long time passing”---lyrics from “Where Have All the Flowers Gone” sung by Peter, Paul and Mary
“Money can't buy back
Your youth when you're old
Or a friend when you're lonely
Or a love that's grown cold”---lyrics from “A Satisfied Mind” sung by Johnny Cash
“Rock steady baby!
That's what I feel now
Let's call this song exactly what it is”---lyrics from “Rock Steady” sung by Aretha Franklin
Early reports indicate that Black Friday Weekend sales are lackluster. But even if they rebound, they cannot hide the biggest problem facing every economy in the developed world; namely, falling demand for goods and services. Merchants and manufacturers alike are asking “Where have all the young girls gone?/Where have all the husbands gone?/Where have all the soldiers gone?” The sad truth is they are “passing.” Indeed, this year, for the first time since 1950, the number of working age persons worldwide will shrink. Meanwhile, the numbers of those aged 65 and above continue to skyrocket. As warned by Harry Dent (highlighted in Vol. 218 www.riskrewardblog.blogspot.com ) this demographic shift is not good for the world’s economies. The peak age for consumption is 46 which means that Baby Boomer demand crested in 2007. And the following generations simply have not procreated like their predecessors. Who needs a five bedroom house like the Busch’s bought in 1989? Who needs a house at all? Apparently not many, as the sale of newly constructed houses has remained below 500,000 annually since 2008 even in the presence of record low mortgage rates. Between 1963 and 2005, that number averaged 700,000 peaking in 2005 at 1.3 million.
So if demand is dropping how come corporations continue to report record earnings? Remember, corporate earnings are not reported as actual earnings, but “earnings per share”. A corporation can improve its “earnings per share” by increasing actual earnings or by reducing share count. And it is the latter course of action that virtually every corporation in the S&P 500 and the Dow Jones Industrial Average has adopted. “Money can’t buy back/Your youth when you’re old/Or a friend when you’re lonely/Or a love that’s grown cold”—but it can buy back stock. Those corporations comprising the S&P 500 have repurchased over $550billion of their stock in the past 12 months thereby reducing their share count by nearly 3% and increasing “earnings per share” accordingly. In the face of ever shrinking demand, real earnings growth is hard to achieve so corporate managers can and do appease shareholders by buoying their stock price via buy backs.
So are we destined for reduced returns on our investment dollars? Absolutely not. It may not be as easy as it has been since 2010, but hopefully it will not be as difficult as it was in 2008-2009. One sector where I predict a “rock steady” annual return of 5-8% for 2016 is preferred stock. As mentioned countless times in this publication, the return on preferred stock is highly correlated to the interest rate on the US 10 Year Bond. The return on preferred stock will remain stable so long as the rate on the 10Year holds steady. With the futures market now 75% confident that the Federal Reserve will raise short term rates 25 basis points in December and that any increase thereafter will be extremely gradual if at all, one can be reasonably confident that the yield on the 10 Year will stabilize and thus the return on a basket of preferred shares will hold steady. For example, “what I feel now” is that for the foreseeable future PGX will trade between $14.50 and $15.00 and will yield between 5.75 and 6%. For those with an appetite for a bit more risk, any number of closed end preferred stock funds should deliver consistent 8-9% returns.
Throughout my life, I have fallen in love with my own ideas. I know this, and so I establish escape routes in case they don’t work. A perfect example is my 8% loss rule. Don’t any of you fall in love with them. Do your own research; reach your own conclusions. Falling in love with ideas, even one’s own, can be dangerous. In the words of Johnny Cash,
“Love is a burnin' thing,
And it makes a fiery ring
Bound by wild desire
I fell into a ring of fire
And it burned, burned, burned
That ring of fire/That ring of fire.”
Sunday, November 29, 2015
Sunday, November 15, 2015
November 15, 2015 Watching The Wheels
Risk/Reward Vol. 284
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“People say I'm crazy/Doing what I'm doing
Well, they give me all kinds of warnings/To save me from ruin
When I say that I'm okay, well, they look at me kinda strange
"Surely, you're not happy now, you no longer play the game"
People say I'm lazy/Dreaming my life away
Well, they give me all kinds of advice/Designed to enlighten me
When I tell them that I'm doing fine watching shadows on the wall
"Don't you miss the big time, boy. You're no longer on the ball"
Ahhh, people ask me questions/Lost in confusion
Well, I tell them there's no problem/Only solutions
Well, they shake their heads and they look at me as if I've lost my mind
I tell them there's no hurry, I'm just sitting here doing time
I'm just sitting here watching the wheels go round and round
I really love to watch them roll
No longer riding on the merry-go-round
I just had to let it go”---lyrics for “Watching The Wheels” sung by John Lennon
OK, I admit it. For the past few weeks, my iPhone has been tuned to the Pandora Beatles station. But don’t knock the lyrics of John and Paul when it comes to financial advice (or any other advice for that matter). Ten days ago, I heard the above song while driving home from a delightful dinner with two new subscribers. They were intrigued by my investment philosophy, in particular my obsession with correlations and my rejection of a buy and hold investment orientation. Unfortunately, I did a poor job of explaining my approach that evening (which is why I described it in last week’s edition www.riskrewardblog.blogspot.com ). I wished that I had had John’s lyrics in mind to assist. "People say I’m crazy/Doing what I’m doing.” “They give me all kinds of warnings/To save me from ruin.” “They give me all kinds of advice/ Designed to enlighten me." “They shake their heads and look at me as if I’ve lost my mind.” But, “I’m just sitting here (in cash) watching the wheels go round and round/No longer riding the merry-go-round.” Because two weeks ago I did not like where my holdings were headed so “I just had to let them go.”
And it's a good thing that I sold. Last week Mr. Market experienced his worse performance since August. Had I remained invested as I was just two weeks ago my handsome profits would have disappeared. I’m not discounting the role of luck, good or bad, in my approach (or anyone else’s). But, luck is merely the intersection of preparation and opportunity. Let’s take oil stocks for example. In late September, I noticed that the price of RDS/A and BP had not recovered from the shock delivered to the oil patch in August when the price of oil fell below $40/bbl. I bought both, as well as VNRBP, ETP and KMI and saw each vault skyward as the price of oil recovered to nearly $50/bbl. On October 24th the price of oil began a rapid decline and I was able to exit all of my oil positions. I did not buy at the bottom, nor sell at the top, but I did make a good profit. Moreover, I came to believe that the foreseeable future would not be good for oil due to the increased likelihood that interest rates would be raised in December, a belief that was confirmed during Janet Yellen’s post FOMC meeting press conference on October 26th. There are direct correlations between increased interest rates and a strong dollar (Increased US bond rates attract international investors thereby raising the demand for dollars at the expense of other currencies.) and between a strong dollar and lower oil prices (All oil contracts worldwide are denominated in dollars. A stronger dollar equates to less buying power in euros or pounds or whatever currency resulting in a lessened ability to purchase and a concomitant drop in demand and price.) These correlations are at work even as I write as the Euro is now worth $1.07 compared to $1.25 last year and the price of oil is back down to $40/bbl. My moves are not infallible. I am right only part of the time. When I am right, I let my winners run until they falter. When I am wrong I sell before absorbing more than an 8% loss on any one position. “I’m not lazy or dreaming my life away; nor am I lost in confusion.” I’m looking for “solutions.”
Alright SmartyPants, it's easy to look brilliant in retrospect. How about the future? OK, this is what I see. First, the yield on the ever important US 10 Year Treasury Bond has held steady at or around 2.3% ever since the blockbuster jobs report of November 6th; this despite a 3.7% decline in the Dow Jones Industrial Average and the S&P 500 over the same period. Since the bond futures are priced with a 70% certainty that the FOMC will raise short term rates in December, I am equally certain (70%) that even with such an increase the rate on the 10Year will not exceed 2.5%. If this is correct, then one should be able to buy with confidence those income securities that are most closely correlated to the rate on the 10Year, such as preferred stocks, and thereby enjoy a 6-9% annualized return. In this sector I like PGX (an ETF) or better yet several closed end funds such as HPS or HPF which pay monthly dividends. Note, however, if you buy closed end funds, be sure to avoid any that trade at a premium to net asset value. For this reason alone, I would avoid my favorite preferred stock fund, FFC. Personally, I likely will not make such a move until after the FOMC's December meeting. Second, with the news on Friday that the world's oil surplus is currently 3billion barrels (a 30 day supply) and growing at 2million barrels a day, the price of crude hit $40/bbl again. Once it hit that level, however, it found support and closed at $40.73. In turn, several of my favorite oil plays (ETP and VNRBP) rallied in the afternoon while others trimmed their losses from earlier in the day. If its price can hold at $40/bbl., there will be some excellent buys to be had in the oil patch. As a word of caution, I would avoid buying anything on Monday due to the potentially disruptive events that occurred in France on Friday night.
I close with a note of sadness---and apprehension. Once again we are reminded that mortal combat always has been and seemingly always will be part of the human experience. At some point even France will respond in kind to violence. With apologies to John Lennon, "the world won't live as one" so long as there are those who refuse to "give peace a chance.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“People say I'm crazy/Doing what I'm doing
Well, they give me all kinds of warnings/To save me from ruin
When I say that I'm okay, well, they look at me kinda strange
"Surely, you're not happy now, you no longer play the game"
People say I'm lazy/Dreaming my life away
Well, they give me all kinds of advice/Designed to enlighten me
When I tell them that I'm doing fine watching shadows on the wall
"Don't you miss the big time, boy. You're no longer on the ball"
Ahhh, people ask me questions/Lost in confusion
Well, I tell them there's no problem/Only solutions
Well, they shake their heads and they look at me as if I've lost my mind
I tell them there's no hurry, I'm just sitting here doing time
I'm just sitting here watching the wheels go round and round
I really love to watch them roll
No longer riding on the merry-go-round
I just had to let it go”---lyrics for “Watching The Wheels” sung by John Lennon
OK, I admit it. For the past few weeks, my iPhone has been tuned to the Pandora Beatles station. But don’t knock the lyrics of John and Paul when it comes to financial advice (or any other advice for that matter). Ten days ago, I heard the above song while driving home from a delightful dinner with two new subscribers. They were intrigued by my investment philosophy, in particular my obsession with correlations and my rejection of a buy and hold investment orientation. Unfortunately, I did a poor job of explaining my approach that evening (which is why I described it in last week’s edition www.riskrewardblog.blogspot.com ). I wished that I had had John’s lyrics in mind to assist. "People say I’m crazy/Doing what I’m doing.” “They give me all kinds of warnings/To save me from ruin.” “They give me all kinds of advice/ Designed to enlighten me." “They shake their heads and look at me as if I’ve lost my mind.” But, “I’m just sitting here (in cash) watching the wheels go round and round/No longer riding the merry-go-round.” Because two weeks ago I did not like where my holdings were headed so “I just had to let them go.”
And it's a good thing that I sold. Last week Mr. Market experienced his worse performance since August. Had I remained invested as I was just two weeks ago my handsome profits would have disappeared. I’m not discounting the role of luck, good or bad, in my approach (or anyone else’s). But, luck is merely the intersection of preparation and opportunity. Let’s take oil stocks for example. In late September, I noticed that the price of RDS/A and BP had not recovered from the shock delivered to the oil patch in August when the price of oil fell below $40/bbl. I bought both, as well as VNRBP, ETP and KMI and saw each vault skyward as the price of oil recovered to nearly $50/bbl. On October 24th the price of oil began a rapid decline and I was able to exit all of my oil positions. I did not buy at the bottom, nor sell at the top, but I did make a good profit. Moreover, I came to believe that the foreseeable future would not be good for oil due to the increased likelihood that interest rates would be raised in December, a belief that was confirmed during Janet Yellen’s post FOMC meeting press conference on October 26th. There are direct correlations between increased interest rates and a strong dollar (Increased US bond rates attract international investors thereby raising the demand for dollars at the expense of other currencies.) and between a strong dollar and lower oil prices (All oil contracts worldwide are denominated in dollars. A stronger dollar equates to less buying power in euros or pounds or whatever currency resulting in a lessened ability to purchase and a concomitant drop in demand and price.) These correlations are at work even as I write as the Euro is now worth $1.07 compared to $1.25 last year and the price of oil is back down to $40/bbl. My moves are not infallible. I am right only part of the time. When I am right, I let my winners run until they falter. When I am wrong I sell before absorbing more than an 8% loss on any one position. “I’m not lazy or dreaming my life away; nor am I lost in confusion.” I’m looking for “solutions.”
Alright SmartyPants, it's easy to look brilliant in retrospect. How about the future? OK, this is what I see. First, the yield on the ever important US 10 Year Treasury Bond has held steady at or around 2.3% ever since the blockbuster jobs report of November 6th; this despite a 3.7% decline in the Dow Jones Industrial Average and the S&P 500 over the same period. Since the bond futures are priced with a 70% certainty that the FOMC will raise short term rates in December, I am equally certain (70%) that even with such an increase the rate on the 10Year will not exceed 2.5%. If this is correct, then one should be able to buy with confidence those income securities that are most closely correlated to the rate on the 10Year, such as preferred stocks, and thereby enjoy a 6-9% annualized return. In this sector I like PGX (an ETF) or better yet several closed end funds such as HPS or HPF which pay monthly dividends. Note, however, if you buy closed end funds, be sure to avoid any that trade at a premium to net asset value. For this reason alone, I would avoid my favorite preferred stock fund, FFC. Personally, I likely will not make such a move until after the FOMC's December meeting. Second, with the news on Friday that the world's oil surplus is currently 3billion barrels (a 30 day supply) and growing at 2million barrels a day, the price of crude hit $40/bbl again. Once it hit that level, however, it found support and closed at $40.73. In turn, several of my favorite oil plays (ETP and VNRBP) rallied in the afternoon while others trimmed their losses from earlier in the day. If its price can hold at $40/bbl., there will be some excellent buys to be had in the oil patch. As a word of caution, I would avoid buying anything on Monday due to the potentially disruptive events that occurred in France on Friday night.
I close with a note of sadness---and apprehension. Once again we are reminded that mortal combat always has been and seemingly always will be part of the human experience. At some point even France will respond in kind to violence. With apologies to John Lennon, "the world won't live as one" so long as there are those who refuse to "give peace a chance.
Sunday, November 8, 2015
November 8, 2015 Correlation
Risk/Reward Vol. 283
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Due to familial obligations, I am not publishing a typical column this week. However, as a result of the blockbuster jobs report issued on Friday, the likelihood of the Federal Reserve raising interest rates in December soared. Indeed, pundits are placing the odds at 70% or higher. Such a development deserves some reflection.
As a student of correlation (more about that in a second), Friday played out in a predictable manner. The likelihood of a rate increase triggered a spike in bond yields. The yield on the US two year Treasury bond jumped to a five year high, and the yield on the 10 Year popped above 2.3%. This of course caused a concomitant drop in bond prices and in the prices of those securities that trade in correlation thereto. (Remember, in the bond and interest rate sensitive world higher yields means lower prices). Thus real estate investment trusts (REIT's), utilities, preferred stocks and a host of other rate sensitive securities took it on the chin. The prospect of increased rates also caused the dollar to strengthen in relation to other world currency. When this happens, the price of oil, which is denominated world wide in dollars, typically falls which it did yesterday. In turn, oil stocks tanked.
As reported last week, the heightened likelihood of this scenario contributed to my recent decision to sell my holdings in oil, REIT's and other rate sensitive securities. Had I not, my profits would have been halved last week. Ironically, based on my study of correlation, these sectors now may be oversold. If this situation continues into next week, I may not wait for the actual rate increase to re-enter.
Displayed below is an excerpt from Vol. 221 (www.riskrewardblog.blogspot.com) which explains in more detail my correlation theory.
"Modern portfolio theory posits that an investor can maximize his/her return and minimize risk through asset diversification. In other words, by creating a portfolio of assets that move in different (even opposite) directions in response to any given market stimulus one can lower one’s risk and still profit. I get the theory. But, it just isn’t right for “ lovers, dreamers or me.” I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity; with movement by that singularity providing clarity on when to buy, hold or sell. I believe that my “some day to find” that singularity, the “rainbow connection” if you will, has arrived. No surprise to my readers, the singularity of which I write is the yield on the 10Year US Treasury Bond (10Year). I further believe that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can prosper. In sum, predictability is more important to me than diversification.
Allow me to elaborate As loyal readers now know,” hands on your knees/hands on your hips/hands down” the benchmark interest rate against which all income securities are priced or spread is the yield on the 10Year. Based upon observation and study over the past three years, “hands on your shoulders/hands on your head/ hands down” the asset class most correlated to movement in the 10Year yield or rate is preferred stock. This is understandable since preferred stocks are a pure interest rate play and absent credit risk are unaffected by the performance of the underlying issuer. Stated alternatively, any change in the price of a credit worthy preferred stock is driven almost exclusively by the interest rate on the 10Year. Indeed, on most days I can tell whether my preferred stocks are “up or down” by simply looking at what happened to the yield on the 10Year. or vice versa Moreover, having studied and confirmed this correlation, I have increased my preferred stock income by buying preferred stock closed end funds (e.g. FFC, HPF, JPC) which enhance returns through leverage. To me, the risk associated with these leveraged funds is no greater since the correlation to the 10Year remains the same. Similar correlations to the yield on the 10Year obtain for mortgage real estate investment trusts, triple net lease investment trusts, leveraged bond funds, leveraged senior loan funds, leveraged municipal bond funds, leveraged utility funds and a host of other income securities. On average this portfolio pays an 8% annual dividend. In addition, I look for stocks or funds that distribute dividends monthly because a corollary to owning a portfolio singularly correlated to the yield on the 10Year is that one must be prepared to sell everything once the prevailing winds shift, and the yield on the 10Year starts to rise. This is what happened during the “taper tantrum” last summer when the yield on the 10Year went from 1.63% on May 2 to 2.16% on May 31 to 2.6% on July 5. Once the upward direction of that movement was confirmed (remember: upward yield means downward price), liquidation of the portfolio was in order (See Vol. 172 www.riskrewardblog.blogspot.com ). That wholesale departure was made more palatable by the receipt of monthly dividends which meant that I was not leaving a juicy quarterly dividend behind. In time, the yield on the 10Year stabilized, the typical spreads returned and I re-entered en masse. (See Vol. 200 www.riskrewardblog.blogspot.com ) If and when the 10Year yield begins to inflate in the future, I will sell and await stability again. It's a win/win because all that I have wanted from the beginning of this journey is a decent rate of return on government bonds (see Vol. 1 www.riskrewardblog.blogspot.com )"
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Due to familial obligations, I am not publishing a typical column this week. However, as a result of the blockbuster jobs report issued on Friday, the likelihood of the Federal Reserve raising interest rates in December soared. Indeed, pundits are placing the odds at 70% or higher. Such a development deserves some reflection.
As a student of correlation (more about that in a second), Friday played out in a predictable manner. The likelihood of a rate increase triggered a spike in bond yields. The yield on the US two year Treasury bond jumped to a five year high, and the yield on the 10 Year popped above 2.3%. This of course caused a concomitant drop in bond prices and in the prices of those securities that trade in correlation thereto. (Remember, in the bond and interest rate sensitive world higher yields means lower prices). Thus real estate investment trusts (REIT's), utilities, preferred stocks and a host of other rate sensitive securities took it on the chin. The prospect of increased rates also caused the dollar to strengthen in relation to other world currency. When this happens, the price of oil, which is denominated world wide in dollars, typically falls which it did yesterday. In turn, oil stocks tanked.
As reported last week, the heightened likelihood of this scenario contributed to my recent decision to sell my holdings in oil, REIT's and other rate sensitive securities. Had I not, my profits would have been halved last week. Ironically, based on my study of correlation, these sectors now may be oversold. If this situation continues into next week, I may not wait for the actual rate increase to re-enter.
Displayed below is an excerpt from Vol. 221 (www.riskrewardblog.blogspot.com) which explains in more detail my correlation theory.
"Modern portfolio theory posits that an investor can maximize his/her return and minimize risk through asset diversification. In other words, by creating a portfolio of assets that move in different (even opposite) directions in response to any given market stimulus one can lower one’s risk and still profit. I get the theory. But, it just isn’t right for “ lovers, dreamers or me.” I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity; with movement by that singularity providing clarity on when to buy, hold or sell. I believe that my “some day to find” that singularity, the “rainbow connection” if you will, has arrived. No surprise to my readers, the singularity of which I write is the yield on the 10Year US Treasury Bond (10Year). I further believe that by maintaining daily vigilance, adhering to strict principles and fearing not, the buying and/or selling, in short order, of some or all of one’s portfolio, one can prosper. In sum, predictability is more important to me than diversification.
Allow me to elaborate As loyal readers now know,” hands on your knees/hands on your hips/hands down” the benchmark interest rate against which all income securities are priced or spread is the yield on the 10Year. Based upon observation and study over the past three years, “hands on your shoulders/hands on your head/ hands down” the asset class most correlated to movement in the 10Year yield or rate is preferred stock. This is understandable since preferred stocks are a pure interest rate play and absent credit risk are unaffected by the performance of the underlying issuer. Stated alternatively, any change in the price of a credit worthy preferred stock is driven almost exclusively by the interest rate on the 10Year. Indeed, on most days I can tell whether my preferred stocks are “up or down” by simply looking at what happened to the yield on the 10Year. or vice versa Moreover, having studied and confirmed this correlation, I have increased my preferred stock income by buying preferred stock closed end funds (e.g. FFC, HPF, JPC) which enhance returns through leverage. To me, the risk associated with these leveraged funds is no greater since the correlation to the 10Year remains the same. Similar correlations to the yield on the 10Year obtain for mortgage real estate investment trusts, triple net lease investment trusts, leveraged bond funds, leveraged senior loan funds, leveraged municipal bond funds, leveraged utility funds and a host of other income securities. On average this portfolio pays an 8% annual dividend. In addition, I look for stocks or funds that distribute dividends monthly because a corollary to owning a portfolio singularly correlated to the yield on the 10Year is that one must be prepared to sell everything once the prevailing winds shift, and the yield on the 10Year starts to rise. This is what happened during the “taper tantrum” last summer when the yield on the 10Year went from 1.63% on May 2 to 2.16% on May 31 to 2.6% on July 5. Once the upward direction of that movement was confirmed (remember: upward yield means downward price), liquidation of the portfolio was in order (See Vol. 172 www.riskrewardblog.blogspot.com ). That wholesale departure was made more palatable by the receipt of monthly dividends which meant that I was not leaving a juicy quarterly dividend behind. In time, the yield on the 10Year stabilized, the typical spreads returned and I re-entered en masse. (See Vol. 200 www.riskrewardblog.blogspot.com ) If and when the 10Year yield begins to inflate in the future, I will sell and await stability again. It's a win/win because all that I have wanted from the beginning of this journey is a decent rate of return on government bonds (see Vol. 1 www.riskrewardblog.blogspot.com )"
Sunday, November 1, 2015
November 1, 2015 Nae Nae
Risk/Reward Vol. 282
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Drop it like it's hot
Drop it like it's hot”---lyrics from “Drop It Like It’s Hot” sung by Snoop Dawg
“Now watch me whip (Kill it!)
Now watch me nae nae (Okay!)
Now watch me whip whip
Watch me nae nae (Want me do it?)”---lyrics from “Watch Me” sung by Silento
“When you were young and your heart was an open book
You used to say live and let live
(you know you did, you know you did you know you did)
But if this ever changing world in which we're living
Makes you give in and cry
Say live and let die”---lyrics from “Live and Let Die” sung by Paul McCartney
October was a good month for Mr. Market as the Dow Jones Industrial Average (DJIA) rose 8.5%, its biggest monthly percentage gain in four years. As detailed in earlier editions, I was fortunate to catch the updraft, in particular in the oil patch. But as discussed last week, that sector had begun to cool so on Monday I “dropped it like it was hot/dropped it like it was hot.” I made a small profit on KMI and ETF which have yet to rebound from the surprise equity offering that KMI launched (see Vol. 281 www.riskrewardblog.blogspot.com ). But, I profited handsomely in selling RDS/A (Shell), VNRBP and BP. Mid and long term, I see oil as a great investment, especially Shell. It has adjusted so well to the new, lower price of oil, it is able to cover operating costs, debt service, capital expenditures and, most importantly, its nearly 9% dividend all from current revenue. But given the downward bias in oil these past two weeks and the fact that my big winners were mostly in my 401k account, I decided to take a tax free time out.
How did you interpret Wednesday's Federal Reserve post meeting press release? Are we in for a rate increase in December? Clearly, Mr. Market is without a clue as the DJIA dropped 131 points in the minutes following the press release and then rebounded 203 points to close the day in positive territory. In other words, watching the Fed caused Mr. Market initially to do the “nae, nae” then to “whip, whip” back upward. Who knows, after December’s meeting maybe he'll do the “bop, bop” or the “Superman” or even the “stanky leg.” Sometimes I wish the Fed would just remain Silento.
Lost in the wake of the Fed’s press release was news this week that China adjusted downward to 6.5% the projected rate of growth of its gross domestic profit. That news broke at the same time China announced that it was abandoning its “one child rule.” This is likely too little too late as China, like Japan before it, has become a demographic time bomb. Its working age population is shrinking---fast. Today each retired citizen is supported by 5 workers; in 2040 that ratio shrinks to 2 to 1. Fewer workers means fewer consumers; fewer consumers means less production. This is bad news for the world’s economies, especially those in the developing world. They prospered from 2009 through 2014 primarily via exporting raw materials to China. Take a look at Vol. 74 where I catalog the percentage of the world’s cement, copper, iron ore, etc. that China consumes. (www.risksrewardblog.blogspot.com ). It is astounding. This is of particular concern when one realizes that the performance of 15 of the 30 companies comprising the DJIA is dependent on China. In light of this news and the Fed’s ambiguous signals, I decided to take some profit off the table in sectors other than oil. In so doing, I followed the advice of Sir Paul : “When I was young/And my heart was an open book/I used to say live and let live/But this ever-changing world in which we're livin'/Sometimes makes me give in and cry/Say live and let die”
Maybe you’re amazed that I have chosen to bail after Mr. Market’s splendid October. “Maybe I’m Amazed” myself. Am I being wise to capture what I consider an acceptable level of profit for the year or am I merely a frightened “Band on the Run.” Who knows? But, I rarely have regretted selling and often have regretted staying put. I will take certainty over "A Little Luck” anytime. I do not see myself re-entering until after the Fed’s December meeting---unless of course I hear a “Silly Love Song” and change my mind. But do your own research and do not "Listen To What The Man Said,"
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Drop it like it's hot
Drop it like it's hot”---lyrics from “Drop It Like It’s Hot” sung by Snoop Dawg
“Now watch me whip (Kill it!)
Now watch me nae nae (Okay!)
Now watch me whip whip
Watch me nae nae (Want me do it?)”---lyrics from “Watch Me” sung by Silento
“When you were young and your heart was an open book
You used to say live and let live
(you know you did, you know you did you know you did)
But if this ever changing world in which we're living
Makes you give in and cry
Say live and let die”---lyrics from “Live and Let Die” sung by Paul McCartney
October was a good month for Mr. Market as the Dow Jones Industrial Average (DJIA) rose 8.5%, its biggest monthly percentage gain in four years. As detailed in earlier editions, I was fortunate to catch the updraft, in particular in the oil patch. But as discussed last week, that sector had begun to cool so on Monday I “dropped it like it was hot/dropped it like it was hot.” I made a small profit on KMI and ETF which have yet to rebound from the surprise equity offering that KMI launched (see Vol. 281 www.riskrewardblog.blogspot.com ). But, I profited handsomely in selling RDS/A (Shell), VNRBP and BP. Mid and long term, I see oil as a great investment, especially Shell. It has adjusted so well to the new, lower price of oil, it is able to cover operating costs, debt service, capital expenditures and, most importantly, its nearly 9% dividend all from current revenue. But given the downward bias in oil these past two weeks and the fact that my big winners were mostly in my 401k account, I decided to take a tax free time out.
How did you interpret Wednesday's Federal Reserve post meeting press release? Are we in for a rate increase in December? Clearly, Mr. Market is without a clue as the DJIA dropped 131 points in the minutes following the press release and then rebounded 203 points to close the day in positive territory. In other words, watching the Fed caused Mr. Market initially to do the “nae, nae” then to “whip, whip” back upward. Who knows, after December’s meeting maybe he'll do the “bop, bop” or the “Superman” or even the “stanky leg.” Sometimes I wish the Fed would just remain Silento.
Lost in the wake of the Fed’s press release was news this week that China adjusted downward to 6.5% the projected rate of growth of its gross domestic profit. That news broke at the same time China announced that it was abandoning its “one child rule.” This is likely too little too late as China, like Japan before it, has become a demographic time bomb. Its working age population is shrinking---fast. Today each retired citizen is supported by 5 workers; in 2040 that ratio shrinks to 2 to 1. Fewer workers means fewer consumers; fewer consumers means less production. This is bad news for the world’s economies, especially those in the developing world. They prospered from 2009 through 2014 primarily via exporting raw materials to China. Take a look at Vol. 74 where I catalog the percentage of the world’s cement, copper, iron ore, etc. that China consumes. (www.risksrewardblog.blogspot.com ). It is astounding. This is of particular concern when one realizes that the performance of 15 of the 30 companies comprising the DJIA is dependent on China. In light of this news and the Fed’s ambiguous signals, I decided to take some profit off the table in sectors other than oil. In so doing, I followed the advice of Sir Paul : “When I was young/And my heart was an open book/I used to say live and let live/But this ever-changing world in which we're livin'/Sometimes makes me give in and cry/Say live and let die”
Maybe you’re amazed that I have chosen to bail after Mr. Market’s splendid October. “Maybe I’m Amazed” myself. Am I being wise to capture what I consider an acceptable level of profit for the year or am I merely a frightened “Band on the Run.” Who knows? But, I rarely have regretted selling and often have regretted staying put. I will take certainty over "A Little Luck” anytime. I do not see myself re-entering until after the Fed’s December meeting---unless of course I hear a “Silly Love Song” and change my mind. But do your own research and do not "Listen To What The Man Said,"
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