June 12, 2016 Strange Days

Risk/Reward Vol. 310

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

“We chased our pleasures here
Dug our treasures there
But can you still recall
The time we cried
Break on through to the other side”---lyrics from “Break on Through” sung by The Doors

“Now give me money (that's what I want)
That's what I want (that's what I want)
That's what I want (that's what I want) yeah
That's what I want”---lyrics from “Money” sung by The Beatles (and every garage band)

“So you heard it all before
Falling in and out of trust
Trying to rekindle us
Only to lose yourself”---lyrics from “Mark My Words” sung by Justin Bieber

Both major indices flirted with year to date highs on Wednesday only to fall on Thursday and Friday. Dow Jones “chased its pleasures here and dug its treasures there”, but just could not “break on through to the other side” of 18000. The confidence that arose from the belief that the Federal Reserve will not raise interest rates at its upcoming meeting was offset by increased odds that Britain will vote to exit the European Union later this month. The impact of Brexit has been poorly assessed and uncertainty abounds. Why? Because until very recently the elites on both sides of the Channel believed it highly unlikely. Mr. Market abhors uncertainty and thus has fled to instruments that are safer than equities such bonds and cash.

Did you say cash? Yes, cash. With much of the world’s bonds bearing negative interest rates (buy a 1000 Euro German government bond today and get 995 Euros back in a year—yes really) and with the European Central Bank and the Bank of Japan charging financial institutions that keep excess funds on deposit, the world has seemingly gone mad. How mad? Well, Commerzbank, the second largest bank in Germany announced this past week that it is considering stashing its excess funds in vaults in lieu of depositing them with the ECB. Its ability to do so is hampered, of course, by the ECB’s decision to cease printing 500Euro bills, a decision designed to discourage the very move contemplated by Commerzbank and by thousands of Germany’s savers. This story is not over. Culturally, Germans are savers and the idea of being charged to keep savings on deposit is abhorrent to them. If and when that occurs, they will buy vaults and demand that banks “give them their money (that’s what they want)/that’s what they want/yeah that’s what they want.”

But not all of the news was discouraging this week. The price of oil held near $50/bbl. despite news that the number of rigs operating in the US increased last week for the first time in months. Moreover, Shell, the Anglo-Dutch energy conglomerate, held an informative nvestors' conference where CEO, Ben van Beurdan, announced that the synergies associated with Shell’s much criticized mega merger earlier this year with natural gas producer BG are better than expected. Unlike statements from some CEO's from whom "I have heard it all before/Falling in and out of trust/Trying to rekindle my interest/Only to have me lose", van Beuran is a man whose words an investor can mark. Long one of my favorites in the oil patch and my first purchase when I re-entered the market in April, Shell stock (RDS/B) jumped 5% this week. It is up 13% year to date. Nevertheless, due to its 7+% dividend, I believe Shell stock has much more room to run. Accordingly, I bought more. Also, this week, one of my favorites mlp’s, SUN (the operator of Sunoco’s wholesale and retail operations), was hit with a very negative analyst report. Having done my own homework, I disagreed and used the downgrade as an opportunity to buy SUN at a deep discount. Time will tell who is right.

A sad truth of history is one's inability to grasp the significance of the times in which one lives. Dear Readers, these are truly historic times. The persistence of near zero interest rates in the US and the presence of now negative interest rates elsewhere are unprecedented---and to my mind dangerously so. The unquestioned belief held by central bankers, lo these past 8 years, that low rates and easy money will achieve growth and inflate the world’s economies is insane; at least according to the definition of insanity attributed to Einstein: to wit; doing the same thing over and over again expecting a different result. The fact is that our central bankers have it wrong. But, like weathermen, they cannot admit their mistake and cannot set a different course. Indeed, we may be witnessing the most wrongheaded experiment in monetary history. To quote The Doors, we are in the midst of “Strange Days”:
“Strange days have found us
And through their strange hours
We linger alone
Bodies confused
Memories misused”

June 5, 2016 Surprise

Risk/Reward Vol. 309

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

Last week's holiday and this week's familial obligations have precluded me from publishing two consecutive editions. That stated, I share with you the following.

Had I written an edition last week it would have recorded my certainty (shared in most part by Mr. Market) that the Federal Reserve would raise rates in June or July. I also would have reported that Mr. Market had positioned himself for such an event and that I likely would not sell in advance of those meetings despite previous statements to the contrary.

Friday's miserable jobs report has taken a June increase off the table, at least according to the odds makers at the CME. Moreover, the folks at Goldman Sachs are now questioning whether a move in July makes sense. From the action in the stock market on Friday, it appears that Mr. Market may have shed his fascination with the Fed as the plummeting of odds that an increase will occur did little to move the needle. Both the Dow Jones Industrial Average and the S&P 500 stayed within a very tight trading range all week. Both are up just over 2% for the year

On a personal level, I continue to do well as the rate on the 10 Year Treasury Bond has stayed well below 2% and the price of oil has stabilized near $48. Moreover, the price of natural gas has risen slightly which has increased the value of some of my pipeline plays. The modest portfolio I started in late April is up over 3.2% with energy plays OKE, PAA, ETP, KYN and DPM, preferred stock funds HPI and HPF and real estate investment trusts STAG and CIM leading the way. Moreover, this portfolio averages over 7% in annual dividend payments, many of which are paid monthly. Combined with the profits I took in early April, this year's performance is better than I expected---at least so far. I don't like being a trader, but buying and holding in a market bloated by eight years of zero bound interest rates is not prudent for a person at my stage in life.