February 5, 2018 (665)

Risk/Reward Vol. 379

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

Holy smokes! If you were not tempted to sell when the Dow Jones Industrial Average sank 540 points on Monday and Tuesday, you probably were tempted come Friday afternoon. Is this the beginning of the end of the bull run? Is a correction around the corner? Who knows? No one. If you think otherwise, replay the evening telecasts this week of the Stock Prognosticator in Chief, Jim Cramer and listen to equivocation at its best. Like everyone else peddling advice, he talks almost exclusively about how to identify a good buying opportunity. Hey, Cramer how about spending 50% or even 10% of your time on identifying when to sell? Because remember, Dear Reader, a profit is not a profit until it is harvested. So again I ask, how many times have you sold a stock for a profit? You would be surprised to learn how few people have ever done so. Do yourself a favor. Just do it. Just sell something at a profit. Just so you know how and just so you know how good it feels. Because this week may not have been the catalyst for you to sell, but someday some impetus will be.

So what caused the downdraft? Well, I read the three most popular financial dailies every day and not one could muster a decent answer. Interest rate escalation emanating from heightened inflation forecasts was the most often cited. I would agree that interest rate news caused the volatility on Wednesday and Thursday. But Monday and Tuesday's drama? I don't buy it. I think the action on those two days was concern on what the President would say during the State of the Union or more importantly how it would be received. I am no Trumpeter, but viewed objectively (see the CBS Poll) he knocked that speech out of the park. So why didn't the markets skyrocket on Wednesday? Well they did until the Fed issued its press release at 1pm. Slightly hawkish language therein caused an already jittery market to lose most of its gains for the day. On Thursday a nascent recovery was squelched by interest rate news once again---the yield on the 30 Year Treasury went above 3% for the first time in nearly a year and the 10Year hit 2.78%, territory not seen for more than 3 years. The thought is that higher interest rates will make corporations less profitable as they refinance their record level of debt (1.5 times earnings on average for the S&P500) while simultaneously investors will forsake equities for bonds as rates increase. So how does one explain Friday when the yield on the 10 Year leaped to close at an eye popping 2.84% and the Dow Jones Industrial Average fell an astounding 665 points (-2.54%)? To a certain extent, it was a tale of two markets. The morning's stumble was in part a reaction to news that wages grew at an annualized rate of 2.9% last month which signaled that inflation was approaching more quickly than expected. This was reflected in the spike in the rate in the 10Year which is influenced heavily by inflation expectations. But the big drop, no doubt was motivated by politics just as I prognosticated last week and just as I reiterate this week. Check the hourly charts and you will see an otherwise bad day turn horrible as soon as the Nunez memo was released. Mr. Market's fear is that the memo could give Trump cover to fire Rod Rosenstein of the Justice Department, the man who named Robert Mueller as the special prosecutor and who heretofore has resisted entreaties from many to fire Mueller. Firing of Rosenstein, replacing him with someone who would in turn fire Mueller would result in a political melee the likes of which have not been seen since the famous "Saturday Night Massacre" during the Nixon administration. If such a crisis did arise the markets would tumble. Let's see how this plays out.

Lost in all the volatility and politics is appreciation for what we have achieved on the energy front. The U. S. Department of Energy reported this week that at over 10million bbls/day the US is positioned to surpass both Saudi Arabia and Russian to become the world's largest producer of oil. Thank you fracking! As a result of the further development of this technology, the US has DOUBLED, yes doubled oil production since 2008! And frankly the end of this march to energy independence is nowhere in sight. Also this week, Exxon Mobil announced that it now is focusing its investment on domestic production. It plans to invest billions into Texas' Permian Basin with the expectation that over the next few years it will add another 500,000 bbls/day to the US total. The dividends from energy independence are 'uge! It means that we can now threaten and implement sanctions in the Mideast that we would never have dreamed possible just a few years ago. It means that if we so choose we can leave that God forsaken part of the world to its own devices. In the future, we need not become entangled in Gulf Wars which we all know were about oil and not Weapons of Mass Destruction. You doubt me about the cause? Google and then read the April, 2001 "Strategic Policy Challenges of the 21st Century" prepared by the Baker Institute and the Council on Foreign Relations at the behest of Vice President Cheney. Or simply watch "Three Days of the Condor" a hauntingly prescient 1975 movie starring Robert Redford and Faye Dunaway and co-starring two of my favorite character actors, John Houseman and Max Von Sydow. A true classic that holds up well even today.