Risk/Reward Vol. 80
TO: 2 recipients
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THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Patience is the companion of wisdom"---St. Augustine
"He that can have patience, can have what he will"---Benjamin Franklin
"IBD Rule #15---DON'T BOTTOM GUESS. Declining markets often have huge up days that don't last. A market rising on high volume for three consecutive days may be indicative that the market has turned up at least in the short term."---William O'Neill
Having sold everything but gold on or before July 29th and being on the sidelines through last week and "murderous Monday" this week, I was salivating as Tuesday dawned with the market on the rise. I was and am fully cognizant of Mr. O'Neill's wise counsel above, but I became impatient and bought the following before 10 a.m Tuesday: ZpC, FTR, AVF,KMP,LINE, BACpL, NLY, ALLYpB, AAR, GEC, CpR, METpB, VOD, ARY, AFC, AFE, AHLpD, SDRL, SBR, WIN, DUK, NWpC , RDS/A, and CHKpD. I only invested 15% of my cash. By the time of my dinner meeting in Minneapolis, I was looking like a genius having made 5% in few hours. By bedtime I was lamenting not buying more. I added PG, MCD, CAT, COP, CVX, ETN, UIL, AZN, T and FCX to my shopping list to buy the next day.
By the time I deplaned in Milwaukee on Wednesday, I was singing another tune. YIKES!!! What a bad day. When Thursday opened to the upside, I sold everything again ending up with a 2% gain and a sense of relief. This is not how I want to live. Why is discipline so hard for me (see last weekend's Facebook picture of a cigar in my mouth)? Don't trust me to take your cow to town to sell, Mother. I then promised myself not to look at the markets until Monday afternoon at the earliest, and to buy only if 3 days of "up" had been achieved on decent volume. When I do buy, many of what are catalogued above will be on my list. They are all yielding incredibly well, still. The markets may have turned up, but the Dow is still 1000 points below where I exited two weeks ago, and there is a lot of profit runway available. I sold GLD on Thursday at 169.
What concerns me most at present? European sovereign debt. Think about it. Seventeen completely different economies--and cultures--under one currency. Take Italy. It is the third largest issuer of sovereign debt in the world (behind the US and Japan) with $2.6 trillion outstanding. Its gross domestic product (GDP) is only $2 trillion. Its population is the second "grayist" in the world (behind Japan) with 28% of its population already retired. 25% of those employed work for the government, and they receive salaries and benefits 15% better than those in private industry. 80% of all workers are covered by collective bargaining. I ask--how can a popularly elected official impose the kind of austerity needed? He/she cannot. Moreover, even if one could impose such austerity, the population would likely revolt once its benefits were curtailed. Oh, you think not, well look what is happening in Great Britain--a society so civil police don't carry guns---at least up until now. Not even Germany (GDP of $3.3 trillion) has enough money to bail out Italy and Spain, let alone France. Unless the European Central Bank (against the expressed objection of Germany--perhaps Europe's only solvent economy) decides to print trillions more euros so that Europe can repay its combined sovereign debt with inflated currency (like the Fed has done with the dollar over the past 2 years), there will be a default, likely by Italy.
Why do I, an American, care about European sovereign debt defaults? Because, buckaroos, no one buys sovereign debt without buying credit default insurance. Thus, for example, even if Societe Generale is the largest nominal holder of Italian bonds that does not mean that it has not "hedged" its position by buying default insurance from a variety of sources in private, opaque transactions. Remember what happened when Lehman Brothers defaulted? The music stopped and much of the ultimate liability fell on AIG which had sold credit insurance "off book" and which was "saved" by an infusion of $182 billion by the US government. Who holds the "Old Maid" that is, Italy's 2.6 TRILLION credit default insurance? AIG, Bank of America, Goldman? No one knows---and no one is talking--but if a default occurs no one will lend to anyone for fear of non-payment. This scares the h*ll out of me.
What can I do? Well, I can't sit on the sidelines while the dollar gets inflated and cd's pay zero interest. I will re-enter the market, likely next week. Yield will protect my downside to a certain extent, but I will be VERY mindful of liquidity. If I sense a significant down draft, I will be out like a fat kid in dodge ball. I recognize that this makes me more of a "trader" than an "investor" which to some is a pejorative. But, I am wealthier than I was on July 29, 2011---how many can say that?
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