Risk/Reward Vol. 112
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Cause I'm hanging on every word you say
And even if you don't want to speak tonight, that's alright."---lyrics "Breathing" by Lifehouse
"He said-- Patches, I'm depending on you, son
To pull the family thru/My son, it's all left up to you"---lyrics "Patches" sung by Clarence Carter
"Fear tends to manifest itself much more quickly than greed. So, volatile markets tend to be on the
downside. In up markets, volatility tends to gradually decline."---Philip Roth
"Take it from me/It's a lesson to be learned
Even the good guys get burned/Take it from me
No strings attached/ Baby, you're the one for me"---"No Strings Attached" by N Sync
Receipt of this edition is proof that I did not win the lottery.
On Monday morning, Fed Chairman Ben Bernanke gave a speech wherein he warned that employment gains could not be sustained without economic growth which he feared could not be maintained without continuing or even expanding the current easy money policies of the Fed. "Hanging on every word", the stock market rose sharply, ending the day up 161 points. Like all stock market participants I was pleased--at least at first blush. But upon reflection, I wished that Uncle Ben would "not want to speak". News of more "easy money" means that the Fed will continue to overbid for Treasury securities and thus will continue to depress yields on Treasury securities (10 yr. at 2.15%, 30 yr. at 3.2%). This in turn will depress the yields on the securities priced off of Treasury securities such as bank c.d.'s, money market funds and investment grade corporate bonds. For anyone looking for a decent, safe return, the traditional refuge of these asset classes will remain unavailable for the foreseeable future.
That leaves the stock market (inclusive of mutual funds, etf's, reits, mlp's, preferred stock and exchange traded debt) as the only place where a decent return can be achieved, albeit with substantial risk. In effect, the stock market is the financial equivalent to "Patches". We are all "depending on it to pull the family thru/ It's all left up to you.". I don't like this fact. I would much prefer to park the lion's share of my money in Treasuries or c.d.'s ---but I can't afford returns of 1-2% , and I doubt that any of my readers can.
Speaking of the stock market, it ended the first quarter in record fashion, but the last few weeks have been--well, choppy. Even the rise on Monday did not result from "good" news, but rather, as noted above, from news that major asset classes will remain off-limits to those who want more than a paltry return. The market fell Tuesday through mid day Thursday on continued concerns over a slow down in China, a Eurozone recession and the price of oil. Frankly, fear, more than optimism (or greed) seems to have gripped the market recently, and as a consequence we should all expect more volatility.
So, what does an individual investor do? Well, I continue to prune positions that have more downside than upside potential (e.g. AT, Ally-pA, CQP, TBF and 1/2 of NLY) thereby raising cash. I take comfort in the preferred shares and exchange traded debt that I own. These securities are considerably less volatile than common stock, especially those that have the buffer of a hefty common dividend in front of them. (Remember, preferred shares and exchange traded debt are higher in the capital structure and thus MUST be paid before any common dividend is paid). For example, this week I bought below its redemption price (always important! ), the 8.5 % Series A preferred of Colony Financial (CLNYpA) which is a commercial mortgage real estate investment trust, the common stock of which pays an 8% dividend.. Moreover, since Colony was created after the 2008 financial crisis, it has the added benefit of having "no strings attached" to the overpricing of real estate assets of that era which "can burn good guys" even today.
But is that enough? Frankly, I sense that the smart money is planning an exit or at a minimum some substantial profit taking and significant re-allocation. I see choppy days ahead if the news from China and Europe is not more encouraging and if the price of oil/gasoline does not moderate. Thus, I am contemplating taking profits in some of my lower yielding financials ( e,g. AEG) and buying VXX, an exchange traded fund that gains when volatility measured by the VIX and VIX futures rises. The VIX (which is a rolling mix of 30 day options on the S & P 500 designed to reflect market volatility) has been remarkably calm this first quarter and sits at multi-year lows. My belief is that the fear of a Chinese slowdown, a Eurozone recession and a summer of high gas prices will translate into a rise in volatility. If so, VXX may be a place to be. If China does not ease its current monetary policy (a move expected Sunday evening), I may be a buyer.
If the news from China turns encouraging, I may swerve to the positive (and against the negative sentiment I currently feel) by buying commodities, especially copper. FCX is looking mighty attractive these days and carries a handsome 3.3% dividend. If China surprises to the upside, FCX could catapult upward.
In closing, I am cautiously opportunistic. As always, I remain flexible and nimble. I don't care to wake one day and realize N Sync's worst nightmare: that my first quarter profits are
GONE
No comments:
Post a Comment