Risk/Reward Vol. 122
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Hope springs eternal through your eyes
Draws me closer to your side
And keeps me there where I belong"---lyrics from "Hope Springs Eternal" by Air Supply
"Oh, when them cotton bolls get rotten/You can't pick very much cotton
In them old cotton fields back home"---lyrics from "Cotton Field" by Huddie Ledbetter
"I'm just an old chunk of coal
But I'm gonna be a diamond some day"---lyrics from "Chunk of Coal" by Johnny Cash
The stock market is an unpredictable place these days. Despite signs everywhere that a double dip into world wide recession is a real possibility, "hope springs eternal" as evidenced by this week's move upward. On Wednesday, the Dow Jones average spiked 287 points on the rumor of a breakthrough in the game of brinksmanship being played in the Eurozone between Germany and everyone else, and the hint by Fed Vice Chair Janet Yellen that, domestically, a new round of quantitative easing (either a further cut in already rock bottom rates or a continuation of Operation Twist---the replacing of short term with long term notes) may be in the offing. Many more market participants were drawn "closer to the positive side" on Thursday morning with the announcement by the Chinese central bank that for the first time since 2008 it was cutting interest rates in order to spur economic growth which has declined from 10.4% (annualized) in Q1 2010 to 8.1% in Q1 2012. That news was moderated later in the day by comments from Fed Chair Ben Bernanke indicating that further quantitative easing may not be in the cards. On Friday, the average moved steadily upward on the hunch that Spain will formally request assistance for its banks on Saturday. The Dow closed the week up 436 points---its best performance of the year. Go figure!
I view all of this as a repeat of what we saw last August: the stock market rising (or falling) on comments, rumors and hunches attributed to government officials and central bankers. Discussions of market fundamentals (like the profits and growth prospects of individual companies) have been relegated to the sidelines---which is "where I belong"--in cash. I simply have no faith that any bureaucrat in Europe (facing a monstrous sovereign debt and banking crisis) or here (facing the Fiscal Cliff discussed in Vol. 118 www.riskrewardblog.blogspot.com) will act before significantly more upheaval is experienced. I hope I am wrong.
I continue to search for positive signals to re-enter the stock market if and when the Eurozone and Fiscal Cliff situations are addressed. I am finding little so far. Two traditionally early indicators of economic growth, copper and cotton, are not faring well. Copper prices were down 12% in May. And, the cotton market is "rotten"; down 60% in the last 6 months and down 20% in May alone. You simply can't justify "pickin' very much cotton" at those levels.
Oh, and as for coal, about which I wrote last week---Fuggedaboutit! Stockpiles at China's largest coal importing seaport are near capacity. And domestically, it was reported this week that the percentage of electricity generated by "chunks of coal" has fallen to 34% which ties it with natural gas (33%), a progressively cheaper (thanks to fracking) and significantly cleaner source of energy. Indeed, the use of natural gas as a source of power generation (which now appears as a more likely source of "diamonds" than coal) has increased 40% in one year. This new information, however, does whet my appetite even more for Linn Energy (LINE) which has the following attractive characteristics: it is involved primarily in the domestic US market (oil and natural gas); it is well capitalized and opportunistic in its acquisitions; its natural gas production is hedged (price guaranteed) at attractive rates through 2017 and its oil production is hedged through much of 2016; it yields nearly 8%; it is currently attractively priced due to a perceived glut of natural gas; and lastly (but significantly) its stated corporate objective is "stability and growth of distributions for the long term benefit of unit holders" (that would be me!).
So in sum, I am not tempted to re-enter the stock market (except for LINE), even with this week's stellar performance. The signs, overall, simply do not look positive. If I remain idle for a while---so be it. Frankly, my current attitude toward the market is best articulated by noted 80's hair group Air Supply---"I'm all out of love."
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