November 24, 2012 Safety in Numbers

Risk/Reward Vol. 145

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

"Remember all the things we wanted/Now all our memories, they're haunted
We were always meant to say goodbye/Even with our fists held high
But I want you to move on/So I 'm already gone."---lyrics from "Already Gone" by Kelly Clarkson

"No deposit/No return
Boy, if you wanna real love/You got a lot to learn"---lyrics from "No Deposit No Return" sung by Sheena Easton

"There is safety in numbers/In numbers my friend
You'll find me well protected/When you come around again"---lyrics from "Safety in Numbers" by Joan Osborne

The Dow Jones Industrial Average (DJIA) spiked 421 points this week even though Fiscal Cliff concerns have not "moved on." Democrats and Republicans still have "their fists held high," and neither party has achieved any of "the things they wanted." So why did the market skyrocket? Because by Monday, all of the politicos were "already gone" from Washington---the President overseas and Congress on Thanksgiving Week break. No news on the Fiscal Cliff was indeed good news for investors. We will see what happens next week when Congress reconvenes with only a month left in which to reach a deal. My "memories" of the previous month are "haunted" by volatility--up on rumors of a compromise, down on rumors of a fissure.

To me, the most important news this week came from Fed Chairman Ben Bernanke who stated on Tuesday that the Fed's commitment to low interest rates will continue until employment improves. This guarantees that meager returns on safe investments will persist. Simply put, the Fed has no "real love" for conservative investors. Ponder these facts: 1) in 2007 the average yield on an investment grade corporate bond was 5.7%, today it is 2.67% : 2) in 2008 a five year certificate of deposit yielded 4%, today it yields 1.3%. And yet, because of fearful events such as the Fiscal Cliff, money continues to pour out of equities and into bonds. "No (certificates of) deposit" for yield hunters like me, because "no return" is available. Today, folks like me are forced to be risk takers or traders or both---and in these areas I "got a lot to learn."

One thing I have learned is that there is "safety in numbers, in numbers my friend." Allow me to elaborate. You may recall from earlier posts that I purchased stock in HiCrush Partners (HCLP), an entitiy that owns an income share in Wisconsin fracking sand mines. I liked its 8+% yield and the fact that it had hedged any downside in fracking sand pricing by signing several "take or pay" contracts with large oil service companies like Baker Hughes. On November 13, 2012 (after I sold for other reasons, thank goodness), HCLP announced that Baker Hughes had cancelled its contract, a fact that caused the stock to drop nearly 30% in one day. Who needs that! I still want exposure to fracking sand in general and to HCLP in particular, but next time I will buy it as part of an exchange traded fund (ETF) or closed end fund (CEF) where I will "be well protected" by the fact that HCLP will be one of several similar holdings in the fund. And this was not my first lesson in the concept of "safety in numbers". Back on April 19, 2010, Barb owned BP stock that traded at $60. On that day, BP was viewed as one of the best companies in the world with a huge balance sheet and an excellent dividend. One day later, because of the Deepwater Horizon disaster, BP was considered one of the worst corporate citizens in history, and its stock fell each day thereafter until June 20, 2010 when it hit $27. That fall would have been much more palatable if cushioned by an uptick in the stock of its competitors also housed in an oil ETF or CEF.

Although the DJIA has recovered nearly half of what it lost since my October exit, I remain on the sidelines. Until the Fiscal Cliff is resolved, I foresee more down than up days. However, when I do re-enter, I will seek safety in the diversity readily available in ETF's and CEF's. Yes, I have learned "a lot" from HCLP, BP and Kelly Clarkson---"Because of you, I learned to play on the safe side, so I don't get hurt.."