March 2, 2013 Volatility

Risk/Reward Vol. 159

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

"I needed the money/Cause I had none
I fought the law/And the law won."---lyrics from "I Fought the Law" sung by the Bobby Fuller Four

"I be takin' notes on you/Like you be a test
Roll the purple blunt up/So I won't stress."---lyrics from "After That" sung by Brandy

"The static of your arms/It is the catalyst
You're a chemical that burns/There is nothing like this
It's the purest element/But it's so volatile."---lyrics from "Strangeness & Charm" sung by Florence + The Machine

With apologies to the Bobby Fuller Four, if you "need money", don't "fight the Fed, cause the Fed will win." Recall that just last week, minutes from the Federal Reserve's January meeting (hinting that the Fed's monthly purchases of $85billion of mortgages and Treasury securities ("QE3") may end before anticipated) caused the Dow Jones Industrial Average (DJIA) to drop 108 points in one day. This week, in two separate hearings before Congress, Fed Chair Bernanke proclaimed that QE3 was still needed, was still effective and would not end soon. The DJIA skyrocketed 116 points one day and 175 points the next, recovering from a 216 point drop on Monday caused by the indecisive Italian election. As for Sequestration, it appears the stock market cares little, if at all. The DJIA was up 89 points for the week.

With the stock market nearing all time highs, where should one invest? If you are not afraid of a little speculation, take a look at Citigroup (C). Over the past 4 years, with the possible exception of Bank of America (BAC), C has been more closely regulated than any corporation in the US, has been mandated to raise huge amounts of capital and has been precluded from returning any significant cash to shareholders. C pays less than a 1% dividend, and trades at about 60% of book value. Normally banks trade at 100% of book or higher. Next week the Fed will release the results of its most recent "stress test", and on March 14th the Fed will announce which banks can raise dividends and/or engage in share buy backs. If "you be takin' notes" and your research reveals that C will be allowed to raise dividends, buy back shares or both, an investment may be in order. If you are right, "roll a purple blunt" and celebrate. If you want to speculate even more, look at BAC even though it had a great run in 2012.

Speaking of banks, say what you will about Dodd-Frank, but that heavy handed legislation has served as a "catalyst" for making banks more stable and for making banking an investment-worthy sector. My preferred investment in the sector is preferred stock, and my preferred vehicles ( the "purest elements", if you will) are the exchange traded funds, PGX an PGF. "There is nothing like these." Each pays a 6+% dividend, and each has low "volatility". Volatility measures risk. The lower the volatility, the more "static"the stock and the lower the risk. Volatility is expressed as a percentage. For example, PGX's volatility is 4.5% which means that 68.2% of the time (one standard deviation for you statisticians), PGX trades in a range-- plus or minus-- 4.5% of its annual average (mean) price. This level of volatility is comparable to that of investment grade bonds (LQD) which yield significantly less. Their low volatility and the fact that they pay their dividends on a monthly basis make PGX and PGF excellent places to park money---a modern day passbook savings account---well, not quite that secure. The largest ETF in this space is PFF, but it yields less than 6% . For those who want more of a yield in this sector, look at JPC and JPI, two closed end funds which also hold preferred shares but which assume extra risk via leverage.

So far, the stock market has taken Sequestration in stride. Can it be that Mr. Market believes that so long as credit remains easy (QE3) economic recovery will continue, Sequestration notwithstanding? Can it be that Florence + The Machine concur with Goldman Sach's Abby Joseph Cohen and that

"The dog days are gone/The horses are coming"?