Risk/Reward Vol. 160
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Good news is blowin' in your window/Good news is knockin' on your door
Good news is comin' round the corner/Good news is rollin' round your floor."---lyrics from "Good News" by Randy Newman
"Now Peter Piper picked peppers/But Run rocked rhymes
Humpty Dumpty fell down/That's his hard time
Jack B. Nimble/And he was quick."---lyrics from "Peter Piper" by Run DMC
"I'm gonna give you 30 days to get back home
I done talked to the gypsy woman on the telephone
She gonna sent out a world wide hoo-doo
That'll be the thing to suit you."---lyrics from "30 Days" by Chuck Berry
When it comes to stocks, "good news is blowin' in your window and knockin' on your door!" In fact, a series of "good news" reports this week, culminating in encouraging jobs numbers on Friday, catapulted the Dow Jones Industrial Average (DJIA) to four consecutive all time high closings. The DJIA ended the week up 308 points and is up 9.9% year to date! Talk about "Good news comin' round the corner and rollin' round your floor." The predictions of doom surrounding Sequestration have had as much impact on the stock market as those surrounding the Mayan calendar apocalypse.
But how long will it last? Will one's ability to pick winning stocks (which year to date has been as easy as "Peter Piper pickin' peppers) end like "Humpty Dumpty"---"fallen down and on hard times?" Valuable insight on this was provided by billionaire hedge fund guru, Stanley Druckenmiller (George Soros's former partner), during an interview on CNBC last Monday morning. A link to a related article and part of the interview is provided here: www.cnbc.com/id/100522303 It is worth reading and watching. In Druckenmiller's opinion, we are in the 7th or 8th inning of an equity bull run that will end badly. As he sees it, the Federal Reserve's low interest/easy money policy (QE3) has depressed investment grade yields so severely that conservative investors have been forced to accept unprecedented levels of risk. Equities are the only place left since bonds yields are so low. He cited as an example a Zambian government bond in such demand by investors that it is paying only 5% in interest. (No kidding--I checked.) As he said, do you really think the risk of regime change in Zambia over the next 20 years warrants only a 5% yield? According to Druckenmiller, the inevitable result will be a "malinvestment bust" (e.g. defaults on these risky investments), rampant inflation of asset values or both. Druckenmiller's advice is to be like Jack--stay nimble and be ready to exit investments "quickly". Obviously, one can accomplish this only by remaining diligent.
But how will an investor, even a diligent one, know when the time is right to exit? Is there something available other than "talking to the gypsy woman or sending out a world wide hoo-doo.?" I think so. First, I monitor developments in junk bond and senior loan funds like a hawk. In this regard, note that shorting (betting that a stock will fall in value) in the two largest junk bond exchange traded funds (HYG and JNK) has spiked recently. I'm not pushing a panic button, but it is something to watch. Second, I own some modest short positions (e.g. TBT) and a volatility position (VXX) to help me monitor negative sentiment in the market. . Third, I own substantial amounts of stocks and funds that pay MONTHLY dividends. Monthly dividends provide a steady and predictable income, result in lower stock volatility and require great discipline on the part of business managers. After all, those managers must generate sufficient revenue to pay a dividend every "30 days." It is in this respect that monthly dividend stocks serve as canaries in the mindshaft. I do not wait an entire quarter to learn whether a company is meeting its objectives. Each month, if there is even a hint of a dividend cut, I exit immediately. For those interested, a partial list of monthly payers can be found here: www.dividenddetective.com/monthly-dividends.htm
And so the market continues its climb upward. I am enjoying the ride. But, I remain vigilant and nimble. At some point, Mr. Market, like the great Randy Newman himself, inevitably will change his tune and instead of crooning "Good News", he will be singing:
"Short!, People"
P.S. Did you act on last week's stock tip? Throughout Monday morning, Citigroup was available for $42.25. Later in the week, it passed the Fed's stress test with flying colors. It closed Friday at 46.68--- a 10% gain in 4 1/2 days.
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