Risk/Reward Vol. 166
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Slow down, you move too fast
You've got to make the morning last."---lyrics from "Feeling Groovy (59th St. Bridge Song)" by Simon and Garfunkel
"Right to the top/Don't look back
Turning the rags/Giving commodities a rain check."---lyrics from "It's Time" by Imagine Dragons and as performed on "Glee"
"We'll count the hugs and the kisses
When dividends are due
'Cause I'm in the market for you."---lyrics from "I'm In The Market For You"---by Louis Armstrong
With Monday opening on disappointing growth numbers from China and closing with the terrorist attack in Boston, the stock market "slowed down." The market recovered on Tuesday, but fell again on Wednesday and limped through Thursday and Friday, with the Dow Jones Industrial Average closing down 318 points for the week. Having "moved too fast", stocks were bound to correct. It is unfortunate that one catalyst this week was "mourning."
But is the drop merely a temporary correction or is the stock market now priced "right to the top"? Will we "look back" on this week as the one during which riches "turned to rags"? Of course, no one knows for sure, but there are signs that the world's economy is slowing despite massive infusions of capital compliments of quantitative easing here and abroad. Prominent among these signs is the "rain check" on the demand for commodities. The international price of oil (Brent) fell below $100/bbl. for the first time since July, 2012. Copper prices are at their lowest point since October, 2011. On a broader scale, CFD, an exchange traded fund which tracks a host of commodities futures (oil, natural gas, copper, soybeans, corn, cattle, wheat, etc.) is at multi-year lows. Participants in this week's Global Commodities Conference in Switzerland predicted that commodity prices will likely continue their slide. And as for gold, "rain check" doesn't begin to describe its precipitous fall. With the emergence of the commodity-driven Chinese economy as a major influence on stock prices and with the financialization of commodities in general (via ETF's), the correlation between commodity demand and the stock market is no longer debatable. A sustained drop in commodity prices (read, demand) is a negative signal to the stock market.
So what did I do this week? I kept my eye on investments that held steady during the two days of triple digit declines. And two that warranted "hugs and kisses" were PGF and PGX, exchange traded funds that own a variety of preferred stocks. I bought more: PGX in my 401K because half of its holdings pay dividends that do not qualify for preferential tax treatment and PGF in my personal account because all of its holdings pay qualified dividends. Although neither of these has appreciated during the huge stock run of 2013, neither has fallen in price. Both pay monthly dividends, and both yield over 6% annually. And 6% is all that "I'm in the market for."
Next week should give some visibility on whether this swoon is a temporary correction or an early beginning to the summer doldrums which have characterized the past few years. In either event, I will continue my search for steady monthly payors like PGX and PGF (and their slightly more volatile closed end fund cousins, JPI, JPC and HPF), stocks that in times like this
"Ease my mind/Like a bridge over troubled waters."
P.S. And as for the year to date 30% decline of Apple---unless and until it deploys its pile of cash ($130bn) in a shareholder friendly way (say, a significant dividend increase or a massive buy back campaign), I am keeping my distance. Apparently, I am not alone.
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