April 27, 2013 Good News/Bad News

Risk/Reward Vol. 167

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

"I guess all is fair in love and war/Someone wins
But someone wins more/You never know what time will do
All I know is I've got some good news/I've got some bad news."---lyrics from "Good News/Bad News" by George Strait

"Stop in the name of love/Before you break my heart
Think it over/Think it over."---lyrics from "Stop In The Name of Love" sung by The Supremes

"Come round you rovin' gamblers/And a story I will tell
About the greatest gambler/You all should know him well."---lyrics from "Ramblin' Gamblin' Willie" by Bob Dylan

In what at first blush appeared to be an illogical twist, the Dow Jones Industrial Average (DJIA) rose 165 points this week despite lackluster earnings reports and bad economic data from around the globe: lower purchasing manager indices (signaling a slowdown) from both the U. S. and China and news that the recession in the Eurozone has worsened to the point of infecting Germany. Why hasn't the stock market tanked? The answer is simple: when stock prices are influenced more by monetary and fiscal policies than by economic fundamentals, "bad news" is indeed "good news" because "bad news" holds the prospect of more easy-money measures and government stimuli. Indeed, although "you never know what time will do", the prevailing wisdom is that because the Eurozone is in such bad shape, the European Central Bank (ECB) will lower its discount rate (the rate at which commercial banks borrow from central banks) from 0.75% to 0.50% at its meeting next Thursday. In addition, as proof that "all is fair in love and war", the austerity measures put in place throughout the Eurozone a few months ago as an inflation safeguard may soon be abandoned in favor of more government stimulus. As discussed previously (www.riskrewardblog.blogspot.com Vol. 126), easy money policies and government stimuli may have detrimental long term effects, but in the short run they are very good for stocks.

The market's overall strength notwithstanding, it did suffer a precipitous if ephemeral drop on Tuesday in response to a fake AP Tweet that the White House had been attacked and the President injured. In the span of a few minutes, the DJIA lost and then recovered 1%. Due to the Flash Crash of 2010 and the prospect of incidents such as this, I no longer rely on automatic sell orders. If you do, "think it over/ think it over." If you persist, then "in the name of love" be sure to use "stop"-limit orders, not "stop" orders. I leave it to you to ascertain the difference, but it is significant. Use of the former lessens the chance that such an event "will break your heart."

If the ECB lowers the discount rate and austerity in the Eurozone is abandoned, look for Eurozone stocks to rise and the Euro to fall in relation to the dollar. This is what happened to the Japanese stock market and the yen earlier this year when similar measures were announced in Japan. So "come round you rovin' gamblers/And a story I will tell." At that time I purchased a dollar hedged, exchange traded fund (ETF) holding a basket of Japanese stocks (DXJ) which has appreciated 27% since I acquired it January 9, 2013. I certainly am not "the greatest gambler", but next week I am contemplating buying HEDJ, a dollar hedged ETF holding a basket of Eurozone stocks. Maybe lightning will strike twice.

When "bad news" is "good news", when a fake Tweet can crash the stock market and when austerity is trumped by stimulus, one is left to wonder if fundamentals are now irrelevant. In such times, I resort to the advice of that noted investor, Bob Dylan

"The answer my friend is blowin' in the wind/The answer is blowin' in the wind."

P.S. This week, Linn Energy (LINE) and its affiliate Linco (LNCO) announced a monthly dividend policy making them ever more attractive to me.

P.S.S. I am comfortably ahead of my full year goal. That said, as of today, I do not intend to "sell in May." I hope I do not regret this decision. What are your intentions?