August 24, 2013 Roller Coaster

Risk/Reward Vol. 183

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

"How can I be sure/In a world that's constantly changing?
How can I be sure/Where I stand with you?"---lyrics from "How Can I Be Sure" sung by The Young Rascals

"I recall when I was young/My papa said don't cry
Life is full of ups and downs/Like a roller coaster ride."---lyrics from "Roller Coaster" by the Partridge Family

"I'm pickin' up good vibrations
Good, good, good, good vibrations."---lyrics from "Good Vibrations" by the Beach Boys

"How can I be sure/In a world that's constantly changing? How can I be sure/Where I stand with QE3 tapering?" The fact is I/we can't be sure. Indeed, if we take the Federal Reserve at its word: to wit, that its decision making is transparent, then one must conclude that the Fed itself, does not know what it will do at its much anticipated September meeting. Nevertheless, many hours were spent by countless analysts parsing each sentence of the Fed's July meeting minutes (which were released last Wednesday) in an effort to divine the Fed's one true intention. And seemingly every participant at the Jackson Hole conference had an opinion on when the Fed would start tapering; every participant, that is, except the Fed members themselves.

Not surprisingly, both the bond and the stock markets "were full of ups and downs/Like a roller coaster ride" as the uncertain future of QE3 dominated the financial news. The yield on the 10Year Treasury Bond ("10Year") went from 2.83 last Friday to over 2.9 mid week to close at 2.82 on Friday. Similarly the Dow Jones Industrial Average plunged 200 points by mid week from last Friday's close only to recover almost all that it had lost at week's end, in spite of Thursday's unnerving NASDAQ snafu. No sector made me "cry" more than the uber rate-sensitive, mortgage real estate investment trusts (mREIT's). My favorite in that area, MTGE (which I bought on July 18th at 18.23) went from 19.31 last Friday to 17.96 on Monday only to rebound to 19.93 at the close this past Friday. Why did it recover so well, even as QE3 uncertainty persists?

Could it be that the stock markets (even the fixed income sectors like mREIT's) have become comfortable with the inevitability of tapering and finally have factored in a rise in the 10Year rate to 3+%? ( a possibility about which I wrote in Vol. 181 www.riskrewardblog.blogspot.com ) Call me a pollyanna, but I am "pickin' up good vibrations" to that effect---"good, good, good vibrations." Indeed, in discussions with a few subscribers this week, I lamented my hesitation to buy what I perceive to be great bargains in the form of OpF, AEV, MHRpD, CTY, GOODpN, EEP, KMP, SHNH, ARCC, FSC, PSEC---just to name a few. If I am correct, prices on these worthy, 7+% dividend payers could stabilize, if not appreciate. I was not a buyer this past week, but I may be one next week.

As I have written previously, this Beach Boy doesn't need the stock market to "Catch A Wave." All "Barbara Ann" and "The Stupe (Sloop) John B." desire is some market stability so that we can collect our dividends over the next few months. And, I sense that the market may be stabilizing ----whether tapering begins in September or not. I may be right, or we may be headed toward a "Wipeout." Stay tuned, fellow surfers, and we shall see.