October 5, 2013 Buddy, Gonna Shut You Down

Risk/Reward Vol. 189
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN

"Declining numbers at an even rate/At the the count of one we both accelerate
Tach it up/Tach it up
Buddy gonna shut you down"---lyrics from "Shut Down" by The Beach Boys

"If you change your mind/I'm the first in line
Honey I'm still fine/Take a chance on me."---lyrics from "Take a Chance on Me" by Abba

"I'm back in the USSR
You don't know how lucky you are, boy
Back in the USSR"---lyrics from "Back in the USSR" by The Beatles.

After weeks of Republicans "taching up/taching up" the threat that "Buddy, gonna shut the government down," the government actually did shut down this week. That fact, plus the prospect of a default on government debt if the debt ceiling is not raised before October 17th (including a default on the ever important 10 Year Treasury Bond ("10Year")), caused the Dow Jones Industrial Average to drop 186 points this week. One would think that with a default looming, the price of the 10Year would "decline at an even rate" and that correspondingly its yield would "both accelerate." But, the 10Year held steady; its yield hovering between 2.62 and 2.65% throughout the week (note: a steady yield means a steady price). According to commentators, the following explains the relative calm dominating the bond market. First, it is highly unlikely that even the crazies in D.C. will allow a default to occur. Second, the economic data over the past few weeks shows a flat if not weakening economy which lessens the likelihood that quantitative easing (QE3) will be tapered any time soon. This bodes well for the 10Year, thus mitigating some of the negative bias associated with a possible default. And, third, even if a default occurs, it will impact the rest of the world worse than here.

The above logic caused me to stand pat in the face of a default; something that I did not do the last time one was threatened. (See Vol. 78 www.riskrewardblog.blogspot.com ) This time, "I'm still fine"; as none of my positions has triggered a sell signal. But frankly even if some do, I likely will not sell. Indeed, I've "changed my mind." I intend to be "first in line" to buy if and when the situation worsens. That stated, I do not recommend that you "Take a chance on me." I watch the market like a hawk and thus feel comfortable taking the risk. You do what your research indicates or what your professional recommends. Do not rely on me.

With all the brouhaha in D.C., a significant story in Thursday's Wall Street Journal (WSJ) was all but ignored. Therein, the WSJ reported that as a result of horizontal drilling and fracking (first discussed in this publication in June 2011, see Vol 70 www.riskrewardblog.blogspot.com), the United States has surpassed Russia as the world's largest producer of oil and natural gas. A personage no less than the head of the U.S. Energy Information Agency termed the development "a remarkable turn of events." It is the first time since 1982, when Russia was "back in the USSR" that the U. S. has produced more natural gas than Russia. And, the U.S.'s 10million barrels/day production of oil is only slightly less than that of Russia, a gap that will be bridged this year. Once again, "we don't know how lucky we are, boy" to live in such a bountiful country. I invest in this segment primarily through pipeline companies (KMP) and the preferred stock of small exploration companies: MHRpD, VNRAP and GSTpA, which when averaged pay monthly dividends at an annualized rate in excess of 8%. I also speculate with the common stock of LINE and VNR which likewise pay outsized monthly dividends.

So, "Do you want to know a secret/Do you promise not to tell? Closer/Let me whisper in your ear" If the news from Washington becomes progressively negative next week and if the market sells off, I will follow Warren Buffett's advice: "Be fearful when others are greedy and be greedy when others are fearful."