Risk/Reward Vol. 193
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"People hearing without listening
People writing songs that voices never share
And no one dared
Disturb the sound of silence."---lyrics from "Sounds of Silence" by Simon and Garfunkel
"Jam up and jelly tight
My, my, my baby
Now you're outta sight."---lyrics from "Jam Up and Jelly Tight" by Tommy Roe
"I am he/As you are he
And you are me
And we are all together
I am the Eggman/They are the Eggmen
I am the Walrus/Goo goo g-joob"---lyrics from "I Am the Walrus" by The Beatles
When the Federal Reserve Open Market Committee (FOMC) issued its press release on Wednesday, each phrase was parsed and each word analyzed in search of any clue as to when quantitative easing (QE3) would be tapered. Commentators noted that the FOMC omitted a reference to a concern over increased interest rates, a concern which had been discussed in previous releases. Immediately, the bond and stock markets were "disturbed by the sound of this silence." "Without listening", "people heard" from the silence the threat of QE3 tapering earlier than anticipated. And "no one dared" to challenge this interpretation. As a consequence, the price of bonds dropped (as indicated by the rise in the yield on the 10 Year Treasury Bond) and the stock market fell from its QE3 infused record high on Tuesday. The stock market recovered somewhat on Friday, but the 10 Year continued to sell off on the heels of an upbeat ISM number (which further fueled fears of a sooner-than-expected QE3 tapering) ending the week at a yield of 2.62%---not good news for income investors like me.
Have you noticed declines in both the price of domestic oil and the price of gasoline? These declines are a direct result of increased domestic oil production and world wide refining capacity. The U S is now producing 7.9 million barrels of crude oil per day which by law cannot be exported.. As a consequence stockpiles of crude at Cushing, OK (a pipeline hub at which domestic prices are determined) are increasing which in turn is causing the price of domestic crude (WTI) to fall in comparison to crude's international price (Brent). Brent oil is in short supply due to Libyan production declines and supply problems in Nigeria. In other words, domestically, crude is "Jammed up" while internationally it is "Jelly tight." . "My, my, my." The price of WTI for December delivery is $96-97 per barrel while the price of Brent is "outta sight" at $109-110 per barrel. Meanwhile, the price of gasoline (which U.S. producers CAN export) is falling because worldwide refining capacity is increasing at the same time world wide demand is waning. Someday the U.S. will have a comprehensive energy policy which will accommodate the sea change which has arisen from our new found domestic production; a policy which will allow the export of crude (and LNG and other products). But, don't look for such a policy not under this administration. Meanwhile, I still like oil stocks even if they are underperforming the market (except LINE which jumped 11% on Friday on news that its merger with BRY may actually occur).
Disappointing third quarter results from mortgage real estate investment trust ("mREIT"), AGNC, reverberated throughout the entire mREIT market early in the week. Despite the fact that AGNC faces unique issues, its performance tainted everyone. Truly ,in the mREIT world "I am he/As you are he/And you are me/And we are all together." I am still far ahead with my investment in MTGE, but it took a hit despite reporting a good quarter. It trades well below its book value which is a common metric for determining the price of an mREIT stock. Apparently, when it comes to mREITs, the market cannot tell the difference between the Eggman and the Walrus. Goo goo g'joob, indeed!
Although both the Dow Jones Industrial Average and the S&P 500 reached record highs this week, I am contemplating raising cash. I find very little in this market to "Please, Please Me." I study it "Eight Days A Week", and yet my studies do not "Help" me overcome a feeling that "It Won't Be Long, Yeah" before "I'm a Loser, " a "No Where Man" if you will. Financially I'm up, but confidence-wise "I'm Really Down" due largely to the prospect of rising interest rates. Then again, perhaps my funk is just the realization that investing is "A Long and Winding Road" , that none of us can afford to just "Let It Be," and that, in the end, most of our profits go to the "Taxman."
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