December 7, 2013 Wearing Shades

Risk/Reward Vol. 198

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

"So twiddly-dee, twiddly dum
Look out baby, cause here I come
So get ready, so get ready."---lyrics from "Get Ready" sung by The Temptations

"Apogee solar bright/Apogee through the night
Apogee over ground/Don't think I'll be coming down."---lyrics from "Apogee" by Jethro Tull

"Things are great/And they're only getting better
I'm doing all right/Getting good grades
The future's so bright/I gotta wear shades."---lyrics from "Future's So Bright I Gotta Wear Shades" by Timbuk 3

All week the market absorbed and processed news in anticipation of Friday's all important, "Look out baby, cause here I come," jobs report. As the week unfolded, good news on employment from ADP ("twiddly-dee") and on the GDP front ("twiddly dum") conditioned the market to "get ready, get ready" for a jobs report at or near a 200,000 increase. In the Bizarro World of investing that meant that the Dow Jones Industrial Average (DJIA) dropped 264 points through Thursday because good economic news heightens the likelihood that the Federal Reserve will taper its QE3 program which in turn could cause interest rates to spike and potentially could depress stock prices. When the jobs report came in as expected on Friday, the DJIA rose 198 points, closing the week only 66 points down. How come?

I believe the market rose on Friday because of happenings in the bond market. Anticipating a good jobs number and the real possibililty that QE3 tapering will begin in December or January, the yield on the 10 Year Treasury Bond rose precipitously from 2.74% last Friday to 2.88% on Thursday. However, when the good jobs report came on Friday, the rate on the 10 Year held below 2.9% To me, this means that if the Federal Reserve begins tapering within the next 60 days (and I think it will based upon several weeks of good economic news and the recent comments of some Fed members such as Charles Plosser), interest rates will not spike. Indeed, they may be at their "Apogee" whether "solar bright or through the night" I for one "don't think they'll be coming down", either. We are where we were back in mid September when the investing world believed that QE3 tapering was imminent only to be shocked when it was not implemented. I predicted then as I do again today that 3% is the ceiling on the 10Year yield for the foreseeable future---and that it will hold even if tapering begins soon--and let's all hope it does. (See Vol. 186 www.riskrewardblog.blogspot.com )

If I am right, then "Things are great/And they're only going to get better" for me. Don't get me wrong. "I'm doing all right this year/Getting good grades" if you will. But if tapering begins and the rate on the 10 Year stays below 3%, my "future's so bright/I gotta wear shades." I will deploy cash into my favorite income producing sectors (bdc's, preferred stock, REIT's),reap some capital appreciation (because these sectors are oversold) and collect outsized dividends. I just need to be patient for a few weeks. The next big event on the interest rate front is the FOMC meeting on December 15-16. We should get a good read on tapering then. And speaking of a "future so bright" did you catch the forward guidance given by two of my favorite oil plays (KMP and LINE)? Income investors should read what each said this week about next year's distributions.

Investing is not easy. I have spent a great deal of time studying the market. As The Temptations say, it's "Really Got a Hold On Me." That said, I "Ain't Too Proud to Beg" for input and advice. I am interested in learning "The Way You Do The Thing You Do." So unless you're "Too Busy Thinking About Your Baby", drop me a line with your thoughts and observations. Doing so would be like "Sunshine on a Cloudy Day." and will put me on "Cloud Nine."