January 4, 2014 Smooth Sailing

Risk/Reward Vol. 202

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

"We've got smooth sailing, sailing/Looks like every drop of rain is gone,gone,gone
Smooth sailing, sailing/And a blue sky full of rainbows from now on."---lyrics from "Smooth Sailing" sung by Ella Fitzgerald

"Everything is so clear you can see it/And everything is so real you can feel it
And it's real, so real, so real, so real/Can you dig it?"---lyrics from "Grazing In The Grass" sung by The Friends of Distinction

"No return, no return, no return/I'm at a point of no return."---lyrics from "No Return" by Eminem

I subscribe to three daily financial newspapers and to a variety of weekly newsletters published by brokerage firms. Without exception, each is predicting "smooth sailing, sailing" for the stock market for the foreseeable future. With no threat from a fiscal cliff, a sequester, a debt ceiling, a Chinese slowdown, a Eurozone debt crisis and with QE3 tapering already underway, to these writers it "looks like every drop of rain is gone,gone,gone/And a blue sky full of rainbows from now on." I don't disagree as the Dow Jones Industrial Average ended the week on a positive note after stumbling on a slow trading day Thursday. We should see decent earnings in the coming weeks and more importantly upbeat guidance. I am adding to my index funds.

So if "Everything is so clear you can see it/And everything is so real you can feel it" are there any sectors of the market where one can achieve outsized returns? After all, as an active manager, shouldn't I be on the look out for these? I am, and I believe there are. If the recovery is "so real, so real, so real", then the demand for natural resources should rebound from what was a dismal 2013. FCX has experienced a decent recovery over the past few months while other mining/natural resource companies (oil stocks notwithstanding) continue to lag. Recently, I bought GGN, a closed end fund comprised of mining ("Can you dig it?") and natural resource stocks which is trading at a significant discount to its net asset value (NAV). It can and does pay a handsome double digit dividend by writing covered calls on its portfolio.

Although 2013 was a record year for stocks, bonds fared poorly, and many bond fund managers (including the "Bond King", PIMCO's Bill Gross) saw "No return, no return, no return" at all. This poor performance resulted from a spike in interest rates (remember, bond prices fall as interest rates rise) and was mirrored by most fixed income securties which are also interest rate sensitive. The sectors that reached "a point of no return" included mortgage real estate investment trusts, business development companies (BDC's), preferred stocks and municipal bond funds. As discussed in several recent editions (see e.g. Vol 200 http://www.riskrewardblog.blogspot.com/ ), so long as interest rates remain steady or rise slowly and gradually ( note how the all important yield on the 10 Year Treasury has continued to hover around 3%), many oversold, interest rate sensitive stocks will provide a decent return. I recently increased my holdings in two of my favorites, FFC ( a preferred stock closed end fund) and MAIN (a BDC which on Friday gave very encouraging guidance for 2014). I also recently added to my municipal bond fund holdings.

Speaking of Ella Fitzgerald, "Baby, It's Cold Outside." Record cold weather persists countrywide. Wow, I long for some "Summertime". Unfortunately, we will not be experiencing "A Heat Wave" anytime soon. But "Rain or Shine", we must attend to our investments, even when they leave us "Bewitched, Bothered and Bewildered." Happy New Year!