February 1, 2014 Buy, Buy Baby

Risk/Reward Vol. 206

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

"Fools rush in/Where wise men never go
But wise men never fall in love/So how are they to know?"---lyrics from "Fools Rush In" sung by Ricky Nelson

"If the sky above you should turn dark and full of clouds/And that old north wind should begin to blow
Keep your head together and call my name out loud/And soon I'll be knocking at your door."---lyrics from "You've Got a Friend" sung by James Taylor

"Bye, bye baby/Baby, bye, bye
Bye, bye baby/Don't make me cry."---lyrics from "Bye, Bye Baby" sung by The Four Seasons

Recall that in May, before there was any mention of quantitative easing (QE) tapering, I wrote as follows:

"Clearly QE and the search for yield have led many to make risky investments : ones they "will wish weren't chosen." A case in point is this week's sale of $400million worth of 10 year Rwanda bonds. "Yeah, Rwanda, Rwanda"---you remember, the genocidal nation featured in the movie "Hotel Rwanda". That bond issue was oversubscribed and the bidding drove the bonds down to a 6.625% interest rate---roughly the same yield one would get from the tax advantaged preferred shares of an A rated insurance company or of the Royal Bank of Scotland." (See Vol. 168 http://www.riskrewardblog.blogspot.com/ )

Back then (and for some time before and after) yield hungry "Fools rushed in" to emerging markets like Rwanda and even more so into South Africa, Turkey, India, Brazil, Russia, etc. Flattered by their new found attractiveness, many emerging market nations incurred debt at levels "where wise men never go." Awash in money, necessary economic reforms were not enacted and international account deficits grew. "How were they to know" that at some time this apparent love affair would end. But, when social unrest hit some (e.g Turkey) and economic slow down hit others (e.g Brazil and Russia), many heretofore fools suddenly became wise. They started selling emerging market securities and abandoning emerging market currencies. "Wise (money) men never fall in love" with a company or a country, and if holding any investment becomes too risky, they exit. What started as an orderly emerging market sell-off late last year became a stampede this week. Central banks in South Africa, India and Turkey took desperate measures to support the outflow of capital, but failed to stem the panic. In Russia, the leading tabloid advised its readers to convert half of their savings from rubles to dollars or euros. Every stock and bond market in the world has become volatile.

As volatility has increased (check out the price action on Friday!) a flight to safety has ensued. Savy investors know that "if the world's economies should turn dark and full of clouds/And that old north wind begin to blow", "Keep your head together" and invest in US Treasury securities. This notion was reinforced by PIMCO's Bill Gross who Tweeted on Wednesday "Turkey & South Africa flunk currency test-don't wait around to see who's next. De-risk, move to Treasuries." And move many did, as investors came "knocking on the door" of those holding Treasuries. So much so, that when, on Wednesday, the Federal Reserve announced that it was reducing (tapering) QE3 by another $10billion dollars in February (an event which in the past would have caused the 10Year Treasury to plummet in price and thus spike in yield), the influx of funds into Treasuries counteracted the taper and caused the price of the 10Year to rise and the rate to plummet to 2.67%---the lowest since early November. This drop was very good for interest rate sensitive/fixed income securities which have traded for months as if interest rates would rise as tapering progressed. Year to date the value of these has increased even as the general market has faltered. The Dow Jones Industrial Average fell 181 points for the week and experienced its worst month since May 2012.

One of the reasons I write this column is to record and hopefully to learn from past judgments. This is what I wrote in Vol. 99 (http://www.riskrewardblog.blogspot.com/ ) as I reviewed my performance at year end 2011:

"....I need to appreciate that although world events (i.e. the European debt crisis) do impact our stock markets, those events are not the only factors to be considered. United States companies currently have extremely healthy balance sheets, very high productivity, excellent managers and world class franchises. As a consequence, McDonalds, CocaCola, Johnson & Johnson, Yum Brands, Apple, Caterpillar etc, are positioned to grow here and abroad for years to come, and should not be abandoned for any substantial period of time simply because Greece can't repay its debt"

Is the emerging market crisis of 2014 so terribly different from the European debt crisis of 2011? Should I simply ignore the fact that on Thursday the Department of Commerce reported that the US economy grew at a robust annualized rate of 3.2% in Q4 2013? Am I experiencing deja vu? Well, this time instead of selling into the panic, I decided not only to hold firm, but to "Buy,buy, baby/Baby, buy buy." On a dip, I bought HQH, a closed end fund that holds substantial amounts of Celgene, Biogen, Gilead and a host of other biotech and biopharma companies. I had tried to buy some months ago, but it was like trying to catch a rocket as HQH rose over 60% in 2013. I also added more AAPL after the market expressed disappointment with its earnings. I simply can not resist buying the shares of a company that continues to grow earnings year over year, has no debt and has accumulated over $160billion of cash while at the same time undertaking the largest share buy back program in history. Carl Icahn says that buying AAPL is a "no brainer." At least on that score, I qualify as a stockholder. I also bought more ARRpB, a mortgage real estate investment trust (mREIT) and added to my municipal bond fund holdings. The prospects for mREITS (my favorite, MTGE, is up over 9% year to date) and leveraged municipal bond funds have brightened with the 10Year yield moderating. On the speculative side, I added to my holdings of GGN in the belief that currency devaluation throughout emerging markets will spur the purchase of gold as a hedge.

This week, more than ever, experience, as recorded in my writings, guided my decisons. As you, my loyal readers, know, during my four years of active investment management, "I've seen fire and I've seen rain/ I've seen sunny days that I thought would never end/I've seen lonely times when I could not find a friend." But through it all, "I always thought I 'd see good, fixed income returns again." Let's hope they stay.