Risk/Reward Vol. 212
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You'll always be my guardian angel
Always be my guiding light."---lyrics from "Guardian Angel/Guiding Light" sung by The Seekers
"How many times must the cannon ball fly/Before they are forever banned
How many times can a man turn his head/Pretending he just doesn't see
The answer my friend is blowin' in the wind/The answer is blowin' in the wind."---lyrics from "Blowin' In The Wind" sung by Bob Dylan
"Watch the smiths in the village of a thousand dreams told
Change the copper into gold."---lyrics from "Change Copper Into Gold" sung by Seals & Croft.
Unemployment has dropped to just above 6.5%. In previous communiques, the Federal Reserve has stated that 6.5% is the benchmark at which it would consider raising interest rates. The investing world is left to wonder if the Fed will re-affirm or alter this "forward guidance" at its meeting scheduled for March 18-19, 2014. Recent comments from individual Fed officials, including Vice Chair-nominee Stanley Fischer, have led many to speculate that the Fed will abandon the 6.5% target for some other, less quantitative benchmark. Forward guidance is a tool employed by central bankers. It consists of communiques intended to "guide" market expectations as to future actions particularly as they impact interest rates. Central bankers believe that providing a "guiding light" will reduce interest rate volatility. In a paper issued this week by the Bank for International Settlements (the central bank for central banks), two BIS economists postulate that forward guidance may not be a "guardian angel." They argue that investors have come to believe that they will be given ample warning of any significant change in policy, and as a consequence investors take on outsized risk. This in turn causes asset bubbles. ( Here is a link to their paper www.bis.org/publ/qtrpdf/r_qt1403f.htm) The economists cite the "taper tantrum" of 2013 discussed in last week's edition ( Vol. 211 www.riskrewardblog.blogspot.com ) as an example of how forward guidance can foment rather than suppress volatility. "Guiding light" or not, as an income investor laser focused on interest rates, I will be watching very closely the communique that the Fed issues next week.
Throughout the week, I corresponded with one subscriber about the fate of Linn Energy (LINE/LINCO) which dropped precipitously after a bashing by Jim Cramer and an attack by short sellers. As loyal readers know, I never have to ask "How many times must a cannon ball fly/Before they are banned?" or "How many times can a man turn his head/Pretending he just doesn't see?" Once a stock drops 8% below its purchase price (and often times a higher threshold), it is gone. Two of my LINE positions hit that mark on Thursday, and I decided to sell all four. The Linn story remains fundamentally sound, and I have no doubt that some day I will own it again. As to when, "the answer is blowin' in the wind." I do not hate any given stock, nor do I love any. I simply will not ride a stock below my rule-based sell point . A corollary to that rule, however, is that if I see an opportunity to profit from a stock, I will buy it--- whether or not owning that stock caused me a loss in the past.
A corporate bond default in China raised concerns as to the health of that economy; concerns that wreaked havoc on copper and iron ore prices. (China is the largest importer of both.) Understandably, the entire mineral and mining sector fell except for gold which hit a 24 week high as investors world wide sought the perceived safety of that precious metal. The "Smiths (and Fong's and Patel's) in a thousand villages" are "changing from owning copper to owning gold." I do not own physical gold or any shares in a physical gold exchange traded fund (e.g. GLD). That said, I do own shares in GGN, a closed end fund holding positions in gold miners and to a lesser extent other natural resource companies. I bought GGN on two occasions in January, 2014 when I perceived that it was woefully underpriced. That hunch has rewarded me handsomely, as both positions are up over 11%. Moreover, GGN pays a double digit annual dividend on a monthly basis. Parenthetically, the flight to safety occasioned by uncertainty in China and the Ukraine has attracted investors to U.S government securities, most notably the benchmark 10Year Treasury Bond, off which most of my income securities are priced or spread. (See Vol. 209 www.riskrewardblog.blogspot.com ). The yield on the 10 Year fell to 2.64% at week's end which buoyed the price of many of my holdings. (N.B. Lower yields means higher prices.)
Market participants were rocked this week as the Dow Jones Industrial Average sank 387 points and now is down 3% year to date. The S&P500 also dropped into negative territory for the year. My income stocks held their own, but I too was rocked by the energy sector. As noted by that well known investment guru, Bob Dylan, some weeks, stocks will
"... stone ya when you're trying to be good
They'll stone ya just like they said they would
They'll stone ya when you're tryin' to go home
They'll stone ya when you're there all alone
But, I would not feel so all alone
Everybody must get stoned."
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