March 22, 2014 Limbo

Risk/Reward Vol. 213

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

"I didn't mean to hurt you
I'm sorry that I made you cry"---lyrics from "Jealous Guy" by John Lennon

"It's hard to understand
But the touch of your hand
Can start me crying."---lyrics from "Crying" sung by Roy Orbison

"Jack be limbo/Jack be quick
Jack go under limbo stick
Limbo lower now
How low can you go?"---lyrics from "Limbo Rock" sung by Chubby Checker

On Wednesday, Federal Reserve Chair Janet Yellen held her first FOMC press conference. She told reporters that the current Fed funds short term interest rate of 0-0.25% (which the Fed controls) could be raised as early as mid 2015. She also discussed the interest rate projections of individual FOMC members, the majority of whom now see short term rates reaching 1% or higher by year end 2015 and as high as 2.25% come year end 2016. Just last December, the majority projected rates to be 0.75% or lower come year end 2015 and no greater than 1.75% at the end of 2016. This change in projections took the market by surprise. She "may not have meant to hurt me", but Ms. Yellen's comments "made me cry" as the rate on the 10Year Treasury Bond (which trades in relation to anticipated short term rates) spiked to 2.8% and appeared to be heading higher. This, in turn caused the price of my interest rate sensitive stocks to drop. (Again, a rise in interest rates means a drop in prices.) Fortunately for me, by week's end, the yield on the 10Year stopped rising and actually receded to 2.75%.

Although "it's hard to understand" how the market will react to any given stimulus (note the market move on Monday despite the annexation vote in Crimea), I am certain that a rise in interest rates "will start me crying." Such a rise can come from a mere "touch of Ms. Yellen's hand" To avoid a tantrum, I must remain disciplined and exit rate-sensitive stocks (preferred stocks, business development companies, mortgage real estate development companies, leveraged closed end funds, etc.) if and when yields start their move upward in earnest. Timing is everything when it comes to these. I recall clearly how rate sensitive securities plummeted last summer in response to Ben Bernanke's suggestion that QE3 tapering could begin as early as July, 2013. (It did not begin until January, 2014). ( See vols. 171 and 172 www.riskrewardblog.blogspot.com ) Had I not sold at that time, I would have lost all of my year to date gains and gone into the red in a matter of less than 10 days.

And speaking of crying, "how low can Kinder Morgan (KMP,KMR,KMI) go?" Kinder has been in "Limbo" since it was trashed in a Barron's article in February. Despite giving assurance early in the week that it will raise its already impressive dividend (7.5%), Kinder fell even further "under the limbo stick." On Thursday, however, the tide may have turned leaving this "Jack" to wonder whether it is time to "be quick" and to add more Kinder to his holdings despite having trimmed some just last week. Kinder is the largest oil, natural gas and gasoline pipeline company in the U.S. and owns a host of ancillary, profitable business. I do not see the demand for these products lessening any time soon. Once the taint of the Barron' article subsides (and I am confident that it will), Kinder should garner a price worthy of its large and sustainable cash flow.

With the rate on the 10Year stabilizing, I enjoyed a comeback on Friday; this despite a massive drop in biotech stocks (which I hold in the closed end fund, HQH). My comeback was not as robust, however, as the market's performance for the week with the Dow Jones Industrial Average gaining 237 points. In truth, the Fed's more hawkish approach to future interest rates was a twist that I did not anticipate. Had the 10Year rate continued to rise, I would have sold positions faster than Chubby Checker can pivot, leaving it to Ms. Yellen to croon:

"Come on let's twist again like we did last summer
Yea, let's twist again like we did last year
Do you remember when things were really hummin'
Yea, let's twist again, twistin' time is here"