March 29, 2014 Go Where You Wanna Go

Risk/Reward Vol. 214

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

"You gotta go/Go where you wanna go
And do/Do what you wanna do."---lyrics from "Go Where You Wanna Go" sung by The Mamas and The Papas

"Return to sender/Address unknown
No such number/No such zone."---lyrics from "Return to Sender" sung by Elvis Presley

"I will follow him/Follow him
Wherever he may go
For nothing can keep me away
He is my destiny."---lyrics from "I Will Follow Him" sung by Peggy March

If you subscribe to any financial publication (e.g. IBD, the Wall Street Journal, the Financial Times), you have been inundated this week by full page ads from BlackRock touting its "go anywhere" funds. With $4trillion (yes, that's TRILLION) under management, BlackRock is the largest asset manager in the world. Frustrated by the paltry returns afforded its clients by traditional fixed income instruments such as Treasury securities and investment grade corporate bonds, BlackRock is suggesting that retirement age income seekers (grand-Mamas and grand-Papas, if you will) look beyond traditional income vehicles and invest in funds that employ an active and dynamic approach to finding yield (e.g BCIIX). The guidelines for these funds permit fund managers to buy and sell preferred stock, real estate investment trusts, master limited partnerships, senior loans, business development companies, puts, calls, derivatives and a host of other non-traditional securities. Sound familiar? Like me, these managers "go where they wanna go/And do what they wanna do" in search of today's most elusive beast---a decent yield. I find comfort in knowing that I am not alone in this quest.

As mentioned in last week's edition (Vol. 213 www.riskrewardblog.blogspot.com ), biotech stocks have been pummeled ever since Congressman Henry Waxman wrote to high flyer Gilead Sciences two weeks ago asking it to justify the price of its Hep C drug. Unlike Elvis's girlfriend, Gilead could not simply mark the envelope "Return to sender/Address unknown/No such number/No such zone." Indeed, this letter has caused a stampede from these stocks because biotech like all pharmaceuticals is heavily reliant upon government reimbursement, a reliance that will only increase once Obamacare is fully implemented. IBB, the biotech exchange traded fund, is down 12% since March 18th. I am exposed to the sector through HQH, a closed end fund, which is down 10% for the same time period. However, but for the question raised by Waxman (which is a big issue), the future looks bright for these companies (Gilead, BiogenIdec, Celgene) each of whom has a robust pipeline of drugs awaiting final FDA approval. Is it time to trim or to add? Hmmm?

Conventional wisdom is that if and when the Federal Reserve raises the Fed Funds rate (the overnight interest rate charged by and between banks with funds on deposit with the Federal Reserve), the impact will ripple up the entire interest rate curve causing the yield on the 10 Year Treasury to rise (and its price to fall). Pundits opine that the 10Year "will follow the Fed Funds rate/Wherever it may go/Nothing can keep it away/It is its destiny." As loyal readers know, a rise in the yield on the 10 Year Treasury would not be good for those currently invested in securities priced in relation (or spread) thereto such as preferred stock, real estate investment trusts, etc.---in other words the types of investments I like. In anticipation of a rise in the Fed Funds rate, I have charted the relationship between Fed Funds and the 10 Year and frankly do not see an historic correlation. (I use the graphing function available on FRED, the Federal Reserve Bank of St. Louis' website.) This fact is borne out by how steady the rate on the 10Year has been since Janet Yellen's March 19th press conference where the possibility of raising the Fed Funds rate in 2015 first surfaced. My charting reveals that the 10Year is more correlated to the rate of inflation. If I am right, I will not need to exit these favorites until the rate of inflation increases (or some other event negatively impacts the 10 Year), irrespective of what the Fed does to the Fed Funds rate.

With the indices stuck in a trading range (DJIA down 1.5% and the S&P 500 up a mere 0.5% year to date) and returns from bonds "once abundant/now elusive" (a quote from the opening frame of BlackRocks's homepage), investors no longer enjoy "sweet dreams 'til the sunbeams find you/Sweet dreams that leave all the worries behind you." Instead they are forced to be nimble risk takers or to hire managers like BlackRock to be so on their behalf. But rest assured, through it all, I will be there, struggling beside you. In that regard, "in your dreams whatever they may be/Dream a little dream of me."