June 21, 2014 Wings of a Dove

Risk/Reward Vol. 225

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

“On the wings of a pure, white dove
He sends His pure sweet love
A sign from above
On the wings of a dove”---lyrics from “Wings of a Dove” sung by Ferlin Husky

"Take me in tender woman
Take me in, for heaven's sake
Take me in, tender woman"/ Sighed the snake”---lyrics from “The Snake” sung by Johnny Rivers

“Don’t have the inclination to look back on any mistake
In the fury of the moment/I can see the master’s plan
In every leaf that trembles/In every grain of sand.”---lyrics from “Every Grain of Sand” sung by Bob Dylan

Two weeks ago, I reported that I had sold most of my interest rate-sensitive securities and stated:
“Likely, I will stay that way (1/3rd in cash) until after the Federal Reserve meets later this month. Signals from that meeting could have a big impact on interest rates and by extension the value of interest rate sensitive securities.” (Vol. 224 www.riskrewardblog.blogspot.com )

The Federal Reserve met on Tuesday and Wednesday, and I can report that currently I am re-purchasing many of the securities that I had sold. I re-enter “On the wings of a pure, white (haired) monetary dove” named Janet Yellen. Characterizing the fear of inflation expressed by others as nothing more than "noise", Fed Chair Yellen confirmed at her Wednesday news conference that the Federal Reserve intends to keep interest rates low for the foreseeable future. That was the “sign from above” that I needed. And I was not the only one to take notice of “Her pure sweet love” as the Dow Jones Industrial Average rose more than 100 points during her press conference. Also that day, the rate on the benchmark 10 Year Treasury Bond (10Year) fell from 2.65% to 2.61% (which of course meant that its price rose). In addition, Yellen's words propelled the S&P 500 to another record high which it sustained through Friday's close.

Although I forewent some capital appreciation and some dividend payments during my two week hiatus, I derived great comfort from having the interest rate-sensitive portion of my portfolio on the sidelines as the yield on the 10Year moved up (and its price correspondingly moved down) in anticipation of a more hawkish Federal Reserve meeting (which did not materialize). The makeup of my portfolio and more particularly its sensitivity to interest rate fluctuations prompted some at last weekend’s Subscriber Roundtable to liken my investment strategy to snake handling. Am I not like the “tender woman” who is “taken in by the interest rate snake” only to be bitten and left for dead? I think not. Rather, I liken myself to a herpetologist. As loyal readers know, I not only watch interest rates, I study them everyday "for heaven's sake". Admittedly, in today’s world, interest rate-sensitive securities are not for the casual investor or for the part time student. That said, I believe that, fully understood and closely monitored, these securities (e.g. preferred stocks, leveraged closed end bond funds, etc.) can be a source of steady and secure income, and that is what I seek as I approach retirement. Speaking of studying, thanks to the subscriber who sent me a link to a short, but informative discussion on why Northern Trust believes that the interest rate on the all important 10Year Treasury Bond will remain low well into the future. View it here: https://www.northerntrust.com/insights-research/market-economic-commentary/marketscape .

Much uncertainty surrounds the situation in Iraq which currently produces 3.4 million barrels of oil per day (4-5% of world's daily consumption). “The fury of the moment”, however, has redounded to the benefit of those invested in domestic oil and gas. The meteoric rise in domestic production is directly tied to fracking, and fracking is wholly dependent on a steady supply of high grade frack sand, the type mined by HiCrush LP (HCLP). HCLP operates two large frack sand mines in Wisconsin. HCLP's stock is up 70% since my October, 2013 purchase and up 48% since my follow-on purchase in early January, 2014. All the while it has paid a handsome dividend. “I don’t have the inclination to look back on any mistake”, but if I did I would regret not buying more. I see profits "In every grain of sand" that HCLP mines.

Assurance this week from the Federal Reserve that it intends to keep interest rates low was a “Taste of Honey” for me. It means that we likely will avoid the precipitous drop in interest rate sensitive securities that we experienced last summer. Avoiding such a drop is "Goode (for) Johnny B." (sorry Mr. Rivers!) and keeps me from “The Poor Side of Town.”