Risk/Reward Vol. 226
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“You don’t pull on Superman’s cape
You don’t spit in the wind”---lyrics from “You Don’t Mess With Jim” sung by Jim Croce
“Feel like jumpin’ baby/Won’t ya join me please
I don’t feel like beggin’/But I’m on my knees
So be my guest/You got nothin’ to lose
Won’t ya let me take you on a sea cruise.”---lyrics “Sea Cruise” sung by Frankie Ford
“This old man/He played nine
He played knick-knack on my spine
With a knick-knack paddy whack
Give a dog a bone
This old man came rolling home.”---lyrics from “This Old Man” sung by Everyone
Although the major stock indices continue to flirt with record highs, financial commentators characterize investor sentiment as jittery. One factor contributing to this sentiment is the following: much of the gain in stock prices over the past year has resulted from an increase in stock multiples as opposed to an increase in corporate earnings. Recall that a primary determiner of a stock’s value is its price to earnings or p/e ratio which is otherwise termed its multiple. For example, Google, which trades at $575 per share, had earnings over the past twelve months of 19.09 per share, and thus has a p/e ratio or multiple of 30.12 ($575/$19.09= 30.12). Nobel prize winner, Robert Shiller, who is viewed as a “Superman” when it comes to economic trends (e.g. the Case-Shiller Home Price Index) measures the health of stock markets by calculating an average “Cyclically Adjusted Price to Earnings Ratio” or CAPE for all of the stocks comprising the S&P 500 Index (S&P) or predecessor indices. Since 1881, Superman's CAPE has averaged a multiple of 17. Today, the CAPE multiple of the S&P is 26, a number that has been exceeded only three times: in 1929, 2000 and 2007, just before significant market downturns. CAPE has been criticized because it does not take into consideration interest rates which are currently at historic lows. Nevertheless, his observations are more than just “spittin’ in the wind.”
Domestic oil producers and oil services companies “felt like jumpin’” this week. After years of “beggin’” from “on their knees”, the Commerce Department approved the applications of Pioneer Natural Resources (PXD) and Enterprise Products (EPD) to export condensate. Condensate is a petroleum product that is lighter than crude oil, but is capable of being refined into diesel and jet fuel. Condensate is found in large quantities in the oil fields of West Texas and North Dakota. It is better suited to foreign refineries than to US refineries which are engineered to crack heavier oil imported from the mid-East, Nigeria and Venezuela. This fact supported sending condensate “on a sea cruise” since many of our domestic refiners can not refine condensate and thus “got nothin’ to lose”. As noted previously (see Vol.193 www.riskrewardblog.blogspot.com ), US producers have been precluded from exporting unrefined petroleum products since 1973 so the potential associated with exporting condensate is significant. On news of the approval, stocks in the oil patch rose generally, and the stock of oil services companies such as HCLP and TRN skyrocketed.
As loyal readers know, I have had a love/hate relationship with ARCP, the triple-net-lease real estate investment trust (REIT) founded by the not so “Old Man”, Nick Schorsch. “(K)Nick” has a “knack”of upsetting stockholders by overpaying himself and by making massive acquisitions funded by disruptive secondary stock offerings . The former problem was eliminated Friday last when Nick took a “paddy whack”, stepped down as CEO and went “rolling home”. The latter problem likely has been resolved by an announcement accompanying the resignation that ARCP will eschew acquisitions for the remainder of the year and instead will rely upon organic growth to improve its already handsome monthly dividend. Due in part to “Nick’s knack”, ARCP has lagged the REIT sector this year, but I believe these recent developments and its 8+% dividend will give this “dog a bone” and will propel ARCP’s stock higher. I added to my position.
If you read financial news reports, you know that the markets have shown little, if any volatility. Indeed, the market indices have closed above their 200 day moving averages for more than 400 consecutive days. That said, investors are nervous because they know (like Jim Croce) that one cannot “Put Time in a Bottle”. Someday a bear market will come roaring back, “badder than old King Kong/Meaner than a junk yard dog.” Thus, I, for one, remain vigilant; ever ready to exit should I see a clear bearish signal. For my income weighted portfolio, that signal will be in the form of a spike in the interest rate on the 10Year Treasury Bond. Currently, that rate remains in a range between 2.5 and 2.65%. Should it suddenly spike and head toward 3%, I will sell. I may be a market timer, but I am not a gambler (although like Bad, Bad Leroy Brown “I like my fancy clothes!”).
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