August 23, 2014 Do What You Say

Risk/Reward Vol. 232

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

“Why don’t you do what you say
Say what you mean
One thing leads to another.”---lyrics from “One Thing Leads to Another” sung by The Fixx

“We bounce to this track
Hands to the sky/And throw your hair back
Bounce, bounce, bounce.”---lyrics from “Bounce” sung by Calvin Harris

“Listen children, all is not lost
All is not lost, oh no, no
Can you dig it?/Yes I can
And I’ve waited such a long time
For the day.”---lyrics from “Saturday in the Park” sung by Chicago

On August 9th, when last I wrote, I noted that from my vantage point on the sidelines, prices throughout the oil patch had fallen significantly and that several stocks including master limited partnerships KMR, KMP and ETP (each of which is controlled by Kinder Morgan (KMI)) were “very attractive.” Sadly, although I “said what I meant”, I had no time to “to do what I said.” “One thing (low prices) led to another (a buyout).” Indeed, the very next day, Sunday August 10th, Richard Kinder, the chairman of KMI announced a reorganization effectively collapsing KMR, KMP and ETP into KMI under terms very favorable to KMR, KMP and ETP shareholders. The shares of these skyrocketed when the market opened on August 11th and are now up 30% in just two weeks.

Kinder Morgan shares were not the only stocks that shone brightly these past two weeks. The lessening of tension in both Ukraine and the Gaza Strip caused investors to put “Hands to the sky/And throw their hair back” as the Dow Jones Industrial Average gained nearly 500 points and the S&P 500 entered record territory. Aiding this “Bounce, bounce, bounce” was a return to the belief that the Federal Reserve would maintain its zero-bound monetary policy. Indeed, on Friday August 15th the rate on the US 10Year Treasury Bond fell to 2.35%, its lowest point since the “taper tantrum” began on June 19, 2013. The rate has remained suppressed closing at 2.40% yesterday.

Despite broad gains in the market in general, however, the income securities that I favor still have not recovered to where they were earlier this summer. What “I’ve waited such a long time for is the day” when a clearer read on future interest rates can be had. And that day may have occurred yesterday when, at the much anticipated Jackson Hole conference, both Fed Chair Janet Yellen and ECB President Mario Draghi reiterated their devotion to low rates. Her comments in particular were interpreted as supporting a slight rise in short term rates next summer and a measured move upward thereafter. “Can you dig it?/Yes, I can.” So, “listen children, all is not lost/All is not lost” when it comes to more 2014 profits. I am reviewing and revising my buy list. Likely, I’ll be invested again once the impact of Jackson Hole is fully digested by the market---which could be as early as next week.

In retrospect and upon reflection, I am comfortable with my decision to lock-in my 7+% gain for the year on July 31st--- including the sale of KMP, KMR or ETP . “Does Anybody Really Know What Time It Is?” when it comes to predicting mergers, acquisitions or reorganizations? That said, participation in Kinder’s meteoric rise during the past two weeks would have “Colour(ed) My World” very green indeed. After Richard Kinder made the announcement, I received emails from several subscriber/Kinder shareholders to the effect of “Wishing You Were Here.” I must admit, these notes did not ease the pain, but they did “Make Me Smile.”