Risk/Reward Vol. 236
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Yeah, you can tell everybody
Go ahead and tell everybody
I’m the man, I’m the man, I’m the man.”---lyrics from “The Man” sung by Aloe Blacc
“You got me running, muttering, screaming each and every night
Faster and faster.”---lyrics from “Faster” sung by Janelle Monae
“The present has no ribbon
Your gift keeps on giving
We’re up all night to get lucky.”---lyrics from “Get Lucky” sung by Daft Punk
As I have written in the past (see Vols. 174, 205, 217, 220 and 224 www.riskrewardblog.blogspot.com ), “you can tell everybody/Go ahead and tell everybody” that when it comes to gauging the pulse of the Federal Reserve, Jon Hilsenrath of the Wall Street Journal is “the man, is the man, is the man.” And never has his position as the Fed’s designated leak been more on display than Tuesday morning during a webcast that he hosted and that I watched. At approximately 11:15 a.m., he predicted, confidently, that in the statement scheduled to be released the next day at the conclusion of its two day meeting, the Fed would not abandon its promise to forego raising short term interest rates for a “considerable time” after QE3 ends in October (see last week’s discussion). Almost instantaneously, both the Dow Jones Industrial Average (DJIA) and the S&P 500 (which had been languishing in negative territory for days in anticipation of the Fed’s statement) skyrocketed. The DJIA gained more than 100 points in a matter of minutes. Indeed, the release of the actual statement by the Fed on Wednesday afternoon, which confirmed Hilsenrath’s prediction, proved anticlimactic as the markets moved only modestly upward. Assured that the Fed’s easy money policy will remain intact for the next several months, the DJIA continued to cruise upward to new highs on Thursday and Friday.
That said, the Fed’s statement was not all rosy for the easy money crowd. Although Mr. Market has interpreted the phrase “considerable time” used in the statement to mean that short term interest rates will not be raised until mid-2015, the Fed’s statement also contained charts indicating that once rates do begin to rise, the pace will be “faster” than previously anticipated. This news caused “muttering and screaming” among fixed income investors as reflected in the yield on the bellwether 10 Year Treasury Bond which increased on the news, closing Thursday at 2.63% (highest since July 3) and Friday at 2.59%. (Remember a rise in yield means a drop in price.) For those like me who were agnostic as to the Fed’s course of action (since I was 2/3rds in cash), the statement and its impact have helped inform the actions I will take over the next few weeks and months. My read is that, absent exogenous events, the yield on the 10Year will remain range bound between 2.4% and 2.75% into the first quarter of 2015. This read gives me comfort sufficient to reinvest into the full complement of securities that I held prior to liquidating them at the end of July. Assuming my read is correct, these securities should provide me an additional 1 ½ to 2% gain by year end.
With so much attention focused this week on the Fed, Scotland and the Alibaba IPO, it would have been easy to overlook some “presents”, many of which came with “no ribbon.” One such present is a rights offering issued by Gabelli Equity Trust (GAB), market guru Mario Gabelli’s flagship equity closed end fund. Rights offerings (RO) are like secondary stock issuances, but limit the participants to existing shareholders thus reducing their dilutive effect. GAB’s offering has resulted in its stock trading at or below its projected post RO net asset value (NAV) something that rarely happens. This looks like “a gift” which will “keep on giving". I initiated a position late in the week. Sometimes, you don’t need to be “up all night to get lucky.” I also took advantage of a dip in ARCP, the nation’s largest single tenant triple net lease real estate investment trust. For those who want a lesser but more secure return, take a look at its preferred stock, ARCPP. And then there are the oil companies, all of which remain in the bargain bin. A broken record I may be, but one cannot look at the events occurring in the mid-east and the sanctions placed on Russia (the world’s second largest oil exporter) and not conclude that a bet on US domestic oil production, transport and/or supply is a good one. Pick any number of companies in these sectors, and I believe you will be a winner.
And so my search for a reasonable return in exchange for a reasonable risk continues. Earning such a return in today’s zero-bound interest rate environment, created and now perpetuated by the world’s central banks, is not easy. But, like Daft Punk, I believe the following:
“Work it, make it, do it, makes us
Harder, better, faster, stronger.
And work it, make it, do it, I will.
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