October 18, 2014 Welcome Back

Risk/Reward Vol. 238

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

“Those dreams have remained/And they’ve turned around
Welcome back/Welcome back/Welcome back.”---lyrics from “Welcome Back” sung by John Sebastian

“I’ll never look up/Never give up
And if it gets rough/It’s time to get rough
But now, falling, falling, falling.”---lyrics from “Falling” sung by Haim

“Please forgive me for rambling
I just wanted y’all to know/That I don’t know it all
Don’t be surprised.”---lyrics from “Surprise” sung by Gnarls Barkley (Cee-lo)

“Welcome back/Welcome back/Welcome back” from Italy---NOT. Holy Cannoli! I leave for two weeks, and the stock market yo-yo’s then drops like a rock. And as for my “dreams” of a nice, gentle ride into the end of the year, “they’ve turned around.” I am glad that I left the country 2/3rd’s in cash. That said, I suffered like the rest of you on the remaining 1/3rd. I found the task of managing my investments difficult while basking in the sun on Capri or touring in Rome; a task made even more difficult by the fact that I had a seven hour head start on cocktail hour (um, make that a nine, no more like a twelve hour head start). Oh well, I still am ahead of the game and have already compiled my “ buy” list if and when I am comfortable that a bottom has been reached. Cash is a very nice commodity to own right now.

Leading the “falling, falling, falling” has been the oil patch. Talk about “getting rough!” One month ago WTI crude traded at $95/bbl. On Thursday morning it traded below $80/bbl before rebounding. The reason: who knows? It could be that Saudi Arabia is trying to drive higher cost producers (e.g. U.S. frackers) out of business; it could be a slack in world wide demand; or it could be that several refineries around the world are shuttered for routine maintenance reducing daily demand by as much as 3million bbls/day. Whatever the reason(s), this precipitous drop began just before I left and caused me to exit BBEP as I was boarding the plane. I reduced my LNCO position by half upon my return. Nevertheless, I am ready to buy both back once I perceive some price stability. Indeed, at present, oil and natural gas stocks are so cheap, I am finding it difficult not to buy, with crude trading at what I perceive to be the bottom ($80/bbl). That said I have been Kardashianed (definition---fooled by a false bottom) in the past. I don’t need to buy at the nadir and will await a confirmed rally before re-entering. In addition to LNCO, I am still holding VNR, BBEPP, VNRBP and FEI each of which experienced a much needed spike on Thursday and Friday.

The one place that I found some relief these past two weeks was in fixed income; those securities most directly correlated to the yield on the 10 Year U.S Treasury Bond. This of course is the bellwether about which I have been “rambling” for more than a year (“Please forgive me.”). Just last month I predicted that the yield on the 10Year would be range bound for the remainder of the year between 2.45% and 2.75% ( See Vol. 236 www.riskrewardblog.blogspot.com ) As proof that “I don’t know it all”, during my sojourn in Italy, the yield plummeted from 2.45% to 2.09% at the close on Wednesday. It finished the week at 2.19%. “I just want y’all to know” that I was as “Surprised” by this as anyone. In any event, it kept the value of the fixed income portion of my holdings (e.g. FFC, DSL, OXLCO, MVF, HPF, EIM, VGM, HPS ) from falling (remember price goes up as yield goes down) even during the worst of the sell-off. This drop in rates results directly from a flight to safety caused by fear: fear that China will not meet even its reduced target of a 7.5% growth in gross domestic product; fear of deflation in the Eurozone; fear of ebola; fear of ISIS; fear of fear itself; fear that seems overblown in light of several good corporate earnings reports this week.

I am hopeful that the market’s action on Thursday and Friday signals that a bottom has been reached in both the value of equities and the price of crude oil. If this is confirmed next week, I see myself becoming an aggressive buyer. Unlike John Sebastian, I won’t have to be a “daydreamin' boy” when it comes to profits or to otherwise “Believe in Magic.” A confirmed rally will provide me with a reason “to have to make up my mind/To say yes to some and leave some others behind.”