November 29, 2014 How Low

Risk/Reward Vol. 244

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

“It hurts like hell/To be torn apart
And it hurts like hell/To be thrown around.”---lyrics from “Torn Apart” sung by Bastille

“Go low/Lower than you know
Go low, Go low/Lower than you know”---lyrics from “How Low”---sung by Ludicris

“Though I can't seem to let you go.
The one thing that I still know is that you're keeping me down”---lyrics from “Gravity” sung by Sara Bareilles

The big event this week occurred on Thanksgiving when our markets were closed. The oil ministers of OPEC met in Vienna that day and afterward announced that a majority had voted to maintain current levels of oil production despite a lessening of world demand and a glut in production. By Friday afternoon, the price of oil plummeted below $67/bbl., a drop of more than 30% since June. This is good news for oil consumers, but if you own the shares of domestic oil exploration companies or you are Nigeria, Venezuela or Russia (the economies of which are dependent on oil trading above $100/bbl.) “it hurts like hell.” They must feel “torn apart” and/or “thrown around.” Thank goodness I sold Breitburn (BBEP) and Linn (LNCO)) last week. Both experienced double digit percentage declines on Friday alone with LNCO plunging over 18% . Ouch!

Speaking of “going low/Lower than you know” the Eurozone continued its march toward deflation and recession this week. Reports issued Friday detailed that the annualized rate of inflation for November was 0.3%, down from 0.4% in October, and that the Eurozone unemployment rate remains at 11.5%. The concern, of course, is that if deflation takes hold and Eurozone consumers come to understand that they can achieve a better return from holding cash than from investing and/or that they can purchase goods at a lower price by simply waiting another day, week or month to buy, Eurozone economies will degrade from a downward trend into a tailspin. Look for the ECB to advocate even more aggressive quantitative easing in the coming days.

So what do lower oil prices and Eurozone deflation mean to me? “The one thing I know is, like Gravity, they will keep domestic interest rates down.” Indeed, on Friday after the full impact of the above described developments had been absorbed by the U.S. markets, the rate on the 10 Year U.S. Treasury Bond fell to 2.19%. The lower the rate on this bellwether, the better my interest rate sensitive, income securities do. Indeed, on what otherwise was a flat trading day Friday, my preferred stock closed end funds (FFC, HPF, HPS), each of which pays at least an 8% dividend, each gained at least 0.5%. Now that I am back in sync with my principles (see last week's edition www.riskrewardblog.blogspot.com ) I should do well with these for the foreseeable future.

The Dow Jones Industrial Average and the S&P500 remained remarkably steady this week, at or near record levels. How long can this last given the economic turmoil in Europe and Asia? Who knows, but it sure feels good. That said, if and when I see the market in general or any segment thereof falter (e.g. as oil has), I will be brave and hit the sell button. As Sara Bareilles admonishes:

“Say what I wanna say
And let the words fall out
Honestly I wanna see me be brave”