January 17, 2015 Sweet Child O' Mine

Risk/Reward Vol. 250

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“Oh, baby
I, I, I, I’m fallin’”---lyrics from “Fallin’” sung by Alicia Keyes

“Take me down to the paradise city
Where the grass is green and the girls are pretty.”---lyrics from “Paradise City” sung by Guns N Roses

“There’s a million oil rigs pumping
That black gold all over the world”---lyrics from “One Good Well” sung by Don Williams

Year to date, both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index are down about 2%. “Oh, baby”, should one be worried that stocks will continue “fallin’”? After all, earnings season is underway, and it has been underwhelming to say the least. That said, let’s not forget what happened last year. Remember? Between the close on December 31, 2013 and February 4, 2014, the DJIA fell 1131 points or 6.8% only to rebound sharply and to finish the year with a total return of nearly 10%. (See Vols. 205-207 www.riskrewardblog.blogspot.com ) I see nothing to indicate that the year-to-date dip is anything other than profit taking and repositioning. Friday's solid move upward corroborates this belief. As emphasized repeatedly here, where else can money go if one wants any return at all? The answer is the same as it was in 2013 and 2014 (See Vols. 164 and 201 www.riskrewardblog.blogspot.com ) --- TINA---There Is No Alternative--- to US equities.

Well maybe one—municipal bond funds. In 2014, muni/bond funds were a “paradise city” with the S&P Municipal Bond Index (Index) seeing a double digit total return, much of it tax preferred and with very little volatility. Talk about “where the grass is green and the girls are pretty!” On a personal level, I held my municipal bond closed end funds for the entire year, and my return mirrored that of the Index. If the yield on the bellwether 10 Year US Treasury Bond (to which muni bond funds are correlated) does not rise too quickly and stays below 2.5% (and year to date it has been sinking, closing at 1.81% on Friday), municipal bond funds should have another good year. Adding to their attraction are the following facts: 1) fewer municipalities are floating bonds thus increasing the appeal of those bonds already in the market; and 2) repayment risk is very low with only 57 defaults last year out of 20,000 issuers. As noted, I invest in this sector through closed end funds because they employ leverage to enhance returns. I employ a triangular selection process, choosing those funds that trade below net asset value, have a greater than 6% tax preferred annual dividend and garner at least a Bronze rating on Morningstar. I hold currently MYI, EIM, VGM, MQT, MVF, PML, MYD, PMO, OIA, MUA and MNP, all in my personal (non 401k or IRA) account.

I am not calling a bottom on oil prices (or am I?), but did you notice the resistance this week to prices below $44/bbl and the 10% rebound that followed? Right now “There’s a million rigs pumping/That black gold all over the world”. But with all of the cut backs in capital spending (this week Shell walked away from a massive project in Qatar and Statoil abandoned several Arctic Circle leases), the glut will diminish. On the domestic side, producers have done much to reduce the cost of hydraulic fracturing (“fracking”). Conoco announced recently that its fracking operations would continue to be profitable even at $40/bbl. EOG reported that it could make a 10% profit on $40/bbl. oil. I have a feeling that we may have seen oil's nadir.

The market has displayed some negative vibes so far this year, but certainly not an “Appetite For Destruction.” By no means is Mr. Market “Knockin’ on Heaven’s Door.” As Axl, himself, advises, “all we need is a little patience”. Certainly, that virtue paid off last year. And as noted above, if one wants a return on one’s investment, the US stock market is the only game in town---make that, in the world . Unlike Mr. Rose, one need not ask:

“Where do we go
Where do we go now
Where do we go
Sweet Child ‘O Mine?”