Risk/Reward Vol. 248
THIS IS NOT INVESTMENT OR TAX ADVICE, IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It's of utmost importance
We're dealing with a volatile substance."---lyrics from "Never Tell" sung by The Violent Femmes
"What you think isn't always true
And you don't know where your interest lies."---lyrics from "You Don't Know Where Your Interest LIe" sung by Paul Simon
"Wait till next year/Wait till next year
I've got an image to nurse
And a role to rehearse."---lyrics from "Wait Til Next Year" sung by Eric Burdon and The Animals
Those who simply bought index funds triumphed once again in 2014. The Dow Jones Industrial Average provided nearly 10% in total return (appreciation plus dividends) and the S&P nearly 13%. But 2014 also proved that when we are dealing with equities, "we're dealing with a volatile substance." Remembering this is "of utmost importance." Indeed, a mere three weeks ago the Dow was trading 800 points below its year end close at which time it was heading toward a total annual return of less than 5%. I fell just short of my 6% annual goal, but did so holding considerable cash and with considerably less volatility. Indeed, had I not been defrauded by ARCP and had I been able to unload my oil stocks within my 8% loss limit, I would have done much better. For me, the key to profitability lies in minimizing losses. In fact, in retrospect I should have sold back in July when I was up 10% and was contemplating liquidation. (see Vol. 229 www.riskrewardblog.blogspot.com ) Coulda, woulda, shoulda---volatile indeed!
Many stories have and will be written about the stock market's performance in 2014. But what the commentators "think isn't always true." For me, the story of the year is "where your interest (rate) lies." As 2014 dawned, quantitative easing was coming to an end, and as a consequence, very few wags predicted that the rate on the bellwether 10 year US Treasury Bond would go down as the year progressed--- let alone prognosticated that it would end the year at 2.17%, 86 basis point below where it started. This year-long continuation of low rates made bond buying unattractive for anyone seeking a yield thereby pushing even widows and orphans into equities. More significantly, it fueled the incredible stock buy back spree about which I wrote in Vol. 245 (www.riskrewardblog.blogspot.com). With the rest of the world foundering, where else could one put one's money but US equities. That is plain to see in hindsight, but was not so obvious as we lived Fed meeting to Fed meeting anticipating an interest rate hike that never came. Hopefully, Chair Yellen's clearer vision will reduce volatility in 2015.
So what will "next year" bring, Mr. Market? "I've got an image to nurse." 2015 again will be about interest rates. I am confident that the Federal Reserve will not raise short term rates until June, and I continue to believe that a rise in those rates will have minimal impact on longer term ones(10-30 year bonds). Longer term rates respond more to inflation which I see remaining in check (below 2% here, much lower worldwide) for the foreseeable future. Demand for goods and services is waning here and abroad for a host of reasons including demographics. With demand low, unemployment worldwide will remain high and wages, the primary driver of inflation, will remain stagnant. Low inflation and thus low long term rates is good news for my favorite income plays (preferred stock, utilities, municipal bond funds, mlp's and real estate investment trusts) all of which do well in such an environment. Cheap credit also will continue to fuel stock buy backs. This year's wild card is energy. No one predicted the dramatic decrease in oil and natural gas prices experienced in the second half of 2014. I do not see them remaining depressed all year as more companies cut back on their capital expenditures and exploration efforts. Buying solid companies (CVX, COP, ETP, KMI) on dips and looking for a confirmed rise in prices as a signal to buy more speculative plays should reward market watchers this year.
I close on some personal news. After 38 years of practicing law with Michael Best & Friedrich LLP, I decided to retire as of December 31, 2014. My years at MBF were rewarding on so many fronts, but the lure of MBF's pension plan, devised to incentivize people of my age to leave, proved irresistible. That said, I am not ready to abandon completely the profession that I was born to practice. And so, effective January 1, 2015, I have associated in an "of counsel" capacity with the law firm of Hansen Reynolds Dickinson Crueger LLC (www.hrdclaw.com). HRDC is a litigation boutique founded by four of my former partners a few years ago and now has offices in Milwaukee, Madison and Chicago. You will hear more about my professional plans in the coming days and weeks, but with the New Year dawning, I am living a Paul Simon lyric: I am
"Lookin' for fun and feelin' groovy!"
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