October 18, 2015 Dry Powder

Risk/Reward Vol. 280

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

“While you've been saving your neck

I've been breaking mine for ya'

The power is on, the guillotine hums

My back's to the wall - go on, let it fall

Make up your mind”---lyrics from “Make Up Your Mind” sung by Florence + The Machine

“Don't wait keep right on

But be aware

Don't take too long

The time just seems to fly

Just keep your powder dry”---lyrics from “Keep Your Powder Dry” sung by Motorhead

“This land is your land
This land is my land

From California to the New York island

From the red wood forest to the Gulf Stream waters

This land was made for you and Me”---lyrics from “This Land Is Your Land” sung by Woodie Guthrie

Volatility again prevailed in the stock market this week. And why not. Disappointing retail sales prompted two of Janet Yellen’s closest allies on the FOMC (Fed Governors Tarullo and Brainerd) to speculate that it may not be appropriate to raise rates in 2015. How does this square with Chair Yellen’s commitment to raise rates absent a significant downturn; a downturn that has not materialized? These mixed messages prompted Larry Fink, the founder and CEO of BlackRock the world’s largest asset management firm, to blast the Fed. He accused it of destabilizing financial markets worldwide when its mission should be to promote stability. Mr. Market finds himself in Florence’s shoes: “While Janet’s been saving her neck/He’s been breaking his/The power is on, the guillotine hums/His back’s to the wall- go on, let it fall/Make up your mind!”

But volatility need not be bad---at least not for those who "kept their powder dry.” Having plenty of cash on hand going into September’s swoon has proven a year-saver for me, at least so far. Capturing the double digit gains reported in last week’s edition (See Vol. 279 www.riskrewardblog.blogspot.com ) as well as others (e.g. a 12% gain in HQH to which a subscriber/fellow ski bum led me) has yours truly on track for a profitable 2015 even as the indices remain in the red. But one does not acquire powder without selling---hopefully at a profit. Paraphrasing Bernard Baruch, I've never lost money taking a profit. I need to keep this in mind and to “be aware/Don’t take too long (to sell)/The time just seems to fly.”

If the Fed does not raise rates in 2015 or even if it does but signals that it is a “one and done”, interest rate sensitive stocks including two of my favorite sectors, preferred stocks and real estate investment trusts (REIT’s), will continue to hold value and to pay handsome dividends. Both have done well recently with FFC (a preferred stock closed end fund) up 9% and two REIT’s, OHI and O, up 9% and 7.5% respectively, since I bought them at the beginning of September. Bargains may be difficult to find going forward, but a stable interest rate environment is always good for real estate. Make “this land/your land/From California to the New York island/From the redwood forest to the Gulf Stream waters/This land’s worth owning by you and me.”

Buy and hold has been an uninspiring strategy this year. The profit I will make in 2015, assuming I do, will come from adherence to my loss limit rule then re-entering in September at the bottom of a trough. The question remains will I sell in time to avoid another downturn. This has been an issue for me in the past. In any event, being nimble has been key this year, and may well be for years to come as economic growth remains sluggish worldwide. Florence’s lyrics may provide a path to success in the future:


“Run fast for your mother, run fast for your father

Run for your children, for your sisters and brothers

Leave all your love and your longing behind

You can't carry it with you if you want to survive”