Risk/Reward Vol. 284
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
“People say I'm crazy/Doing what I'm doing
Well, they give me all kinds of warnings/To save me from ruin
When I say that I'm okay, well, they look at me kinda strange
"Surely, you're not happy now, you no longer play the game"
People say I'm lazy/Dreaming my life away
Well, they give me all kinds of advice/Designed to enlighten me
When I tell them that I'm doing fine watching shadows on the wall
"Don't you miss the big time, boy. You're no longer on the ball"
Ahhh, people ask me questions/Lost in confusion
Well, I tell them there's no problem/Only solutions
Well, they shake their heads and they look at me as if I've lost my mind
I tell them there's no hurry, I'm just sitting here doing time
I'm just sitting here watching the wheels go round and round
I really love to watch them roll
No longer riding on the merry-go-round
I just had to let it go”---lyrics for “Watching The Wheels” sung by John Lennon
OK, I admit it. For the past few weeks, my iPhone has been tuned to the Pandora Beatles station. But don’t knock the lyrics of John and Paul when it comes to financial advice (or any other advice for that matter). Ten days ago, I heard the above song while driving home from a delightful dinner with two new subscribers. They were intrigued by my investment philosophy, in particular my obsession with correlations and my rejection of a buy and hold investment orientation. Unfortunately, I did a poor job of explaining my approach that evening (which is why I described it in last week’s edition www.riskrewardblog.blogspot.com ). I wished that I had had John’s lyrics in mind to assist. "People say I’m crazy/Doing what I’m doing.” “They give me all kinds of warnings/To save me from ruin.” “They give me all kinds of advice/ Designed to enlighten me." “They shake their heads and look at me as if I’ve lost my mind.” But, “I’m just sitting here (in cash) watching the wheels go round and round/No longer riding the merry-go-round.” Because two weeks ago I did not like where my holdings were headed so “I just had to let them go.”
And it's a good thing that I sold. Last week Mr. Market experienced his worse performance since August. Had I remained invested as I was just two weeks ago my handsome profits would have disappeared. I’m not discounting the role of luck, good or bad, in my approach (or anyone else’s). But, luck is merely the intersection of preparation and opportunity. Let’s take oil stocks for example. In late September, I noticed that the price of RDS/A and BP had not recovered from the shock delivered to the oil patch in August when the price of oil fell below $40/bbl. I bought both, as well as VNRBP, ETP and KMI and saw each vault skyward as the price of oil recovered to nearly $50/bbl. On October 24th the price of oil began a rapid decline and I was able to exit all of my oil positions. I did not buy at the bottom, nor sell at the top, but I did make a good profit. Moreover, I came to believe that the foreseeable future would not be good for oil due to the increased likelihood that interest rates would be raised in December, a belief that was confirmed during Janet Yellen’s post FOMC meeting press conference on October 26th. There are direct correlations between increased interest rates and a strong dollar (Increased US bond rates attract international investors thereby raising the demand for dollars at the expense of other currencies.) and between a strong dollar and lower oil prices (All oil contracts worldwide are denominated in dollars. A stronger dollar equates to less buying power in euros or pounds or whatever currency resulting in a lessened ability to purchase and a concomitant drop in demand and price.) These correlations are at work even as I write as the Euro is now worth $1.07 compared to $1.25 last year and the price of oil is back down to $40/bbl. My moves are not infallible. I am right only part of the time. When I am right, I let my winners run until they falter. When I am wrong I sell before absorbing more than an 8% loss on any one position. “I’m not lazy or dreaming my life away; nor am I lost in confusion.” I’m looking for “solutions.”
Alright SmartyPants, it's easy to look brilliant in retrospect. How about the future? OK, this is what I see. First, the yield on the ever important US 10 Year Treasury Bond has held steady at or around 2.3% ever since the blockbuster jobs report of November 6th; this despite a 3.7% decline in the Dow Jones Industrial Average and the S&P 500 over the same period. Since the bond futures are priced with a 70% certainty that the FOMC will raise short term rates in December, I am equally certain (70%) that even with such an increase the rate on the 10Year will not exceed 2.5%. If this is correct, then one should be able to buy with confidence those income securities that are most closely correlated to the rate on the 10Year, such as preferred stocks, and thereby enjoy a 6-9% annualized return. In this sector I like PGX (an ETF) or better yet several closed end funds such as HPS or HPF which pay monthly dividends. Note, however, if you buy closed end funds, be sure to avoid any that trade at a premium to net asset value. For this reason alone, I would avoid my favorite preferred stock fund, FFC. Personally, I likely will not make such a move until after the FOMC's December meeting. Second, with the news on Friday that the world's oil surplus is currently 3billion barrels (a 30 day supply) and growing at 2million barrels a day, the price of crude hit $40/bbl again. Once it hit that level, however, it found support and closed at $40.73. In turn, several of my favorite oil plays (ETP and VNRBP) rallied in the afternoon while others trimmed their losses from earlier in the day. If its price can hold at $40/bbl., there will be some excellent buys to be had in the oil patch. As a word of caution, I would avoid buying anything on Monday due to the potentially disruptive events that occurred in France on Friday night.
I close with a note of sadness---and apprehension. Once again we are reminded that mortal combat always has been and seemingly always will be part of the human experience. At some point even France will respond in kind to violence. With apologies to John Lennon, "the world won't live as one" so long as there are those who refuse to "give peace a chance.
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