December 13, 2015 What Goes Round

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

Risk/Reward Vol. 287

“But now the days grow short/I'm in the autumn of the year
And now I think of my life as vintage wine from fine old kegs”---lyrics from “It Was A Very Good Year” sung by Frank Sinatra

“When you hear that the preaching does begin
Bend down low for to drive away your sin
And when you gets religion, you want to shout and sing
There'll be a hot time in the old town tonight”---lyrics from “Hot Time In The Old Town Tonight” sung by Bessie Smith

“Don't want to think about it
Don't want to talk about it
What goes around, goes around
Comes all the way back around”---lyrics from “What Goes Around” sung by Justin Timberlake

“The days grow short. It’s the autumn of the year.” It’s time to assess. Was it "A Very Good Year?" Do you think of your portfolio's year to date performance "as vintage wine from find old kegs?" Or does it leave you with a sour note as if turned to vinegar? If it is the latter, you are not alone. Year to date the Dow Jones Industrial Average is down 3.1% and the S&P 500 is down 2.2%. As far as stock indices go, only the tech heavy NASDAQ Composite is in positive territory with a year to date gain of 4.1%. According to a report from the Federal Reserve released this past Thursday, the net worth of U.S. households fell in the third quarter due primarily to a $2.3 trillion drop in the value of equities. But it could be worse. You could have invested with noted money manager (and Milwaukee native son) David Einhorn whose flag ship hedge fund is down over 20% so far this year.

Recently, it has been commodities in general and the oil and natural gas patches in particular that have driven Mr. Market downward. Consistently warm temperatures have reduced the demand for fossil fuels worldwide. Indeed, it hasn’t been “preaching or getting religion or shouting or singing”, but the presence of El Nino which has produced a “Hot Time In The Old Town Tonight.” Natural gas is trading at 17 year lows, and crude oil closed the week at $35/bbl, more than 70% off of its mid 2014 price. With Saudi Arabia continuing to flood the world with petroleum, prices will continue to suffer. But, for how long? If the Saudi’s purpose in ramping up production is to ruin US producers and to curtail the miracle of fracking, then 2016 could be the year the hemorrhaging abates. Up to now, many small to medium US producers have been able to survive because of hedging. Indeed, through 2015, domestic producers hedged nearly 30% of their production at or above $50/bbl. That percentage drops to 11% in 2016. The result likely will be continued cut backs in production, reductions in capital expenditures and a series of debt defaults and/or bankruptcies. If you want a preview, look at what mighty Kinder Morgan did last Tuesday; cutting its dividend by 75%! KMI is down an astonishing 57% year to date.

So what’s going on? Oh ye of short memory! This is the stock market, bro! Unless you “don’t think about it or/Don’t talk about it”, you know that when it comes to Mr. Market “what goes around, goes around and comes all the way back around.” If you have cash on hand (and as loyal readers know I have ample having sold entire porfolios this spring and again on October 26th), a disappointing close of 2015 could present excellent buying opportunities in 2016. But where? As discussed previously, in preferred stock once the Fed raises rates as it likely will next week. And (of all places), the oil patch. Huh? That’s right, the oil patch. Chevron, Conoco, BP and Shell all recently have reiterated that maintaining their hefty dividends (5-8%) are their top priority. Each has a budget in place for 2016 which has room for dividends even at rock bottom oil prices. But do not be in a hurry to buy. The bottom may not have been reached. Buy stock on the rise. It is never wise to catch a falling knife.

To be Frank, 2015 is not looking good. The two major stock indices are struggling to break even. “From This Moment On” the time for any Santa Claus Rally is short. Even if you conclude that a bottom has been reached, remember that only “Fools Rush In.” Caution is the best approach. I, for one, don’t have “Someone to Watch Over Me.” Fortunately, I took profits in October, and unless I do something stupid, “They Can’t Take That Away From Me.”