December 6, 2015 Truckin"

Risk/Reward Vol. 286

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

‘Truckin', like the do-dah man
Once told me "You've got to play your hand"
Sometimes the light's all shinin' on me;
Other times I can barely see.
Lately it occurs to me
What a long, strange trip it's been”---lyrics from “Truckin’” sung by The Grateful Dead

“I'll never know
How the future will go
I don't know what to tell you,
I'm not a fortune teller”---lyrics from “Fortune Teller” sung by Maroon Five

“Like a rock, I was strong as I could be
Like a rock, nothin' ever got to me
Like a rock, I was something to see
Like a rock”---lyrics from “Like A Rock” sung by Bob Seger

Trying to ascertain what occurred in the stock market last week was like “Truckin’”. “Sometimes the light was all shinin’ on me”, and I thought that I grasped what was happening. At other times “I could barely see”; unable to make any sense of what was unfolding. At its end “it occurred to me”, that the week, like the entire year to date, was just “a long strange trip.” Buffeted up and down by a disappointing ISM report, an anemic ECB rate cut, news that the Saudi’s will not cut oil production, a forecasts of slower global growth and finally solid job numbers, the Dow Jones Industrial Average (DJIA) ended the week up only 0.28% despite Friday’s 2.12% jump, and the S&P 500 gained a mere 0.08% despite rising 2.05% on Friday. Year to date, the DJIA is up 0.14% while the S&P is up 1.6% despite the volatility. Are we destined like “the do-dah man” to merely “play our hand?”

Maybe; maybe not. “I’ll never know/How the future will go/I don’t know what to tell you/I’m not a fortune teller.” But, I can foresee the following holding through the first quarter of next year: 1) an accommodative ECB; 2) a 0.25% increase in the Fed Funds rate; 3) oil in the $40-45 range; 4) steady if unspectacular domestic employment; 5) near zero inflation ; and 6) global growth in the 2% range. I view last week’s activity as those in the market positioning themselves for the above described scenario; nothing more and nothing less. Of the events cataloged above, to me (not surprisingly) the most significant is the now almost certain increase in the Fed Funds rate at the FOMC meeting of mid December.

Why? Because, Dear Readers, as I have preached lo these many months and years, for income investors such as yours truly, money can be made so long as the rate on US Treasury securities remains steady “like a rock.” If the FOMC raises the short term rate in December and signals that it will be conservative in any future moves (as most now believe), the rate on the US Ten Year will stabilize as will the rates on securities priced in relation thereto; most notably preferred stocks. I see the 10Year stabilizing near 2.3% and PGX (a basket of highly rated preferred stocks) yielding a steady 5.75-5.9%. That would be “something to see”, indeed. There is no reason to jump the gun however. I will remain “as strong as I can be” and resist the urge to buy in advance of the FOMC’s meeting.

For income investors, the last several years of zero bound interest rates have been trying to say the least. Talk about sailing “Against The Wind”! But if the FOMC “Turns The Page” and begins to raise rates, like Bob Seger, I will “Lock and Load” up with several of my long time favorites. Perhaps, “You’ll Accompany Me”, but only if and when you reach your own conclusions based upon your own research.