January 10, 2016 Waterloo

Risk/Reward Vol. 290

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

“Happy New Year
May we all have our hopes, our will to try
If we don't we might as well lay down and die
You and I”---lyrics from “Happy New Year” sung by Abba

“But you ran out of gas
Down the road a piece
Then the battery went dead
And now the cable won't reach”---lyrics from “Last Chance Texaco” sung by Ricky Lee Jones

“Welcome to my nightmare
Pressures on, blood pressure racing
I calculate my next step, pacin'
Don't know if I'll meet expectations”---lyrics from “Die Hard” sung by Dr. Dre

“Happy New Year/May we all have our hopes” and “the will to try” to prosper. Based upon 2016’s first week, that won’t be easy. I am not suggesting that “we might as well lay down and die”, but I am advising caution. And for good reason. In this past week, the Dow Jones Industrial Average (DJIA) and the S&P 500 (S&P) each dropped 6%. Political unrest in the Mideast, sinking oil prices worldwide and discouraging news from China (two days of precipitous stock market drops and a report that the Chinese economy will grow at only a 6% clip in 2016) combined to cause the S&P to notch its second worst kickoff week since 1929!

The continuing drop in oil prices is of particular concern to me. I remain confident that the price of crude will rebound above $50/bbl sometime this year. I don’t want us “running out of gas” or experiencing “batteries going dead”, but hopefully production will be cut by someone, soon. The current oil glut was the subject of a thoughtful piece written by Donald Lufkin in Friday’s Wall Street Journal. He characterized the current oversupply as a classic case of innovation (to wit, fracking) “creatively destroying” the Malthusian shibboleth that population will outstrip the supply of natural resources. Lufkin is optimistic that once the price of crude is rationalized we should be in for a sustained period of prosperity, freed from the yoke of Mideast petrocrats.

So do I view 2016 as “my nightmare, with pressure on, blood pressure racin’, pacin’ , not knowin’ if I’ll meet expectations?” Abba-solutely not! Why not? Because the majority of my holdings are preferred stocks, preferred stock closed end funds, REIT’s and other securities closely correlated to the yield on the US 10Year Treasury Note. (For an explanation of why I like this non diverse approach see Vol. 221 www.riskrewardblog.blogspot.com ) So far this year that yield has fallen which means the prices of the 10Year and those securities that are correlated thereto have risen. (Remember the lower the yield, the higher the price.) Indeed, I am even this week and would have been off to a banner start but for a few disappointments in the oil patch (OKE and VNRBP). With corporate profits expected to founder, I see my approach working well this year.

With apologies to Abba, I don’t see this first week as our “Waterloo.” Nor should we be sending an “SOS.” “Knowing Me, Knowing You” we should remain calm. This may not be a year where “The Winner Takes It All.” But with a principled approach aimed primarily at avoiding loss, one should see some profits. That is why I choose to “Take a Chance on Me”---or at least on my approach.