January 17, 2016 Better Place

Risk/Reward Vol. 291

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

“We gotta get out of this place
Girl, there's a better life
For me and you”---lyrics from “We Gotta Get Out of This Place” sung by Eric Burdon and The Anim

“Falling in and out of love with you
Falling in and out of love with you
Don't know what I'm gonna do...I just keep
Falling in and out of love”---lyrics from “Falling In and Out of Love” sung by the Pure Prairie League

“This is my gimmick and I wanna win it
I'm selling out
I won't fight you no more”---lyrics from “The Sellout” sung by Macy Gray

Let’s review the news from the oil patch this week: on Tuesday it was reported that 30 oil companies have declared bankruptcy in the past few weeks and that many more are teetering on the verge of insolvency; several times this week the price of crude fell below $30/bbl closing on Friday at $29.65; despite a 51% cut in domestic capital expenditures, production continues to outpace demand; and on the international front, the sanctions against Iran are to be lifted in the next two weeks which will add another 1-2 million bbls/day to an already oversupplied market. Small wonder that I sold all of my oil positions on Monday. I barely broke even, the handsome gains about which I wrote just a few weeks ago having evaporated. I still like oil in the long run, but for now “We gotta get out of this place/Cash is a better life/For me and you.”

As for the rest of the market, Holy Pure Prairie League! Rarely have I seen such volatility; not only day to day but hour to hour. The VIX, which measures volatility, is at 28, its highest level since 2012. Check out this week’s charts. They tell a tale of “Falling in and out of love/Don’t know what to do/Falling in and out of love with you, Mr.Market.” By the end of the week however, it became clear that the falling was mostly “out.” Indeed, according to Tuesday's Wall Street Journal, pension funds are holding the highest percentage of cash since 2004. At the close on Friday, the Dow Jones Industrial Average was down 2.2% for the week and 8.25% year to date. The S&P 500 was down 2.2% and 8% for the same time periods. Panic caused a flight to safety. As a consequence, the yield on the US 10Year fell to 2.02% (remember, the greater the demand/price, the lower the yield) but not even that downward march immunized my beloved preferred shares and preferred share closed end funds from irrational selling. That said, my preferreds remain in the green. In fact, I used the stampede as an opportunity to add new positons in HPF and HPI.

What I found most compelling this week was the admonition by JP Morgan to use any rally in the stock market to sell equities. In effect, JP Morgan is “selling out/not willing to fight the bear anymore.” This is the first such advice in many years. Indeed, since 2010 JP Morgan and virtually every other investment house have advised the opposite; to wit, to use every dip as a buying opportunity. Sitting primarily in cash, I relish such advice. If followed by others, it will create great buying opportunities for me. Once again, remaining patient will be my greatest challenge. I don’t aspire to buy at the bottom---just somewhere near it. What is the bottom is anybody’s guess. I don’t need to know. I just need confirmation that it has been reached.

We may be facing a bear. So far, the stock market is on a pace to record its worst month since November, 2008. But with apologies to Eric Burdon, bear markets “Don’t Bring Me Down.” They end sometime. And when they do, profits can be made. Let’s face it folks, a bull market cannot run forever. Bulls and bears are the yin and yang of investing. “River Deep and Mountain High”, if you will. So “Don’t Let Me Be Misunderstood”. Bear markets may “Spill the wine”, but they allow smart investors to “take that pearl.”