February 14, 2015 Rubber Ball

Risk/Reward Vol. 295

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

“I'm like a rubber ball
Baby that's all that I am to you
(Bouncy, bouncy) (bouncy, bouncy)
Just a rubber ball”---lyrics from “Rubber Ball” sung by Bobby Vee

"He saw magnificent perfection,
Whereon he thought of himself in balance,
And he knew he was.”---lyrics from “The Balance” by The Moody Blues

“So don't act like it's a bad thing to fall in love with me, me
It's not a bad thing to fall in love with me, me
Not such a bad thing to fall in love with me”---lyrics from “Not Such a Bad Thing” sung by Justin Timberlake

Was Friday’s 2% gain in the major indices a sign that “like a rubber ball/Bouncy, bouncy/Bouncy, bouncy/" Mr. Market is poised to bounce back into positive territory for the year? Is Friday’s remarkable 12% rise in oil prices (to which Mr. Market is now so closely correlated---see last week’s edition www.riskrewardblog.blogspot.com ) sustainable? I suspect not given that the impetus for the upward movement in both the price of oil and the stock indices was a statement from the United Arab Emirates’ oil minister that OPEC members will not pump more oil to compensate for lower US production. Not increasing production is a long way from cutting production. And with a world already awash in petroleum and new supplies entering the market from Iran, a cut by OPEC is what is needed.

Moreover, despite the remarkable gain experienced on Friday, both major indices closed down for the week. Why? There is no one answer, but clearly a major factor is Mr. Market’s sense that the world’s central banks are no longer effective in spurring economic growth, if they ever were. With the ECB, the Bank of Japan and several other regulators now charging banks for holding funds held in reserve and with interest rates already at historic lows, borrowing remains sluggish as do corporate capital expenditures and consumer consumption. The economists that run central banks are mystified and confused. Wasn't it in December that Janet Yellen and her cohorts raised short term interest rates confident that the economy was on the mend? Can it be that a short 45 days later she is contemplating reversing course? This bespeaks self doubt among the economists who run the Federal Reserve, which is rare given that they are schooled to believe that their levers can be used to “Balance” supply and demand. For them it is an article of faith that, with their help and guidance, resources can be reallocated to dampened or spur demand as desired. At their core, they believe that markets always seek equilibrium; that state where supply meets demand in “magnificent perfection.” What we are witnessing may prove them wrong; and may prove right George Soros’ theory of reflexivity; that is, that markets, like humans, are imperfect. They are not always rational. Like the humans who created them, markets experience fear and panic which by themselves can lessen demand and cause economies to spiral downward toward recession and its evil twin deflation even in the face of lower prices and other inducements to spend.

The fact that the indices are struggling does not mean that money cannot be made. In times of fear, investors love safety, causing the price of safe havens to rise. “It’s not such a bad thing to fall in love with safe havens/Not such a bad thing.” Two classic refuges are gold and government bonds. And at least one of our fellow subscribers loaded up on both at the beginning of the year. His vehicles of choice were TLT, an exchange traded fund holding long dated Treasury bonds which is up 9% year to date and GLD, the gold exchanged traded fund, which is up 17% year to date. Good job, Mr. X! Also doing well are certain real estate investment trusts, notably, O which is up 17% year to date and which in addition pays a nice dividend.

No doubt, these are trying times for investors. But as in all of life’s endeavors, one has choices. One can be the whiny Justin Timberlake who can only “Cry Me a River.” Being that Justin Timberlake certainly is N'Sync with current market sentiment and “Not a Bad Thing.” Or one can be the Justin Timberlake who seeks opportunity when markets are down. That Justin Timberlake knows that “What Goes Around/Comes Around." That Justin Timberlake is dedicated to bringing “Sexy Back." Through continuous study that Justin Timberlake prepares for when it’s time to “Buy, Buy Buy.”