March 13, 2016 Beggar Thy Neighbor

Risk/Reward Vol. 299

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

As noted, my schedule does not permit a typical edition this week. However, the week was significant and worthy of some observations.

. In the face of warnings from the Bank for International Settlements (the central bank for central banks) that negative interest rates carry unknown risks, the ECB lowered rates further into the negative on Thursday. In addition, it expanded its bond buying spree to 80billion Euros per month and promised virtually unlimited liquidity to Europe’s banking community. Despite spiking the monetary punch bowl, the ECB forcasts growth across the Eurozone at only 1.4% for 2016 and inflation at 0.1%. Apparently, one can only consume so many champagne cocktails.

. The unstated reason for the ECB’s action is to “beggar thy neighbor”; that is to spur exports at the expense of other economies by cheapening the value of the Euro vs. the dollar and other currencies. Here is the logic. Lower interest rates cause those with excess cash to dump Euro bonds and to buy higher earning ones such as those of the US. In order to effect this sale and purchase, one sells Euro’s and buys dollars. In the process, the demand for and thus the value of Euros lessens and the demand/value of the dollar (or other currency) increases. Currency devaluation is one way of spurring exports since one’s goods are cheapened by definition. That said, the ECB’s plan backfired. Within minutes of the announcement, ECB president Mario Draghi was asked if there could be more accommodation in the future. He responded that he doubted the need. This caused currency speculators to support the Euro which actually appreciated in value by day’s end. Not very super, Mario!

. Pipeline master limited partnerships plummeted mid-week on news that a bankruptcy court in New York ruled that the contracts between mlp’s and drillers were executory; that is they could be rejected in bankruptcy. I would have been surprised had the ruling gone the other way, so I viewed the dip as a buying opportunity. I added to positions. By week’s end, the sector had recovered.

. The ECB’s move almost certainly dooms any threat that the Federal Reserve will raise rates in March and casts further doubt on a rate increase before this fall. This development plus the apparent bottoming of the oil market prompted me to be a buyer this week. I added to my OKE and STAG positions and bought LVS, PSEC and JMF which I viewed as undervalued. I also took a flyer on CIM, a mortgage REIT that I have owned (and been burned by) in the past. It would not have been my first choice in that sector but for the recent announcement that it was paying a special dividend in addition to its normal one this quarter. Within the next two weeks I will have earned $0.98 in dividends on a $13.76 stock, a 7% return. Comparing CIM’s performance against the mREIT market in general reveals that very little of the dividend is baked into the purchase price. In other words, I don’t’ think CIM’s price will fall much ex-dividend.