March 6, 2016 Signs

Risk/Reward Vol. 298

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

“Just gimme some kind of sign girl
Oh my baby
To show me that you're mine girl
Oh yeah”---lyrics from “Gimme Little Sign” sung by Brenton Wood

“Signs, Signs, Everywhere there's signs.
Blocking out the scenery. Breaking my mind.
Do this! Don't do that! Can't you read the signs?”---lyrics from “Signs” sung by The Five Man Electrical Band

“It's a sign of the times
That your love for me is getting so much stronger
It's a sign of the times
And I know that I won't have to wait much longer”---lyrics “Sign of the Times” sung by Petula Clark

As loyal readers know, I have been looking for “some kind of sign/Oh, my baby/To show me” some stability in the factors that influence Mr. Market. This week there were “Signs, signs/ Everywhere there were signs/Breaking my mind/Can’t you read the signs.”

Here is what I saw:
1) Oil prices rose for the third consecutive week. More importantly, they rose despite reports that crude oil inventories are at their highest level in 80 years. I believe they rose because of the continued reduction in the number of domestic rigs in operation and signs that Saudi Arabia and Russia are actually both committed to limiting production to January levels. Whatever the reasons, oil prices appear to be stabilizing above $30/bbl.
2) Although the performance of the stock indices remains tied to the price of oil, the correlation is not as lock stepped as it has been for the past several weeks. Indeed, on Monday the major indices dropped despite the price of oil increasing. Moreover, throughout the remainder of the week, the indices and the price of oil frequently diverged intraday. I view this uncoupling as a healthy sign.
3) Both major indices saw broad support as the Dow Jones Industrial Average closed the week above the all-important 17,000 level for the first time since January 5th, and the S&P 500 closed at 1999.99, just below the magical 2000 mark.
4) The yield on the 10 Year Treasury rose to 1.87% as investors rotated out of the fear-trade and into equities. That said, the rise was not a spike, and thus did not adversely impact my preferred stock and REIT holdings. This rotation notwithstanding I do not see the rate on the 10Year exceeding 2% any time soon. Several factors are at work to depress it. First, as reported on Friday, wages actually fell in February despite a healthy increase in the number of jobs. An increase in average hourly wages is the Fed’s number one indicator of inflation. So, with the prospect of wage growth and thus inflation low, I do not see the Fed raising rates in March and likely not in June. Moreover, in Europe, the ECB reported this week that prices in the Common Market deflated in January, and that in response one could expect short term rates to go even more negative. Also to combat deflation, Japan issued the world’s first negative rate 10 Year Bond this week. With negative rates prevalent everywhere but in the US, one can expect excess cash to flow into US bonds increasing their price and keeping their rates low.

So how did these “signs of the times” impact me? They made my current holdings “so much stronger” and gave me confidence that I won’t “have to wait much longer” to be a more aggressive buyer. Indeed, I have started already. As loyal readers know, going into February I held only a few positions and those were in preferred stock funds. During that month I cautiously added stocks that I viewed as extremely oversold (see Vol. 296 www.riskrewardblog.blogspot.com ). Here are some and how they have performed through yesterday:

BuyDate /Sec. /+ % /div
2/3 GM 10% 4.8%
2/4 Ford 17% 4.4%
2/16 Shell 6.5% 7.8%
2/16 BP 7% 7.7%
2/16 Ventas 15% 5.2%
2/16 Omega 15% 6.6%
2/16 Blackstone 13% 9.3%
2/17 ETP 1% 14%
2/18 Gabelli(GAB 7% 11%
2/23 Sunoco(SUN 7% 8.8%
2/26 Oneok 12% 9.2%

More importantly, nothing I bought in February is in the red. The above performances warranted adding to each position in recent days.

Due to my heavy cash position, the entire portfolio that I manage is up only 1.5% year to date which is better than the major indices which are still 2.6% underwater. With recent purchases, I am now 40% invested. I don’t expect the stocks listed above to continue to appreciate at their current rate. However, I am hoping to hold them for at least 6 months so that I can collect 2 quarter’s worth of dividends. I intend to buy some other stocks that I view as oversold, but likely I will not reduce my cash position much below 50%. This is my intended, low risk path to my desired 6% annual return. If the market turns however, I will sell it all---very quickly. At this stage in my life, preservation of principle is most important. As Petula knows, Barb and I want to continue living “Downtown” and will do whatever it takes so that we "Don't Sleep in the Subway, Darling.”