March 27, 2016 Just Like Me

Risk/Reward Vol. 301

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

“Oh baby, come on, let me take you where the action is
Oh baby, come on, let me take you where the action is
It's so neat to meet you, baby, where the action is”---lyrics from “Action” sung by Paul Revere and the Raiders

“And don't it seem like
Kicks just keep gettin' harder to find
And all your kicks ain't bringin' you peace of mind”---lyrics from “Kicks” sung by Paul Revere and the Raiders

“It's just like me, it's just like me
It's just like you my baby, it's just like you”---lyrics from “Just Like Me” sung by Paul Revere and the Raiders.

One would have thought that the terrorism in Brussels would have dominated the markets this past week. Surprisingly, it did not. Indeed, by the close of business on Tuesday, all of the major market indices in Europe (CAC 40, FTSE and DAX) showed gains. In the US, the major indices gave some ground, but there was no flight to safety, with the favorite refuge of those in flight, the US 10 Year Treasury Bond, having more sellers than buyers that day. So, dear Readers, “let me take you where the action is” (or at least was this past week.)

And that was with our old friends, the Federal Reserve and the price of oil. Despite a clear signal ten days ago from the Federal Reserve’s Open Market Committee (FOMC) that no more than two rate increases should be expected this year and none before June (see Vol 300 www.riskrewardblog.blogspot.com ), Mr. Market was taken aback on Thursday by an interview given by influential FOMC member James Bullard. He indicated that the first of those rate increases “may not be far off.”’ In response, the futures market handicapped the likelihood of an April rate increase at 12%, considerably higher than the 2% odds that prevailed at the end of last week. In turn, the dollar strengthened in comparison to other currencies which (as discussed last week) caused the price of oil to fall below $40/bbl. The correlation between the price of oil and the stock indices held, so both the Dow Jones Industrial Average and the S&P 500 ended lower for the first time in five weeks. Commentators speculated that Ms. Yellen may be facing an insurrection on the FOMC. This is not good news. Given the Fed’s outsized influence on markets here and abroad, even the hint of dissension “ain’t bringin’ you, me or Mr. Market any peace of mind” and most certainly will make stock price increases “harder to find.”

So what does this mean to investor/traders “just like me” or to those “just like you”? I can’t speak to those like you, but for those like me, a sooner-than-later rate increase may cause me to exit en masse. As I discussed in last week’s edition and as I alluded to above, an unexpected rate increase would cause the dollar to appreciate versus other currencies which in turn would cause the price of oil to plummet. My portfolio is built on two assumptions: 1) the rate on the US Treasury 10 Year Bond not spiking above 2% (emphasis on spike) and 2) the price of oil remaining at $40/bbl. Mr. Bullard’s comments last week cast shade on both of these assumptions and put a corresponding dent in my year to date profits. My tolerance for losing any more is wearing thin.

One good (no great) benefit of writing Risk/Reward is the connection it maintains between my Readers (many of whom are longtime friends) and me. This week one Reader/ friend requested lyrics from Paul Revere and the Raiders. Who am I to refuse? Because in the end, it is personal relationships and not profits that are the source of life’s great joys. As Paul Revere reminds us,

“When your world don't seem just right
And life's gettin' you uptight
You can change that wrong to right
Cause I was there myself last night
We're gonna' have a good thing
Such a good thing baby”