April 10, 2016 Bunny Market 2

Risk/Reward Vol. 303

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

“All join in the fun
Father, mother, son
Do the Bunny Hop
Hop, hop, hop”---lyrics from “The Bunny Hop” sung by Ray Anthony

“You know the good ole days weren't always good
And tomorrow ain't as bad as it seems
I’m keepin’ the faith.”--- lyrics from “Keeping the Faith” sung by Billy Joel

“Get down, get down, get down
Get down, get down tonight baby”---lyrics from “Get Down Tonight” sung by KC and the Sunshine Band

As I noted in last week’s edition, we are in a “bunny” hop market. This week, both the Dow Jones Industrial Average and the S&P 500 were up two days and down three, finishing the week off 1.2% and basically flat for the year. “Father, mother, son” have all been forced to “join in the fun.” There is no escape---unless of course one sells which is what I did this past week. I picked my spots and captured some excellent first quarter profits. I intend to stay mostly in cash until after the OPEC meeting in Doha, Qatar and the Federal Reserve meeting (about which I wrote last week www.riskrewardblog.blogspot.com ) each of which is to be held later this month.

The stock indices would have performed much worse but for oil stocks which were buoyed by an 8% increase in the price of oil. Oil now hovers near $40/bbl. Why you ask? Here are a few reasons: 1) midweek the Kuwaiti oil minister predicted that the major oil producers would limit production at the Doha meeting even if Iran balked; 2) supplies from Canada were interrupted by a leak and subsequent shut down of the Keystone pipeline (not to be confused with the ill-fated and disapproved Keystone XL pipeline); and 3) the number of oil rigs operating domestically dropped to 354, one half the number pumping just one year ago. Lost in this wave of good news for oil stocks was a report that at current production levels the world is oversupplied by 1million bbls. of oil per day (about 1.2% of daily consumption). Apparently, Mr. Market is “keeping the faith” when it comes to oil, believing that the “good ole times weren’t always good and tomorrow ain’t as bad as it seems.” I am not so sanguine. That is why I am completely out of oil until after the meetings in Doha.

Okay, that explains why I am out of oil, but why did I sell interest rate sensitive stocks when the yield on the 10Year has plummeted to 1.7%? (Remember the value of interest rate sensitive securities goes up when interest rates go down.) The simple answer is to capture profits. The nuanced answer lies in my belief that the world’s central bankers are now engaged in an all-out currency war in which each is deploying tools that heretofore have never been used such as negative interest rates. Stymied by an inability to cheapen each’s currency and thus to spur inflation (the perceived wisdom today being that inflation is a good thing), God only knows what tools each will employ next; all in a desperate effort to have the yen, Euro or dollar “get down, get down, get down” in comparison to other currencies. Worse off than most is Japan where the yen keeps appreciating and deflation keeps mounting despite drastic measures having been taken to cause the opposite. It is my belief that the Bank of Japan will take another, as yet unknown step toward debasing the yen in advance of or in response to the Fed’s meeting in late April. Hamstrung by its commitment to raise rates at least twice in 2016, at that meeting the Fed likely will signal a rate increase for June. This will exacerbate the divergence in worldwide monetary policy, the impact of which on interest rates and those securities that trade in correlation thereto is unknown---and unknowable given the lack of precedent. I find this discomforting. So why not take some time off?

In sum, I sense that in the next few weeks events may unfold that will “Shake shake shake, shake shake shake/Shake Mr. Market’s booty, shake his booty.” As set forth above, I have good reason to so believe. In times past I have not acted on such beliefs, much to my regret. So, I will let events unfold and once the dust settles (assuming there is a dust up in the market), I will re-enter. Because like KC, “That's the way, uh-huh, uh-huh/I like it, uh-huh, uh-huh”