May 1, 2016 Breaking Up

Risk/Reward Vol. 305

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

"Runnin' Bear loved Little White Dove
With a love big as the sky
Runnin' Bear loved Little White Dove
With a love that couldn't die”---lyrics from “Running Bear” sung by Johnny Preston

"I beg of you don't say goodbye
Can't we give our love another try?
Come on, baby, let's start anew
Cause breaking up is hard to do”---lyrics from “Breaking Up Is Hard To Do” sung by Neal Sedaka

“One pill makes you larger
And one pill makes you small…
And if you go chasing rabbits
And you know you're going to fall”---lyrics from “White Rabbit” sung by Jefferson Airplane

As I reminded you last week, Dear Reader, I exited the market in early April in anticipation of two events: 1) the oil ministers’ meeting in Doha on April 17 and 2) the Federal Reserve’s meeting held this past week. Both have occurred, and neither has had the effect that I anticipated. Despite the failure of the Doha participants to reach an agreement limiting oil production, the price of oil has risen 20% in April and now is 70% higher than it was in January. Why? In large part due to production cuts in the US and supply disruptions elsewhere. As for the Fed, as anticipated, it did not raise rates at its April meeting. But instead of clearly signaling a rate increase in June, it published some dovish comments which diminished the likelihood of that occurring. Usually such dovish statements bring out the bulls. This time however, it was "Runnin’ Bear who loved Little White Dove/With a love big as the sky.” Both major indices fell this week relinquishing much of their year to date gains. Why so bearish? I surmise it was a combination of factors: 1) a disappointing economic growth report for Q1; 2) market darling Apple reporting a quarterly reduction in sales for the first time since 2003; and 3) noted investor Carl Icahn’s statement that the persistence of low interest rates has created a stock market bubble.

One trend that continued this past week was the “breaking up” of the correlation between the price of oil and the direction of the indices. As highlighted above, this week oil rose while the markets in general fell. Will the two “say goodbye” or will they give it “another try” and “start anew.” After all, once a correlation is established “breaking up is hard to do.” I believe that the break-up will continue since it has always seemed counterintuitive to me. Shouldn’t lower oil prices be good for the consumer and thus good for our consumer based economy? Besides, the price of oil is more naturally correlated to the dollar which closed Friday at a year to date low when compared to a basket of other major currencies (known as the "dollar index"). This was primarily the result of the Bank of Japan declining to lower interest rates thereby allowing the yen to appreciate versus the dollar. As discussed in previous editions (see e.g. Vol 300 www.riskrewardblog.blogspot.com ), a weaker dollar results in higher oil prices.

And so the bunny hop market continues (See Vols. 302 and 303 www.riskrewardblog.blogspot.com). "One pill makes the market larger/And one pill makes it small.” So is it true that if you “go chasing rabbits/ you’re going to fall?” Well, I suppose you could go ask Alice, but in my opinion, not necessarily. I spotted some opportunities as the market swooned on Thursday 1, 2016, and thus began my re-entry. I am treading lightly, but if oil prices hold and the Fed doesn’t raise rates in June, I should make some money by carefully picking, choosing, buying and selling. Not easy, but you gotta do what you gotta do in a bunny hop market.

It is a crazy market indeed; very tough to read. But as we all know if playing the market were easy we would all be rich. Just keep studying and learning. To quote Jefferson Airplane:1, 2016

"When logic and proportion
Have fallen sloppy dead
And the White Knight is talking backwards
And the Red Queen's off with her head
Remember what the dormouse said
Feed your head"