January 22, 2017 Volume

Risk/Reward Vol. 337
 
THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN.



And so it begins.  Who would have thought that The Donald would be the 45th President of the United States?  Whatever his presidency may be, it surely will be different.  And that, Dear Readers, is as political as I will get.

Lost in the week's hullaballoo was the action in the bond pits.  The rate on the all important US Treasury 10Year Bond jumped to nearly 2.5% following news that inflation in December, as measured by CPI, had reached 0.3% for the month and 2.1% year over year.  This development prompted many to sell bonds in the belief that inflation in 2017 will accelerate forcing the Fed to raise short term interest rates 4 times as opposed to 3 times which heretofore has been the consensus view.  I remain convinced that other forces (such as the paltry rates available overseas) will moderate domestic bond yields and thus took the opportunity to add to several bond related positions.

As loyal readers know, my bond related positions include several preferred stocks and preferred stock closed end funds.  My fascination with these investment vehicles has prompted some to ask why their investment advisors do not buy them---indeed why they are rarely if ever discussed.  The answer is simple----volume.  If you Google "Wall Street Journal Preferred Stock Closing Table" and "CEFConnect" you will see that many of the names that I own trade, on average,  25,000 shares or less daily.  I typically buy in lots of 1000 and rarely accumulate more than a few thousand shares of any issue.  Why?  Because I do not want to impact the price and buying or selling more than 1000 shares at a time can have an impact.  Now imagine you are a money manager entrusted with 50 accounts.  Even if one believed that preferred stocks 337otherwise made sense for one's clients, one could not buy 50 positions at a time without massively disrupting if not manipulating any given stock's market.  So unless you, as an individual investor, order such a purchase it will not happen.  Remember, money managers are under great pressure to treat their clients equally.  Indeed, for a host of reasons it is more important for them to be consistent than to be right.  This is not a criticism, but it is a fact.

The domestic oil and gas rig count continues to increase.  It now numbers 694 compared with 480 in March, 2016.  This is a testament to American ingenuity, a national trait that was sorely underestimated by Saudi Arabia when it began flooding the market with oil in 2014.  At the time, conventional wisdom was that US frackers needed $60/bbl. in order to break even.  That may have been true in 2014, but by 2017 advances in technology have reduced the break even to $40/bbl. with some producers capable of profiting at $30/bbl.  In addition new fracking "cocktails" (mixture of water, sand and pressure) have resulted in each well producing 40% more oil than in 2014.  I see opportunity in oil/gas in 2017 and recently have added to my holdings in KYN and JMF.