Risk/Reward Vol. 347
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Once again, both major indices ended the week where they began, a missile strike and a disappointing jobs report notwithstanding. That is not to suggest however that the week was without volatility. On Wednesday, a favorable ADP number caused the Dow Jones Industrial Average to gain triple digits in the morning only to be reversed and eclipsed that afternoon with the publication of unexpectedly hawkish minutes from the Fed's March meeting. Unexpected because the press release issued immediately after the March meeting gave no hint that downsizing the Fed's balance sheet had been hotly debated at the meeting. Hawkish because the consensus of the participants was that downsizing would begin this year and because some discussion was had on the merits of selling the entire bond portfolio at one time. A one time sale of over $2Trillion of Treasury securities (nearly 20% of the total amount of such securities available for sale) would undoubtedly deflate the value of the world's bond market, the prospect of which scared the h-e-double hockey sticks out of Mr. Market. This fear caused the stock market drop. Per usual, Mrs. Bond reacted more slowly. As the totality of the minutes were digested she came to realize (as did Mr. Market the next day) that the pace of bond reduction, if any, was dependent upon how the economy progressed and that market disruption would be taken into account. In short, the minutes were a trial balloon, the effect of which certainly was duly noted.
Because the bond market did not panic my interest rate sensitive holdings held their own for the week permitting me once again to harvest some dividends. This stability is both a good and a bad thing. Good because it provides some assurance that I will not be devastated by an overreaction. Bad because I suspect it is due, in part, to the ever lessening liquidity in the bond and bond related markets. As I have written in the past, until the passage of the Dodd Frank Act in 2010, major commercial banks maintained bond trading desks which literally served as bond market makers or buyers of last resort. Entities such as JP Morgan, Citigroup and Bank of America could absorb billions of dollars bonds and hold them until prices stabilized. After the most recent financial crisis, regulators deemed that function too risky for any FDIC insured institution and it was legislated away. In so doing, Congress may have created an even bigger problem because no substitute bond market safety valve has evolved. Meanwhile, as a result of low rates, more and more governments and corporations have issued and continue to issue more and more bonds. This brewing bottleneck is something to watch.
Instability in the Middle East is not good geopolitically, but it helps to support oil prices. Both Brent (international) and WTI (domestic) prices are now above $50/bbl. The domestic rig count continues to increase but is no where near its 2014 peak. My oil plays have done well with HCLP (the fracking sand miner) leading the way. It is up 15% since I purchased it on March 24th. I may not wait for it to re-establish a dividend before taking a profit. OKE and FPL are also doing nicely. I may increase my oil/gas patch exposure this week
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