Risk/Reward Vol. 351
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
With the major indices near all time highs, stable interest rates, improved earnings and the lowest volatility index (VIX) reading since 1993, shouldn't passive investors declare victory and drop the mike? After all virtually no active manager has outperformed the indices since the recovery began in 2010. Just let the chips ride forever. Right? Well, not according to the leading hedge fund managers who congregated earlier this week in New York for the annual Sohn Investment Conference. This is a great gathering, and I have written about it in the past. (See Vols. 220 and 306 www.riskrewardblog.blogspot.com) Comments from two of my favorites, Kevin Warsh, the former Federal Reserve official and Bond King Jeffrey Gundlach are worth noting. Warsh criticized the Fed for being too responsive to Mr. Market and advocated that it take a longer, more objective view of its role. Specifically, Warsh warned that the Fed's accommodative policies have left it with little to no powder should the economy nose dive again. Gundlach was more specific--- and more negative. He advocated shorting the S&P 500 which he views as extremely overvalued by any measure including CAPE about which I wrote last week.
So do I believe the markets will undergo a major correction any time soon? I doubt it for one reason: There Is No Alternative a/k/a the TINA factor. (See Vols. 164, 201, 250 and 253) Really, where else would any investor put his/hers/their money right now? Short term bonds provide virtually no return, and longer term debt is very risky considering the lack of liquidity (no market makers) about which I have also written in the past. No one can be criticized for adopting an all-in, equity index strategy given our recent history. That stated, only a fool would do so without giving some consideration to an exit. Sell in May and go away? Probably not. But never sell? Eek. Stated alternatively, it would be a shame if anyone rode his/her well deserved gains down the drain if and when a correction occurred. What to do? Well, how about practicing---just in case. Let me ask: how many of you have ever sold a stock for a gain? Not for a loss, for a gain. I bet very few. So do me a favor. Pick a big winner, hopefully held in a tax deferred account (e.g. 401k or IRA) and sell it next week. You can buy it back the next day, but sell it. Doing so will familiarize you with the mechanics of a sale and will help overcome the mental block that I am sure most if not all of you have about selling a winner. I do it all the time. Admittedly, I am a nut. But I will not be caught flat footed by what happened in 2000 or 2008. No way, no how. And it is what happened then that informs my investing approach first and foremost. If you are of a certain age, I recommend that those dates inform yours as well.
Is anyone else in awe of what American ingenuity has done to disrupt the world's energy market? Recall the state of things just 15 short years ago. Saddam Hussein had the power to choke the Straits of Hormuz through which sailed 20% of the world's oil supply each and every day. Truth be told, this threat was what really motivated the second Iraq war because the US was wholly incapable of supplying its own energy needs. Segue to today. Thanks to the emergence of new technology, most notably advances in fracking, the US is on the doorstep of energy independence and now sits as the world's swing producer. Today, if OPEC and Russia try to limit production, the gap is easily filled by frackers in the US. By July, US production of crude will exceed 10million/bbls/day, half again as much as it was in 2003-2004. And the sky is the limit as the cost of domestic production continues to drop. Even major international producers such as Shell are investing in Texas oil fields which lay abandoned just a few short years ago. I like pipelines in this space and am looking for a price dip in FEI or FPL before reinitiating positions.
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