July 31, 2016 Exit

Risk/Reward Vol. 316

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

Having reached my goal for the year on the portfolio that I manage, I decided to sell on Tuesday. As described back in March and April (Vols. 300 and 302 www.riskrewardblog.blogspot.com ) that portfolio was constructed based upon two premises: 1) the rate on the US Ten Year Bond staying below 2% and 2) the price of oil staying above $40/bbl. The events of the past few months have permitted this portfolio to produce a capital return much better than I had expected with oil touching $50 in May and June and the 10 Year Yield hitting all time lows in the wake of Brexit. That said, the price of oil has slipped below $42/bbl. and over the next few months, the yield on the 10Year is more likely to rise than to fall. (Remember a rise in yield means a drop in value). Accordingly, I reaped my profits and headed to the sidelines. Below is a further discussion of my rationale.

As I expected on Wednesday, the Federal Reserve Open Market Committee voted to keep short term interest rates at their current 1/4 to 1/2%. I read the press release following the FOMC meeting to be more upbeat on the economy. This attitude normally prompts the Fed futures market to increase the odds of a rate increase, and this time was no exception. The odds of a September rate hike rose that afternoon from 25% to 30%. Do I believe that rates will be increased at the next FOMC meeting in September? No. We will be in the thick of the election cycle, and the Fed will avoid anything that would disrupt the markets to the detriment of the establishment candidate, HRC. Doubt me? Read the article on Fed Governor Lael Brainard in last week's NYTimes, and you too will conclude that she aspires to a top policy position in the Clinton administration. A further reason to hold steady on rates was the disappointing gross domestic product report issued on Friday. The US economy year to date has only grown at an annualized rate of 1%, well below the 2-2.5% expected. Thus, the current rate on the 10Year remained in the 1.5% zone through the week. Frankly, my desire to exit interest rate sensitive securities was not as pronounced as my desire to exit oil, but I saw no compelling reason to stay. So I sold. As I have said repeatedly, selling on a high note is good for the soul. Or as Bernard Baruch remarked "I made my money selling too soon."

As to the price of oil, several factors have contributed to its retrenchment. First, recent articles have brought into question the accuracy of reports tallying the quantity of stored oil worldwide. Several countries, most notably Russia, do not report stored oil figures to the markets, nor do those private entities that own oil tankers currently moored off shore. Second, the disruption in the flow from Canada incident to the fires in Alberta has been all but eliminated. Third, I am concerned by the steady increase in the number of rigs operating domestically. Fourth, the supply of gasoline in the US continues to build even in the midst of the summer driving season. None of these factors bodes well for oil or oil related stocks. Accordingly, I chose not to risk losing the gains that I have achieved. The decision to sell on Tuesday appeared prescient on Friday as Exxon and Chevron reported disappointed earnings.

Some may wonder whether my buying and selling creates a tax nightmare. The answer is no---for the most part. I use a 401k and some IRA's as trading accounts. Trading there does not generate any capital gains tax. I try to keep the personal assets that I manage in cash. The only exceptions are master limited partnerships which are not suitable for tax deferred accounts. Remember that for the past year or so, I have rarely invested more than 40% of available capital. In disinflationary (nay deflationary) times, cash remains king. Furthermore, when opportunities arise (e.g. buying GM in the wake of Brexit or OKE when it carried a sustainable 13+% dividend), I have plenty of dry powder.

Don't take my actions as a sign that the asset bubble about which I often write is about to burst. I believe that the central banks of the world will continue to subsidize financial assets even in the face of declining economic growth. Europe and the US are the new Japan where secular stagnation persists. But please note that as of last month the cumulative wealth of the US (e.g. the total value of stocks, bonds, houses, etc.) is now 5 times the gross national income. This bloated ratio has only been achieved two other times in our history: 1999-2000 and 2004-2005. In other words, just before the two most recent stock market crashes. At some time even cheap money cannot keep the bubble from bursting. Undoubtedly, I will dart in and out of the market several more times before that occurs, but I am ever watchful for signs of it approaching

July 24, 2016 Observations

Risk/Reward Vol. 315

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

Another week and more record highs on both the major stock indices. This, despite another quarter of fewer earnings--albeit better than expected. Of the money I manage personally, I am 30% invested. I am contemplating taking profits and heading to the sideline.

Here are some observations:

1) The S&P 500 (SPY) is trading at 21 times trailing 12 months earnings. This is above the long term average of 16 times earnings, but no where near the multiples that pervaded the NASDAQ back in the dot com days. Is it a bubble? Maybe. But I am less concerned by the S&P multiple than I am by the S&P's possible interplay with that which is clearly a bubble: the world's bond market. If and when rates start to rise there will be a stampede to sell the trillions of dollars worth of bonds that are currently yielding at or below 0%. As the once and current bond kings, Bill Gross and Jeff Gundlach, have warned, in the wake of Obama's Dodd-Frank legislation, money center banks, once the dominant player in providing bond liquidity, can no longer make a market in bonds. No institutions have taken their place. In short there is insufficient liquidity in the bond market. If and when the stampede starts there will be few if any buyers, and the value of bonds will plummet. To meet obligations, investors may need to sell other assets at bargain prices including stocks. We could see 2008-2009 again. And you wonder why the Federal Reserve refuses to raise rates even as unemployment falls below 5%?

2) The domestic oil rig count rose for the fourth consecutive week and now numbers 371. This is a far cry from the 1600 that operated domestically in 2014, but the increase did contribute to the price of oil falling to $45/bbl. For students of Joseph Schumpeter, the collapse in the price of oil presents a classic case of "creative destruction." Until recently, domestic producers could not profit from oil prices below $60/bbl. Innovation forced upon producers by declining prices has resulted in some being able now to operate profitably at $40/bbl. This is the beauty of capitalism.

3) Two of the largest public pension funds, CALPERS and CALSTERS, announced their June, 2016 fiscal year results. One earned 0.6%, the other earned 1.4%. They pay benefits based upon an actuarial assumption of earning 7% on their assets, an average return they have not seen in years. The pension funds of 20 states are below 70% funded despite increasing contributions more than 75% since 2007. This unfunded liability is one of the greatest financial threats facing America. O K, maybe we owe long term public employees their pensions, but why promise these goodies to new hires? .

4) No one expects the Federal Reserve to raise rates at its meeting next week, but look for any hint of a September increase in the press release following the meeting.

5) For those of you chasing yield by purchasing emerging market securities or junk bond funds, I highly recommend reading Jason Zweig's article in Saturday's Wall Street Journal. Zweig is the editor of the most recent edition of Benjamin Graham's classic "The Intelligent Investor."

July 17, 2016 Henry Ford

Risk/Reward Vol. 314

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

Both the S&P 500 and the Dow Jones Industrial Average hit all time highs this week even as the bond market held strong. The conditions underlying this new, new normal of which I wrote last week are still in place. (
http://www.riskrewardblog.blogspot.com/ ) US investors keep pouring into equities as foreign buyers lap up US debt. What choice does either group have? Each is picking the tallest pygmy in a game of pygmy basketball. Take the bond market. In early 2008, the average yield on a 10 year government bond (US and foreign) was 4.3%. Today that average is 0.5%. No wonder the US Ten Year at 1.5 is so attractive to foreign buyers. Domestically, I pity the poor asset managers at pension funds, insurance companies and similar institutions. For years they have assumed that they will see, on average, a 7-8% return by mixing a healthy dose of conservative US Treasury securities with a sprinkling of more speculative, yield-boosting equities and alternative investments. But how can they possibly expect to approach that average when the yield on a 30 Year US Treasury Bond is a paltry 2.25%? The answer is that they cannot. Thus they are forced to invest far into the risk curve, doubling down on an unhealthy percentage of stocks. Consequently, stock prices continue to climb despite five straight quarters of declining profitability across the S&P 500, a factoid that is emblematic of the disconnect between the financial markets and the general economy. Like the witches in Macbeth, asset managers ply their trade while lamenting: "Double, double toil and trouble/ Fire burn, and caldron (read, equity markets ) bubble".

I caught some flack from readers last week for suggesting that secular stagnation will prevail unless and until wealth is redistributed. Believe me, I do not "Feel the Bern", but clearly a lot of folks do. That said, wealth redistribution does not have to be government mandated, and to my thinking is better when not done so. Back in 1914, Henry Ford came to realize that laborers in his employ could not afford a Ford, an automobile designed to be everyman's vehicle. Thus in the matter of 24 hours, he doubled the wages of his assembly workers to $5/day. Editorials across the land excoriated Ford for sewing the seeds of capitalist destruction. But destruction did not ensue and for the next several years America saw wages climb and the economy grow. Today's Henry Ford is Jamie Dimon, the CEO of JPMorganChase. He announced this week that over the next few years he will be raising the wages at the bottom of his workforce. Tellers, who make on average $10.15/hour, can expect to see wages of $12-16/hour. Hardly as dramatic as Henry Ford's move, but significant nevertheless Similar actions are under consideration at Starbucks. Apparently, Mssrs. Dimon and Schultz see things as I do. A consumer based society simply cannot grow when 42% of its workforce makes $15/hour or less.

I for one am enjoying the recent stock run up. Both the major indices are up over 5.5% since the results of the Brexit vote were announced on June 23rd. The S&P is up 18% since sliding into a trough in February. I have comfortably exceeded my annual goal of 6%, and am contemplating exiting the market for a while. That said, I do not see any serious threat to my portfolio in the near term. And, I like it's average dividend yield of 7+%. My big winner recently is GM which I ought on June 28. It's up over 11%. The big winner year to date is OKE. My recent re-entry is up 30% since April 28. Had I held it continuously since when I first bought on February 26th, I would have seen a 102% profit. I can't complain since I captured a majority of that gain during my two holding periods.

The Promenade des Anglais in Nice is one of our favorite places. We will return there one day.

July 10, 2016 New New Normal

Risk/Reward Vol. 313

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

The jobs report issued on Friday was pure Goldilocks: large enough to indicate a strengthening economy yet not so large as to threaten an interest rate increase. 287,000 new jobs was just right. As a consequence, both the bond market and the stock market reached new intraday records, an anomaly during normal times because they are usually inversely correlated. But what is "normal" these days? Indeed, this "double counterintuitive" may signal a new "new normal" at least in the United States. The old "new normal", a phrase coined by Mohamed El Erian several years ago, described his prescient prediction that we were in for a prolonged period of low interest rates. This new, new normal arises from domestic investors eschewing U S Treasury securities in favor of higher returning risk assets (equities) at the same time that foreign investors buy those very same US Treasuries. To the latter point, the yield on the US Ten Year Bond fell to 1.36% on Friday but still attracted a surfeit of foreign bond buyers who are facing the harsh reality that one third of all government bonds worldwide are trading at negative interest rates.

The sad news from Baton Rouge, Minneapolis and Dallas paints an ugly picture of race relations in this country. I do not offer any opinions on this subject, but any investor who ignores this fact does so at his/her peril. Lost in the news was a recently released study from the respected Pew Research Center showing that white households have 13 times the wealth of black households and almost that much more than Hispanic households. Combine this fact with another Pew study reporting that the modal age of whites is 55 while that of blacks is 24 and that of Hispanics is 8 and one comes to the following obvious conclusion. Wealth in this country is concentrated in aging white households, and that concentration will become more intense absent a redistribution of wealth. Until that occurs, our consumer driven economy will remain moribund. Why? Because old people simply do not consume. Doubt me? Look at Japan. To reiterate, our economy faces a demographic headwind of historic proportion. I leave to others whether and how to redistribute wealth, but absent that occurring secular stagnation will be the order of the day.

So how does an investor prosper in these times? Here is one strategy. I believe that secular stagnation will persist, that interest rates will stay at historic lows, that Mr. Market has not fully embraced this and that thus there are still pockets of mispriced assets. Top on the list of mispriced assets are preferred stocks. As described in Vol. 207 ( www.riskrewardblog.blogspot.com ) most income securities trade in relation to the yield on the US Ten Year Treasury Bond. Since the 2008 financial crisis, the spread between the yield on the 10Year and the yield on an index of preferred stocks (as measured by the exchange traded fund, PGX) has been 360 basis points. In the wake of the post-Brexit drop in interest rates, that spread has widened to over 430 basis points (yield on PGX 5.7%- yield on US Ten Year 1.4%= 4.3% or 430 basis points). History indicates that if the yield on the 10Year remains low, over time this spread will revert to the norm by the price of PGX increasing to the level that its yield is 5%. (Remember the higher the price the lower the yield). If that occurs one will see capital appreciation as well as receiving a nice monthly dividend. I bought PGX this week. I also added to my collection of preferred stock closed end funds (HPF, HPS, HPI, DFP, JPC, JPS). As a note of caution, due to their use of leverage and the fact that they now trade above net asset value, one must be careful in one's selection of closed end funds.

Enjoy the new, new normal!

July 3, 2016 Busch's Postulate Redux

Risk/Reward Vol. 312

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

As I predicted last week, Brexit nothwithstanding, the stock markets recovered. And it is no mystery why. Where else but equities can an investor get a return, and where other than US equities would any rational person invest?

With $11 trillion worth of bonds world wide trading at below zero interest rates, only speculators would enter the bond market. Between our Federal Reserve's failure to raise rates and the rate vacuum elsewhere in the world, it is small wonder that the yield on the US Ten Year Treasury Bond reached an all time low of 1.385% intraday on Friday . Now I want all of you to stop reading for a moment and to grasp how historic this is. The United States began issuing 10 Year Treasury Bonds in 1790 during the tenure of Alexander Hamilton, our first Treasury Secretary serving in President Washington's cabinet. In all of the time since, the US Ten Year has never yielded as little as it did on Friday. Can anyone say "central bank manipulation'?

But why are we experiencing such sluggish economic growth after 9 years of artificially low interest rates? Maybe, just maybe, the wonks at the Federal Reserve have had it all wrong. But like weathermen, they are incapable of admitting to a mistake. Indeed, the closest to an admission that I have seen or read occurred 10 days ago during Janet Yellen's testimony before Congress, an admission that was lost in the furor arising from Brexit. Read that testimony, and you will find buried there an admission that perhaps we are in for a much longer period of sluggish growth---one where productivity laggers. Laggering productivity is a euphemism for secular stagnation which in turn is a fancy word for unfavorable demographics. The fact is that the baby boomers (those born between 1946 and1961) have driven economic prosperity in the US since the 1960's. They are getting older and less productive. In addition, they don't buy as many cars or boats or playpens or houses as those who are young, and there simply are not as many young adults as there are boomers Those of advanced age, like boomers today, tend to be savers not consumers. And not shockingly, when boomers can't get a decent return on conservative investments like a cd or a savings account or a bond, they are forced to save more. Logic would say that given this, the Federal Reserve should adopt policies that INCREASE the rate of return on conservative investments so that boomers would have more disposable income to spend. But have they? No they have doubled down on what is proving to be an ever spiraling race to zero interest and below.

What does this mean to me? I continue to subscribe to Busch's Postulate described more than two years ago in Vol. 218 Riskrewardblog and repeated below.

"You may be right/I may be crazy
But it just may be a lunatic/You're looking for."---lyrics from "You May Be Right" sung by Billy Joel

"People who need people
Are the luckiest people in the world
Children needing other children"---lyrics from "People" sung by Barbra Streisand

"A room is still a room
Even when there's nothing there but gloom
But a room is not a house
And a house is not a home."---lyrics from "A House Is Not a Home" sung by Dionne Warwick

Busch's Postulate: Interest rates will not increase in the foreseeable future.

In so postulating, I posit two premises: 1) economies in countries with aging and shrinking populations do not grow; and 2) the above notwithstanding, central bankers and the economists that they employ believe they can spur economic growth by maintaining low interest rates. I lit on these two premises while reading Harry Dent Jr.'s new book "The Demographic Cliff". If you google Mr. Dent, you may conclude that he is a crackpot. "You may be right/He may be crazy/But it just may be a lunatic (as opposed to an economist) that we are looking for." And before dismissing premise number one, take a gander at Japan's experience over the past 15 years and keep an eye on present day Europe. One has long suffered from economic stagnation, even deflation and the other is on the verge. (Indeed , my concern is such that I am currently spending several days on the French Riviera helping its economy.) The US is not far behind. All three have aging/shrinking populations. Dent is not alone in his thinking. Read the musings of Stephen Conwill who as president of Milliman of Japan has witnessed deflation first hand and who has issued the following challenge: "Find in history an example of an economy that has combined solid growth with a declining population."

It is Mr. Dent's further contention that a person's peak age of consumption is 46--- a larger abode, college tuition, a second home, a nicer car, etc. With the post World War II Baby Boom ending in 1961, simple math led Dent to conclude that Baby Boomer consumption crested in 2007. The offspring of the Boomers have heretofore reproduced at less than the population replacement rate (1.84 births per woman vs. 2.1 needed to simply replace a population) and even that rate is trending down. Apparently, they do not believe that "People who need people/Are the luckiest people in the world." Or that "children need other children." As Harry puts it, in the US the dyers are outnumbering the buyers. (N.B. In 2012 deaths outnumbered births in the US non-Hispanic white population for the first time in history.) The birth rate in Europe and Japan is even lower, and if you think that China will help spur demand, think of the impact of the "one child rule". Hence, Dent sees years of lessening demand world wide and slow to no growth.

So how does this impact my investing? As noted in premise two above, central bankers have unlimited hubris, but limited tools to combat slow growth. They can keep short term interest rates low by fiat (e.g. via the Fed fund rate) and longer term ones low by quantitative easing (e.g. buying bonds and mortgages). Both may have a short term positive impact on the stock market but neither has proven to spur economic growth. As reported this week, despite spending hundreds of billions of dollars to suppress mortgage rates (QE3), new home sales for March were at an annualized rate of 384,000 down from February and downright puny when compared to the 1,400,000 new homes sold in 2005. Last week, the number of existing home sales was reported at an annualized rate of 4.6million compared to 7.25million in 2005. Talk about "nothing there but gloom." I guess Dionne is right, "a room is not a house/And a house is not a home"--- if no one buys it, that is. Yet, despite demonstrated ineffectiveness, we can expect the Fed to keep interest rates low. And as long as interest rates stay low (especially on the 10Year US Treasury Bond) my high yielding, income securities remain a good investment. Holding pat with preferred stocks, utilities, real estate investment trusts and leveraged close end funds seems the right thing to do.

The mediocre performance of the stock market year to date (as of Friday the Dow Jones Industrial Average is down 1% and the S&P is up less than 1%) reflects mounting concern over the prospects for solid economic growth despite low interest rates. Some, like Dent, believe that slow growth could become no growth or even deflation. I'm not saying that any day soon you, like Ms. Warwick, will be able to "put $100 down and buy a car", but the deflationary impact of an aging/shrinking population is disconcerting. And as for Janet Yellen, like all central bankers,

"The moment she wakes up
Before she puts on her make up
She says a little prayer"

that low interest rates will spur growth. Bonne chance, Janet!

Au revoir from Nice.

June 26, 2016 Brexit

Risk/Reward Vol. 311

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

My summer schedule is such that publishing Risk/Reward may be sporadic. In other words, I am having too much fun on Friday and Saturday to bother with composing it. That said, what happened this week is too important to go without comment.

As I wrote in the last edition (http://www.riskrewardblog.blogspot.com/ ), until very recently Europe's elites had underestimated the likelihood and the impact of Brexit. Going into Thursday's referendum the vote was slated to be close, but markets across the globe were convinced that Britain would remain in the European Union. I continued to monitor the situation but saw no reason to sell given that stocks continued to perform well. Indeed with the early returns showing that Brexit would be defeated, Thursday proved to be a major up day. After the close of the United States stock markets that day however the vote began to turn. By Friday morning Brexit was a reality. Predictably the markets tumbled as uncertainty reigned. And as we all know Mr. Market abhors uncertainty. By Friday's close both the Dow Jones Industrial Average and the S&P 500 had fallen 3.5 %. That fact notwithstanding both were down only 1.6% for the week.

As for my portfolio, I too took a hit on Friday but remained positive for the week. As stated I monitored the situation closely throughout the week and do not second-guess myself in staying put except in one respect. I should have sold Shell and BP before the close on Thursday. Had I done so I would have mitigated half the loss that I experienced on Friday. Holding those Eurocentric stocks was not worth the risk of Brexit no matter what the odds.

I believe that Friday was the worst of it and that we should see a positive return next week

June 12, 2016 Strange Days

Risk/Reward Vol. 310

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

“We chased our pleasures here
Dug our treasures there
But can you still recall
The time we cried
Break on through to the other side”---lyrics from “Break on Through” sung by The Doors

“Now give me money (that's what I want)
That's what I want (that's what I want)
That's what I want (that's what I want) yeah
That's what I want”---lyrics from “Money” sung by The Beatles (and every garage band)

“So you heard it all before
Falling in and out of trust
Trying to rekindle us
Only to lose yourself”---lyrics from “Mark My Words” sung by Justin Bieber

Both major indices flirted with year to date highs on Wednesday only to fall on Thursday and Friday. Dow Jones “chased its pleasures here and dug its treasures there”, but just could not “break on through to the other side” of 18000. The confidence that arose from the belief that the Federal Reserve will not raise interest rates at its upcoming meeting was offset by increased odds that Britain will vote to exit the European Union later this month. The impact of Brexit has been poorly assessed and uncertainty abounds. Why? Because until very recently the elites on both sides of the Channel believed it highly unlikely. Mr. Market abhors uncertainty and thus has fled to instruments that are safer than equities such bonds and cash.

Did you say cash? Yes, cash. With much of the world’s bonds bearing negative interest rates (buy a 1000 Euro German government bond today and get 995 Euros back in a year—yes really) and with the European Central Bank and the Bank of Japan charging financial institutions that keep excess funds on deposit, the world has seemingly gone mad. How mad? Well, Commerzbank, the second largest bank in Germany announced this past week that it is considering stashing its excess funds in vaults in lieu of depositing them with the ECB. Its ability to do so is hampered, of course, by the ECB’s decision to cease printing 500Euro bills, a decision designed to discourage the very move contemplated by Commerzbank and by thousands of Germany’s savers. This story is not over. Culturally, Germans are savers and the idea of being charged to keep savings on deposit is abhorrent to them. If and when that occurs, they will buy vaults and demand that banks “give them their money (that’s what they want)/that’s what they want/yeah that’s what they want.”

But not all of the news was discouraging this week. The price of oil held near $50/bbl. despite news that the number of rigs operating in the US increased last week for the first time in months. Moreover, Shell, the Anglo-Dutch energy conglomerate, held an informative nvestors' conference where CEO, Ben van Beurdan, announced that the synergies associated with Shell’s much criticized mega merger earlier this year with natural gas producer BG are better than expected. Unlike statements from some CEO's from whom "I have heard it all before/Falling in and out of trust/Trying to rekindle my interest/Only to have me lose", van Beuran is a man whose words an investor can mark. Long one of my favorites in the oil patch and my first purchase when I re-entered the market in April, Shell stock (RDS/B) jumped 5% this week. It is up 13% year to date. Nevertheless, due to its 7+% dividend, I believe Shell stock has much more room to run. Accordingly, I bought more. Also, this week, one of my favorites mlp’s, SUN (the operator of Sunoco’s wholesale and retail operations), was hit with a very negative analyst report. Having done my own homework, I disagreed and used the downgrade as an opportunity to buy SUN at a deep discount. Time will tell who is right.

A sad truth of history is one's inability to grasp the significance of the times in which one lives. Dear Readers, these are truly historic times. The persistence of near zero interest rates in the US and the presence of now negative interest rates elsewhere are unprecedented---and to my mind dangerously so. The unquestioned belief held by central bankers, lo these past 8 years, that low rates and easy money will achieve growth and inflate the world’s economies is insane; at least according to the definition of insanity attributed to Einstein: to wit; doing the same thing over and over again expecting a different result. The fact is that our central bankers have it wrong. But, like weathermen, they cannot admit their mistake and cannot set a different course. Indeed, we may be witnessing the most wrongheaded experiment in monetary history. To quote The Doors, we are in the midst of “Strange Days”:
“Strange days have found us
And through their strange hours
We linger alone
Bodies confused
Memories misused”

June 5, 2016 Surprise

Risk/Reward Vol. 309

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

Last week's holiday and this week's familial obligations have precluded me from publishing two consecutive editions. That stated, I share with you the following.

Had I written an edition last week it would have recorded my certainty (shared in most part by Mr. Market) that the Federal Reserve would raise rates in June or July. I also would have reported that Mr. Market had positioned himself for such an event and that I likely would not sell in advance of those meetings despite previous statements to the contrary.

Friday's miserable jobs report has taken a June increase off the table, at least according to the odds makers at the CME. Moreover, the folks at Goldman Sachs are now questioning whether a move in July makes sense. From the action in the stock market on Friday, it appears that Mr. Market may have shed his fascination with the Fed as the plummeting of odds that an increase will occur did little to move the needle. Both the Dow Jones Industrial Average and the S&P 500 stayed within a very tight trading range all week. Both are up just over 2% for the year

On a personal level, I continue to do well as the rate on the 10 Year Treasury Bond has stayed well below 2% and the price of oil has stabilized near $48. Moreover, the price of natural gas has risen slightly which has increased the value of some of my pipeline plays. The modest portfolio I started in late April is up over 3.2% with energy plays OKE, PAA, ETP, KYN and DPM, preferred stock funds HPI and HPF and real estate investment trusts STAG and CIM leading the way. Moreover, this portfolio averages over 7% in annual dividend payments, many of which are paid monthly. Combined with the profits I took in early April, this year's performance is better than I expected---at least so far. I don't like being a trader, but buying and holding in a market bloated by eight years of zero bound interest rates is not prudent for a person at my stage in life.

May 22, 2017 Get On Up

Risk/Reward Vol. 308

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

“So get on up
On the floor
Get on up, now
And dance some more”---lyrics from “Get On Up” sung by The Esquires

“Sky high
Hey, let's fly
Sky high”---lyrics from “Sky High” sung by The Atlantic Rhythm Section

“Spark and it's like gasoline
I start pumping like a machine,
My heart only runs on supreme”---lyrics from “Gasoline” sung by Britney Spears

Two weeks ago (Vol. 306 www.riskrewardblog.blogspot.com ), I discussed a core tenet of modern investing: markets are driven more by monetary policies set by central bankers than by traditional metrics such as earnings and profits. This week put to rest any dissenting view. On Tuesday, two members of the Federal Reserve indicated that the Mr. Market had underestimated the likelihood of a rate increase this summer. On Wednesday, the Fed released the minutes from its April meeting which read much more hawkish on interest rates than the press release following that meeting. In the wake of these events, the futures market “got on up/Off the floor” as the likelihood of a June increase shot up from 4% at of the beginning of the week to 34% on Thursday. Over the past eight years, the threat of higher rates has caused Mr. Market to sell off and this time was no different as both the Dow Jones Industrial Average and the S&P 500 gave back gains achieved earlier in the week.

So why are Fed members so concerned about Mr. Market’s misreading of their intentions? The answer is succinctly addressed in an opinion piece that appeared in Wednesday’s Wall Street Journal written by Martin Feldstein, President Reagan’s chief economic advisor. Therein, Feldstein described the disruptions that have resulted from eight years of zero bound interest rates. Among those are a stock market that trades at a historically high price/earnings ratio and a commercial real estate bubble that will undoubtedly burst in the near future. If you doubt this latter point, drive around your city or any city and take stock of the building boom---apartments and office buildings are springing up everywhere. Cranes are “sky high/let’s fly/sky high.” Why are they being constructed? I doubt that it is to serve tenant demand. Rather, investors are in a desperate search for a decent return and are willing to take outsized risks, and banks need to deploy capital. Thus a perfect storm is brewing. Several members of the Federal Reserve see what’s ahead and are trying to soften the blow by moderating Mr. Market's expectation of endless low rates.

Although the stock markets cooled, the price of oil rose again this week. News of increasing inventories and the adverse impact of a rising dollar were offset by continuing supply disruptions in Canada and Nigeria and a report that Americans are consuming a record amount of gasoline. This bodes well for oil prices as the ever important summer driving season begins. Early in the week Goldman Sachs raised its near term crude oil price target, and Daniel Yergin, considered by many as the most knowledgeable student of oil pricing, 1, 2017raised his September, 2016 estimate to $50/bbl. My oil stocks (listed in previous editions) continued to appreciate. “Spark and it’s gasoline/pumping like a machine/My heart (and portfolio) run on supreme.” Leading the surge once again is OKE which is up 16% since I repurchased it on April 28th and up an incredible 80% since I first purchased it on February 26th!

So what do I make of this week’s action? If I believed that the Fed would raise rates in June, I would sell on the next big up day. I don’t believe that they will act in June. The data upon which they rely is not sufficiently firm, and everyone is sweating the world wide impact should Britain vote to exit the European Union. That referendum is scheduled for June 28th, after the next Fed meeting. However, if the data continues to improve and Britain stays in the EU, July could see a rate increase. I will be out of the market in advance of that event. We all saw what happened after the last rate increase in December. Both major indices dropped by more than 10%. Who needs that? I will sell and reenter once the market experiences a confirmed rebound---like it did in late February of this year. I take heed from Britney’s first big hit. Once Janet gives “me the sign, Baby”, I won’t wait for her “to hit me one more time.”

May 15, 2016 Graham

Risk/Reward Vol. 307

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

“ I could be your payback
Hey, gonna help you get your sway back”---lyrics from “Payback’ sung by Rascal Flatts

“You are the apple of my eye,
Forever you'll stay in my heart”---lyrics from “You Are the Sunshine of My Life” sung by Stevie Wonder

“Flow river flow
Past the shaded tree
Go river, go
Go to the sea”---lyrics from “The Ballad of Easy Rider” sung by The Byrds

One result of lower first quarter earnings (discussed in last week’s edition See Vol. 306 www.riskrewardblog.blogspot.com ) is that a higher percentage of profits is being paid out as dividends. Do the math. Dividends are paid from earnings. If dividends remain the same and if earnings decrease then perforce a higher percentage of earnings must be allocated to dividend payments. Recently, the average percent of earnings paid in dividends, by those companies in the S&P 500 that pay dividends, has risen to 50%, noticeably above the 43% paid out in 2014 and the ten year average of 46%. Recently, this increase in dividend percentage prompted Larry Fink, the CEO of BlackRock, to write to the boards of directors of each of the S&P 500 companies to warn them to be more careful on how they allocate capital. Fink wants these boards to invest more in innovation and to pay out less in dividends. Fink’s missives are not dismissed lightly considering that BlackRock manages $4.5 trillion (more than 2% of ALL of the world’s financial assets!) much of which is invested in large chunks of each of the 500. But is he correct? Not according to Benjamin Graham, Warren Buffet’s mentor and the father of modern portfolio management. According to Graham, the hallmark of a healthy company is a long record of dividend payments in the magnitude of 67% of corporate earnings. Indeed, before 1970, the 30 companies comprising the Dow Jones Industrial Average paid over 60% of earnings out as dividends. Not so today. But in a world that pays no return on savings accounts, cd’s or bonds how is one to derive income if not from dividends? I look for such shareholder friendly companies and put them on a list for further study. Dividends are a way to “get your payback/ to get your sway back.” Accordingly, I am in Graham’s camp; not Fink’s.

The antithesis of Benjamin Graham was Steve Jobs---and his successor at Apple, Tim Cook, is not much better. Although Apple has started paying a dividend, it is a pittance in comparison to what it should be. For this and other reasons, Mr.Market no longer considers AAPL the “apple of his eye” which necessarily must “forever stay in his heart”---or his portfolio. Allow me to elaborate. As of the most recent quarter, AAPL holds $233billion in cash or cash equivalents on its balance sheet. To put this in perspective, with just this free cash, AAPL could purchase all but a handful of the world’s other companies. Moreover, it continues to accumulate cash, quarter after quarter, because its capital needs are met from current earnings. AAPL trades at less than 9 times earnings, well below the average for the S&P 500 which means that Mr. Market places no value at all on AAPL’s huge cash position. So, Mr. Cook, why not reward your shareholders by paying them a dividend FROM THE MONEY THEY HAVE EARNED? After all, you do recognize, do you not, that it is the shareholders’ money? Given that much of the cash hoard is oversees and upon repatriation would be taxed at the corporate level, AAPL still would have over $170million to distribute which equates to about $31/share, a one time 30% dividend given AAPL’s current price. Okay, spread the payments out over a few years, but pay it out! Won’t happen, will it.

One sector that remains dedicated to rewarding shareholders with dividends is the oil patch. Indeed, its leaders are committed to doing whatever is necessary to maintain those dividends even in the face depressed oil prices and earnings. Will they be able to do so? Time will tell, but their task has become easier given that the price of oil has now climbed above $45/bbl. As discussed last week, contributing to the recent price increase are geopolitical issues that raise questions on whether “the river of oil “ in some hot spots will continue to “flow/Past the shaded tree/and Go to the sea.” The hot spot this week was Nigeria where insurgents have disabled pipelines and taken nearly 1million barrels off the market. This portends well for those invested in this sector as the summer driving season approaches.

Ever so cautiously, I continued to add to positions this week hoping to prosper in this bunny hop market (Dow up 200 points one day; down 200 points the next). In the words of The Byrds:

“To everything - turn, turn, turn
There is a season - turn, turn, turn”

Hopefully, in the near future, it will be “time to 5, 20reap”--- profits that is.

May 8, 2016 0% Interest

Risk/Reward Vol. 306

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

"Candy's got some space to fill in her daydream
Living high on yesterday's lies
Talking to me about some 0% interest and,
How she got a better deal than the next guy”---lyrics from “0% Interest” sung by Jason Mraz

‘Born under a bad sign.
I've been down since I began to crawl.
If it wasn't for bad luck,
I wouldn't have no luck at all”---lyrics from “Born Under a Bad Sign” sung by Cream

“All I need is what I've got
My soul is free and I've got more than enough
Let it roll, roll, roll right off my back
Let it flow, flow, flow, that's where I'm at”---lyrics from “All I Need” sung by Natasha Bedingfield

With first quarter earnings season coming to a close, the results have been disappointing. Year over year, the average Q1 earnings of the 500 largest companies in the US (comprising the S&P 500 Index) are down 7.1%. Clearly, corporate America has “some space to fill in its daydream.” Indeed, with the two major stock indices still positive year to date (albeit barely) one could argue that Mr. Market is “living high on yesterday’s lies.” That is, of course, if the stock markets were driven by fundamentals like earnings and profits. Clearly, they are not. They are driven by central bankers who for the past several years have kept traditional savings instruments worldwide at “0% Interest” or 0%lower thereby driving everyone into stocks. In other words, stocks are the only game in town and will remain so as long as the Federal Reserve does not raise interest rates. That is why stocks rallied on Friday on the heels of a disappointing job growth report. A bad jobs number means that it is unlikely that the Fed will raise rates in June. Indeed, the futures markets now indicate only a 4% chance that the Fed will act then. With no money to be made in savings accounts, cd’s or bonds, investors have no choice but to bid up stocks. Look for the sugar high that that stocks currently enjoy (the description used this week by noted investor Stanley Druckenmiller) to continue for a while longer and for a postponement of the day of reckoning mentioned by Carl Icahn last week.

So do all of these economic “bad signs” mean that investors will have “bad luck or no luck at all?” Of course not. I, for one, intend to profit from interest rate sensitive securities that are currently mispriced in anticipation of a rate increase in June, an increase that I now do not believe will occur. And I am not alone in this pursuit. At this past week’s Sohn Investment Conference (the annual gathering of billionaire money managers), the Bond King himself, Jeffery Gundlach (cited in Vols. 220, 235, 263, 266 and 269 www.riskrewardblog.blogspot.com ) informed the group assembled that the most underpriced interest rate sensitive securities were shares in mortgage real estate investment trusts (“mREIT’s). This has always been one of my favorite sectors. Indeed, I bought CIM when I re-entered the market several days ago. Gundlach invests in REM, an mREIT exchange traded fund.

I also believe that money can be made in the oil/natural gas sector by buying on dips, collecting an occasional dividend and selling into rallies; in effect trading “bunny hop” style as discussed2016 in the three immediately preceding editions. Until this week, much of the news in this sector has been about how everyone has “more than enough”, how production just “rolls, rolls, rolls” and how crude just “flows, flows, flows.” The horrendous fire in Alberta, Canada this week, however, has had an effect. The US imports 2 million bbls/day from Canada. The fire has taken nearly 1 million bbls/day off line and more importantly has re-inserted production risk into the price of oil I say “re-inserted” because until the past year or so, the price of oil carried a significant production risk premium arising from the possibility of natural disasters (e.g. fires, pipeline breaks, etc.) and/or the politics of the locales responsible for the vast majority of the world’s production (e.g. the Mid-east, Venezuela, Africa and Russia). Recent production and, as a consequence, pricing have been set by the Saudi’s at a level designed to drive non-conventional producers (frackers) out of business. In addition, much has been made of a lack of storage for this excess production. But remember, the total US non-strategic storage capacity is only 500million barrels which is barely one month’s supply. I see oil staying above $40 given the current state of affairs which is the level I need to justify investing. In the past two weeks, in this sector, I have bought BP, RDS/B, ETP, KYN, JMF, FEI, DPM, OKE and PAA on dips. Time will tell if I have gauged this correctly.

As loyal readers know, I believe that the markets are now positioned for me to make money (see. Vols. 302 and 303): oil above $40/bbl. and the rate on the US Ten Year 016reasonably stable and comfortably below 2%. I am about 20% invested and will continue to add positions as opportunities present. I am never comfortable in the markets, but participation is a necessary evil. So please, Mr. Market, take note of Cream's famous lyric and do not disappoint:

"I've been waiting so long
To be....
In the sunshine of your love."

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"

April 24, 2016 Doves Cry

Risk/Reward Vo. 304

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

“I said let's go crazy (Go crazy)
Let's go, let's go
Let's go”---lyrics from “Let’s Go Crazy” sung by Prince

Touch if you will my stomach
Feel how it trembles inside
You've got the butterflies all tied up
Don't make me chase you
Even doves have pride”---lyrics from “When Doves Cry” sung by Prince

“Little Red Corvette
Honey, you got to slow down
(Got to slow down)
Little Red Corvette”---lyrics from “Little Red Corvette” sung by Prince

Two weeks ago, when last I corresponded, I reported that I had sold my holdings thereby capturing an acceptable level of profit. I was awaiting the results of the oil ministers’ meeting in Doha (April 17th) and the Federal Reserve’s meeting scheduled for April 26-27th before deciding whether to re-enter the market. The meeting in Doha ended without Saudi Arabia or any other major oil exporting country (e.g. Iran or Russia) agreeing to limit production. But instead of this news causing oil prices to decline, they have risen---and risen quite sharply---8% this week alone. What? Has the oil world “Gone crazy”? Given what has also happened, probably not. Domestic production continues to fall with US daily output now below 9million bbls/day. In addition, oil workers are on strike in Kuwait and flows from Iraq and Nigeria have also been disrupted. These latter events have reduced the daily worldwide supply by 3%. Will these disruptions continue? Who knows, but those who remained in the oil patch these past two weeks have been richly rewarded.

And boy don’t I know it. Had I remained in the oil stocks that I sold two weeks ago I would have doubled my profits in that sector. Yes doubled! And with the rest of the market continuing to trade in correlation to the price of oil, the other stocks that I sold did well also. “Touch if you will my stomach/Feel how it trembles inside/Losing those profits has got the butterflies all tied up/Even doves have pride.” But I am not kicking myself. I have rethought my decision to sell several times these past few days, and I believe that my judgment was sound. You can’t always get it right. I find solace in two quotes from the legendary investor Bernard Baruch: 1) “Being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong “ ; and 2) “I made my money by selling too soon.”

One difference between now and a few years ago is my ability to resist chasing profits. In times past, when a sector sky rocketed like oil did this past week, I would have been back in as fast as “a Red Corvette.” And invariably, I would have bought just in time to see the rocket fall back from space. Nowadays, “honey, I just slow down.” Another opportunity to profit will come along. One need only be patient. Indeed, my eyes are now on the Federal Reserve meeting scheduled for next week. No one expects a rate increase this time around, but look closely at the press release following the meeting. Given the steady increase in job numbers and continued positive domestic economic news, the Fed may signal a rate increase in June. Such a “hawkish” signal would widen the divergence between the Fed and both the Bank of Japan and the European Central Bank. Each has signaled a willingness to lower rates even further into the negative and to otherwise be more “dovish.” In times past, any widening of this divergence has resulted in a stronger dollar which in turn has lowered oil prices and by correlation, the US stock market in general. A similar result next week could present a buying opportunity.

And so my education continues. I missed out on some great profits these past two weeks, but I am not second guessing myself. If investing were easy, everyone would be rich. The nice thing about Mr. Market is that he presents us with money making (and money losing) opportunities time and again. Unlike Prince, we “are not out of time.” There is no reason to party (or to invest) like its “1999”.

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”

April 3, 2016 Bunny Market

Risk/Reward Vol. 302

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

Due to travel and family commitments, this edition will not follow the usual pattern. However, important developments occurred this week which require recording and reporting.

. Both the Dow Jones Industrial Average and the S&P 500 gained each day and now reside in the green: the DJIA up over 2% and the S&P up over 1.5% year to date.

. No one can doubt the sway that the Fed holds over Mr. Market. Much of the gains experienced this week came after Janet Yellens’ speech on Tuesday. Before she spoke the DJIA was down nearly 100 points. After she spoke it spiked 200 points (1.2%), and never looked back.

. In her speech, she noted that despite several indicators pointing to a strengthening economy, inflation as measured by the Fed’s favorite yardstick (the PCE Index) remained at 1.7% year over year; stubbornly below the Fed’s desired 2%. She emphasized the “asymmetry” that now exists in the Fed’s tool box. That is, the Fed’s tools to spur inflation are nearly exhausted (zero bound interest rates and prolonged quantitative easing) while those that exist to curb inflation remain unused (higher rates and increased reserve requirements). This observation was interpreted by some to suggest that the Fed may wait until the PCE Index attains or exceeds 2% before raising rates.

. Yellen’s speech lessened the likelihood of a rate increase in April to nearly zero. The spotlight now is squarely on the June meeting. If the Fed is to maintain any credibility in regard its prognostications , one should expect the minutes following the April meeting to signal a move in June.

. Oil prices hovered just below $40 until Friday when the Saudi oil minister reversed position and said that Saudi Arabia would not support limits at this month’s OPEC meeting in Doha unless Iran and other large producers likewise agreed. This statement caused a significant drop in oil prices. Adding to the woes in the energy sector was news on Friday that natural gas reserves were at an all time high (52% higher than the five year average) just as the heating season ends. This was not good news to nat gas iproducers or to pipeline companies.

. Friday’s energy sector news notwithstanding the DJIA rose 100 points on Friday following an encouraging, but not too rosy employment report. Perhaps the correlation between oil and the indices about which I have written over the past several weeks may be coming to an end.

. Does this week's action portend that the indices will continue to rise as they have since hitting the year’s low in February? I suspect not. And I am not alone. Take a look at the most recent newsletter from James Paulsen, Chief Investment Strategist at Wells Fargo Capital Management and a frequent contributor to CNBC’s Squawk Box. http://www.wellscap.com/docs/emp/20160321.pdf . Paulsen terms the current situation a “bunny market”; one that hops up and down but does not go anywhere. Unlike most of his peers, Paulsen recommends that investors attempt to time the market, a strategy that is heresy to most money managers.

. So what does this all mean to me? As loyal readers know, I study correlations; primarily those tied to the yield on the 10 Year US treasury. That yield impacts domestic interest rate sensitive stocks (my favorite sectors) and the value of the dollar/oil internationally. As the rate on the 10 Year rises, the value of the dollar increases and the price of oil falls. Since my portfolio is premised upon 1) the rate of the 10 Year not spiking above 2% and 2) the price of oil remaining near $40/bbl. , I have done quite well so far this year as the 10 Year rate has fallen consistently and the price of oil has appreciated nearly 50% since my mid February re-entry. That said, I see little upside in remaining as fully invested as I am as mid-April approaches--- when both the Doha (OPEC) and the Fed meetings are scheduled. I see great risks to my two investment premises coming from these two events. Accordingly, I will harvest some profits soon. Hopefully, I will catch a bunny hop that will vault me to year to date highs (as experienced Thursday past), but even if I don’t I will raise cash. I intend to watch the Fed and Doha mostly from the sidelines.

March 27, 2016 Just Like Me

Risk/Reward Vol. 301

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

“Oh baby, come on, let me take you where the action is
Oh baby, come on, let me take you where the action is
It's so neat to meet you, baby, where the action is”---lyrics from “Action” sung by Paul Revere and the Raiders

“And don't it seem like
Kicks just keep gettin' harder to find
And all your kicks ain't bringin' you peace of mind”---lyrics from “Kicks” sung by Paul Revere and the Raiders

“It's just like me, it's just like me
It's just like you my baby, it's just like you”---lyrics from “Just Like Me” sung by Paul Revere and the Raiders.

One would have thought that the terrorism in Brussels would have dominated the markets this past week. Surprisingly, it did not. Indeed, by the close of business on Tuesday, all of the major market indices in Europe (CAC 40, FTSE and DAX) showed gains. In the US, the major indices gave some ground, but there was no flight to safety, with the favorite refuge of those in flight, the US 10 Year Treasury Bond, having more sellers than buyers that day. So, dear Readers, “let me take you where the action is” (or at least was this past week.)

And that was with our old friends, the Federal Reserve and the price of oil. Despite a clear signal ten days ago from the Federal Reserve’s Open Market Committee (FOMC) that no more than two rate increases should be expected this year and none before June (see Vol 300 www.riskrewardblog.blogspot.com ), Mr. Market was taken aback on Thursday by an interview given by influential FOMC member James Bullard. He indicated that the first of those rate increases “may not be far off.”’ In response, the futures market handicapped the likelihood of an April rate increase at 12%, considerably higher than the 2% odds that prevailed at the end of last week. In turn, the dollar strengthened in comparison to other currencies which (as discussed last week) caused the price of oil to fall below $40/bbl. The correlation between the price of oil and the stock indices held, so both the Dow Jones Industrial Average and the S&P 500 ended lower for the first time in five weeks. Commentators speculated that Ms. Yellen may be facing an insurrection on the FOMC. This is not good news. Given the Fed’s outsized influence on markets here and abroad, even the hint of dissension “ain’t bringin’ you, me or Mr. Market any peace of mind” and most certainly will make stock price increases “harder to find.”

So what does this mean to investor/traders “just like me” or to those “just like you”? I can’t speak to those like you, but for those like me, a sooner-than-later rate increase may cause me to exit en masse. As I discussed in last week’s edition and as I alluded to above, an unexpected rate increase would cause the dollar to appreciate versus other currencies which in turn would cause the price of oil to plummet. My portfolio is built on two assumptions: 1) the rate on the US Treasury 10 Year Bond not spiking above 2% (emphasis on spike) and 2) the price of oil remaining at $40/bbl. Mr. Bullard’s comments last week cast shade on both of these assumptions and put a corresponding dent in my year to date profits. My tolerance for losing any more is wearing thin.

One good (no great) benefit of writing Risk/Reward is the connection it maintains between my Readers (many of whom are longtime friends) and me. This week one Reader/ friend requested lyrics from Paul Revere and the Raiders. Who am I to refuse? Because in the end, it is personal relationships and not profits that are the source of life’s great joys. As Paul Revere reminds us,

“When your world don't seem just right
And life's gettin' you uptight
You can change that wrong to right
Cause I was there myself last night
We're gonna' have a good thing
Such a good thing baby”

March 20, 2016 Fool on The Hill

Risk/Reward Vol. 300

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

“(Turn around)
Every now and then
I get a little bit nervous
That the best of all the years have gone by”---lyrics from “Total Eclipse of the Heart” sung by Bonnie Tyler

“Baby you can drive my car
Yes I'm gonna be a star
Baby you can drive my car
And maybe I love you”---lyrics from “Drive My Car” sung by The Beatles

“Ooh, the beauty is there
But a beast is in the heart
(Oh-oh, here she comes)
Watch out boy
She'll chew you up”---lyrics from “Maneater” sung by Hall & Oates

It was a mere five weeks ago, February 11th to be exact, when the Dow Jones Industrial Average and the S&P 500 hit bottom; both down over 10% year to date. The investing public was “a little bit nervous/That best of all the years had gone by.” Since then however, both major indices have experienced a significant “Turn around” and are now positive for the year. The reason for the recovery can be found by simply charting the price of oil against these indices. As reported here, over the course of the past several weeks, with few exceptions (like Friday), up and down days even hours in the indices have been directly, almost perfectly, correlated to the price of oil.

So why has the price of oil improved from $27/bbl. on February 11th to $40/bbl. this week? One factor is a cut back in domestic production. Another is the hope that major international producers likewise will limit production, a hope that gained traction this week with the announcement that Saudi Arabia, Russia and other major oil exporters are meeting in Doha, Qatar on April 17th to discuss the price of crude. A third factor “driving that car” may not be so obvious---US monetary policy. What? Janet Yellen influences the worldwide price of oil? Most certainly. When it comes to oil prices, the Fed is “a star.” Like many commodities, the price of oil is denominated worldwide in dollars. The higher the dollar goes in comparison to other currencies, the more expensive oil becomes internationally. More expensive oil lowers demand, and lower demand means lower prices. With the news on Wednesday that the Federal Reserve was holding pat on interest rates and foresaw no more than two small increases during the remainder of 2016 (compared with 4 foreseen just last December), the value of the dollar sank in comparison to other currencies and the price of oil jumped $2/bbl.

So what does this mean to me? Well, if oil stays above $40/bbl. and if the interest rate on the benchmark 10 Year US Treasury Bond does not spike above 2%, I should do well with the non diverse, interest rate and oil sensitive portfolio that I began acquiring in mid February (see Vol. 296 http://www.riskrewardblog.blogspot.com/ ) The stocks in each of these sectors were bludgeoned earlier this year in anticipation of more aggressive interest rate increases and plummeting oil prices. With both of these factors moderating I should see continued capital appreciation and a few months of excellent dividend payments. I say a few months because even though “the beauty is there”, the “beast is in the heart.” By that I mean that the value of these positions is entirely within the control of Janet Yellen. If she decides to become more aggressive on rates, “watch out boy, she’ll chew you up.” Any such increase will depress interest rate sensitive stocks and as discussed above will cause the price of oil to fall thereby decreasing the value of oil related companies.

So why do I not diversify? In my humble opinion, diversification in this market is false prophecy. Asset prices worldwide are supported entirely by a debt bubble created and manipulated by a handful of central bankers who are experimenting with tools (i.e. negative interest rates) that heretofore have never been deployed. I am singularly focused on what these bankers do. Thus, my investments are in those securities that are most directly correlated to their actions. When the worm turns, I will sell everything. You may believe diversification will provide you a buffer to ride out the next bubble burst. Those who so believed in 2008 were bailed out by the world's central bankers (via quantitative easing and zero bound interest rates) and by China's central planners (via massive infrastructure improvements). The tools they used are no longer effective or are no longer available. So sell, I will. It’s a just a matter of time. A fool I may be; but, like The Beatles, I will be a “Fool on The Hill”; a hill of cash.

March 13, 2016 Beggar Thy Neighbor

Risk/Reward Vol. 299

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

As noted, my schedule does not permit a typical edition this week. However, the week was significant and worthy of some observations.

. In the face of warnings from the Bank for International Settlements (the central bank for central banks) that negative interest rates carry unknown risks, the ECB lowered rates further into the negative on Thursday. In addition, it expanded its bond buying spree to 80billion Euros per month and promised virtually unlimited liquidity to Europe’s banking community. Despite spiking the monetary punch bowl, the ECB forcasts growth across the Eurozone at only 1.4% for 2016 and inflation at 0.1%. Apparently, one can only consume so many champagne cocktails.

. The unstated reason for the ECB’s action is to “beggar thy neighbor”; that is to spur exports at the expense of other economies by cheapening the value of the Euro vs. the dollar and other currencies. Here is the logic. Lower interest rates cause those with excess cash to dump Euro bonds and to buy higher earning ones such as those of the US. In order to effect this sale and purchase, one sells Euro’s and buys dollars. In the process, the demand for and thus the value of Euros lessens and the demand/value of the dollar (or other currency) increases. Currency devaluation is one way of spurring exports since one’s goods are cheapened by definition. That said, the ECB’s plan backfired. Within minutes of the announcement, ECB president Mario Draghi was asked if there could be more accommodation in the future. He responded that he doubted the need. This caused currency speculators to support the Euro which actually appreciated in value by day’s end. Not very super, Mario!

. Pipeline master limited partnerships plummeted mid-week on news that a bankruptcy court in New York ruled that the contracts between mlp’s and drillers were executory; that is they could be rejected in bankruptcy. I would have been surprised had the ruling gone the other way, so I viewed the dip as a buying opportunity. I added to positions. By week’s end, the sector had recovered.

. The ECB’s move almost certainly dooms any threat that the Federal Reserve will raise rates in March and casts further doubt on a rate increase before this fall. This development plus the apparent bottoming of the oil market prompted me to be a buyer this week. I added to my OKE and STAG positions and bought LVS, PSEC and JMF which I viewed as undervalued. I also took a flyer on CIM, a mortgage REIT that I have owned (and been burned by) in the past. It would not have been my first choice in that sector but for the recent announcement that it was paying a special dividend in addition to its normal one this quarter. Within the next two weeks I will have earned $0.98 in dividends on a $13.76 stock, a 7% return. Comparing CIM’s performance against the mREIT market in general reveals that very little of the dividend is baked into the purchase price. In other words, I don’t’ think CIM’s price will fall much ex-dividend.

March 6, 2016 Signs

Risk/Reward Vol. 298

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

“Just gimme some kind of sign girl
Oh my baby
To show me that you're mine girl
Oh yeah”---lyrics from “Gimme Little Sign” sung by Brenton Wood

“Signs, Signs, Everywhere there's signs.
Blocking out the scenery. Breaking my mind.
Do this! Don't do that! Can't you read the signs?”---lyrics from “Signs” sung by The Five Man Electrical Band

“It's a sign of the times
That your love for me is getting so much stronger
It's a sign of the times
And I know that I won't have to wait much longer”---lyrics “Sign of the Times” sung by Petula Clark

As loyal readers know, I have been looking for “some kind of sign/Oh, my baby/To show me” some stability in the factors that influence Mr. Market. This week there were “Signs, signs/ Everywhere there were signs/Breaking my mind/Can’t you read the signs.”

Here is what I saw:
1) Oil prices rose for the third consecutive week. More importantly, they rose despite reports that crude oil inventories are at their highest level in 80 years. I believe they rose because of the continued reduction in the number of domestic rigs in operation and signs that Saudi Arabia and Russia are actually both committed to limiting production to January levels. Whatever the reasons, oil prices appear to be stabilizing above $30/bbl.
2) Although the performance of the stock indices remains tied to the price of oil, the correlation is not as lock stepped as it has been for the past several weeks. Indeed, on Monday the major indices dropped despite the price of oil increasing. Moreover, throughout the remainder of the week, the indices and the price of oil frequently diverged intraday. I view this uncoupling as a healthy sign.
3) Both major indices saw broad support as the Dow Jones Industrial Average closed the week above the all-important 17,000 level for the first time since January 5th, and the S&P 500 closed at 1999.99, just below the magical 2000 mark.
4) The yield on the 10 Year Treasury rose to 1.87% as investors rotated out of the fear-trade and into equities. That said, the rise was not a spike, and thus did not adversely impact my preferred stock and REIT holdings. This rotation notwithstanding I do not see the rate on the 10Year exceeding 2% any time soon. Several factors are at work to depress it. First, as reported on Friday, wages actually fell in February despite a healthy increase in the number of jobs. An increase in average hourly wages is the Fed’s number one indicator of inflation. So, with the prospect of wage growth and thus inflation low, I do not see the Fed raising rates in March and likely not in June. Moreover, in Europe, the ECB reported this week that prices in the Common Market deflated in January, and that in response one could expect short term rates to go even more negative. Also to combat deflation, Japan issued the world’s first negative rate 10 Year Bond this week. With negative rates prevalent everywhere but in the US, one can expect excess cash to flow into US bonds increasing their price and keeping their rates low.

So how did these “signs of the times” impact me? They made my current holdings “so much stronger” and gave me confidence that I won’t “have to wait much longer” to be a more aggressive buyer. Indeed, I have started already. As loyal readers know, going into February I held only a few positions and those were in preferred stock funds. During that month I cautiously added stocks that I viewed as extremely oversold (see Vol. 296 www.riskrewardblog.blogspot.com ). Here are some and how they have performed through yesterday:

BuyDate /Sec. /+ % /div
2/3 GM 10% 4.8%
2/4 Ford 17% 4.4%
2/16 Shell 6.5% 7.8%
2/16 BP 7% 7.7%
2/16 Ventas 15% 5.2%
2/16 Omega 15% 6.6%
2/16 Blackstone 13% 9.3%
2/17 ETP 1% 14%
2/18 Gabelli(GAB 7% 11%
2/23 Sunoco(SUN 7% 8.8%
2/26 Oneok 12% 9.2%

More importantly, nothing I bought in February is in the red. The above performances warranted adding to each position in recent days.

Due to my heavy cash position, the entire portfolio that I manage is up only 1.5% year to date which is better than the major indices which are still 2.6% underwater. With recent purchases, I am now 40% invested. I don’t expect the stocks listed above to continue to appreciate at their current rate. However, I am hoping to hold them for at least 6 months so that I can collect 2 quarter’s worth of dividends. I intend to buy some other stocks that I view as oversold, but likely I will not reduce my cash position much below 50%. This is my intended, low risk path to my desired 6% annual return. If the market turns however, I will sell it all---very quickly. At this stage in my life, preservation of principle is most important. As Petula knows, Barb and I want to continue living “Downtown” and will do whatever it takes so that we "Don't Sleep in the Subway, Darling.”

February 28, 2016 Crystal Ball

Risk/Reward Vol. 297

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

“You babe, steppin' out
Into the night
Into the light”---lyrics from “Steppin’ Out” sung by Joe Jackson

“Oh I've felt that fire and I've been burned
But I wouldn't trade the pain for what I've learned
Of the cracks in the crystal, the cracks in the crystal ball”---lyrics from “Crystal Ball” sung by Pink

“I've been saving all my money just to take you there
I smell the garden in your hair”---lyrics from “Marrakesh Express” sung by Crosby, Stills and Nash

Once again this week, the price of oil and the two major stock indices were lock “steppin” up and down; “into the night/then into the light.” If you doubt this correlation, take a look at Wednesday’s action. In the morning, the price of oil sank below $30/bbl. on news from the Saudi minister of oil that OPEC would not cut production. The drop in the price of oil caused the Dow Jones Industrial Average (DJIA) to sink 267 points. That afternoon, the Energy Information Agency announced that gasoline inventories had fallen for the week. The price of oil jumped $2/bbl., and the DJIA rebounded 320 points to close the day up 53. Is this correlation logical? How long will it last? Logical or not, it exists. And it will continue to exist until it doesn’t. This is the current state of the market, and this is why I remain mostly in cash.

As loyal readers know, I study the factors that affect the yield on the benchmark 10 Year US Treasury Bond; the yield to which my favorite securities (preferred stock, REIT’s, BDC’s, etc.) are correlated; the yield that is my “crystal ball.” Every time that I misread the signals impacting the 10Year, I “feel the fire and I get burned.” That said, “I wouldn’t trade the pain for what I’ve learned.” So what do I see? Before Friday, all inputs signaled that the yield on the 10Year would remain indefinitely below 2%, where it has resided since the end of January. Forward interest rate indicators (e.g. the 5 Year TIPS breakeven and the 5 Year/5Year Forward) were both well below 2%. But on Friday, the Commerce Department released personal consumer expenditure (PCE) numbers (the Federal Reserve Open Market Committee’s (FOMC) favorite inflation index) which showed that year over year core inflation (that which excludes food and fuel) was at 1.7% in January; not that far from the Fed’s target of 2%. These numbers do not change my opinion that no rate hike will occur in March, but they do increase the odds of a June rate hike from 25 to 34%, at least according to the futures market. I continue to like interest rate sensitive stocks, but if other indications of inflation appear, I may exit some positions.

Speaking of interest rates, it was refreshing to hear FOMC member, James Bullard, admit on Thursday’s Squawk Box telecast that the past several years of low interest rates have deprived an entire generation of a decent return on savings. Since 2008, an investor has had no chance of visiting Marrakesh or any other locale where one “can smell the garden in one’s hair” if he has merely “saved all his money just to take you there.” Reward has come only with risks that previous generations of savers have not had to face; risks inherent in equities and lower rated bonds. But, alas, fellow savers, do not look for rates to normalize. News from yesterday’s G-20 meeting confirms that the world’s central bankers will not change their easy money, low interest rate policies any time soon.

Another week has passed, and “Déjà Vu”, the correlation between the price of oil and the stock indices “Carries On.” Directionally, that has been upward these past two weeks. Reports on Friday indicate that the number of domestic oil rigs in operation has dropped to 400 from a high of 1600 in October, 2014. Is this enough information for me to significantly increase my exposure to stock? No, not until I see more stability in the price of oil. I stated so several weeks ago, and I stand by that statement. After all, in the words of CSN, “one must have a code that you can live by.”

February 21, 2016 Ahab

Risk/Reward Vol. 296

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

“Let me tell you about Ahab the Arab
The sheik of the burning sand
He had emeralds and rubies just drippin' off 'a him
And a ring on every finger of his hand”---lyrics from “Ahab the Arab” sung by Ray Stevens

“You're losing interest in me and it's showing
It is no big thing but it's growing
The pain of heartbreak I've just started knowing
Well, it is no big thing but it's growing”---lyrics from “It Ain’t No Big Thing” sung by Elvis Presley

“There's a fire starting in my heart
Reaching a fever pitch
And it's bringing me out the dark”---lyrics from “Rolling In The Deep” sung by Adele

This week, once again, the stock market was correlated to oil. This week, however, stock prices were less impacted by the hour to hour price fluctuation in the price of oil than by the release of oil related news. And the news was encouraging, a fact which caused the two major indices to enjoy their best week of the year. Early in the week, word came from a meeting in Doha that “Ahab the Arab, the sheik of the burning sand/He of emeralds and rubies and a ring on every finger of his hand“ (in the persons of the oil ministers of Saudi Arabia, Kuwait and Qatar along with Russia) was prepared to limit production to January’s level if Iran and Iraq would likewise agree. No word was forthcoming from Iraq, but the Iranian oil minister hinted that he was in favor of production limits. Next came word that savvy investor David Tepper had made a large investment in ETP, an oil and gas pipeline owner. Then came news that the oracle himself, Warren Buffett had invested in Kinder Morgan (KMI), another pipeline owner. These investments signaled to many that the smart money had determined that oil was approaching a bottom. Oil did spike above $32/bbl midweek before falling on Friday. That fall was not precipitous, however, and oil stocks retained much of Wednesday’s healthy gains.

Further contributing to Mr. Market’s good week was news gleaned from the Federal Reserve’s January meeting minutes which were released on Wednesday. In the minutes, Fed members aired their concerns that the likelihood of inflation hitting the desired 2% target was fading. The release of the minutes was followed by a statement from heretofore Fed interest rate hawk, James Bullard, that the economy was too weak to support another rate hike anytime soon. This statement pleased Mr. Market, at least in the short run. However, for those, such as yours truly, who desire rate normalization even at the cost of short term pain, the Fed minutes and Bullard's words were disappointing. When if ever will we be able to achieve a decent return on a safe investment? Maybe not for years. It is hard to fathom now, but in 2007 one could achieve a 5.4% annual return on an FDIC insured 12 month CD. That instrument pays 1.1% today. This “loss of interest” may be “no big thing” to Wall Street mavens, but it gives me and others seeking a decent safe return the "pain of heart ache.” I suggest that the inability of Mr. and Mrs. Saver to garner any return on their deposits is a major contributing factor to their obvious distrust of and displeasure with anyone associated with the Establishment.

As loyal readers know, I am a huge fan of David Tepper (see Vols. 59 and 170 riskrewardblog.blogspot.com ). His purchase of ETP “started a fire in my heart that reached such a fever pitch that it brought me out of the dark” at least in regard oil and pipelines. I opened new positions in ETP, RDS/B, and BP this week. And if James Bullard has become a rate hike dove, then I see no reason to hold back on buying heretofore oversold interest rate sensitive stocks. So I opened new positions in REIT’s VTR and OHI, preferred stock closed end fund DFP, equity play GAB, hedge fund BX and municipal bond closed end funds MQT and VGM. That said, I am not “Rolling In Too Deep." More than 2/3rds of what I manage is still in cash. But, the signposts that I watch signaled that it was time to make a move.

Like Elvis, I invest with a healthy dose of “Suspicion.” Indeed maintaining a “Suspicious Mind”, well “That’s All Right, Mama.” My purchases this week, notwithstanding I have not “Surrender”(ed) to irrational exuberance. I know Mr. Market can “Be Cruel” even to a “heart that’s true.” If the market reverses, my loss limit rules will keep me from ever spending a night in “Heartbreak Hotel.” If things get “All Shook Up”, I will enter sell orders and cash will be “Returned to Sender.”

February 14, 2015 Rubber Ball

Risk/Reward Vol. 295

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

“I'm like a rubber ball
Baby that's all that I am to you
(Bouncy, bouncy) (bouncy, bouncy)
Just a rubber ball”---lyrics from “Rubber Ball” sung by Bobby Vee

"He saw magnificent perfection,
Whereon he thought of himself in balance,
And he knew he was.”---lyrics from “The Balance” by The Moody Blues

“So don't act like it's a bad thing to fall in love with me, me
It's not a bad thing to fall in love with me, me
Not such a bad thing to fall in love with me”---lyrics from “Not Such a Bad Thing” sung by Justin Timberlake

Was Friday’s 2% gain in the major indices a sign that “like a rubber ball/Bouncy, bouncy/Bouncy, bouncy/" Mr. Market is poised to bounce back into positive territory for the year? Is Friday’s remarkable 12% rise in oil prices (to which Mr. Market is now so closely correlated---see last week’s edition www.riskrewardblog.blogspot.com ) sustainable? I suspect not given that the impetus for the upward movement in both the price of oil and the stock indices was a statement from the United Arab Emirates’ oil minister that OPEC members will not pump more oil to compensate for lower US production. Not increasing production is a long way from cutting production. And with a world already awash in petroleum and new supplies entering the market from Iran, a cut by OPEC is what is needed.

Moreover, despite the remarkable gain experienced on Friday, both major indices closed down for the week. Why? There is no one answer, but clearly a major factor is Mr. Market’s sense that the world’s central banks are no longer effective in spurring economic growth, if they ever were. With the ECB, the Bank of Japan and several other regulators now charging banks for holding funds held in reserve and with interest rates already at historic lows, borrowing remains sluggish as do corporate capital expenditures and consumer consumption. The economists that run central banks are mystified and confused. Wasn't it in December that Janet Yellen and her cohorts raised short term interest rates confident that the economy was on the mend? Can it be that a short 45 days later she is contemplating reversing course? This bespeaks self doubt among the economists who run the Federal Reserve, which is rare given that they are schooled to believe that their levers can be used to “Balance” supply and demand. For them it is an article of faith that, with their help and guidance, resources can be reallocated to dampened or spur demand as desired. At their core, they believe that markets always seek equilibrium; that state where supply meets demand in “magnificent perfection.” What we are witnessing may prove them wrong; and may prove right George Soros’ theory of reflexivity; that is, that markets, like humans, are imperfect. They are not always rational. Like the humans who created them, markets experience fear and panic which by themselves can lessen demand and cause economies to spiral downward toward recession and its evil twin deflation even in the face of lower prices and other inducements to spend.

The fact that the indices are struggling does not mean that money cannot be made. In times of fear, investors love safety, causing the price of safe havens to rise. “It’s not such a bad thing to fall in love with safe havens/Not such a bad thing.” Two classic refuges are gold and government bonds. And at least one of our fellow subscribers loaded up on both at the beginning of the year. His vehicles of choice were TLT, an exchange traded fund holding long dated Treasury bonds which is up 9% year to date and GLD, the gold exchanged traded fund, which is up 17% year to date. Good job, Mr. X! Also doing well are certain real estate investment trusts, notably, O which is up 17% year to date and which in addition pays a nice dividend.

No doubt, these are trying times for investors. But as in all of life’s endeavors, one has choices. One can be the whiny Justin Timberlake who can only “Cry Me a River.” Being that Justin Timberlake certainly is N'Sync with current market sentiment and “Not a Bad Thing.” Or one can be the Justin Timberlake who seeks opportunity when markets are down. That Justin Timberlake knows that “What Goes Around/Comes Around." That Justin Timberlake is dedicated to bringing “Sexy Back." Through continuous study that Justin Timberlake prepares for when it’s time to “Buy, Buy Buy.”

February 7, 2016 Strange Relationship

Risk/Reward Vol. 294

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

“Do U know?
I think U and I got a strange relationship
What's this strange relationship?”---lyrics from “Strange Relationship” sung by Prince

“If you're down and confused
And you don't remember who you're talking to
Concentration slips away”---lyrics from “Love the One You’re With” sung by Crosby Stills and Nash

“Tell me, tell me, tell me lies
Tell me lies
Tell me sweet little lies”---lyrics from “Little Lies” sung by Fleetwood Mac

“Do you know/I think oil and the S&P 500 got a strange relationship/What’s this strange relationship?” Lately, as the price of oil goes, so goes the S&P. At the close on Friday, that correlation is 97% year to date. Huh? OK, maybe there is some relationship between the price of oil and the stock market. Lower oil prices reflect less demand, and lower oil prices mean fewer oil patch jobs. But, logically, any such relationship should be more than offset by the positive impact that cheap fuel has on consumer pocketbooks. Shouldn’t it? Apparently not today. Now add to the mix the relationship between the relative value of the dollar and the price of oil. Look what happened on Wednesday. Influential Fed member Bill Dudley cast shade on the likelihood of a rate hike at next month’s FOMC meeting. On that comment, the dollar fell in relation to other currencies causing the price of oil to rise 8% almost immediately. That news, in turn, caused the Dow Jones Industrial Average to go from a negative 193 points to a positive 183 points in a matter of minutes. YIKES!

Recognizing that a correlation exists explains directionality, but does not address the rapidity of the reaction. Since early January, oil and stocks have traded in lockstep, minute to minute. How can so many market participants react so quickly and so uniformly? On this point, John Boy, aren’t you “down and confused?” Not really, Dear Readers. “Don’t you remember who you’re talking to?” The answer is found in the “concentration” which exists in all markets today. The total market value of the S&P 500 is $18trillion. The total market value of the US bond market is $37trillion. Combined their market value is $55trillion. According to benefits consultant Towers Watson, the top five US fund managers have $14.4 trillion under management (for illustration purposes 14.4trillion/55trillion= 25%). The top dog, BlackRock, manages $4.7trillion alone. In other words, if just a few people atop a few firms sense (create?) a correlation, they can move the needle so as to make any such prophecy self-fulfilling. I don’t believe that a grand conspiracy exists, but the above statistics go a long way in explaining the minute to minute, lockstep correlation that exists today.

Although the previous week’s gains in the indices evaporated , my portfolio (85% in cash plus a few REIT's and a few preferred stock funds) continued to gain ground, albeit modestly. That is because the yield to which REIT's and preferred stocks are correlated (that on the US 10 Year Treasury Bond) continued to move downward, and downward yields equate to increased prices. I added GM and Ford midweek after both dropped dramatically despite record earnings and upbeat guidance. Their 5+% dividends should keep their prices from falling further. I did not buy any oil as that entire sector continues to take a beating. Perhaps deservedly so. Take Conoco. In December, Conoco’s CEO reiterated that the company’s number one priority was maintaining its dividend even at the expense of capital expenditures. So you can imagine the market’s surprise when that same CEO announced this week that Conoco was cutting its dividend by 66%! “Tell me, tell me, tell me lies/Tell me lies/Tell me sweet little lies”---indeed. This is not the first time that a CEO hath protested too much when asked about the sanctity of a dividend, and sadly it won’t be the last.

This market is like a Prince best hits album. If you follow the markets minute by minute, you will go “Delirious.” So “Let’s (not) Go Crazy.” This is not “1999” with its infamous internet bubble. And it’s not 2009 either. That said, no one is profiting enough to buy a “Little Red Corvette.” Just remain calm, don your “Raspberry Beret” and stay out of the “Purple Rain.” Next week, pay attention to Janet Yellen’s Congressional testimony. If she infers that no rate hike will be forthcoming in March, the dollar will drop in value, the price of oil will increase and, as if in lockstep, stocks will rise. If she hawkishly indicates that a rate increase could occur in March, you will "hear what it sounds like when (interest rate) doves cry," and the opposite will occur.