WASHINGTON, September 20, 2017 – It was another strange day on Wall Street today, with investors, funds and HFT supercomputers alike thrashing about aimlessly, trying to figure out what Wednesday’s latest Federal Reserve tea leaves reading was all about.
The Fed’s Wednesday announcement clearly stated that it would begin some time in October 2017 to steadily liquidate is massive $4.5 trillion bond holdings from its equally massive balance sheet.
These bond purchases were a major part of the Federal Reserve’s QE 1-3 programs and were designed to inject liquidity into the nation’s struggling financial systems. The Fed now believes that this stimulus is no longer necessary, but will be unwinding these assets slowly so as not to upset the still-delicate national financial apple cart.
As a result of today’s announcement, the stock market’s response was mixed. After a mellow, low-volume, mostly positive morning session, stocks sold off sharply just after the Fed’s intentions were made clear with their 2 p.m. ET information release. Markets recovered somewhat after that initial selling bout, and both the S&P 500 and the DJIA closed up, with both once again achieving record territory.
Problem is, not all sectors had fun Wednesday afternoon. Case in point: Apple (symbol: AAPL), which got hit again today with acknowledged technical problems involving the new Apple Watches hitting the wires along with rumors (without confirmation) that the availability of the company’s new, high-end iPhone X models would be delayed, potentially imperiling the company’s traditionally strong, upcoming 1st quarter (FY 2018) results.
Apple’s real or imagined issues hit the stock today, and hence our position. We’re still positive on Q1, so we added modestly to our existing position. AAPL shares recovered modestly late in the day, although they still closed down on the session.
More troubling was an additional hit on our Allergan Convertible Preferred “A” shares (symbol: AGN/PRA, your broker’s symbol may vary), which were off a sickening $14.78 per share today after an even worse decline Tuesday.
Tuesday’s decline was due to the mother company (AGN) being named by numerous state attorneys general in a massive suit alleging that Allergan and other drug companies and distributors illegally pushed opioid pain relievers, leading to the current epidemic use and abuse of these drugs by criminals and illegal recreational users alike.
In many ways, this is a nonsense suit. But the state AGs, encouraged by the success of anti-tobacco litigation decades ago are glimpsing another opportunity to tap into a perpetual income stream from the pharma companies, allegedly to pay for treatment of opioid addicts. The funds, however, like those tobacco settlements, will ultimately find their way into other uses, including political kickbacks, and any “health benefits” would soon disappear.
This “case” is less obvious than the tobacco case, however, and litigation, one way or another, will go on for years, so it poses no imminent danger to any companies targeted by this rent-seeking witch-hunt. Nonetheless, Tuesday’s market action was unkind to Allergan’s common stock and, by extension, to the preferred shares as well, linked as they are to the common by the convertibility factor.
Today, as if in concert with the state AGs, a couple of key firms downgraded their rating of Allergan’s common stock from “Outperform” (buy, accumulate) to “Market Perform” (hold), hitting the common stock – and the linked preferred – once again.
It’s been a miserable two days for anyone overcommitted to Allergan Land, and our Allergan Preferred “A” shares have been hit so bad this month that they’ve affected our entire portfolio, to the bad, of course.
We continue to hold, however. There’s no evidence that Allergan’s numbers will be any less than stellar for the current quarter. So, once again, as in the previous quarter, we expect the next quarterly report to boost the shares of both the common and the preferred rather substantially. So we’ll hold right now, although we need to get another quart of Maalox for our medicine cabinet in the meantime.
Given the big hits we’ve taken in Apple and AGN/PRA, we decided to take some above-average profits in our holdings of Calumet (CLMT) our once favorite oil and oil by-product Master Limited Partnership (MLP) that nearly tanked in 2016 due to massive over-indebtedness. Calumet’s current management has pulled the company back from the brink, and its numbers improved dramatically last quarter as it quickly sold off underperforming assets.
A short-squeeze in the shares ensued – always a nice thing to happen when you’re holding the shares. CLMT shares quickly spiked, briefly hitting $9 per share before getting sold off by profit-takers last week.
We bailed today at $7.50 per share. That doesn’t give us bragging rights. But it did give us a short-term gain of 45 percent in less than 3 weeks, and we’ll take it, particularly since we held the shares in our large IRA rollover account, meaning the short-term gains are not currently taxable. Feels good.
Likewise, we sold off our position – for now – in Freeport-MacMorAn (FCX), a gold and copper mining giant that’s trying to get back on the comeback trail after some disastrous expansionary moves a few years ago.
We made money in this stock earlier in the year, but our current holdings were getting batted back and forth due to international political troubles involving their Indonesian copper holdings and God knows what else. Given over all market conditions, we decided to bail today for slightly over our breakeven point, just to get out for now. (We’ll likely return later.)
With some reluctance, we also exited our position in big oil refiner Valero (VLO), a reliable big dividend payer. Our position, was up about 10 percent as of this afternoon, and the stock is looking toppy after a big run. So, given the strangeness in the Allergan twins and elsewhere, we exited VLO as well today, taking with us a roughly 10 percent profit.
That was pretty much it for today. In general, we decided to exit at least two clearly profitable situations due to our increasing nervousness over this already nasty September market. MSM headlines crow about each daily Dow and S&P record close. But the stocks hitting new highs are diminishing in number by the day, and many stocks and sectors have been damaged badly this month, including a few of those we currently hold.
Until we can get clearer readings, we’re raising cash for now. More than ever, September has demonstrated to us once again that no matter how much excitement the market averages may provide for TV’s blow-dried financial commentators, if you, as an investor, aren’t in the lucky sectors that are driving these gains, you could be losing your shirt.