WASHINGTON, November 8, 2016 – As was the case on Monday, we’re doing very little with our portfolios today mainly because it’s election day which (may) bring a close to the most insane U.S. Presidential campaign of all time. Or at least the most insane campaign in the last 116 years or so. Wall Street has been rising and falling lately primarily on rumors, rigged polls, and one-sided reports from a major media that has been transformed before our eyes into the propaganda arm of America’s once-great Democrat Party.
It’s a hell of a way to invest, of course, unmoored as it is from dollars and cents, at least in terms of profits, losses, balance sheets, price-earnings ratios and technical analysis. So we’ve decided to mostly sit today out, holding on to reduced positions and having no clue as to what tomorrow may bring.
Investing in this market is like enduring a slow-moving cancer inside your body. In such a case, doctors often advise doing nothing at the moment while engaging instead in “watchful waiting.” That is, keeping an eye on that sleepy malignancy so that if it happens to wake up and start doing its thing at a rapid clip, everyone will be ready to jump.
That’s what we’re doing today and maybe even tomorrow with our portfolios: watchful waiting.
As of the moment, we’ve reduced our portfolio positions down to about 40 percent cash. The remainder is primarily invested in term-preferred stocks which, unlike open-ended preferred stocks, have a specific and mostly near term redemption date, meaning that these high-yielding stocks will be called back on a certain date and redeemed at “par,” which is usually (though not always) $25 per share.
Since we bought a batch of these at prices under or well under $25 per share, we’re not too worried, even if a Fed interest rate increase takes prices down a peg or three. That’s because, barring corporate catastrophe, these stocks are senior to the issuing company’s common stock and will continue to pay dividends unless the company itself gets into a dire financial situation. Even then, the company will first have to eliminate dividends on its common stock before it hits those preferreds.
Since the bulk of our preferred holding will be redeemed between 2018 and 2023, they’re now regarded as fairly short term holding by most investors, as opposed to preferred stocks that have no specific redemption rate. Thus, our holdings will, presumably, not fluctuate too badly if the Fed decides to put the pedal to the metal as far as interest rate increases are concerned. Plus, the companies that issued these shares will almost certainly redeem them for $25 per share, which will mean capital gains for us as well.
Besides those preferreds, however, we’re quite light on everything else. We’re essentially doing a “Kilroy” with our portfolios right now, choosing to remain hunkered down in our bunkers and just peeking out occasionally to see what’s going on out there before sinking back down again lest someone across the way should decide to take us out.
It’s a hell of a way to invest. But markets are at their ultimate point of irrationality today and tomorrow, so any bet one takes is likely to be wrong.
That said, we’re also retaining a small hedge in the form of a few hundred shares of the short S&P 500 ETF whose trading symbol is SDS, which, amusingly, reminds us of the 1960s including the insane kind of Boomer street theater we’re seeing played out in Election 2016 for perhaps the last time.
We’ve also kicked up our position in SGOL, the Swiss-based gold bullion ETF, which we can trade without commission at our brokerage. Its one drawback is that trading action in SGOL is thin, so the bid-ask spreads tend to be wide and you have to fish for each trade. Another ETF, IAU, is probably more useful to small investors, but we can’t trade this one without commission. If you can, that’s the one you might wish to look at if you buy our hedging argument.
The idea here is that if things get really tense, gold, as a known store of value, tends to rise. On the other hand, deflationary actions like Fed interest rate increases, will tend to push gold and gold ETFs back down again. Worse, precious metals markets over the last few years have clearly been manipulated from parts unknown. Guesses range from central banks to large money center banks to those legendary Gnomes of Zurich.
All of this is why we trade in and out of SGOL and occasionally its companion silver ETF, SIVR. These are opportunistic trades that succeed or fail on a random basis. New investors should probably not venture into this territory until they first conduct some “watchful waiting” exercises with make-believe portfolios of precious metals ETFs. Random moves here are almost bound to fail.
Looking ahead, investors and traders alike will try to game the market’s next moves, some of which will rely heavily on whomever wins the election. A Hillary win, for example, might cause traders to resume their already overdone trashing of pharmaceutical stocks. A Trump win might breath life back into oil and gas stocks and might even perk up the shares of those former coal giants that have remained clear of bankruptcy filings. But these trades are for another day, unless you like to bet on stocks as if you were playing the slots in Las Vegas.
Aside from the above, we’re sitting on our hands for now.
Meanwhile, here’s hoping that our country—and our portfolios—survive tonight’s exercise in chaos theory.