“As oil prices continue to sink…” begins a Wall Street Journal article that got top billing on the Fidelity fund group’s website today. Isn’t it amazing how the financial markets love to throw mud in the eye of anybody who makes such confident assertions? Over the past four trading sessions, the nearby (March) West Texas crude oil contract has soared 18%!
Either this is one of the biggest short-covering rallies ever, or the long, agonizing (for energy investors) collapse in oil prices is over. I lean toward the latter interpretation.
Why? Because the rebound is being greeted with utter disbelief. Even an old friend of mine, a steadfast energy bull for the past 25 years, calls it “a dead-cat bounce.”
Be careful there. What if this turns out to be the feline with nine lives?
To be honest with you, I myself don’t expect Texas tea to keep gaining 18% a week, every week. However, major market turnarounds often begin with an explosive rally that confounds the skeptics.
If you doubt me, go back and study some of the gurus’ reactions to the stock market’s initial surge off the historic bottom in March 2009. Google the phrase. Yup, they were talking about dead-cat bounces then, too, at 7000 on the Dow. You know what happened next.
Many energy investments have rocketed so far in the past few sessions that I would prefer to do any additional buying on a two- or three-day pullback.
Plains All-American Pipeline, L.P. (NYSE:PAA), a fast-growing master limited partnership serving some of America’s richest oilfields, still looks attractive. But I think you’ll be able to snag PAA in a good range in the near-term. PAA stock currently yields 5.2%, which is mostly tax-deferred.
If oil really has put in a major bottom here, investors who have been blindly piling into Treasury and high-grade municipal bonds for “safety” may be in for a rude awakening. Prices for Treasuries and munis have been zooming in the belief that the Federal Reserve will postpone — and postpone — any decision to raise overnight interest rates.
A strong, persistent rebound in oil, however, could give Yellen & Co. just enough courage to vote a rate hike by mid-year. Long before the event, you can be sure that speculators will be dumping Treasuries and munis — especially closed-end municipal bond funds, whose fat dividends would be threatened by an increase in overnight borrowing costs.
I sold some of my closed-end muni funds at the end of 2014, and I’ve sold some more in the new year. As a rule of thumb, I recommend selling any closed-end muni fund that you’re holding at a paper gain of less than 10%. I foresee a pullback of at least that magnitude when the present euphoria in the bond market turns to “fear of the Fed.”
I’ve also sold some more of my preferred stocks. I hate to see the income disappear, but I know that in a general bond market rout (go back and look at your charts from the summer of 2013) preferred prices could drop fast enough to wipe out several years’ worth of dividend income.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.
