July 30, 2011 "Twilight Zone"

Risk/Reward Vol. 78

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

"You unlock this door with the key of imagination.  Beyond it is another dimension--a dimension of sound, a dimension of sight, a dimension of the mind.  You're moving into a land of both shadow and substance, of things and ideas.  You've just crossed over into the Twilight Zone."-- Rod Serling

"I made my money by selling too soon.....I never lost money by turning a profit"---Bernard Baruch

As my longtime readers know, I am not a skittish investor.  I started this venture four days after the flash crash, held steady during the tax debate, two European debt crises, the Egyptian uprising, the tsunami--you name it.  But, I am now spooked--spooked by, of all things, my own government.  Oh, I don't mean the Kabuki theater that has dominated Washington since John Adams moved there--I mean the current, conscious decision to destroy wealth.  On the left, it is borne of a sincerely held belief that salvation rests in the redistribution of wealth.  On the right, it is a similarly sincerely held belief that the government is too big and too intrusive.  But whatever the philosophical underpinning the result is the same---the real threat of wealth destruction.

As late as Wednesday, I believed that a compromise on the debt ceiling would be reached.  But, the revolt of the Tea Party combined with the President's demagoguery caused the market to drop 200 points that day.  This of itself was not surprising, but the pervasiveness of the losses across my extremely diverse portfolio was stunning.  Everything was red.  I went back to my year long records and tried to find some cognate, and finding none my disturbance heightened.  The next day dawned with a rise in the market, and I took advantage of it by selling everything but oil, tobacco, utilities and gold, all in advance of the cancellation of the vote on the Boehner bill.  The next morning, I noticed a tone of concern on those upon whom I look for guidance--many of whom had gone to cash.  Once the market started to climb Friday mid morning, I sold everything but gold.

My reason is simple.  I am willing to risk the occurrence of a "black swan"(an unpredicted and unprecedented event such as the tsunami or the Egyptian uprising), but I need not and will not suffer through a knowing and purposeful sail into the unchartered waters of a default by the US government.  Remember,  Magellan and Capt. Cook are celebrated for trailblazing on their missions of discovery, but each met with an unsavory end (actually their endings may have been savory since each was eaten by cannibals).  To mix metaphors,  I am not Rod Serling--the Twilight Zone holds no appeal to me.  Oh, and if you think the really smart guys know what will happen in the event of a default, I suggest you read "Too Big to Fail" the recent best seller that recounts the disastrous decision made by the Fed, the Treasury and all of Wall Street to let Lehman Brothers declare bankruptcy.  The ensuing game of musical chairs left the taxpayers without a seat, holding the bag for several hundred billions of dollars of TARP exposure; all, while their 401k's tanked.  

I wish no one ill.  I hope that I am wrong and that sanity prevails.  But look at the risk/reward equation.  By selling, I capture my hard earned, handsome profits at the cost of commissions (which at $7 per trade are inconsequential) and some capital gains tax in my personal accounts, much of which are long term.  If calm prevails, I will re-enter at or near where I left---the market is not going to spike.  If chaos ensues, I will be sitting pretty with plenty of powder to strike when the time is right.  I don't want to feel like the millions of investors who still have not recovered from the backwash arising from the Lehman bankruptcy.

This exercise serves as a reminder that contrary to the conventional wisdom, individual investors such as yours truly have a decided advantage in times like this.  I am nothing, if not nimble.  If I were running someone else's money and had preached to them a "long term" approach similar to the "buy and hold" philosophy so often invoked in earlier times, I would be nervous.  Last night, I slept very soundly

July 23, 2011 "Avoiding Temptation"

Fw: Risk/Reward Vol. 77

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

"I generally avoid temptation unless I cannot resist"---Mae West


2 The woman said to the serpent, “We may eat fruit from the trees in the garden, 3 but God did say, ‘You must not eat fruit from the tree that is in the middle of the garden, and you must not touch it, or you will die.’”

4 “You will not certainly die,” the serpent said to the woman. 5 “For God knows that when you eat from it your eyes will be opened, and you will be like God, knowing good and evil.”

6 When the woman saw that the fruit of the tree was good for food and pleasing to the eye, and also desirable for gaining wisdom, she took some and ate it. She also gave some to her husband, who was with her, and he ate it. 7 Then the eyes of both of them were opened, and they realized they were naked; so they sewed fig leaves together and made coverings for themselves.---- Genesis 3


Since Eve had her first date with Adam, temptation has been associated with the apple, and never more so than this week.  Allow me to explain.

As the clock ticked toward the time for Apple's quarterly report (4pm EST July 19, 2011), I became progressively more interested in buying.  As you may recall from Volume 75  ( http://riskrewardblog.blogspot.com ) I bought a position in Apple on July 7 and another on July 8, once it broke through the $350 resistance line.  As day broke on the 19th, I had a premonition that Apple would blow through the market's estimates.  Back in the day during earlier forays into investing, I would have acted on this hunch.  But,  purchasing positions in advance of quarterly earnings is anathema under my new, disciplined Risk/Reward approach to investing.  As Squawk Box ended and I headed to work, the temptation intensified.  By 10 am, I was online and  bought three times my then current holdings.  My ability to resist was no greater than had I walked into an ice cream parlor in South Haven or a tobacco shop inStrasburg.   As the afternoon progressed, my guilt overtook me and by the close I sold off most of what I had purchased that day.  Of course, at the market close, Apple reported blow out earnings and jumped $25 in after hours trading.

Although I forewent some excellent profits, I felt much better for having sold.  Investing without discipline is a certain formula for disaster---believe me I know from experience having ridden the dot com bubble to the bottom.

But, how about that Apple!  My God, what a company.  It still is cheap even at $390, trading at a price/earnings ratio of 15 with a growth rate of 19%. This equates to a 0.8 PEG (price/earnings/growth rate), and any stock with a PEG below 1 is considered inexpensive.  Indeed, Apple is such a great company, it cannot afford to dilute its earning stream by acquiring any other company.  Its organic production and growth is simply to good--so good that it now is the second most valuable company in the world and is sitting on $76 billion in cash.  To give some perspective to this hoard, understand that there are only 30 companies in the United States that are worth more than $76 billion.  On his Wednesday telecast, Cramer increased his valuation of Apple to $500 per share.  If Apple is not going to buy another company and if it refuses to pay a dividend (it could afford to pay a one time dividend of $80 per share!), then it should start investing in itself with a share buy back.  Apple shareholders/cultists would love Steve Jobs even more, because even though Apple is the greatest company going today, its stock is not (as evidenced by its low PEG).  Its stock has appreciated 50% in the past year, but given Apple's truly incredible  financial performance it should have done much better.  Frankly, one could have done nearly as well owning Chevron (53%), Shell(38%) or ConocoPhillips(46%) with their healthy dividends included.  And our old friend gold didn't do badly over the past year either (34%)  I will keep my Apple, but until the market becomes more confident in consumer spending, I fear this remarkable behemoth will not get its due.  

Speaking of gold, I intend to buy more after the inevitable dip that will occur when (if) the US debt ceiling is raised, and the fear of a default in the world's reserve currency is abated.  I will likely buy in mid to late August, in advance of the traditional increase in gold prices driven by the fall Indian wedding season and the celebration of Diwali in October.  Even absent its "hedging" value as a response to currency devaluation in the US and Europe, gold would likely appreciate due to its ever increasing demand by the growing middle classes in India and China which accounted for 58% of all gold purchased in Q 1 2011.

As the furor in Europe subsides, look for some decent yields coming from European banks.  In the future, these institutions will not be able to rely so heavily upon sovereign debt as a source of capital.  Regulations are now afoot that would require Europe's major banks to raise $654 billion of additional capital (much of it equity) by 2019.  I smell hefty dividends.

I am thankful that I overcame temptation.  Although not handed to me on Mt. Sinai, my investing commandments are sacred--at least to me.

July 16, 2011 "Debt Crises and Gold"

 Risk/Reward Vol. 76

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

"Deficit spending is simply a scheme for the confiscation of wealth.  Gold stands in the way of this insidious process.  It stands as a protector of property rights.  If one grasps this, one has no difficulty in understanding a (government's) antagonism toward a gold standard."---Alan Greenspan (1966)

"Bankers know that history is inflationary and that money is the last thing that a wise man will hoard."--Will Durant

"It's what you learn after you know it all that counts."--Harry Truman

Once again the world is fixated on debt crises--here and in Europe.

Two weeks ago,  a short reprieve was secured in the Eurozone when Greece passed reform legislation in return for an emergency loan from the EU and the International Monetary Fund (IMF).  This loan is enough to keep Greece afloat for 3 months.  A more permanent fix is now being debated with Germanytaking a hard line, insisting that any restructuring must require private holders of Greek debt to take up to a 30% haircut.  Take a moment and appreciate the enormity of this.  This is like asking little Johnny to take 70 cents for every dollar he invested in a US Savings Bond.  Holy Baklava, Apollo!!

Not surprisingly, the above prospect sent shockwaves through the rest of Europe, especially impacting the finances of other financially weak countries likeItaly and Spain.  This week the yields on 10 year Italian treasury bonds spiked to 5.66%, almost 3% MORE than the 10 year German bond.  (Remember, higher yields means lower price and more risk.)  This is stunning since one purpose of the Euro was to even out these differences.  Moreover, this rise in yield has made it virtually impossible for Italian and Spanish companies to borrow since the pricing of their bonds is based on a spread to government yields.  Suffice it to say, that for a host of reasons the credit markets in Europe are beginning to freeze.

On our side of the Pond, Washington dances ever so close to defaulting on our debt.  This week Moody's, one of the premier rating agencies, announced that it was considering downgrading US debt from its Aaa rating.  If you want to read something truly scary, read Moody's follow on memo on the implications of lowering that rating which one of my readers shared with me.  The report itself is not free, but the press release and follow on analysis is.  Unless something gets done soon, this apprehension will weigh down ALL markets.

Add to this cheery news, the disappointing jobs numbers and the hint that the Federal Reserve may enter a third round of quantitative easing.  I find this disturbing.  Quantitative easing is nothing more than printing more money so as to facilitate more deficit spending.  Inflation may not be hitting wages or housing (seemingly the only items that are important to the Fed), but it surely is everywhere else.  The US dollar is down 13% from a year ago in comparison to a basket of other significant currencies (e.g. Swiss Franc, Swedish Krona, Canadian Dollar, Japanese Yen, etc.)

What is an investor to do?

First, it seems to me that the combination of instability and inflation will only make GOLD more valuable---and it has.  My latest gold purchase was June 30, 2011 and half way through the month it is up 6%.  Gold is the world's number 1 refuge from fear (it used to be the US dollar)---and investors are full of fear.  Please understand that I am not a "gold bug".  I use it soley as a counter bet or hedge.  Gold going up more often than not means my portfolio is otherwise going down.  I hate having to buy gold.  But, buy it, I do, and the vehicle I use to own it is GLD, an ETF that physically holds gold.  It is very, very liquid and closely tracks the actual price of gold bullion.  The one downside is that it does not pay a dividend--so I am in and out all of the time.  As a consequence, I have recently opened a position in a Gabelli closed end fund, GGN.  I like GGN because it not only holds gold but it also holds positions in many gold miners and a few other natural resource plays.  Best of all, it employs a covered call strategy to generate income which it distributes monthly.  At its current price, it yields over 9%. (In a covered call, one buys the underlying stock shares and sells, for a premium, an option to a third party to buy or call the stock in the future for a higher price.  If done expertly, one keeps both the stock and the premium.)

Second, I do not see interest rates increasing any time soon, a fact which confirms the wisdom of my repurchase of Annaly Capital (NLY)(assuming of course that the US does not default on its debt obligations including the guarantee of Freddie and Fannie upon which Annaly's top line relies)  In so doing however, I re-learned a valuable lesson.  EASE YOUR WAY INTO POSITIONS.  DO NOT BUY ALL AT ONCE.  Allow me to elaborate.  I first  re-entered NLY on July 7 at a price above $18.  Four days later, NLY announced a secondary offering of more stock--its third such offering this year.  When companies like NLY do this it has a short term negative impact on the price of the stock because the "offering" is not technically to the public--it is to a handfull of investment banks (e.g. Merrill Lynch, JPMorgan, etc.) which purchase the entire new issue (here, 120,000,000 shares worth $2.1 billion) and then resell them to the public.  In order to induce the investment banks to buy or "underwrite" the entire issue, the stock is "priced" to them below the current market to compensate them for the risk that they cannot sell all of the shares at a profit.  The new issue was "priced" at $17.70 and when the new shares hit the market they caused the price to drop to $17.90 or so where I again bought.  Had I not "eased" into this position, I would have missed the opportunity.  This strategy is not foolproof.  Sometimes the stock just takes off and doesn't look back.  If so, buy it going up---things could be a lot worse---like having to dump a slug of stock once it passes one's loss limit on the way down--mine being 8%..

As we look back on this week, we are reminded that governments do not learn from history and thus are doomed to repeat it (paraphrasing George Santayana).  Nimble investors need not follow suit.

July 9, 2011 "How To"

 Risk/Reward Vol. 75

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

"Ignorance is the curse of God; knowledge is the wing wherewith we fly to heaven"--William Shakespeare

"If you don't know where you are going, you'll end up someplace else."---Yogi Berra

"Aim at nothing, and you will hit it every time."--Zig Ziglar

In recent weeks, some of my readers have asked how to "get started"; or in some cases "how to reboot" their investment approach.  I do not profess any expertise in this area (see above disclaimer), but I can relate how I "rebooted" after many years of fits and starts.

For me the first step was education.  The first two books I read were "Getting Back to Even" by Jim Cramer of Mad Money fame and "How to Make Money in Stocks" by William O'Neill, the founder of Investor Business Daily (IBD).  Later, I read "The Intelligent Investor" by the late Benjamin Graham, WarrenBuffett's guru.  These help familiarize one with terms and provide some basic rules.  For example, although I am not a slavish devotee of O'Neill's quasi-technical approach, he did emphasize the 8% rule (do not take more than an 8% loss on any position) which has served me well.  I also read the educational offerings at  http://www.quantumonline.com/incomeinvestments.cfm  a storehouse of information on all types of investments beyond common stocks such as preferred stock, oil trusts, business development companies, master limited partnerships, real estate investment trusts, exchange traded debt, closed end funds, etc.  Get to know what these are.

Step two was creating a daily reading list.  I am obsessive and excessive.  My motto is "Moderation in all things is itself immoderate."  So, I chose to be immoderate in financial reading.  I read the Wall Street Journal, IBD and the Financial Times daily.  The first two are the easier reads, but the last one is superior once you get your "sea legs."  I also peruse free publications on the internet such as <http://www.seekingalpha.com .  I take notes on a steno pad--just recording facts helps one retain them.  However, if you do nothing else, watch Cramer's show Mad Money every day on CNBC.  Honestly, once you get past his schtick, you will be kept as current on the market as you need be..

Step three, I set a goal.  As my early readers know, my goal is to achieve a 7% return on my investments in a zero inflation environment.  I chose this goal because the income from that yield will support Barb and me in our lifestyle should I decide to retire at age 62 (NB to subscibers who are also my partners---DO NOT reassign my corner office just yet.  I will not retire at 62.  I just want to be able to flip you off on my terms and at my time---which will not be age 62.)  We set this goal by doing a deep dive into our assets and our expenses.  Younger readers have a much longer horizon---and many more expenses.  But that does not mean you cannot start calculating.  There are many programs on-line that can help.  I use one provided by PennMutual. https://www.pennmutual.com/pmlwebsite/pages/PML_Public/Main_Content/calcs/wealthaccumulation/index_1006.h
Run some calculations.  For example, say you are 35, have $100,000 in a 401k and anticipate contributing $10,000 per year for the next 30 years.  At 7% you can expect to have $1,900,000 at age 66 which at  7% will pay you $133,000 per year without invading principal.  At 9%, one can expect $3,000,000 at age 66 paying $270,000 per annum without invading principal.  At 4%, one can expect $950,000 paying only $38,000 per year. I chose these returns advisedly.  7% can be achieved in today's environment with a diverse portfolio of preferred stock, master limited partnerships, exchange traded debt and only a minimal amount of daily attention.  Obviously, the risk in averaging a 9% return is considerably more and the time spent in oversight is significant.  A 4% return is what one would have achieved over the past 10 years if one had invested in the average blended or large cap mutual fund and simply let it sit.  The lesson is obvious.  An enhanced return can be achieved by being an active stewart of your portfolio.

Lastly, I opened a Scottrade account and just "did it".  Buying a security can be intimidating (and selling one even more so).  Accordingly, some may want the comfort of working with a broker/money manager.  But alone or with assistance, understand that you and you alone are responsible for your own financial security.  It does not and should not take a village to achieve financial independence.  Start slowly.  It took me from May, 2010 to January, 2011 to fully deploy the money Barb allowed me to invest.  Sell some securities for profit, just to get that good feeling.  Cut your losses at your tolerance level--say 8%.  Keep track of how you are doing each day.  Try to enjoy it.

On a personal note, I had another good week despite the downturn on Friday.  I did buy some Annaly Capital, and I repurchased some Apple.  I have seen no negative stories on Apple's supply chain in recent weeks (see previous posts), and once Apple blew through its resistance level of $350 I bought some.  Apple's chart had formed what looked to be a "cup and handle", and I decided not to wait for confirmation of its rally.  Those that have read Mr. O'Neill's book know of what I speak----others should not remain ignorant of its content.  Just sayin'.

July 2, 2011 "Greek To Me"

Fw: Risk/Reward Vol 74

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

CASSIUS: Did Cicero say any thing?
CASCA: Ay, he spoke Greek.
CASSIUS: To what effect?
CASCA: .... those that understood him smiled at one another and shook their heads; but, for mine own part, it was Greek to me. ---William Shakespeare,  Julius Caesar, Act I Scene II

"No ticky, no laundry"---Marco Polo

"He who will not economize, will have to agonize."---Confucius



The stock market was positively giddy this week;  euphoric on news of temporary relief from the on going Greek debt problem.  It was my best week since I began writing this publication.  However, my optimism is muted based upon news this week from China.

Ok, Ok, so why am I so fixated on what happens in China?

Well, buckaroos, wrap yourself in the following statistics:  China has 1.3 billion people, 20% of the world's population; China is the largest manufacturer in the world;  China is the world's largest exporter; China is the world's largest automobile manufacturer; China consumes the following percentages of the WORLD'S commodities:  53% of cement, 48% of iron ore, 47% of coal, 45% of lead, 40% of copper, 36% of nickel, 10% of oil (US consumes 20% of world's oil).  In addition, take a look at the 30 companies that comprise the Dow Industrial Average.  At least 15 of them are relying heavily on increasing business in China to drive future growth and profitability; companies like McDonald's, Caterpillar, Alcoa, GE, Boeing, etc.  And remember,  according to Larry Kudlow, the growth in corporate profits is the "mother's milk" of the stock market.  Frankly, what happens in China is more important to a stock portfolio than the Greek debt crisis, the war in Afghanistan, the US budget deficit, Charlie Sheen's contract, and you name what else---combined.  So if you think I am too fixated on China----EXCUSE ME!

Ahem, what is the news from China?

Earlier this week, Chinese government auditors revealed that Chinese municipal debt is much higher than previously estimated.  The combined debt of all Chinese governments is now 70% of China's gross domestic product.  This compares to 97% for the US and 225% for Japan.  This debt overhang will undoubtedly slow the rate of China's growth (e.g. cities will not be able to borrow to build as many housing units as promised) which already has been lowered to 9.5% for 2011, down from 10.5% in 2010.  This is still a tremendous rate, but directionally going the wrong way.  This news comes on the heals of a report that the Chinese real estate "bubble" may be deflating.  Real estate values in Hong Kong are down 15% so far this year.  As reported in earlier editions, China's construction industry is a huge driver of its economy and a pull back in that sector will have a tremendous impact on the demand for everything---most certainly commodities.  This pull back was confirmed this week in a report from Glencore, the world's largest commodity trader.  And,  as demonstrated from the above statistics, China IS the world's commodity market.

So what does this mean to me as an investor?

Well, it confirms my decisions to exit copper (Southern Copper is down 50% from its 52 week high); to exit aluminum (Alcoa is down 17% from its 52 week high); to exit coal (Peabody is down 20%); and to exit iron ore (SID is down 30%).  I am staying clear of these for a while although it was also reported this week that the inventories of copper (a leading indicator) in China have fallen recently.  This, of course, is a good sign.  The news from China has NOT dampened my bullish outlook on oil.  The release of oil reserves reported in this publication last week had little sustained impact on the price of crude as it bounced back this week.  Frankly, the amount released, 60 million barrels, is literally a drop in the bucket compared to the DAILY worldwide consumption of 89 million barrels.  I am standing pat with my oil portfolio which is skewed toward domestic production (MHR preferreds, GMXR preferred, SBR--small exploration companies or trusts and Chevron--a mega diversified oil company).  Chevron alone has several thousand wells in Texas' Permian Basin and is planning 350 more this year.  I also still own some Statoil, Shell, BP, ConocoPhillips, Permian Basin Trust,  and San Juan Trust, although not as much as a few months ago.

With the above discussed exit from commodities and my previously discussed pruning of real estate investment trust positions, I am cash heavy--- well above the 20% position insisted upon by my bride.  I hate not having money at work.  So, I parked some in the recently issued exchange traded debt of Century Link (CTQ) and U. S. Cellular (UZA.  Both are investment grade, pay around 7%, are not redeemable until 2016 and trade at or near their par/redemption price.  I also caught an awesome dip in Ally Bank preferred Series B which is not investment grade, but trades in great volume (thus allowing for liquidity) and yields 8.7% at my purchase price of $24.32.   Lastly, as reported last week, I will look at reentering Annaly Capital now that QE2 is officially over.

Happy Fourth!!!

June 25, 2011

 Risk/Reward Vol.73

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

"Oh, accursed hunger of gold, to what dost thou not compel human hearts."---Virgil (Roman poet) 

"But in truth, should I meet with gold and spices in great quantity, I shall remain til I collect as much as possible, and for this purpose, I am proceeding solely in quest of them"---Christopher Columbus

"Brusha, brusha, brusha, Get the new Ipana

Its dandy for your teeth"---Bucky Beaver

http://www.youtube.com/watch?v=Jt_38KUk-r4

Many of our subscribers see no value in allocating any portion of a portfolio to gold.  They assert that it has no real value.  I appreciate the view, but my response is simple---I am not smarter than the market.  And the market values gold.

From the beginning of civilization, gold has captured men's fascination.  As reported in previous posts, 52% of all gold is used in jewelry, 16% is held by individual investors, 12% is used by industry and 18% is held by central banks as foreign exchange reserves.  The largest reserve is held by the United States which owns 8,133 tons.  Central banks continue to purchase gold, as do the increasingly jewelry conscious middle classes of India and China.  This week the Financial Times reported that Greeks are hoarding gold as a hedge against financial collapse and that the Chinese mint is releasing many more of its gold "Panda" coins which the Chinese hold as a hedge against inflation.

As long as the market values gold (just like it values yoga outfits, Iphones, expensive coffee and social media), I will too.  I own it as a hedge--selling it before I take a loss and buying when it starts to appreciate.  Gold is up 24% since I first bought it in August, 2010.  PS Cramer thinks that one should hold a 10% gold position at all times.

Oil took a hit Thursday with the news of the release of reserves by the US and others.  This is a political move aimed at OPEC's decision to not increase production as reported previously.  I don't see this having any long term impact.  If anything, it presents a buying opportunity.

I bought the preferred shares of two Bermudan insurers this week.  Series E Preferred RE and Series B Endurance Holdings both pay above 7.5%, trade just below the call price of $25, are not redeemable until 2016 and are issued by A rated insurers.  To me this is just marginally riskier than a T-bill with more stability and one heck of lot more return.  I now hold similar  positions in the preferred stock of 5 such companies-these two, Aspen Insurance, Axis and Montpelier RE.

As phase 2 of quantitative easing ("QE2"- during which the Federal Reserve purchased over $600 million of Treasury securities) ends this month, the interest rates on 10 year Treasuries  continue at historic lows--hovering at 2.9%.  On Wednesday, the Fed announced that it would keep another interest rate factor-the discount rate- at 0.25%.  In addition, international financiers (although not the Chinese) continue to buy treasury securities.   The US dollar is still winning the battle of uglies against the Euro thanks to the financial crisis in Greece.  What does this mean to me?  Well, if rates continue  to be low into July, I am going to buy a new position in Annaly Capital (NLY), my favorite "agency" real estate investment trust.  As you may recall, NLY purchases mortgages, that are guaranteed by Fannie and Freddie, with short term borrowed funds, making money on the spread between the guaranteed mortgage rate and the short term funds rate.  In times of low interest rates on short term funds (like now), NLY makes significant profit and as a real estate investment trust, it pays very hefty dividends (currently over 13%).  I made a ton on NLY, but dropped it several weeks ago believing interest rates would spike at the end of QE2 causing a pinch in NLY's profits.  It looks like I was wrong--low interest rates persist and NLY reached a 52 week high last week with the announcement that it was increasing its dividend. YIKES!  NLY here I come.

Krisenfest---German adjective for "crisis-proof".

My daily study over the past year has helped me build a stable portfolio.  I learn a great deal each time the market rollercoasters like it has recently.  Very few of my holdings have even approached my 8% loss limit which has given me a sense confidence and peace of mind.  Indeed, I have been involved in an intense jury trial for much of this month.  Last year I would have been "freaked" by the market's recent volatility.  Yet, during the trial, I did not give a thought to my holdings until I checked them late at night.   No portfolio is Krisenfest.  But, maybe I am approaching that state; thanks again, to my daily study. 

 After all, Bucky, how can you be frustrated with the world of investments, if you spend less time on it each day than you do brushing your teeth?

June 18, 2011

Risk/Reward Vol. 72

F

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

 

"Banks are more dangerous than standing armies"---Thomas Jefferson

 

"Size matters"--Eve

 

Another volatile week, driven mostly by continued concern about a possible default on Greek debt.  Why do we care?  One reason is the lack of transparency as to who actually is "at risk" should Greece default on its bonds.  Published accounts indicate that large French and German banks nominally own much of the debt, but it is likely that they and any other large holder also purchased credit default insurance, or swaps.  This fact makes Greece "hauntingly similar" to the bankruptcy of Lehman Brothers, according to some commentators.  If you recall, "the music stopped" after the collapse of Lehman and the market for subprime debt that it maintained, and the most significant player left without a "chair" was AIG which had sold billions of dollars of subprime credit insurance.  Indeed, the US government pumped more than $120 billion dollars into AIG so that it could make good on that insurance and so that the credit markets, which have come to depend on swaps,  would not collapse.  Who is insuring the Greek debt, if anyone?   The world of swaps and derivatives remains largely private and unregulated.  I make no political statement here, I am just stating a fact.  The impact on me, however, was felt this week.  As loyal readers know, I have done very well with the exchange traded debt of the new AIG which trades under symbols AVF and AFF.  Based upon a Lehman redux fear, these badboys took a nosedive midweek but recovered nicely by Friday.  I did my due diligence and do not believe that the new AIG is significantly exposed to Greek debt.  I came close to selling near Friday's close, but with encouraging news coming from Europe I held.  I am going to reduce my exposure over time however.

 

It appears that international regulators will mandate that the banks deemed "too big to fail" (e.g. RBS, Citi, JPMorgan, Bank America, etc.) will need Tier 1 capital equal to 9.5% of assets compared with the usual 7%.   What this means is that in the next few years, these mega banks will need to raise even more funds.  The most likely means will be "contingent capital" trust preferreds.   They are treated as debt until a bank runs short of capital at which time they automatically become equity.  Because of this "contingent" aspect, the yield on these is usually high.   Keep your eyes peeled.

 

Also, as loyal readers know, I own a variety of positons in the preferred stock of regional banks.  These are small and recently stable instititions (Associated Bank, TCF, etc) and the preferreds pay good dividends.  The daily volume in these however is very small.  One such holding, Taylor Capital (TAYC-P), dropped like a rock this week when someone unloaded 70,000 shares into a market that usually sees 10,000 shares traded.  It has made a comeback, but I re- learned a lesson.  The size of the daily volume does make a difference in liquidity, and as you all know liquidity is one of my guiding principles.  In the future, go big, or go home. 

 

Speaking of Eve, she is missing---at least in China.  The Financial Times reported this week that thanks to the mix of cultural preference (a son is a family's Social Security), the "one child rule" and ultrasound, the male/female ratio in China is 121/100.  That equates to 10's of millions of  forced bachelors.  This correlates directly to the fact that riots and strikes in China (which are illegal) numbered over 180,000 last year, 493 per day.  Have you been reading about the revolt currently under way in "Jeans City", China?  Civil unrest in China will lead to a further slowdown in the Chinese domestic economy (read, housing and consumer purchases).  This could have a catastrophic impact on commodities.  That is why I am mostly out of that sector---except for oil of course.  Oh, and do you think China might become more militarily aggressive?  One of my readers scoffs at this notion.  Read today's WSJ book review of "Unnatural Selection--The Consequences of a World Full of Men".

 

And the beat goes. on.

June 11, 2011

Fw: Risk/Reward Vol. 71

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

"If I could turn, turn back the hands of time.  Then, Darlin' (dollars) you'd still be mine."---R. Kelly

OUCH!  The sky was falling!  (See last week's edition below)

The Dow drops for the sixth week in a row, closes below 12,000 for the first time since March and flashes no good news.  Knowing what I know now, I would have "raised cash" (read, sold) last week.  It is NEVER too late to do that, however.

I was forced out of only one company, a speculative real estate investment trust(REIT) by the 8% loss rule (IStar preferreds Series I and E), but I decided not to wait on others.  I dumped my newly acquired business development plays, PSEC and FSC (discussed a few weeks ago) and Commonwealth, another REIT.  I own several REITs and will likely reduce exposure in this sector over time.

In light of continuing negative news out of China, I exited large positions in natural gas (KYN) and commodity (BCF) funds, and in coal transporter Norfork Southern.  If the slowdown in Chinese real estate development is the start of a bubble burst, it could have the same effect that the bursting of the bubble in US consumerism (fed by easy credit) had in 2008.  For the first time, I am open to the possibility that we could be headed to a second dip of world wide recession.  Even a modest slow down in China has had a negative impact on most commodities--especially copper.  Copper also took a jolt this week with the election of the leftist candidate as president of Peru, the second largest copper exporter.  He ran on the promise to significantly raise taxes on copper miners.

In addition, OPEC met last week and decided not to "collectively" increase the supply of oil, despite a world wide shortage caused in part by the lessening of  supply from Lybia.  Saudi Arabia may ignore the vote and unilaterally increase supply, but one does not know for certain.  I took profits in Chevron, Conoco-Phillips, and BP and may shed my last "big oil" holding in Shell.  Ironically, the uncertainty in the world oil market resulted in an increase this week in my small, domestic plays such MHRpC and D,  GMXRp and Sabine (SBR)--you are welcome unnamed subscriber.  With domestic oil production literally piling up in the central storage facilities in Cushing, OK (where most oil pipelines terminate), a historic divergence in the price of West Texas Crude (WTI), priced at Cushing,  and Brent Crude, priced in London, has occurred.  Many transport companies are hurrying to find ways to exit crude out of Cushing and down to Houston so as to open a new intermediary pricing location.  Thus, this may be a good time to buy Energy Transport Partners (ETP), which has taken a beating lately but which actually gained last week.  It is one of the companies building such a Cushing-Houston pipeline.  Its CEO was interviewed this week on Cramer and made a very strong statement about the continuing vitality of its 7.5+% dividend.  I have not bought yet, but may---always looking for a silver lining.

I took a beating this week, for sure, but still am up 8% for the past six months with my "widow and orphans" stocks holding ground.   This means that I have given back 20% of my gains (10%-8%=2%/10%=20%)  Thus, I am in a profit taking mood, and certainly a loss prevention one.  I don't need to be greedy--plus a few more weeks like this and all my gains will be a fleeting memory. I like cash today--and likely will like cash/profits next May when the adage discussed last week is ripe for review.

  So, all of you Jacks, be nimble, I say---and avoid the flame.  (Note the shameless mix of nursery rhymes and fables)

Subject: Risk/Reward Vol. 70

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

"Sell in May and go away"---Investment Adage

"The sky is falling in!  The sky is falling in!"--Chicken Little

"Know when to hold 'em, know when to fold 'em, know when to walk away"---Kenny Rogers

Conventional wisdom preaches that the summer months are not great for investors: that most money is made in the period November through April.  Nothing about this year disproves this adage.   The Dow fell for the fifth consecutive week; sinking 2.3% just last week and over 5% since the end of April.  With disappointing news on the jobs front, a slowdown in growth in China, a debt crisis in Europe, stubbornly high gasoline prices and a game of "bluff poker" being played in D.C. over our debt ceiling, there is no reason for optomism.

But what to sell?  Due to the makeup of my five Baskerville portfolios (purpose: 7% annual return), I have actually been positive 3 of the 5 weeks as investors seek safer returns.  I am down a total of 1/2 of 1% (0.4% to be precise) over the past 5 weeks across my entire holdings.  As reported over that time period, I have shed most of my "growth" stocks (primarily tech) housed in the Cloncs Fund (purpose: principal appreciation).  What is left in Cloncs are staples (Coke, Yum (KFC)), energy plays (Chevron, BP, Conoco-Phillips and Norfolk Southern) and gold.  Frankly, the preponderance of "widow and orphan" high yielding common stocks (tobacco, utilities, telecoms, etc), preferred shares ( financials, insurance and energy exploration), real estate investment trusts, oil trusts, and exchange traded debt (insurance and financials) housed in the Baskervilles have worked as designed.  The 5% negative correction in the Dow over the past five weeks,  in light of the huge run up from November through April (I am still up over 10% for that period),  does not seem out of line considering the adage above and the steady stream of bad news.  As a consequence, I am holdin'---at least for now.

On a longer horizon, I do have concerns. 

One is whether China is ready to re-accelerate its economy.  A series of articles in the Financial Times this week was very illuminating on the tug of war at play between the hard line communists and the capitalists (who have held sway for the past several years).  This struggle is not over, and how it unfolds has huge implications considering how much the world  has come to rely on China's economy as it transitions from an exporter to a consumer.  A slowdown in housing development, alone, in China (which accounts for a huge percentage of its steel and copper consumption) could rock the world--literally.  China consumes for use or production nearly 50% of several of the world's commodities---cement, iron ore, coke, steel and copper.  Think what a slow down in those items would bring. 

A second concern is the growing drumbeat by environmentalist here and abroad over "fracking".  This is the revolutionary drilling technique that is used to extract oil and natural gas (including liquids) from shale.  It promises to be one avenue of energy independence for America, unless derailed by heretofore groundless environmental concerns.  Keep a vigilant eye on this.

Good luck, Henny Penny (Turkey Lurkey and Foxy Woxy, as well)!!!

June 4, 2011

Risk/Reward Vol. 70

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

 

"Sell in May and go away"---Investment Adage

 

"The sky is falling in!  The sky is falling in!"--Chicken Little

 

"Know when to hold 'em, know when to fold 'em, know when to walk away"---Kenny Rogers

 

Conventional wisdom preaches that the summer months are not great for investors: that most money is made in the period November through April.  Nothing about this year disproves this adage.   The Dow fell for the fifth consecutive week; sinking 2.3% just last week and over 5% since the end of April.  With disappointing news on the jobs front, a slowdown in growth in China, a debt crisis in Europe, stubbornly high gasoline prices and a game of "bluff poker" being played in D.C. over our debt ceiling, there is no reason for optomism.

 

But what to sell?  Due to the makeup of my five Baskerville portfolios (purpose: 7% annual return), I have actually been positive 3 of the 5 weeks as investors seek safer returns.  I am down a total of 1/2 of 1% (0.4% to be precise) over the past 5 weeks across my entire holdings.  As reported over that time period, I have shed most of my "growth" stocks (primarily tech) housed in the Cloncs Fund (purpose: principal appreciation).  What is left in Cloncs are staples (Coke, Yum (KFC)), energy plays (Chevron, BP, Conoco-Phillips and Norfolk Southern) and gold.  Frankly, the preponderance of "widow and orphan" high yielding common stocks (tobacco, utilities, telecoms, etc), preferred shares ( financials, insurance and energy exploration), real estate investment trusts, oil trusts, and exchange traded debt (insurance and financials) housed in the Baskervilles have worked as designed.  The 5% negative correction in the Dow over the past five weeks,  in light of the huge run up from November through April (I am still up over 10% for that period),  does not seem out of line considering the adage above and the steady stream of bad news.  As a consequence, I am holdin'---at least for now.

 

On a longer horizon, I do have concerns. 

 

One is whether China is ready to re-accelerate its economy.  A series of articles in the Financial Times this week was very illuminating on the tug of war at play between the hard line communists and the capitalists (who have held sway for the past several years).  This struggle is not over, and how it unfolds has huge implications considering how much the world  has come to rely on China's economy as it transitions from an exporter to a consumer.  A slowdown in housing development, alone, in China (which accounts for a huge percentage of its steel and copper consumption) could rock the world--literally.  China consumes for use or production nearly 50% of several of the world's commodities---cement, iron ore, coke, steel and copper.  Think what a slow down in those items would bring. 

 

A second concern is the growing drumbeat by environmentalist here and abroad over "fracking".  This is the revolutionary drilling technique that is used to extract oil and natural gas (including liquids) from shale.  It promises to be one avenue of energy independence for America, unless derailed by heretofore groundless environmental concerns.  Keep a vigilant eye on this.

 

Good luck, Henny Penny (Turkey Lurkey and Foxy Woxy, as well)!!!