October 30, 2011 ANGIE, ANGIE

 Risk/Reward Vol. 90



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



"Oh, yes, I like it/Screaming like never before
Baby, I like it, I like it/Party, karamu, fiesta, forever"--Lyrics from "I Like It" from Enrique Iglesias' album "Euphoria"



"Angie, Angie/ When will those clouds all disappear?
Angie, Angie/ Where will it lead us to from here?"--Lyrics from "Angie" by the Rolling Stones



"This is my quest, to follow that star
No matter how hopeless/ No matter how far"--Lyrics from "Impossible Dream" from musical "Man of LaMancha"



With the markets experiencing the best month in decades, it is safe to say that "Euphoria" reigns. After months of uncertainty, SOME clarity was brought to the European sovereign debt/bank crisis this week. Oh, you don't need the wisdom of Yogi to realize "that it ain't over 'til its over" (which also makes baseball so great; note Game 6!). But, real commitment has been exhibited by the stakeholders; sufficient to give heart to a market that otherwise was ready to roar based upon good corporate earnings and news that the US economy grew at an annualized rate of 2.5% in Q3. The European deal announced Wednesday has the following components: 1) institutional holders taking a 50% haircut on Greek debt (YIKES!--can you imagine that on US Savings bonds?); 2) European banks compensating for sovereign debt writedowns by raising 106 billion Euros in "new" capital; 3) the direct subsidy to Greece being increased to 130billion Euros; and 4) the EFSF being leveraged to 1trillion Euros presumably by allowing it to "insure" a set percentage of sovereign debt.



Frankly, the above represents a significant accomplishment and great praise is due to "Angie" Merkel. Principled leadership is to be admired--we sure could use some back home. Germany's newest Iron Chancellor held tough in insisting that Germany would not contribute one more Euro unless and until private bondholders shared in the pain----and a 50% haircut is really painful! My goodness, yesterday Sarkozy went on French national television and told his people they must become "more German" (starting with repealing the 35 hour work week). Barry, how about delivering the same message-- instead of villifing success and fiscal responsibility? Angie, no matter "where it leads from here", you are my odds on favorite for Person of the Year.



As the markets return to late July levels, I am picking up some real bargains from the shopping list I compiled over the last several weeks. I am even cautiously adding some financials, swooping up some high paying preferreds from old favorites Zions Bank (ZBpC), and National Westminster (NWpC) --which already has written down its Greek debt 50%, and buying the preferreds of real estate investment trusts that pay solid common dividends (e.g. Entertainment Properties and Ashford Hospitality). I also recommend studying closed end funds for some real bargains. Many were really battered recently and are trading well below their net asset values (NAV). I am back into BCF which holds a variety of mining and mineral stocks which I believe will again soar. BCF is trading 5% below its already low NAV---all the while paying over 8% in dividends!



On October 22, 2011, the Wall Street Journal interviewed John Rowe, CEO of Exelon, the large Chicago based electrical utility. Refreshingly candid, Mr. Rowe positied that it is time for Washington to stop tilting at the windmill of "clean energy"---investing in the "Impossible Dream(s)" of wind and solar power is quixotic--they can't supply our needs. Moreover, no one supports atomic power, and there is no such thing as "clean" coal. The only near and long term solution is natural gas. It is 50% cleaner than coal and thanks to recent break throughs in shale horizontal drilling and fracking , the US is now the world's leading producer with huge reserves. In 2008, we were importing natural gas paying $8per million BTU. Now we are paying less than $4, and last week Cheniere Energy announced a 20 year contract to supply natural gas in liquid form (LNG) to a British utility for a huge premium---natural gas in Britain costs $11per million BTU! Cheniere stock went up 90% in two days---yeah, that's right 90%! There are so many profitable ways to play US natural gas and oil exploration. On the exploration side I like LINE, SDR, PER, SBR, PBT, BPT and in the pipeline/storage area I like KMP, EEP and ETP. I also see a consolidation in this space (read merger and acquistion activity like KMP's acquisiton of El Paso last week) especially in light of the diminishing production by mega oil companines like Chevron (see this week's announcement).



I am resisting the euphoria--and with good reason as the precarious condition of Italy becomes the next focus of possible contagion. But, it feels good to loosen the purse strings and to begin to purchase positions with some conviction. Cautious aggression may make for some money making opportunites---it sure did last week.



Past editions available at www.riskrewardblog.blogspot.com

October 22, 2011 NOSTRADAMUS--I AIN'T

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

"Adversity on which I thrived/Destroy the alter

Now I am vilified/ Nostradamus, Nostradamus"---lyrics from "Nostradamus" by heavy metal favorite Judas Priest

"I used to want you so bad/ I'm so through with that

Cause honestly, you turned out to be the best thing I never had."--lyrics from "Best Thing I Never Had" by Beyonce

"Ares, exceeding strength, chariot rider, golden helmed, doughty in heart, shield bearer, savior of cities, harnessed in bronze, strong of arm, unwearying, mighty with the spear."---Homer--Hymn 8 to Ares (700BC).

Nostradamus, I ain't--No.1.  As discussed last week, I bought Apple in anticipation of block buster earnings only to suffer a 6% decline when the market received a disappointing report on Tuesday.  Frankly, I believe it to be an overreaction and assuming AAPL does not dip any more, I am confident that I will be back to even or better by next quarter.  I know better than to buy in anticipation of earnings, but with Apple (again!) I just could not resist.

Nostradamus, I ain't-No. 2.  With the markets closing near the trading range high (11,700) last Friday, I speculated that strong earnings reports throughout the week would vault the market through the range and set up the rest of the year for solid stock gains---absent catastrophic news from Europe.  The earnings all week (except Apple) were strong and nothing catastrophic came from Europe, but good earnings were not enough to vault the market out of the range---even though Friday did close above 11,800.  The fact remains that the markets are still captive to the hour to hour stream of yeah/boo news regarding the European debt crisis.  

This trading range pattern is exhausting and frustrating!   What can a lowly investor do?   Answer:  Don't despair.  KEEP STUDYING!!!!  Allow me to elaborate.

As my early subscribers know, I am primarily an income investor---always in search of big, safe and secure dividend/interest payments.  In mid 2010, I became a fan of the preferred stock of Citigroup (C), Bank of America (BAC), JPMorgan (JPM) and other such banks as they worked their way out from under the 2008-2009 Lehman Brothers induced financial crisis.  I bought positions in several preferred issues well below the call or redemption price (usually $25) each of which carried a dividend in excess of 7%.  I reaped great quarterly dividends and sold all of these at a handsome profit before the August, 2011 market swoon.   Since that time, these preferred shares, like virtually all bank stocks, have taken a beating---so much so that they are again looking mighty juicy.  Indeed, my interest was peaked even more when C, BAC and JPM reported surprisingly good earnings this week.  That is, of course, until I read more deeply into the reports.  YIKES!  Therein, I learned that C has $30bn of loan exposure in Portugal, Italy,Ireland, Greece and Spain (PIIGS).  JPM has $20bn exposed to the PIIGS, and BAC $15bn.   All claim that their exposure has been "hedged" through collateral and credit default insurance, but this merely begs the question as to how credit worthy their counterparties are.  Problems in Europe could  wipe out any equity cushion and could cause the preferred dividends not to be paid.  My deep dive into the reports saved me from buying "...the best thing I never had."

Further study also revealed, however, that banks, now so preoccupied with Europe, are underserving the borrowing needs of corporate America--especially the small and middle market (companies with earnings below $100 million).  This void is being filled in part by business development companies (BDC).  BDC's are largely unregulated pools of money that provide capital in several forms--from senior secured loans (like banks) to stock investments (like private equity groups)--mainly to small and middle market privately held companies.  BDC's are attractive to yield hunters like me because they are required to distribute 90% of their earnings to their shareholders.

One of the largest and most respected BDC's  is the "exceedingly strong, golden helmed, savior of cities" Ares Capital Corporation (ARCC).  Although it has little direct exposure to Europe, ARCC has taken a beating like all financial institutions.  I have long liked its exchange traded debt, ARY, which recently has been trading below its redemption price and currently yields better than 7.75%.  I recently started buying it again.   Also, ARCC common stock dipped recently on the announcement that it is raising more money through a secondary equity offering (usually priced below the market) so I bought some.  I intend to buy even more once the secondary is priced.  This bad boy currently yields 9.7% in dividends.  

Alas, the fact remains that, based on earnings, stocks are incredibly cheap right now----unless of course the world's markets are sent into a tailspin by sovereign debt defaults in Europe.  I am making cautious purchases of stocks which I believe have minimal exposure to Europe---ever ready, however, to exit if a major disruption occurs.  That said, I am still 90% in cash--ever thankful that I bailed on the market in July.  My current holdings (except Apple) average over 8% in dividend/interest, and I am in positive territory even with AAPL's poor performance this week.  Here is a list:  PER, SDT, AAPL, T, MO, EEP, FTR, CTQ, CTW, STON, TNH, RAI, NLY, AT, WIN, KMP, AHTpE, ARCC, ARY, SDRL, BCF.

Remember past editions are available at  www.riskrewardblog.blogspot.com 

October 15, 2011 MACT the Knife

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

"Monday, Monday, can't trust that day/Monday, Monday sometimes it just turns out that way

Oh, Monday morning, you gave me no warning of what was to be

Oh, Monday, Monday how could you leave and not take me?"----Lyrics from "Monday, Monday" by the Mamas and the Papas

"Now on the sidewalk, sunny morning/Lies a body just oozin' life

And someone's sneakin' round the corner/Could that someone be Mac the Knife?"--- Lyrics from "Mac the Knife" sung by Bobby Darin

"There is a tide in the affairs of men/When taken at flood lead on to a fortune

On such a full sea are we now afloat/And we must take the current where it serves."  "Julius Caesar" Act 4 Scene 3,  William Shakespeare

With the Dow closing on Friday near its three month trading range high (11,644), this coming Monday will launch a week full of promise or disappointment--assuming (and this is a big assumption) that the European sovereign debt crisis does not explode again.  Next week presents the most significant earnings report calendar.  The results and future guidance given by companies such as Halliburton and Schlumerger from the oil services sector, Coca Cola and McDonald's from the consumer sector, Abbott and Lilly from pharma, GE and AT&T will likely set the stage for the rest of the year.  All the major banks also report, but expect nothing from these laggards whose stock prices have taken a terrible beating this year.  Closing on Friday near its all time high, the expectations for Apple are huge.  I bought some in the belief that come Wednesday, it will shoot from its current $422 to over $450-- assuming it reports another blockbuster quarter.  A 6% profit in a few days would be nice.  So buckle your belts, Buckaroos---and remember--- unlike the Mamas and the Papas you have been given warning.

As I wrote last week, I went shopping for electric utilities this week, a sector that has actually increased in value since the August stock swoon.  My old favorites Duke, PGN, UIL and FirstEnergy are pretty pricey these days, yielding barely 5%.  I bought some, but will buy more once they moderate in price--something surely to occur if the market otherwise stabilizes.  On a related note, my research did uncover a threat to electic utilities posed by a set of proposed pollution regulations promulgated by the USEPA known as MACT (Maximum Achievable Control Technology) which if implemented will take off line several old coal fired plants and will reduce the amount of electricity nationwide 8% by 2015!  Twenty five state attorneys general are trying to stop these regs, but have not been successful as of yet.  Talk about "oozin' life" at the hands of MACT the Knife!  This startling statistic sent me searching for electric power generators that do not rely on coal.  I happened across a non utility generator called Atlantic Power (AT) which relies primarily on natural gas fired plants and which recently doubled in size through an acquisition.  To pay for this, AT is issuing more stock and in order to insure its sale, it priced the offering below the market price.  I bought some in the low $13 area which locks me into a very handsome 8+% dividend.  

My utility search also brought me back to telecommunications--land-line and cellular.  These all took a beating in August and each presents a great opportunity.  With recent assurances by management that their respective monstrous dividends are secure, I added to my CenturyLink exchange traded notes (CTQ and CTW) and repurchased some of my old favorites;  the common stock of Windstream, Frontier, AT&T and Verizon. 

This past week, the Financial Times did an entire insert on the remarkable Canadian oil industry which has caused a sea change in the Canadian economy since the oil rich tar sands of Alberta have been commercialized.  Canada now holds the world's third largest oil reserve and supplies more oil to the US than any other foreign nation (20% or more of oil imports).  Most of the oil is imported through pipelines.  You may have read that Canada is seeking to increase this flow through a new pipeline called Keystone XL which the Obama administration has yet to approve (can you say environmental Luddites).  I am riding the "tide" called Enbridge (EEP) to great "fortune".  It is the largest Canadian oil pipeline owner and pays a handsome 7+% dividend.  Indeed, take a look at all oil and gas pipeline companies.  They are very attractive now, and I do not see their cash flow being disrupted even if a European hiccup occurs again.  Attention:  these are master limited partnerships and should not be held in retirement accounts.  If you want exposure to these in 401k or IRA, look at a closed end fund that holds these such as KYN.

I am slowly re-entering the market, but am still very heavily in cash.  There are some great opportunities available--even outside of financial and insurance companies, all of which are too exposed to European debt contagion.  

Past editions available at  www.riskrewardblog.blogspot.com 

October 9, 2011 VITA BELLA

Risk/Reward Vol. 87



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



"I find it very, very easy to be true/I find myself alone when each day is through

Yes, I'll admit that I'm a fool for you/Because you're mine, I walk the line."---lyrics from "Walk the Line" by Johnny Cash



"Bells will ring ting-a-ling a-ling, ting-a-ling a ling/And you'll sing "Vita bella"

Hearts will play tippy tippy tay, tippy tippy tay/ Like a gay tarantella---lyrics from "That's Amore" by Dean Martin



"Hello, hello baby, you called, I can't hear a thing/I have got no service in the club you see, you see

Wha-wha what did you say, huh, you're breaking up on me/Sorry, I cannot hear you, I'm kinda busy"--"Telephone" by Lady Gaga and Beyonce



Buongiorno!



Wow, do I love Florence and Tuscany! Hats off to Lady Barbara for planning and executing a perfect eight day vacation/excursion. Great weather, great food, great wine---and I have not absorbed so much culture since I spilled a Petri dish on myself in 8th grade biology.



Talk about "walking the line"! Whew! The "floors" of 10,700 on the Dow and 1120 on the S&P were breached at the close on Monday and continued to fall throughout Tuesday--until a late rally brought them back above water. Truly, had I not been trekking through the Cinque Terre (can you say "amazing!") on Tuesday I would likely have sold many holdings that were at or above my 8% loss limit (but not CTQ and CTW discussed below). Remember, once trading range "floors" are breached, there can often be a precipitous fall if a saving rally does not materialize. One did this time, but keep your eyes on this the next time the markets fall to 10,700/1120---and they will, unless and until a resolution of the European debt situation is reached.



"Vita bella"---life truly is beautiful in Italy. But if anyone believes that Italy will be willing or able to repay its sovereign debt without substantial outside help---FAGGETABOUTIT!. I am more convinced than ever that we have just seen the tip of the iceberg known as the European sovereign debt crisis . The size of the Greek debt ($454 billion) is nothing--literally--compared to that of Italy ($2.1 trillion), not to mention Italy and Spain combined ($3 trillion).



Why do I believe this? Well, I follow the "open your eyes" theory of life. Take a look around, observe, reflect and draw your own conclusions.



Observation 1: If you visit the Uffizi Gallery in Florence, a state run museum, you will be told that the famous Visari Corridor is not open to the public. BUT, if you book the right "tour", you can arrange a private stroll through this amazing structure full of invaluable and rarely seen art. (Barb did so arrange, and I highly recommend it.)



Observation 2: Many galleries prohibit photographs. BUT, if you book the right "tour", you can snap away.



Observation 3: Many day trips advertise a return to the city by 5:30. Good luck with that! Make it more like 8:30 or 9. (By the way, this approach is very conducive to vacationing, but not for business.)



Observaton 4: Google the criminal allegations (the ones actually filed over the years, not the mere rumors) against Italy's long sitting Prime Minister Silvio Berlusconi who also happens to be its third wealthiest citizen. Talk about a guy who knows the meaning of "tarantella"! ( an up tempo folk dance; also translates to tarantulla)



When you ask about these things, once you are comfortable with a local (like the truly brilliant and passionate tour leaders and docents), the response is universal---"That's Italy!"



In sum, Italy can promise whatever it needs to get to the next day---but its ability to actually resolve its debt load remains in doubt--at least in this oberver's opinion.



As noted above, two of the securities I would not have dumped last Tuesday were CTQ and CTW, the exchange traded debt of CenturyLink, the acquisitive telecom services company which recenty swallowed Qwest. Paying over 7.25%, these "beauties" barely moved off of their issue price of $25 during last week's herky jerky trading. I really like holdings like these; ones that have a priority in payment over juicy common dividends and which have little if any connection to the financial or insurance industries. Now, that I am back in the saddle, I will be looking for more of these as I slowly slip back into the market.



Remember, past editions available at www.riskrewardblog.blogspot.com

October 1, 2011 UP AND DOWN

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

Greetings from Firenze--truly one of the most beautiful places on earth.

"The word aerobics came about when the gym instructors got together and said:  If we are going to charge by the hour,  we can't call it Jumping Up and Down."---Rita Rudner

"We can never know about the days to come/But we think about them anyway

And I wonder if I'm really with you now/Or just chasin after some finer day

Anticipation, anticipation is making me late/Is keeping me waitin'---Carly Simon lyrics from "Anticipation"

"If I die young, bury me in satin/Lay me down on a bed of roses

Sink me in the river at dawn/Send me away with the words of a love song."---Band Perry lyrics from "If I Die Young"

If aerobics is the appropriate word in the gym, "volatility" is the word in this up and down market.  But how volatile has it been in reality?  Do yourself a favor and go to Google or Yahoo Finance, click on the 3 month chart of the Dow Jones Industrials or the S&P 500.  Note the choppy pattern since early August, but also marvel at its "disciplined" pattern:  never higher than 11,700 on the Dow or 1220 on the S&P, but never lower than 10,700 or 1120 respectively.  Welcome to what traders call  a "trading range".  This "trading range" presents profit opportunities to traders who buy index ETF's (or their components) at the "floor" and sell at their highs.  This is a way to make some money, but not a very comfortable one for an "investor".  That said, one has to marvel at how the "floors" of 10700 and 1120 have held despite some serious market "body blows" like the threatened US default back in August and the non stop drama of the European sovereign debt crisis.  When will it ever end?  Talk about ANTICIPATION--and "keeping me waiting" to invest more.

With the markets absorbing the "yea/boo" daily news and yet, still holding the floor, I re-entered 10 days ago: not with the idea of trading, but of cherry picking dividend paying stocks on slight dips.  I say "slight" because I only want to buy stocks that have a stronger floor than the indexes; those that pay sufficiently high dividends that their price will not drop precipitously absent some cataclysmic news such as a US default .  I no longer consider a Greek default "cataclysmic" since the markets have had time to fully consider its ramification. 

For  a good primer on this approach, chart the performance of Duke Power over the S&P or the Dow.  You will see DUK holding very steady in the storms that have characterized the stock markets recently.  Do the same for tobacco (MO, RAI), other utilities and wireless telecoms (AT&T and Verizon).  This used to be the case with the financial industry, but no more.  If you seek tranquility, stay away from these--even their preferred shares-- at least for the time being.  

Another industry that has held its own is the funeral and cemetery business.  Recently I bought stock in Stonemor (STON) which has been buying funeral homes and cemeteries across the country for the past several years.  Obviously, it has been keeping customers satisfied by catering to their every "last" wish--be it a "bed of roses", a "silk dress" or a "love song".  Organized as a master limited partnership it pays a very hefty 8+% dividend.  I also like and bought some CenturyLink (CTL) exchange traded notes (CTQ and CTW), proceeds of which will assist in the incorporation of the old Qwest assets into CenturyLink.  These 7.5% beauties are payable before CTL's hefty (and heretofore sacrosanct) 8% common dividend.  As a consequence,  I view these investment grade notes as reasonably secure----and they are instantaneously liquid.

If you need a reminder of the genius of America, read the September report of the National Petroleum Council on the future of "home grown" oil and gas production.  In the period 2008 to 2011, the US went from being a net importer of natural gas at $8/million cu ft to an exporter at $4/million cu ft and has increased known oil reserves by many fold, both by bringing new technology (fracking) to the oil/gas patch.  In the process, tens of thousands of new jobs have been created---and many more await, once regulators remove the barriers.  It just serves as a reminder---if you want a problem fixed, put a profit motive behind its resolution.