Fw: Risk/Reward Vol. 94
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Once I built a railroad, I made it run/Made it race against time
Once I built a railroad, Now it's done/ Brother, can you spare a dime?"--Lyrics from 1932 hit song "Brother Can You Spare a Dime"
"Lloyd Banks in the house, bad news
Tony Yayo in the house, bad news
50Cent in the house, bad news
Whenever 50 around, it's bad news"--Lyrics from "Bad News" by rap artist 50 Cent
"When you're weary/Feeling small
When tears are in your eyes/I will dry them all...
Like a bridge over troubled waters/I will lay me down"--Lyrics from "Bridge Over Troubled Waters", Simon and Garfunkel
I hope everyone had a restful and joyous holiday. Lady Barbara and I basked in the warmth of Denver's sunshine (70F) and the smiles of two of our beautiful grandchildren. Despite the challenges that face us all, Americans have much for which we should be thankful.
That said, Brother, can you spare a dime? Once again, our governments, at home and abroad, have proven themselves unworthy of us, the governed. The result is the worst Thanksgiving week stock performance SINCE 1932! The Super Committee proved itself as ineffective as a Jay Cutler tackle (sorry, Matt and Todd, but could not resist). And speaking of all thumbs, when will Mario Draghi, the European Central Bank's new president, realize that dribbles and drabs of bond buying on the secondary market is ineffective at stemming the sovereign debt crisis? Turn on the printing presses and take default off the table. Perhaps subscriber and noted wag Larry B. is correct: Europe has it backwards--a German pope and an Italian central banker. If the failure of the German bond sale on Wednesday is not enought to awaken everyone is Europe that drastic measures are needed, then perhaps nothing will.
Adding insult to injury, the news from China is no longer neutral. This week the Hong Kong Purchasing Manager's Index fell to 48 indicating a slow down in the Chinese economy. "Whenever around 50 (or lower), it's bad news!" Moreover, for the first time since 2007, more foreign capital left China than entered. This exit is due in part to the working capital needs of international companies--working capital that formerly was supplied by loans from large, European banks. These banks continue to shrink their lending activity and to hoard capital in order to cover the losses sustained in writing down Euro zone bond losses. Remember, European banks have historically provided 25% of working capital to US companies through loan syndications and the lion's share of working capital to South American companies. This shrinking of European lending is a vicious cycle, as credit, the mother's milk of commerce, continues to evaporate.
On the personal front, I did NOT exit the market--holding steady on my 25% market allocation despite the market's free fall below the new Dow floor of 11,700. My holdings average over 8% in annual dividends/interest and with notable exceptions in natural resources (GGN, BCF) and European financials (IDG, INZ and NWpC), have kept their value. Overall, I am down 2% in principal on my market plays--which is tolerable considering what has happened. Frankly, I am perplexed by the precipitous fall of the preferred stock of National Westminster Series C (NWpC). The National Westminster franchise is at the heart of the what its parent, the Royal Bank of Scotland (RBS), sees as its future. As revealed in its most recent quarterly report (November 4, 2011), RBS has done a stellar job of reducing its exposure to continental sovereign debt and is handling its significant exposrure to Irish debt in a responsible and seemingly transparent manner. NWpC paid its committed dividend even during the worst of the 2008-2009 crisis, when the stock traded in the single digits. Currently trading at $17, it pays an astounding 11.5% in interest! If and when it is redeemed at $25, NWpC will provide a 45% profit--not counting dividends. Surprisingly, NWpC trades significantly lower than similar securities that have a lower credit rating (e.g. ZBpC). Does anyone believe that the UK government, which owns 83% of RBS will NOT provide whatever "bridge" is necessary to help RBS "over these troubled waters"? After all, RBS has done everything that the government oversight committee has demanded--and more. What am I missing? Please comment.
I probably will regret not exiting all positions when the 11,700 level was breached, but the temptation is to double down on some of my positions, not to run. If I were younger, I likely would do so. But at my age and stage , I will likely sell and take the 2% loss on my current 25% allocation if conditions worsen at all.
Are you enjoying these posts? If so, let me know. Remember, past editions are available at www.riskrewardblog.blogspot.com .
Saturday, November 26, 2011
Sunday, November 20, 2011
November 20, 2011 Limbo
Risk/Reward Vol. 93
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Jack be nimble, Jack be quick
Jack go under limbo stick...
How low can you go?"---Lyrics from "Limbo Rock" by Chubby Checker
"So hoist the John B's sails/See how the mainsail sets
Call for the captain ashore/ Let me go home----Lyrics from "Sloop John B" by the Beach Boys
"The point is, ladies and gentlemen, that greed, for lack of a better word, is good."---Gordon Gecko from the movie "Wall Street"
A personal shout out to Bob Kerbell, a loyal subscriber and good friend, for hosting the opening weekend of the deer gun season. Bob's hospitality is surpassed only by the majesty of his farm/game preserve. Nothing compares to a walk through the woods in anticipation of rousting a monster buck. One of these years I will break the tie between the number of my sailing and hunting trophies.
Europe remains a mess--keeping the rest of the world in limbo. How low will I go? Not much lower than 11,700 on the Dow, a level with which we flirted several times last week. It's a shame considering how well US corporations have performed, but I will not hesitate to punt if the market goes south. I am too old NOT to "time" the market.
On news that Teekay LNG Partners (TGP) floated a secondary stock offering to defray the cost of acquiring more liquid natural gas(LNG) tankers, I bought. As a result of hydraulic fracking, natural gas has become plentiful in many places around the world--most notably in the US where the cost has been halved since 2008. However, the demand has heightened in countries that heretofore have relied upon nuclear energy to generate electricity--a taboo since the tragedy in Japan. Indeed the cost of LNG in Japan is now $15/mmBTU compared to $3.87/mmBTU, the cost of natural gas in the US. This spread has resulted in a premium for LNG tankers such as the ones TGP owns and operates. I see the 8% dividend growing in coming years--if not, you can change the lyrics from Sloop John B to Stupe John B.
Speaking of fracking, did you catch the spike in WTI oil pricing that occurred mid week with the announcement that one of my favorite pipeline companies, Enbridge, is buying a half interest in the Seaway pipeline that runs from Houston to the oil storage hub at Cushing, OK? Enbridge intends to reverse the flow of the Seaway to take oil OUT of Cushing and down to the refineries near Houston. This is a huge development and stands as further indication that the domestic production of oil (from the Bakken, the Eagle Ford and the Mississippian basins) is not to be stopped. Heretofore the Seaway pipeline brought IMPORTED oil from Houston to Cushing. If the market holds, I will buy more SDT, PER, EEP.
Also, if the market holds, I intend to buy the investment grade, exchange traded debt of Kohlberg, Kravis and Roberts, LLC. (KKR) which trades on the NYSE as KFH. Henry Kravis was the main protagonist in the bestseller and movie "Barbarians at the Gate" which chronicled the takeover of RJRNabisco by "raiders" back in 1988. Kravis is thought to be the inspiration for Gordon Gecko, the "Wall Street" villai
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Jack be nimble, Jack be quick
Jack go under limbo stick...
How low can you go?"---Lyrics from "Limbo Rock" by Chubby Checker
"So hoist the John B's sails/See how the mainsail sets
Call for the captain ashore/ Let me go home----Lyrics from "Sloop John B" by the Beach Boys
"The point is, ladies and gentlemen, that greed, for lack of a better word, is good."---Gordon Gecko from the movie "Wall Street"
A personal shout out to Bob Kerbell, a loyal subscriber and good friend, for hosting the opening weekend of the deer gun season. Bob's hospitality is surpassed only by the majesty of his farm/game preserve. Nothing compares to a walk through the woods in anticipation of rousting a monster buck. One of these years I will break the tie between the number of my sailing and hunting trophies.
Europe remains a mess--keeping the rest of the world in limbo. How low will I go? Not much lower than 11,700 on the Dow, a level with which we flirted several times last week. It's a shame considering how well US corporations have performed, but I will not hesitate to punt if the market goes south. I am too old NOT to "time" the market.
On news that Teekay LNG Partners (TGP) floated a secondary stock offering to defray the cost of acquiring more liquid natural gas(LNG) tankers, I bought. As a result of hydraulic fracking, natural gas has become plentiful in many places around the world--most notably in the US where the cost has been halved since 2008. However, the demand has heightened in countries that heretofore have relied upon nuclear energy to generate electricity--a taboo since the tragedy in Japan. Indeed the cost of LNG in Japan is now $15/mmBTU compared to $3.87/mmBTU, the cost of natural gas in the US. This spread has resulted in a premium for LNG tankers such as the ones TGP owns and operates. I see the 8% dividend growing in coming years--if not, you can change the lyrics from Sloop John B to Stupe John B.
Speaking of fracking, did you catch the spike in WTI oil pricing that occurred mid week with the announcement that one of my favorite pipeline companies, Enbridge, is buying a half interest in the Seaway pipeline that runs from Houston to the oil storage hub at Cushing, OK? Enbridge intends to reverse the flow of the Seaway to take oil OUT of Cushing and down to the refineries near Houston. This is a huge development and stands as further indication that the domestic production of oil (from the Bakken, the Eagle Ford and the Mississippian basins) is not to be stopped. Heretofore the Seaway pipeline brought IMPORTED oil from Houston to Cushing. If the market holds, I will buy more SDT, PER, EEP.
Also, if the market holds, I intend to buy the investment grade, exchange traded debt of Kohlberg, Kravis and Roberts, LLC. (KKR) which trades on the NYSE as KFH. Henry Kravis was the main protagonist in the bestseller and movie "Barbarians at the Gate" which chronicled the takeover of RJRNabisco by "raiders" back in 1988. Kravis is thought to be the inspiration for Gordon Gecko, the "Wall Street" villai
Saturday, November 12, 2011
November 12, 2011 On the Edge of Glory?
Risk/Reward Vol. 92
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I'm on the edge of glory/And I'm hanging on a moment of truth
I'm on the edge of glory/And I'm hanging on a moment with you."---lyrics "Edge of Glory" by Lady Gaga
"Three coins in a fountain/Each coin seeking happiness,,,
There they lie in the fountain/Somewhere in the heart of Rome"--lyrics "Three Coins in A Fountain" as sung by Frank Sinatra
"Don't cry for me Argentina/The truth is I never left you
All through my wild days/My mad existence
I kept my promise/Don't keep your distance"--lyrics 'Don't Cry for Me Argentina" from "Evita"
"There are only two things I hate in the world: people who are intolerant of other people's culture and the Dutch"---quote from "Austin Powers in Goldmember"
I find myself once again perched on the fulcrum of the risk/reward see-saw: so many tantalizing securities are available, priced at levels yielding 8 even 9% in dividends/interest. But, do these low prices indicate that we are "on the edge of glory" or the edge of an abyss? Should I use down days such as Wednesday to buy more or use upticks such as Thursday and Friday to exit with a modest profit? On the one hand, I am heartened by the new "floor" of 11,700 on the Dow which held during Wednesday's 389 point fall. I even harbor some belief that the world's leaders now understand the cataclysmic consequence of failing to deal with sovereign debt---a belief that I did not have when I exited the market in late July. Yet, I remain chary: painfully aware of Europe's now chronic inability to resolve that crisis (this week of course centered on Italy). We are all "hanging on a moment"---moment to moment. I have decided to invest up to 25%, with 75% still in cash. However, I am prepared to exit in a flash if the floor does not hold.
Speaking of Italy, is the only answer to its mountainous debt for every man, woman and child in the world to throw three Krugerrands into Trevi fountain? I doubt that the Chinese will. No, the only answer is for the European Central Bank (ECB) to print Euros sufficient to buy and hold a huge percentage of the debt of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) in return for a prohibition against any additional borrowing and a reduction in their entitlement lifestyle. Germany will not like this European version of quantitative easing---as it continues to insist that private bondholders share in the pain by taking huge writeoffs. But frankly, since so many major European banks have relied on these bonds as the bases for their core capital--a writeoff sufficient to satisfy the Germans would sink those banks and would freeze the entire credit market worldwide. Even now international banks are balking at lending to Eurozone banks, fearing their "counterparty" is no longer credit worthy---and interbank lending is literally what makes world commerce possible. The sooner the ECB (read, Germany) recognizes the need for massive intervention, the sooner the healing can begin.
On a more positive front, there was a flood of good quarterly earnings reported this week . Moreover, on Tuesday, I awoke to news of a huge oil discovery by YPFRepsol (YPF), the former Argentine national oil company--a discovery that increased its reserves by at least 50%! I had been looking at YPF because of its huge dividend (11%) occasioned by a precipitous drop in share price (remember high yield means low share price) following an announcement by the Argentine government that henceforth all overseas profits must be repatriated to Argentina before being distributed as dividends. This will be a pain in the arse, but should not interfere with the dividend. This week's discovery merely reaffirmed my desire to buy--and I did. This is more speculative than my usual investment--but what a potential return! I simply could not "keep my distance". I hope no one "cries for me"as a result of this gamble. P.S. Don't get me started on American oil policy---did you see the cowardly decison to postpone the building of the Keystone XL pipeline until after the 2012 election? This means going for at least two more years without 500,000 bbls/day of oil from Canada and deferring 20,000 high paying jobs.
With quarterly earnings reports come quarterly conference calls--most of which are transcribed and made available to the public. (See, www.seekingalpha.com ) In these calls and the q&a that follow, companies explain what they have done and what they expect in the future. In the parlance, they give "guidance" to anyone who cares to listen/read. This week two of my favorite Dutch insurance/financial companies, ING and Aegon (in the US known as Transamerica) reported. I was heavily invested in their investment grade exchange traded debt before the 2010 European sovereign debt crisis and have been looking to reinvest if and when I was comfortable that each had reduced its exposure to the PIIGS. This week during its conference call, each explained how it had off loaded PIIGS exposure--and soon thereafter I bought IDG, AEF and AEV. These securities and others issued by ING and Aegon have been sullied by the broad brush used to paint all European financial institutions as irresponsible. I do not believe it is warranted with these two, whose investment grade hybrid debt is cheap now and thus paying very high interest. Unlike Mr. Powers, I like the Dutch. (For a detailed explanation of how I mine for investments see the July 9, 2011 edition of Risk/Reward, Vol 75, located at www.riskrewardblog.blogspot.com )
In closing, I hope that I am on the "edge of glory", and that my love affair with high yielders does not devolve into another Lady Gaga lyric---"A Bad Romance".
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I'm on the edge of glory/And I'm hanging on a moment of truth
I'm on the edge of glory/And I'm hanging on a moment with you."---lyrics "Edge of Glory" by Lady Gaga
"Three coins in a fountain/Each coin seeking happiness,,,
There they lie in the fountain/Somewhere in the heart of Rome"--lyrics "Three Coins in A Fountain" as sung by Frank Sinatra
"Don't cry for me Argentina/The truth is I never left you
All through my wild days/My mad existence
I kept my promise/Don't keep your distance"--lyrics 'Don't Cry for Me Argentina" from "Evita"
"There are only two things I hate in the world: people who are intolerant of other people's culture and the Dutch"---quote from "Austin Powers in Goldmember"
I find myself once again perched on the fulcrum of the risk/reward see-saw: so many tantalizing securities are available, priced at levels yielding 8 even 9% in dividends/interest. But, do these low prices indicate that we are "on the edge of glory" or the edge of an abyss? Should I use down days such as Wednesday to buy more or use upticks such as Thursday and Friday to exit with a modest profit? On the one hand, I am heartened by the new "floor" of 11,700 on the Dow which held during Wednesday's 389 point fall. I even harbor some belief that the world's leaders now understand the cataclysmic consequence of failing to deal with sovereign debt---a belief that I did not have when I exited the market in late July. Yet, I remain chary: painfully aware of Europe's now chronic inability to resolve that crisis (this week of course centered on Italy). We are all "hanging on a moment"---moment to moment. I have decided to invest up to 25%, with 75% still in cash. However, I am prepared to exit in a flash if the floor does not hold.
Speaking of Italy, is the only answer to its mountainous debt for every man, woman and child in the world to throw three Krugerrands into Trevi fountain? I doubt that the Chinese will. No, the only answer is for the European Central Bank (ECB) to print Euros sufficient to buy and hold a huge percentage of the debt of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) in return for a prohibition against any additional borrowing and a reduction in their entitlement lifestyle. Germany will not like this European version of quantitative easing---as it continues to insist that private bondholders share in the pain by taking huge writeoffs. But frankly, since so many major European banks have relied on these bonds as the bases for their core capital--a writeoff sufficient to satisfy the Germans would sink those banks and would freeze the entire credit market worldwide. Even now international banks are balking at lending to Eurozone banks, fearing their "counterparty" is no longer credit worthy---and interbank lending is literally what makes world commerce possible. The sooner the ECB (read, Germany) recognizes the need for massive intervention, the sooner the healing can begin.
On a more positive front, there was a flood of good quarterly earnings reported this week . Moreover, on Tuesday, I awoke to news of a huge oil discovery by YPFRepsol (YPF), the former Argentine national oil company--a discovery that increased its reserves by at least 50%! I had been looking at YPF because of its huge dividend (11%) occasioned by a precipitous drop in share price (remember high yield means low share price) following an announcement by the Argentine government that henceforth all overseas profits must be repatriated to Argentina before being distributed as dividends. This will be a pain in the arse, but should not interfere with the dividend. This week's discovery merely reaffirmed my desire to buy--and I did. This is more speculative than my usual investment--but what a potential return! I simply could not "keep my distance". I hope no one "cries for me"as a result of this gamble. P.S. Don't get me started on American oil policy---did you see the cowardly decison to postpone the building of the Keystone XL pipeline until after the 2012 election? This means going for at least two more years without 500,000 bbls/day of oil from Canada and deferring 20,000 high paying jobs.
With quarterly earnings reports come quarterly conference calls--most of which are transcribed and made available to the public. (See, www.seekingalpha.com ) In these calls and the q&a that follow, companies explain what they have done and what they expect in the future. In the parlance, they give "guidance" to anyone who cares to listen/read. This week two of my favorite Dutch insurance/financial companies, ING and Aegon (in the US known as Transamerica) reported. I was heavily invested in their investment grade exchange traded debt before the 2010 European sovereign debt crisis and have been looking to reinvest if and when I was comfortable that each had reduced its exposure to the PIIGS. This week during its conference call, each explained how it had off loaded PIIGS exposure--and soon thereafter I bought IDG, AEF and AEV. These securities and others issued by ING and Aegon have been sullied by the broad brush used to paint all European financial institutions as irresponsible. I do not believe it is warranted with these two, whose investment grade hybrid debt is cheap now and thus paying very high interest. Unlike Mr. Powers, I like the Dutch. (For a detailed explanation of how I mine for investments see the July 9, 2011 edition of Risk/Reward, Vol 75, located at www.riskrewardblog.blogspot.com )
In closing, I hope that I am on the "edge of glory", and that my love affair with high yielders does not devolve into another Lady Gaga lyric---"A Bad Romance".
Saturday, November 5, 2011
November 5, 2011 A Tale of Two Aldous
Fw: Risk/Reward Vol. 91
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING . RELY ON NOTHING STATED HEREIN.
Limo Driver--"Would you like for me to take the Chiswick Roundabout through Hounslow and Stains?"
Aaron Green--"What is this, f*#king Middle Earth? Just take us to the airport, ok."-- Script from the movie "Get Him to the Greek"
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness..." "A Tale of Two Cities" by Charles Dickens
"Every ceiling, when reached, becomes a floor upon which one walks as a matter of course and prescriptive right." Aldous Huxley author of "Brave New World"
"Little darling, the smile is returning to the faces/Little Darling, it seems like years since it's been here
Here comes the sun, here comes the sun/And I say, it's all right"---lyrics from "Here Comes the Sun" by the Beatles.
In the movie "Get Him to the Greek", Aaron Green (Jonah Hill) is dispatched by his boss, the head of a talent agency, to escort Aldous Snow (Russell Brand), a reprobate, has-been rock star from his home in London to the Greek Theater in Los Angeles, the site of Snow's comeback concert. During the trip, Aaron is brought to the brink of ruin several times due to the irresponsibility of his charge. Sound familiar? How many times will the Eurozone escort Greece to the altar of financial salvation only to have it balk at contributing one euro into the collection plate?
The above notwithstanding, I am heartened by how the market reacted to this week's rollercoaster events. The Dow took a body blow on the news of a possible Greek referendum, falling more than 550 points on Monday and Tuesday. But it rebounded respectably as the week progressed. More importantly, note that its lowest point in the week (11,650) or "floor" was the "ceiling" of the trading range (10,700-11700) which dominated the market from early August through most of October and about which I have written extensively in the past. Have we entered a "Brave New" trading range where Q3's ceiling is Q4's floor? With the 50% writeoff (haircut) of Greek debt taken last week, maybe the specter of a Greek default just is not as scary as before. Whatever the reason, I was sufficiently comfortable that I did not bail---I actually added to some positions and opened others.
"A Tale of Two Telecoms" played out this week. On November 2, 2011, Frontier Communications (FTR), one of the three large legacy landline companies, reported disappointing earnings. As loyal readers know, I have been a fan of FTR because of its double digit dividend. But, this favorite continues to struggle to digest its acquisition of the mountain of assets it purchased from Verizon last year. In order to meet its outsized dividend, it had to distribute more than 70% of its free cash flow. This is an unhealthy percentage, and the market punished it. The next day, another landline company, CenturyLink (CTL) reported earnings and gave a bright picture of its integration of Qwest, its most recent acquisition. Its dividend payment only required 50% of free cash flow which portends a possible increase in dividend in the future and made even more secure the positions I hold in its exchange traded debt (CTQ and CTW). I love this company. The third landline leader Windstream (WIN) also reported this week and also disappointed Wall Street although not to the extent of FTR. I own WIN and plan to add some more on this dip. The dividends from these babies are just too good to resist.
Some of my hottest holdings are in the nitrogen based fertilizer market, TNH and UAN. Both distribute monster dividends, and their prospects for 2012 are outstanding in light of the anticipated record plantings of corn and the continued depressed price of natural gas, the main feedstock for this product (another economic benefit of hydrolic fracturing or fracking). Look for a new entry into this space in the coming weeks--Rentech Nitrogen Partners (RNP)
As loyal readers know (See Vol 89 available at www.riskrewardblogspot.com ), I am a huge fan of business development companies (BDC's) like Ares Capital in which I own both common stock (ARCC) and exchange traded debt (ARY). As discussed previously, BDC's are pools of money that provide capital to small to medium sized businesses, usually in the form of senior secured loans--the profitable and boring business in which commercial banks used to excel . They are of great interest to me because in order to keep their pass-through tax status they must distribute 90% of their earnings. One sunny spot in this space is Solar Capital (SLCR). Last week it announced earnings including a writedown of debt mandated by arcane accounting rules. This caused an immediate drop in the stock. My comfort level was restored when the CEO explained the situation on Cramer's Mad Money. I grabbed some on its way back up and plan on enjoying its double digit dividend for months to come.
So another yeah/boo Eurocentric week ends. I will continue to buy, to be cautious (but not timid), to be watchful and to be nimble.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING . RELY ON NOTHING STATED HEREIN.
Limo Driver--"Would you like for me to take the Chiswick Roundabout through Hounslow and Stains?"
Aaron Green--"What is this, f*#king Middle Earth? Just take us to the airport, ok."-- Script from the movie "Get Him to the Greek"
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness..." "A Tale of Two Cities" by Charles Dickens
"Every ceiling, when reached, becomes a floor upon which one walks as a matter of course and prescriptive right." Aldous Huxley author of "Brave New World"
"Little darling, the smile is returning to the faces/Little Darling, it seems like years since it's been here
Here comes the sun, here comes the sun/And I say, it's all right"---lyrics from "Here Comes the Sun" by the Beatles.
In the movie "Get Him to the Greek", Aaron Green (Jonah Hill) is dispatched by his boss, the head of a talent agency, to escort Aldous Snow (Russell Brand), a reprobate, has-been rock star from his home in London to the Greek Theater in Los Angeles, the site of Snow's comeback concert. During the trip, Aaron is brought to the brink of ruin several times due to the irresponsibility of his charge. Sound familiar? How many times will the Eurozone escort Greece to the altar of financial salvation only to have it balk at contributing one euro into the collection plate?
The above notwithstanding, I am heartened by how the market reacted to this week's rollercoaster events. The Dow took a body blow on the news of a possible Greek referendum, falling more than 550 points on Monday and Tuesday. But it rebounded respectably as the week progressed. More importantly, note that its lowest point in the week (11,650) or "floor" was the "ceiling" of the trading range (10,700-11700) which dominated the market from early August through most of October and about which I have written extensively in the past. Have we entered a "Brave New" trading range where Q3's ceiling is Q4's floor? With the 50% writeoff (haircut) of Greek debt taken last week, maybe the specter of a Greek default just is not as scary as before. Whatever the reason, I was sufficiently comfortable that I did not bail---I actually added to some positions and opened others.
"A Tale of Two Telecoms" played out this week. On November 2, 2011, Frontier Communications (FTR), one of the three large legacy landline companies, reported disappointing earnings. As loyal readers know, I have been a fan of FTR because of its double digit dividend. But, this favorite continues to struggle to digest its acquisition of the mountain of assets it purchased from Verizon last year. In order to meet its outsized dividend, it had to distribute more than 70% of its free cash flow. This is an unhealthy percentage, and the market punished it. The next day, another landline company, CenturyLink (CTL) reported earnings and gave a bright picture of its integration of Qwest, its most recent acquisition. Its dividend payment only required 50% of free cash flow which portends a possible increase in dividend in the future and made even more secure the positions I hold in its exchange traded debt (CTQ and CTW). I love this company. The third landline leader Windstream (WIN) also reported this week and also disappointed Wall Street although not to the extent of FTR. I own WIN and plan to add some more on this dip. The dividends from these babies are just too good to resist.
Some of my hottest holdings are in the nitrogen based fertilizer market, TNH and UAN. Both distribute monster dividends, and their prospects for 2012 are outstanding in light of the anticipated record plantings of corn and the continued depressed price of natural gas, the main feedstock for this product (another economic benefit of hydrolic fracturing or fracking). Look for a new entry into this space in the coming weeks--Rentech Nitrogen Partners (RNP)
As loyal readers know (See Vol 89 available at www.riskrewardblogspot.com ), I am a huge fan of business development companies (BDC's) like Ares Capital in which I own both common stock (ARCC) and exchange traded debt (ARY). As discussed previously, BDC's are pools of money that provide capital to small to medium sized businesses, usually in the form of senior secured loans--the profitable and boring business in which commercial banks used to excel . They are of great interest to me because in order to keep their pass-through tax status they must distribute 90% of their earnings. One sunny spot in this space is Solar Capital (SLCR). Last week it announced earnings including a writedown of debt mandated by arcane accounting rules. This caused an immediate drop in the stock. My comfort level was restored when the CEO explained the situation on Cramer's Mad Money. I grabbed some on its way back up and plan on enjoying its double digit dividend for months to come.
So another yeah/boo Eurocentric week ends. I will continue to buy, to be cautious (but not timid), to be watchful and to be nimble.
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