Risk/Reward Vol. 107
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Many times by the highway side, I tried to flag a ride/With bloodshot eyes and gritting teeth, I'd watch the cars roll by
In the empty air, my only guide, I traveled on alone/Been a long time comin' and I'll be a long time gone"---lyrics "Long Time Gone" by Bob Dylan
"Is it any wonder, heaven's racked with thunder/And all my dreams go under like fallin' rain
Execution Day"---lyrics "Execution Day" by Meat Loaf
"My mom, she gave me a nickel/She told me to buy a pickle
But, I didn't buy no pickle/I bought some bubble gum
Bazooka, zooka Bubble Gum"---lyrics "Bazooka Bubble Gum Song" by Bazooka Joe
"Tall and tan and young and lovely/The girl from Impanema goes walking
And when she passes, each one she passes goes--Ah"---lyrics "Girl from Ipanema" sung by (among others) Andy Williams
Every three months (or "quarterly" in stock market parlance), corporations with shares that trade on United States' stock markets are required to report their earnings. These reports are usually accompanied by conference calls held between the CEO's of the reporting companies (and perhaps other senior managment) and investment professionals wherein the executives discuss financial results and future plans in detail and wherein they give "guidance" on what they believe will happen in the future. Transcipts of these conference calls are readily available, (www.seekingalpha.com ), and each evening during earnings season, I peruse that day's transcipts, paying particular attention to comments relating to stocks I own. The exercise is not taxing; my eyes are not "bloodshot" nor are my "teeth gritting" from the effort. I recommend you try it. It provides a wonderful break from CSI, The Voice, American Idol, American Pickers or whatever other drivel you endure. As a yield hunter, I vigilantly look for comments impacting future dividend payments. To me, good managers are those that deliver what they "guide". Some execute, and unfortunately, some only deliver "empty air".
Allow me to illustrate. As my long time Readers know, I like telecom companies, especially those in the legacy land line segment, such as CenturyLink (CTL), Windstream (WIN) and until recently Frontier (FTR). Like tobacco companies, land line telecoms operate in a stable, slowly declining industry, characterized by low capital expenditures, steady cash flow and outsized dividends. During conference calls held last fall, the CEO's of CTL, WIN and FTR each reported acceptable financial performance and "guided" that their respective dividends were safe. Frontier's CEO went so far as to state: "We expect improvement in our dividend payout ratio" and then affirmed FTR's $0.75 per share dividend. In the weeks following that conference call, market commentators speculated vociferously that FTR's dividend would be cut, and the stock plummeted. Despite numerous opportunities to address the speculation about a dividend cut, Frontier's management remained silent, leaving this investor with the impression that the previous quarter's guidance ("improvement in our dividend payout ratio") was still accurate. At the February 16, 2012 quarterly conference call, FTR's CEO announced a reduction in the dividend--contrary to her previous guidance. My reaction was not a "long time comin'", I "executed" a sell order the next day---"is it any wonder?" Oh, and by the way, both CTL and WIN delivered on their previous guidance, and gave positive guidance for the future. This past week I added another WIN position.
Keep your eyes on Europe next Wednesday (Feb. 29), as the European Central Bank (ECB) launches phase two of its Long Term Refinancing Operation (LRTO), otherwise known as the Backdoor Bazooka (see Risk/Reward Vol. 98 at www.riskrewardblog.blogspot.com ). This is a continuation of the ECB's program to make three year, low interest rate loans available to Eurozone banks to insure their liquidity and to entice them to continue purchasing sovereign debt--in particular that of Spain and Italy. The LTRO (which at year end 2011 infused 489Billion Euros into Eurozone bank coffers) has been hailed as the single most significant factor in stabilizing the European debt "pickle". Let's hope phase 2 provides enough bubble gum to plug the dyke holding back the flood of Eurozone sovereign debt, and that the Eurozone continues to stabilize.
If Europe remains stable, if the Iranian situation does not boil over and if oil prices do not escalate much more, the economies of the world may actually experience some growth this year. Traditionally, an early indicator of economic growth is an uptick in the cost of commodities--particularly copper. Noting that many commodities are in backwardation (future prices are lower than current prices), Goldman Sachs this week recommended that its clients "overweight" (buy) commodities. There are many ways to achieve exposure to commodities. I like two closed end funds: CFD (which purchases commodities futures) and BCF (which invests in mining and mineral companies). One long time reader has gained exposure to commodites by investing in Brazilian companies that trade on the NYSE. There are more than 40 including Vale, CPL, ABV, EBR, etc. He reasons that since Brazil's economy is highly dependent on commodities, Brazilian stocks should do well generally when commodity prices rise. So far he has been right. Indeed, he has profited so much recently that he is contemplating a trip to Rio so he, too, can be ignored by the beautiful women of Ipanema. I likewise believe that emerging market investment provides exposure to commodities, so I own shares in the closed end fund INH, to which I added this week.
Twenty or so of the thirty seven trading days this year have ended to the upside. And as all Meat Loaf fans know, this is good
"'Cause two outta three ain't bad."
Saturday, February 25, 2012
Saturday, February 18, 2012
February 18, 2011 Rockin'
Risk/Reward Vol. 106
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"She's got a competition clutch with four on the floor/And she purrs like a kitten 'til the lake pipes roar
And if that ain't enough to make you flip your lid/There's one more thing, I got the pink slip, Daddy
She's my little deuce coupe/You don't know what I got"---lyrics from "Little Deuce Coupe" by The Beach Boys
"It crawled along the boulevard with two wheels on the grass/ That old Trans Am was dying hard but still had a lot of gas
The golden gate was wide open/The sun came shining through/Where once angels stood and cried/Everything was new."---lyrics from "Trans Am" by Neil Young
"Should 5 percent appear too small/Be thankful I don't take it all
'Cause I'm the taxman/Yeah, I'm the taxman"--- lyrics from "The Taxman" by The Beatles
"Go Greased Lightnin'/You're burnin up the quarter mile
Go Greased Lightnin'/Go Greased Lightnin'---lyrics "Greased Lightnin'" from "Grease"
"I want to live/I want to give
I've been a miner for a heart of gold"---lyrics "Heart of Gold" by Neil Young
Dear Readers, I sincerely hope that you have profited from the remarkable stock market drag race of 2012. The US economy is "purrin' like a kitten" and after "four (years) on the floor", the Dow Jones Index has its "lake pipes roarin'", closing on Friday near 13,000: the first time it has approached that "lid flippin'" number since 2008! Except for SCCO, I haven't "pink slipped" any of my purchases.
One of my big winners has been Aegon (AEG), a Dutch insurance company which derives most of its revenue and profit from its better known San Francisco based subsidiary, Transamerica Insurance. Man, has the "golden gate been wide open/and the sun come shining through" since I highlighted Aegon in Volume 99 of Risk/Reward on December 31, 2011. The common stock is up 33% since that date, and the preferred (AEF) has achieved double digit appreciation while carrying an 8+% dividend. On Friday, Aegon announced that it will reinstitute a common dividend (last paid in 2009) a fact which caused the stock to spike and which will give even more protection to the preferred yield. (Remember, preferred dividends must be paid before common dividends can be.) Indeed, the entire financial sector (which I also discussed in Vol 99) has done spectacularly. My several, high yielding preferred stock positions have rocked. That said, I believe some high yielders like NWpC, IDG and DUA "still have a lot of gas" and thus more room to appreciate.
One reader asked for my reaction to The Taxman's--Yeah, the Taxman's (a/k/a President Obama) budget proposal to raise the tax on dividends to one's marginal rate--which at its highest is 39.6%. This is just another battle in the Class War--but one that will not get much of a rise or much of a tax raise either. Dividends are already taxed at 50%: 35% at the corporate level before distribution and 15% once received by the shareholder. The Taxman's proposal raises the rate as high as 75%: 35% at the corporate level and 39.6% at the shareholder level. Why has there not been more protest? First, understand that 70% of all dividend paying stock is owned by entities that do not pay taxes at all (e.g. pension funds, 401k's etc.), and these entities don't care a whit about the tax rate at the shareholder level. Second, many corporations do not like to pay dividends (e.g. Apple), preferring to reinvest that cash at the corporate level or to embark on stock buy backs which are taxed as capital gains. And third, the stock market has already anticipated The Taxman's move, a fact which is reflected in the plethora of "tax pass through" structures (they pay no tax at the corporate level) now available to high yield hunters (like me): to wit; real estate investment trusts, oil trusts, master limited partnerships and business development companies. Indeed, The Taxman's proposal, like many from his predecessors, seems aimed to harm only one person--me. But, fret not, Dear Readers. I am nimble. I will adjust, and I will prosper.
The markets rose this week despite the riots and the "burnin' up" in Grease--or is it Greece? My read is that in the several months since Greece began to "travolta", the rest of the Eurozone has repositioned through massive liquidity infusions (e.g. the "Backdoor Bazooka" a/k/a the LTRO discussed in Vol. 95 of Risk/Reward available at www.riskrewardblog.blogspot.com ) and Greek bond liquidations such that should Greece chose to default, it will not infect the rest of Europe-- in particular not Italy and not Spain. The very successful sale of Spanish bonds this week, while Greece burned, was indicative of this.
Obviously, one cannot expect the market to continue to move upward without some significant correction. Normal market moves aside, God only knows what natural disasters (a la the Japanese earthquake) or man made tragedies (Iran) may befall us. So what does one do to hedge? One way is to buy gold (GLD) which has recently been stuck in a trading range. Naysayers notwithstanding, man has been "mining for a heart of gold" forever. Consider the following: if you melted all of the gold mined from the beginning of time, it would occupy a cube that is only 66 feet by 66 feet by 66 feet; stated alternatively, a cube with a base that is 1/2 the size of a baseball infield and 6 stories high. Shockingly little, do you agree? Despite enormous mining efforts currently underway, the gold supply grew only 2800 tons in 2011 (4%) while demand reached 4067 tons. Moreover, 50% of that demand came from China and India---markets that are just now emerging from third world status with growing middle classes which crave gold. Oh, and despite poo pooing its inherent value, central banks purchased 439 tons of gold last year compared with 77 tons in 2010 and more than anytime since 1964, when many of the world's central banks were still on the gold standard. I am a buyer.
All told (and tolled), it was a great week, occurring in a great year (so far). Enjoy it--but remain vigilant and nimble. Don't be afraid to take a profit--no one ever lost a dime taking one. And so I close with a reiteration and another Neil Young song title: when you feel it, take a profit and don't
"Cough Up the Bucks
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"She's got a competition clutch with four on the floor/And she purrs like a kitten 'til the lake pipes roar
And if that ain't enough to make you flip your lid/There's one more thing, I got the pink slip, Daddy
She's my little deuce coupe/You don't know what I got"---lyrics from "Little Deuce Coupe" by The Beach Boys
"It crawled along the boulevard with two wheels on the grass/ That old Trans Am was dying hard but still had a lot of gas
The golden gate was wide open/The sun came shining through/Where once angels stood and cried/Everything was new."---lyrics from "Trans Am" by Neil Young
"Should 5 percent appear too small/Be thankful I don't take it all
'Cause I'm the taxman/Yeah, I'm the taxman"--- lyrics from "The Taxman" by The Beatles
"Go Greased Lightnin'/You're burnin up the quarter mile
Go Greased Lightnin'/Go Greased Lightnin'---lyrics "Greased Lightnin'" from "Grease"
"I want to live/I want to give
I've been a miner for a heart of gold"---lyrics "Heart of Gold" by Neil Young
Dear Readers, I sincerely hope that you have profited from the remarkable stock market drag race of 2012. The US economy is "purrin' like a kitten" and after "four (years) on the floor", the Dow Jones Index has its "lake pipes roarin'", closing on Friday near 13,000: the first time it has approached that "lid flippin'" number since 2008! Except for SCCO, I haven't "pink slipped" any of my purchases.
One of my big winners has been Aegon (AEG), a Dutch insurance company which derives most of its revenue and profit from its better known San Francisco based subsidiary, Transamerica Insurance. Man, has the "golden gate been wide open/and the sun come shining through" since I highlighted Aegon in Volume 99 of Risk/Reward on December 31, 2011. The common stock is up 33% since that date, and the preferred (AEF) has achieved double digit appreciation while carrying an 8+% dividend. On Friday, Aegon announced that it will reinstitute a common dividend (last paid in 2009) a fact which caused the stock to spike and which will give even more protection to the preferred yield. (Remember, preferred dividends must be paid before common dividends can be.) Indeed, the entire financial sector (which I also discussed in Vol 99) has done spectacularly. My several, high yielding preferred stock positions have rocked. That said, I believe some high yielders like NWpC, IDG and DUA "still have a lot of gas" and thus more room to appreciate.
One reader asked for my reaction to The Taxman's--Yeah, the Taxman's (a/k/a President Obama) budget proposal to raise the tax on dividends to one's marginal rate--which at its highest is 39.6%. This is just another battle in the Class War--but one that will not get much of a rise or much of a tax raise either. Dividends are already taxed at 50%: 35% at the corporate level before distribution and 15% once received by the shareholder. The Taxman's proposal raises the rate as high as 75%: 35% at the corporate level and 39.6% at the shareholder level. Why has there not been more protest? First, understand that 70% of all dividend paying stock is owned by entities that do not pay taxes at all (e.g. pension funds, 401k's etc.), and these entities don't care a whit about the tax rate at the shareholder level. Second, many corporations do not like to pay dividends (e.g. Apple), preferring to reinvest that cash at the corporate level or to embark on stock buy backs which are taxed as capital gains. And third, the stock market has already anticipated The Taxman's move, a fact which is reflected in the plethora of "tax pass through" structures (they pay no tax at the corporate level) now available to high yield hunters (like me): to wit; real estate investment trusts, oil trusts, master limited partnerships and business development companies. Indeed, The Taxman's proposal, like many from his predecessors, seems aimed to harm only one person--me. But, fret not, Dear Readers. I am nimble. I will adjust, and I will prosper.
The markets rose this week despite the riots and the "burnin' up" in Grease--or is it Greece? My read is that in the several months since Greece began to "travolta", the rest of the Eurozone has repositioned through massive liquidity infusions (e.g. the "Backdoor Bazooka" a/k/a the LTRO discussed in Vol. 95 of Risk/Reward available at www.riskrewardblog.blogspot.com ) and Greek bond liquidations such that should Greece chose to default, it will not infect the rest of Europe-- in particular not Italy and not Spain. The very successful sale of Spanish bonds this week, while Greece burned, was indicative of this.
Obviously, one cannot expect the market to continue to move upward without some significant correction. Normal market moves aside, God only knows what natural disasters (a la the Japanese earthquake) or man made tragedies (Iran) may befall us. So what does one do to hedge? One way is to buy gold (GLD) which has recently been stuck in a trading range. Naysayers notwithstanding, man has been "mining for a heart of gold" forever. Consider the following: if you melted all of the gold mined from the beginning of time, it would occupy a cube that is only 66 feet by 66 feet by 66 feet; stated alternatively, a cube with a base that is 1/2 the size of a baseball infield and 6 stories high. Shockingly little, do you agree? Despite enormous mining efforts currently underway, the gold supply grew only 2800 tons in 2011 (4%) while demand reached 4067 tons. Moreover, 50% of that demand came from China and India---markets that are just now emerging from third world status with growing middle classes which crave gold. Oh, and despite poo pooing its inherent value, central banks purchased 439 tons of gold last year compared with 77 tons in 2010 and more than anytime since 1964, when many of the world's central banks were still on the gold standard. I am a buyer.
All told (and tolled), it was a great week, occurring in a great year (so far). Enjoy it--but remain vigilant and nimble. Don't be afraid to take a profit--no one ever lost a dime taking one. And so I close with a reiteration and another Neil Young song title: when you feel it, take a profit and don't
"Cough Up the Bucks
Saturday, February 11, 2012
February 11, 2012 Lunatic
Fw: Risk/Reward Vol. 105
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"There's a stranger in my bed/There's a pounding in my head
Glitter all over the room/Pink flamingos in the pool
I smell like a mini bar/DJ's passed out in the yard."---lyrics "Last Friday Night" by Katy Perry
"You may be right/I may be crazy"---lyrics "You May Be Right" by Billy Joel
"Oh, Sugar/ Honey, honey/You are my candy girl
And you got me wantin' you"---lyrics "Sugar, Sugar" by The Archies
Noah Cross: "You may think you know what you are dealing with, but, believe me you don't."
Jake Geddes: "That's what the District Attorney used to tell me in Chinatown."---lines from "Chinatown" starring Jack Nicholson
"Who likes short shorts/ We wear short shorts"--lyrics from "Short Shorts" by The Royal Teens
Holy Katy Perry! What hit the market on Friday? The Dow damage may not have been deep (-89pts) but it was widespread with only one of the Dow 30 ending in the green. The consensus reason was fresh concern over Greece. That may be--with some opportunistic profit taking for good measure. Whatever the cause--let it end. That said, I am still way ahead for the month and the year, so let's call Friday's activity "a hickey, not a bruise."
OK, Reader X, "you may be right, I may be crazy" for having so many positions in so many securities. And you are correct in observing that most professionals and pundits preach that one should hold only a handful of positions. But, what pray tell, do they put you in? ETF's? Mutual funds? Closed end funds? And what are those? Nothing more than an amalgamation of stocks including the good, the bad and the mediocre in which you hold an infinitesimal percentage. So, why not do as I have done and create a mini-fund of hand selected securities across a variety of sectors?
OK, say you in response, why not limit yourself to the best of breed as recommended by Jim Cramer? My reply is two letters--BP. In early 2010, by consensus, BP was the best oil company in the world with diversified holdings and a juicy dividend. Then, overnight came the Deepwater Horizon disaster which caused BP's stock to fall 50% in 60 days. I know because Lady Barbara and I rode it down much of the way. (This was one impetus for the adoption of my 8% loss limit.) We would have been better served had we split our oil holdings between BP, Chevron, Shell and Conoco, all excellent companies. It only takes one mistake to go from hero to zero---ask Wes Welker, or better yet, ask Giselle.
This week I continued to diversify my holdings. I wanted exposure to a host of commodities including sugar (although not honey or candy). After studying several alternatives, I opened a position in CFD, a Nuveen sponsored closed end fund which is run by Gresham Investment Management. The people at Gresham employ a disciplined approach to futures and forward contracts investing across a wide array of commodities from metals to fibers to foodstuffs. I spent a considerable amount of time studying the approach, and in the end I was convinced to invest because of the consistency of the return.
I also wanted exposure to emerging markets--especially the Chinese stock market which pays higher dividends than its US counterpart. This fact is appealing to a yield hunter such as me. But who am I to debate Noah Cross when it comes to Chinatown (or Brazil or India for that matter). Like poor Jake Geddes, I don't know what I am dealing with. So I purchased some shares in another closed end fund, IHD, with seemingly good diversification and an excellent dividend track record.
Over the past several months, I have maintained a dialogue with one loyal reader on the topic of when, if ever, the cost of the 30 year Treasury bond would start to fall. (Remember falling bond prices means higher interest rates or yields.) For the past few years, the Federal Reserve has consciously kept all interest rates low through quantitative easing (massive purchases of Treasury securities of all durations at inflated prices and thus depressed yields). Starting this past summer, the Fed has concentrated on keeping long term interest rates low through Operation Twist (massive purchases of Treasury bonds of 20 or more years duration). The purpose of these moves is to force investors out of the safe haven of government securities (because of those depressed yields) and into riskier, higher yielding investments in the private sector which in turn should spur overall economic and job growth. The downside, of course, is that if left unchecked, the expansion of the Fed's balance sheet (from printing the money necessary to purchase the Treasury bonds) will result in inflation. With the economy perking (albeit modestly) and with better (although not good) news on job growth, some pundits are speculating that Operation Twist will not be renewed when it expires in June. If that happens and if Europe stabilizes, one can expect a drop in the price of long term Treasury bonds (because the Fed won't be bidding them up) and a concomitant rise in the 30 year Treasury rates which have been languishing at an historically low 3% since October. I agree, and have decided to short 20+ year Treasury bonds by buying shares in a single inverse ETF called TBF. The bolder among us who prefer "Short Shorts" may want to try a double or triple short ETF when the time is right.
And so, my list of holdings continues to grow, although not so rapidly, since I am about 80% invested. And, I freely admit that I may be crazy, but only if you concede that in this market:
"It just may be a lunatic you're looking for".
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"There's a stranger in my bed/There's a pounding in my head
Glitter all over the room/Pink flamingos in the pool
I smell like a mini bar/DJ's passed out in the yard."---lyrics "Last Friday Night" by Katy Perry
"You may be right/I may be crazy"---lyrics "You May Be Right" by Billy Joel
"Oh, Sugar/ Honey, honey/You are my candy girl
And you got me wantin' you"---lyrics "Sugar, Sugar" by The Archies
Noah Cross: "You may think you know what you are dealing with, but, believe me you don't."
Jake Geddes: "That's what the District Attorney used to tell me in Chinatown."---lines from "Chinatown" starring Jack Nicholson
"Who likes short shorts/ We wear short shorts"--lyrics from "Short Shorts" by The Royal Teens
Holy Katy Perry! What hit the market on Friday? The Dow damage may not have been deep (-89pts) but it was widespread with only one of the Dow 30 ending in the green. The consensus reason was fresh concern over Greece. That may be--with some opportunistic profit taking for good measure. Whatever the cause--let it end. That said, I am still way ahead for the month and the year, so let's call Friday's activity "a hickey, not a bruise."
OK, Reader X, "you may be right, I may be crazy" for having so many positions in so many securities. And you are correct in observing that most professionals and pundits preach that one should hold only a handful of positions. But, what pray tell, do they put you in? ETF's? Mutual funds? Closed end funds? And what are those? Nothing more than an amalgamation of stocks including the good, the bad and the mediocre in which you hold an infinitesimal percentage. So, why not do as I have done and create a mini-fund of hand selected securities across a variety of sectors?
OK, say you in response, why not limit yourself to the best of breed as recommended by Jim Cramer? My reply is two letters--BP. In early 2010, by consensus, BP was the best oil company in the world with diversified holdings and a juicy dividend. Then, overnight came the Deepwater Horizon disaster which caused BP's stock to fall 50% in 60 days. I know because Lady Barbara and I rode it down much of the way. (This was one impetus for the adoption of my 8% loss limit.) We would have been better served had we split our oil holdings between BP, Chevron, Shell and Conoco, all excellent companies. It only takes one mistake to go from hero to zero---ask Wes Welker, or better yet, ask Giselle.
This week I continued to diversify my holdings. I wanted exposure to a host of commodities including sugar (although not honey or candy). After studying several alternatives, I opened a position in CFD, a Nuveen sponsored closed end fund which is run by Gresham Investment Management. The people at Gresham employ a disciplined approach to futures and forward contracts investing across a wide array of commodities from metals to fibers to foodstuffs. I spent a considerable amount of time studying the approach, and in the end I was convinced to invest because of the consistency of the return.
I also wanted exposure to emerging markets--especially the Chinese stock market which pays higher dividends than its US counterpart. This fact is appealing to a yield hunter such as me. But who am I to debate Noah Cross when it comes to Chinatown (or Brazil or India for that matter). Like poor Jake Geddes, I don't know what I am dealing with. So I purchased some shares in another closed end fund, IHD, with seemingly good diversification and an excellent dividend track record.
Over the past several months, I have maintained a dialogue with one loyal reader on the topic of when, if ever, the cost of the 30 year Treasury bond would start to fall. (Remember falling bond prices means higher interest rates or yields.) For the past few years, the Federal Reserve has consciously kept all interest rates low through quantitative easing (massive purchases of Treasury securities of all durations at inflated prices and thus depressed yields). Starting this past summer, the Fed has concentrated on keeping long term interest rates low through Operation Twist (massive purchases of Treasury bonds of 20 or more years duration). The purpose of these moves is to force investors out of the safe haven of government securities (because of those depressed yields) and into riskier, higher yielding investments in the private sector which in turn should spur overall economic and job growth. The downside, of course, is that if left unchecked, the expansion of the Fed's balance sheet (from printing the money necessary to purchase the Treasury bonds) will result in inflation. With the economy perking (albeit modestly) and with better (although not good) news on job growth, some pundits are speculating that Operation Twist will not be renewed when it expires in June. If that happens and if Europe stabilizes, one can expect a drop in the price of long term Treasury bonds (because the Fed won't be bidding them up) and a concomitant rise in the 30 year Treasury rates which have been languishing at an historically low 3% since October. I agree, and have decided to short 20+ year Treasury bonds by buying shares in a single inverse ETF called TBF. The bolder among us who prefer "Short Shorts" may want to try a double or triple short ETF when the time is right.
And so, my list of holdings continues to grow, although not so rapidly, since I am about 80% invested. And, I freely admit that I may be crazy, but only if you concede that in this market:
"It just may be a lunatic you're looking for".
Saturday, February 4, 2012
February 4, 2012 Well, Virginia
Risk/Reward Vol. 104
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You got a nice white dress and a party on your confirmation/You got a brand new soul, mmm, and a cross of gold
But Virginia, they didn't give you quite enough information"--lyrics "Only the Good Die Young" by Billy Joel
"Other guys may be rich and handsome/But Baby, I prefer you
You have quality that can't be surpassed/ And the love we have I know is going to last
That's why I prefer you"---lyrics "I Prefer You" sung by Etta James
"We in the time of our lives, baby/Turn the music up, Primetime
Yeah, Primetime, beat by Dion, our third eon
That's what the fu#* we on"---lyrics "Prime Time" by Jay-Z and Kanye West
"The best thing in life is free/But you can give it to the birds and the bees
I need some money/Need some money, now"---"I Need Money" sung by John Lee Hooker
Well, Virginia, did you put on "your nice white dress" and "party" this week when the S&P 500 experienced the "golden cross"? For the uninitiated, a golden cross occurs when the 50 day moving average moves above (crosses) the 200 day moving average---historically a "confirmation" of a bull market. I realize that it isn't quite as stunning as a "new soul", but the prospect of a "rich and handsome" return on one's investment is good news indeed.
And speaking of a "rich and handsome" return, how about the performance of the security type that "I Prefer": to wit; preferred stock. Google "WSJ preferred stock closing table", click on the first entry and gaze on a thing of beauty. Holy (late and great) Etta James! The penultimate column displays the current yield on each stock (note how perfectly many fit my desire for a 7% annual return), and the last column (in green and red) displays how much each has appreciated just since January 1, 2012. Stunning, is it not? The reason is simple. The preferred stock sector is dominated by the financial industry (banks and insurance companies), the stock of which has soared so far this year. It's no wonder that I am loving my positions in BCSD, BCSC, IDG, AEF, AVF, BACL, BACT, NWC, MSJ, JSM, JZK etc. You really don't have to be an early Facebook investor to make money in this market! To learn more about preferred stock investing, consult www.quantumonline.com .
In light of last week's pronouncement by Uncle Ben Bernanke, this week I continued my search for investments that should do well in a prolonged, low interest rate environment. In addition to the sectors discussed last week, take a look at entities that purchase mortgages that are NOT guaranteed by a Federal agency (unlike AGNC and NLY discussed last week). Four years into the mortgage crisis, the world is still awash in sub-"Prime(time)" paper, frankly, much of which is current and performing per its terms. With their own borrowing costs at all time lows and with last week's assurance that rates will remain low, non-agency mortgage REITs which buy these mortgages, such as Chimera, Apollo Residential Mortgage and Invesco, are beginning to perform well. I bought some Chimera (CIM) this week. This is a risky sector. Don't buy unless you have the swagger of a Jay-Z or a Kanye.
Another sector that should do well in a low interest rate environment is floating rate, senior loan funds. Allow me to explain. Growing businesses, large and small, constantly "need some money"--no different than John Lee Hooker Jr.'s need for heroin. Very few businesses have enough cash on hand at any given time to fund new equipment purchases, plant expansions, acquisitions, inventory builds, etc.. They meet these money needs through bank loans, secured by first or "senior" mortgages on their finished goods, equipment and accounts receivable. Typically, these senior loans are for a specific term (e.g. three years) and are subject to a floating rate of interest (e.g. 2% above the prime rate) which is reset periodically (e.g. monthly). In order to maintain their own liquidity, banks sell these loans to pools of money like pension funds, mutual funds and closed end funds, with the banks making a profit by servicing the loans. Individual investors can participate in these loans by buying shares in these various funds which trade on the stock market just like other businesses. I like these floating rate loan funds because they maintain a constant and rolling spread between the cost of money to the funds (low) and the interest rate charged on the loans (medium to high based on repayment risk). This week I bought shares of EFT and JFR, both well regarded by Morningstar.
With no bad news coming from China or Europe and with good corporate earnings and job reports at home propelling the Dow to its highest close since May, 2008, I am hopeful (assuming Israel doesn't bomb Iran) that market volatility stays low-- allowing my high yielders to perform. If this all holds, I will sigh with relief and sing my favorite Etta James refrain:
"At last..."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You got a nice white dress and a party on your confirmation/You got a brand new soul, mmm, and a cross of gold
But Virginia, they didn't give you quite enough information"--lyrics "Only the Good Die Young" by Billy Joel
"Other guys may be rich and handsome/But Baby, I prefer you
You have quality that can't be surpassed/ And the love we have I know is going to last
That's why I prefer you"---lyrics "I Prefer You" sung by Etta James
"We in the time of our lives, baby/Turn the music up, Primetime
Yeah, Primetime, beat by Dion, our third eon
That's what the fu#* we on"---lyrics "Prime Time" by Jay-Z and Kanye West
"The best thing in life is free/But you can give it to the birds and the bees
I need some money/Need some money, now"---"I Need Money" sung by John Lee Hooker
Well, Virginia, did you put on "your nice white dress" and "party" this week when the S&P 500 experienced the "golden cross"? For the uninitiated, a golden cross occurs when the 50 day moving average moves above (crosses) the 200 day moving average---historically a "confirmation" of a bull market. I realize that it isn't quite as stunning as a "new soul", but the prospect of a "rich and handsome" return on one's investment is good news indeed.
And speaking of a "rich and handsome" return, how about the performance of the security type that "I Prefer": to wit; preferred stock. Google "WSJ preferred stock closing table", click on the first entry and gaze on a thing of beauty. Holy (late and great) Etta James! The penultimate column displays the current yield on each stock (note how perfectly many fit my desire for a 7% annual return), and the last column (in green and red) displays how much each has appreciated just since January 1, 2012. Stunning, is it not? The reason is simple. The preferred stock sector is dominated by the financial industry (banks and insurance companies), the stock of which has soared so far this year. It's no wonder that I am loving my positions in BCSD, BCSC, IDG, AEF, AVF, BACL, BACT, NWC, MSJ, JSM, JZK etc. You really don't have to be an early Facebook investor to make money in this market! To learn more about preferred stock investing, consult www.quantumonline.com .
In light of last week's pronouncement by Uncle Ben Bernanke, this week I continued my search for investments that should do well in a prolonged, low interest rate environment. In addition to the sectors discussed last week, take a look at entities that purchase mortgages that are NOT guaranteed by a Federal agency (unlike AGNC and NLY discussed last week). Four years into the mortgage crisis, the world is still awash in sub-"Prime(time)" paper, frankly, much of which is current and performing per its terms. With their own borrowing costs at all time lows and with last week's assurance that rates will remain low, non-agency mortgage REITs which buy these mortgages, such as Chimera, Apollo Residential Mortgage and Invesco, are beginning to perform well. I bought some Chimera (CIM) this week. This is a risky sector. Don't buy unless you have the swagger of a Jay-Z or a Kanye.
Another sector that should do well in a low interest rate environment is floating rate, senior loan funds. Allow me to explain. Growing businesses, large and small, constantly "need some money"--no different than John Lee Hooker Jr.'s need for heroin. Very few businesses have enough cash on hand at any given time to fund new equipment purchases, plant expansions, acquisitions, inventory builds, etc.. They meet these money needs through bank loans, secured by first or "senior" mortgages on their finished goods, equipment and accounts receivable. Typically, these senior loans are for a specific term (e.g. three years) and are subject to a floating rate of interest (e.g. 2% above the prime rate) which is reset periodically (e.g. monthly). In order to maintain their own liquidity, banks sell these loans to pools of money like pension funds, mutual funds and closed end funds, with the banks making a profit by servicing the loans. Individual investors can participate in these loans by buying shares in these various funds which trade on the stock market just like other businesses. I like these floating rate loan funds because they maintain a constant and rolling spread between the cost of money to the funds (low) and the interest rate charged on the loans (medium to high based on repayment risk). This week I bought shares of EFT and JFR, both well regarded by Morningstar.
With no bad news coming from China or Europe and with good corporate earnings and job reports at home propelling the Dow to its highest close since May, 2008, I am hopeful (assuming Israel doesn't bomb Iran) that market volatility stays low-- allowing my high yielders to perform. If this all holds, I will sigh with relief and sing my favorite Etta James refrain:
"At last..."
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