Risk/Reward Vol. 112
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Cause I'm hanging on every word you say
And even if you don't want to speak tonight, that's alright."---lyrics "Breathing" by Lifehouse
"He said-- Patches, I'm depending on you, son
To pull the family thru/My son, it's all left up to you"---lyrics "Patches" sung by Clarence Carter
"Fear tends to manifest itself much more quickly than greed. So, volatile markets tend to be on the
downside. In up markets, volatility tends to gradually decline."---Philip Roth
"Take it from me/It's a lesson to be learned
Even the good guys get burned/Take it from me
No strings attached/ Baby, you're the one for me"---"No Strings Attached" by N Sync
Receipt of this edition is proof that I did not win the lottery.
On Monday morning, Fed Chairman Ben Bernanke gave a speech wherein he warned that employment gains could not be sustained without economic growth which he feared could not be maintained without continuing or even expanding the current easy money policies of the Fed. "Hanging on every word", the stock market rose sharply, ending the day up 161 points. Like all stock market participants I was pleased--at least at first blush. But upon reflection, I wished that Uncle Ben would "not want to speak". News of more "easy money" means that the Fed will continue to overbid for Treasury securities and thus will continue to depress yields on Treasury securities (10 yr. at 2.15%, 30 yr. at 3.2%). This in turn will depress the yields on the securities priced off of Treasury securities such as bank c.d.'s, money market funds and investment grade corporate bonds. For anyone looking for a decent, safe return, the traditional refuge of these asset classes will remain unavailable for the foreseeable future.
That leaves the stock market (inclusive of mutual funds, etf's, reits, mlp's, preferred stock and exchange traded debt) as the only place where a decent return can be achieved, albeit with substantial risk. In effect, the stock market is the financial equivalent to "Patches". We are all "depending on it to pull the family thru/ It's all left up to you.". I don't like this fact. I would much prefer to park the lion's share of my money in Treasuries or c.d.'s ---but I can't afford returns of 1-2% , and I doubt that any of my readers can.
Speaking of the stock market, it ended the first quarter in record fashion, but the last few weeks have been--well, choppy. Even the rise on Monday did not result from "good" news, but rather, as noted above, from news that major asset classes will remain off-limits to those who want more than a paltry return. The market fell Tuesday through mid day Thursday on continued concerns over a slow down in China, a Eurozone recession and the price of oil. Frankly, fear, more than optimism (or greed) seems to have gripped the market recently, and as a consequence we should all expect more volatility.
So, what does an individual investor do? Well, I continue to prune positions that have more downside than upside potential (e.g. AT, Ally-pA, CQP, TBF and 1/2 of NLY) thereby raising cash. I take comfort in the preferred shares and exchange traded debt that I own. These securities are considerably less volatile than common stock, especially those that have the buffer of a hefty common dividend in front of them. (Remember, preferred shares and exchange traded debt are higher in the capital structure and thus MUST be paid before any common dividend is paid). For example, this week I bought below its redemption price (always important! ), the 8.5 % Series A preferred of Colony Financial (CLNYpA) which is a commercial mortgage real estate investment trust, the common stock of which pays an 8% dividend.. Moreover, since Colony was created after the 2008 financial crisis, it has the added benefit of having "no strings attached" to the overpricing of real estate assets of that era which "can burn good guys" even today.
But is that enough? Frankly, I sense that the smart money is planning an exit or at a minimum some substantial profit taking and significant re-allocation. I see choppy days ahead if the news from China and Europe is not more encouraging and if the price of oil/gasoline does not moderate. Thus, I am contemplating taking profits in some of my lower yielding financials ( e,g. AEG) and buying VXX, an exchange traded fund that gains when volatility measured by the VIX and VIX futures rises. The VIX (which is a rolling mix of 30 day options on the S & P 500 designed to reflect market volatility) has been remarkably calm this first quarter and sits at multi-year lows. My belief is that the fear of a Chinese slowdown, a Eurozone recession and a summer of high gas prices will translate into a rise in volatility. If so, VXX may be a place to be. If China does not ease its current monetary policy (a move expected Sunday evening), I may be a buyer.
If the news from China turns encouraging, I may swerve to the positive (and against the negative sentiment I currently feel) by buying commodities, especially copper. FCX is looking mighty attractive these days and carries a handsome 3.3% dividend. If China surprises to the upside, FCX could catapult upward.
In closing, I am cautiously opportunistic. As always, I remain flexible and nimble. I don't care to wake one day and realize N Sync's worst nightmare: that my first quarter profits are
GONE
Saturday, March 31, 2012
Saturday, March 24, 2012
March 24, 2011 Always and Forever
Risk/Reward Vol 111
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Leisure is the time for doing something useful. This leisure the diligent person will obtain, the lazy one never."--quote from Benjamin Franklin
"Stormy days we passed the time away/Sleepin' in some good warm place
Man came along and we gave him a little race/Was that a vigilante man?"--lyrics "Vigilante Man" by Woodie Guthrie
"Yes, I love technology/But not as much as you, you see
But I still love technology/Always and forever"--lyrics "Always and Forever" (The Wedding Song) by Kip Dynamite--Napoleon's brother
"What you gon' do with all that junk/All that junk inside your trunk?"--lyrics "My Humps" by the Black Eyed Peas
With the Dow Index experiencing its worst week of the year on news of an impending Eurozone recession, slowing growth in China and the ever increasing price of oil, one is left to ponder: Is there any asset worth owning that is safe? With the traditional safe haven of government securities either unsafe (municipals) or bearing too low of a yield (10yr. Treasuries paying 2.25%), the answer is decidedly NO. That said, the current state of flux presents great opportunities for profit for those that are diligent, vigilant and technologically adept. Allow me to elaborate.
Example 1--Diligence. Thursday evening while leisurely enjoying the American Idol results show, I reviewed my current holdings using a simple spread sheet available at www.seekingalpha.com and noticed that CHKR, PER and STD, three of my favorite oil and gas trusts, had fallen much more than the market in general. I accessed some recent stories available at SeekingAlpha and the current gossip available through Yahoo.Finance. I determined that the drop was the result of some profit taking, some repositoning into another oil play and general market malaise. I placed a pre market limit order through my on-line Scottrade account for more of each at a deep discount to the closing price. The next day, all three opened lower, but not low enough to meet my limit and then each jumped significantly. I did not prosper in the move, but I was well positioned. Yo, Ben, talk about "doing something useful" with leisure! The entire effort--from review through ordering (which I did the next morning before an early meeting)--took 5 minutes---literally. Diligence made easy by technology.
Example 2--Vigilance. Late last December, I bought the exchange traded debt of Sprint (JZK) below $18 on the news that Sprint's launch of the I-phone was helping it make a turnaround. I rode JZK up to nearly $23 at the close last Friday. While taking a break from a meeting Monday morning, I accessed my Scottrade account, noticed that JZK was falling precipitously, clicked on news stories, learned that a leading market analyst was questioning Spint's solvency, decided to sell, clicked the TRADE button and sold at above $21 (it fell much more throughout the day and week). I did all of this from my I-phone in less than 3 minutes. Vigilance made easy by technology.
Now I realize that I left the fringe many years ago and am now a full time resident of Lunatic-ville. But that doesn't mean you cannot learn a lesson or two from the insane--people like me and Kip, Napoleon Dynamite's brother. We both love technology--"always and forever". Even if you don't love technology, in today's world you need to embrace it just to get along--like embracing that aunt who had scratchy hair or smelled like cigarettes or wore too much perfume. Some things you just got to do. Get an I-phone and ask a six year old (or the E-Trade baby) how to download all the free apps you need to make life easy.
Despite pull backs endemic to the market in general, banks stocks continue to attract me. JPM is up nearly 10% since I bought it on March 13, 2012, and it carries a decent dividend. BAC's road to recovery will undoubtedly be rocky, but I see it as a big gainer over time.
With yields in many sectors continuning to fall, money has flooded into the "trunks" of junk bond exchange traded funds like JNK and HYG with the predictible result of lowering yields in this space. I like high yield bonds and senior loans but prefer to access them through closed end funds because of their use of leverage. Do your own research on these at www.cefconnect.com .
In closing, I urge you, again, to sharpen your technology skills--something the internet and the tools that access it (e.g. the I-phone) make easier each day. Remember what Kip's brother Napoleon Dynamite said:
"Girls only want boyfriends who have great skills--like nunchuku skills, bow hunting skills, and computer (hacking) skills."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Leisure is the time for doing something useful. This leisure the diligent person will obtain, the lazy one never."--quote from Benjamin Franklin
"Stormy days we passed the time away/Sleepin' in some good warm place
Man came along and we gave him a little race/Was that a vigilante man?"--lyrics "Vigilante Man" by Woodie Guthrie
"Yes, I love technology/But not as much as you, you see
But I still love technology/Always and forever"--lyrics "Always and Forever" (The Wedding Song) by Kip Dynamite--Napoleon's brother
"What you gon' do with all that junk/All that junk inside your trunk?"--lyrics "My Humps" by the Black Eyed Peas
With the Dow Index experiencing its worst week of the year on news of an impending Eurozone recession, slowing growth in China and the ever increasing price of oil, one is left to ponder: Is there any asset worth owning that is safe? With the traditional safe haven of government securities either unsafe (municipals) or bearing too low of a yield (10yr. Treasuries paying 2.25%), the answer is decidedly NO. That said, the current state of flux presents great opportunities for profit for those that are diligent, vigilant and technologically adept. Allow me to elaborate.
Example 1--Diligence. Thursday evening while leisurely enjoying the American Idol results show, I reviewed my current holdings using a simple spread sheet available at www.seekingalpha.com and noticed that CHKR, PER and STD, three of my favorite oil and gas trusts, had fallen much more than the market in general. I accessed some recent stories available at SeekingAlpha and the current gossip available through Yahoo.Finance. I determined that the drop was the result of some profit taking, some repositoning into another oil play and general market malaise. I placed a pre market limit order through my on-line Scottrade account for more of each at a deep discount to the closing price. The next day, all three opened lower, but not low enough to meet my limit and then each jumped significantly. I did not prosper in the move, but I was well positioned. Yo, Ben, talk about "doing something useful" with leisure! The entire effort--from review through ordering (which I did the next morning before an early meeting)--took 5 minutes---literally. Diligence made easy by technology.
Example 2--Vigilance. Late last December, I bought the exchange traded debt of Sprint (JZK) below $18 on the news that Sprint's launch of the I-phone was helping it make a turnaround. I rode JZK up to nearly $23 at the close last Friday. While taking a break from a meeting Monday morning, I accessed my Scottrade account, noticed that JZK was falling precipitously, clicked on news stories, learned that a leading market analyst was questioning Spint's solvency, decided to sell, clicked the TRADE button and sold at above $21 (it fell much more throughout the day and week). I did all of this from my I-phone in less than 3 minutes. Vigilance made easy by technology.
Now I realize that I left the fringe many years ago and am now a full time resident of Lunatic-ville. But that doesn't mean you cannot learn a lesson or two from the insane--people like me and Kip, Napoleon Dynamite's brother. We both love technology--"always and forever". Even if you don't love technology, in today's world you need to embrace it just to get along--like embracing that aunt who had scratchy hair or smelled like cigarettes or wore too much perfume. Some things you just got to do. Get an I-phone and ask a six year old (or the E-Trade baby) how to download all the free apps you need to make life easy.
Despite pull backs endemic to the market in general, banks stocks continue to attract me. JPM is up nearly 10% since I bought it on March 13, 2012, and it carries a decent dividend. BAC's road to recovery will undoubtedly be rocky, but I see it as a big gainer over time.
With yields in many sectors continuning to fall, money has flooded into the "trunks" of junk bond exchange traded funds like JNK and HYG with the predictible result of lowering yields in this space. I like high yield bonds and senior loans but prefer to access them through closed end funds because of their use of leverage. Do your own research on these at www.cefconnect.com .
In closing, I urge you, again, to sharpen your technology skills--something the internet and the tools that access it (e.g. the I-phone) make easier each day. Remember what Kip's brother Napoleon Dynamite said:
"Girls only want boyfriends who have great skills--like nunchuku skills, bow hunting skills, and computer (hacking) skills."
March 17, 2011 Know When To Hold 'Em---
Risk/Reward Vol. 110
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Life's a mess, don't stress/Test
I'm givin', but be thankful that you're livin'/Blessed"---lyrics "Holla If You Hear Me" by 2Pac
"I'm leaving you tomorrow/Seems to me girl/You know I've done all I can
You see I've begged, stole and borrowed/Gal, that's why I'm easy/I'm easy like Sunday morning"---lyrics "Easy" by Lionel Ritchie
"I'm sure I'll enjoy your company, apple pie a la mode
You be turning me on with your modesty, apple pie a la mode"--lyrics "Apple Pie A La Mode" by Destiny's Child
"You got to know when to hold 'em/ Know when to fold 'em
Know when to walk away/Know when to run"---lyrics "The Gambler" by Kenny Rogers
On Monday, the Dow closed up a modest 37 points. On my ride home, I listened to Larry Kudlow's interview of noted bank analyst, Dick Bove who described his take on the Federal Reserve's "stress test" of the nation's 19 largest banks, the results of which were to be made public on Thursday. Bove predicted that most would pass the test which was designed by regulators to simulate a significant financial "mess" similar to that experienced in 2008. He further prognosticated that several banks would be allowed to raise their dividends. Feeling "blessed" to have heard the interview, I opened a position in JP Morgan Chase (JPM), the best of the money center banks, first thing Tuesday morning. At around 3pm EST Tuesday, JPM announced that it had just been informed by the Fed that it had passed the test. It further stated that it was increasing its dividend 20% and launching a massive stock buy back. Holy 2Pac, holla if you hear me! JPM shot up 7% immediately and forced many of the 15 other banks that passed the stress test to make similar announcements. The Dow spiked, finishing up 227 points --led for the first time in a long while by the banking sector. More importantly, the Dow catapulted into what appears to be a new trading plateau above 13,000.
This great news followed an encouraging announcement made earlier in the day by the Federal Reserve's Open Market Committee that in the Fed's opinion the economy and employment were both growing at a moderate pace, and that in its opinion, the global financial crisis (read, Eurozone sovereign debt situation) was under control. Market gurus interpreted these statements to mean that the Fed would not embark on a further round of quantitative "easing" any time soon and would not renew Operation Twist (selling short term and buying longer term Treasury bonds as discussed in Vol. 85 at www.riskrewardblog.blogspot.com ). In other words, having "begged, stole and borrowed" and indiscriminately printed money to upbid US Treasury bonds (and thus keeping interest rates artificially and historically low), the Fed may be leaving the bond market. Assuming this is true, assuming the stock market remains strong and assuming that no exogenous event causes a flight to safety, it's "easy, easy like Sunday morning" to predict that Treasury bond prices will fall.
So what does all of this mean to the individual investor?
First, if the stock market is actually gaining confidence in banks, further investment in that sector is warranted. As loyal readers know, I am overweight this sector (and very happily so). Nevertheless I sold some foundering GLD and bought Bank of America (BAC). This huge institution is trading at 45% of book value. Healthy banks generally trade at or above 100% of book value. Thus, if BAC is getting healthier, there is a lot of room left to run despite its recent hefty gains.
Second, if the Fed does slow the pace of quantitative easing, it will be time to start shorting U S Treasury securities.. I opened a position in TBF in anticipation of this occurring. If Treasuries drop in price to pre-August, 2011 levels (when the threat of a US default reached a boiling point and the Greek debt crisis re-emerged), TBF should gain 25%.
Third, taking the Fed at its word that the Eurozone crisis is under control, I bought RBSpT, one of the preferred stock issues of the Royal Bank of Scotland which suspended dividend payments for a minimum period of 2 years back in April, 2010. The market has begun to believe that these dividend payments will recommence, and RBSpT is up 40% so far this year. By my calculations, it has another 20% to go if dividend payments are re-instituted (not counting the 10% yield).
Talk about A La Mode, how 'bout dat Apple! As discussed in Vol. 103 last January, "I sure enjoy this company", but I have not "been turned on" by how "modestly" the market has priced, or should I say underpriced, the stock. Well, in the past two weeks, the market has viewed AAPL more favorably, in part as a response to the persistent rumor that it will declare a dividend and distribute some of the $100billion in cash that it holds. Whatever the reason, it is all a la mode to me, with AAPL appreciating 37% since my re-entry on January 17, 2012.
Thanks to those of you who wrote me last week. I received some great feedback. One theme that resonated was a lament on the total absence of any guidance on when to sell. Amen! Whether "buy and hold" was ever an acceptable approach, it certainly has not been for me during my 35 years of investing. From this man's viewpoint, "you got to know when to hold 'em; know when to fold 'em; know when to walk away; know when to run". Accordingly, I will spend time on this subject in the future. In the interim, do yourself a favor-- sell something this week--be it a big winner or any loser or a stock that just doesn't feel right (like Chimera after it fired its auditor this week). It doesn't matter, just do it. And when you are done, do it again. The more you do it, the easier it is. As I have discussed with Lady Barbara for the past few years, selling wisely is as important as buying wisely.
"And she believes in me"
On this topic, you should as well..
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Life's a mess, don't stress/Test
I'm givin', but be thankful that you're livin'/Blessed"---lyrics "Holla If You Hear Me" by 2Pac
"I'm leaving you tomorrow/Seems to me girl/You know I've done all I can
You see I've begged, stole and borrowed/Gal, that's why I'm easy/I'm easy like Sunday morning"---lyrics "Easy" by Lionel Ritchie
"I'm sure I'll enjoy your company, apple pie a la mode
You be turning me on with your modesty, apple pie a la mode"--lyrics "Apple Pie A La Mode" by Destiny's Child
"You got to know when to hold 'em/ Know when to fold 'em
Know when to walk away/Know when to run"---lyrics "The Gambler" by Kenny Rogers
On Monday, the Dow closed up a modest 37 points. On my ride home, I listened to Larry Kudlow's interview of noted bank analyst, Dick Bove who described his take on the Federal Reserve's "stress test" of the nation's 19 largest banks, the results of which were to be made public on Thursday. Bove predicted that most would pass the test which was designed by regulators to simulate a significant financial "mess" similar to that experienced in 2008. He further prognosticated that several banks would be allowed to raise their dividends. Feeling "blessed" to have heard the interview, I opened a position in JP Morgan Chase (JPM), the best of the money center banks, first thing Tuesday morning. At around 3pm EST Tuesday, JPM announced that it had just been informed by the Fed that it had passed the test. It further stated that it was increasing its dividend 20% and launching a massive stock buy back. Holy 2Pac, holla if you hear me! JPM shot up 7% immediately and forced many of the 15 other banks that passed the stress test to make similar announcements. The Dow spiked, finishing up 227 points --led for the first time in a long while by the banking sector. More importantly, the Dow catapulted into what appears to be a new trading plateau above 13,000.
This great news followed an encouraging announcement made earlier in the day by the Federal Reserve's Open Market Committee that in the Fed's opinion the economy and employment were both growing at a moderate pace, and that in its opinion, the global financial crisis (read, Eurozone sovereign debt situation) was under control. Market gurus interpreted these statements to mean that the Fed would not embark on a further round of quantitative "easing" any time soon and would not renew Operation Twist (selling short term and buying longer term Treasury bonds as discussed in Vol. 85 at www.riskrewardblog.blogspot.com ). In other words, having "begged, stole and borrowed" and indiscriminately printed money to upbid US Treasury bonds (and thus keeping interest rates artificially and historically low), the Fed may be leaving the bond market. Assuming this is true, assuming the stock market remains strong and assuming that no exogenous event causes a flight to safety, it's "easy, easy like Sunday morning" to predict that Treasury bond prices will fall.
So what does all of this mean to the individual investor?
First, if the stock market is actually gaining confidence in banks, further investment in that sector is warranted. As loyal readers know, I am overweight this sector (and very happily so). Nevertheless I sold some foundering GLD and bought Bank of America (BAC). This huge institution is trading at 45% of book value. Healthy banks generally trade at or above 100% of book value. Thus, if BAC is getting healthier, there is a lot of room left to run despite its recent hefty gains.
Second, if the Fed does slow the pace of quantitative easing, it will be time to start shorting U S Treasury securities.. I opened a position in TBF in anticipation of this occurring. If Treasuries drop in price to pre-August, 2011 levels (when the threat of a US default reached a boiling point and the Greek debt crisis re-emerged), TBF should gain 25%.
Third, taking the Fed at its word that the Eurozone crisis is under control, I bought RBSpT, one of the preferred stock issues of the Royal Bank of Scotland which suspended dividend payments for a minimum period of 2 years back in April, 2010. The market has begun to believe that these dividend payments will recommence, and RBSpT is up 40% so far this year. By my calculations, it has another 20% to go if dividend payments are re-instituted (not counting the 10% yield).
Talk about A La Mode, how 'bout dat Apple! As discussed in Vol. 103 last January, "I sure enjoy this company", but I have not "been turned on" by how "modestly" the market has priced, or should I say underpriced, the stock. Well, in the past two weeks, the market has viewed AAPL more favorably, in part as a response to the persistent rumor that it will declare a dividend and distribute some of the $100billion in cash that it holds. Whatever the reason, it is all a la mode to me, with AAPL appreciating 37% since my re-entry on January 17, 2012.
Thanks to those of you who wrote me last week. I received some great feedback. One theme that resonated was a lament on the total absence of any guidance on when to sell. Amen! Whether "buy and hold" was ever an acceptable approach, it certainly has not been for me during my 35 years of investing. From this man's viewpoint, "you got to know when to hold 'em; know when to fold 'em; know when to walk away; know when to run". Accordingly, I will spend time on this subject in the future. In the interim, do yourself a favor-- sell something this week--be it a big winner or any loser or a stock that just doesn't feel right (like Chimera after it fired its auditor this week). It doesn't matter, just do it. And when you are done, do it again. The more you do it, the easier it is. As I have discussed with Lady Barbara for the past few years, selling wisely is as important as buying wisely.
"And she believes in me"
On this topic, you should as well..
Saturday, March 10, 2012
March 10, 2012 As Good As It Gets
Risk/Reward Vol. 109
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"And when I get excited/My little China girl says
Oh baby, just shut your mouth/She says ...sh"---lyrics "China Girl" by David Bowie
Melvin Udall (Jack Nicholson)--"You're a disgrace to depression!"---quote from the movie "As Good As It Gets"
"My thinking is derailed/I'm tied up to the tracks
The train of consequences/There ain't no turnin' back"---lyrics "Train of Consequences" by Megadeath
"Downtown people on the corner watching the people play
And while the people watch them play/The players watch the people
On a Wall Street kind of day"---lyrics "Wall Street Kind of Day" by the Four Seasons
As loyal readers know, I believe that American stock markets, absent exogenous events (e.g. an Israeli air strike or a tsunami), are driven, up or down, by three factors: the U.S. economy (read, corporate earnings and job growth); stability in the Eurozone; and the rate of growth in China. See Vols. 70 and 74 available at www.riskrewardblog.blogspot.com . One needs no further proof than what happened on Tuesday. Having "gotten excited" by last month's excellent quarterly earnings reports and in the wake of the European Central Bank's (ECB) stabilizing Long Term Refinanciing Operation (the LTRO discussed last week), the Dow Jones Industrial Average was flirting with the 13,000 level only to experience a "mouth shutting" two hundred point drop on the news that "China Girl" was revising its forecasted growth rate down from 8.5% to 7.5% and further news that Chinese leaders saw no immediate need for any stimulus. Talk about "saying---sh!" Some decent domestic job news on Thursday and Friday caused a rebound, but the Dow closed 55 points down for the week.
So how does an individual investor react to this development? Here is what I did. Since 60% of all iron ore is consumed by China, I sold my stake in the Mesabi Iron Trust (MSB). I also deferred any further investment in China's favorite commodity supplier--Brazil. On a broader scale, with Thursday's uptick, I sold most of my losing positions (thankfully only a handful)--even those that had never approached my 8% loss limit. Unlike Melvin Udall, I'm not talking "depression" or even a recessionary dip, but absent better news from China, yours truly believes that at its current level, the stock market is about "as good as it gets". Selling my losers allows me the luxury of excess cash to be used to buy if and when drops like those last Tuesday occur. P.S. Cramer advised the same this week.
We are living in a world of unintended "consequences". The Federal Reserve has kept its discount rate (the rate it lends money to banks) at record lows, and the ECB via the LTRO has literally flooded Eurozone banks with 1trillion Euros worth of 1% loans, both with the express purpose of incenting banks here and abroad to, in turn, make low interest rate loans to their industrial customers thereby encouraging investment and more importantly spurring job growth. Unfortunately, "that thinking has been derailed" because, at the same time, bank regulators here and abroad by virtue of increased capital requirements and stricter lending standards have "tied banks to the tracks" causing them to hoard cash and to reduce, not grow, their lending activity. And, as Megadeath predicted "there ain't no turnin' back." For example, commercial banks at the insistence of regulators who deem them too risky, are selling entire portfolios of real estate loans just as the real estate market, particularly the commercial space, is beginning to turn around.
But, fear not, dear Readers, where there is a demand for capital, the ever "watchful people of Wall Street will play". Wall Street knows how to raise money, and the good "players" know how to price (measure) risk. If banks won't lend to companies, Wall Street will borrow on their behalf in the public markets via bonds and exchange traded funds or create other pools of money in the form of investment trusts or development companies which in turn can lend to industry. Activity in these areas is currently at a fever pitch precisely because banks are not lending, with new offerings literally every day. The low yields on investment grade bonds and the clumsy manner in which they trade make them unappealing to me. I prefer high yield bonds to which I gain exposure in a liquid and diversified way via exchange traded funds such as JNK or HYG. As discussed in previous editions, I also gain exposure through senior loan, closed end funds like JFR. On the business development side, I like ARCC, SLRC and the closed end fund FGB. As for real estate loan exposure, on the residential side, I like investment trusts that purchase mortgages guaranteed by the federal agencies, Fannie Mae and Freddie Mac; trusts such as NLY and AGNC (currently priced attractively due to a secondary offering). In the commercial mortgage space, look at the preferred shares of commercial mortgage real estate investment trusts like RAIT and NorthStar Realty, both of which have decent yields and are protected by hefty common dividends.
In closing, I solicit some responses--responses of any kind to my postings. Honestly folks, sometimes I feel like Wall-E, toiling away in complete solitude. When I do get responses, I find them very helpful--not only with investing ideas but with guidance on how to make future postings more relevant. Recognizing that the Four Seasons suffer from dissociative identity disorder, I request that you eschew their advice that "Silence Is Golden" and that instead you follow their admonition to "Talk like a Man"--at least to talk like this man. I look forward to your comments.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"And when I get excited/My little China girl says
Oh baby, just shut your mouth/She says ...sh"---lyrics "China Girl" by David Bowie
Melvin Udall (Jack Nicholson)--"You're a disgrace to depression!"---quote from the movie "As Good As It Gets"
"My thinking is derailed/I'm tied up to the tracks
The train of consequences/There ain't no turnin' back"---lyrics "Train of Consequences" by Megadeath
"Downtown people on the corner watching the people play
And while the people watch them play/The players watch the people
On a Wall Street kind of day"---lyrics "Wall Street Kind of Day" by the Four Seasons
As loyal readers know, I believe that American stock markets, absent exogenous events (e.g. an Israeli air strike or a tsunami), are driven, up or down, by three factors: the U.S. economy (read, corporate earnings and job growth); stability in the Eurozone; and the rate of growth in China. See Vols. 70 and 74 available at www.riskrewardblog.blogspot.com . One needs no further proof than what happened on Tuesday. Having "gotten excited" by last month's excellent quarterly earnings reports and in the wake of the European Central Bank's (ECB) stabilizing Long Term Refinanciing Operation (the LTRO discussed last week), the Dow Jones Industrial Average was flirting with the 13,000 level only to experience a "mouth shutting" two hundred point drop on the news that "China Girl" was revising its forecasted growth rate down from 8.5% to 7.5% and further news that Chinese leaders saw no immediate need for any stimulus. Talk about "saying---sh!" Some decent domestic job news on Thursday and Friday caused a rebound, but the Dow closed 55 points down for the week.
So how does an individual investor react to this development? Here is what I did. Since 60% of all iron ore is consumed by China, I sold my stake in the Mesabi Iron Trust (MSB). I also deferred any further investment in China's favorite commodity supplier--Brazil. On a broader scale, with Thursday's uptick, I sold most of my losing positions (thankfully only a handful)--even those that had never approached my 8% loss limit. Unlike Melvin Udall, I'm not talking "depression" or even a recessionary dip, but absent better news from China, yours truly believes that at its current level, the stock market is about "as good as it gets". Selling my losers allows me the luxury of excess cash to be used to buy if and when drops like those last Tuesday occur. P.S. Cramer advised the same this week.
We are living in a world of unintended "consequences". The Federal Reserve has kept its discount rate (the rate it lends money to banks) at record lows, and the ECB via the LTRO has literally flooded Eurozone banks with 1trillion Euros worth of 1% loans, both with the express purpose of incenting banks here and abroad to, in turn, make low interest rate loans to their industrial customers thereby encouraging investment and more importantly spurring job growth. Unfortunately, "that thinking has been derailed" because, at the same time, bank regulators here and abroad by virtue of increased capital requirements and stricter lending standards have "tied banks to the tracks" causing them to hoard cash and to reduce, not grow, their lending activity. And, as Megadeath predicted "there ain't no turnin' back." For example, commercial banks at the insistence of regulators who deem them too risky, are selling entire portfolios of real estate loans just as the real estate market, particularly the commercial space, is beginning to turn around.
But, fear not, dear Readers, where there is a demand for capital, the ever "watchful people of Wall Street will play". Wall Street knows how to raise money, and the good "players" know how to price (measure) risk. If banks won't lend to companies, Wall Street will borrow on their behalf in the public markets via bonds and exchange traded funds or create other pools of money in the form of investment trusts or development companies which in turn can lend to industry. Activity in these areas is currently at a fever pitch precisely because banks are not lending, with new offerings literally every day. The low yields on investment grade bonds and the clumsy manner in which they trade make them unappealing to me. I prefer high yield bonds to which I gain exposure in a liquid and diversified way via exchange traded funds such as JNK or HYG. As discussed in previous editions, I also gain exposure through senior loan, closed end funds like JFR. On the business development side, I like ARCC, SLRC and the closed end fund FGB. As for real estate loan exposure, on the residential side, I like investment trusts that purchase mortgages guaranteed by the federal agencies, Fannie Mae and Freddie Mac; trusts such as NLY and AGNC (currently priced attractively due to a secondary offering). In the commercial mortgage space, look at the preferred shares of commercial mortgage real estate investment trusts like RAIT and NorthStar Realty, both of which have decent yields and are protected by hefty common dividends.
In closing, I solicit some responses--responses of any kind to my postings. Honestly folks, sometimes I feel like Wall-E, toiling away in complete solitude. When I do get responses, I find them very helpful--not only with investing ideas but with guidance on how to make future postings more relevant. Recognizing that the Four Seasons suffer from dissociative identity disorder, I request that you eschew their advice that "Silence Is Golden" and that instead you follow their admonition to "Talk like a Man"--at least to talk like this man. I look forward to your comments.
Saturday, March 3, 2012
March 3, 2011 Lessons From Ike
Risk/Reward Vol. 108
THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It's not money that is the root of all evil--it's the lack thereof."---quote from Reverend Ike
"Carry on my wayward son/There'll be peace when you are done."--lyrics "Carry On Wayward Son" by Kansas
"School's out for summer/School's out forever/School's been blown to pieces."--lyrics "School's Out" by Alice Cooper
"Why did he desert me/In my hour of need/I am truly am indeed/Alone again naturally"--lyrics "Alone Again (Naturally)" by Gilbert O'Sullivan
If you had any doubt previously, you know now that Mario Draghi, the president of the European Central Bank (ECB) (like his US counterpart Uncle Ben Bernanke) is from the Reverend Ike School of Economics. Talk about "avoiding evil", how about that second round of the Long Term Refinancing Operation (LTRO) which occurred last Wednesday (and which was discussed in last week's edition). Over 800 banks took advantage of 1% three year loans to borrow 529billion Euros ($713billion) from the ECB. That makes a total LTRO disbursement of 1trillion Euros ($1.3trillion) since mid December, 2011. With this massive infusion of liquidity, there now is "no lack of money" in Europe. To put it in perspective, in 2008-2009 the infamous TARP program infused what looks now like a paltry $432billion into US banks. Whether it is fiscally sound policy in the long run or merely a means to refinance Europe with inflated currency, the LTRO has been a godsend of Eurozone stability to US investors. If you doubt this fact, hearken back just three months ago by re-reading Vol. 96 posted on December 10, 2011 (www.riskrewardblog.blogspot.com ) when the DJIA was 10% lower than where it sits today.
The ECB's handout to these 800 "wayward sons" had its intended effect--quite immediately. The very next day, many of these banks used the new money to upbid the Spanish and Italian sovereign bond auctions which concomitantly sent their 10 year bond interest rates below 5%. (Remember, as discussed in Vol. 98 which is available at www.riskrewardblog.blogspot.com, 5% is a sustainable interest rate for these two at-risk economies.) The banks' decision to "carry (the bonds) on" their books makes sense. Buy a bond yielding 5% with money costing 1%, pledge it as collateral for the loan, and book 4% as profit. This is how the LTRO brought "peace" to the Eurozone "when it was done." And this is why my positions in Eurozone financial institutions like IDG and AEG are up 30% or more in two months.
Speaking of schools, I have done well in 2012 by investing in certain SLM (Sallie Mae) securities. As many of you know, Sallie Mae or the Student Loan Market Association was founded in 1972 as a government sponsored entity (like Freddie Mac or Fannie Mae) to originate, source and collect government guaranteed student loans. This virtually risk-free business model ended in 2010 when Congress withdrew SLM's guaranteed student loan origination franchise. The investing community thought this withdrawal would eventually cause the company's demise, but it has shown remarkable resilience. It cut overhead, and drawing upon its loan underwriting expertise, it launched several privately financed programs--all the while maintaining excellent cash flow from the run-off of its loan portfolio. I like two of its exchange traded debt issues: JSM which has appreciated 14% in 2012 and still pays nearly 7% in interest and SLMAP which has gone up 12.5% and still yields 7.7%. SLM is clearly not "out forever", not even "out for summer" and certainly not "blown to pieces".
With natural gas languishing at $2.46/mmBTU in the United States even after a substantial reduction in production (remember: in 2008 before fracking began in earnest, nat gas in the US traded as high as $12/mmBTU, much of it imported from Canada), anyone advocating investing in nat gas seemingly should be "deserted" and left "alone, naturally". But with the Iranian situation causing oil to spike; with President Obama hinting that he may support conversion of over the road vehicles to nat gas; with the news that many locally oriented fleets are converting to nat gas (80% of Waste Management's new truck purchases are to run on natural gas); with a run up in the stock of Westport Innovations (WPRT), the holder of many nat gas vehicle patents; with a planned nationwide build out of service stations underway by Clean Energies Fuel (CLNE); and with the certainty that this wonderfully mild winter in the US will not repeat, it is merely a matter of time before nat gas prices rise again. When that time arrives, I plan to invest in the convertible preferred stock of Chesapeake Energy (CHKpD).
For the present, I bought Cheniere Energy Partners (CQP) on the news this week that the world's largest money manager, BlackRock (with $3.65 TRILLION under management), invested $2billion into CQP's natural gas liquification facility at Sabine Pass, LA. With the glut of domestic nat gas, Cheniere is expanding its liquid natural gas (LNG) importing facility there (which was built pre-fracking) to add LNG exporting capacity. The math is elegantly simple: buy US domestic nat gas at $2-3/mmBTU, liquify it, ship it overseas and sell it for $16mmBTU in Japan or $13mmBTU in Europe (current prices). Even though CQP spiked on the news that a financial heavyweight like BlackRock was a believer in its vision and though the facility will not be operational until 2015, I pulled the trigger. All things remaining equal, I can afford to wait for a big pop because CQP pays a 7% dividend.
Although the market slipped ever so slightly this week, one has to be impressed by its relative stability in the face of a continuum of yeah/boo world news (Yikes! Iran). I am pleased with my moves this year, but much remains to be learned. This week's lesson comes from Draghi favorite Reverend Ike:
"The best thing you can do for the poor is not to be one of them.
THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"It's not money that is the root of all evil--it's the lack thereof."---quote from Reverend Ike
"Carry on my wayward son/There'll be peace when you are done."--lyrics "Carry On Wayward Son" by Kansas
"School's out for summer/School's out forever/School's been blown to pieces."--lyrics "School's Out" by Alice Cooper
"Why did he desert me/In my hour of need/I am truly am indeed/Alone again naturally"--lyrics "Alone Again (Naturally)" by Gilbert O'Sullivan
If you had any doubt previously, you know now that Mario Draghi, the president of the European Central Bank (ECB) (like his US counterpart Uncle Ben Bernanke) is from the Reverend Ike School of Economics. Talk about "avoiding evil", how about that second round of the Long Term Refinancing Operation (LTRO) which occurred last Wednesday (and which was discussed in last week's edition). Over 800 banks took advantage of 1% three year loans to borrow 529billion Euros ($713billion) from the ECB. That makes a total LTRO disbursement of 1trillion Euros ($1.3trillion) since mid December, 2011. With this massive infusion of liquidity, there now is "no lack of money" in Europe. To put it in perspective, in 2008-2009 the infamous TARP program infused what looks now like a paltry $432billion into US banks. Whether it is fiscally sound policy in the long run or merely a means to refinance Europe with inflated currency, the LTRO has been a godsend of Eurozone stability to US investors. If you doubt this fact, hearken back just three months ago by re-reading Vol. 96 posted on December 10, 2011 (www.riskrewardblog.blogspot.com ) when the DJIA was 10% lower than where it sits today.
The ECB's handout to these 800 "wayward sons" had its intended effect--quite immediately. The very next day, many of these banks used the new money to upbid the Spanish and Italian sovereign bond auctions which concomitantly sent their 10 year bond interest rates below 5%. (Remember, as discussed in Vol. 98 which is available at www.riskrewardblog.blogspot.com, 5% is a sustainable interest rate for these two at-risk economies.) The banks' decision to "carry (the bonds) on" their books makes sense. Buy a bond yielding 5% with money costing 1%, pledge it as collateral for the loan, and book 4% as profit. This is how the LTRO brought "peace" to the Eurozone "when it was done." And this is why my positions in Eurozone financial institutions like IDG and AEG are up 30% or more in two months.
Speaking of schools, I have done well in 2012 by investing in certain SLM (Sallie Mae) securities. As many of you know, Sallie Mae or the Student Loan Market Association was founded in 1972 as a government sponsored entity (like Freddie Mac or Fannie Mae) to originate, source and collect government guaranteed student loans. This virtually risk-free business model ended in 2010 when Congress withdrew SLM's guaranteed student loan origination franchise. The investing community thought this withdrawal would eventually cause the company's demise, but it has shown remarkable resilience. It cut overhead, and drawing upon its loan underwriting expertise, it launched several privately financed programs--all the while maintaining excellent cash flow from the run-off of its loan portfolio. I like two of its exchange traded debt issues: JSM which has appreciated 14% in 2012 and still pays nearly 7% in interest and SLMAP which has gone up 12.5% and still yields 7.7%. SLM is clearly not "out forever", not even "out for summer" and certainly not "blown to pieces".
With natural gas languishing at $2.46/mmBTU in the United States even after a substantial reduction in production (remember: in 2008 before fracking began in earnest, nat gas in the US traded as high as $12/mmBTU, much of it imported from Canada), anyone advocating investing in nat gas seemingly should be "deserted" and left "alone, naturally". But with the Iranian situation causing oil to spike; with President Obama hinting that he may support conversion of over the road vehicles to nat gas; with the news that many locally oriented fleets are converting to nat gas (80% of Waste Management's new truck purchases are to run on natural gas); with a run up in the stock of Westport Innovations (WPRT), the holder of many nat gas vehicle patents; with a planned nationwide build out of service stations underway by Clean Energies Fuel (CLNE); and with the certainty that this wonderfully mild winter in the US will not repeat, it is merely a matter of time before nat gas prices rise again. When that time arrives, I plan to invest in the convertible preferred stock of Chesapeake Energy (CHKpD).
For the present, I bought Cheniere Energy Partners (CQP) on the news this week that the world's largest money manager, BlackRock (with $3.65 TRILLION under management), invested $2billion into CQP's natural gas liquification facility at Sabine Pass, LA. With the glut of domestic nat gas, Cheniere is expanding its liquid natural gas (LNG) importing facility there (which was built pre-fracking) to add LNG exporting capacity. The math is elegantly simple: buy US domestic nat gas at $2-3/mmBTU, liquify it, ship it overseas and sell it for $16mmBTU in Japan or $13mmBTU in Europe (current prices). Even though CQP spiked on the news that a financial heavyweight like BlackRock was a believer in its vision and though the facility will not be operational until 2015, I pulled the trigger. All things remaining equal, I can afford to wait for a big pop because CQP pays a 7% dividend.
Although the market slipped ever so slightly this week, one has to be impressed by its relative stability in the face of a continuum of yeah/boo world news (Yikes! Iran). I am pleased with my moves this year, but much remains to be learned. This week's lesson comes from Draghi favorite Reverend Ike:
"The best thing you can do for the poor is not to be one of them.
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