Risk/Reward Vol. 133
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Turn around, every now and then I get a little bit nervous/That the best of all the years have gone by
Turn around Bright Eyes/Every now and then I fall apart."---lyrics from "Total Eclipse of the Sun" by Jim Steinman/Bonnie Tyler
"You think I'm your fool/Well you may just be right
Cause minute by minute by minute/ I keep holding on"---lyrics from "Minute by Minute" sung by the Doobie Brothers
"Let's get down to business/I don't got no time to play around
What is this, must be a circus in town/Let's shut down on these clowns"---lyrics from "Business" by Eminem
After six weeks of upward movement, the Dow Jones Industrial Average (DJIA) did a "turn around," ending the week down 118 points. Was this just a hot market catching its breath, something that happens "every now and then?" Or, should we be "a little bit nervous/That the best of all the years have gone by?" Will the market recover or will it "fall apart?" Let's take a look, Bright Eyes.
The week started well and by Tuesday mid morning the DJIA was coasting above its four year closing high. At first, for technical reasons, there was a pullback and then "minute by minute by minute" the bad news began to roll. Federal Reserve member, James Bullard, stated on CNBC that quantitative easing may not be so imminent. Then, the Congressional Budget Office revised its report on the impact of the Fiscal Cliff (expiration of the Bush tax cuts, sequestration of appropriations and end of extended unemployment benefits all scheduled to occur on January 1, 2013) concluding that absent legislative action the Cliff will result in a recession in 2013. HSBC reported that the slowdown in China was worse than had been reported. Iron ore, a bellwether of industrial output, fell to a four year low. All the while, uncertainty continued to reign in the still vacationing Eurozone. By the closing bell on Thursday, the DJIA stood at 13,057, some 269 points below its Tuesday mid day high. On Friday, a relief rally spurred by a letter from Chair Bernanke to Congress that Fed action is available if necessary added 100 points to the DJIA.
Through it all, even though "you may think me a fool (and you may just be right)", I "kept holding on". I continue to believe that recession remains the number one concern of world economic and political leaders and that eventually various forms of stimulus (quantitative easing and a resolution of the Fiscal Cliff by the US, sovereign bond purchases by the European Central Bank and infrastructure investment by China) will be instituted. We simply have not reached the requisite level of desperation yet. That said, I remain disciplined. When RIO approached my 8% loss limit, I sold it, unhesitatingly. And I will go to 100% cash if and when I conclude that any element of the above described stimulus is not forthcoming. We need all three major economies to act in order to avert a world wide recession.
In the meantime, I remain in search of yield. As reported earlier, one of my favorite high yield sectors is "business" development companies ("BDC's"). These are pools of money that finance the sale or restructuring of privately held, middle market companies through senior loans, mezzanine financing and equity investments. BDC's have been very active over the past few years as commercial banks have shied away from financing middle market transactions. The king of this sector is Ares Capital (ARCC) which just last week launched a secondary offering of its stock. These events are always good buying opportunities, but if you want to take advantage of them you "can't clown around". I didn't "play around" but "got down to business" and grabbed some shares at a very attractive price. I also loaded up on FGB, a closed end fund comprised of the shares of several high quality BDC's, the price of which became attractive after it went ex-dividend this week.
Also, for those in hunt of yield in the oil and gas exploration and development space, take a look at Vanguard Natural Resources (VNR), a smaller version of Linn Energy which like LINE employs a smart hedging strategy, but, even better than LINE, pays an 8+% annual dividend on a monthly basis.
I bought some AAPL stock on a pullback on Tuesday. By any measure, Apple is a very cheap stock even at my entry point of $657. I rode AAPL from $427 to $636 earlier this year. We will see what Friday's patent verdict and the upcoming debut of the I-phone 5 bring.
No doubt about it, this was an anxious week. And I am very mindful of Bonnie Tyler's advice about "Heartaches". Don't let them hit you "when it's too late"; don't let them "hit you when you're down". If I am wrong about the stimulus, I will exit. Such an exit will undoubtedly cause me heartache, but it will be assuaged by some profits, I assure you.
Saturday, August 25, 2012
Saturday, August 18, 2012
August 18, 2012 Leverage
Risk/Reward Vol. 132
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"All quiet on the Western Front, nobody saw/A youth asleep in the foreign soil, planted by the war
Feel the pulse of human blood pouring forth/See the stems of Europe bend under force."---lyrics from "All Quiet on the Western Front" sung by Elton John
"My interest level is dropping/My interest level is dropping
I've heard all I want to/I don't want to hear anymore."---lyrics from "No Compassion" by the Talking Heads
"Betty's been down in the iron mine/Bringing home energy
Yeah, I'm goin' steady with Iron Ore Betty/And she's goin' steady with me."---lyrics from "Iron Ore Betty" by John Prine
With all of the Eurozone and most of Wall Street on holiday for the month of August (note how low the volume has been recently), "all is quiet on the Western Front". The Dow Jones Industrial Average stayed within a confined range all week and ended up 68 points. As a holder of high yielding securities, I very much like the tranquility. Indeed, I would have the stock market stay frozen where it is, indefinitely, while I collect my 7+% in dividends and interest. But, no one will be "asleep in the foreign soil" come September. Necessarily, the "stems of Europe will bend under the force" of sovereign debt. How they bend will dictate my future course of action.
Although the downward progression of the yield on 10 year Treasury notes has halted, it still rests at near historic lows---below 2%. The result is that every yield priced off that benchmark, most notably corporate bonds, is likewise at or near historic lows. As of Friday, the average yield on a 10 year, A-rated corporate bond was 2.73%---not nearly enough to support this old boy should he choose to retire. I need 6-7% to support my profligate ways. "I've heard all I want to" about the "interest level dropping". "I don't want to hear anymore". But what can one do?
As I have written previously, one must seek investments that take advantage of low interest rates---those that use leverage.
My favorite leverage plays are closed end funds. As I have explained in earlier editions, closed end funds invest in the securities of other companies much like their better known and better understood cousins mutual funds and exchange traded funds. Like these other two, closed end funds invest in securities in a manner consistent with their published guidelines (e.g. some invest in oil companies, others in preferred stocks, still others in corporate bonds, etc. ). What distinguishes closed end funds is that they do not redeem shares. One's ability to buy into or sell out of a closed end fund is wholly dependent on other shareholders' willingness to buy or sell shares. Thus, a key factor for me in choosing a closed end fund is the volume of trades per day or liquidity. Thankfully, most are sufficiently liquid that I can enter or exit on a heartbeat--just like any other stock. Another very important distinction between closed end funds and their cousins is that closed end funds can incur debt: that is, borrow money to buy stocks. Thus in times of low interest rates (like now), closed end funds can use leverage (here, the difference between the cost of borrowing and the return on the stock purchased) to enhance shareholder returns. I have used them to good advantage in achieving diversity and steady returns in preferred stocks (JPC), senior debt (JFR), real estate (RQI), commodity futures (CFD) and corporate debt (BPP). If you are interested, learn more at www.cefconnect.com .
Another way to achieve a decent return is to buy stocks that are currently out of favor. And nothing is more out of favor than "iron mining". As reported a few weeks ago, I bought Cliffs Natural Resources (CLF) after its disappointing quarterly report. It has rebounded somewhat, but more importantly it is paying me a "goin' steady" 6+% dividend while I wait for "Iron Ore Betty" (read; steel production) to rebound. In the same vein (no pun intended), this week I bought BHP Billiton (BHP), the world's largest iron miner, due to its excellent cash flow and its announced dedication to maintaining (and someday growing) its dividend (currently paying at 3.2%). Also out of favor are commercial mortgages. Commercial mortgages under various names ( cmbs, cre, cdo, etc.) were demonized in the wake of the 2008 real estate downturn when their holders (primarily banks) were required to "mark them to market" (write them down). Billions of dollars of these are coming due this year, and banks are looking to other institutions such as mortgage reits to take them out via refinancing. If properly underwritten, these securities can provide an excellent return. I like the preferred stock of Winthrop Realty Trust (WTR) and NorthStar Realty (NRFpA and NRFpB) in this space.
I close with a bit of trivia. Between 1979 and 1989, Jerry Harrison of the Talking Heads was our neighbor in Shorewood, WI. I only hope that the lyrics from their hit "Once in a Lifetime" do not prove prophetic in regard my current investing gambit.
"Into the blue again, after the money is gone.
Same as it ever was, same as it ever was".
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"All quiet on the Western Front, nobody saw/A youth asleep in the foreign soil, planted by the war
Feel the pulse of human blood pouring forth/See the stems of Europe bend under force."---lyrics from "All Quiet on the Western Front" sung by Elton John
"My interest level is dropping/My interest level is dropping
I've heard all I want to/I don't want to hear anymore."---lyrics from "No Compassion" by the Talking Heads
"Betty's been down in the iron mine/Bringing home energy
Yeah, I'm goin' steady with Iron Ore Betty/And she's goin' steady with me."---lyrics from "Iron Ore Betty" by John Prine
With all of the Eurozone and most of Wall Street on holiday for the month of August (note how low the volume has been recently), "all is quiet on the Western Front". The Dow Jones Industrial Average stayed within a confined range all week and ended up 68 points. As a holder of high yielding securities, I very much like the tranquility. Indeed, I would have the stock market stay frozen where it is, indefinitely, while I collect my 7+% in dividends and interest. But, no one will be "asleep in the foreign soil" come September. Necessarily, the "stems of Europe will bend under the force" of sovereign debt. How they bend will dictate my future course of action.
Although the downward progression of the yield on 10 year Treasury notes has halted, it still rests at near historic lows---below 2%. The result is that every yield priced off that benchmark, most notably corporate bonds, is likewise at or near historic lows. As of Friday, the average yield on a 10 year, A-rated corporate bond was 2.73%---not nearly enough to support this old boy should he choose to retire. I need 6-7% to support my profligate ways. "I've heard all I want to" about the "interest level dropping". "I don't want to hear anymore". But what can one do?
As I have written previously, one must seek investments that take advantage of low interest rates---those that use leverage.
My favorite leverage plays are closed end funds. As I have explained in earlier editions, closed end funds invest in the securities of other companies much like their better known and better understood cousins mutual funds and exchange traded funds. Like these other two, closed end funds invest in securities in a manner consistent with their published guidelines (e.g. some invest in oil companies, others in preferred stocks, still others in corporate bonds, etc. ). What distinguishes closed end funds is that they do not redeem shares. One's ability to buy into or sell out of a closed end fund is wholly dependent on other shareholders' willingness to buy or sell shares. Thus, a key factor for me in choosing a closed end fund is the volume of trades per day or liquidity. Thankfully, most are sufficiently liquid that I can enter or exit on a heartbeat--just like any other stock. Another very important distinction between closed end funds and their cousins is that closed end funds can incur debt: that is, borrow money to buy stocks. Thus in times of low interest rates (like now), closed end funds can use leverage (here, the difference between the cost of borrowing and the return on the stock purchased) to enhance shareholder returns. I have used them to good advantage in achieving diversity and steady returns in preferred stocks (JPC), senior debt (JFR), real estate (RQI), commodity futures (CFD) and corporate debt (BPP). If you are interested, learn more at www.cefconnect.com .
Another way to achieve a decent return is to buy stocks that are currently out of favor. And nothing is more out of favor than "iron mining". As reported a few weeks ago, I bought Cliffs Natural Resources (CLF) after its disappointing quarterly report. It has rebounded somewhat, but more importantly it is paying me a "goin' steady" 6+% dividend while I wait for "Iron Ore Betty" (read; steel production) to rebound. In the same vein (no pun intended), this week I bought BHP Billiton (BHP), the world's largest iron miner, due to its excellent cash flow and its announced dedication to maintaining (and someday growing) its dividend (currently paying at 3.2%). Also out of favor are commercial mortgages. Commercial mortgages under various names ( cmbs, cre, cdo, etc.) were demonized in the wake of the 2008 real estate downturn when their holders (primarily banks) were required to "mark them to market" (write them down). Billions of dollars of these are coming due this year, and banks are looking to other institutions such as mortgage reits to take them out via refinancing. If properly underwritten, these securities can provide an excellent return. I like the preferred stock of Winthrop Realty Trust (WTR) and NorthStar Realty (NRFpA and NRFpB) in this space.
I close with a bit of trivia. Between 1979 and 1989, Jerry Harrison of the Talking Heads was our neighbor in Shorewood, WI. I only hope that the lyrics from their hit "Once in a Lifetime" do not prove prophetic in regard my current investing gambit.
"Into the blue again, after the money is gone.
Same as it ever was, same as it ever was".
Saturday, August 11, 2012
August 11, 2012 Before and After
Risk/Reward Vol. 131
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"The sun's gonna shine in my backdoor someday
Just you wait and see, just you wait and see."---lyrics from "Wait and See" by Canned Heat
"His future's bright, my future's dim/And all the dreams we shared you share with him
See the difference between old and new/Before and after losing you."---lyrics from "Before and After" by Chad and Jeremy
"Bad news is come to town/He's walkin' three feet off the ground
He's ordering another round."---lyrics from "Bad News" by Neil Young
With no pronouncements from the world's central banks expected or received this week, the stock market putzed along "waiting." It seems all are hoping "to see" some "sunshine in the backdoor someday"---sunshine in the form of further stimulus from the US, China and the Eurozone. Market stability reigned with the Dow closing at 13208, up 112 points for the week. The S&P closed above the magical 1400 level. Refreshingly, stock fundamentals (not exogenous events) dictated price gains and losses.
As I discussed last week, I like to buy dividend paying stocks soon "after" they report disappointing news. Optimally, I like buying after I read the transcript of the earnings conference call (which usually occurs simultaneously with the earnings report and can be found at www.SeekingAlpha.com). The more detailed information there affords me a level of confidence; provided, of course. that the reasons for the disappointment are explained to my satisfaction. I used this technique this week to buy more ETP and AGNC on post earnings dips (although I had to double down on AGNC the second day after the report in order to effect an immediately profitable trade). Sometimes, not often, I gamble. I buy stocks "before" earnings are reported on a hunch that the earnings will exceed expectations. I shouldn't, I know---but sometimes I just can't resist. I did so a few weeks ago, buying Frontier Communications (FTR) in advance of its earnings announcement. This produced a homerun as FTR blew away expectations. I have enjoyed a 22% appreciation in just two weeks (not counting a whopping 9+% dividend!). So, I decided to employ the same technique to add to my holdings in Windstream (WIN) one of FTR's competitors in the telephone landline space; all the while hoping that I would "share the same dream". OUCH! The stock fell like a rock on the day WIN reported disappointing earnings. "Dim"wit! If only I had listened to Chad and Jeremy--be a buyer (or a boyfriend for that matter) AFTER heartbreaking news, and your "future will be bright." I don't mind owning WIN with its 10+% dividend. I just wish I had bought after the earnings report and not before.
On Thursday, China reported that its factory production had dropped to a three year low, and on Friday China reported disappointing export numbers. Ironically (but predictably), this "bad news" was favorably received by the markets, spurring speculation that now China must surely "order another round" of stimulus, like the $600billion infrastructure improvement binge it initiated in response to the worldwide recession in 2008-2009. That exercise superheated China's economy, causing significant inflation (especially in real estate); so I don't expect stimulation at that level. But, I do expect some significant spending---and that is good news for commodity/mining, industrial and oil stocks.
So far, my thesis has worked. I have profited (WIN notwithstanding) from my belief that the world's major economies will do whatever is necessary to avert another recession. Obviously, other market participants concur. I remain chary, however. I am not like Canned Heat. I don't believe that we are living in a time or place "where the water tastes like wine" or where you "can jump in the water and stay drunk all the time." (from "Going Up The Country"). Someday, this stimulus induced market buzz will end, and I may have to exit---yet again.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"The sun's gonna shine in my backdoor someday
Just you wait and see, just you wait and see."---lyrics from "Wait and See" by Canned Heat
"His future's bright, my future's dim/And all the dreams we shared you share with him
See the difference between old and new/Before and after losing you."---lyrics from "Before and After" by Chad and Jeremy
"Bad news is come to town/He's walkin' three feet off the ground
He's ordering another round."---lyrics from "Bad News" by Neil Young
With no pronouncements from the world's central banks expected or received this week, the stock market putzed along "waiting." It seems all are hoping "to see" some "sunshine in the backdoor someday"---sunshine in the form of further stimulus from the US, China and the Eurozone. Market stability reigned with the Dow closing at 13208, up 112 points for the week. The S&P closed above the magical 1400 level. Refreshingly, stock fundamentals (not exogenous events) dictated price gains and losses.
As I discussed last week, I like to buy dividend paying stocks soon "after" they report disappointing news. Optimally, I like buying after I read the transcript of the earnings conference call (which usually occurs simultaneously with the earnings report and can be found at www.SeekingAlpha.com). The more detailed information there affords me a level of confidence; provided, of course. that the reasons for the disappointment are explained to my satisfaction. I used this technique this week to buy more ETP and AGNC on post earnings dips (although I had to double down on AGNC the second day after the report in order to effect an immediately profitable trade). Sometimes, not often, I gamble. I buy stocks "before" earnings are reported on a hunch that the earnings will exceed expectations. I shouldn't, I know---but sometimes I just can't resist. I did so a few weeks ago, buying Frontier Communications (FTR) in advance of its earnings announcement. This produced a homerun as FTR blew away expectations. I have enjoyed a 22% appreciation in just two weeks (not counting a whopping 9+% dividend!). So, I decided to employ the same technique to add to my holdings in Windstream (WIN) one of FTR's competitors in the telephone landline space; all the while hoping that I would "share the same dream". OUCH! The stock fell like a rock on the day WIN reported disappointing earnings. "Dim"wit! If only I had listened to Chad and Jeremy--be a buyer (or a boyfriend for that matter) AFTER heartbreaking news, and your "future will be bright." I don't mind owning WIN with its 10+% dividend. I just wish I had bought after the earnings report and not before.
On Thursday, China reported that its factory production had dropped to a three year low, and on Friday China reported disappointing export numbers. Ironically (but predictably), this "bad news" was favorably received by the markets, spurring speculation that now China must surely "order another round" of stimulus, like the $600billion infrastructure improvement binge it initiated in response to the worldwide recession in 2008-2009. That exercise superheated China's economy, causing significant inflation (especially in real estate); so I don't expect stimulation at that level. But, I do expect some significant spending---and that is good news for commodity/mining, industrial and oil stocks.
So far, my thesis has worked. I have profited (WIN notwithstanding) from my belief that the world's major economies will do whatever is necessary to avert another recession. Obviously, other market participants concur. I remain chary, however. I am not like Canned Heat. I don't believe that we are living in a time or place "where the water tastes like wine" or where you "can jump in the water and stay drunk all the time." (from "Going Up The Country"). Someday, this stimulus induced market buzz will end, and I may have to exit---yet again.
Saturday, August 4, 2012
August 4, 2012 Anticipation
Risk/Reward Vol. 130
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Anticipation, anticipation is makin' me late
Is keepin' me waitin'"---lyrics from "Anticipation" by Carly Simon
"I count the spiders on the wall/I count the cobwebs in the hall
I count the candles on the shelf/When I'm alone, I count myself"---lyrics from "The Counting Song" by the Count (Sesame Street)
"I've lived long enough to have learned/The closer you get to the fire the more you get burned
But that won't happen to us/Because it's always been a matter of trust."---lyrics from "A Matter of Trust" by Billy Joel
In light of recent pronouncements from both the Federal Reserve and the European Central Bank (ECB) (see last week's quotes), the world's stock markets were "anticipating" action when each of those central banks had meetings this week: quantitative easing (QE3) by the Fed and sovereign debt purchases by the ECB. Neither occurred, with both "keepin' us waitin'" until their meetings in September before we see any such movement, if then. The markets' reactions were not surprising with the Dow Jones Industrial Average dropping 32 points on Wednesday following the Fed meeting and 97 points on Thursday following the ECB meeting. What WAS surprising was how shallow the drops were and how quickly the markets recovered on Friday with the Dow gaining 217 points ostensibly on a modest jobs report. I submit that the rebound was due more to the belief that the world's largest economies (especially China) and their central banks will do everything in their power--be it stimulus spending or monetary easing-- to avert a recession. It is this belief that provides me the impetus to continue to invest in stocks.
As the earnings season winds down, it has become apparent that the U. S. economy is weakening--or is it? Although more than half of the reporting companies have missed expected revenues and profits, one must remember that accounting is not synonymous with "counting". Indeed, accounting is more an art than a science. Admittedly, Count, a spider is a spider, but is a spider egg a spider or work in process? Is an unused cobweb an asset or has it outlived its useful life and thus should it be written down (not counted)? Why only count the candles on the shelf---how about the ones you just ordered or have deferred ordering? Frankly, when others are reporting disappointing numbers, sometimes it makes sense for a management team to use the cover of a generally bad quarter to report all of the skeletons in the closet. Whatever the reason, I like when dividend paying companies "disappoint" because invariably the market overreacts thus providing the opportunity to buy what Cramer calls an "accidental high yielder". (Remember, the lower the stock price the higher the yield.) I bought the following high yielders on disappointing news this week: CLF, TOT, TAC, MCY, HBC, EXC.
One hot sector so far this year has been and continues to be real estate investment "trusts" (REITs), especially those that invest in mortgages and other forms of real estate financing. The availability of cheap money thanks to historic low interest rates and the demand for residential rental property has caused a flurry of acquisitions and refinancings. Literally every week there are several new stock issuances as REITs continuously raise capital to fund these activities. Indeed, some commentators are warning that the sector is so hot, one could "get burned". As a consequence, I like buying the preferred stock of these entities as opposed to their common stock. Both pay excellent dividends, but the preferred dividend must be paid in full before any common stock dividend is paid. These are good companies, and every one of their investors believes that disaster "won't happen to us." But, I like the downside protection afforded by a preferred position, nevertheless. This week I bought NRFpB, ARIpA and IVRpA.
As stated repeatedly over the past few weeks, my thesis is simple: if all of the world's major economies and central banks are willing to borrow and spend (read, stimulus), to employ monetary easing and to do whatever else is necessary to avert a recession, then growth, albeit temporary, will occur. "I've lived long enough to have learned" that the long term impact will be rampant inflation, but that could take months, even years to unfold. In the interim, I want to participate, via dividends and modest appreciation, for as long as it lasts. I am not a pollyanna, but as Billy Joel sings "...the good ole days weren't always good, and tomorrow ain't as bad as it seems."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Anticipation, anticipation is makin' me late
Is keepin' me waitin'"---lyrics from "Anticipation" by Carly Simon
"I count the spiders on the wall/I count the cobwebs in the hall
I count the candles on the shelf/When I'm alone, I count myself"---lyrics from "The Counting Song" by the Count (Sesame Street)
"I've lived long enough to have learned/The closer you get to the fire the more you get burned
But that won't happen to us/Because it's always been a matter of trust."---lyrics from "A Matter of Trust" by Billy Joel
In light of recent pronouncements from both the Federal Reserve and the European Central Bank (ECB) (see last week's quotes), the world's stock markets were "anticipating" action when each of those central banks had meetings this week: quantitative easing (QE3) by the Fed and sovereign debt purchases by the ECB. Neither occurred, with both "keepin' us waitin'" until their meetings in September before we see any such movement, if then. The markets' reactions were not surprising with the Dow Jones Industrial Average dropping 32 points on Wednesday following the Fed meeting and 97 points on Thursday following the ECB meeting. What WAS surprising was how shallow the drops were and how quickly the markets recovered on Friday with the Dow gaining 217 points ostensibly on a modest jobs report. I submit that the rebound was due more to the belief that the world's largest economies (especially China) and their central banks will do everything in their power--be it stimulus spending or monetary easing-- to avert a recession. It is this belief that provides me the impetus to continue to invest in stocks.
As the earnings season winds down, it has become apparent that the U. S. economy is weakening--or is it? Although more than half of the reporting companies have missed expected revenues and profits, one must remember that accounting is not synonymous with "counting". Indeed, accounting is more an art than a science. Admittedly, Count, a spider is a spider, but is a spider egg a spider or work in process? Is an unused cobweb an asset or has it outlived its useful life and thus should it be written down (not counted)? Why only count the candles on the shelf---how about the ones you just ordered or have deferred ordering? Frankly, when others are reporting disappointing numbers, sometimes it makes sense for a management team to use the cover of a generally bad quarter to report all of the skeletons in the closet. Whatever the reason, I like when dividend paying companies "disappoint" because invariably the market overreacts thus providing the opportunity to buy what Cramer calls an "accidental high yielder". (Remember, the lower the stock price the higher the yield.) I bought the following high yielders on disappointing news this week: CLF, TOT, TAC, MCY, HBC, EXC.
One hot sector so far this year has been and continues to be real estate investment "trusts" (REITs), especially those that invest in mortgages and other forms of real estate financing. The availability of cheap money thanks to historic low interest rates and the demand for residential rental property has caused a flurry of acquisitions and refinancings. Literally every week there are several new stock issuances as REITs continuously raise capital to fund these activities. Indeed, some commentators are warning that the sector is so hot, one could "get burned". As a consequence, I like buying the preferred stock of these entities as opposed to their common stock. Both pay excellent dividends, but the preferred dividend must be paid in full before any common stock dividend is paid. These are good companies, and every one of their investors believes that disaster "won't happen to us." But, I like the downside protection afforded by a preferred position, nevertheless. This week I bought NRFpB, ARIpA and IVRpA.
As stated repeatedly over the past few weeks, my thesis is simple: if all of the world's major economies and central banks are willing to borrow and spend (read, stimulus), to employ monetary easing and to do whatever else is necessary to avert a recession, then growth, albeit temporary, will occur. "I've lived long enough to have learned" that the long term impact will be rampant inflation, but that could take months, even years to unfold. In the interim, I want to participate, via dividends and modest appreciation, for as long as it lasts. I am not a pollyanna, but as Billy Joel sings "...the good ole days weren't always good, and tomorrow ain't as bad as it seems."
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