Risk/Reward Vol. 163
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"If I were a rich man/All day long I'd biddy biddy bum
If I were a wealthy man."---lyrics from "Fiddler on the Roof" sung by Tevya
"Headline-breadline/Blow my mind
And now this deadline/Eviction--or pay rent."---lyrics from "Rent "from Rent the Musical
"Don't count me out/At the start of the bout
I'm just doing the secondary waltz."---lyrics from "Secondary Waltz" by Mark Knopfler
Happy Easter and Brilliant First Quarter!
If you, like Tevya, were from Russia and "you were a rich man", you would not want any of your money deposited in Cyprus. Biddy, biddy bum, indeed! To resolve the banking crisis there, the Cyprus government (at the insistence of the Eurozone Troika of which I wrote last week) has frozen all bank deposits in excess of 100,000Euros (which is the upper limit of Eurozone depository insurance). Cyprus intends to appropriate funds from each account above that amount sufficient to recapitalize its ailing banks. The brunt of this haircut (estimated to be as much as 40% of said excess) will fall on "wealthy" Russians who have used Cyprus as a banking haven since the fall of communism. This new depositor funded "bail in" approach stands in stark contrast to government funded bank "bail outs" (e.g. TARP) that have been in fashion in the U.S. and elsewhere over the past few years. Cyprus may serve as a model for future bank crises---even in the United States. "Too big to fail" may become passe; replaced by "depositor beware." So take heed. Keep on deposit at any one bank no more than the FDIC insured amount. For more information on this topic go to www.fdic.gov/edie/fdic_info.html . And for those that keep substantial cash deposits in brokerage accounts, make sure that your broker distributes those funds into enough different banks to assure FDIC coverage when your money is not invested in stocks. Also, talk to your IRA and 401k administrators about FDIC protection for cash accounts that you have in your portfolio including money market accounts. You may be unpleasantly surprised by what you learn.
On Tuesday, the Dow Jones Industrial Average (DJIA) reached its all time high (which it eclipsed on Thursday). Tuesday's high came on the "blow your mind headline" that single family house prices are rising at their fastest pace in six years. But this time, the catalyst for escalating prices is different than in times past. According to the Wall Street Journal, the single family house market is not being driven by individual home buyers, but by large institutional investors that are purchasing houses as if on a "deadline"; with the intent of converting them to rental properties. Institutional investors now represent as much as 30% of all home purchasers in hot markets. Blackstone, the large hedge fund, alone has purchased 20,000 homes in the past year, investing $3.5 billion so far. Twelve percent of U.S. households currently rent single family homes, up from 9% in 2004. Foreclosure is no longer the issue for many home bodies. It is "eviction--or pay rent." I cite these statistics not as a cause of concern, but as an opportunity. As the income from these investments normalizes, look for hedge funds to capitalize these income streams by creating real estate investment trusts ("REIT"), units of which they will sell to the public. One such REIT has already been formed, Silver Bay Realty Trust (SBY), but it is too early for me to tell if it can sustain the type of cash flow one expects from a REIT.
One reason to keep cash available in your brokerage account is to take advantage of opportunities that present. And one did this week. Recall (See Vol. 102 www.riskrewardblog.blogspot.com ) that untaxed entities such as master limited partnerships, business development companies and REITs cannot accumulate earnings because they are required to distribute 90% of them to their shareholders in oder to maintain their pass-through status. Since they cannot accumulate earnings, they must either borrow money or issue new stock via a secondary offering if they wish to grow. When they do a "Secondary Waltz", they typically price the stock below the then current market price in order to assure that all of the new stock is sold. Although this causes a temporary drop in the stock price, "don't count these stocks out at the start of the bout." Their prices usually rise to pre-offering levels within a few days. Thus, I view secondary offerings as great buying opportunities, and that is why I bought more Calumet Specialty Products Partners (CLMT) this week after it priced its secondary offering 4% below its previous closing price. My favorite niche refinery, CLMT has already begun to climb, all the while carrying a healthy 7% dividend.
With both the S&P 500 and the DJIA setting record highs this week, the sun just keeps on shining. My only question is the same that Tevya posed:
"Sunrise / Sunset?"
P.S. I am up 6.13% for the quarter. This is the return on the funds under my direct management and available for investment as of the close on 12/31/12 and does not count additions made via personal savings or 401k contributions since that date. For the same period, the DJIA is up 11.25%, the S&P 500 is up 10.03% and NADAQ is up 8.21%. Considering that this portfolio was all cash (and thus risk free) on January 1st due to Fiscal Cliff concerns, considering the diversification in this portfolio (equities, foreign and domestic bonds, senior notes, partnerships, cash, commodities, hedges etc.) and considering that my average annual yield is above 7% (compared to 2.3% for the DJIA, 2% for the S&P 500 and virtually nothing for the NASDAQ), I am quite pleased.
Saturday, March 30, 2013
Saturday, March 23, 2013
March 23, 2013 What's Going On
Risk/Reward Vol. 162
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Let the world around us just fall apart
Baby we can make it if we're heart to heart."---lyrics from "Nothing's Gonna Stop Us Now" sung by Starship
"If you do want me, gimme little sugar
If you don't want me, don't lead me on, girl
Just gimme some kind of sign, girl."---lyrics from "Gimme Little Sign" sung by Brenton Wood
"Picket lines and picket signs/Don't punish me with brutality
Talk to me/ So you can see/What's going on"---lyrics from "What's Going On" by Marvin Gaye
Last weekend, the world learned that as a condition to receiving financial aid from the International Monetary Fund, the European Central Bank and the European Commission (the "Troika"), the government of Cyprus ordered its banks closed and announced that it would tax (ahem, confiscate) up to 9.9% of every depository account banked on that island. Understandably, the citizens took to the streets resulting in the Cypriot government reconsidering its intentions. In the interim, the banks remain closed. The news from Cyprus has caused huge "heart to heart" concern throughout the rest of the Eurozone. After all, if the Troika can insist upon such drastic measures from Cyprus, it can do the same from the other countries that are dependent on the Troika's financial assistance such as Italy, Spain, Greece and Portugal. Last year, such news would have sent the Dow Jones Industrial Average (DJIA) into a sustained tailspin. But, consistent with its recent "Nothing's Gonna Stop Us Now" attitude, the DJIA experienced only a mild correction on Monday (down 62 points) and rose 3 points on Tuesday. "Let the world around us fall apart", we Americans just keep investing in stocks.
Then, talk about withholding "a little sugar." Talk about "not leading you on". And talk about "some kind of sign, girl." On Wednesday, economic bellwethers Caterpillar and Fed Ex reported disappointing results and warned of challenges in the months ahead. On the same day, the purchasing managers of Europe reported a worsening of the slowdown in the Eurozone. Also that day, the two commodities most correlated with economic growth in China, copper and iron ore, fell to multi-month lows portending a possible slowing of that economy. In times past, the combination of bad news about the U.S, Europe and China on the same day would have sunk the market, Instead the DJIA rose 56 points. On Thursday, the DJIA fell 90 points on disappointing results from tech giant Oracle and continued turmoil in Cyprus, but it rebounded 91points on Friday, closing down only 2 points for the week.
One is left to wonder "What's going on?" With "picket lines and picket signs" still blocking the streets of Cyprus and no good news from the rest of the world, why isn't the market "punishing me with brutality?" The answer is---once again---Ben Bernanke and the Federal Reserve. On Wednesday, when nothing but depressing news was otherwise on the wires, Chairman Ben announced that the Fed would continue quantitative easing (QE3): to wit; would continue to keep interest rates on debt low by purchasing $45billion of Treasury securities and $40billion of mortgages each month until unemployment reached 6.5% or until inflation gets out of control. Obviously, for now, the U.S. stock market finds the continuation of cheap credit more compelling than any other factor. This, I suggest, should be a cause of concern for all of us. Ostensibly, QE3 is to serve as a catalyst for the entire economy, a function at which it is failing if the reports from Caterpillar and Fed Ex are to be believed. In the real economy (as opposed to Wall Street), the only sector benefiting from QE3 is housing to which the Fed has a single minded devotion. ( Can you imagine what the tech sector would be like if the Fed purchased $40billion dollars of software each month as opposed to home mortgages?) Indeed other than subsidizing housing, all QE3 appears to be doing is causing a bubble in progressively risky investments such as junk bonds and equities as investors seek returns that are no longer available in investment grade securities, the yields on which the Fed continues to depress.
In regard this latter point, on Friday noted investor Wilbur Ross joined the chorus (Druckenmiller, Blinder, Dalio, etc.) in warning that the bond market is inflated by at least 25% and when the current bull run on bonds ends, it will end badly. So enjoy these times, dear Readers. I am. But remain diligent and nimble. Then, if a bond market fade causes stock prices to fall, you and I, like Marvin Gaye:
"Won't be dog gone
We'll be long gone."
P.S. My speculative play of the week was buying Apple at 451.98. This is the first anniversary of the announcement of Apple's dividend. I am hoping the dividend will be increased and/or a massive stock buyback will be announced sometime soon. If not, I will sell---again.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Let the world around us just fall apart
Baby we can make it if we're heart to heart."---lyrics from "Nothing's Gonna Stop Us Now" sung by Starship
"If you do want me, gimme little sugar
If you don't want me, don't lead me on, girl
Just gimme some kind of sign, girl."---lyrics from "Gimme Little Sign" sung by Brenton Wood
"Picket lines and picket signs/Don't punish me with brutality
Talk to me/ So you can see/What's going on"---lyrics from "What's Going On" by Marvin Gaye
Last weekend, the world learned that as a condition to receiving financial aid from the International Monetary Fund, the European Central Bank and the European Commission (the "Troika"), the government of Cyprus ordered its banks closed and announced that it would tax (ahem, confiscate) up to 9.9% of every depository account banked on that island. Understandably, the citizens took to the streets resulting in the Cypriot government reconsidering its intentions. In the interim, the banks remain closed. The news from Cyprus has caused huge "heart to heart" concern throughout the rest of the Eurozone. After all, if the Troika can insist upon such drastic measures from Cyprus, it can do the same from the other countries that are dependent on the Troika's financial assistance such as Italy, Spain, Greece and Portugal. Last year, such news would have sent the Dow Jones Industrial Average (DJIA) into a sustained tailspin. But, consistent with its recent "Nothing's Gonna Stop Us Now" attitude, the DJIA experienced only a mild correction on Monday (down 62 points) and rose 3 points on Tuesday. "Let the world around us fall apart", we Americans just keep investing in stocks.
Then, talk about withholding "a little sugar." Talk about "not leading you on". And talk about "some kind of sign, girl." On Wednesday, economic bellwethers Caterpillar and Fed Ex reported disappointing results and warned of challenges in the months ahead. On the same day, the purchasing managers of Europe reported a worsening of the slowdown in the Eurozone. Also that day, the two commodities most correlated with economic growth in China, copper and iron ore, fell to multi-month lows portending a possible slowing of that economy. In times past, the combination of bad news about the U.S, Europe and China on the same day would have sunk the market, Instead the DJIA rose 56 points. On Thursday, the DJIA fell 90 points on disappointing results from tech giant Oracle and continued turmoil in Cyprus, but it rebounded 91points on Friday, closing down only 2 points for the week.
One is left to wonder "What's going on?" With "picket lines and picket signs" still blocking the streets of Cyprus and no good news from the rest of the world, why isn't the market "punishing me with brutality?" The answer is---once again---Ben Bernanke and the Federal Reserve. On Wednesday, when nothing but depressing news was otherwise on the wires, Chairman Ben announced that the Fed would continue quantitative easing (QE3): to wit; would continue to keep interest rates on debt low by purchasing $45billion of Treasury securities and $40billion of mortgages each month until unemployment reached 6.5% or until inflation gets out of control. Obviously, for now, the U.S. stock market finds the continuation of cheap credit more compelling than any other factor. This, I suggest, should be a cause of concern for all of us. Ostensibly, QE3 is to serve as a catalyst for the entire economy, a function at which it is failing if the reports from Caterpillar and Fed Ex are to be believed. In the real economy (as opposed to Wall Street), the only sector benefiting from QE3 is housing to which the Fed has a single minded devotion. ( Can you imagine what the tech sector would be like if the Fed purchased $40billion dollars of software each month as opposed to home mortgages?) Indeed other than subsidizing housing, all QE3 appears to be doing is causing a bubble in progressively risky investments such as junk bonds and equities as investors seek returns that are no longer available in investment grade securities, the yields on which the Fed continues to depress.
In regard this latter point, on Friday noted investor Wilbur Ross joined the chorus (Druckenmiller, Blinder, Dalio, etc.) in warning that the bond market is inflated by at least 25% and when the current bull run on bonds ends, it will end badly. So enjoy these times, dear Readers. I am. But remain diligent and nimble. Then, if a bond market fade causes stock prices to fall, you and I, like Marvin Gaye:
"Won't be dog gone
We'll be long gone."
P.S. My speculative play of the week was buying Apple at 451.98. This is the first anniversary of the announcement of Apple's dividend. I am hoping the dividend will be increased and/or a massive stock buyback will be announced sometime soon. If not, I will sell---again.
Saturday, March 16, 2013
March 16, 2012 Embrace The Obvious
Risk/Reward Vol. 161
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Bubble, Pop, Electric
Take it to the back seat
Run it like a track meet."---lyrics from "Bubble, Pop, Electric" by Gwen Stefani
"And I feel/Like I've been here before
Feel /Like I've been here before "---lyrics from "Deja Vu" by Crosby Stills & Nash
"This opportunity comes once in a lifetime, yo
You better lose yourself in the music, the moment
You own it, You better never let it go.'---lyrics from "Lose Yourself" by Eminem
In June, 2005, I sat on the board of a company that derived a significant percentage of its revenues and profits from the real estate/construction sector of the economy. And, man, real estate back then was red hot--"on a run like a track meet." But by that time, those who cared to look could see that the sector was a "Bubble" that could "Pop": a bubble inflated and perpetuated by the Federal Reserve's (then chaired by Alan Greenspan) low interest rate policy. Recognition of the bubble notwithstanding, the board faced a quandary. Real estate was still such a profitable part of the business, no rational person could simply "take it to the back seat." As a consequence, the board tasked a bright business development person with developing a real estate risk assessment tool we called the "RE Risk Report". The board received updated reports frequently, and the risk of real estate was discussed extensively at each of our monthly meetings. For us, the good times in real estate lasted well into 2006 at which time we determine that it was time to reduce exposure to that sector. Thank God we did.
To repeat, we on the board recognized the real estate bubble in June, 2005. This is what Ben Bernanke said in October, 2005 as then reported by the Washington Post:
"Ben Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next Chairman of the Federal Reserve."
"And I feel like I've been here before/Like I've been here before." These days, Chairman Bernanke proclaims with equal confidence that quantitative easing (QE3) is not creating an asset "bubble that is about to burst". Yesterday (in what can only be described as the kiss of death) Alan Greenspan concurred with Bernanke in an interview on CNBC. Yet, those who care to look (e.g. Druckenmiller, Dalio and this week Alan Blinder) predict that it is just a matter of time before the QE3-induced bond and stock market bubbles burst. We are in the "moment", fellow investors, facing a quandary just like my fellow board members did back in 2005. It would have been folly for that company to exit real estate in 2005 just as it would be folly for us to exit the stock market today. If one needs a reminder of this, please note that the Dow Jones Industrial Average (DJIA) continued its impressive climb this week, closing up 117 points. But what risk assessment tools can we investors employ? When will it be time for us to exit?
If anyone can answer those two questions, definitively, please send him/her my way. For "the moment", in regard the stock market "I own it." That is not to say, that "I will never let it go." I will not "lose myself in the music" that Benanke is playing. As Stanley Druckenmiller said last week, the asset bubble will end badly---we just don't know when. Bubbles always do. Take a look at the five year chart back to 2008. If one had exited down 8-10% from the Lehman Brother's fiasco that began September 15, 2008 and re-entered half way up the spike that occurred during any of the several days following the March 9, 2009 confirmed bottom, one would have enjoyed an investment "opportunity that comes once in a lifetime." Except, I don't believe it was a "once in a lifetime." I believe we will see it again in the not too distant future. This time I will be ready "yo". I will short Treasury bonds once that market collapses (and that will occur no later than the end of QE3--if it ever ends). I will exit any stock if it tumbles below my 8% loss limit, and I will short the DJIA and the S&P if they collapse as precipitously as they did in 2008.
You and I cannot impact monetary policy. But we can observe the obvious: QE3 and similar easy money policies adopted by central banks throughout the world are inflating an asset bubble and are creating a circumstance that likely will result in a crash. Why not enthusiastically embrace the obvious and prosper if and when that crash occurs? After all, the magnificent stock market run that we have experienced since 2009 was made possible only by the crash of 2007-2008. As those noted investment advisors, Crosby, Stills & Nash preach:
"The darkest hour/Is always just before the dawn.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Bubble, Pop, Electric
Take it to the back seat
Run it like a track meet."---lyrics from "Bubble, Pop, Electric" by Gwen Stefani
"And I feel/Like I've been here before
Feel /Like I've been here before "---lyrics from "Deja Vu" by Crosby Stills & Nash
"This opportunity comes once in a lifetime, yo
You better lose yourself in the music, the moment
You own it, You better never let it go.'---lyrics from "Lose Yourself" by Eminem
In June, 2005, I sat on the board of a company that derived a significant percentage of its revenues and profits from the real estate/construction sector of the economy. And, man, real estate back then was red hot--"on a run like a track meet." But by that time, those who cared to look could see that the sector was a "Bubble" that could "Pop": a bubble inflated and perpetuated by the Federal Reserve's (then chaired by Alan Greenspan) low interest rate policy. Recognition of the bubble notwithstanding, the board faced a quandary. Real estate was still such a profitable part of the business, no rational person could simply "take it to the back seat." As a consequence, the board tasked a bright business development person with developing a real estate risk assessment tool we called the "RE Risk Report". The board received updated reports frequently, and the risk of real estate was discussed extensively at each of our monthly meetings. For us, the good times in real estate lasted well into 2006 at which time we determine that it was time to reduce exposure to that sector. Thank God we did.
To repeat, we on the board recognized the real estate bubble in June, 2005. This is what Ben Bernanke said in October, 2005 as then reported by the Washington Post:
"Ben Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next Chairman of the Federal Reserve."
"And I feel like I've been here before/Like I've been here before." These days, Chairman Bernanke proclaims with equal confidence that quantitative easing (QE3) is not creating an asset "bubble that is about to burst". Yesterday (in what can only be described as the kiss of death) Alan Greenspan concurred with Bernanke in an interview on CNBC. Yet, those who care to look (e.g. Druckenmiller, Dalio and this week Alan Blinder) predict that it is just a matter of time before the QE3-induced bond and stock market bubbles burst. We are in the "moment", fellow investors, facing a quandary just like my fellow board members did back in 2005. It would have been folly for that company to exit real estate in 2005 just as it would be folly for us to exit the stock market today. If one needs a reminder of this, please note that the Dow Jones Industrial Average (DJIA) continued its impressive climb this week, closing up 117 points. But what risk assessment tools can we investors employ? When will it be time for us to exit?
If anyone can answer those two questions, definitively, please send him/her my way. For "the moment", in regard the stock market "I own it." That is not to say, that "I will never let it go." I will not "lose myself in the music" that Benanke is playing. As Stanley Druckenmiller said last week, the asset bubble will end badly---we just don't know when. Bubbles always do. Take a look at the five year chart back to 2008. If one had exited down 8-10% from the Lehman Brother's fiasco that began September 15, 2008 and re-entered half way up the spike that occurred during any of the several days following the March 9, 2009 confirmed bottom, one would have enjoyed an investment "opportunity that comes once in a lifetime." Except, I don't believe it was a "once in a lifetime." I believe we will see it again in the not too distant future. This time I will be ready "yo". I will short Treasury bonds once that market collapses (and that will occur no later than the end of QE3--if it ever ends). I will exit any stock if it tumbles below my 8% loss limit, and I will short the DJIA and the S&P if they collapse as precipitously as they did in 2008.
You and I cannot impact monetary policy. But we can observe the obvious: QE3 and similar easy money policies adopted by central banks throughout the world are inflating an asset bubble and are creating a circumstance that likely will result in a crash. Why not enthusiastically embrace the obvious and prosper if and when that crash occurs? After all, the magnificent stock market run that we have experienced since 2009 was made possible only by the crash of 2007-2008. As those noted investment advisors, Crosby, Stills & Nash preach:
"The darkest hour/Is always just before the dawn.
Saturday, March 9, 2013
March 9, 2013 Good News/Short People
Risk/Reward Vol. 160
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Good news is blowin' in your window/Good news is knockin' on your door
Good news is comin' round the corner/Good news is rollin' round your floor."---lyrics from "Good News" by Randy Newman
"Now Peter Piper picked peppers/But Run rocked rhymes
Humpty Dumpty fell down/That's his hard time
Jack B. Nimble/And he was quick."---lyrics from "Peter Piper" by Run DMC
"I'm gonna give you 30 days to get back home
I done talked to the gypsy woman on the telephone
She gonna sent out a world wide hoo-doo
That'll be the thing to suit you."---lyrics from "30 Days" by Chuck Berry
When it comes to stocks, "good news is blowin' in your window and knockin' on your door!" In fact, a series of "good news" reports this week, culminating in encouraging jobs numbers on Friday, catapulted the Dow Jones Industrial Average (DJIA) to four consecutive all time high closings. The DJIA ended the week up 308 points and is up 9.9% year to date! Talk about "Good news comin' round the corner and rollin' round your floor." The predictions of doom surrounding Sequestration have had as much impact on the stock market as those surrounding the Mayan calendar apocalypse.
But how long will it last? Will one's ability to pick winning stocks (which year to date has been as easy as "Peter Piper pickin' peppers) end like "Humpty Dumpty"---"fallen down and on hard times?" Valuable insight on this was provided by billionaire hedge fund guru, Stanley Druckenmiller (George Soros's former partner), during an interview on CNBC last Monday morning. A link to a related article and part of the interview is provided here: www.cnbc.com/id/100522303 It is worth reading and watching. In Druckenmiller's opinion, we are in the 7th or 8th inning of an equity bull run that will end badly. As he sees it, the Federal Reserve's low interest/easy money policy (QE3) has depressed investment grade yields so severely that conservative investors have been forced to accept unprecedented levels of risk. Equities are the only place left since bonds yields are so low. He cited as an example a Zambian government bond in such demand by investors that it is paying only 5% in interest. (No kidding--I checked.) As he said, do you really think the risk of regime change in Zambia over the next 20 years warrants only a 5% yield? According to Druckenmiller, the inevitable result will be a "malinvestment bust" (e.g. defaults on these risky investments), rampant inflation of asset values or both. Druckenmiller's advice is to be like Jack--stay nimble and be ready to exit investments "quickly". Obviously, one can accomplish this only by remaining diligent.
But how will an investor, even a diligent one, know when the time is right to exit? Is there something available other than "talking to the gypsy woman or sending out a world wide hoo-doo.?" I think so. First, I monitor developments in junk bond and senior loan funds like a hawk. In this regard, note that shorting (betting that a stock will fall in value) in the two largest junk bond exchange traded funds (HYG and JNK) has spiked recently. I'm not pushing a panic button, but it is something to watch. Second, I own some modest short positions (e.g. TBT) and a volatility position (VXX) to help me monitor negative sentiment in the market. . Third, I own substantial amounts of stocks and funds that pay MONTHLY dividends. Monthly dividends provide a steady and predictable income, result in lower stock volatility and require great discipline on the part of business managers. After all, those managers must generate sufficient revenue to pay a dividend every "30 days." It is in this respect that monthly dividend stocks serve as canaries in the mindshaft. I do not wait an entire quarter to learn whether a company is meeting its objectives. Each month, if there is even a hint of a dividend cut, I exit immediately. For those interested, a partial list of monthly payers can be found here: www.dividenddetective.com/monthly-dividends.htm
And so the market continues its climb upward. I am enjoying the ride. But, I remain vigilant and nimble. At some point, Mr. Market, like the great Randy Newman himself, inevitably will change his tune and instead of crooning "Good News", he will be singing:
"Short!, People"
P.S. Did you act on last week's stock tip? Throughout Monday morning, Citigroup was available for $42.25. Later in the week, it passed the Fed's stress test with flying colors. It closed Friday at 46.68--- a 10% gain in 4 1/2 days.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Good news is blowin' in your window/Good news is knockin' on your door
Good news is comin' round the corner/Good news is rollin' round your floor."---lyrics from "Good News" by Randy Newman
"Now Peter Piper picked peppers/But Run rocked rhymes
Humpty Dumpty fell down/That's his hard time
Jack B. Nimble/And he was quick."---lyrics from "Peter Piper" by Run DMC
"I'm gonna give you 30 days to get back home
I done talked to the gypsy woman on the telephone
She gonna sent out a world wide hoo-doo
That'll be the thing to suit you."---lyrics from "30 Days" by Chuck Berry
When it comes to stocks, "good news is blowin' in your window and knockin' on your door!" In fact, a series of "good news" reports this week, culminating in encouraging jobs numbers on Friday, catapulted the Dow Jones Industrial Average (DJIA) to four consecutive all time high closings. The DJIA ended the week up 308 points and is up 9.9% year to date! Talk about "Good news comin' round the corner and rollin' round your floor." The predictions of doom surrounding Sequestration have had as much impact on the stock market as those surrounding the Mayan calendar apocalypse.
But how long will it last? Will one's ability to pick winning stocks (which year to date has been as easy as "Peter Piper pickin' peppers) end like "Humpty Dumpty"---"fallen down and on hard times?" Valuable insight on this was provided by billionaire hedge fund guru, Stanley Druckenmiller (George Soros's former partner), during an interview on CNBC last Monday morning. A link to a related article and part of the interview is provided here: www.cnbc.com/id/100522303 It is worth reading and watching. In Druckenmiller's opinion, we are in the 7th or 8th inning of an equity bull run that will end badly. As he sees it, the Federal Reserve's low interest/easy money policy (QE3) has depressed investment grade yields so severely that conservative investors have been forced to accept unprecedented levels of risk. Equities are the only place left since bonds yields are so low. He cited as an example a Zambian government bond in such demand by investors that it is paying only 5% in interest. (No kidding--I checked.) As he said, do you really think the risk of regime change in Zambia over the next 20 years warrants only a 5% yield? According to Druckenmiller, the inevitable result will be a "malinvestment bust" (e.g. defaults on these risky investments), rampant inflation of asset values or both. Druckenmiller's advice is to be like Jack--stay nimble and be ready to exit investments "quickly". Obviously, one can accomplish this only by remaining diligent.
But how will an investor, even a diligent one, know when the time is right to exit? Is there something available other than "talking to the gypsy woman or sending out a world wide hoo-doo.?" I think so. First, I monitor developments in junk bond and senior loan funds like a hawk. In this regard, note that shorting (betting that a stock will fall in value) in the two largest junk bond exchange traded funds (HYG and JNK) has spiked recently. I'm not pushing a panic button, but it is something to watch. Second, I own some modest short positions (e.g. TBT) and a volatility position (VXX) to help me monitor negative sentiment in the market. . Third, I own substantial amounts of stocks and funds that pay MONTHLY dividends. Monthly dividends provide a steady and predictable income, result in lower stock volatility and require great discipline on the part of business managers. After all, those managers must generate sufficient revenue to pay a dividend every "30 days." It is in this respect that monthly dividend stocks serve as canaries in the mindshaft. I do not wait an entire quarter to learn whether a company is meeting its objectives. Each month, if there is even a hint of a dividend cut, I exit immediately. For those interested, a partial list of monthly payers can be found here: www.dividenddetective.com/monthly-dividends.htm
And so the market continues its climb upward. I am enjoying the ride. But, I remain vigilant and nimble. At some point, Mr. Market, like the great Randy Newman himself, inevitably will change his tune and instead of crooning "Good News", he will be singing:
"Short!, People"
P.S. Did you act on last week's stock tip? Throughout Monday morning, Citigroup was available for $42.25. Later in the week, it passed the Fed's stress test with flying colors. It closed Friday at 46.68--- a 10% gain in 4 1/2 days.
Saturday, March 2, 2013
March 2, 2013 Volatility
Risk/Reward Vol. 159
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I needed the money/Cause I had none
I fought the law/And the law won."---lyrics from "I Fought the Law" sung by the Bobby Fuller Four
"I be takin' notes on you/Like you be a test
Roll the purple blunt up/So I won't stress."---lyrics from "After That" sung by Brandy
"The static of your arms/It is the catalyst
You're a chemical that burns/There is nothing like this
It's the purest element/But it's so volatile."---lyrics from "Strangeness & Charm" sung by Florence + The Machine
With apologies to the Bobby Fuller Four, if you "need money", don't "fight the Fed, cause the Fed will win." Recall that just last week, minutes from the Federal Reserve's January meeting (hinting that the Fed's monthly purchases of $85billion of mortgages and Treasury securities ("QE3") may end before anticipated) caused the Dow Jones Industrial Average (DJIA) to drop 108 points in one day. This week, in two separate hearings before Congress, Fed Chair Bernanke proclaimed that QE3 was still needed, was still effective and would not end soon. The DJIA skyrocketed 116 points one day and 175 points the next, recovering from a 216 point drop on Monday caused by the indecisive Italian election. As for Sequestration, it appears the stock market cares little, if at all. The DJIA was up 89 points for the week.
With the stock market nearing all time highs, where should one invest? If you are not afraid of a little speculation, take a look at Citigroup (C). Over the past 4 years, with the possible exception of Bank of America (BAC), C has been more closely regulated than any corporation in the US, has been mandated to raise huge amounts of capital and has been precluded from returning any significant cash to shareholders. C pays less than a 1% dividend, and trades at about 60% of book value. Normally banks trade at 100% of book or higher. Next week the Fed will release the results of its most recent "stress test", and on March 14th the Fed will announce which banks can raise dividends and/or engage in share buy backs. If "you be takin' notes" and your research reveals that C will be allowed to raise dividends, buy back shares or both, an investment may be in order. If you are right, "roll a purple blunt" and celebrate. If you want to speculate even more, look at BAC even though it had a great run in 2012.
Speaking of banks, say what you will about Dodd-Frank, but that heavy handed legislation has served as a "catalyst" for making banks more stable and for making banking an investment-worthy sector. My preferred investment in the sector is preferred stock, and my preferred vehicles ( the "purest elements", if you will) are the exchange traded funds, PGX an PGF. "There is nothing like these." Each pays a 6+% dividend, and each has low "volatility". Volatility measures risk. The lower the volatility, the more "static"the stock and the lower the risk. Volatility is expressed as a percentage. For example, PGX's volatility is 4.5% which means that 68.2% of the time (one standard deviation for you statisticians), PGX trades in a range-- plus or minus-- 4.5% of its annual average (mean) price. This level of volatility is comparable to that of investment grade bonds (LQD) which yield significantly less. Their low volatility and the fact that they pay their dividends on a monthly basis make PGX and PGF excellent places to park money---a modern day passbook savings account---well, not quite that secure. The largest ETF in this space is PFF, but it yields less than 6% . For those who want more of a yield in this sector, look at JPC and JPI, two closed end funds which also hold preferred shares but which assume extra risk via leverage.
So far, the stock market has taken Sequestration in stride. Can it be that Mr. Market believes that so long as credit remains easy (QE3) economic recovery will continue, Sequestration notwithstanding? Can it be that Florence + The Machine concur with Goldman Sach's Abby Joseph Cohen and that
"The dog days are gone/The horses are coming"?
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"I needed the money/Cause I had none
I fought the law/And the law won."---lyrics from "I Fought the Law" sung by the Bobby Fuller Four
"I be takin' notes on you/Like you be a test
Roll the purple blunt up/So I won't stress."---lyrics from "After That" sung by Brandy
"The static of your arms/It is the catalyst
You're a chemical that burns/There is nothing like this
It's the purest element/But it's so volatile."---lyrics from "Strangeness & Charm" sung by Florence + The Machine
With apologies to the Bobby Fuller Four, if you "need money", don't "fight the Fed, cause the Fed will win." Recall that just last week, minutes from the Federal Reserve's January meeting (hinting that the Fed's monthly purchases of $85billion of mortgages and Treasury securities ("QE3") may end before anticipated) caused the Dow Jones Industrial Average (DJIA) to drop 108 points in one day. This week, in two separate hearings before Congress, Fed Chair Bernanke proclaimed that QE3 was still needed, was still effective and would not end soon. The DJIA skyrocketed 116 points one day and 175 points the next, recovering from a 216 point drop on Monday caused by the indecisive Italian election. As for Sequestration, it appears the stock market cares little, if at all. The DJIA was up 89 points for the week.
With the stock market nearing all time highs, where should one invest? If you are not afraid of a little speculation, take a look at Citigroup (C). Over the past 4 years, with the possible exception of Bank of America (BAC), C has been more closely regulated than any corporation in the US, has been mandated to raise huge amounts of capital and has been precluded from returning any significant cash to shareholders. C pays less than a 1% dividend, and trades at about 60% of book value. Normally banks trade at 100% of book or higher. Next week the Fed will release the results of its most recent "stress test", and on March 14th the Fed will announce which banks can raise dividends and/or engage in share buy backs. If "you be takin' notes" and your research reveals that C will be allowed to raise dividends, buy back shares or both, an investment may be in order. If you are right, "roll a purple blunt" and celebrate. If you want to speculate even more, look at BAC even though it had a great run in 2012.
Speaking of banks, say what you will about Dodd-Frank, but that heavy handed legislation has served as a "catalyst" for making banks more stable and for making banking an investment-worthy sector. My preferred investment in the sector is preferred stock, and my preferred vehicles ( the "purest elements", if you will) are the exchange traded funds, PGX an PGF. "There is nothing like these." Each pays a 6+% dividend, and each has low "volatility". Volatility measures risk. The lower the volatility, the more "static"the stock and the lower the risk. Volatility is expressed as a percentage. For example, PGX's volatility is 4.5% which means that 68.2% of the time (one standard deviation for you statisticians), PGX trades in a range-- plus or minus-- 4.5% of its annual average (mean) price. This level of volatility is comparable to that of investment grade bonds (LQD) which yield significantly less. Their low volatility and the fact that they pay their dividends on a monthly basis make PGX and PGF excellent places to park money---a modern day passbook savings account---well, not quite that secure. The largest ETF in this space is PFF, but it yields less than 6% . For those who want more of a yield in this sector, look at JPC and JPI, two closed end funds which also hold preferred shares but which assume extra risk via leverage.
So far, the stock market has taken Sequestration in stride. Can it be that Mr. Market believes that so long as credit remains easy (QE3) economic recovery will continue, Sequestration notwithstanding? Can it be that Florence + The Machine concur with Goldman Sach's Abby Joseph Cohen and that
"The dog days are gone/The horses are coming"?
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