THIS IS NOT TAX OR INVESTMENT ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Opportunity knocks for every man---but you have to give a woman a ring." Mae West
The stock market has provided great opportunities recently. Since April 30, 2010, the Dow is up 16%, the S&P 500 13% and the NASDAQ 12.6%. More recently the Dow is up 10% since hitting its year- to- date (YTD) low on March 16, 2011. What is driving this rise (particularly the most recent one) and is it sustainable? Every pundit has a theory. I think the most cogent explanation has come from the noted billionaire investor John Malone who was a guest on Squawk Box on Friday (I switched to CNBC between the carriage ride to the Palace and the balcony kiss). He asserts that the stock market is no different than any other commodity in which he invests and like gold, oil, silver, and income producing property, the stock market will continue to appreciate as long as it is in demand. It will continue to be in demand as long as managers deliver strong profits and as long as investors cannot get a decent return from traditional safe havens such as Treasury securities which are being kept artificially low by the Federal Reserve. He is concerned about the US economy and the ability of US concentrated companies to maintain high profit levels. He suggests that investors go with companies that have significant exposure to international markets. Consistent with that comment, did you notice that Caterpillar which reported on Friday derived 66% of its revenue from overseas? Note the profits that YUM (Col. Sanders) generates are now coming more and more from China. Norfolk Southern Rail hit its numbers out of the park in large part because it is transporting coal to East Coast ports for shipment overseas.
Unlike Mr. Malone, who is the largest single land owner in the United States (over 2 million acres), I choose not to own actual real estate (or actual gold for that matter). I do like real estate investment trusts (REITS) which have made a significant comeback in part from the recovery and in part from merely surviving the horrendous write downs that they have been forced to take. If you hold property on your books that you have written down to zero, you can show some great profits if you can continue to hold it and ultimately sell it for millions. I have written in the past about my holdings in the preferred stock of hotel REITS. I bought more Ashford Hospitality Trust Series E preferred (AHTpE) this week. They pay a 9% dividend (not qualified for 15% tax treatment so I hold in my 401k) and cannot be redeemed until 2016. Similar returns with significant capital appreciation are also available in REITS that specialize in mezzanine and specialized lending to commercial building owners and tenants. I own the preferred shares of Northstar Realty Finance and I-Star. These pay in the 9% range ( I bought much earlier at lower prices and better returns). They are part of my speculative holdings, and need to be closely monitored. So far, so good----on up and down days.
Last week I predicted consolidation in the utility space. This week AES offered to buy Dayton Power and Light (DPL) and Excelon bid on Constellation Energy offering an 18% premium. As detailed in the Financial Times, with the need to access capital to rehab and build new generation and transmission facilities, small power companies, simply due to size and the concomitant lack of diversity in income stream, must pay more in borrowing costs. The interest that a borrower must pay on A rated bonds is significantly less than on lower rated BBB- bonds. This fact alone will drive mergers and acquisitions. Utilities--- widow and orphan stocks that generate 5% and greater dividends---now present the real prospect of a pop from an acquisition. Seems to be the best of both worl
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