July 2, 2011 "Greek To Me"

Fw: Risk/Reward Vol 74

THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN

CASSIUS: Did Cicero say any thing?
CASCA: Ay, he spoke Greek.
CASSIUS: To what effect?
CASCA: .... those that understood him smiled at one another and shook their heads; but, for mine own part, it was Greek to me. ---William Shakespeare,  Julius Caesar, Act I Scene II

"No ticky, no laundry"---Marco Polo

"He who will not economize, will have to agonize."---Confucius



The stock market was positively giddy this week;  euphoric on news of temporary relief from the on going Greek debt problem.  It was my best week since I began writing this publication.  However, my optimism is muted based upon news this week from China.

Ok, Ok, so why am I so fixated on what happens in China?

Well, buckaroos, wrap yourself in the following statistics:  China has 1.3 billion people, 20% of the world's population; China is the largest manufacturer in the world;  China is the world's largest exporter; China is the world's largest automobile manufacturer; China consumes the following percentages of the WORLD'S commodities:  53% of cement, 48% of iron ore, 47% of coal, 45% of lead, 40% of copper, 36% of nickel, 10% of oil (US consumes 20% of world's oil).  In addition, take a look at the 30 companies that comprise the Dow Industrial Average.  At least 15 of them are relying heavily on increasing business in China to drive future growth and profitability; companies like McDonald's, Caterpillar, Alcoa, GE, Boeing, etc.  And remember,  according to Larry Kudlow, the growth in corporate profits is the "mother's milk" of the stock market.  Frankly, what happens in China is more important to a stock portfolio than the Greek debt crisis, the war in Afghanistan, the US budget deficit, Charlie Sheen's contract, and you name what else---combined.  So if you think I am too fixated on China----EXCUSE ME!

Ahem, what is the news from China?

Earlier this week, Chinese government auditors revealed that Chinese municipal debt is much higher than previously estimated.  The combined debt of all Chinese governments is now 70% of China's gross domestic product.  This compares to 97% for the US and 225% for Japan.  This debt overhang will undoubtedly slow the rate of China's growth (e.g. cities will not be able to borrow to build as many housing units as promised) which already has been lowered to 9.5% for 2011, down from 10.5% in 2010.  This is still a tremendous rate, but directionally going the wrong way.  This news comes on the heals of a report that the Chinese real estate "bubble" may be deflating.  Real estate values in Hong Kong are down 15% so far this year.  As reported in earlier editions, China's construction industry is a huge driver of its economy and a pull back in that sector will have a tremendous impact on the demand for everything---most certainly commodities.  This pull back was confirmed this week in a report from Glencore, the world's largest commodity trader.  And,  as demonstrated from the above statistics, China IS the world's commodity market.

So what does this mean to me as an investor?

Well, it confirms my decisions to exit copper (Southern Copper is down 50% from its 52 week high); to exit aluminum (Alcoa is down 17% from its 52 week high); to exit coal (Peabody is down 20%); and to exit iron ore (SID is down 30%).  I am staying clear of these for a while although it was also reported this week that the inventories of copper (a leading indicator) in China have fallen recently.  This, of course, is a good sign.  The news from China has NOT dampened my bullish outlook on oil.  The release of oil reserves reported in this publication last week had little sustained impact on the price of crude as it bounced back this week.  Frankly, the amount released, 60 million barrels, is literally a drop in the bucket compared to the DAILY worldwide consumption of 89 million barrels.  I am standing pat with my oil portfolio which is skewed toward domestic production (MHR preferreds, GMXR preferred, SBR--small exploration companies or trusts and Chevron--a mega diversified oil company).  Chevron alone has several thousand wells in Texas' Permian Basin and is planning 350 more this year.  I also still own some Statoil, Shell, BP, ConocoPhillips, Permian Basin Trust,  and San Juan Trust, although not as much as a few months ago.

With the above discussed exit from commodities and my previously discussed pruning of real estate investment trust positions, I am cash heavy--- well above the 20% position insisted upon by my bride.  I hate not having money at work.  So, I parked some in the recently issued exchange traded debt of Century Link (CTQ) and U. S. Cellular (UZA.  Both are investment grade, pay around 7%, are not redeemable until 2016 and trade at or near their par/redemption price.  I also caught an awesome dip in Ally Bank preferred Series B which is not investment grade, but trades in great volume (thus allowing for liquidity) and yields 8.7% at my purchase price of $24.32.   Lastly, as reported last week, I will look at reentering Annaly Capital now that QE2 is officially over.

Happy Fourth!!!