Risk/reward No. 25

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

I have been on the road since the beginning of the month.  This schedule has hampered my writing, but not my research or investing activity.

For reporting purposes, I have split my portfolio by quarters of purchase.  The portion purchased in the May-July quarter which as you know is comprised of securities paying interest/dividends in excess of 7%, has experienced a capital appreciation of 7%, net of all loss incurred on sales.   This means that if the markets stay unchanged through May, 2011, I will experience a 14% annualized return.  I am hoping the markets increase.  The Aug-October portion (which is only 1/2 over) is also comprised of 7+% payors and has experienced a net capital appreciation of over 3%.  Obviously, the vast majority of my picks have appreciated, but the clear winners have been the financial trust preferred.  With ever improving balance sheets and the light touch of Basel III, these jewels have shown.  The trust preferreds of ING, Aegon, and Deutsche Bank in particular have done well--and with very heavy volume.  Unfortunately, all of the trust preferreds are fast approaching their $25 call price above which I will not purchase them.  Ally Bank (f/k/a GMAC) and AIG still present opportunities for excellent yields but at junk bond risk levels.  I intend to buy some more.

My quest for returns continues.  I am feeling more bullish about the world economy, if not that of the US.  I expect to add to my energy and commodity positions and will open positions in E (Italian energy company) and SID (Brazilian steel and ore).  This bullish feel notwithstanding, I am hedging against a continuation of the sideways and narrow trading market we have experienced recently by selling (writing) some covered calls.  Covered calls are contracts granting to another the right to purchase stocks I hold at a specified price (strike) at a specified date in the future (expiration) in exchange for an option price (premium).  I am uncomfortable doing this unassisted and thus will dip my toe by purchasing into a closed end fund that does this--probably EXG which has experienced excellent returns recently.

I used the recent run up of the market to unload at no loss PHK and MCHP.  PHK is a closed end fund that trades well above its net asset value (NAV).  Although PHK promises a good return, the risk of a sudden drop (a la GUT) made it unwise for me to hold.  MCHP, like INTC, was the wrong way to play the tech area.