August 27 2011 FEED YOUR HEAD

Fw: Risk/Reward Vol. 82

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

1997-- "To participate in the euro currency, member nations must maintain a debt ratio of 60% of GDP"---Stability and Growth Pact of Eurozone

1999-- "A common currency imposes on us a duty to cooperate more on policy...A debate among politicians on monetary policy is counterproductive."--German Chancellor Gerhard Schroder on the launching of the Euro

2011--  the average debt to GDP ratio of the 17 Eurozone nations is 80%; that of Italy is 118%; that of Greece is 142%; monetary policy is debated daily by European politicians

"When logic and proportion have fallen sloppy dead, 

  And the White Queen is talking backward

  And the Red Queen's "off with her head"

  Remember what the dormouse said:

  "Feed your head."----White Rabbit by Jefferson Airplane

I used the market uptick on Tuesday and Wednesday to take modest profits in advance of the Bernanke speech, the impact of which was uncertain to me.  Despite the positive direction taken by the stock market on Friday after that speech, there still is simply nothing on the horizon to give confidence to investors or to warrant abandoning the sidelines.  

First and foremost, the Eurozone has yet to provide a clear path for resolving the sovereign debt issue.  Indeed, earlier this week Finland persisted in receiving collateral from Greece in exchange for ratifying the Greek bond deal tentatively approved last July.  This unvarnished exercise of nationalism was met with similar demands from other countries and threatens to unwind the tenuous  sovereign debt patch currently in place.  Uncertainty on all fronts remains as is evidenced by the 25% decline in the German stock market so THIS MONTH!  Sufferin'Sauerbraten!   I remain of the mind that unless and until a comprehensive, pan-European solution is implemented (e.g. Eurobonds), the threat of European debt contagion will threaten the world's economic stability and thus will continue to sap confidence away from the world's stock markets.

Second, the US economy is sputtering, teetering on the brink of dipping back into recession.  We are facing the prospect of a prolonged period of Japanese style stagflation (low interest rate, slow/no growth and high unemployment).  De-leveraging from our monstrous personal and government debts will take a long time.  I simply do not expect the type of news that would sustain a bull market from this corner of the world.

Third, despite stellar, sequential quarterly earnings reports by Dow and S&P 100 companies, the prospect for continued excellence in the third and fourth quarters is dimming.  The economies of emerging nations (especially China) upon which these multinational companies have relied for profitability are facing their own challenges as their politicians and central bankers try to slow their rates of inflation without stalling their growth.  Engineering these "soft landings" is difficult, if even possible to achieve.  The stock markets need some encouraging words from China---pure and simple.

Query:  What is an individual investor to do now that "logic and proportion have fallen sloppy dead"?  Answer.  Do what the dormouse said: "Feed you head."  Study sectors and companies so that when confidence returns to the stock market you can execute with conviction.  

I, for one, continue to believe in oil and gas---black gold, Texas tea.  There simply is no substitute for these energy sources.  Moreover, with the emergence of India, China and other fast track economies, worldwide demand will only increase.  This demand has spurred the development of alternative sources (shale oil and gas in areas like the Bakken field in North Dakota and the Eagle Ford field in Texas).  I have every reason to be bullish on oil/gas,  once confidence, in general, returns to the stock market.  I continue to like big oil (RDS, COP, CVX), pipeline transportation and storage (KMP, ETP) and exploration (MHRpD, SDRL).  I will open positions once I am convinced that the market is confident enough to avoid the recent spate of volatility.

I also  believe in certain real estate sectors.  I like the preferred shares of real estate investment trusts that pay a healthy common dividend (AHTpE, ELSpA, HCNpI).  The common dividend serves as a buffer (or "canary in the mineshaft") since the preferred dividend must be paid before the common.  If the common dividend is ever reduced, I will exit the preferred.  I also like agency mortgage REITs (NLY, AGNC) so long as interest rates remain low.

Of course, "widow and orphan" stocks (utilities, tobacco and telecom) will also be added.

Lastly, I will likely "speculate" on the preferred stock and/or exchange traded debt of insurers (MRHpA, ENHpB, AHLpA, METpB, AVF) and banks (CpR, BACpL and ZpC) especially now that Warren Buffet has "legitimized" Bank of America by investing $5billion in its preferred stock.  Ironically, with the exception of Bank of America, the preferred shares of non-European financial institutions have remained THE MOST STABLE stock investments during the August roller coaster.

But, to reiterate, I will do none of this unless and until I perceive that the market, in general, has regained some confidence.   You cannot fight a downward market move, and I have no desire to catch a falling knife in search of the market's bottom.  I don't need to buy at the market low.   The Dow is still 1000 points below where I made my major exit at the end of July so I have plenty of profit "runway" once confidence is restored.

As I review my actions this month, I give myself a C.  I was at once erratic and reactive.  Fortunately, occasional market upticks provided me opportunities to avoid any significant losses, and I am still way ahead as a result (fortuitously) of exiting completely on July 29th.  August serves as reminder that I am still very much the student---one whose experiences are not so vast or varied as to warrant the "trading" that I have done.  In retrospect, I should not have gone in and out of the market this month.  Instead,  I should have had the conviction to stay completely on the sidelines until confidence (especially in Europe) has been restored.  

Managing money can be like "chasing rabbits".  There are no "men on the chessboard who get up and tell you where to go".  Oh, and don't bother asking Alice.  When it comes to buying stocks,  I don't think even she will know.

August 20, 2011 "These Boots Are Made for Walking"

Risk/Reward Vol. 81

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

"One moment of patience may ward off great disaster.  One moment of impatience may ruin a whole life."---Confucius

"The gem cannot be polished without friction, nor man perfected without trials."---Confucius

"I was a star in Japan before any radio stations in the U. S. paid any attention to me."---Nancy Sinatra

With apologies to Confucius, success in the market is more certain if one masters the teachings of two other Chinese philosophers:  Ti Ming and Tem Po. (with due attribution to loyal reader Iron Mike).   The market having experienced three consecutive "up" days and the non-event of the Sarkozy-Merkel meeting, I cautiously re-entered late Tuesday afternoon.  My Ti Ming could not have been worse, but my Tem Po (only 15% invested) was appropriated.  HOLY SHIITAKE!!!!  It has been a rough ride ever since with the markets nose diving Thursday and Friday.

Why did I re-enter, you may ask (because my bride certainly did)?  Remember, my decision to cash out earlier this month was made in anticipation that the bozos in Washington would actually allow a default and that S&P would downgrade the US.  These were unprecedented events the consequences of which I was unwilling to withstand.  It was never my intention to stay out of the markets---I can't.  My financial independence is keyed to achieving a steady 6-7% return which cannot be attained by sitting on the sidelines with cash or investing in the "safety" of mid term Treasury securities.   My approach is simple:  buy high yielding securities, the dividends from which should serve as a cushion against a precipitous drop (except when facing default and downgrade) and sell any position that exceeds an 8% drop.  

As of Friday's close, most of my holdings held reasonably well.  The preferred stock of the insurers (ENHpA, MRHpA) held full value with the common stock of tobacco (RAI, MO) and utilities (DUK, NGG,POM) falling only 1-2%.   Oil and gas took a 4-7% hit (RDS/A, CHKpD, KMP, ETP, CLMT) and to my mind now present some awesome opportunities especially in the MLP/pipeline space occupied by KMP and ETP.  The mortgage REITs (NLY, AGNC, IVR) were hit harder still (but not to the 8% level).  In this regard, I like IVR, a hybrid mortgage REIT which was hit hard by the timing of a secondary offering, the expiration of options and the market in general last week.  As of Friday's close, it is paying a 23% dividend which to my thinking is a bargain.  The biggest disappointments are in the blue chip industrials (CAT, ETN, FCX) all of which will be sold by noon Monday if they do not improve substantially.

Confidence in equities is fading---fast.  So far this month, investors globally have withdrawn $42billion from equity funds making August the worst "outflow" month since February, 2009.  Since May, $110 billion have been withdrawn.  Despite the appearance of great bargains (eg.CAT, ETN, FCX), fortunes are lost in bucking the overall trend of the market---which is decidedly downward.   Everyone is jittery.  The scare-du-jour Friday was a report that an unnamed European bank had received $200 million in short term funding from the Federal Reserve.  This is indicative that inter bank lending, which is the key to world wide liquidity (and the absence of which "froze" the credit markets in 2008), is being hampered by the fear that some European banks may be insolvent due to their large investment in Italian, Greek and Spanish sovereign debt.  Frankly, these "panics" will become more frequent unless and until a pan-European solution to the Eurozone sovereign debt crisis is found.

Oh, by the way, why would the US want to emulate a country that "discovered" Nancy Sinatra?  Well, we are--we are fast becoming Japan, a country that for the last 20 years has experienced no economic growth, high unemployment and crushing sovereign debt despite low interest rates.  No wonder sushi has become a staple in New York, London and Berlin.  Longterm, the only hope on the horizon for individual investors like yours truly is in the profitability of multinational corporations  that find economic opportunity in emerging nations such as China, Brazil and India.  Unfortunately, there has been little news of encouragement from those countries in recent weeks.

This week ended on a very sour note for me.  Ti Ming was not kind to me, and I was saved only be adherence to the teachings of Tem Po.  Many seeming bargains exist, but I will likely resist them unless and until some broader confidence and encouragement emerges.

August 13,2011 Patience is a Virture

Risk/Reward Vol. 80

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

"Patience is the companion of wisdom"---St. Augustine

"He that can have patience, can have what he will"---Benjamin Franklin

"IBD Rule #15---DON'T BOTTOM GUESS.  Declining markets often have huge up days that don't last.  A market rising on high volume for three consecutive days may be indicative that the market has turned up at least in the short term."---William O'Neill

Having sold everything but gold on or before July 29th and being on the sidelines through last week and  "murderous Monday" this week, I was salivating as Tuesday dawned with the market on the rise.  I was and am fully cognizant of Mr. O'Neill's wise counsel above, but I became impatient and bought the following before 10 a.m Tuesday:  ZpC, FTR, AVF,KMP,LINE, BACpL, NLY, ALLYpB, AAR, GEC, CpR, METpB, VOD, ARY, AFC, AFE, AHLpD, SDRL, SBR, WIN, DUK, NWpC , RDS/A, and CHKpD.  I only invested 15% of my cash.  By the time of my dinner meeting in Minneapolis,  I was looking like a genius having made 5% in few hours.  By bedtime I was lamenting not buying more.  I added PG, MCD, CAT, COP, CVX, ETN, UIL, AZN, T and FCX to my shopping list to buy the next day.

By the time I deplaned in Milwaukee on Wednesday, I was singing another tune.  YIKES!!!  What a bad day.  When Thursday opened to the upside, I sold everything again ending up with a 2% gain and a sense of relief.   This is not how I want to live.  Why is discipline so hard for me (see last weekend's Facebook picture of a cigar in my mouth)?  Don't trust me to take your cow to town to sell, Mother.  I then promised myself not to look at the markets until Monday afternoon at the earliest, and to buy only if 3 days of "up" had been achieved on decent volume. When I do buy, many of what are catalogued above will be on my list.  They are all yielding incredibly well, still.  The markets may have turned up, but the Dow is still 1000 points below where I exited two weeks ago, and there is a lot of profit runway available.  I sold GLD on Thursday at 169.

What concerns me most at present?  European sovereign debt.  Think about it.  Seventeen completely different economies--and cultures--under one currency.   Take Italy.  It is the third largest issuer of sovereign debt in the world (behind the US and Japan) with $2.6 trillion outstanding.  Its gross domestic product (GDP) is only $2 trillion.  Its population is the second "grayist" in the world (behind Japan) with 28% of its population already retired.  25% of those employed work for the government, and they receive salaries and benefits 15% better than those in private industry. 80% of all workers are covered by collective bargaining.  I ask--how can a popularly elected official impose the kind of austerity needed?  He/she cannot.  Moreover, even if one could impose such austerity, the population would likely revolt once its benefits were curtailed.  Oh, you think not, well look what is happening in Great Britain--a society so civil police don't carry guns---at least up until now. Not even Germany (GDP of $3.3 trillion) has enough money to bail out Italy and Spain, let alone France.   Unless the European Central Bank (against the expressed objection of Germany--perhaps Europe's only solvent economy) decides to print trillions more euros so that Europe can repay its combined sovereign debt with inflated currency (like the Fed has done with the dollar over the past 2 years), there will be a default, likely by Italy. 

Why do I, an American, care about European sovereign debt defaults?  Because, buckaroos, no one buys sovereign debt without buying credit default insurance.  Thus, for example,  even if Societe Generale is the largest nominal holder of Italian bonds that does not mean that it has not "hedged" its position by buying default insurance from a variety of sources in private, opaque transactions.  Remember what happened when Lehman Brothers defaulted?  The music stopped and much of the ultimate liability fell on AIG which had sold credit insurance "off book" and which was "saved" by an infusion of $182 billion by the US government.  Who holds the "Old Maid" that is, Italy's 2.6 TRILLION credit default insurance?  AIG, Bank of America, Goldman?   No one knows---and no one is talking--but if a default occurs no one will lend to anyone for fear of non-payment.  This scares the h*ll out of me.

What can I do?   Well, I can't sit on the sidelines while the dollar gets inflated and cd's pay zero interest.  I will re-enter the market, likely next week.  Yield will protect my downside to a certain extent, but I will be VERY mindful of liquidity.  If I sense a significant down draft, I will be out like a fat kid in dodge ball.  I recognize that this makes me more of a "trader" than an "investor" which to some is a pejorative.  But, I am wealthier than I was on July 29, 2011---how many can say that?

August 7, 2011 Whoa, Nelly!

Risk/Reward Vol. 79

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

"Luck is what happens when preparation meets opportunity."--Seneca (100 AD)

"Whoa, Nelly!"---Pat Brady

"If I had known what I was unleashing, I'd have become a watchmaker."---Albert Einstein on the unintended consequence of his atomic theory

"Keep your faith in God, but keep your powder dry."---Oliver Cromwell

The presence or absence of investor confidence is the single greatest influence on whether bulls or bears reign.  What has anyone seen in the conduct of those running our country or the Eurozone that instills confidence?  Did no one realize the consequences of dithering on the debt ceiling extension?  That half hearted effort happened just in time for the sovereign debt crisis in Italy to reach a boil.  More importantly, there is no good news from China (no bad news, just nothing to serve as a counter balance).  No confidence---no conviction.  Once people like me began to exit, last week's stampede ensued.  Whoa, Nelly! 

I see little that inspires my "animal spirit" desire to invest.  Certainly our president does not inspire investment, and I see no credible candidate from the Republicans capable of inspiring me or anyone else.  To make matters worse, many politicos are impeding growth.  For example, the Wall Street Journal recently reported how drilling for oil and gas in the Marcellus shale formation has resulted in tens of thousands of high paying jobs in Pennsylvania.  Directly across the border, in New York, the governor has refused to allow such drilling even though the formation lies in large part in that state.  Environmentalist have caused him to dither while unemployment runs rampant.  What is wrong with this picture?  Why not employ people in this worthy effort to free our country from foreign energy dependence?

I admit.  I was lucky to liquidate when I did (see Vol. 78), and even luckier when I promised Barb not to re-enter the market for the entirety of last  week.  Obviously,  I have plenty of dry powder and may re-enter next week considering how "cheap" many of my favorite dividend/interest paying plays (e.g. TEF, AVF, VZ, NLY, MO, etc.) have become.  I am furiously studying the best re-entry vehicles and price points.

 By the way, are you not tiring of the pundits who kept advising us this past Friday that "now" is an excellent time to buy into the market "on the cheap".  With what?, most are asking.  Where were these pundits two weeks ago when they should have been advising us to sell at the highs?  No one (with the possible exception of Cramer and he only rarely) spends ANY time talking about profit taking.  I promise--- in the future I will share my "selling" thoughts just as freely as my "buying" ones. 

Last week I encountered a retired state court judge, a man who worked his entire career for the State of Wisconsin and whose entire retirement benefit comes from a state pension.  I asked as to his well being and was told that he, like countless other Cheeseheads, spends 7 months a year in Florida to evade the Wisconsin income tax-----the very source of his pension!   I cite this irony not as a criticism, but to emphasize that people (and organizations) operate in their own economic self interest.  So who are we to criticize GE, run by President Obama's chief business adviser Jeffrey Immelt, when it announce last week that it was moving its Xray division headquarters from Milwaukee to China?  Wake up America, if you make it uncomfortable for business to operate here, it will go elsewhere, especially when you consider that 15% of the Fortune 100 CEO's are foreign born.

I apologize for the lack of any concrete advice in this edition.  Suffice it to say that as Monday approaches, cash still looks good.