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.