Fw: Risk/Reward Vol. 89
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THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Adversity on which I thrived/Destroy the alter
Now I am vilified/ Nostradamus, Nostradamus"---lyrics from "Nostradamus" by heavy metal favorite Judas Priest
"I used to want you so bad/ I'm so through with that
Cause honestly, you turned out to be the best thing I never had."--lyrics from "Best Thing I Never Had" by Beyonce
"Ares, exceeding strength, chariot rider, golden helmed, doughty in heart, shield bearer, savior of cities, harnessed in bronze, strong of arm, unwearying, mighty with the spear."---Homer--Hymn 8 to Ares (700BC).
Nostradamus, I ain't--No.1. As discussed last week, I bought Apple in anticipation of block buster earnings only to suffer a 6% decline when the market received a disappointing report on Tuesday. Frankly, I believe it to be an overreaction and assuming AAPL does not dip any more, I am confident that I will be back to even or better by next quarter. I know better than to buy in anticipation of earnings, but with Apple (again!) I just could not resist.
Nostradamus, I ain't-No. 2. With the markets closing near the trading range high (11,700) last Friday, I speculated that strong earnings reports throughout the week would vault the market through the range and set up the rest of the year for solid stock gains---absent catastrophic news from Europe. The earnings all week (except Apple) were strong and nothing catastrophic came from Europe, but good earnings were not enough to vault the market out of the range---even though Friday did close above 11,800. The fact remains that the markets are still captive to the hour to hour stream of yeah/boo news regarding the European debt crisis.
This trading range pattern is exhausting and frustrating! What can a lowly investor do? Answer: Don't despair. KEEP STUDYING!!!! Allow me to elaborate.
As my early subscribers know, I am primarily an income investor---always in search of big, safe and secure dividend/interest payments. In mid 2010, I became a fan of the preferred stock of Citigroup (C), Bank of America (BAC), JPMorgan (JPM) and other such banks as they worked their way out from under the 2008-2009 Lehman Brothers induced financial crisis. I bought positions in several preferred issues well below the call or redemption price (usually $25) each of which carried a dividend in excess of 7%. I reaped great quarterly dividends and sold all of these at a handsome profit before the August, 2011 market swoon. Since that time, these preferred shares, like virtually all bank stocks, have taken a beating---so much so that they are again looking mighty juicy. Indeed, my interest was peaked even more when C, BAC and JPM reported surprisingly good earnings this week. That is, of course, until I read more deeply into the reports. YIKES! Therein, I learned that C has $30bn of loan exposure in Portugal, Italy,Ireland, Greece and Spain (PIIGS). JPM has $20bn exposed to the PIIGS, and BAC $15bn. All claim that their exposure has been "hedged" through collateral and credit default insurance, but this merely begs the question as to how credit worthy their counterparties are. Problems in Europe could wipe out any equity cushion and could cause the preferred dividends not to be paid. My deep dive into the reports saved me from buying "...the best thing I never had."
Further study also revealed, however, that banks, now so preoccupied with Europe, are underserving the borrowing needs of corporate America--especially the small and middle market (companies with earnings below $100 million). This void is being filled in part by business development companies (BDC). BDC's are largely unregulated pools of money that provide capital in several forms--from senior secured loans (like banks) to stock investments (like private equity groups)--mainly to small and middle market privately held companies. BDC's are attractive to yield hunters like me because they are required to distribute 90% of their earnings to their shareholders.
One of the largest and most respected BDC's is the "exceedingly strong, golden helmed, savior of cities" Ares Capital Corporation (ARCC). Although it has little direct exposure to Europe, ARCC has taken a beating like all financial institutions. I have long liked its exchange traded debt, ARY, which recently has been trading below its redemption price and currently yields better than 7.75%. I recently started buying it again. Also, ARCC common stock dipped recently on the announcement that it is raising more money through a secondary equity offering (usually priced below the market) so I bought some. I intend to buy even more once the secondary is priced. This bad boy currently yields 9.7% in dividends.
Alas, the fact remains that, based on earnings, stocks are incredibly cheap right now----unless of course the world's markets are sent into a tailspin by sovereign debt defaults in Europe. I am making cautious purchases of stocks which I believe have minimal exposure to Europe---ever ready, however, to exit if a major disruption occurs. That said, I am still 90% in cash--ever thankful that I bailed on the market in July. My current holdings (except Apple) average over 8% in dividend/interest, and I am in positive territory even with AAPL's poor performance this week. Here is a list: PER, SDT, AAPL, T, MO, EEP, FTR, CTQ, CTW, STON, TNH, RAI, NLY, AT, WIN, KMP, AHTpE, ARCC, ARY, SDRL, BCF.
Remember past editions are available at www.riskrewardblog.blogspot.com
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