November 12, 2011 On the Edge of Glory?

Risk/Reward Vol. 92

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

"I'm on the edge of glory/And I'm hanging on a moment of truth
I'm on the edge of glory/And I'm hanging on a moment with you."---lyrics "Edge of Glory" by Lady Gaga

"Three coins in a fountain/Each coin seeking happiness,,,
There they lie in the fountain/Somewhere in the heart of Rome"--lyrics "Three Coins in A Fountain" as sung by Frank Sinatra

"Don't cry for me Argentina/The truth is I never left you
All through my wild days/My mad existence
I kept my promise/Don't keep your distance"--lyrics 'Don't Cry for Me Argentina" from "Evita"

"There are only two things I hate in the world: people who are intolerant of other people's culture and the Dutch"---quote from "Austin Powers in Goldmember"

I find myself once again perched on the fulcrum of the risk/reward see-saw: so many tantalizing securities are available, priced at levels yielding 8 even 9% in dividends/interest. But, do these low prices indicate that we are "on the edge of glory" or the edge of an abyss? Should I use down days such as Wednesday to buy more or use upticks such as Thursday and Friday to exit with a modest profit? On the one hand, I am heartened by the new "floor" of 11,700 on the Dow which held during Wednesday's 389 point fall. I even harbor some belief that the world's leaders now understand the cataclysmic consequence of failing to deal with sovereign debt---a belief that I did not have when I exited the market in late July. Yet, I remain chary: painfully aware of Europe's now chronic inability to resolve that crisis (this week of course centered on Italy). We are all "hanging on a moment"---moment to moment. I have decided to invest up to 25%, with 75% still in cash. However, I am prepared to exit in a flash if the floor does not hold.

Speaking of Italy, is the only answer to its mountainous debt for every man, woman and child in the world to throw three Krugerrands into Trevi fountain? I doubt that the Chinese will. No, the only answer is for the European Central Bank (ECB) to print Euros sufficient to buy and hold a huge percentage of the debt of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) in return for a prohibition against any additional borrowing and a reduction in their entitlement lifestyle. Germany will not like this European version of quantitative easing---as it continues to insist that private bondholders share in the pain by taking huge writeoffs. But frankly, since so many major European banks have relied on these bonds as the bases for their core capital--a writeoff sufficient to satisfy the Germans would sink those banks and would freeze the entire credit market worldwide. Even now international banks are balking at lending to Eurozone banks, fearing their "counterparty" is no longer credit worthy---and interbank lending is literally what makes world commerce possible. The sooner the ECB (read, Germany) recognizes the need for massive intervention, the sooner the healing can begin.

On a more positive front, there was a flood of good quarterly earnings reported this week . Moreover, on Tuesday, I awoke to news of a huge oil discovery by YPFRepsol (YPF), the former Argentine national oil company--a discovery that increased its reserves by at least 50%! I had been looking at YPF because of its huge dividend (11%) occasioned by a precipitous drop in share price (remember high yield means low share price) following an announcement by the Argentine government that henceforth all overseas profits must be repatriated to Argentina before being distributed as dividends. This will be a pain in the arse, but should not interfere with the dividend. This week's discovery merely reaffirmed my desire to buy--and I did. This is more speculative than my usual investment--but what a potential return! I simply could not "keep my distance". I hope no one "cries for me"as a result of this gamble. P.S. Don't get me started on American oil policy---did you see the cowardly decison to postpone the building of the Keystone XL pipeline until after the 2012 election? This means going for at least two more years without 500,000 bbls/day of oil from Canada and deferring 20,000 high paying jobs.

With quarterly earnings reports come quarterly conference calls--most of which are transcribed and made available to the public. (See, www.seekingalpha.com ) In these calls and the q&a that follow, companies explain what they have done and what they expect in the future. In the parlance, they give "guidance" to anyone who cares to listen/read. This week two of my favorite Dutch insurance/financial companies, ING and Aegon (in the US known as Transamerica) reported. I was heavily invested in their investment grade exchange traded debt before the 2010 European sovereign debt crisis and have been looking to reinvest if and when I was comfortable that each had reduced its exposure to the PIIGS. This week during its conference call, each explained how it had off loaded PIIGS exposure--and soon thereafter I bought IDG, AEF and AEV. These securities and others issued by ING and Aegon have been sullied by the broad brush used to paint all European financial institutions as irresponsible. I do not believe it is warranted with these two, whose investment grade hybrid debt is cheap now and thus paying very high interest. Unlike Mr. Powers, I like the Dutch. (For a detailed explanation of how I mine for investments see the July 9, 2011 edition of Risk/Reward, Vol 75, located at www.riskrewardblog.blogspot.com )

In closing, I hope that I am on the "edge of glory", and that my love affair with high yielders does not devolve into another Lady Gaga lyric---"A Bad Romance".