Fw: Risk/Reward Vol. 94
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN
"Once I built a railroad, I made it run/Made it race against time
Once I built a railroad, Now it's done/ Brother, can you spare a dime?"--Lyrics from 1932 hit song "Brother Can You Spare a Dime"
"Lloyd Banks in the house, bad news
Tony Yayo in the house, bad news
50Cent in the house, bad news
Whenever 50 around, it's bad news"--Lyrics from "Bad News" by rap artist 50 Cent
"When you're weary/Feeling small
When tears are in your eyes/I will dry them all...
Like a bridge over troubled waters/I will lay me down"--Lyrics from "Bridge Over Troubled Waters", Simon and Garfunkel
I hope everyone had a restful and joyous holiday. Lady Barbara and I basked in the warmth of Denver's sunshine (70F) and the smiles of two of our beautiful grandchildren. Despite the challenges that face us all, Americans have much for which we should be thankful.
That said, Brother, can you spare a dime? Once again, our governments, at home and abroad, have proven themselves unworthy of us, the governed. The result is the worst Thanksgiving week stock performance SINCE 1932! The Super Committee proved itself as ineffective as a Jay Cutler tackle (sorry, Matt and Todd, but could not resist). And speaking of all thumbs, when will Mario Draghi, the European Central Bank's new president, realize that dribbles and drabs of bond buying on the secondary market is ineffective at stemming the sovereign debt crisis? Turn on the printing presses and take default off the table. Perhaps subscriber and noted wag Larry B. is correct: Europe has it backwards--a German pope and an Italian central banker. If the failure of the German bond sale on Wednesday is not enought to awaken everyone is Europe that drastic measures are needed, then perhaps nothing will.
Adding insult to injury, the news from China is no longer neutral. This week the Hong Kong Purchasing Manager's Index fell to 48 indicating a slow down in the Chinese economy. "Whenever around 50 (or lower), it's bad news!" Moreover, for the first time since 2007, more foreign capital left China than entered. This exit is due in part to the working capital needs of international companies--working capital that formerly was supplied by loans from large, European banks. These banks continue to shrink their lending activity and to hoard capital in order to cover the losses sustained in writing down Euro zone bond losses. Remember, European banks have historically provided 25% of working capital to US companies through loan syndications and the lion's share of working capital to South American companies. This shrinking of European lending is a vicious cycle, as credit, the mother's milk of commerce, continues to evaporate.
On the personal front, I did NOT exit the market--holding steady on my 25% market allocation despite the market's free fall below the new Dow floor of 11,700. My holdings average over 8% in annual dividends/interest and with notable exceptions in natural resources (GGN, BCF) and European financials (IDG, INZ and NWpC), have kept their value. Overall, I am down 2% in principal on my market plays--which is tolerable considering what has happened. Frankly, I am perplexed by the precipitous fall of the preferred stock of National Westminster Series C (NWpC). The National Westminster franchise is at the heart of the what its parent, the Royal Bank of Scotland (RBS), sees as its future. As revealed in its most recent quarterly report (November 4, 2011), RBS has done a stellar job of reducing its exposure to continental sovereign debt and is handling its significant exposrure to Irish debt in a responsible and seemingly transparent manner. NWpC paid its committed dividend even during the worst of the 2008-2009 crisis, when the stock traded in the single digits. Currently trading at $17, it pays an astounding 11.5% in interest! If and when it is redeemed at $25, NWpC will provide a 45% profit--not counting dividends. Surprisingly, NWpC trades significantly lower than similar securities that have a lower credit rating (e.g. ZBpC). Does anyone believe that the UK government, which owns 83% of RBS will NOT provide whatever "bridge" is necessary to help RBS "over these troubled waters"? After all, RBS has done everything that the government oversight committee has demanded--and more. What am I missing? Please comment.
I probably will regret not exiting all positions when the 11,700 level was breached, but the temptation is to double down on some of my positions, not to run. If I were younger, I likely would do so. But at my age and stage , I will likely sell and take the 2% loss on my current 25% allocation if conditions worsen at all.
Are you enjoying these posts? If so, let me know. Remember, past editions are available at www.riskrewardblog.blogspot.com .
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