Fw: Risk/Reward Vol. 91
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING . RELY ON NOTHING STATED HEREIN.
Limo Driver--"Would you like for me to take the Chiswick Roundabout through Hounslow and Stains?"
Aaron Green--"What is this, f*#king Middle Earth? Just take us to the airport, ok."-- Script from the movie "Get Him to the Greek"
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness..." "A Tale of Two Cities" by Charles Dickens
"Every ceiling, when reached, becomes a floor upon which one walks as a matter of course and prescriptive right." Aldous Huxley author of "Brave New World"
"Little darling, the smile is returning to the faces/Little Darling, it seems like years since it's been here
Here comes the sun, here comes the sun/And I say, it's all right"---lyrics from "Here Comes the Sun" by the Beatles.
In the movie "Get Him to the Greek", Aaron Green (Jonah Hill) is dispatched by his boss, the head of a talent agency, to escort Aldous Snow (Russell Brand), a reprobate, has-been rock star from his home in London to the Greek Theater in Los Angeles, the site of Snow's comeback concert. During the trip, Aaron is brought to the brink of ruin several times due to the irresponsibility of his charge. Sound familiar? How many times will the Eurozone escort Greece to the altar of financial salvation only to have it balk at contributing one euro into the collection plate?
The above notwithstanding, I am heartened by how the market reacted to this week's rollercoaster events. The Dow took a body blow on the news of a possible Greek referendum, falling more than 550 points on Monday and Tuesday. But it rebounded respectably as the week progressed. More importantly, note that its lowest point in the week (11,650) or "floor" was the "ceiling" of the trading range (10,700-11700) which dominated the market from early August through most of October and about which I have written extensively in the past. Have we entered a "Brave New" trading range where Q3's ceiling is Q4's floor? With the 50% writeoff (haircut) of Greek debt taken last week, maybe the specter of a Greek default just is not as scary as before. Whatever the reason, I was sufficiently comfortable that I did not bail---I actually added to some positions and opened others.
"A Tale of Two Telecoms" played out this week. On November 2, 2011, Frontier Communications (FTR), one of the three large legacy landline companies, reported disappointing earnings. As loyal readers know, I have been a fan of FTR because of its double digit dividend. But, this favorite continues to struggle to digest its acquisition of the mountain of assets it purchased from Verizon last year. In order to meet its outsized dividend, it had to distribute more than 70% of its free cash flow. This is an unhealthy percentage, and the market punished it. The next day, another landline company, CenturyLink (CTL) reported earnings and gave a bright picture of its integration of Qwest, its most recent acquisition. Its dividend payment only required 50% of free cash flow which portends a possible increase in dividend in the future and made even more secure the positions I hold in its exchange traded debt (CTQ and CTW). I love this company. The third landline leader Windstream (WIN) also reported this week and also disappointed Wall Street although not to the extent of FTR. I own WIN and plan to add some more on this dip. The dividends from these babies are just too good to resist.
Some of my hottest holdings are in the nitrogen based fertilizer market, TNH and UAN. Both distribute monster dividends, and their prospects for 2012 are outstanding in light of the anticipated record plantings of corn and the continued depressed price of natural gas, the main feedstock for this product (another economic benefit of hydrolic fracturing or fracking). Look for a new entry into this space in the coming weeks--Rentech Nitrogen Partners (RNP)
As loyal readers know (See Vol 89 available at www.riskrewardblogspot.com ), I am a huge fan of business development companies (BDC's) like Ares Capital in which I own both common stock (ARCC) and exchange traded debt (ARY). As discussed previously, BDC's are pools of money that provide capital to small to medium sized businesses, usually in the form of senior secured loans--the profitable and boring business in which commercial banks used to excel . They are of great interest to me because in order to keep their pass-through tax status they must distribute 90% of their earnings. One sunny spot in this space is Solar Capital (SLCR). Last week it announced earnings including a writedown of debt mandated by arcane accounting rules. This caused an immediate drop in the stock. My comfort level was restored when the CEO explained the situation on Cramer's Mad Money. I grabbed some on its way back up and plan on enjoying its double digit dividend for months to come.
So another yeah/boo Eurocentric week ends. I will continue to buy, to be cautious (but not timid), to be watchful and to be nimble.
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