January 14, 2012 Kohoutek

Risk/Reward Vol. 101

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

"She carried ribbon, she wore them out/Courage built a bridge/Jealous tore it down
At least it's something you've left behind/Like Kohoutek, you were gone"--Lyrics from "Kohoutek" by REM

"I was born in a cross fire hurricane/And I howled at my mom in the driving rain
But it's all right now, in fact it's a gas/ But it's all right now, I'm Jumpin' Jack Flash
It's a gas!"---Lyrics from "Jumpin' Jack Flash" by The Rolling Stones

"A European/ I wish I had European style
Designer cars and the way of living/ With burning eyes
I could watch you smile"---Lyrics from "European" by A Flock of Seagulls

In December, 2010, Meredith Whitney, the stock analyst who accurately predicted the 2008 banking crisis, opined that in 2011, between 50 and 100 cash-strapped and debt-laden municipalities would default on municipal bonds. No prediction since the ill fated Comet Kohoutek has proven such a dud, and all that Ms. Whitney's prophecy
"left behind" were several months of depressed municipal bond prices. By year end 2011, however, this sector had rebounded handsomely with no more than the usual number of defaults. In fact, a large number of municipalities are now getting their bloated budgets in order and are experiencing better than expected tax revenues. Before Ms. Whitney's prognostication, I held positions in several municipal bond closed end funds (NMO, NPM, EIM) which I sold for a loss. As part of my diversification effort, I am investigating a re-entry. In the interim, I have invested in the exchange traded debt of Assured Guaranty Municipal Holdings, Inc.(AGOB), a Bermuda based insurer of municipal bonds, which carries an A3/A+ rating and currently pays 7% in interest.

That (Jumpin' Jack) Flash you see in the Western skies, "it's a gas!" In fact, it is the wasteful burning of natural gas emanating from hundreds of new wells made possible by hydraulic fracturing (fracking). As discussed in several previous editions (www.riskrewardblog.blogspot.com ), thanks to fracking the United States, which as recently as 2008 was a net importer of natural gas at $9/mmBTU, is now awash in this resource which last week was priced as low as $2.70/mmBTU. Due to commitments to ground lessors and to the value of other products from the same wells (e.g. oil and natural gas liquids), several producers have elected to burn the now too-cheap natural gas at the well head instead of paying to pipe it to already-full storage facilities. What a shame! If our government gave the same incentives to natural gas that it does to pie-in-the-sky "green" energy sources (wind and solar), over-the-road trucks, taxis, electric generators of all types, etc. would be powered predominantly by this cheap, plentiful and clean fuel source. Think of it---energy independence is within our grasp, but is going up in smoke (quite literally) because our administration needs votes from anti-fracking environmentalists.

From an investor's perspective, take care to select the securities of those companies and trusts that concentrate their drilling efforts on oil and/or natural gas liquids (which are much desired due to various industrial uses). Do your homework, and don't "howl" at me if you are caught in the "driving rain"!

Even though the short term Italian and Spanish bond auctions went well on Thursday, I'd rather be a flock of seagulls than a European right now---at least financially speaking. On Friday, the never ending saga of Greek debt raised its ugly head again, doubt about Italy and Spain's ability to sell longer term bonds (e.g. 10yr.) surfaced, and after the markets closed, S&P downgraded 9 European countries including France.. That said, the market this week differentiated between those European companies that have distanced themselves from the sovereign debt crisis and others. For example, the preferred stock of AEG and ING did well as did the preferreds of several British banks (NWpC, HBCpA, BCSpD).

Year to date (all of 2 weeks!), my big winner is JZK, the exchange traded debt of Sprint which is up 23% since I purchased it on December 22nd. I am also impressed by the stability of the preferreds/exchanged traded debt of real estate investment trusts (particularly those companies in the storage industry such as PSApS and CUBEpA) and of insurance companies (MHNA, AHLpA).

I am now about 25% invested, overweight on financials and oil, but in the process of diversifying, picking up some blue chip industrial exposure and always in the hunt for good dividend payers like tobacco, REITS, utilities, etc. The portfolio averages well over 7% in dividend/interest payments, and has experienced decent capital appreciation. I have made 64 purchases since December 8, 2011, and I have a long list of others to buy, assuming reasonable market stability. In effect, I am reassembling that which I had pre-July 29, 2011, another Baskerville Fund (my "7% Solution"--an homage to Sherlock Holmes). I don't need the stock market to spike. To quote another 'Stones hit, just "Gimme Shelter" from volatility.