January 21, 2012 Pusherman

Risk/Reward Vol. 102

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

"I've never had a single thing that is new/Even Jake the Plumber, he's the man I adore
Had the nerve to tell me he's been married before
Everyone knows that I'm just Second Hand Rose from Second Avenue"--lyrics "Second Hand Rose" by Fannie Brice/Barbra Steisand

"I'm your doctor in need/Want some coke/ Want some weed
You know me/I'm your friend/Your main boy-thick and thin/I'm your Pusherman."---lyrics "Pusherman" by Curtis Mayfield

"There's talk on the street, it sounds so familiar/Great expectations, everybody's watching you
Johnny Come Lately, the new kid in town/Everybody loves you, so don't let them down."--lyrics "New Kid in Town" by the Eagles

"She takes my money when I'm in need/ Yeah, she's a trifling friend indeed
Oh, she's a gold digger way over town/ That digs on me"--lyrics "Gold Digger" by Kanye West

As early subscribers know, I am a yield hunter. As such, I am a fan of real estate investment trusts (REIT's), master limited partnerships (MLP's) and business development companies (BDC's) because each must distribute 90% of their earnings in order to qualify as a "pass-through" entity for income tax purposes. One by-product of this requirement is the need for these entities to issue new stock from time to time. The reason: they cannot retain earnings/cash to fund growth. (Unlike Apple which has nearly $100billion---yes I said BILLION--of retained earnings/cash sitting on its books.) When these pass-through entities issue new stock--called a "secondary offering"-- they do so at a price which will assure that all the shares will be sold; thus usually at a discount to the market. This causes a drop in the stock price which can frustrate current shareholders but which also can present an excellent buying opportunity, considering that the stock of good companies rebounds within a few days of the offering. I used secondary offerings of DFTpB, ERF, MMLP and NAT this week to make what I believe will be excellent buys. Fannie Brice made a fortune as a Second(ary) Hand Rose, and we can as well.

This week the central banks of Europe, China and the United States expressed dissatisfaction with economic growth, and it is expected that each will take action to spur it. China is expected to lower interest rates; in February the European Central Bank will make another 500billion Euros worth of inexpensive three year loans available to Eurozone banks: and the Federal Reserve next week is expected to hint that a trillion dollars of QE3 may be in the offing. Everyone is addicted to cheap money, and the heads of central banks (the "Pushermen") are most accommodating in providing liquidity. Whether it is weed, coke or cheap funding, all addictions end badly--ultimately.

But, in the short term, we can all enjoy the "high" that the influx of money will provide. It will afford some help in stabilizing Europe (note how little news has come from that front lately--and to such good effect). It will spur further development in China. And, it should boost the stock market, as investors are "pushed"out of ever-lower yielding Treasuries and into riskier investments like equities. The Dow Jones is already up 500 points (4%) this month, and the introduction of even more money portends higher stock prices if the upcoming earnings reports warrant them. I do not intend to be a Johnny Come Lately. I have "great expectations", and I do not intend to "let myself down." I am currently 40% invested. A list of my holdings is attached.

Financials have been very good to me so far this year (AEG up 23% since 1/5/12; IDG up 14% since 12/30/11; BCSpD up 9.5% since 1/4/12; AEF up 8.5% since 12/29/11), but I have reached my exposure limit to this sector. Oil continues to do well although the companies primarily committed to natural gas are suffering somewhat as nat gas hit a 10 year low. With worldwide demand increasing and continued anxiety surrounding the Gulf of Hormuz, I don't see oil prices plummeting any time soon.

I look for my "trifling friend" gold (GLD) to appreciate again this year so I bought some this week. Moreover, if the market continues to appreciate, I see tech, especially Apple, also doing well. And why not! Do you own an I-Phone 4S? What a magnificent product! I have a position in AAPL in advance of it earnings report. Indeed, I could have cited O.C. Smith and his "Little Green Apples" song to the same effect as Kanye West. Apple and GLD both look like excellent trading stocks for the foreseeable future. I will likely "trade" index ETF's as well.

Enjoy perusing my holdings. As noted, I am overweight financials and oil and will use the remaining 60% to balance the portfolio. Any tips, observations, leads or criticisms are appreciated. Worry not, you won't "Rain on My Parade". The upcoming week is chock full of earnings reports and should be very interesting.