February 11, 2012 Lunatic

Fw: Risk/Reward Vol. 105

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

"There's a stranger in my bed/There's a pounding in my head
Glitter all over the room/Pink flamingos in the pool
I smell like a mini bar/DJ's passed out in the yard."---lyrics "Last Friday Night" by Katy Perry

"You may be right/I may be crazy"---lyrics "You May Be Right" by Billy Joel

"Oh, Sugar/ Honey, honey/You are my candy girl
And you got me wantin' you"---lyrics "Sugar, Sugar" by The Archies

Noah Cross: "You may think you know what you are dealing with, but, believe me you don't."
Jake Geddes: "That's what the District Attorney used to tell me in Chinatown."---lines from "Chinatown" starring Jack Nicholson

"Who likes short shorts/ We wear short shorts"--lyrics from "Short Shorts" by The Royal Teens

Holy Katy Perry! What hit the market on Friday? The Dow damage may not have been deep (-89pts) but it was widespread with only one of the Dow 30 ending in the green. The consensus reason was fresh concern over Greece. That may be--with some opportunistic profit taking for good measure. Whatever the cause--let it end. That said, I am still way ahead for the month and the year, so let's call Friday's activity "a hickey, not a bruise."

OK, Reader X, "you may be right, I may be crazy" for having so many positions in so many securities. And you are correct in observing that most professionals and pundits preach that one should hold only a handful of positions. But, what pray tell, do they put you in? ETF's? Mutual funds? Closed end funds? And what are those? Nothing more than an amalgamation of stocks including the good, the bad and the mediocre in which you hold an infinitesimal percentage. So, why not do as I have done and create a mini-fund of hand selected securities across a variety of sectors?

OK, say you in response, why not limit yourself to the best of breed as recommended by Jim Cramer? My reply is two letters--BP. In early 2010, by consensus, BP was the best oil company in the world with diversified holdings and a juicy dividend. Then, overnight came the Deepwater Horizon disaster which caused BP's stock to fall 50% in 60 days. I know because Lady Barbara and I rode it down much of the way. (This was one impetus for the adoption of my 8% loss limit.) We would have been better served had we split our oil holdings between BP, Chevron, Shell and Conoco, all excellent companies. It only takes one mistake to go from hero to zero---ask Wes Welker, or better yet, ask Giselle.

This week I continued to diversify my holdings. I wanted exposure to a host of commodities including sugar (although not honey or candy). After studying several alternatives, I opened a position in CFD, a Nuveen sponsored closed end fund which is run by Gresham Investment Management. The people at Gresham employ a disciplined approach to futures and forward contracts investing across a wide array of commodities from metals to fibers to foodstuffs. I spent a considerable amount of time studying the approach, and in the end I was convinced to invest because of the consistency of the return.

I also wanted exposure to emerging markets--especially the Chinese stock market which pays higher dividends than its US counterpart. This fact is appealing to a yield hunter such as me. But who am I to debate Noah Cross when it comes to Chinatown (or Brazil or India for that matter). Like poor Jake Geddes, I don't know what I am dealing with. So I purchased some shares in another closed end fund, IHD, with seemingly good diversification and an excellent dividend track record.

Over the past several months, I have maintained a dialogue with one loyal reader on the topic of when, if ever, the cost of the 30 year Treasury bond would start to fall. (Remember falling bond prices means higher interest rates or yields.) For the past few years, the Federal Reserve has consciously kept all interest rates low through quantitative easing (massive purchases of Treasury securities of all durations at inflated prices and thus depressed yields). Starting this past summer, the Fed has concentrated on keeping long term interest rates low through Operation Twist (massive purchases of Treasury bonds of 20 or more years duration). The purpose of these moves is to force investors out of the safe haven of government securities (because of those depressed yields) and into riskier, higher yielding investments in the private sector which in turn should spur overall economic and job growth. The downside, of course, is that if left unchecked, the expansion of the Fed's balance sheet (from printing the money necessary to purchase the Treasury bonds) will result in inflation. With the economy perking (albeit modestly) and with better (although not good) news on job growth, some pundits are speculating that Operation Twist will not be renewed when it expires in June. If that happens and if Europe stabilizes, one can expect a drop in the price of long term Treasury bonds (because the Fed won't be bidding them up) and a concomitant rise in the 30 year Treasury rates which have been languishing at an historically low 3% since October. I agree, and have decided to short 20+ year Treasury bonds by buying shares in a single inverse ETF called TBF. The bolder among us who prefer "Short Shorts" may want to try a double or triple short ETF when the time is right.

And so, my list of holdings continues to grow, although not so rapidly, since I am about 80% invested. And, I freely admit that I may be crazy, but only if you concede that in this market:

"It just may be a lunatic you're looking for".