February 18, 2011 Rockin'

Risk/Reward Vol. 106

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

"She's got a competition clutch with four on the floor/And she purrs like a kitten 'til the lake pipes roar
And if that ain't enough to make you flip your lid/There's one more thing, I got the pink slip, Daddy
She's my little deuce coupe/You don't know what I got"---lyrics from "Little Deuce Coupe" by The Beach Boys

"It crawled along the boulevard with two wheels on the grass/ That old Trans Am was dying hard but still had a lot of gas
The golden gate was wide open/The sun came shining through/Where once angels stood and cried/Everything was new."---lyrics from "Trans Am" by Neil Young

"Should 5 percent appear too small/Be thankful I don't take it all
'Cause I'm the taxman/Yeah, I'm the taxman"--- lyrics from "The Taxman" by The Beatles

"Go Greased Lightnin'/You're burnin up the quarter mile
Go Greased Lightnin'/Go Greased Lightnin'---lyrics "Greased Lightnin'" from "Grease"

"I want to live/I want to give
I've been a miner for a heart of gold"---lyrics "Heart of Gold" by Neil Young

Dear Readers, I sincerely hope that you have profited from the remarkable stock market drag race of 2012. The US economy is "purrin' like a kitten" and after "four (years) on the floor", the Dow Jones Index has its "lake pipes roarin'", closing on Friday near 13,000: the first time it has approached that "lid flippin'" number since 2008! Except for SCCO, I haven't "pink slipped" any of my purchases.

One of my big winners has been Aegon (AEG), a Dutch insurance company which derives most of its revenue and profit from its better known San Francisco based subsidiary, Transamerica Insurance. Man, has the "golden gate been wide open/and the sun come shining through" since I highlighted Aegon in Volume 99 of Risk/Reward on December 31, 2011. The common stock is up 33% since that date, and the preferred (AEF) has achieved double digit appreciation while carrying an 8+% dividend. On Friday, Aegon announced that it will reinstitute a common dividend (last paid in 2009) a fact which caused the stock to spike and which will give even more protection to the preferred yield. (Remember, preferred dividends must be paid before common dividends can be.) Indeed, the entire financial sector (which I also discussed in Vol 99) has done spectacularly. My several, high yielding preferred stock positions have rocked. That said, I believe some high yielders like NWpC, IDG and DUA "still have a lot of gas" and thus more room to appreciate.

One reader asked for my reaction to The Taxman's--Yeah, the Taxman's (a/k/a President Obama) budget proposal to raise the tax on dividends to one's marginal rate--which at its highest is 39.6%. This is just another battle in the Class War--but one that will not get much of a rise or much of a tax raise either. Dividends are already taxed at 50%: 35% at the corporate level before distribution and 15% once received by the shareholder. The Taxman's proposal raises the rate as high as 75%: 35% at the corporate level and 39.6% at the shareholder level. Why has there not been more protest? First, understand that 70% of all dividend paying stock is owned by entities that do not pay taxes at all (e.g. pension funds, 401k's etc.), and these entities don't care a whit about the tax rate at the shareholder level. Second, many corporations do not like to pay dividends (e.g. Apple), preferring to reinvest that cash at the corporate level or to embark on stock buy backs which are taxed as capital gains. And third, the stock market has already anticipated The Taxman's move, a fact which is reflected in the plethora of "tax pass through" structures (they pay no tax at the corporate level) now available to high yield hunters (like me): to wit; real estate investment trusts, oil trusts, master limited partnerships and business development companies. Indeed, The Taxman's proposal, like many from his predecessors, seems aimed to harm only one person--me. But, fret not, Dear Readers. I am nimble. I will adjust, and I will prosper.

The markets rose this week despite the riots and the "burnin' up" in Grease--or is it Greece? My read is that in the several months since Greece began to "travolta", the rest of the Eurozone has repositioned through massive liquidity infusions (e.g. the "Backdoor Bazooka" a/k/a the LTRO discussed in Vol. 95 of Risk/Reward available at www.riskrewardblog.blogspot.com ) and Greek bond liquidations such that should Greece chose to default, it will not infect the rest of Europe-- in particular not Italy and not Spain. The very successful sale of Spanish bonds this week, while Greece burned, was indicative of this.

Obviously, one cannot expect the market to continue to move upward without some significant correction. Normal market moves aside, God only knows what natural disasters (a la the Japanese earthquake) or man made tragedies (Iran) may befall us. So what does one do to hedge? One way is to buy gold (GLD) which has recently been stuck in a trading range. Naysayers notwithstanding, man has been "mining for a heart of gold" forever. Consider the following: if you melted all of the gold mined from the beginning of time, it would occupy a cube that is only 66 feet by 66 feet by 66 feet; stated alternatively, a cube with a base that is 1/2 the size of a baseball infield and 6 stories high. Shockingly little, do you agree? Despite enormous mining efforts currently underway, the gold supply grew only 2800 tons in 2011 (4%) while demand reached 4067 tons. Moreover, 50% of that demand came from China and India---markets that are just now emerging from third world status with growing middle classes which crave gold. Oh, and despite poo pooing its inherent value, central banks purchased 439 tons of gold last year compared with 77 tons in 2010 and more than anytime since 1964, when many of the world's central banks were still on the gold standard. I am a buyer.

All told (and tolled), it was a great week, occurring in a great year (so far). Enjoy it--but remain vigilant and nimble. Don't be afraid to take a profit--no one ever lost a dime taking one. And so I close with a reiteration and another Neil Young song title: when you feel it, take a profit and don't

"Cough Up the Bucks