March 17, 2011 Know When To Hold 'Em---

Risk/Reward Vol. 110


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


"Life's a mess, don't stress/Test
I'm givin', but be thankful that you're livin'/Blessed"---lyrics "Holla If You Hear Me" by 2Pac


"I'm leaving you tomorrow/Seems to me girl/You know I've done all I can
You see I've begged, stole and borrowed/Gal, that's why I'm easy/I'm easy like Sunday morning"---lyrics "Easy" by Lionel Ritchie


"I'm sure I'll enjoy your company, apple pie a la mode
You be turning me on with your modesty, apple pie a la mode"--lyrics "Apple Pie A La Mode" by Destiny's Child


"You got to know when to hold 'em/ Know when to fold 'em
Know when to walk away/Know when to run"---lyrics "The Gambler" by Kenny Rogers


On Monday, the Dow closed up a modest 37 points. On my ride home, I listened to Larry Kudlow's interview of noted bank analyst, Dick Bove who described his take on the Federal Reserve's "stress test" of the nation's 19 largest banks, the results of which were to be made public on Thursday. Bove predicted that most would pass the test which was designed by regulators to simulate a significant financial "mess" similar to that experienced in 2008. He further prognosticated that several banks would be allowed to raise their dividends. Feeling "blessed" to have heard the interview, I opened a position in JP Morgan Chase (JPM), the best of the money center banks, first thing Tuesday morning. At around 3pm EST Tuesday, JPM announced that it had just been informed by the Fed that it had passed the test. It further stated that it was increasing its dividend 20% and launching a massive stock buy back. Holy 2Pac, holla if you hear me! JPM shot up 7% immediately and forced many of the 15 other banks that passed the stress test to make similar announcements. The Dow spiked, finishing up 227 points --led for the first time in a long while by the banking sector. More importantly, the Dow catapulted into what appears to be a new trading plateau above 13,000.


This great news followed an encouraging announcement made earlier in the day by the Federal Reserve's Open Market Committee that in the Fed's opinion the economy and employment were both growing at a moderate pace, and that in its opinion, the global financial crisis (read, Eurozone sovereign debt situation) was under control. Market gurus interpreted these statements to mean that the Fed would not embark on a further round of quantitative "easing" any time soon and would not renew Operation Twist (selling short term and buying longer term Treasury bonds as discussed in Vol. 85 at www.riskrewardblog.blogspot.com ). In other words, having "begged, stole and borrowed" and indiscriminately printed money to upbid US Treasury bonds (and thus keeping interest rates artificially and historically low), the Fed may be leaving the bond market. Assuming this is true, assuming the stock market remains strong and assuming that no exogenous event causes a flight to safety, it's "easy, easy like Sunday morning" to predict that Treasury bond prices will fall.


So what does all of this mean to the individual investor?


First, if the stock market is actually gaining confidence in banks, further investment in that sector is warranted. As loyal readers know, I am overweight this sector (and very happily so). Nevertheless I sold some foundering GLD and bought Bank of America (BAC). This huge institution is trading at 45% of book value. Healthy banks generally trade at or above 100% of book value. Thus, if BAC is getting healthier, there is a lot of room left to run despite its recent hefty gains.


Second, if the Fed does slow the pace of quantitative easing, it will be time to start shorting U S Treasury securities.. I opened a position in TBF in anticipation of this occurring. If Treasuries drop in price to pre-August, 2011 levels (when the threat of a US default reached a boiling point and the Greek debt crisis re-emerged), TBF should gain 25%.


Third, taking the Fed at its word that the Eurozone crisis is under control, I bought RBSpT, one of the preferred stock issues of the Royal Bank of Scotland which suspended dividend payments for a minimum period of 2 years back in April, 2010. The market has begun to believe that these dividend payments will recommence, and RBSpT is up 40% so far this year. By my calculations, it has another 20% to go if dividend payments are re-instituted (not counting the 10% yield).


Talk about A La Mode, how 'bout dat Apple! As discussed in Vol. 103 last January, "I sure enjoy this company", but I have not "been turned on" by how "modestly" the market has priced, or should I say underpriced, the stock. Well, in the past two weeks, the market has viewed AAPL more favorably, in part as a response to the persistent rumor that it will declare a dividend and distribute some of the $100billion in cash that it holds. Whatever the reason, it is all a la mode to me, with AAPL appreciating 37% since my re-entry on January 17, 2012.


Thanks to those of you who wrote me last week. I received some great feedback. One theme that resonated was a lament on the total absence of any guidance on when to sell. Amen! Whether "buy and hold" was ever an acceptable approach, it certainly has not been for me during my 35 years of investing. From this man's viewpoint, "you got to know when to hold 'em; know when to fold 'em; know when to walk away; know when to run". Accordingly, I will spend time on this subject in the future. In the interim, do yourself a favor-- sell something this week--be it a big winner or any loser or a stock that just doesn't feel right (like Chimera after it fired its auditor this week). It doesn't matter, just do it. And when you are done, do it again. The more you do it, the easier it is. As I have discussed with Lady Barbara for the past few years, selling wisely is as important as buying wisely.


"And she believes in me"


On this topic, you should as well..