August 11, 2012 Before and After

Risk/Reward Vol. 131

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

"The sun's gonna shine in my backdoor someday
Just you wait and see, just you wait and see."---lyrics from "Wait and See" by Canned Heat

"His future's bright, my future's dim/And all the dreams we shared you share with him
See the difference between old and new/Before and after losing you."---lyrics from "Before and After" by Chad and Jeremy

"Bad news is come to town/He's walkin' three feet off the ground
He's ordering another round."---lyrics from "Bad News" by Neil Young

With no pronouncements from the world's central banks expected or received this week, the stock market putzed along "waiting." It seems all are hoping "to see" some "sunshine in the backdoor someday"---sunshine in the form of further stimulus from the US, China and the Eurozone. Market stability reigned with the Dow closing at 13208, up 112 points for the week. The S&P closed above the magical 1400 level. Refreshingly, stock fundamentals (not exogenous events) dictated price gains and losses.

As I discussed last week, I like to buy dividend paying stocks soon "after" they report disappointing news. Optimally, I like buying after I read the transcript of the earnings conference call (which usually occurs simultaneously with the earnings report and can be found at www.SeekingAlpha.com). The more detailed information there affords me a level of confidence; provided, of course. that the reasons for the disappointment are explained to my satisfaction. I used this technique this week to buy more ETP and AGNC on post earnings dips (although I had to double down on AGNC the second day after the report in order to effect an immediately profitable trade). Sometimes, not often, I gamble. I buy stocks "before" earnings are reported on a hunch that the earnings will exceed expectations. I shouldn't, I know---but sometimes I just can't resist. I did so a few weeks ago, buying Frontier Communications (FTR) in advance of its earnings announcement. This produced a homerun as FTR blew away expectations. I have enjoyed a 22% appreciation in just two weeks (not counting a whopping 9+% dividend!). So, I decided to employ the same technique to add to my holdings in Windstream (WIN) one of FTR's competitors in the telephone landline space; all the while hoping that I would "share the same dream". OUCH! The stock fell like a rock on the day WIN reported disappointing earnings. "Dim"wit! If only I had listened to Chad and Jeremy--be a buyer (or a boyfriend for that matter) AFTER heartbreaking news, and your "future will be bright." I don't mind owning WIN with its 10+% dividend. I just wish I had bought after the earnings report and not before.

On Thursday, China reported that its factory production had dropped to a three year low, and on Friday China reported disappointing export numbers. Ironically (but predictably), this "bad news" was favorably received by the markets, spurring speculation that now China must surely "order another round" of stimulus, like the $600billion infrastructure improvement binge it initiated in response to the worldwide recession in 2008-2009. That exercise superheated China's economy, causing significant inflation (especially in real estate); so I don't expect stimulation at that level. But, I do expect some significant spending---and that is good news for commodity/mining, industrial and oil stocks.

So far, my thesis has worked. I have profited (WIN notwithstanding) from my belief that the world's major economies will do whatever is necessary to avert another recession. Obviously, other market participants concur. I remain chary, however. I am not like Canned Heat. I don't believe that we are living in a time or place "where the water tastes like wine" or where you "can jump in the water and stay drunk all the time." (from "Going Up The Country"). Someday, this stimulus induced market buzz will end, and I may have to exit---yet again.