August 25, 2012 Bright Eyes

Risk/Reward Vol. 133

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

"Turn around, every now and then I get a little bit nervous/That the best of all the years have gone by
Turn around Bright Eyes/Every now and then I fall apart."---lyrics from "Total Eclipse of the Sun" by Jim Steinman/Bonnie Tyler

"You think I'm your fool/Well you may just be right
Cause minute by minute by minute/ I keep holding on"---lyrics from "Minute by Minute" sung by the Doobie Brothers

"Let's get down to business/I don't got no time to play around
What is this, must be a circus in town/Let's shut down on these clowns"---lyrics from "Business" by Eminem

After six weeks of upward movement, the Dow Jones Industrial Average (DJIA) did a "turn around," ending the week down 118 points. Was this just a hot market catching its breath, something that happens "every now and then?" Or, should we be "a little bit nervous/That the best of all the years have gone by?" Will the market recover or will it "fall apart?" Let's take a look, Bright Eyes.

The week started well and by Tuesday mid morning the DJIA was coasting above its four year closing high. At first, for technical reasons, there was a pullback and then "minute by minute by minute" the bad news began to roll. Federal Reserve member, James Bullard, stated on CNBC that quantitative easing may not be so imminent. Then, the Congressional Budget Office revised its report on the impact of the Fiscal Cliff (expiration of the Bush tax cuts, sequestration of appropriations and end of extended unemployment benefits all scheduled to occur on January 1, 2013) concluding that absent legislative action the Cliff will result in a recession in 2013. HSBC reported that the slowdown in China was worse than had been reported. Iron ore, a bellwether of industrial output, fell to a four year low. All the while, uncertainty continued to reign in the still vacationing Eurozone. By the closing bell on Thursday, the DJIA stood at 13,057, some 269 points below its Tuesday mid day high. On Friday, a relief rally spurred by a letter from Chair Bernanke to Congress that Fed action is available if necessary added 100 points to the DJIA.

Through it all, even though "you may think me a fool (and you may just be right)", I "kept holding on". I continue to believe that recession remains the number one concern of world economic and political leaders and that eventually various forms of stimulus (quantitative easing and a resolution of the Fiscal Cliff by the US, sovereign bond purchases by the European Central Bank and infrastructure investment by China) will be instituted. We simply have not reached the requisite level of desperation yet. That said, I remain disciplined. When RIO approached my 8% loss limit, I sold it, unhesitatingly. And I will go to 100% cash if and when I conclude that any element of the above described stimulus is not forthcoming. We need all three major economies to act in order to avert a world wide recession.

In the meantime, I remain in search of yield. As reported earlier, one of my favorite high yield sectors is "business" development companies ("BDC's"). These are pools of money that finance the sale or restructuring of privately held, middle market companies through senior loans, mezzanine financing and equity investments. BDC's have been very active over the past few years as commercial banks have shied away from financing middle market transactions. The king of this sector is Ares Capital (ARCC) which just last week launched a secondary offering of its stock. These events are always good buying opportunities, but if you want to take advantage of them you "can't clown around". I didn't "play around" but "got down to business" and grabbed some shares at a very attractive price. I also loaded up on FGB, a closed end fund comprised of the shares of several high quality BDC's, the price of which became attractive after it went ex-dividend this week.

Also, for those in hunt of yield in the oil and gas exploration and development space, take a look at Vanguard Natural Resources (VNR), a smaller version of Linn Energy which like LINE employs a smart hedging strategy, but, even better than LINE, pays an 8+% annual dividend on a monthly basis.

I bought some AAPL stock on a pullback on Tuesday. By any measure, Apple is a very cheap stock even at my entry point of $657. I rode AAPL from $427 to $636 earlier this year. We will see what Friday's patent verdict and the upcoming debut of the I-phone 5 bring.

No doubt about it, this was an anxious week. And I am very mindful of Bonnie Tyler's advice about "Heartaches". Don't let them hit you "when it's too late"; don't let them "hit you when you're down". If I am wrong about the stimulus, I will exit. Such an exit will undoubtedly cause me heartache, but it will be assuaged by some profits, I assure you.