August 4, 2012 Anticipation

Risk/Reward Vol. 130

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

"Anticipation, anticipation is makin' me late
Is keepin' me waitin'"---lyrics from "Anticipation" by Carly Simon

"I count the spiders on the wall/I count the cobwebs in the hall
I count the candles on the shelf/When I'm alone, I count myself"---lyrics from "The Counting Song" by the Count (Sesame Street)

"I've lived long enough to have learned/The closer you get to the fire the more you get burned
But that won't happen to us/Because it's always been a matter of trust."---lyrics from "A Matter of Trust" by Billy Joel

In light of recent pronouncements from both the Federal Reserve and the European Central Bank (ECB) (see last week's quotes), the world's stock markets were "anticipating" action when each of those central banks had meetings this week: quantitative easing (QE3) by the Fed and sovereign debt purchases by the ECB. Neither occurred, with both "keepin' us waitin'" until their meetings in September before we see any such movement, if then. The markets' reactions were not surprising with the Dow Jones Industrial Average dropping 32 points on Wednesday following the Fed meeting and 97 points on Thursday following the ECB meeting. What WAS surprising was how shallow the drops were and how quickly the markets recovered on Friday with the Dow gaining 217 points ostensibly on a modest jobs report. I submit that the rebound was due more to the belief that the world's largest economies (especially China) and their central banks will do everything in their power--be it stimulus spending or monetary easing-- to avert a recession. It is this belief that provides me the impetus to continue to invest in stocks.

As the earnings season winds down, it has become apparent that the U. S. economy is weakening--or is it? Although more than half of the reporting companies have missed expected revenues and profits, one must remember that accounting is not synonymous with "counting". Indeed, accounting is more an art than a science. Admittedly, Count, a spider is a spider, but is a spider egg a spider or work in process? Is an unused cobweb an asset or has it outlived its useful life and thus should it be written down (not counted)? Why only count the candles on the shelf---how about the ones you just ordered or have deferred ordering? Frankly, when others are reporting disappointing numbers, sometimes it makes sense for a management team to use the cover of a generally bad quarter to report all of the skeletons in the closet. Whatever the reason, I like when dividend paying companies "disappoint" because invariably the market overreacts thus providing the opportunity to buy what Cramer calls an "accidental high yielder". (Remember, the lower the stock price the higher the yield.) I bought the following high yielders on disappointing news this week: CLF, TOT, TAC, MCY, HBC, EXC.

One hot sector so far this year has been and continues to be real estate investment "trusts" (REITs), especially those that invest in mortgages and other forms of real estate financing. The availability of cheap money thanks to historic low interest rates and the demand for residential rental property has caused a flurry of acquisitions and refinancings. Literally every week there are several new stock issuances as REITs continuously raise capital to fund these activities. Indeed, some commentators are warning that the sector is so hot, one could "get burned". As a consequence, I like buying the preferred stock of these entities as opposed to their common stock. Both pay excellent dividends, but the preferred dividend must be paid in full before any common stock dividend is paid. These are good companies, and every one of their investors believes that disaster "won't happen to us." But, I like the downside protection afforded by a preferred position, nevertheless. This week I bought NRFpB, ARIpA and IVRpA.

As stated repeatedly over the past few weeks, my thesis is simple: if all of the world's major economies and central banks are willing to borrow and spend (read, stimulus), to employ monetary easing and to do whatever else is necessary to avert a recession, then growth, albeit temporary, will occur. "I've lived long enough to have learned" that the long term impact will be rampant inflation, but that could take months, even years to unfold. In the interim, I want to participate, via dividends and modest appreciation, for as long as it lasts. I am not a pollyanna, but as Billy Joel sings "...the good ole days weren't always good, and tomorrow ain't as bad as it seems."