Risk/Reward Vol. 141
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"To get water from a faucet/You got to turn it
And if you want my love/You got to earn it, earn it, earn it."--lyrics from "You've Got to Earn It" by the Temptations
"So what do I do/With this death wish I have?
With the cliff's edge so near?"---lyrics from "Cliff's Edge" by Patrick Swayze
"And there's history on the juke box/Where the spies and scoundrels dwell
It was the place to go in Bamako/Direction--Buffet Hotel"---lyrics from "Buffet Hotel" by Jimmy Buffett
We are in the midst of the third quarter earnings season. So far, over 60% of the companies reporting have failed to beat expected revenues (although, through cost cutting, 67% have beaten bottom line expectations). The stock market has reacted negatively to the news. The Dow Jones Industrial Average closed down 236 points for the week. If companies want investor's "love" (read, money), they are going to have to "earn it, earn it, earn it." by "turning on a faucet" of financial performance. That did not happen in Q3, and the guidance that companies are giving for Q4 does not portend for the better.
Of course, the reasons why any given company has not performed above expectations are unique, but one common theme is the deleterious impact of the Fiscal Cliff, that catastrophic year-end coincidence of the expiration of the Bush Tax Cuts and the impositon of across-the-board budget cuts that most economists agree will cause the U. S. economy to tail spin into a recession. Most of our leaders believe that allowing us to fall over the Cliff is bad policy, but one side insists that the remedy must be at the expense of entitlements and the other at the expense of tax cuts---neither side having left room for compromise. And all of this must be addressed by a lame duck Congress! Yikes! Despite protestations to the contrary, "with the cliff so near", it looks to me that a sizable number of our elected officials "have a death wish." This is a real and looming crisis, Dear Readers, one that prompted 80 CEO's representing a broad range of political views to petition this week that it be resolved ASAP! Indeed, the Fiscal Cliff is the reason that I am effectively out of the stock market at present.
My decision to liquidate was the topic of discussion this week with one of my subscribers, a devotee of Warren Buffett. Buffett, the nation's second wealthiest man and a person who is deemed so savvy in investing that he is called "The Oracle of Omaha" (or is that "of Obama"?), has long preached that one cannot time the market. Buy great, undervalued companies, croons he, hold their stock for years as the value unfolds and refrain from worrying about issues of the day (e.g. the Fiscal Cliff). But, query, what is the "history of this jukebox"? Is the Buffett Hotel really the "place to go"? If one had invested $50,000 in Berkshire Hathaway (Buffett's holding company) in January, 2000 it would be worth $130,000 today. But if one had invested $50,000 in Berkshire in December, 2007 (just before The Great Recession), it would be worth $46,000 today (with no dividends having been paid). Frankly, Warren, my horizon is not that long. I'm not saying you are a "scoundrel", but I needed (and got) a decent return on my investments over the past 5 years. And I would not have consumed an 8% loss even if served in Warren's Buffet. The Oracle may have the luxury of time---I do not--certainly not 5 years in the hole.
As the world spins toward the Fiscal Cliff, the lovely (and fiscally conservative) Barbara and I sleep soundly with our holdings mostly in cash. If suddenly the market turns and rockets upward with us on the sidelines
"Some people (will) claim that there's a woman to blame
But I know it (will be) my own damned fault"
Saturday, October 27, 2012
Saturday, October 20, 2012
October 20, 2012 The Other Side
Risk/Reward Vol. 140
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"If they don't win it's a shame
For it's one, two, three strikes you're out/ At the old ballgame"---lyrics from "Take Me Out to the Ballgame" by Norworth/VonTilzer
"Well variety is the spice of life
That's what the judge is gonna tell my wife"---lyrics from "Variety Is The Spice of Life" by the Doors (after Jim Morrison's death)
"Swimming upstream, swimming upstream
Fightin' every inch of the way for a poor boy's dream"---lyrics from "Swimming Upstream" by Ricky Van Shelton
As I predicted in the previous edition, the stock market was on a roller coaster this week--up on good earnings reports early in the week and then tumbling on Friday with disappointments from Google, McDonald's and others. The Dow Industrials gained a meager 15 points this week.
"It's a shame", but one of my favorite sectors, agency mortgage real estate investment trusts (mReits), has experienced a great deal of volatility recently. Even stalwarts such as NLY and AGNC have been buffeted in the action. Through a bidding process, mReits purchase government guaranteed mortgages from Fannie Mae and Freddie Mac, profiting from the spread between the rate of return on the mortgage and the cost of shorter term borrowing. This has been very profitable for the past few years as mReit's cost of funds has dropped quicker than mortgage rates. However, three negative factors have contributed to upsetting this sector in the past two weeks. Strike One: the Federal Reserve's most recent round of quantitative easing (QE3) has introduced a new competitor into the mReit market which has driven mortgage rates/returns down: the Federal Reserve itself. That's right, the Fed is bidding on and purchasing more than $40billion of mortgages each month. Yikes! Strike Two: this unprecedented availability of lower interest rates has resulted in a wave of refinancing with higher yielding mortgages being repaid and replaced by lower yielding ones. Strike Three: these early repayments have reduced the book value of each mReit, and one should resist paying more than book value for any of these entities even though their yields are attractive above book value. The run on mReits in the past few weeks caused NLY to authorize a share buy back which has served to stabilize the price. Despite the disruption in the sector, however, mReits are not "out" of my list of favorites---they are still in my "ballgame." That said, I sold most of my mReit positions before heading to France and before the volatility began, but I will reinvest once the Fiscal Cliff is resolved.
Even though I have been taking profits and raising cash over the past few weeks in advance of the election and the Fiscal Cliff, I really like my pre-liqidation portfolio, and you can "tell my wife" that I will reconstruct it in time. "Variety" or I should say diversity being "the spice of life", my holdings were comprised in equal measure of Reits (mReits, commercial mortgage reits, conventional reits, etc. ), finance/insurance (bank preferreds, insurance preferreds, business development companies, etc. ) and oil/natural gas (major oil, small e&d companies, pipeline and storage mlp's, etc.) with lesser percentages in utilities, natural resources and health care. These sectors pay handsome dividends averaging over 7%. Noticeably absent are tech, industrials and retail which simply do not provide enough dividend income to suit my desires.
In the oil and natural gas space, I continue to love Linn Energy (LINE). This "upstream" company (upstream=exploration and development or e&d, midstream=pipelines and storage, downstream=refining and distribution) continues to do "swimmingly" well having appreciated 15% this year while still paying 7+%. What I like most is its hedging activity which guarantees a decent return for years to come. Last week, LINE, a limited partnership, issued a new security LNCO which trades as a common stock and thus is appropriate for investment by retirement vehicles. I highly recommend that you take a look at this. LINE has fulfilled this "poor boy's dreams" and LNCO can do the same for anyone's 401k, IRA or similar account.
As stated above, I am liquidating my holdings in an orderly fashion in advance of the Fiscal Cliff. This is earlier than I had planned but our trip to France provided a convenient starting point. I don't see the election providing a market stimulus no matter who wins. It is what happens in the days immediately following the election that will count. Stories out of D.C this week indicate that President Obama is not inclined to compromise on any of his proposals which means the Bush Tax Cuts will end---and that will not be good for the stock market. Stocks may become much cheaper in the weeks ahead, and I want plenty of cash available to take advantage of the dip. I don't see any scenario between now and year end in which stocks will escalate significantly. I am willing to forego one quarter's worth of dividends to avoid the pain. Let the elections take place, and let the Fiscal Cliff come or otherwise be resolved. Then and only then can we, like the Doors, "break on through to the other side."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"If they don't win it's a shame
For it's one, two, three strikes you're out/ At the old ballgame"---lyrics from "Take Me Out to the Ballgame" by Norworth/VonTilzer
"Well variety is the spice of life
That's what the judge is gonna tell my wife"---lyrics from "Variety Is The Spice of Life" by the Doors (after Jim Morrison's death)
"Swimming upstream, swimming upstream
Fightin' every inch of the way for a poor boy's dream"---lyrics from "Swimming Upstream" by Ricky Van Shelton
As I predicted in the previous edition, the stock market was on a roller coaster this week--up on good earnings reports early in the week and then tumbling on Friday with disappointments from Google, McDonald's and others. The Dow Industrials gained a meager 15 points this week.
"It's a shame", but one of my favorite sectors, agency mortgage real estate investment trusts (mReits), has experienced a great deal of volatility recently. Even stalwarts such as NLY and AGNC have been buffeted in the action. Through a bidding process, mReits purchase government guaranteed mortgages from Fannie Mae and Freddie Mac, profiting from the spread between the rate of return on the mortgage and the cost of shorter term borrowing. This has been very profitable for the past few years as mReit's cost of funds has dropped quicker than mortgage rates. However, three negative factors have contributed to upsetting this sector in the past two weeks. Strike One: the Federal Reserve's most recent round of quantitative easing (QE3) has introduced a new competitor into the mReit market which has driven mortgage rates/returns down: the Federal Reserve itself. That's right, the Fed is bidding on and purchasing more than $40billion of mortgages each month. Yikes! Strike Two: this unprecedented availability of lower interest rates has resulted in a wave of refinancing with higher yielding mortgages being repaid and replaced by lower yielding ones. Strike Three: these early repayments have reduced the book value of each mReit, and one should resist paying more than book value for any of these entities even though their yields are attractive above book value. The run on mReits in the past few weeks caused NLY to authorize a share buy back which has served to stabilize the price. Despite the disruption in the sector, however, mReits are not "out" of my list of favorites---they are still in my "ballgame." That said, I sold most of my mReit positions before heading to France and before the volatility began, but I will reinvest once the Fiscal Cliff is resolved.
Even though I have been taking profits and raising cash over the past few weeks in advance of the election and the Fiscal Cliff, I really like my pre-liqidation portfolio, and you can "tell my wife" that I will reconstruct it in time. "Variety" or I should say diversity being "the spice of life", my holdings were comprised in equal measure of Reits (mReits, commercial mortgage reits, conventional reits, etc. ), finance/insurance (bank preferreds, insurance preferreds, business development companies, etc. ) and oil/natural gas (major oil, small e&d companies, pipeline and storage mlp's, etc.) with lesser percentages in utilities, natural resources and health care. These sectors pay handsome dividends averaging over 7%. Noticeably absent are tech, industrials and retail which simply do not provide enough dividend income to suit my desires.
In the oil and natural gas space, I continue to love Linn Energy (LINE). This "upstream" company (upstream=exploration and development or e&d, midstream=pipelines and storage, downstream=refining and distribution) continues to do "swimmingly" well having appreciated 15% this year while still paying 7+%. What I like most is its hedging activity which guarantees a decent return for years to come. Last week, LINE, a limited partnership, issued a new security LNCO which trades as a common stock and thus is appropriate for investment by retirement vehicles. I highly recommend that you take a look at this. LINE has fulfilled this "poor boy's dreams" and LNCO can do the same for anyone's 401k, IRA or similar account.
As stated above, I am liquidating my holdings in an orderly fashion in advance of the Fiscal Cliff. This is earlier than I had planned but our trip to France provided a convenient starting point. I don't see the election providing a market stimulus no matter who wins. It is what happens in the days immediately following the election that will count. Stories out of D.C this week indicate that President Obama is not inclined to compromise on any of his proposals which means the Bush Tax Cuts will end---and that will not be good for the stock market. Stocks may become much cheaper in the weeks ahead, and I want plenty of cash available to take advantage of the dip. I don't see any scenario between now and year end in which stocks will escalate significantly. I am willing to forego one quarter's worth of dividends to avoid the pain. Let the elections take place, and let the Fiscal Cliff come or otherwise be resolved. Then and only then can we, like the Doors, "break on through to the other side."
Saturday, October 13, 2012
October 13, 2012 Wear Your Love Like Heaven
Risk/Reward Vol. 139
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You've got to pick up every stitch/Beatniks are out to make it rich
Oh no, must be the season of the witch/Must be the season of the witch"---lyrics from "Season of the Witch" by Donovan
"Head under water and they tell me/To breathe easy for a while
The breathing's getting harder/Even I know this"---lyrics from "Love Song" by Sara Bareilles
"I'll tell you something/ That Jack, he is a banker and Jane she is a clerk
And both of them save their money/When they come home from work
Sweet Jane/Sweet Jane"---lyrics from "Sweet Jane" by Lou Reed
With third quarter earnings reports (and future guidance) beginning this week, we are in "the season of the witch"---or should I say the season of the which. Which will it be? A season in which earnings propel the market upward--- one in which investors can "pick up every stitch" and even "beatniks get rich?" Or one in which lower earnings drag the market down? I look for a few weeks of roller coaster performance with individual stock fundamentals holding sway. That said, the commentators believe we are in for disappointment. This week was disappointing for sure, with the Dow Jones Industrial Average falling 282 points. Accordingly, I have not redeployed the cash that I raised before leaving for Europe and have sold more in the interim.
When I do redeploy, "I know this": I will be reinvesting in the preferred shares of commercial mortgage real estate investment trusts ("cmReits") like NRFpA or B and RASpA or B. Over the next 5 years, $2 trillion of commercial real estate mortgages become due and of those, $1trillion are "under water"---that is the value of the real estate is worth less than the balance due on the mortgage. Banks will not renew these obligations, many of which they have had to write down. But commercial real estate owners can "breathe easy for a while" because into this financing void have ridden cmREITS, pools of money, the managers of which know how to underwrite sophisticated refinancings. And there are plenty of opportunities. Take a look at the number of new offerings listed on www.quantumonline.com .
Lastly, I bid farewell to one of the most astute investors that I have ever met, my mother in law, "Sweet Jane" Holt. Widowed at an early age, Jane re-entered the work force after a 20 year hiatus, serving as a member of the administrative staff at Park Tudor School for 17 years. During that time, Jane provided for her children and maintained a series of beautiful homes---all the while saving and investing, in homage to one the mantras of her generation: "don't ever be a financial burden to your children." In retirement, Jane travelled the world and during the last eight years of her life lived in a lovely apartment at Hoosier Village---all the while embodying another mantra of her generation: "never invade principal." I saw her portfolio for the first time yesterday and was impressed by its construction and diversity. I only wish she would have been more open with her investment philosophy, but modesty prevented her from doing so.
In the spring of 1968, Jane and Jim Holt (along with Betty and Jack Busch) chaperoned the North Central High School Junior Prom. The theme of the Prom was the title of a popular song at the time by Donovan, "Wear Your Love Like Heaven." Until this week, I thought this was the most insipid prom theme I had ever encountered. But yesterday, I read the lyrics. I now see the song as a musical picture, a picture of Jane Holt standing on the porch of her cottage in Linden Hills gazing westward at the sunset (the most beautiful in the world):
"Color in sky prussian blue/Scarlet fleece changes hue
Crimson ball sinks from view/Wear your love like heaven, wear your love like heaven."
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You've got to pick up every stitch/Beatniks are out to make it rich
Oh no, must be the season of the witch/Must be the season of the witch"---lyrics from "Season of the Witch" by Donovan
"Head under water and they tell me/To breathe easy for a while
The breathing's getting harder/Even I know this"---lyrics from "Love Song" by Sara Bareilles
"I'll tell you something/ That Jack, he is a banker and Jane she is a clerk
And both of them save their money/When they come home from work
Sweet Jane/Sweet Jane"---lyrics from "Sweet Jane" by Lou Reed
With third quarter earnings reports (and future guidance) beginning this week, we are in "the season of the witch"---or should I say the season of the which. Which will it be? A season in which earnings propel the market upward--- one in which investors can "pick up every stitch" and even "beatniks get rich?" Or one in which lower earnings drag the market down? I look for a few weeks of roller coaster performance with individual stock fundamentals holding sway. That said, the commentators believe we are in for disappointment. This week was disappointing for sure, with the Dow Jones Industrial Average falling 282 points. Accordingly, I have not redeployed the cash that I raised before leaving for Europe and have sold more in the interim.
When I do redeploy, "I know this": I will be reinvesting in the preferred shares of commercial mortgage real estate investment trusts ("cmReits") like NRFpA or B and RASpA or B. Over the next 5 years, $2 trillion of commercial real estate mortgages become due and of those, $1trillion are "under water"---that is the value of the real estate is worth less than the balance due on the mortgage. Banks will not renew these obligations, many of which they have had to write down. But commercial real estate owners can "breathe easy for a while" because into this financing void have ridden cmREITS, pools of money, the managers of which know how to underwrite sophisticated refinancings. And there are plenty of opportunities. Take a look at the number of new offerings listed on www.quantumonline.com .
Lastly, I bid farewell to one of the most astute investors that I have ever met, my mother in law, "Sweet Jane" Holt. Widowed at an early age, Jane re-entered the work force after a 20 year hiatus, serving as a member of the administrative staff at Park Tudor School for 17 years. During that time, Jane provided for her children and maintained a series of beautiful homes---all the while saving and investing, in homage to one the mantras of her generation: "don't ever be a financial burden to your children." In retirement, Jane travelled the world and during the last eight years of her life lived in a lovely apartment at Hoosier Village---all the while embodying another mantra of her generation: "never invade principal." I saw her portfolio for the first time yesterday and was impressed by its construction and diversity. I only wish she would have been more open with her investment philosophy, but modesty prevented her from doing so.
In the spring of 1968, Jane and Jim Holt (along with Betty and Jack Busch) chaperoned the North Central High School Junior Prom. The theme of the Prom was the title of a popular song at the time by Donovan, "Wear Your Love Like Heaven." Until this week, I thought this was the most insipid prom theme I had ever encountered. But yesterday, I read the lyrics. I now see the song as a musical picture, a picture of Jane Holt standing on the porch of her cottage in Linden Hills gazing westward at the sunset (the most beautiful in the world):
"Color in sky prussian blue/Scarlet fleece changes hue
Crimson ball sinks from view/Wear your love like heaven, wear your love like heaven."
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