January 5, 2013 Back in Black

Risk/Reward Vol. 151

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

"What a friend we have in Congress/Who will guard our every shore
Spend three quarters of our taxes/Getting ready for a war."---lyrics from "What a Friend We Have in Congress" by John Denver

"Back in black/I hit the sack
I've been too long/I'm glad to be back"---lyrics from "Back in Black" by AC/DC

"He's making a list/And checking it twice
Gonna find out who's naughty and nice."---lyrics from "Santa Claus Is Coming To Town" by Coots and Gillespie

Can you believe it--- 20% maximum capital gains and dividend tax rates! "What a friend we have in Congress." I "shore" didn't think that investors would fare this well under the 11th hour tax plan (the "Deal"). The only real question is if, by postponing the sequestration and debt ceiling issues, the Republicans are merely "getting ready for a war." I think not. The Deal passed 89-8 in the Senate and 257-167 in the House, and both chambers are "bluer" this term. And clearly the stock market thinks not as well. The S&P 500 closed the week at its highest level in five years, and the VIX (which measures volatility) fell more than 40%. Oh, we will see some choppiness in the coming weeks, but I do not expect to exit again.

Yes, I'm "back" and hopefully soon "in the black." "I've been gone too long/I'm glad to be back." Once again, Mr. Market showed his wisdom. He did not overreact to the Fiscal Cliff threat, and he has started the New Year in stride. As for me, I did not fare too badly either. I exited with the Dow Jones Industrial Average at 13,500, and I am re-entering at 13,400. The portfolio that I sold in October has yet to fully recover--so I am ahead of the game. Moreover, I was risk free from October through December, and as a consequence I slept soundly.

So how did I engineer my re-entry? As I have written previously, I spent my three month sojourn on the sidelines studying. I "made a list" and "checked it many more times than twice." I have known what I wanted to buy, in what amounts and below what prices for weeks. On Wednesday morning, after the Deal was cut, I entered limit orders on approximately half of my desired positions. In setting the limit price, I took into consideration the 200 point rise at the open. I then went about my work. When I checked at the close, many of my orders were filled thanks to a mid day dip which also allowed me to catch some of the upward momentum experienced in late afternoon trading. I repeated the process on Thursday and again on Friday. By virtue of the normal "naughty and nice" moments given to investors during any given day, 75% of my investable capital is now in the market.

What did I buy? As I discussed in Vol.149 ( www.riskrewardblog.blogspot.com ), I decided to re-enter primarily via closed end and exchange traded funds. I like the instant diversification and stability they afford. I selected funds from the following sectors: preferred stocks, business development companies, high yield bonds, investment grade bonds, convertible bonds, emerging market debt, real estate investment trusts, commodities, indices, tech, value, commodities (including oil), small cap and large cap, the last one with an emphasis on covered calls. I looked for funds that pay on average an 8% yield (preferably on a monthly basis), that trade at or below net asset value and that are rated at least a Bronze by Morningstar. Not all of my choices meet the criteria, but most do.

Over the next few editions I will discuss each sector. This week's sector is large cap/covered call funds. The term "large cap" means companies with large capitalizations (e.g. those listed in the Fortune 100, DJIA, etc.). These funds enhance their returns by selling call options for a premium on the large cap stocks they hold (cover). This creates a steady income flow, although it lessens the opportunity for a home run on any given stock because if the strike price on the option is reached the stock will be called or sold. These funds also enhance returns by using leverage (borrowed money), a practice which is lucrative in times of low interest rates like today. In this sector, I like BOE, EOI, CII and IGD, each of which has recently traded below its net asset value and each of which yields better than 9%. Learn more about these funds at www.CEFConnect.com .

And so the Deal is sealed. As an investor, I am pleased. As an American, however, I am disappointed in Congress which once again demonstrated that is only capable of "Dirty Deeds Done Dirt Cheap."