Risk/Reward Vol. 163
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"If I were a rich man/All day long I'd biddy biddy bum
If I were a wealthy man."---lyrics from "Fiddler on the Roof" sung by Tevya
"Headline-breadline/Blow my mind
And now this deadline/Eviction--or pay rent."---lyrics from "Rent "from Rent the Musical
"Don't count me out/At the start of the bout
I'm just doing the secondary waltz."---lyrics from "Secondary Waltz" by Mark Knopfler
Happy Easter and Brilliant First Quarter!
If you, like Tevya, were from Russia and "you were a rich man", you would not want any of your money deposited in Cyprus. Biddy, biddy bum, indeed! To resolve the banking crisis there, the Cyprus government (at the insistence of the Eurozone Troika of which I wrote last week) has frozen all bank deposits in excess of 100,000Euros (which is the upper limit of Eurozone depository insurance). Cyprus intends to appropriate funds from each account above that amount sufficient to recapitalize its ailing banks. The brunt of this haircut (estimated to be as much as 40% of said excess) will fall on "wealthy" Russians who have used Cyprus as a banking haven since the fall of communism. This new depositor funded "bail in" approach stands in stark contrast to government funded bank "bail outs" (e.g. TARP) that have been in fashion in the U.S. and elsewhere over the past few years. Cyprus may serve as a model for future bank crises---even in the United States. "Too big to fail" may become passe; replaced by "depositor beware." So take heed. Keep on deposit at any one bank no more than the FDIC insured amount. For more information on this topic go to www.fdic.gov/edie/fdic_info.html . And for those that keep substantial cash deposits in brokerage accounts, make sure that your broker distributes those funds into enough different banks to assure FDIC coverage when your money is not invested in stocks. Also, talk to your IRA and 401k administrators about FDIC protection for cash accounts that you have in your portfolio including money market accounts. You may be unpleasantly surprised by what you learn.
On Tuesday, the Dow Jones Industrial Average (DJIA) reached its all time high (which it eclipsed on Thursday). Tuesday's high came on the "blow your mind headline" that single family house prices are rising at their fastest pace in six years. But this time, the catalyst for escalating prices is different than in times past. According to the Wall Street Journal, the single family house market is not being driven by individual home buyers, but by large institutional investors that are purchasing houses as if on a "deadline"; with the intent of converting them to rental properties. Institutional investors now represent as much as 30% of all home purchasers in hot markets. Blackstone, the large hedge fund, alone has purchased 20,000 homes in the past year, investing $3.5 billion so far. Twelve percent of U.S. households currently rent single family homes, up from 9% in 2004. Foreclosure is no longer the issue for many home bodies. It is "eviction--or pay rent." I cite these statistics not as a cause of concern, but as an opportunity. As the income from these investments normalizes, look for hedge funds to capitalize these income streams by creating real estate investment trusts ("REIT"), units of which they will sell to the public. One such REIT has already been formed, Silver Bay Realty Trust (SBY), but it is too early for me to tell if it can sustain the type of cash flow one expects from a REIT.
One reason to keep cash available in your brokerage account is to take advantage of opportunities that present. And one did this week. Recall (See Vol. 102 www.riskrewardblog.blogspot.com ) that untaxed entities such as master limited partnerships, business development companies and REITs cannot accumulate earnings because they are required to distribute 90% of them to their shareholders in oder to maintain their pass-through status. Since they cannot accumulate earnings, they must either borrow money or issue new stock via a secondary offering if they wish to grow. When they do a "Secondary Waltz", they typically price the stock below the then current market price in order to assure that all of the new stock is sold. Although this causes a temporary drop in the stock price, "don't count these stocks out at the start of the bout." Their prices usually rise to pre-offering levels within a few days. Thus, I view secondary offerings as great buying opportunities, and that is why I bought more Calumet Specialty Products Partners (CLMT) this week after it priced its secondary offering 4% below its previous closing price. My favorite niche refinery, CLMT has already begun to climb, all the while carrying a healthy 7% dividend.
With both the S&P 500 and the DJIA setting record highs this week, the sun just keeps on shining. My only question is the same that Tevya posed:
"Sunrise / Sunset?"
P.S. I am up 6.13% for the quarter. This is the return on the funds under my direct management and available for investment as of the close on 12/31/12 and does not count additions made via personal savings or 401k contributions since that date. For the same period, the DJIA is up 11.25%, the S&P 500 is up 10.03% and NADAQ is up 8.21%. Considering that this portfolio was all cash (and thus risk free) on January 1st due to Fiscal Cliff concerns, considering the diversification in this portfolio (equities, foreign and domestic bonds, senior notes, partnerships, cash, commodities, hedges etc.) and considering that my average annual yield is above 7% (compared to 2.3% for the DJIA, 2% for the S&P 500 and virtually nothing for the NASDAQ), I am quite pleased.
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