August 27 2011 FEED YOUR HEAD

Fw: Risk/Reward Vol. 82

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

1997-- "To participate in the euro currency, member nations must maintain a debt ratio of 60% of GDP"---Stability and Growth Pact of Eurozone

1999-- "A common currency imposes on us a duty to cooperate more on policy...A debate among politicians on monetary policy is counterproductive."--German Chancellor Gerhard Schroder on the launching of the Euro

2011--  the average debt to GDP ratio of the 17 Eurozone nations is 80%; that of Italy is 118%; that of Greece is 142%; monetary policy is debated daily by European politicians

"When logic and proportion have fallen sloppy dead, 

  And the White Queen is talking backward

  And the Red Queen's "off with her head"

  Remember what the dormouse said:

  "Feed your head."----White Rabbit by Jefferson Airplane

I used the market uptick on Tuesday and Wednesday to take modest profits in advance of the Bernanke speech, the impact of which was uncertain to me.  Despite the positive direction taken by the stock market on Friday after that speech, there still is simply nothing on the horizon to give confidence to investors or to warrant abandoning the sidelines.  

First and foremost, the Eurozone has yet to provide a clear path for resolving the sovereign debt issue.  Indeed, earlier this week Finland persisted in receiving collateral from Greece in exchange for ratifying the Greek bond deal tentatively approved last July.  This unvarnished exercise of nationalism was met with similar demands from other countries and threatens to unwind the tenuous  sovereign debt patch currently in place.  Uncertainty on all fronts remains as is evidenced by the 25% decline in the German stock market so THIS MONTH!  Sufferin'Sauerbraten!   I remain of the mind that unless and until a comprehensive, pan-European solution is implemented (e.g. Eurobonds), the threat of European debt contagion will threaten the world's economic stability and thus will continue to sap confidence away from the world's stock markets.

Second, the US economy is sputtering, teetering on the brink of dipping back into recession.  We are facing the prospect of a prolonged period of Japanese style stagflation (low interest rate, slow/no growth and high unemployment).  De-leveraging from our monstrous personal and government debts will take a long time.  I simply do not expect the type of news that would sustain a bull market from this corner of the world.

Third, despite stellar, sequential quarterly earnings reports by Dow and S&P 100 companies, the prospect for continued excellence in the third and fourth quarters is dimming.  The economies of emerging nations (especially China) upon which these multinational companies have relied for profitability are facing their own challenges as their politicians and central bankers try to slow their rates of inflation without stalling their growth.  Engineering these "soft landings" is difficult, if even possible to achieve.  The stock markets need some encouraging words from China---pure and simple.

Query:  What is an individual investor to do now that "logic and proportion have fallen sloppy dead"?  Answer.  Do what the dormouse said: "Feed you head."  Study sectors and companies so that when confidence returns to the stock market you can execute with conviction.  

I, for one, continue to believe in oil and gas---black gold, Texas tea.  There simply is no substitute for these energy sources.  Moreover, with the emergence of India, China and other fast track economies, worldwide demand will only increase.  This demand has spurred the development of alternative sources (shale oil and gas in areas like the Bakken field in North Dakota and the Eagle Ford field in Texas).  I have every reason to be bullish on oil/gas,  once confidence, in general, returns to the stock market.  I continue to like big oil (RDS, COP, CVX), pipeline transportation and storage (KMP, ETP) and exploration (MHRpD, SDRL).  I will open positions once I am convinced that the market is confident enough to avoid the recent spate of volatility.

I also  believe in certain real estate sectors.  I like the preferred shares of real estate investment trusts that pay a healthy common dividend (AHTpE, ELSpA, HCNpI).  The common dividend serves as a buffer (or "canary in the mineshaft") since the preferred dividend must be paid before the common.  If the common dividend is ever reduced, I will exit the preferred.  I also like agency mortgage REITs (NLY, AGNC) so long as interest rates remain low.

Of course, "widow and orphan" stocks (utilities, tobacco and telecom) will also be added.

Lastly, I will likely "speculate" on the preferred stock and/or exchange traded debt of insurers (MRHpA, ENHpB, AHLpA, METpB, AVF) and banks (CpR, BACpL and ZpC) especially now that Warren Buffet has "legitimized" Bank of America by investing $5billion in its preferred stock.  Ironically, with the exception of Bank of America, the preferred shares of non-European financial institutions have remained THE MOST STABLE stock investments during the August roller coaster.

But, to reiterate, I will do none of this unless and until I perceive that the market, in general, has regained some confidence.   You cannot fight a downward market move, and I have no desire to catch a falling knife in search of the market's bottom.  I don't need to buy at the market low.   The Dow is still 1000 points below where I made my major exit at the end of July so I have plenty of profit "runway" once confidence is restored.

As I review my actions this month, I give myself a C.  I was at once erratic and reactive.  Fortunately, occasional market upticks provided me opportunities to avoid any significant losses, and I am still way ahead as a result (fortuitously) of exiting completely on July 29th.  August serves as reminder that I am still very much the student---one whose experiences are not so vast or varied as to warrant the "trading" that I have done.  In retrospect, I should not have gone in and out of the market this month.  Instead,  I should have had the conviction to stay completely on the sidelines until confidence (especially in Europe) has been restored.  

Managing money can be like "chasing rabbits".  There are no "men on the chessboard who get up and tell you where to go".  Oh, and don't bother asking Alice.  When it comes to buying stocks,  I don't think even she will know.

August 20, 2011 "These Boots Are Made for Walking"

Risk/Reward Vol. 81

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

"One moment of patience may ward off great disaster.  One moment of impatience may ruin a whole life."---Confucius

"The gem cannot be polished without friction, nor man perfected without trials."---Confucius

"I was a star in Japan before any radio stations in the U. S. paid any attention to me."---Nancy Sinatra

With apologies to Confucius, success in the market is more certain if one masters the teachings of two other Chinese philosophers:  Ti Ming and Tem Po. (with due attribution to loyal reader Iron Mike).   The market having experienced three consecutive "up" days and the non-event of the Sarkozy-Merkel meeting, I cautiously re-entered late Tuesday afternoon.  My Ti Ming could not have been worse, but my Tem Po (only 15% invested) was appropriated.  HOLY SHIITAKE!!!!  It has been a rough ride ever since with the markets nose diving Thursday and Friday.

Why did I re-enter, you may ask (because my bride certainly did)?  Remember, my decision to cash out earlier this month was made in anticipation that the bozos in Washington would actually allow a default and that S&P would downgrade the US.  These were unprecedented events the consequences of which I was unwilling to withstand.  It was never my intention to stay out of the markets---I can't.  My financial independence is keyed to achieving a steady 6-7% return which cannot be attained by sitting on the sidelines with cash or investing in the "safety" of mid term Treasury securities.   My approach is simple:  buy high yielding securities, the dividends from which should serve as a cushion against a precipitous drop (except when facing default and downgrade) and sell any position that exceeds an 8% drop.  

As of Friday's close, most of my holdings held reasonably well.  The preferred stock of the insurers (ENHpA, MRHpA) held full value with the common stock of tobacco (RAI, MO) and utilities (DUK, NGG,POM) falling only 1-2%.   Oil and gas took a 4-7% hit (RDS/A, CHKpD, KMP, ETP, CLMT) and to my mind now present some awesome opportunities especially in the MLP/pipeline space occupied by KMP and ETP.  The mortgage REITs (NLY, AGNC, IVR) were hit harder still (but not to the 8% level).  In this regard, I like IVR, a hybrid mortgage REIT which was hit hard by the timing of a secondary offering, the expiration of options and the market in general last week.  As of Friday's close, it is paying a 23% dividend which to my thinking is a bargain.  The biggest disappointments are in the blue chip industrials (CAT, ETN, FCX) all of which will be sold by noon Monday if they do not improve substantially.

Confidence in equities is fading---fast.  So far this month, investors globally have withdrawn $42billion from equity funds making August the worst "outflow" month since February, 2009.  Since May, $110 billion have been withdrawn.  Despite the appearance of great bargains (eg.CAT, ETN, FCX), fortunes are lost in bucking the overall trend of the market---which is decidedly downward.   Everyone is jittery.  The scare-du-jour Friday was a report that an unnamed European bank had received $200 million in short term funding from the Federal Reserve.  This is indicative that inter bank lending, which is the key to world wide liquidity (and the absence of which "froze" the credit markets in 2008), is being hampered by the fear that some European banks may be insolvent due to their large investment in Italian, Greek and Spanish sovereign debt.  Frankly, these "panics" will become more frequent unless and until a pan-European solution to the Eurozone sovereign debt crisis is found.

Oh, by the way, why would the US want to emulate a country that "discovered" Nancy Sinatra?  Well, we are--we are fast becoming Japan, a country that for the last 20 years has experienced no economic growth, high unemployment and crushing sovereign debt despite low interest rates.  No wonder sushi has become a staple in New York, London and Berlin.  Longterm, the only hope on the horizon for individual investors like yours truly is in the profitability of multinational corporations  that find economic opportunity in emerging nations such as China, Brazil and India.  Unfortunately, there has been little news of encouragement from those countries in recent weeks.

This week ended on a very sour note for me.  Ti Ming was not kind to me, and I was saved only be adherence to the teachings of Tem Po.  Many seeming bargains exist, but I will likely resist them unless and until some broader confidence and encouragement emerges.

August 13,2011 Patience is a Virture

Risk/Reward Vol. 80

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

"Patience is the companion of wisdom"---St. Augustine

"He that can have patience, can have what he will"---Benjamin Franklin

"IBD Rule #15---DON'T BOTTOM GUESS.  Declining markets often have huge up days that don't last.  A market rising on high volume for three consecutive days may be indicative that the market has turned up at least in the short term."---William O'Neill

Having sold everything but gold on or before July 29th and being on the sidelines through last week and  "murderous Monday" this week, I was salivating as Tuesday dawned with the market on the rise.  I was and am fully cognizant of Mr. O'Neill's wise counsel above, but I became impatient and bought the following before 10 a.m Tuesday:  ZpC, FTR, AVF,KMP,LINE, BACpL, NLY, ALLYpB, AAR, GEC, CpR, METpB, VOD, ARY, AFC, AFE, AHLpD, SDRL, SBR, WIN, DUK, NWpC , RDS/A, and CHKpD.  I only invested 15% of my cash.  By the time of my dinner meeting in Minneapolis,  I was looking like a genius having made 5% in few hours.  By bedtime I was lamenting not buying more.  I added PG, MCD, CAT, COP, CVX, ETN, UIL, AZN, T and FCX to my shopping list to buy the next day.

By the time I deplaned in Milwaukee on Wednesday, I was singing another tune.  YIKES!!!  What a bad day.  When Thursday opened to the upside, I sold everything again ending up with a 2% gain and a sense of relief.   This is not how I want to live.  Why is discipline so hard for me (see last weekend's Facebook picture of a cigar in my mouth)?  Don't trust me to take your cow to town to sell, Mother.  I then promised myself not to look at the markets until Monday afternoon at the earliest, and to buy only if 3 days of "up" had been achieved on decent volume. When I do buy, many of what are catalogued above will be on my list.  They are all yielding incredibly well, still.  The markets may have turned up, but the Dow is still 1000 points below where I exited two weeks ago, and there is a lot of profit runway available.  I sold GLD on Thursday at 169.

What concerns me most at present?  European sovereign debt.  Think about it.  Seventeen completely different economies--and cultures--under one currency.   Take Italy.  It is the third largest issuer of sovereign debt in the world (behind the US and Japan) with $2.6 trillion outstanding.  Its gross domestic product (GDP) is only $2 trillion.  Its population is the second "grayist" in the world (behind Japan) with 28% of its population already retired.  25% of those employed work for the government, and they receive salaries and benefits 15% better than those in private industry. 80% of all workers are covered by collective bargaining.  I ask--how can a popularly elected official impose the kind of austerity needed?  He/she cannot.  Moreover, even if one could impose such austerity, the population would likely revolt once its benefits were curtailed.  Oh, you think not, well look what is happening in Great Britain--a society so civil police don't carry guns---at least up until now. Not even Germany (GDP of $3.3 trillion) has enough money to bail out Italy and Spain, let alone France.   Unless the European Central Bank (against the expressed objection of Germany--perhaps Europe's only solvent economy) decides to print trillions more euros so that Europe can repay its combined sovereign debt with inflated currency (like the Fed has done with the dollar over the past 2 years), there will be a default, likely by Italy. 

Why do I, an American, care about European sovereign debt defaults?  Because, buckaroos, no one buys sovereign debt without buying credit default insurance.  Thus, for example,  even if Societe Generale is the largest nominal holder of Italian bonds that does not mean that it has not "hedged" its position by buying default insurance from a variety of sources in private, opaque transactions.  Remember what happened when Lehman Brothers defaulted?  The music stopped and much of the ultimate liability fell on AIG which had sold credit insurance "off book" and which was "saved" by an infusion of $182 billion by the US government.  Who holds the "Old Maid" that is, Italy's 2.6 TRILLION credit default insurance?  AIG, Bank of America, Goldman?   No one knows---and no one is talking--but if a default occurs no one will lend to anyone for fear of non-payment.  This scares the h*ll out of me.

What can I do?   Well, I can't sit on the sidelines while the dollar gets inflated and cd's pay zero interest.  I will re-enter the market, likely next week.  Yield will protect my downside to a certain extent, but I will be VERY mindful of liquidity.  If I sense a significant down draft, I will be out like a fat kid in dodge ball.  I recognize that this makes me more of a "trader" than an "investor" which to some is a pejorative.  But, I am wealthier than I was on July 29, 2011---how many can say that?

August 7, 2011 Whoa, Nelly!

Risk/Reward Vol. 79

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

"Luck is what happens when preparation meets opportunity."--Seneca (100 AD)

"Whoa, Nelly!"---Pat Brady

"If I had known what I was unleashing, I'd have become a watchmaker."---Albert Einstein on the unintended consequence of his atomic theory

"Keep your faith in God, but keep your powder dry."---Oliver Cromwell

The presence or absence of investor confidence is the single greatest influence on whether bulls or bears reign.  What has anyone seen in the conduct of those running our country or the Eurozone that instills confidence?  Did no one realize the consequences of dithering on the debt ceiling extension?  That half hearted effort happened just in time for the sovereign debt crisis in Italy to reach a boil.  More importantly, there is no good news from China (no bad news, just nothing to serve as a counter balance).  No confidence---no conviction.  Once people like me began to exit, last week's stampede ensued.  Whoa, Nelly! 

I see little that inspires my "animal spirit" desire to invest.  Certainly our president does not inspire investment, and I see no credible candidate from the Republicans capable of inspiring me or anyone else.  To make matters worse, many politicos are impeding growth.  For example, the Wall Street Journal recently reported how drilling for oil and gas in the Marcellus shale formation has resulted in tens of thousands of high paying jobs in Pennsylvania.  Directly across the border, in New York, the governor has refused to allow such drilling even though the formation lies in large part in that state.  Environmentalist have caused him to dither while unemployment runs rampant.  What is wrong with this picture?  Why not employ people in this worthy effort to free our country from foreign energy dependence?

I admit.  I was lucky to liquidate when I did (see Vol. 78), and even luckier when I promised Barb not to re-enter the market for the entirety of last  week.  Obviously,  I have plenty of dry powder and may re-enter next week considering how "cheap" many of my favorite dividend/interest paying plays (e.g. TEF, AVF, VZ, NLY, MO, etc.) have become.  I am furiously studying the best re-entry vehicles and price points.

 By the way, are you not tiring of the pundits who kept advising us this past Friday that "now" is an excellent time to buy into the market "on the cheap".  With what?, most are asking.  Where were these pundits two weeks ago when they should have been advising us to sell at the highs?  No one (with the possible exception of Cramer and he only rarely) spends ANY time talking about profit taking.  I promise--- in the future I will share my "selling" thoughts just as freely as my "buying" ones. 

Last week I encountered a retired state court judge, a man who worked his entire career for the State of Wisconsin and whose entire retirement benefit comes from a state pension.  I asked as to his well being and was told that he, like countless other Cheeseheads, spends 7 months a year in Florida to evade the Wisconsin income tax-----the very source of his pension!   I cite this irony not as a criticism, but to emphasize that people (and organizations) operate in their own economic self interest.  So who are we to criticize GE, run by President Obama's chief business adviser Jeffrey Immelt, when it announce last week that it was moving its Xray division headquarters from Milwaukee to China?  Wake up America, if you make it uncomfortable for business to operate here, it will go elsewhere, especially when you consider that 15% of the Fortune 100 CEO's are foreign born.

I apologize for the lack of any concrete advice in this edition.  Suffice it to say that as Monday approaches, cash still looks good.  

July 30, 2011 "Twilight Zone"

Risk/Reward Vol. 78

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

"You unlock this door with the key of imagination.  Beyond it is another dimension--a dimension of sound, a dimension of sight, a dimension of the mind.  You're moving into a land of both shadow and substance, of things and ideas.  You've just crossed over into the Twilight Zone."-- Rod Serling

"I made my money by selling too soon.....I never lost money by turning a profit"---Bernard Baruch

As my longtime readers know, I am not a skittish investor.  I started this venture four days after the flash crash, held steady during the tax debate, two European debt crises, the Egyptian uprising, the tsunami--you name it.  But, I am now spooked--spooked by, of all things, my own government.  Oh, I don't mean the Kabuki theater that has dominated Washington since John Adams moved there--I mean the current, conscious decision to destroy wealth.  On the left, it is borne of a sincerely held belief that salvation rests in the redistribution of wealth.  On the right, it is a similarly sincerely held belief that the government is too big and too intrusive.  But whatever the philosophical underpinning the result is the same---the real threat of wealth destruction.

As late as Wednesday, I believed that a compromise on the debt ceiling would be reached.  But, the revolt of the Tea Party combined with the President's demagoguery caused the market to drop 200 points that day.  This of itself was not surprising, but the pervasiveness of the losses across my extremely diverse portfolio was stunning.  Everything was red.  I went back to my year long records and tried to find some cognate, and finding none my disturbance heightened.  The next day dawned with a rise in the market, and I took advantage of it by selling everything but oil, tobacco, utilities and gold, all in advance of the cancellation of the vote on the Boehner bill.  The next morning, I noticed a tone of concern on those upon whom I look for guidance--many of whom had gone to cash.  Once the market started to climb Friday mid morning, I sold everything but gold.

My reason is simple.  I am willing to risk the occurrence of a "black swan"(an unpredicted and unprecedented event such as the tsunami or the Egyptian uprising), but I need not and will not suffer through a knowing and purposeful sail into the unchartered waters of a default by the US government.  Remember,  Magellan and Capt. Cook are celebrated for trailblazing on their missions of discovery, but each met with an unsavory end (actually their endings may have been savory since each was eaten by cannibals).  To mix metaphors,  I am not Rod Serling--the Twilight Zone holds no appeal to me.  Oh, and if you think the really smart guys know what will happen in the event of a default, I suggest you read "Too Big to Fail" the recent best seller that recounts the disastrous decision made by the Fed, the Treasury and all of Wall Street to let Lehman Brothers declare bankruptcy.  The ensuing game of musical chairs left the taxpayers without a seat, holding the bag for several hundred billions of dollars of TARP exposure; all, while their 401k's tanked.  

I wish no one ill.  I hope that I am wrong and that sanity prevails.  But look at the risk/reward equation.  By selling, I capture my hard earned, handsome profits at the cost of commissions (which at $7 per trade are inconsequential) and some capital gains tax in my personal accounts, much of which are long term.  If calm prevails, I will re-enter at or near where I left---the market is not going to spike.  If chaos ensues, I will be sitting pretty with plenty of powder to strike when the time is right.  I don't want to feel like the millions of investors who still have not recovered from the backwash arising from the Lehman bankruptcy.

This exercise serves as a reminder that contrary to the conventional wisdom, individual investors such as yours truly have a decided advantage in times like this.  I am nothing, if not nimble.  If I were running someone else's money and had preached to them a "long term" approach similar to the "buy and hold" philosophy so often invoked in earlier times, I would be nervous.  Last night, I slept very soundly

July 23, 2011 "Avoiding Temptation"

Fw: Risk/Reward Vol. 77

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

"I generally avoid temptation unless I cannot resist"---Mae West


2 The woman said to the serpent, “We may eat fruit from the trees in the garden, 3 but God did say, ‘You must not eat fruit from the tree that is in the middle of the garden, and you must not touch it, or you will die.’”

4 “You will not certainly die,” the serpent said to the woman. 5 “For God knows that when you eat from it your eyes will be opened, and you will be like God, knowing good and evil.”

6 When the woman saw that the fruit of the tree was good for food and pleasing to the eye, and also desirable for gaining wisdom, she took some and ate it. She also gave some to her husband, who was with her, and he ate it. 7 Then the eyes of both of them were opened, and they realized they were naked; so they sewed fig leaves together and made coverings for themselves.---- Genesis 3


Since Eve had her first date with Adam, temptation has been associated with the apple, and never more so than this week.  Allow me to explain.

As the clock ticked toward the time for Apple's quarterly report (4pm EST July 19, 2011), I became progressively more interested in buying.  As you may recall from Volume 75  ( http://riskrewardblog.blogspot.com ) I bought a position in Apple on July 7 and another on July 8, once it broke through the $350 resistance line.  As day broke on the 19th, I had a premonition that Apple would blow through the market's estimates.  Back in the day during earlier forays into investing, I would have acted on this hunch.  But,  purchasing positions in advance of quarterly earnings is anathema under my new, disciplined Risk/Reward approach to investing.  As Squawk Box ended and I headed to work, the temptation intensified.  By 10 am, I was online and  bought three times my then current holdings.  My ability to resist was no greater than had I walked into an ice cream parlor in South Haven or a tobacco shop inStrasburg.   As the afternoon progressed, my guilt overtook me and by the close I sold off most of what I had purchased that day.  Of course, at the market close, Apple reported blow out earnings and jumped $25 in after hours trading.

Although I forewent some excellent profits, I felt much better for having sold.  Investing without discipline is a certain formula for disaster---believe me I know from experience having ridden the dot com bubble to the bottom.

But, how about that Apple!  My God, what a company.  It still is cheap even at $390, trading at a price/earnings ratio of 15 with a growth rate of 19%. This equates to a 0.8 PEG (price/earnings/growth rate), and any stock with a PEG below 1 is considered inexpensive.  Indeed, Apple is such a great company, it cannot afford to dilute its earning stream by acquiring any other company.  Its organic production and growth is simply to good--so good that it now is the second most valuable company in the world and is sitting on $76 billion in cash.  To give some perspective to this hoard, understand that there are only 30 companies in the United States that are worth more than $76 billion.  On his Wednesday telecast, Cramer increased his valuation of Apple to $500 per share.  If Apple is not going to buy another company and if it refuses to pay a dividend (it could afford to pay a one time dividend of $80 per share!), then it should start investing in itself with a share buy back.  Apple shareholders/cultists would love Steve Jobs even more, because even though Apple is the greatest company going today, its stock is not (as evidenced by its low PEG).  Its stock has appreciated 50% in the past year, but given Apple's truly incredible  financial performance it should have done much better.  Frankly, one could have done nearly as well owning Chevron (53%), Shell(38%) or ConocoPhillips(46%) with their healthy dividends included.  And our old friend gold didn't do badly over the past year either (34%)  I will keep my Apple, but until the market becomes more confident in consumer spending, I fear this remarkable behemoth will not get its due.  

Speaking of gold, I intend to buy more after the inevitable dip that will occur when (if) the US debt ceiling is raised, and the fear of a default in the world's reserve currency is abated.  I will likely buy in mid to late August, in advance of the traditional increase in gold prices driven by the fall Indian wedding season and the celebration of Diwali in October.  Even absent its "hedging" value as a response to currency devaluation in the US and Europe, gold would likely appreciate due to its ever increasing demand by the growing middle classes in India and China which accounted for 58% of all gold purchased in Q 1 2011.

As the furor in Europe subsides, look for some decent yields coming from European banks.  In the future, these institutions will not be able to rely so heavily upon sovereign debt as a source of capital.  Regulations are now afoot that would require Europe's major banks to raise $654 billion of additional capital (much of it equity) by 2019.  I smell hefty dividends.

I am thankful that I overcame temptation.  Although not handed to me on Mt. Sinai, my investing commandments are sacred--at least to me.

July 16, 2011 "Debt Crises and Gold"

 Risk/Reward Vol. 76

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

"Deficit spending is simply a scheme for the confiscation of wealth.  Gold stands in the way of this insidious process.  It stands as a protector of property rights.  If one grasps this, one has no difficulty in understanding a (government's) antagonism toward a gold standard."---Alan Greenspan (1966)

"Bankers know that history is inflationary and that money is the last thing that a wise man will hoard."--Will Durant

"It's what you learn after you know it all that counts."--Harry Truman

Once again the world is fixated on debt crises--here and in Europe.

Two weeks ago,  a short reprieve was secured in the Eurozone when Greece passed reform legislation in return for an emergency loan from the EU and the International Monetary Fund (IMF).  This loan is enough to keep Greece afloat for 3 months.  A more permanent fix is now being debated with Germanytaking a hard line, insisting that any restructuring must require private holders of Greek debt to take up to a 30% haircut.  Take a moment and appreciate the enormity of this.  This is like asking little Johnny to take 70 cents for every dollar he invested in a US Savings Bond.  Holy Baklava, Apollo!!

Not surprisingly, the above prospect sent shockwaves through the rest of Europe, especially impacting the finances of other financially weak countries likeItaly and Spain.  This week the yields on 10 year Italian treasury bonds spiked to 5.66%, almost 3% MORE than the 10 year German bond.  (Remember, higher yields means lower price and more risk.)  This is stunning since one purpose of the Euro was to even out these differences.  Moreover, this rise in yield has made it virtually impossible for Italian and Spanish companies to borrow since the pricing of their bonds is based on a spread to government yields.  Suffice it to say, that for a host of reasons the credit markets in Europe are beginning to freeze.

On our side of the Pond, Washington dances ever so close to defaulting on our debt.  This week Moody's, one of the premier rating agencies, announced that it was considering downgrading US debt from its Aaa rating.  If you want to read something truly scary, read Moody's follow on memo on the implications of lowering that rating which one of my readers shared with me.  The report itself is not free, but the press release and follow on analysis is.  Unless something gets done soon, this apprehension will weigh down ALL markets.

Add to this cheery news, the disappointing jobs numbers and the hint that the Federal Reserve may enter a third round of quantitative easing.  I find this disturbing.  Quantitative easing is nothing more than printing more money so as to facilitate more deficit spending.  Inflation may not be hitting wages or housing (seemingly the only items that are important to the Fed), but it surely is everywhere else.  The US dollar is down 13% from a year ago in comparison to a basket of other significant currencies (e.g. Swiss Franc, Swedish Krona, Canadian Dollar, Japanese Yen, etc.)

What is an investor to do?

First, it seems to me that the combination of instability and inflation will only make GOLD more valuable---and it has.  My latest gold purchase was June 30, 2011 and half way through the month it is up 6%.  Gold is the world's number 1 refuge from fear (it used to be the US dollar)---and investors are full of fear.  Please understand that I am not a "gold bug".  I use it soley as a counter bet or hedge.  Gold going up more often than not means my portfolio is otherwise going down.  I hate having to buy gold.  But, buy it, I do, and the vehicle I use to own it is GLD, an ETF that physically holds gold.  It is very, very liquid and closely tracks the actual price of gold bullion.  The one downside is that it does not pay a dividend--so I am in and out all of the time.  As a consequence, I have recently opened a position in a Gabelli closed end fund, GGN.  I like GGN because it not only holds gold but it also holds positions in many gold miners and a few other natural resource plays.  Best of all, it employs a covered call strategy to generate income which it distributes monthly.  At its current price, it yields over 9%. (In a covered call, one buys the underlying stock shares and sells, for a premium, an option to a third party to buy or call the stock in the future for a higher price.  If done expertly, one keeps both the stock and the premium.)

Second, I do not see interest rates increasing any time soon, a fact which confirms the wisdom of my repurchase of Annaly Capital (NLY)(assuming of course that the US does not default on its debt obligations including the guarantee of Freddie and Fannie upon which Annaly's top line relies)  In so doing however, I re-learned a valuable lesson.  EASE YOUR WAY INTO POSITIONS.  DO NOT BUY ALL AT ONCE.  Allow me to elaborate.  I first  re-entered NLY on July 7 at a price above $18.  Four days later, NLY announced a secondary offering of more stock--its third such offering this year.  When companies like NLY do this it has a short term negative impact on the price of the stock because the "offering" is not technically to the public--it is to a handfull of investment banks (e.g. Merrill Lynch, JPMorgan, etc.) which purchase the entire new issue (here, 120,000,000 shares worth $2.1 billion) and then resell them to the public.  In order to induce the investment banks to buy or "underwrite" the entire issue, the stock is "priced" to them below the current market to compensate them for the risk that they cannot sell all of the shares at a profit.  The new issue was "priced" at $17.70 and when the new shares hit the market they caused the price to drop to $17.90 or so where I again bought.  Had I not "eased" into this position, I would have missed the opportunity.  This strategy is not foolproof.  Sometimes the stock just takes off and doesn't look back.  If so, buy it going up---things could be a lot worse---like having to dump a slug of stock once it passes one's loss limit on the way down--mine being 8%..

As we look back on this week, we are reminded that governments do not learn from history and thus are doomed to repeat it (paraphrasing George Santayana).  Nimble investors need not follow suit.

July 9, 2011 "How To"

 Risk/Reward Vol. 75

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

"Ignorance is the curse of God; knowledge is the wing wherewith we fly to heaven"--William Shakespeare

"If you don't know where you are going, you'll end up someplace else."---Yogi Berra

"Aim at nothing, and you will hit it every time."--Zig Ziglar

In recent weeks, some of my readers have asked how to "get started"; or in some cases "how to reboot" their investment approach.  I do not profess any expertise in this area (see above disclaimer), but I can relate how I "rebooted" after many years of fits and starts.

For me the first step was education.  The first two books I read were "Getting Back to Even" by Jim Cramer of Mad Money fame and "How to Make Money in Stocks" by William O'Neill, the founder of Investor Business Daily (IBD).  Later, I read "The Intelligent Investor" by the late Benjamin Graham, WarrenBuffett's guru.  These help familiarize one with terms and provide some basic rules.  For example, although I am not a slavish devotee of O'Neill's quasi-technical approach, he did emphasize the 8% rule (do not take more than an 8% loss on any position) which has served me well.  I also read the educational offerings at  http://www.quantumonline.com/incomeinvestments.cfm  a storehouse of information on all types of investments beyond common stocks such as preferred stock, oil trusts, business development companies, master limited partnerships, real estate investment trusts, exchange traded debt, closed end funds, etc.  Get to know what these are.

Step two was creating a daily reading list.  I am obsessive and excessive.  My motto is "Moderation in all things is itself immoderate."  So, I chose to be immoderate in financial reading.  I read the Wall Street Journal, IBD and the Financial Times daily.  The first two are the easier reads, but the last one is superior once you get your "sea legs."  I also peruse free publications on the internet such as <http://www.seekingalpha.com .  I take notes on a steno pad--just recording facts helps one retain them.  However, if you do nothing else, watch Cramer's show Mad Money every day on CNBC.  Honestly, once you get past his schtick, you will be kept as current on the market as you need be..

Step three, I set a goal.  As my early readers know, my goal is to achieve a 7% return on my investments in a zero inflation environment.  I chose this goal because the income from that yield will support Barb and me in our lifestyle should I decide to retire at age 62 (NB to subscibers who are also my partners---DO NOT reassign my corner office just yet.  I will not retire at 62.  I just want to be able to flip you off on my terms and at my time---which will not be age 62.)  We set this goal by doing a deep dive into our assets and our expenses.  Younger readers have a much longer horizon---and many more expenses.  But that does not mean you cannot start calculating.  There are many programs on-line that can help.  I use one provided by PennMutual. https://www.pennmutual.com/pmlwebsite/pages/PML_Public/Main_Content/calcs/wealthaccumulation/index_1006.h
Run some calculations.  For example, say you are 35, have $100,000 in a 401k and anticipate contributing $10,000 per year for the next 30 years.  At 7% you can expect to have $1,900,000 at age 66 which at  7% will pay you $133,000 per year without invading principal.  At 9%, one can expect $3,000,000 at age 66 paying $270,000 per annum without invading principal.  At 4%, one can expect $950,000 paying only $38,000 per year. I chose these returns advisedly.  7% can be achieved in today's environment with a diverse portfolio of preferred stock, master limited partnerships, exchange traded debt and only a minimal amount of daily attention.  Obviously, the risk in averaging a 9% return is considerably more and the time spent in oversight is significant.  A 4% return is what one would have achieved over the past 10 years if one had invested in the average blended or large cap mutual fund and simply let it sit.  The lesson is obvious.  An enhanced return can be achieved by being an active stewart of your portfolio.

Lastly, I opened a Scottrade account and just "did it".  Buying a security can be intimidating (and selling one even more so).  Accordingly, some may want the comfort of working with a broker/money manager.  But alone or with assistance, understand that you and you alone are responsible for your own financial security.  It does not and should not take a village to achieve financial independence.  Start slowly.  It took me from May, 2010 to January, 2011 to fully deploy the money Barb allowed me to invest.  Sell some securities for profit, just to get that good feeling.  Cut your losses at your tolerance level--say 8%.  Keep track of how you are doing each day.  Try to enjoy it.

On a personal note, I had another good week despite the downturn on Friday.  I did buy some Annaly Capital, and I repurchased some Apple.  I have seen no negative stories on Apple's supply chain in recent weeks (see previous posts), and once Apple blew through its resistance level of $350 I bought some.  Apple's chart had formed what looked to be a "cup and handle", and I decided not to wait for confirmation of its rally.  Those that have read Mr. O'Neill's book know of what I speak----others should not remain ignorant of its content.  Just sayin'.

July 2, 2011 "Greek To Me"

Fw: Risk/Reward Vol 74

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

CASSIUS: Did Cicero say any thing?
CASCA: Ay, he spoke Greek.
CASSIUS: To what effect?
CASCA: .... those that understood him smiled at one another and shook their heads; but, for mine own part, it was Greek to me. ---William Shakespeare,  Julius Caesar, Act I Scene II

"No ticky, no laundry"---Marco Polo

"He who will not economize, will have to agonize."---Confucius



The stock market was positively giddy this week;  euphoric on news of temporary relief from the on going Greek debt problem.  It was my best week since I began writing this publication.  However, my optimism is muted based upon news this week from China.

Ok, Ok, so why am I so fixated on what happens in China?

Well, buckaroos, wrap yourself in the following statistics:  China has 1.3 billion people, 20% of the world's population; China is the largest manufacturer in the world;  China is the world's largest exporter; China is the world's largest automobile manufacturer; China consumes the following percentages of the WORLD'S commodities:  53% of cement, 48% of iron ore, 47% of coal, 45% of lead, 40% of copper, 36% of nickel, 10% of oil (US consumes 20% of world's oil).  In addition, take a look at the 30 companies that comprise the Dow Industrial Average.  At least 15 of them are relying heavily on increasing business in China to drive future growth and profitability; companies like McDonald's, Caterpillar, Alcoa, GE, Boeing, etc.  And remember,  according to Larry Kudlow, the growth in corporate profits is the "mother's milk" of the stock market.  Frankly, what happens in China is more important to a stock portfolio than the Greek debt crisis, the war in Afghanistan, the US budget deficit, Charlie Sheen's contract, and you name what else---combined.  So if you think I am too fixated on China----EXCUSE ME!

Ahem, what is the news from China?

Earlier this week, Chinese government auditors revealed that Chinese municipal debt is much higher than previously estimated.  The combined debt of all Chinese governments is now 70% of China's gross domestic product.  This compares to 97% for the US and 225% for Japan.  This debt overhang will undoubtedly slow the rate of China's growth (e.g. cities will not be able to borrow to build as many housing units as promised) which already has been lowered to 9.5% for 2011, down from 10.5% in 2010.  This is still a tremendous rate, but directionally going the wrong way.  This news comes on the heals of a report that the Chinese real estate "bubble" may be deflating.  Real estate values in Hong Kong are down 15% so far this year.  As reported in earlier editions, China's construction industry is a huge driver of its economy and a pull back in that sector will have a tremendous impact on the demand for everything---most certainly commodities.  This pull back was confirmed this week in a report from Glencore, the world's largest commodity trader.  And,  as demonstrated from the above statistics, China IS the world's commodity market.

So what does this mean to me as an investor?

Well, it confirms my decisions to exit copper (Southern Copper is down 50% from its 52 week high); to exit aluminum (Alcoa is down 17% from its 52 week high); to exit coal (Peabody is down 20%); and to exit iron ore (SID is down 30%).  I am staying clear of these for a while although it was also reported this week that the inventories of copper (a leading indicator) in China have fallen recently.  This, of course, is a good sign.  The news from China has NOT dampened my bullish outlook on oil.  The release of oil reserves reported in this publication last week had little sustained impact on the price of crude as it bounced back this week.  Frankly, the amount released, 60 million barrels, is literally a drop in the bucket compared to the DAILY worldwide consumption of 89 million barrels.  I am standing pat with my oil portfolio which is skewed toward domestic production (MHR preferreds, GMXR preferred, SBR--small exploration companies or trusts and Chevron--a mega diversified oil company).  Chevron alone has several thousand wells in Texas' Permian Basin and is planning 350 more this year.  I also still own some Statoil, Shell, BP, ConocoPhillips, Permian Basin Trust,  and San Juan Trust, although not as much as a few months ago.

With the above discussed exit from commodities and my previously discussed pruning of real estate investment trust positions, I am cash heavy--- well above the 20% position insisted upon by my bride.  I hate not having money at work.  So, I parked some in the recently issued exchange traded debt of Century Link (CTQ) and U. S. Cellular (UZA.  Both are investment grade, pay around 7%, are not redeemable until 2016 and trade at or near their par/redemption price.  I also caught an awesome dip in Ally Bank preferred Series B which is not investment grade, but trades in great volume (thus allowing for liquidity) and yields 8.7% at my purchase price of $24.32.   Lastly, as reported last week, I will look at reentering Annaly Capital now that QE2 is officially over.

Happy Fourth!!!