November 26,2011 Bad News

Fw: Risk/Reward Vol. 94
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN

"Once I built a railroad, I made it run/Made it race against time
Once I built a railroad, Now it's done/ Brother, can you spare a dime?"--Lyrics from 1932 hit song "Brother Can You Spare a Dime"

"Lloyd Banks in the house, bad news
Tony Yayo in the house, bad news
50Cent in the house, bad news
Whenever 50 around, it's bad news"--Lyrics from "Bad News" by rap artist 50 Cent

"When you're weary/Feeling small
When tears are in your eyes/I will dry them all...
Like a bridge over troubled waters/I will lay me down"--Lyrics from "Bridge Over Troubled Waters", Simon and Garfunkel

I hope everyone had a restful and joyous holiday. Lady Barbara and I basked in the warmth of Denver's sunshine (70F) and the smiles of two of our beautiful grandchildren. Despite the challenges that face us all, Americans have much for which we should be thankful.

That said, Brother, can you spare a dime? Once again, our governments, at home and abroad, have proven themselves unworthy of us, the governed. The result is the worst Thanksgiving week stock performance SINCE 1932! The Super Committee proved itself as ineffective as a Jay Cutler tackle (sorry, Matt and Todd, but could not resist). And speaking of all thumbs, when will Mario Draghi, the European Central Bank's new president, realize that dribbles and drabs of bond buying on the secondary market is ineffective at stemming the sovereign debt crisis? Turn on the printing presses and take default off the table. Perhaps subscriber and noted wag Larry B. is correct: Europe has it backwards--a German pope and an Italian central banker. If the failure of the German bond sale on Wednesday is not enought to awaken everyone is Europe that drastic measures are needed, then perhaps nothing will.

Adding insult to injury, the news from China is no longer neutral. This week the Hong Kong Purchasing Manager's Index fell to 48 indicating a slow down in the Chinese economy. "Whenever around 50 (or lower), it's bad news!" Moreover, for the first time since 2007, more foreign capital left China than entered. This exit is due in part to the working capital needs of international companies--working capital that formerly was supplied by loans from large, European banks. These banks continue to shrink their lending activity and to hoard capital in order to cover the losses sustained in writing down Euro zone bond losses. Remember, European banks have historically provided 25% of working capital to US companies through loan syndications and the lion's share of working capital to South American companies. This shrinking of European lending is a vicious cycle, as credit, the mother's milk of commerce, continues to evaporate.

On the personal front, I did NOT exit the market--holding steady on my 25% market allocation despite the market's free fall below the new Dow floor of 11,700. My holdings average over 8% in annual dividends/interest and with notable exceptions in natural resources (GGN, BCF) and European financials (IDG, INZ and NWpC), have kept their value. Overall, I am down 2% in principal on my market plays--which is tolerable considering what has happened. Frankly, I am perplexed by the precipitous fall of the preferred stock of National Westminster Series C (NWpC). The National Westminster franchise is at the heart of the what its parent, the Royal Bank of Scotland (RBS), sees as its future. As revealed in its most recent quarterly report (November 4, 2011), RBS has done a stellar job of reducing its exposure to continental sovereign debt and is handling its significant exposrure to Irish debt in a responsible and seemingly transparent manner. NWpC paid its committed dividend even during the worst of the 2008-2009 crisis, when the stock traded in the single digits. Currently trading at $17, it pays an astounding 11.5% in interest! If and when it is redeemed at $25, NWpC will provide a 45% profit--not counting dividends. Surprisingly, NWpC trades significantly lower than similar securities that have a lower credit rating (e.g. ZBpC). Does anyone believe that the UK government, which owns 83% of RBS will NOT provide whatever "bridge" is necessary to help RBS "over these troubled waters"? After all, RBS has done everything that the government oversight committee has demanded--and more. What am I missing? Please comment.

I probably will regret not exiting all positions when the 11,700 level was breached, but the temptation is to double down on some of my positions, not to run. If I were younger, I likely would do so. But at my age and stage , I will likely sell and take the 2% loss on my current 25% allocation if conditions worsen at all.

Are you enjoying these posts? If so, let me know. Remember, past editions are available at www.riskrewardblog.blogspot.com .

November 20, 2011 Limbo

Risk/Reward Vol. 93


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

"Jack be nimble, Jack be quick
Jack go under limbo stick...
How low can you go?"---Lyrics from "Limbo Rock" by Chubby Checker

"So hoist the John B's sails/See how the mainsail sets
Call for the captain ashore/ Let me go home----Lyrics from "Sloop John B" by the Beach Boys

"The point is, ladies and gentlemen, that greed, for lack of a better word, is good."---Gordon Gecko from the movie "Wall Street"

A personal shout out to Bob Kerbell, a loyal subscriber and good friend, for hosting the opening weekend of the deer gun season. Bob's hospitality is surpassed only by the majesty of his farm/game preserve. Nothing compares to a walk through the woods in anticipation of rousting a monster buck. One of these years I will break the tie between the number of my sailing and hunting trophies.

Europe remains a mess--keeping the rest of the world in limbo. How low will I go? Not much lower than 11,700 on the Dow, a level with which we flirted several times last week. It's a shame considering how well US corporations have performed, but I will not hesitate to punt if the market goes south. I am too old NOT to "time" the market.

On news that Teekay LNG Partners (TGP) floated a secondary stock offering to defray the cost of acquiring more liquid natural gas(LNG) tankers, I bought. As a result of hydraulic fracking, natural gas has become plentiful in many places around the world--most notably in the US where the cost has been halved since 2008. However, the demand has heightened in countries that heretofore have relied upon nuclear energy to generate electricity--a taboo since the tragedy in Japan. Indeed the cost of LNG in Japan is now $15/mmBTU compared to $3.87/mmBTU, the cost of natural gas in the US. This spread has resulted in a premium for LNG tankers such as the ones TGP owns and operates. I see the 8% dividend growing in coming years--if not, you can change the lyrics from Sloop John B to Stupe John B.

Speaking of fracking, did you catch the spike in WTI oil pricing that occurred mid week with the announcement that one of my favorite pipeline companies, Enbridge, is buying a half interest in the Seaway pipeline that runs from Houston to the oil storage hub at Cushing, OK? Enbridge intends to reverse the flow of the Seaway to take oil OUT of Cushing and down to the refineries near Houston. This is a huge development and stands as further indication that the domestic production of oil (from the Bakken, the Eagle Ford and the Mississippian basins) is not to be stopped. Heretofore the Seaway pipeline brought IMPORTED oil from Houston to Cushing. If the market holds, I will buy more SDT, PER, EEP.

Also, if the market holds, I intend to buy the investment grade, exchange traded debt of Kohlberg, Kravis and Roberts, LLC. (KKR) which trades on the NYSE as KFH. Henry Kravis was the main protagonist in the bestseller and movie "Barbarians at the Gate" which chronicled the takeover of RJRNabisco by "raiders" back in 1988. Kravis is thought to be the inspiration for Gordon Gecko, the "Wall Street" villai

November 12, 2011 On the Edge of Glory?

Risk/Reward Vol. 92

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

"I'm on the edge of glory/And I'm hanging on a moment of truth
I'm on the edge of glory/And I'm hanging on a moment with you."---lyrics "Edge of Glory" by Lady Gaga

"Three coins in a fountain/Each coin seeking happiness,,,
There they lie in the fountain/Somewhere in the heart of Rome"--lyrics "Three Coins in A Fountain" as sung by Frank Sinatra

"Don't cry for me Argentina/The truth is I never left you
All through my wild days/My mad existence
I kept my promise/Don't keep your distance"--lyrics 'Don't Cry for Me Argentina" from "Evita"

"There are only two things I hate in the world: people who are intolerant of other people's culture and the Dutch"---quote from "Austin Powers in Goldmember"

I find myself once again perched on the fulcrum of the risk/reward see-saw: so many tantalizing securities are available, priced at levels yielding 8 even 9% in dividends/interest. But, do these low prices indicate that we are "on the edge of glory" or the edge of an abyss? Should I use down days such as Wednesday to buy more or use upticks such as Thursday and Friday to exit with a modest profit? On the one hand, I am heartened by the new "floor" of 11,700 on the Dow which held during Wednesday's 389 point fall. I even harbor some belief that the world's leaders now understand the cataclysmic consequence of failing to deal with sovereign debt---a belief that I did not have when I exited the market in late July. Yet, I remain chary: painfully aware of Europe's now chronic inability to resolve that crisis (this week of course centered on Italy). We are all "hanging on a moment"---moment to moment. I have decided to invest up to 25%, with 75% still in cash. However, I am prepared to exit in a flash if the floor does not hold.

Speaking of Italy, is the only answer to its mountainous debt for every man, woman and child in the world to throw three Krugerrands into Trevi fountain? I doubt that the Chinese will. No, the only answer is for the European Central Bank (ECB) to print Euros sufficient to buy and hold a huge percentage of the debt of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) in return for a prohibition against any additional borrowing and a reduction in their entitlement lifestyle. Germany will not like this European version of quantitative easing---as it continues to insist that private bondholders share in the pain by taking huge writeoffs. But frankly, since so many major European banks have relied on these bonds as the bases for their core capital--a writeoff sufficient to satisfy the Germans would sink those banks and would freeze the entire credit market worldwide. Even now international banks are balking at lending to Eurozone banks, fearing their "counterparty" is no longer credit worthy---and interbank lending is literally what makes world commerce possible. The sooner the ECB (read, Germany) recognizes the need for massive intervention, the sooner the healing can begin.

On a more positive front, there was a flood of good quarterly earnings reported this week . Moreover, on Tuesday, I awoke to news of a huge oil discovery by YPFRepsol (YPF), the former Argentine national oil company--a discovery that increased its reserves by at least 50%! I had been looking at YPF because of its huge dividend (11%) occasioned by a precipitous drop in share price (remember high yield means low share price) following an announcement by the Argentine government that henceforth all overseas profits must be repatriated to Argentina before being distributed as dividends. This will be a pain in the arse, but should not interfere with the dividend. This week's discovery merely reaffirmed my desire to buy--and I did. This is more speculative than my usual investment--but what a potential return! I simply could not "keep my distance". I hope no one "cries for me"as a result of this gamble. P.S. Don't get me started on American oil policy---did you see the cowardly decison to postpone the building of the Keystone XL pipeline until after the 2012 election? This means going for at least two more years without 500,000 bbls/day of oil from Canada and deferring 20,000 high paying jobs.

With quarterly earnings reports come quarterly conference calls--most of which are transcribed and made available to the public. (See, www.seekingalpha.com ) In these calls and the q&a that follow, companies explain what they have done and what they expect in the future. In the parlance, they give "guidance" to anyone who cares to listen/read. This week two of my favorite Dutch insurance/financial companies, ING and Aegon (in the US known as Transamerica) reported. I was heavily invested in their investment grade exchange traded debt before the 2010 European sovereign debt crisis and have been looking to reinvest if and when I was comfortable that each had reduced its exposure to the PIIGS. This week during its conference call, each explained how it had off loaded PIIGS exposure--and soon thereafter I bought IDG, AEF and AEV. These securities and others issued by ING and Aegon have been sullied by the broad brush used to paint all European financial institutions as irresponsible. I do not believe it is warranted with these two, whose investment grade hybrid debt is cheap now and thus paying very high interest. Unlike Mr. Powers, I like the Dutch. (For a detailed explanation of how I mine for investments see the July 9, 2011 edition of Risk/Reward, Vol 75, located at www.riskrewardblog.blogspot.com )

In closing, I hope that I am on the "edge of glory", and that my love affair with high yielders does not devolve into another Lady Gaga lyric---"A Bad Romance".

November 5, 2011 A Tale of Two Aldous

Fw: Risk/Reward Vol. 91
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING . RELY ON NOTHING STATED HEREIN.

Limo Driver--"Would you like for me to take the Chiswick Roundabout through Hounslow and Stains?"
Aaron Green--"What is this, f*#king Middle Earth? Just take us to the airport, ok."-- Script from the movie "Get Him to the Greek"

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness..." "A Tale of Two Cities" by Charles Dickens

"Every ceiling, when reached, becomes a floor upon which one walks as a matter of course and prescriptive right." Aldous Huxley author of "Brave New World"

"Little darling, the smile is returning to the faces/Little Darling, it seems like years since it's been here
Here comes the sun, here comes the sun/And I say, it's all right"---lyrics from "Here Comes the Sun" by the Beatles.

In the movie "Get Him to the Greek", Aaron Green (Jonah Hill) is dispatched by his boss, the head of a talent agency, to escort Aldous Snow (Russell Brand), a reprobate, has-been rock star from his home in London to the Greek Theater in Los Angeles, the site of Snow's comeback concert. During the trip, Aaron is brought to the brink of ruin several times due to the irresponsibility of his charge. Sound familiar? How many times will the Eurozone escort Greece to the altar of financial salvation only to have it balk at contributing one euro into the collection plate?

The above notwithstanding, I am heartened by how the market reacted to this week's rollercoaster events. The Dow took a body blow on the news of a possible Greek referendum, falling more than 550 points on Monday and Tuesday. But it rebounded respectably as the week progressed. More importantly, note that its lowest point in the week (11,650) or "floor" was the "ceiling" of the trading range (10,700-11700) which dominated the market from early August through most of October and about which I have written extensively in the past. Have we entered a "Brave New" trading range where Q3's ceiling is Q4's floor? With the 50% writeoff (haircut) of Greek debt taken last week, maybe the specter of a Greek default just is not as scary as before. Whatever the reason, I was sufficiently comfortable that I did not bail---I actually added to some positions and opened others.

"A Tale of Two Telecoms" played out this week. On November 2, 2011, Frontier Communications (FTR), one of the three large legacy landline companies, reported disappointing earnings. As loyal readers know, I have been a fan of FTR because of its double digit dividend. But, this favorite continues to struggle to digest its acquisition of the mountain of assets it purchased from Verizon last year. In order to meet its outsized dividend, it had to distribute more than 70% of its free cash flow. This is an unhealthy percentage, and the market punished it. The next day, another landline company, CenturyLink (CTL) reported earnings and gave a bright picture of its integration of Qwest, its most recent acquisition. Its dividend payment only required 50% of free cash flow which portends a possible increase in dividend in the future and made even more secure the positions I hold in its exchange traded debt (CTQ and CTW). I love this company. The third landline leader Windstream (WIN) also reported this week and also disappointed Wall Street although not to the extent of FTR. I own WIN and plan to add some more on this dip. The dividends from these babies are just too good to resist.

Some of my hottest holdings are in the nitrogen based fertilizer market, TNH and UAN. Both distribute monster dividends, and their prospects for 2012 are outstanding in light of the anticipated record plantings of corn and the continued depressed price of natural gas, the main feedstock for this product (another economic benefit of hydrolic fracturing or fracking). Look for a new entry into this space in the coming weeks--Rentech Nitrogen Partners (RNP)

As loyal readers know (See Vol 89 available at www.riskrewardblogspot.com ), I am a huge fan of business development companies (BDC's) like Ares Capital in which I own both common stock (ARCC) and exchange traded debt (ARY). As discussed previously, BDC's are pools of money that provide capital to small to medium sized businesses, usually in the form of senior secured loans--the profitable and boring business in which commercial banks used to excel . They are of great interest to me because in order to keep their pass-through tax status they must distribute 90% of their earnings. One sunny spot in this space is Solar Capital (SLCR). Last week it announced earnings including a writedown of debt mandated by arcane accounting rules. This caused an immediate drop in the stock. My comfort level was restored when the CEO explained the situation on Cramer's Mad Money. I grabbed some on its way back up and plan on enjoying its double digit dividend for months to come.

So another yeah/boo Eurocentric week ends. I will continue to buy, to be cautious (but not timid), to be watchful and to be nimble.

October 30, 2011 ANGIE, ANGIE

 Risk/Reward Vol. 90



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



"Oh, yes, I like it/Screaming like never before
Baby, I like it, I like it/Party, karamu, fiesta, forever"--Lyrics from "I Like It" from Enrique Iglesias' album "Euphoria"



"Angie, Angie/ When will those clouds all disappear?
Angie, Angie/ Where will it lead us to from here?"--Lyrics from "Angie" by the Rolling Stones



"This is my quest, to follow that star
No matter how hopeless/ No matter how far"--Lyrics from "Impossible Dream" from musical "Man of LaMancha"



With the markets experiencing the best month in decades, it is safe to say that "Euphoria" reigns. After months of uncertainty, SOME clarity was brought to the European sovereign debt/bank crisis this week. Oh, you don't need the wisdom of Yogi to realize "that it ain't over 'til its over" (which also makes baseball so great; note Game 6!). But, real commitment has been exhibited by the stakeholders; sufficient to give heart to a market that otherwise was ready to roar based upon good corporate earnings and news that the US economy grew at an annualized rate of 2.5% in Q3. The European deal announced Wednesday has the following components: 1) institutional holders taking a 50% haircut on Greek debt (YIKES!--can you imagine that on US Savings bonds?); 2) European banks compensating for sovereign debt writedowns by raising 106 billion Euros in "new" capital; 3) the direct subsidy to Greece being increased to 130billion Euros; and 4) the EFSF being leveraged to 1trillion Euros presumably by allowing it to "insure" a set percentage of sovereign debt.



Frankly, the above represents a significant accomplishment and great praise is due to "Angie" Merkel. Principled leadership is to be admired--we sure could use some back home. Germany's newest Iron Chancellor held tough in insisting that Germany would not contribute one more Euro unless and until private bondholders shared in the pain----and a 50% haircut is really painful! My goodness, yesterday Sarkozy went on French national television and told his people they must become "more German" (starting with repealing the 35 hour work week). Barry, how about delivering the same message-- instead of villifing success and fiscal responsibility? Angie, no matter "where it leads from here", you are my odds on favorite for Person of the Year.



As the markets return to late July levels, I am picking up some real bargains from the shopping list I compiled over the last several weeks. I am even cautiously adding some financials, swooping up some high paying preferreds from old favorites Zions Bank (ZBpC), and National Westminster (NWpC) --which already has written down its Greek debt 50%, and buying the preferreds of real estate investment trusts that pay solid common dividends (e.g. Entertainment Properties and Ashford Hospitality). I also recommend studying closed end funds for some real bargains. Many were really battered recently and are trading well below their net asset values (NAV). I am back into BCF which holds a variety of mining and mineral stocks which I believe will again soar. BCF is trading 5% below its already low NAV---all the while paying over 8% in dividends!



On October 22, 2011, the Wall Street Journal interviewed John Rowe, CEO of Exelon, the large Chicago based electrical utility. Refreshingly candid, Mr. Rowe positied that it is time for Washington to stop tilting at the windmill of "clean energy"---investing in the "Impossible Dream(s)" of wind and solar power is quixotic--they can't supply our needs. Moreover, no one supports atomic power, and there is no such thing as "clean" coal. The only near and long term solution is natural gas. It is 50% cleaner than coal and thanks to recent break throughs in shale horizontal drilling and fracking , the US is now the world's leading producer with huge reserves. In 2008, we were importing natural gas paying $8per million BTU. Now we are paying less than $4, and last week Cheniere Energy announced a 20 year contract to supply natural gas in liquid form (LNG) to a British utility for a huge premium---natural gas in Britain costs $11per million BTU! Cheniere stock went up 90% in two days---yeah, that's right 90%! There are so many profitable ways to play US natural gas and oil exploration. On the exploration side I like LINE, SDR, PER, SBR, PBT, BPT and in the pipeline/storage area I like KMP, EEP and ETP. I also see a consolidation in this space (read merger and acquistion activity like KMP's acquisiton of El Paso last week) especially in light of the diminishing production by mega oil companines like Chevron (see this week's announcement).



I am resisting the euphoria--and with good reason as the precarious condition of Italy becomes the next focus of possible contagion. But, it feels good to loosen the purse strings and to begin to purchase positions with some conviction. Cautious aggression may make for some money making opportunites---it sure did last week.



Past editions available at www.riskrewardblog.blogspot.com

October 22, 2011 NOSTRADAMUS--I AIN'T

Fw: Risk/Reward Vol. 89

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

"Adversity on which I thrived/Destroy the alter

Now I am vilified/ Nostradamus, Nostradamus"---lyrics from "Nostradamus" by heavy metal favorite Judas Priest

"I used to want you so bad/ I'm so through with that

Cause honestly, you turned out to be the best thing I never had."--lyrics from "Best Thing I Never Had" by Beyonce

"Ares, exceeding strength, chariot rider, golden helmed, doughty in heart, shield bearer, savior of cities, harnessed in bronze, strong of arm, unwearying, mighty with the spear."---Homer--Hymn 8 to Ares (700BC).

Nostradamus, I ain't--No.1.  As discussed last week, I bought Apple in anticipation of block buster earnings only to suffer a 6% decline when the market received a disappointing report on Tuesday.  Frankly, I believe it to be an overreaction and assuming AAPL does not dip any more, I am confident that I will be back to even or better by next quarter.  I know better than to buy in anticipation of earnings, but with Apple (again!) I just could not resist.

Nostradamus, I ain't-No. 2.  With the markets closing near the trading range high (11,700) last Friday, I speculated that strong earnings reports throughout the week would vault the market through the range and set up the rest of the year for solid stock gains---absent catastrophic news from Europe.  The earnings all week (except Apple) were strong and nothing catastrophic came from Europe, but good earnings were not enough to vault the market out of the range---even though Friday did close above 11,800.  The fact remains that the markets are still captive to the hour to hour stream of yeah/boo news regarding the European debt crisis.  

This trading range pattern is exhausting and frustrating!   What can a lowly investor do?   Answer:  Don't despair.  KEEP STUDYING!!!!  Allow me to elaborate.

As my early subscribers know, I am primarily an income investor---always in search of big, safe and secure dividend/interest payments.  In mid 2010, I became a fan of the preferred stock of Citigroup (C), Bank of America (BAC), JPMorgan (JPM) and other such banks as they worked their way out from under the 2008-2009 Lehman Brothers induced financial crisis.  I bought positions in several preferred issues well below the call or redemption price (usually $25) each of which carried a dividend in excess of 7%.  I reaped great quarterly dividends and sold all of these at a handsome profit before the August, 2011 market swoon.   Since that time, these preferred shares, like virtually all bank stocks, have taken a beating---so much so that they are again looking mighty juicy.  Indeed, my interest was peaked even more when C, BAC and JPM reported surprisingly good earnings this week.  That is, of course, until I read more deeply into the reports.  YIKES!  Therein, I learned that C has $30bn of loan exposure in Portugal, Italy,Ireland, Greece and Spain (PIIGS).  JPM has $20bn exposed to the PIIGS, and BAC $15bn.   All claim that their exposure has been "hedged" through collateral and credit default insurance, but this merely begs the question as to how credit worthy their counterparties are.  Problems in Europe could  wipe out any equity cushion and could cause the preferred dividends not to be paid.  My deep dive into the reports saved me from buying "...the best thing I never had."

Further study also revealed, however, that banks, now so preoccupied with Europe, are underserving the borrowing needs of corporate America--especially the small and middle market (companies with earnings below $100 million).  This void is being filled in part by business development companies (BDC).  BDC's are largely unregulated pools of money that provide capital in several forms--from senior secured loans (like banks) to stock investments (like private equity groups)--mainly to small and middle market privately held companies.  BDC's are attractive to yield hunters like me because they are required to distribute 90% of their earnings to their shareholders.

One of the largest and most respected BDC's  is the "exceedingly strong, golden helmed, savior of cities" Ares Capital Corporation (ARCC).  Although it has little direct exposure to Europe, ARCC has taken a beating like all financial institutions.  I have long liked its exchange traded debt, ARY, which recently has been trading below its redemption price and currently yields better than 7.75%.  I recently started buying it again.   Also, ARCC common stock dipped recently on the announcement that it is raising more money through a secondary equity offering (usually priced below the market) so I bought some.  I intend to buy even more once the secondary is priced.  This bad boy currently yields 9.7% in dividends.  

Alas, the fact remains that, based on earnings, stocks are incredibly cheap right now----unless of course the world's markets are sent into a tailspin by sovereign debt defaults in Europe.  I am making cautious purchases of stocks which I believe have minimal exposure to Europe---ever ready, however, to exit if a major disruption occurs.  That said, I am still 90% in cash--ever thankful that I bailed on the market in July.  My current holdings (except Apple) average over 8% in dividend/interest, and I am in positive territory even with AAPL's poor performance this week.  Here is a list:  PER, SDT, AAPL, T, MO, EEP, FTR, CTQ, CTW, STON, TNH, RAI, NLY, AT, WIN, KMP, AHTpE, ARCC, ARY, SDRL, BCF.

Remember past editions are available at  www.riskrewardblog.blogspot.com 

October 15, 2011 MACT the Knife

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

"Monday, Monday, can't trust that day/Monday, Monday sometimes it just turns out that way

Oh, Monday morning, you gave me no warning of what was to be

Oh, Monday, Monday how could you leave and not take me?"----Lyrics from "Monday, Monday" by the Mamas and the Papas

"Now on the sidewalk, sunny morning/Lies a body just oozin' life

And someone's sneakin' round the corner/Could that someone be Mac the Knife?"--- Lyrics from "Mac the Knife" sung by Bobby Darin

"There is a tide in the affairs of men/When taken at flood lead on to a fortune

On such a full sea are we now afloat/And we must take the current where it serves."  "Julius Caesar" Act 4 Scene 3,  William Shakespeare

With the Dow closing on Friday near its three month trading range high (11,644), this coming Monday will launch a week full of promise or disappointment--assuming (and this is a big assumption) that the European sovereign debt crisis does not explode again.  Next week presents the most significant earnings report calendar.  The results and future guidance given by companies such as Halliburton and Schlumerger from the oil services sector, Coca Cola and McDonald's from the consumer sector, Abbott and Lilly from pharma, GE and AT&T will likely set the stage for the rest of the year.  All the major banks also report, but expect nothing from these laggards whose stock prices have taken a terrible beating this year.  Closing on Friday near its all time high, the expectations for Apple are huge.  I bought some in the belief that come Wednesday, it will shoot from its current $422 to over $450-- assuming it reports another blockbuster quarter.  A 6% profit in a few days would be nice.  So buckle your belts, Buckaroos---and remember--- unlike the Mamas and the Papas you have been given warning.

As I wrote last week, I went shopping for electric utilities this week, a sector that has actually increased in value since the August stock swoon.  My old favorites Duke, PGN, UIL and FirstEnergy are pretty pricey these days, yielding barely 5%.  I bought some, but will buy more once they moderate in price--something surely to occur if the market otherwise stabilizes.  On a related note, my research did uncover a threat to electic utilities posed by a set of proposed pollution regulations promulgated by the USEPA known as MACT (Maximum Achievable Control Technology) which if implemented will take off line several old coal fired plants and will reduce the amount of electricity nationwide 8% by 2015!  Twenty five state attorneys general are trying to stop these regs, but have not been successful as of yet.  Talk about "oozin' life" at the hands of MACT the Knife!  This startling statistic sent me searching for electric power generators that do not rely on coal.  I happened across a non utility generator called Atlantic Power (AT) which relies primarily on natural gas fired plants and which recently doubled in size through an acquisition.  To pay for this, AT is issuing more stock and in order to insure its sale, it priced the offering below the market price.  I bought some in the low $13 area which locks me into a very handsome 8+% dividend.  

My utility search also brought me back to telecommunications--land-line and cellular.  These all took a beating in August and each presents a great opportunity.  With recent assurances by management that their respective monstrous dividends are secure, I added to my CenturyLink exchange traded notes (CTQ and CTW) and repurchased some of my old favorites;  the common stock of Windstream, Frontier, AT&T and Verizon. 

This past week, the Financial Times did an entire insert on the remarkable Canadian oil industry which has caused a sea change in the Canadian economy since the oil rich tar sands of Alberta have been commercialized.  Canada now holds the world's third largest oil reserve and supplies more oil to the US than any other foreign nation (20% or more of oil imports).  Most of the oil is imported through pipelines.  You may have read that Canada is seeking to increase this flow through a new pipeline called Keystone XL which the Obama administration has yet to approve (can you say environmental Luddites).  I am riding the "tide" called Enbridge (EEP) to great "fortune".  It is the largest Canadian oil pipeline owner and pays a handsome 7+% dividend.  Indeed, take a look at all oil and gas pipeline companies.  They are very attractive now, and I do not see their cash flow being disrupted even if a European hiccup occurs again.  Attention:  these are master limited partnerships and should not be held in retirement accounts.  If you want exposure to these in 401k or IRA, look at a closed end fund that holds these such as KYN.

I am slowly re-entering the market, but am still very heavily in cash.  There are some great opportunities available--even outside of financial and insurance companies, all of which are too exposed to European debt contagion.  

Past editions available at  www.riskrewardblog.blogspot.com 

October 9, 2011 VITA BELLA

Risk/Reward Vol. 87



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



"I find it very, very easy to be true/I find myself alone when each day is through

Yes, I'll admit that I'm a fool for you/Because you're mine, I walk the line."---lyrics from "Walk the Line" by Johnny Cash



"Bells will ring ting-a-ling a-ling, ting-a-ling a ling/And you'll sing "Vita bella"

Hearts will play tippy tippy tay, tippy tippy tay/ Like a gay tarantella---lyrics from "That's Amore" by Dean Martin



"Hello, hello baby, you called, I can't hear a thing/I have got no service in the club you see, you see

Wha-wha what did you say, huh, you're breaking up on me/Sorry, I cannot hear you, I'm kinda busy"--"Telephone" by Lady Gaga and Beyonce



Buongiorno!



Wow, do I love Florence and Tuscany! Hats off to Lady Barbara for planning and executing a perfect eight day vacation/excursion. Great weather, great food, great wine---and I have not absorbed so much culture since I spilled a Petri dish on myself in 8th grade biology.



Talk about "walking the line"! Whew! The "floors" of 10,700 on the Dow and 1120 on the S&P were breached at the close on Monday and continued to fall throughout Tuesday--until a late rally brought them back above water. Truly, had I not been trekking through the Cinque Terre (can you say "amazing!") on Tuesday I would likely have sold many holdings that were at or above my 8% loss limit (but not CTQ and CTW discussed below). Remember, once trading range "floors" are breached, there can often be a precipitous fall if a saving rally does not materialize. One did this time, but keep your eyes on this the next time the markets fall to 10,700/1120---and they will, unless and until a resolution of the European debt situation is reached.



"Vita bella"---life truly is beautiful in Italy. But if anyone believes that Italy will be willing or able to repay its sovereign debt without substantial outside help---FAGGETABOUTIT!. I am more convinced than ever that we have just seen the tip of the iceberg known as the European sovereign debt crisis . The size of the Greek debt ($454 billion) is nothing--literally--compared to that of Italy ($2.1 trillion), not to mention Italy and Spain combined ($3 trillion).



Why do I believe this? Well, I follow the "open your eyes" theory of life. Take a look around, observe, reflect and draw your own conclusions.



Observation 1: If you visit the Uffizi Gallery in Florence, a state run museum, you will be told that the famous Visari Corridor is not open to the public. BUT, if you book the right "tour", you can arrange a private stroll through this amazing structure full of invaluable and rarely seen art. (Barb did so arrange, and I highly recommend it.)



Observation 2: Many galleries prohibit photographs. BUT, if you book the right "tour", you can snap away.



Observation 3: Many day trips advertise a return to the city by 5:30. Good luck with that! Make it more like 8:30 or 9. (By the way, this approach is very conducive to vacationing, but not for business.)



Observaton 4: Google the criminal allegations (the ones actually filed over the years, not the mere rumors) against Italy's long sitting Prime Minister Silvio Berlusconi who also happens to be its third wealthiest citizen. Talk about a guy who knows the meaning of "tarantella"! ( an up tempo folk dance; also translates to tarantulla)



When you ask about these things, once you are comfortable with a local (like the truly brilliant and passionate tour leaders and docents), the response is universal---"That's Italy!"



In sum, Italy can promise whatever it needs to get to the next day---but its ability to actually resolve its debt load remains in doubt--at least in this oberver's opinion.



As noted above, two of the securities I would not have dumped last Tuesday were CTQ and CTW, the exchange traded debt of CenturyLink, the acquisitive telecom services company which recenty swallowed Qwest. Paying over 7.25%, these "beauties" barely moved off of their issue price of $25 during last week's herky jerky trading. I really like holdings like these; ones that have a priority in payment over juicy common dividends and which have little if any connection to the financial or insurance industries. Now, that I am back in the saddle, I will be looking for more of these as I slowly slip back into the market.



Remember, past editions available at www.riskrewardblog.blogspot.com

October 1, 2011 UP AND DOWN

Fw: Risk/Reward Vol. 86

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

Greetings from Firenze--truly one of the most beautiful places on earth.

"The word aerobics came about when the gym instructors got together and said:  If we are going to charge by the hour,  we can't call it Jumping Up and Down."---Rita Rudner

"We can never know about the days to come/But we think about them anyway

And I wonder if I'm really with you now/Or just chasin after some finer day

Anticipation, anticipation is making me late/Is keeping me waitin'---Carly Simon lyrics from "Anticipation"

"If I die young, bury me in satin/Lay me down on a bed of roses

Sink me in the river at dawn/Send me away with the words of a love song."---Band Perry lyrics from "If I Die Young"

If aerobics is the appropriate word in the gym, "volatility" is the word in this up and down market.  But how volatile has it been in reality?  Do yourself a favor and go to Google or Yahoo Finance, click on the 3 month chart of the Dow Jones Industrials or the S&P 500.  Note the choppy pattern since early August, but also marvel at its "disciplined" pattern:  never higher than 11,700 on the Dow or 1220 on the S&P, but never lower than 10,700 or 1120 respectively.  Welcome to what traders call  a "trading range".  This "trading range" presents profit opportunities to traders who buy index ETF's (or their components) at the "floor" and sell at their highs.  This is a way to make some money, but not a very comfortable one for an "investor".  That said, one has to marvel at how the "floors" of 10700 and 1120 have held despite some serious market "body blows" like the threatened US default back in August and the non stop drama of the European sovereign debt crisis.  When will it ever end?  Talk about ANTICIPATION--and "keeping me waiting" to invest more.

With the markets absorbing the "yea/boo" daily news and yet, still holding the floor, I re-entered 10 days ago: not with the idea of trading, but of cherry picking dividend paying stocks on slight dips.  I say "slight" because I only want to buy stocks that have a stronger floor than the indexes; those that pay sufficiently high dividends that their price will not drop precipitously absent some cataclysmic news such as a US default .  I no longer consider a Greek default "cataclysmic" since the markets have had time to fully consider its ramification. 

For  a good primer on this approach, chart the performance of Duke Power over the S&P or the Dow.  You will see DUK holding very steady in the storms that have characterized the stock markets recently.  Do the same for tobacco (MO, RAI), other utilities and wireless telecoms (AT&T and Verizon).  This used to be the case with the financial industry, but no more.  If you seek tranquility, stay away from these--even their preferred shares-- at least for the time being.  

Another industry that has held its own is the funeral and cemetery business.  Recently I bought stock in Stonemor (STON) which has been buying funeral homes and cemeteries across the country for the past several years.  Obviously, it has been keeping customers satisfied by catering to their every "last" wish--be it a "bed of roses", a "silk dress" or a "love song".  Organized as a master limited partnership it pays a very hefty 8+% dividend.  I also like and bought some CenturyLink (CTL) exchange traded notes (CTQ and CTW), proceeds of which will assist in the incorporation of the old Qwest assets into CenturyLink.  These 7.5% beauties are payable before CTL's hefty (and heretofore sacrosanct) 8% common dividend.  As a consequence,  I view these investment grade notes as reasonably secure----and they are instantaneously liquid.

If you need a reminder of the genius of America, read the September report of the National Petroleum Council on the future of "home grown" oil and gas production.  In the period 2008 to 2011, the US went from being a net importer of natural gas at $8/million cu ft to an exporter at $4/million cu ft and has increased known oil reserves by many fold, both by bringing new technology (fracking) to the oil/gas patch.  In the process, tens of thousands of new jobs have been created---and many more await, once regulators remove the barriers.  It just serves as a reminder---if you want a problem fixed, put a profit motive behind its resolution.

SEPTEMBER 24, 2011 "THE NATURE OF RISK"

Fw: Risk/Reward Vol. 85

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

"It's time to stop, hey, what's that sound?
Everyone look what's going down"----Lyrics from "What It's Worth" by Buffalo Springfield

"Think simple, as my old master used to say--which means reducing the whole of its the parts into its simplest terms, getting back to first principles."---Frank Lloyd Wright

"You know, Bill, there is one thing I learned in all my years.  Sometimes you just gotta say, "What the f**k, make your move."--- Tom Cruise as Joel Goodson in  "Risky Business"

Did we really need the Federal Reserve to tell us on Wednesday that our economy faces a significant risk to the downside?  Are we so stupid that on Thursday we needed Secretary Geithner to tell us that the European sovereign debt crisis and our own political infighting constitute threats to the stability of the world's economy?  Was anyone really shocked when China, which has remained so quiet these past few weeks, announced on Thursday that its industrial production fell in August and that its import of copper, the bellwether of economic activity, had likewise tumbled?  Was the Fed really surprised when its decision on Wednesday to depress long term interest rates to motivate people out of Treasury securities and into equities (Operation Twist) actually backfired and caused a flood of more money into the "safe haven" of T-bills and notes?

Apparently so.  Because only in response to this onslaught of bad news and central bank blunders did the markets drop more than 700 points to its early August levels (Dow 10,700's); frankly a place that is at least rational, even if otherwise depressing and uncomfortable.  The news on Thursday was almost universally negative----as it should have been.

I say--- IT'S ABOUT TIME!  There simply has been no reason for the markets to have bounced off those early August lows---and there won't be unless and until a resolution of the European sovereign debt crisis emerges.  All along we should have heeded Buffalo Springfield's advice to "..look what's going down", instead of following the buffalo herd that mindlessly drove the market upward over the past several weeks (especially last week) and then over a cliff this week.  (See Risk/Reward Vol. 85 at  http://riskrewardblogspot.com ).

OK, so the markets have dropped 7% this week---what did I do?  Well, one thing I did was to capture my profits in  EUO (Euro short trade) which were almost enough to offset the beating I took in gold--all of which I sold.  I view all non dividend paying securities (GLD, EUO, AAPL) as trading material.  Buy when down, ride them up, but don't ever hold beyond a modest loss---and anyone holding gold through Friday of this week was exposed to big losses.  I cut mine.  Ironically, it fell so low I may buy it again next week.

More significantly, I decided to take on some risk.  Frankly I like the markets at the lower levels that they reached this week.  In deciding to re-enter, I made reference to some of my "first principles".  I literally re-read some of my early missives to my wife, written in March 2010, wherein I reflected on the nature of risk as follows:

"All human activity (including inactivity) involves the calculation of risk.  Should one cross the street between intersections, at the light or not at all?  Should one change jobs?  Am I too young to marry?  If one doesn't cross the street, will one miss that life changing meeting?  If one doesn't change jobs will one be stuck in a rut---will one's current job even be there tomorrow?  If one waits too long to marry will one end his life alone?  Moreover, even if one is amenable to taking some risk, should one always seek to minimize it?  Aye, therein lies the rub.  Without risk, no reward;  and the greater the risk, oftentimes greater the reward.  In stocks, the market reflects a collective calculation of risk.  But, market participants are not omniscient, and prosperity is frequently achieved by outwitting them--even to the point of "timing" market participation.  That said, market timing should not be confused with market timidity."

Recently, I have been timid in regard the market.  With the Dow having dropped to its current level, my research and my admittedly still nascent intuition tells me it is time to be less timid and to take some risk.  No one appears to be grasping at false hope.

As the week ended, I took positions in high paying dividend stocks in sectors that I believe will not be further adversely affected by European contagion.  Not a lot of positions, and not a significant amount of cash.  But a start; reserving at all times my discretion to exit.

  For example,  those that listened to Frontier Communication's (FTR) CEO this week leaned that the company's integration of its recent acquisitions is on track and that its 11+% dividend is safe.  This remarkable percentage dividend, occasioned by the dramatic drop in the overall market (remember: an increase in dividend percentage comes from a drop in stock price) , should keep the stock from any further significant slide, and when the market rebounds, should result in some awesome stock price appreciation.  Meantime, ain't it fun to be paid so well while waiting for a market upturn!

I also purchased some Enbridge Energy Partners (EEP) which owns the pipelines that bring 2 million barrels of oil per day from Canada.  In effect, it operates a toll road in which the very lifeblood of American activity, crude oil,  flows.  With its current high dividend, I don't see this one falling much either. I bought it on this week's dip.

As presaged last week, I  bought UAN (corn fertilizer) and two oil trusts (PER and SDT) each of which saw some significant price drops.  I don't see Europe affecting the need to plant more corn in 2012 or causing oil to stay below $80 per barrel, a price point it reached in this week's sell off.  I also bought tobacco , Altria (MO) and cell service, AT&T (T), both of which fell to acceptable levels.

Next week, I will monitor the situation but will look to buy utilities.  The one area that I will avoid are financials--no banks, no insurance two areas that populate one of  my favorite types of investments--preferred stocks.

In taking these "risks", I was reminded of another Buffalo Springfield warning---"Paranoia strikes deep/ Into your life it will creep/ It starts when you're always afraid/ Step outta line, the man comes and takes you away."  Paranoia will not rule my life---as Joel Goodson says  "Sometimes you just gotta say, "What the f**k, make your move."

September 17, 2011 Home On The Range

Fw: Risk/Reward Vol. 84

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

"But far more numerous were the herd of such,

Who thinks too little, but talks too much."---John Dryden (1631-1700)

"Oh, give me a home where the buffalo roam

Where the deer and the antelope play

Where seldom is heard a discouraging word

And the skies are not cloudy all day"---"Home on the Range"

FBN Reporter:  " Mr. Secretary, is there a risk that the United States could lose its AAA credit rating--yes or no?"

Timothy Geithner:  "No risk of that, no risk."  -- April, 2011

"There is no chance that the major countries of Europe will let their institutions be at risk in the eyes of the market.  There is not a chance.---There is no chance of that."---Timothy Geithner on CNBC, September 14, 2011

"I'm as corny as Kansas in August, high as a flag on the Fourth of July

If you'll excuse an expression I use, I'm in love , I'm in love, I'm in love , I'm in love, I'm in love with a wonderful guy."---Nellie Forbush, South Pacific

Was that a herd of bulls that passed me while I sat on the sidelines this week?  With the Dow experiencing its second best week of the year, it sure looked like it.  Boy, would that be good news!  As my long time readers know, all I want is some stability.  I left the market 6 weeks ago in anticipation of a substantial market drop arising from the threat of a US default and a credit downgrade---a drop that did occur.  If I could be assured that we are now in reasonably safe waters (not subject to an 8% drop in a matter of days), I would gladly re-enter.  Nothing would make me happier than re-acquiring my cadre of lovely dividend payers.

Now that the dust has settled, let's examine what has happened.

One troubling fact is that the market has acted like a herd--literally.   During August and September, stocks have moved up and down in lockstep or "correlated" to an extent not experienced since the the October, 1987 crash.  In other words, stocks have not traded on the strength of each's fundamentals---demonstrably bad stocks have gone up or down at the same time and in the same proportion as excellent stocks.  All have traded in sync (which is usually indicative of a bear market)--and this week upwardly so in response to perceived good news from Europe.  This week, there was very little news (and none of it good) from the US or China.  

Upon reflection, was the news from Europe really positive?

Does anyone really believe that Secretary Geithner is a good prognosticator?  I don't.  Yet, the markets increased immediately after his encouraging words (see above) spoken to Cramer on Wednesday morning.  Moreover, is it actually good news that on Thursday the world's central banks had to guarantee an unlimited supply of dollars to the major banks of Europe because they were unable to attract dollar deposits on their own?  (Note:  As discussed in last week's edition, many US money market funds are now refusing to make deposits of dollars into European banks.)   This bespeaks continued and deepening weakness to me;  yet, on Thursday, the stock market skyrocketed, the Euro appreciated and gold dropped.  (I used the occasion to buy more GLD and to add to my Euro short, EUO.)   Lastly,  did the mixed messages from the G-7 meetings in Poland warrant a 76 point rise in the Dow on Friday?  If you think so, please enlighten me.  Are the markets refusing to hear "...a discouraging word" about anything?

OK, OK.  I am the first to admit that no one is smarter than Mr. Market (and especially not a novice like me)---but c'mon does any of what happened this week make sense?  Maybe it does, and it is just beyond my ken.  If so, and if the market rises--or just remains flat-- for the next week or so, I soon will be repurchasing my dividend paying "lovelies"---and happily so.  Lord knows that I have the liquidity, and my trigger finger is itching.

But-- my brain believes and my gut feels that what I saw this week was not a herd of bulls confidently charging toward prosperity, but a herd of overly optimistic buffaloes blindly charging toward a cliff.  Time will tell.

When I do re-enter, I will not hesitate to allocate a significant portion to one of my favorite sectors---oil and gas.  On the natural gas front, the price has stabilized at $4/million BTU, and any company that has made money at this level should do well into the future.  I like storage facility and pipeline master limited partnerships such as Kinder Morgan Partners (KMP), Plains (PAA), ETP, Boardwalk, etc. (These may not be appropriate for tax deferred  retirement accounts) 

On the oil front, "big" international oil players such as Shell, Chevron and Conoco price off of the Brent benchmark ($110/bbl as of Friday) which has  remained consistent and relatively high as a result of the lessened supply from Libya.  These "big" boys should be able to maintain acceptable levels of dividends and will be repurchased.  

The smaller, US domestic oil exploration plays are hostage to the more volatile WTI pricing benchmark ($88/bbl as of Friday) which has been depressed because of the glut of oil in Cushing, OK which is the storage hub at which WTI is priced.  This glut should be eased over time as new pipelines are built to handle the huge increase in domestic production occasioned by the explosion of horizontal drilling (fracking) in shale formations.  On the domestic side, I like the dividends that come from oil trusts (which do not hold drilling rights per se but hold royalty interests from active oil fields).  I will re-purchase Sabine Trust (SBR, paying 7.5%) which holds royalties from traditional oil fields, and will initiate positions in two new trusts sponsored by a horizontal driller,  Sandridge:   the Perminan (PER) and the Mississippian (SDT).   Sandridge has found success in applying horizontal technology in what were believed to be exhausted traditional oil fields.  This success has come at less cost in part because the pipelines needed to transport the oil are already in place.  At current prices, each of these pays over 10% in dividends.  

Overlooked in the cacophony of Euro news this week was the announcement from the USDA that due to the hot and dry weather this summer, corn harvests will be below expectation--well below that needed to meet demand.   Farmers are reportedly re-allocating more of next year's acreage to corn.  This means that fertilizer will be in demand, especially ammonia and urea ammonium nitrate which are nitrogen based products of particular use in corn production.  In this space, "I'm in love, I'm in love, I'm in love, I'm in love, I'm in love" with CVR Partners (UAN), a limited partnership with production facilities centrally located in Kansas.   At current prices, it pays a 6+% dividend.  Remember-- as a partnership, CVR may not be appropriate for a 401k or IRA.  

OK, bulls (or buffaloes) bring on the week!!!  I am ready---either way.  

Remember past editions are available at http://riskrewardblog.blogspot.com