Tuesday, July 31, 2012


I am very happy with performance this month.  Good outperformance vs the benchmark, this despite being significantly underweighted in equities toward the end of the month.  Check it out!  Month end weights are 27% equity, 22% credit and the rest in cash.

The well received news of Euro support is having a nice effect on US equities.  I am not so sanguine.

Today's comments by Bill Gross


I think are spot on for the long term view on equity.  I would agree that it is not sustainable for stocks to grow at 3% real return over GDP.  However, I have never been in the camp to expect those kind of returns.  I think if your retirement can survive with a 2% real return in absolute value, you will be ok.  That is a bit of a trick though as most people's funds won't last at those return levels.

I would agree with Mr. Gross that bonds cannot help us at their current prices.  TIPS with negative or just barely positive real returns just won't get the job done.  I would say though that I believe equities will help.  Having a portfolio of dividend paying stocks that have some pricing power KO, KMB, PG, MRK will have a beneficial effect on your portfolio.  They are not as cheap as they were, but still worth owning.  Keep an eye out for drops in the market for opportunities to add to those types of stocks.

Right now, I have trimmed almost all speculative positions and am down to about 26% equity exposure.  Definitely on the low side and I believe there will be opportunities to buy stocks at better levels.  I am not a big level believer but watch when the "good news" stops having good effects and peters out.   Likewise, buy when the bad news is being discounted.

Thursday, July 26, 2012

Hello all,

LO has gotten blasted in the last few days and so long as you don't have a moral problem with owning a tobacco stock, I think this is a buying opportunity.

MHN, is back to a 3% premium.  There has been a rally along with other bond exposures as rates have come down.  I still think muni's offer excellent yield and good return for the risk.  That said, if you have a propensity to trade, this ETF doesn't usually get to a higher premium than that so it would be a relative sell.  I had increased my exposure a bit on the last dip and may just sell what I had purchased but this is just rearranging the chairs rather than a a change in view.

I bought some AAPL on the earnings dip.  While it can appear cheap and I believe it is a solid company, the hurdle for AAPL is to convince the market it can still grow even from these lofty levels of sales and income.  This is unprecedented territory so we shall see.

Overall my equity exposure is down to 33% which is low against my long term goal of 45%.  

We will continue to get news that moves the market one way or the other.  Have faith in your ideas and buy when we get dips and sell on large rallies.  Keep position sizes small enough to be nimble and large enough to matter.

What I do is have a certain dollar size position for core ideas and another for speculative ideas.  For me, core ideas have a weight around 1.5-2% each (I have 16 of them) while speculative is around .75% (I have 5 of them).

For core, I buy more on dips (LO for example) and for spec it's more about the price level.  For example JCP I think should not get much cheaper than $20, so that is a rough level where I would reconsider my position.  I don't really have a sell point because my thesis is that if we start a recovery, they will do well in the holiday season.

Friday, July 6, 2012

While the employment numbers should not have surprised anyone, we are seeing a bit of a sell off but I think this is largely a consolidation from the rallies of the past few days.  I am not rushing off to buy more of everything, but just holding the course.

CAT continues to torture me.  I know about a downgrade from an analyst but this stock is trading with way too much volatility for what it is - a solidly run capital good company.  Overall, world growth still exists and will most likely continue.  So I continue to believe the stock is cheap, but it has been punishing.  GE has been much better for me (and a higher yield!)...hmmm, I think I am going to be taking some losses on CAT and adding more to GE...

Performance UPDATE

I updated performance for June.  A good month vs the benchmark.  Largely because I got out of bonds at a good time and added to stocks that outperformed the S&P 500.

Still under the benchmark since 1/2011 but that is because I was running a very conservative equity allocation relative to where I ended up deciding I wanted to be long term.  I initially was looking at around 25% equity but I realize that is too conservative, so I switched to 45%.

Thursday, July 5, 2012

As of yesterday, I have started to grow a bit scared of the rally.  While I still like my stocks, I have decided to start selling some SPY DEC 140 CALLS for 4.5 ish on a portion of my equity portfolio (about 50% currently).  This is not for the squeamish, there is a lot of risk in doing this so I would not recommend this to everyone, but just in case someone is interested, here is my thought process:  

The idea is that my portfolio is designed to mimic the S&P 500 with a bit more income.  So, I believe my portfolio will at least keep pace with the S&P.  I am willing to give up some upside in this market in order to gather some more income.  The 140 call plus the premium of 4.5 will give me a bit less than 6% upside on the net equity portfolio through December 21.  I would be content with that outcome.

For those not predisposed to trade options, I think holding the course is ok here.  If you have a stock that has really done well for you and is a bit overweight, you would not be wrong to trim the position a little bit.  But, in the end, this is just trimming around the edges. Nothing new has happened.  The market will ebb and flow like waves on the ocean.  Over time, the amount of water will rise as economic growth adds to the total water available, if you will kindly extend the analogy, but there will still be tidal flow, wave action and yes, the occasional "rogue wave".

We want to be on firm enough footing to not be knocked out by the rogue wave and instead benefit from it if it comes by buying more on the pullback.

I still am staying away from government bonds and in high grade bonds in general as I would leave that to only the most conservative investors.  I strongly believe that over the next 5-10 years you will do substantially better in stocks than in government bonds.  If you do need to have bonds, keep maturities short.