Tuesday, September 25, 2012

I don't think Plosser's comments are anything we didn't know already.  I maintain that the Fed's actions are all about rebuilding corporate balance sheets - in particular, the banks.  Banks have yet to increase loans in any significant way because of a combination of individuals reducing debt and lending standards rising to more stringent levels.

If the market insists on selling stocks off on this, use this as an opportunity to add a bit to your core income producing stocks.

I may buy back the junk bonds I sold a week ago on a pullback, although I remain a bit skeptical that I am really compensated for the risks here - I would rather own the stocks at these compressed yield spread levels.

My treasury bond fund, TLT, that I purchased a few days back is doing nicely, but if that gets back to the high 120's then I would sell that and wait for another equity rally/bond decline when the price should fall back into the low 120 area.  Overall, while I think government bonds are overpriced, I do not want to fight the Fed.  In addition, this is the only hedge for global unrest.

Monday, September 24, 2012

I like the following article at an interesting website called seeking alpha.  Check it out.  Some self-promotional stuff, but in large part, I think contributors are trying to increase the knowledge base for investors - much like what I am attempting to do here.


My exposure to stocks stays low right now - trying to take advantage of the rally and lock in some gains.  My cash is ready to buy on a dip.  I am not so sure we are going to get much of one, however.  There is just too much money on the sidelines with their faces pressed to the glass wanting into the stock appreciation party.

Sharks.  Fascinating creatures to many including me, they are wonderful hunting machines.  I think of the market in much the same way.  There is no resting for the market.  If you look at it as an entity, it seeks out successful ideas and punishes poor ones.  If you combine that with human nature always pushing to progress, then the market, as a whole, has no choice but to succeed.  Investors have to be very careful being "short the market" for anything other than short periods of time.  There are those investors that hang their hat on a bold prediction for a drop in the market, but as a critical investor it is important to consider their predictions as a whole.  Because the market is volatile, there will always be drops, but often the "short predictor" will stay short even after a drop and never get in.  Or, they miss the 30% rally and claim victory if the stocks fall by 10% subsequently.

This is not to invalidate solid research that seeks to sift through the winners and losers.  There will always be a place for that.  I am just not so sure that trying to be too cute with timing is that productive.

I bring this up at the peril that some would say I am trying to do the same thing here.  Guilty as charged when one considers my performance relative to my long term benchmark of 45% stocks, 45% government bonds and 10% cash.  But, like the Fed, I feel I have a dual mandate.  I  also charge myself with making money in any environment.  Considering this admittedly difficult task, I am willing to tolerate periods of underperformance versus a benchmark - so long as I am still making money.

Currently, my biggest investing difficulty is dealing with the low levels of government interest rates and the impact on future stock prices.  The low level of rates makes stocks look very cheap, but when (if?) we get some growth and rates start going up, then stocks will come off as the market adjusts the required rates of returns upward.  It is not a straight relationship, though because if we do get some growth, then stocks should benefit from this.  Inflation would hurt input costs, but then it would come down to whether companies had pricing power.  The jury is out for me on this one.  I don't know if companies will ever have pricing power (on average) again.

Given the above, stocks look pretty good government bonds will have limited upside (but also not much downside as long as Mr. Bernanke is around).  So the waters look good to wade in to mid-stomach level, I think.  Have some money on the sideline if the opportunity arises, but don't get caught being too bearish.  Long term, the shark keeps swimming.

Tuesday, September 18, 2012

Reader Rick O has pointed out in his comments that it is worthwhile taking a good look at the banks.  In short, the fed actions can seem puzzling to consumers because banks aren't lending as much as we would like them to - especially when rates are so low!  But therein lies the rub.  Rates are so low that it is hard to justify the risks of lending!  However, one of the key benefits of such low borrowing rates for banks (the short term rate the Fed actually controls) is that banks are able to repair balance their balance sheets by borrowing from the fed and buying (or lending) to high quality institutions at longer terms.  Over time, they will earn the spread in the interest rates and be able to build up their equity.  Remember that they can leverage this trade up in an almost unlimited way, so a 1 or 2% spread can become very significant.

If this sounds like it is risky, well, it can be depending on what bonds they buy.  But the alternative is far worse.  We NEED our banks to have stronger balance sheets and be able to support their key function in moving money to areas of growth.

Given the current environment, I continue to like dividend paying stocks.  Government bond yields will continue to be low (Fed will make it so) which will make investors reach for yield.  I recently reduced my high yield bond position and that is probably a mistake given the recent Fed move.  It is a bit tough to get back in higher, but I will be looking for pull backs to do so.

The bank preferreds are good.  PFF is my vehicle of choice there as are bank loans VVR is better than BKLN but I have both.  Overall my portfolio yields about 3.5% which I think is pretty good given that 25% is in cash.  About 2/3 of my yield is from MHN, PFF, VVR, HYG and the rest is from my stocks.

Overall, my equity exposure is around 16% -  well below my target of 45% but I do have a fair amount of options which will gain exposure if we have a move up.  Barring a military action, I think that the balance of market participants being short of their benchmarks and the Fed keeping the foot on the accelerator, I think we will have a positive quarter regardless of the election results.  Taxes may have a disproportionate impact this year given the potential for significant changes.

Thursday, September 13, 2012

With the mini burst upward in stocks, the call options I purchased did their job and bumped up my stock exposure from 20 to around 30% as stocks have rallied.  Given that I am running a portfolio to maximize income while minimizing risk, I have cut down the equity exposure in order to capture gains in stocks.  Put another way, I am not looking for home runs, I am looking for singles, or even getting to base via a walk or hit batsman!

So far this month, the portfolio is up about 1% which is nice progress given that my goal is inflation plus 2%.  YTD is about 5%.

I think the fed is telling us very plainly that they will not let rates go up.  The long term bonds have come off about 8% in the last month (looking at TLT as a proxy).  I think it is worth buying some on the dip here.

Overall, I am bringing stocks down to about 15-20% on this rally.

LO down over 10% in less than a month (and more from the high).  I am leaning towards considering this a buying opportunity, but I am always concerned with drops without much news.  All too often, we learn after the fact about some big news item and the implication, to me, is that some people know ahead of time.  So we should beware.  Instead of buying the stock outright, I bought some October 125 calls.  This will give me some exposure if we get a bounce back.

Barring some geopolitical event (the events in Egypt are unnerving), I think there is good upside in the market right now.  I will look to add to my exposure perhaps with some more call options.

VZ is trading at a high multiple relative to history at around 19.  Their dividend yield is quite high over 4%.  I would agree with a CNBC commentator that it is trading in a more "bond like" manner.  It is always a bit dicey to treat stocks like bonds but I am still persuaded by the story in the growth of mobile data usage.  I still think T and VZ are the biggest games in town and will benefit as usage inevitably increases.  It is one of my core holdings and has done remarkably well but I think this is a case of sticking with the horse.

Tuesday, September 11, 2012

Results updated for August.

Unfortunately, some underperformance crept in for August.  I was not too surprised that my stock picks after having a blistering July, took a break.  September has started nicely so we will see how it unfolds.

JCP has continued it's run up and if you held on, and if you still have it, I would take some chips off the table.  We have had a good run.  At this point some good news is priced in with regard to the holiday season.  Of course, it is still cheaper than others, just not so obviously so.

I do not have too much in the speculative realm right now.  Of my core holdings I am keeping an eye on LO.  Lorillard has been on a downward path lately as tobacco continues to be under ever increasing scrutiny.  I do not believe their dividend is at risk, so I think the pullback is an opportunity to add if you are not filled up there.

Overall, my equity exposure is at about 17%.  This is up from about 9% last month.  This increase is due to my adding SPY calls to buy market exposure.  The chart below shows the value of the VIX over the last 5 years or so.

It is clear we are at low levels and so I believe that if you are low on exposure, then calls offer some value.  I have been sticking to shorter term (for me) October calls.

Finally, you can sign up to get an email when I update the site.  It's in the follow by email section on the lower right.


Friday, September 7, 2012

Hi all,

Sorry about not being more diligent with the frequency of posts.  I am wondering if there is a way for people to be notified when I do update.  Any blog geeks out there? :)

Anyway, I think we are witnessing the manifestation of the market being short stocks (relatie to where there long term position should be) and getting worried that they are going to miss out.  There is no doubt that stocks are cheap RELATIVE to bonds.  The problem is that the bonds are being propped up, so I think that is what has intelligent investors worried.

Now, you could say "Short the bonds!" and that is a reasonable strategy but not without risks if there is a geopolitical problem.  Perhaps shorting corporate bonds is safer and more direct.  I would look to the high yield sector which is looking a bit precarious with a lot of good news priced in.  HYG and JNK are the candidates there.  They are yielding in the low 6% range.  I am watching the spread between 10 year government bonds at 1.6% and high GRADE corporate (Aaa) @ 3.4% and then high YIELD  at 6.2% or so.  So the spread govt to HY is around 4.6% which is tight and gets back to my point that a lot of good news is priced in.  I don't have a historical chart handy, but I think high yield would look more attractive around 7% over the govt bonds and we have seen much higher numbers than that.  I do not believe we have been much tighter than 4.6.  Some of this is due to the fact that as rates get low, the spread come in on a proportionate level, but I believe there should be some absolute numbers in investing and we are getting very close.  Putting in a more mathematical way, the default rate does not have to be that high to wipe out the spread between high grade and high yield.  Making up some numbers here, but I don't think they are far off:

Amount lost on default 40%
% of portfolio defaulting 5%, that is a 2% loss on the portfolio.

Currently, I have about 9% of my portfolio in high yield and I will be taking that amount down, probably about half of that amount.  I probably should go all the way to ZERO, but zero seems so final...

So, I still come back to stocks looking cheap but I am more convinced of that on a relative basis rather than absolute.  I do think there is some upside as the market gets more invested but I think given the gorilla in the room that is the high degree of monetization, I prefer to invest with some protection.  Thankfully, call options are cheap IMHO and so I am buying some call options out to October (SPY Oct 150,155 currently).  These are speculative in nature (because the time value goes away) and so I will be trying to operate a bit quicker than is my usual style.