Thursday, November 29, 2012

I have fallen into a classic short trap.  I shorted AMZN.  I don't really recommend this as it's the stock that never goes down.  It trades at ridiculous multiples to earnings, but it does have it's tentacles everywhere.

Probably a loser trade, but that is usually the case with anything that smells like a hedge.  This year I have lost about 3+% to hedging.  All in the name of keeping returns more stable.  I have the internal debate about whether this is a good idea or not all the time.  No answer yet, both sides are hard-headed   :)

Also, volatility is still cheap in absolute terms, so if you are at all nervous options are not a bad way to either gain exposure (calls) or hedge (puts).  I bought a few of the December 135Puts for $0.42.  Also probably a loser trade, but I rationalize by paying for it with my dividend yield.

I think these are the moments that make investing the challenge it is.  It seems that there is no right move.  It is EXTREMELY difficult to try to time the market on a short term basis.  Companies are in business to make money and continually grow their ability to do so.  But, this ability only exists in the context of economic growth as a whole, intra-national for most companies and international for many others.

The fiscal cliff discussions are a smoke screen in my view.  Bottom line is that we cannot afford the growth in government spending.  Taxes cannot hope to cover it as it is growing far in excess of economic growth.  We will have some sort of "cliff" in the current nomenclature whether it be in the size currently set up or smaller, or eventually, even larger!

And so it falls to us to try to figure out what stocks are discounting.  There will be volatility is the only sure thing.  As in the past, I think an investor needs to try to not listen to much to the chatter and try to understand what the goal is.  When you buy a stock it is economically the same as going into the business personally- with far more flexibility in getting out!  So right now, what business do you want to be in?

Retail, with consumers trying to climb out from their hole of personal debt?  I like this at least in terms of basic stuff which we all need or are inexpensive luxuries, MCD, PG, KO, CLX and KMB are in this group as are many other good companies.

Energy?  I think this has a huge role in future economic development and owning good companies that take leadership positions is critical XOM for instance

Telecom?  VZ and T own the majority of the bandwidth in a world where everything is going wireless.

Pharma?  MRK and JNJ, great companies and we as a species seem to be intent on trying to live forever and our parts break down ;)

Tech?  I am not a big tech guy as I continually get disappointed when tech doesn't work rather than marvelling at the things that do work.  So I am not much help in this arena.  I worry about AAPL (the only one I own) as I find it personally to be resting on its laurels and not delivering quite as high a quality as it used to.

These are all developed companies.  There are many great startups with new ideas, as well.  Remember, we are not far from sharks when it comes to economic activity.  We need to keep swimming (I know some stop for the evenings, but everything needs R&R).  

I do think that eventually we will realize we can't afford the growth in government spending.  That will be a great development and it should happen over time.

In the mean time, stocks will be ok, especially when they pay their shareholders with dividends.  Buy them on dips. Bonds will be ok too as growth will be muted by the inevitable contraction from the fiscal side.  Make sure they have a place in your portfolio.  In a few years we may have to start thinking about inflation, but not yet.

Wednesday, November 28, 2012

Well, that was quick.  I don't know what the news for JCP was, but it popped about 5% and when I can't understand, I don't look a gift horse in the mouth.  I'll take my 5+ in JCP and BBY and say thank you.  I'll play again, soon.

Tuesday, November 27, 2012

For you ETF muni holders out there, be careful of premiums to NAV.  MHN which is one of my core holdings is trading at over 5% premium and that has historically been untenable.  Perhaops the market is focused on taxes going up and believing that muni income will remain shielded.  I believe that in the end it will be protected because it is an important mechanism to help states fund projects.  However, that does not mean there will be no "scares" and if that happens the premiums will disappear.  That will be a buying opportunity, but for now given the high level, I am trimming my position by 10-20%.  I would do more, but the fund is not super-liquid.

As for the fiscal cliff and it's repercussions, I think it is a complex problem and overall the market does a good job of finding value.  Volatility is not very elevated which indicates there is no tremendous concern with surprises.  For my own part, I still believe stocks, in particular dividend paying stocks, are a good value and if it is any indication, my allocation is around 25% which is as high as it has been in a long while.  If we see drops, I will add more, perhaps getting as high as 35%.

The holiday season is giving us an opportunity to buy into what are essentially options.  BBY, JCP are two that I have bought in the last few days with the idea that they are beaten down and could pop 10-20%.  BBY is already there.   CHK is another name I like but this one is a longer term spec.

I continue to buy S on any weakness.

My base case is a slow growth scenario where bonds of all types will be a good hold.  Dividend paying stocks will be good and growth stocks will be hit or miss.  Companies will continue to become more efficient and unemployment will doggedly stay high.  Not a particularly sunny outlook, but it seems to me most likely.

Last note, I just read that stock outflows from funds was 9 billion last week which is the largest in a while.  That combined with the market staying solid indicates that the buying pressure is quite strong.  Politicians can screw this up, but I think we will be ok over time.  Remember that even if we "go over the cliff" it could turn out to be a good, if painful, discipline.

Monday, November 19, 2012

Hi all,

There has started to be some discussion about the effect the possible change in tax rate is having in the stock market.  I have mentioned previously that I believe this to be the case and I worked up a spreadsheet to calculate the effect of changing tax rates on positions subject to long term capital gains.


return in time gap while one is out of the stock

-5% -3% 0% 3% 5% 8%
current gain -20%  $(2.43)  $(3.62)  $(4.82)  $(6.02)  $(7.21)  $(8.41)

-10.00%  $0.29  $(1.06)  $(2.41)  $(3.76)  $(5.11)  $(6.45)
0.00%  $3.00  $1.50  $-    $(1.50)  $(3.00)  $(4.50)
10.00%  $5.71  $4.06  $2.41  $0.76  $(0.89)  $(2.55)
20.00%  $8.43  $6.62  $4.82  $3.02  $1.21  $(0.59)
30.00%  $11.14  $9.19  $7.23  $5.27  $3.32  $1.36
40.00%  $13.86  $11.75  $9.64  $7.53  $5.42  $3.31
50.00%  $16.57  $14.31  $12.05  $9.79  $7.53  $5.27
60.00%  $19.29  $16.87  $14.46  $12.05  $9.63  $7.22
70.00%  $22.00  $19.44  $16.87  $14.30  $11.74  $9.17
80.00%  $24.72  $22.00  $19.28  $16.56  $13.84  $11.13
90.00%  $27.43  $24.56  $21.69  $18.82  $15.95  $13.08

This spreadsheet is calculated for a change in rates from 15% to 40%.  The rows represents your current gain (in %) on a given stock.  The columns represent the change in stock price in the 1 month period (this might be 1 month + one day check with your accountant) that one has to be out of the stock to establish a new position in the same stock.

The basic idea is that if you sell in order to take advantage of current tax law, then, if the stock subsequently goes down, happy days.  But if the stock goes up, then you have a little cushion where you are still ahead of the game.  Example, if you are up 30% on a stock and you sell and the stock goes up 8% during the time you have to be out to satisfy the tax law, then you still benefit by $1.36 (1.36%) and that benefit goes up the more gain you have in the stock.

If the tax rate difference turns out to be less, then the effect is smaller.

Just an FYI to make sure and check that the path you take makes economic sense.  Run your own scenarios.

Wednesday, November 7, 2012

An anecdote about my relationship with this investing activity.

A few days ago I wrote about buying some treasury bonds (TLT) as a form of protection.  Yesterday I found myself with a gain (small) in the position but for whatever reason (reading the tea leaves, my old boss used to say) I felt like a sell off was coming, and though it is not my usual action, I sold.  (I didn't write about this because I feel it is small, way too speculative and not based on anything quantitative)  The stock promptly fell about 1%.  Good, right? Well, that's only part of the story because my "tea leaves" told me I should buy the shares back and get long again.  Sadly, this time I did not heed my gut and today I wake up with the TLT up 2% from where I sold.  Now I feel like I messed up, and yet I made money!  There is no winning.

Ugh, now where's the phone number of my therapist?

Anyway, the way I like to think about the market, it is constantly assessing and adjusting to probabilities.  Before today, there was a (u pick, but there is also a traded market on this) 70% chance that Obama would be re-elected.  At any given point in time, the market price is the weighted average of probability times outcome.  We are reassessing winners and losers.  Now we have certainty about the outcome so "A" path is embarked upon.  We, as a market, are trying to read the foreseeable future and make our bets.  Stocks are down I think, because  and stocks today are losers because taxes on dividends are going up.  I do not think there is a reflection that earnings are going to be bad.  On the contrary, the economic signs have been positive and ultimately that is what matters.

We are not out of the woods yet.  The over-riding concern is global growth and then US growth.  Deleveraging is still going on.  All of these factors point to continued low interest rates and bonds being not as risky as they appear.  I continue to believe , however that you are better off in a high quality dividend paying stock.  Muni bonds are probably ok, but we need to read the environment for "simplifying the tax code" and they may lose some of their tax benefits.  Their yields are attractive nonetheless.

I bailed on NLY and AGNC.  Rates are going to continue their march down and the margins for these business are going to come under continued pressure.  They are very leveraged companies so they are very sensitive to rates.

My stock exposure is up to around 27% and I would like to make it a bit higher as I think by the end of the year stocks will be higher than today.