Thursday, December 13, 2012

The Fed announcement yesterday should not come as a big surprise.  What is interesting to me is that they are trying to be very transparent about what they are looking at when making rate decisions.  They gave us a specific target of 6.5% unemployment before they let off the gas pedal.  Some are concerned that once we start seeing growth, that it will be difficult to slow it down and that will lead to rampant inflation.

While I am concerned about inflation from the monetary side, there is still so much structural over capacity and efficiency gains from technology and global income differentials that I think inflation will be tame - not zero, but tame.

Given that framework and combining with the talk of austerity in some form in the US.  I still believe bonds should be a reasonable percentage of the portfolio.  I am speaking mostly of government bonds, because I am thinking that stocks are a better buy than corporate bonds.  On a spread basis, corporates look attractive, but on an absolute basis not so much.  If you want to dabble in JNK or HYG, that's ok, but recognize it will have a high correlation with stocks (they will go down if stocks do) without the same upside.

Here is a reasonable counter argument to mine:

The problem I have with this counter argument is that the only argument for higher rates seems to be that we are so low (and so we must have to go up).  I am not so sure.

I see 2 probable risks to my view:
1) growth returns before we expect (unemployment down surprisingly fast) in which case I think stocks will go up substantially (hence my weight on stocks being up substantially from 9% to 24%)

2) US becomes less credit worthy.  Big problem if this happens and I just don't know where to hide if this happens.  I don't put a high probability on this because there would have to be a credible foreign alternative to put your money into and I just don't see it.

MHN, despite a recent cut in dividends is now attractive as most of the premium has gone away.  I am re-buying the amounts I sold up at $17.

BBY and JCP have been a trading bonanza.  I unfortunately missed out buying on the last drop as I was distracted.  I think there will be more to come.

S had a drop to 5.52 where I think it is an excellent buy given the deal.  It has since rallied, but keep an eye on it and look to accumulate.

Thursday, December 6, 2012

I think with AAPL, we will see if the emperor has any clothes.  We should retest the recent low of $505 and see if any buyers appear.  Very dicey right now.  The market seems definitely in the "shoot first (sell) and ask questions later" mode.

I found a nice article regarding portfolio construction.  It runs through using correlations to construct a low volatility portfolio which can have a high yield.  In it he uses several instruments I have spoken about.  JNK, BKLN and SPY.  He also uses high grade credits and commodity ETF's as well.

The comments are also instructive as they highlight some of the limitations of this analysis as well as alternatives.  The biggest limitation is that correlations are not stable over time.  In times of crisis, correlations tend to polarize.  For example, all stocks/high yield bonds go toward +1 (with respect to other stocks) while Treasury bonds go to -1 (with respect to stocks) so you lose the correlation benefit.  In such times, it is important to recognize when you have had the "insurable event" i.e. a big down move, then you need to sell the stuff that has gained (treasuries, put options) and buy more of the stuff that has gotten hurt.  Scary, but ultimately the only way to win from volatility.  The trickiest part if to figure what constitutes a big move down.  No easy prescription here for that.  One can look at history as a guide and combine that with instinct.  For me, I start looking when we have a pullback of about 5% in SPY over a short period (a few days).  In addition, I rarely do anything major.  A few percent of adjustment either way rather than taking a big bet.

Wednesday, December 5, 2012

Why do I get the feeling in this market that I'm in the Andrea Gail, out by the Flemish Cap.  We just made the turn and everyone's celebrating and the clouds part showing sunshine...for a brief moment..then, "She's not going to let us out..."

I feel that way in particular about AAPL.  Multiples are low.  The stock is cheap on most metrics and yet it has stopped going up, perhaps because people are a bit skeptical that they will keep pulling the rabbit out of the hat with regards to products that everyone wants.

In general, stocks are following that script.  They are cheap relative to other alternatives and yet it's always a wall or worry that we have to climb.  Perhaps that is the way it should be.   Making money should be a struggle just like everything else in life.

So with that in mind, let's stick to our guns and analyze at face value.  Global growth will be slow.  US growth will be slower still, more so with the effects of austerity that will come about inevitably - higher taxes, lower government spending.  Stocks are cheap because they continue to benefit from increases in productivity.  These improvements come at the expense of employment which further clouds the picture for individuals.  There is nothing fun about being made obsolete, but such is the path.  We have to continually re-invent ourselves to stay ahead of the curve.

The $64,000 question is whether there is a time bomb which will slam stocks at some point.  I do not have a crystal ball I can use to avoid this.  We WILL have volatility, but we can use those drops to buy into the ideas we like.  Keep enough powder dry to be flexible.  Stay with some government bonds to sell if we get an event.  This will be better than all cash.  Maybe, if we get lucky, we will get over that wave.

Monday, December 3, 2012

November performance is updated on the performance tab (+1.13% for the month).  I was quite pleased with overall performance.  Driven mostly by outperformance by the dividend payers relative to the S&P and bonds.

PFF is a preferred equity fund with a heavy concentration in financials.  Currently it yields about 6.3% which I find very attractive.  It is down almost 1% today and I think it is a good buy.  I see banks and other financials continuing to get stronger and the government serving as a backstop.  This is a core holding of mine.  It is trading at around 0% premium so not a big risk from that perspective, unlike MHN, another core holding of mine.  MHN is still at a 5% premium, and in perfectly liquid world, I would sell more than half of it  (especially with capital gains taxes probably going up) and wait to buy it back.  But, it is not particularly liquid and it is easy to impact the price.  The upside to this is when someone does want to get out or get in, we, as astute investors can take advantage of the opportunity and buy or sell into the volume.  Right now, if a big buyer comes in, I will be selling.

TLT.  Yes, rates are low, but I don't see them going higher yet.  Inflation, while present certainly in food, is not impacting enough to show up in the headline numbers.  Growth is still low and the risk is it goes even lower as some form of the fiscal cliff comes to be.  In addition, the fiscal cliff will be seen as good for bonds as it would be a form of discipline which has been lacking in the U.S.  I feel it is important to have some in a balanced portfolio.

I am not so sure though about the credit bet.  High yield/junk bonds and loans will still be ok (I have all of these) but I don't think we get the extra kick from spread compression (junk bond yields coming down relative to treasuries).  So this story would be for the yield which is quite attractive and not for capital gains.

RIMM, just a thought here as I am not a huge fan, but there has been a LOT of bad news here and the stock has stopped going down and actually has rallied a bit.  This type of situation is really difficult for me personally.  I find it hard to buy at this point because I have seen it getting squashed.  And yet, there is some upside here.  VERY speculative.   FB is in the same boat, although it naturally has more upside because it hasn't really screwed up yet.

Energies is an interesting sector.  Other, than dividends, I have not made money on this sector, despite my feeling that this could be a key factor limiting global growth.  Perhaps it is precisely because there will be pressure on energy prices from the search for alternatives.

Healthcare may suffer a similar fate as energy, but the human search for ever longer life quality/lifespan will keep these stocks a good bet.