Tuesday, April 30, 2013

performance updated.

Buoyed by S and a late rally in AAPL, this month was quite good.  Up 1.56% is on par with the benchmark and slightly behind the S&P's 2% return.

Positions on the upswing are the materials/miners and maybe energy.  Consumers will stay a big part of the portfolio.  I will look to sell some/all of the high yield bonds and look to move up the quality curve and gain variable rate exposure by buying the loan ETF's.

Telecomms might be coming down once my S position is fully disposed of.  I am thinking of getting out of VZ, but it continues to be a good story.  Perhaps if I do, then I will replace with T.

Big misses:

Finally, a new wrinkle.  In my past, I used to trade a fair amount of currency.  While I am not, looking at doing a lot of it, I am looking at a specific opportunity in Aussie Dollar.  This currency has been one that I loved a while back when it was below $0.90.  Now above $1.03 I think it is a good sale.  The strong currency has put a strain on Australia and they have it within their power to reduce the pressure by reducing interrest rates and allowing the AUD to depreciate.  In addition, if the US starts looking more attractive, the dollar will appreciate and the AUD will drop.  A fair amount of the appreciation in the AUD has been from yield seekers as their rates are around 3%.

Monday, April 29, 2013

VTA or BKLN versus JNK or HYG

I think loans offer a better value proposition than high yield debt.  Currently, one can earn only a 1% premium for taking on higher risk JNK or HYG relative to BKLN.  In addition, if one is willing to take on a little bit of leverage, VTA offers a compelling story as well and they earn a higher yield.

BKLN is now a legitimate investment vehicle that trades on average $25 million of volume per day.  The other loan funds are much smaller in turns of turnover and one has to be more careful with timing.  In particular, VTA (and VVR which I have and have written about) trade at premiums to their NAV (net asset value) and one must tread lightly there, I think.  I am very reluctant to pay more than 1-2% premium to NAV.   BKLN is at parity with it's NAV.

VZ vs T
VZ has been one of my stars.  Up almost 50% in a short period.  It has also been a tremendous performer relative to T.  My bet was (and still is) that we are moving to a wireless world FULL time and the growth will continue to be robust.  VZ and T own most of the infrastructure and so are poised to be the owner's of the pipeline, so to speak.  S also has a large amount of spectrum and in particular at  the 4G, high performance area.

The bet has worked but I was very fortunate that VZ in particular has run away from T - outperforming by 20% in the last year.  If I were picking right now, I would probably go with T because the valuation metrics are now solidly in their favor.  P/E 14.7 vs 19.2, Price/Book 2.3 vs over 4.  Price to sales is still slightly in favor of VZ but the dividend yield for T is 4.8% vs 3.8%.

So, it seems that a switch into T is reasonable.  In the theoretical world, that would be the end of the argument.  However, taxes will be an issue because I do not believe VZ is going to tank so I need to get out immediately.  I just believe that T is a better value right now and can outperform over time.  If I were institutional size in my positions, then I could enter into a "swap" whereby I would pay someone VZ returns and they would pay me S returns for a set period.  This would allow me to get the economic advantage of owning T without paying taxes on my gains in VZ (really just deferring because I would pay taxes on any gains whenI eventually do sell).

For us individual investors, we can utilize the options market in a similar way.  The downside is it involves many transactions and thus commissions.  But I will discuss it anyway (this can get a bit technical especially with the tax implications, but remember, I am not a CPA or tax expert!)

By selling a call and buy a put at the same strike price, one effectively sells the underlying position.  The opposite trading would be the economic equivalent of buying the underlying asset.  At the expiration, there would be a gain or loss commensurate with the position and taxes would be paid on the gains there.  By using an option longer than 1 year, the gains (losses) would be long term.  Except for the case where the options are classified as section 1256 and then the gains(losses) are automatically split into 60% long term and 40% short term regardless of holding period.

There you have it.  I will be looking at that type of structure for my swap into T on my position.  Probably putting too fine a point on it, but at least it's entertaining for me and I do think T is a better value right now.

Friday, April 26, 2013

Short interest was almost 50% as of yesterday.  For those not familiar with the term, that is the amount of shares in the company that have been borrowed by those betting on the stock price to go down.

That is a shockingly high number.  Typical levels are less than 5%.  If a company is HATED, it might be 15%.

The good news for those of us long the stock is that it provides a pool of potential EAGER buyers if there is any positive news.  The Soros news was definitely positive as is the news that they have lined up some financing.

The volume today would indicate that a significant piece of the short interest will disappear.  I will check on that next week.

But as I wrote my note this morning, the stock has rallied yet another $1 (to $17.20) so I will probably sell it for now and see what happens in the next few days.

I am probably leaving some money on the table.

Normally, being up 15% in a week would be cause for me to sell a speculative position.  The Soros revelation  helps the picture by showing there is another 7-8% of longer term supporters which will help the stock.  I think a lot of bad news has been digested and there is still some upside if they can engineer any improvement.  I would probably sell if we pop above 20.

CLF had a nice pop up 15% yesterday.  I think this sector (materials) has been beaten down and will be a good investment if we get any bit of global growth.  I am currently holding VALE and FCX in this space as well.

Thursday, April 25, 2013

Portfolio construction:

I've done a little bit of legwork reviewing the various sector investment options out there.  It does not require much digging to see that the "Spider" products from State Street Global Advisors is the king fo the roost.

Their sector funds are all, except for telecomm, the ones to turn to if you want to invest in sectors rather than individual stocks.  Also, the SPY is the best game in town for S&P 500 big cap equity exposure.  They are cheap (0.18% annual management expense) and extremely liquid.  They are by far the largest in terms of daily volume versus their competitors.

Best sector funds:
XLY    Consumer - cyclical (discretionary)
XLP     Consumer -non cyclical (staples)
XLE    Energy
XLF    Financial
XLV   Health Care
XLI     Industrials
XLB    Materials
XLK    Technology
XLU     Utilities
IYZ       Telecomm  Barclay's iShares product   0.46% expenses

If one does not have the time or inclination to do any stock analysis then, I recommend just using SPY to get equity exposure.  If you want to dabble a bit deeper, then the sector funds are good.  Further still, one would get into stock selection.

A hybrid would be using sector funds to form the core of your holding, and then if you love a stock, then substitute.

For example:

In my portfolio, the weight in consumer staples is 11.6%.  But let's say I loved KMB (I do), so I want to hold a 2% position in that stock. If I do not care too much for picking others, I could hold the remaining 9.6% in XLP shares.  I could further say I hate some other company.  I could then SHORT that stock also and bump UP my holdings of XLP.

Revenue up 24% year over year and earnings slightly above expectations...so let's sell it down 5%


I am looking to add here.  Another case of too much reliance on guidance.  Everyone wants to jump in front so much that it's easy to miss what is going on currently.  Great company stuck in the middle of all of our movement to smaller form factor computing.

Wednesday, April 24, 2013

I'm buying a little more of CLF.  They report today and  they are near their 5 year low.  This is still a turn around story dependent on global growth.  That said, a lot of bad news is baked in.  This is a RISKY trade, but I am light on materials.

I am also looking at adding a little ORCL which has not participated with the other techs that have bounced back after significant drops.

MHN is trading at a small discount and deserves a look.  it is getting hurt by concerns with tax deductibility of muni interest as well as stocks doing well (asset allocation away from bonds)

LO I trimmed a small amount to bring it in line with my other stocks.  Good report and this is a well run company.

I believe investors should be focused on longer term trends.  Short term stuff can be exciting and is more conducive to cocktail party talk, but the long term is where it's at for investing.  The talking heads on tv are mostly focused on short term because it sells ads and is exciting.

I look at my own investing and largely I try to end up with companies that I don't have to look at too much.  Ideally, I would never sell.  Good companies grow over time, keep pace with inflation and pay their owners with a combination of dividends and asset growth.  Unfortunately, I have a weakness against volatility.  The problem with buying companies and then never selling is that one would be subject to high volatility.  And so, I hedge.  This costs me money over time and I understand that.  I hedge by selling things that appear to have stretched valuations or by selling the indexes.  I am trying to resist the urge to sell my individual stocks and here is why:

My current weights:
sector                    weighting bmark over(under)weight
consumer-cyc 3.7% 4.5% -0.8%
consumer non cyc 11.6% 5.1%  6.5%
energy                         5.5% 7.7%       -2.2%
financials                   10.7% 3.1% 7.6%
healthcare                  4.7% 5.9% -1.2%
industrials                  5.8% 4.4% 1.4%
basic materials 1.7% 3.3% -1.6%
real estate                 0.8% 0.0%       0.8%
tech                            9.0% 4.9% 4.1%
telecomm                  3.8% 2.6% 1.2%
utilities                       0.3% 3.6%       -3.2%
other                           9.7% 0.0% 9.7%
govt                            10.7% 45.0% -34.3%
cash                          21.9% 10.0%      11.9%

One bet that has been working well for me is consumer non-cyclicals.  These are companies like KMB and CLX that have products that are usually not dependent on our economic situation.  We tend not to need more Clorox bleach when the economy is good, for instance.  We need more, when we have more people (population growth) and with global standard of living growth - both of which tend to be in a positive trend all the time.

Are valuations stretched?  Maybe.  KMP is trading at 18.4 times expected earnings which is  a shade over 5% earnings yield.  Their valuation is a bit higher than the market (around 15x P/E).  On the plus side, it pays a dividend of over 3% which is a bit higher than the overall market.  CLX is a bit worse.

These companies are still a lot better than owning government bonds.  I like earning 5% on KMB versus 3% on the US 30 year bond.  The only reason to sell them would be that I was trying to get cute and time the market.  But that would bring me to my first statement, that it is better to be focused on long term rather than short term.  Over time, these companies will do well in my portfolio, so they will stay.  They are currently around 2-3% each of my portfolio as are most of my other stocks.

Today, PG is taking a hit because of the "guidance".  Well run company delivering excellent results.  I am buying a bit more.

AAPL, delivered great results but also is guiding down expectations for the future.  They also announced a great buyback program and an increase in dividends.  I would have liked a slightly higher dividend, but a step in the right direction.  My weight here is a bit too big because I am too fixated on it being "cheap".  Well a stock can be cheap for a long time.  I do not understand the movement so I will be selling some of my position back to a 2-3% vs 4-5% position where it is right now.

Tuesday, April 23, 2013

Interesting preview of the market's nervous state with the response to the fake tweet.
More evidence that options are still inexpensive.  My equity exposure has gotten into the 40+% range and that is a bit high for me right now given how nervous the market is.  I believe there will be opportunities to buy some more cheaply.  I will reduce to the low 30's.  No bold moves for me here.

Obviously the elephant in the room is AAPL earnings.  I am staying put with my current position (which was downsized around this level -406 ish).  I think we could see a 25 point move either way.  I am leaning toward the upside, but who knows.

S, I am leaning towards selling the balance of my position.  DISH may be coming late to the party trying to throw a wrench in.  S may decide that it is not a legitimate bid, in which case the stock will drop to the mid 6's.  Not terrible, but I don't think the upside is too great here either.  I will probably wait until the end of the week.

The miners is an area that holds some promise with FCX being an interesting candidate.

Wednesday, April 17, 2013

Volatility is gut wrenching.  The market is constantly trying to seek the "right" price for stocks.  The right price is the value that discounts the future value of a company (dividends, cash flow, enterprise value) using a rate that is commensurate with the amount of risk in those future cash flows.  So, a company like CLX is pretty well understood and, barring malfeasance, should grow it's cash flows in relation to some combination of U.S. and global growth.  The discount rate should be fairly low reflecting low risk relative to the economic growth numbers.

A high tech company would require a much higher discount rate as there is much variation in growth, market share, obsolescence and such.  In this case, there is much volatility as the market tries to figure it out.

From an investor's point of view, volatility can create opportunities.  Market's are constantly trying to react to news and get closer to the "right" price.  Some positive news, however small, has some knock on effect on all stocks.  Conversely, negative news affects all stocks as well.  The trick, I think is to find out which are the babies being thrown out with the bath water.

Here is a well thought out article regarding INTC:

Today, we found out the Cirrus is guiding expectations of future growth much lower.  Since they are a major AAPL supplier, the market supposes that demand for AAPL products is much lower.  That is a reasonable supposition, but our job as analysts is to figure out what the knock on effects will be.  What can be extrapolated and what is just noise.  In addition, we have to overcome the emotional aspects of investment.  It will not "feel" good to buy on a day like today, but that must be our stance.

In my opinion, today's movement down is a reflection of the AAPL effect, but there is no NEW news.  To me, it is perhaps more evidence of what has been my thesis all along that we are in a slow growth environment.

Two areas that I am underweight and looking to add is in the energy and basic materials - mining, chemicals.  This sector has been hurt by the weaker global growth prospects.  That said, I think the market has discounted the scenario and while there may be some more downside, buying a little on a day like today is probably a good thing.   KMI, COP, FCX(new for me), and CLF and VALE (more speculative) are all candidates.

Otherwise, use a little of your dry powder to buy some solid  favorites at a little cheaper price.  GE, PG, and CLX are on my buy list.

This may be the start of the capitulation I have discussed in the past.  I am cutting my losses and reducing my position by 1/4 right here.

The only plus is that it will save me some taxes on my S gains.

Tuesday, April 16, 2013

Basic Materials, mining companies, chemicals are down for the year (-4%) and for the quarter (-5%).  This sector along with oil and other energy related names are being affected by the slow down in global growth.  The latest news was China growth being a bit short of expectations (not that we should put too much emphasis on China numbers as they are suspect).

There are a lot of very good companies here that are being left behind so I find myself attracted to the idea of buying these.  there is probably a bit too much pessimism here.  For those looking at hedging the bet, buying TLT would be a nice contrast as low growth will ultimately lead to lower yields.  I would prefer to wait for a bit of a pullback in TLT (I'll be looking for a price around 118).  There is a bit of a premium from both the tragic Boston news and previous to that, Cyprus.

There is a bit of "feel" to spread trading.  One knows where to end up, but there are many ways to get there.  There is enough volatility in both components that there is ample reward for taking risk and doing one leg at a time.  If I were implementing this right now, I would buy the stocks first and look to buy the TLT when we get a bit of a rally in stocks, as I believe the bias for stocks is upwards right now.

Monday, April 15, 2013

Muni bonds are under pressure since the release of the President's budget.  From what I understand, the tax exemption would go away at tax rates above 28%.

I still feel the fund is attractive with an effective taxable yield above 8%.  Right now, it is trading at a small discount and is worth buying.

JNK is now yielding about 6%.  The high yield sector has done well.  I continue to hold it, but if we get a dip in stocks and I needed some funds to buy more, I would sell the high yield JNK, HYG.

Well good morning to you as well!  A nice surprise today as Sprint gets a $7.00 offer from DISH networks.  I had a big position in this and I just sold half of it.  At $7.18 it is fairly valued.  It could go higher if Softbank decides to up their bid, but this is a good result and I'm not going to be a pig about it.

Thursday, April 11, 2013

I am adding a position in this stock.  This is a coal and Iron ore mining company.  This company (along with VALE, another of my stocks) has taken a beating as the global growth prospects have pushed down basic commodity prices.  While it still yields 3%, it recently cut it's dividend to shore up its balance sheet.  All good from a management perspective.

While I believe in my thesis of slow growth, this could be a cheap way to hedge some of that and still buy value.  If I am right, it may go a bit lower, but it is already trading fairly cheap to it's expected reduced earnings (PE around 12).

If I am wrong and growth sparks, then this could be off to the races on the upside.

JCP Nice day after buying yesterday, it is giving me a test to maybe get out by rallying 6.7% on nothing.  But, I'll hold on.  I think it will be volatile, but there's more upside than downside here.

LO  I am a bit worried that this is a business that government is determined to kill.  Of course, it's the proverbial golden goose as it generates so much in tax revenue.  That said, it is an industry that is fading.  They have an aggressive buyback program in addition to paying out a good yield, so it's still worth holding, but keep an eye on position size over time.

Wednesday, April 10, 2013

RAX:  I reduced my position to a regular size for me.  This is more than a regular speculative play in that I believe in the story long term, but it was at too large a size (almost double my core positions) to be comfortable for me.
JCP is worth a spec buy down here.  We have absorbed a LOT of bad news.  This level has proven to be a base.  Of course, this could change if we get even more negative surprises on cash usage ("burn").

ANY bit of good news and the stock will be up 10-20%.  Short interest is high (so that will provide some upside if we get any good news).

There's a story about PIMCO raising their treasury weight to the highest it has been in a while.  I agree with this move though for myself, I would move further out the curve than the 10 year.


Economic growth will continue to be anemic as it is also undermined by weak global growth.  The "babble" you may hear about ending QE, is just that.  There is NO evidence that economic growth is coming back!!!  The Fed has emphasized that they want concrete evidence not "expected" growth, but actual growth.  The employment going down to 6.5% which is what they stated as being a goal of theirs will not be enough in and of itself.  If unemployment goes down because the denominator is going down (the number of people in the workforce) that is unsatisfying.  All that means is that there is a larger group of people that have given up looking for work.  That kind of improvement would be pernicious and long lasting.  Unfortunately, that is where we are heading and in that environment, 30 year treasury rates north of 3% are worth buying.  TLT below 117 is a good buy.  I will wait for that level again and look to buy a bit.

Better yet, I like buying well run companies that pay their shareholders.  They will continue to become more efficient and improve earnings even though top line growth won't be great.

Options continue to be a cheap way to hedge or gain exposure.

Friday, April 5, 2013

Bad number of course, so let's take stock:


-Global growth still not helping.  In fact US is probably the only engine right now (not new, really).

-Austerity on the fiscal side in Europe and the many in the US pushing for this as well.  This is counter-balanced with the loose monetary policy being run by the US and now Japan has joined in.


Corporate health is excellent.  Continuing to become more efficient.

Bond yields are low.  This helps in repairing balance sheets.  I suspect this effect is mostly played out.  I don't think there is much more to be wrung out here.

I am BUYING down here.  Bringing my equity weight up above 40%.  I keep getting pummeled by RAX and AAPL - I must be a masochist, but I do believe in the stories here.  What I should do is bring their weight down to smaller impact, and replace it with S&P (SPY).

Equities are the best odds game in town.  Nothing guaranteed, of course, but the best odds.  Treasuries (long duration-TLT) still ok as the global growth picture is the dominant factor here.  The TLT has had a nice run up in the last few days, so there may be a pull back.  Unfortunately, I sold all of mine so I have none to sell.

If I need cash to buy stocks, I would sell some of the high yield (JNK,HYG) that have done relatively well here.

Wednesday, April 3, 2013

Interesting read.  Perhaps a bit harsh, but it's a good reality check on not always following the "hot" money.


Some basic rules which have worked well for me over time:

-Do your own homework

-focus on actual results rather than perhaps rosy forecasts

-don't forget fees and especially avoid layers of fees (for example a mutual fund that invests in ETF's)

-index funds can be very cost effective

-things are never as bad as they seem nor as good as they seem, which is another way of stating Buffet's be greedy when others are fearful and fearful when others are greedy.

-don't get carried away by any one idea

Tuesday, April 2, 2013

Here are some sector returns:

                                                                                                                     QTD           YTD

iShares Dow Jones U.S. Aerospace & Defense Index Fund ITA             -1.27%   8.47%
iShares Dow Jones U.S. Basic Materials Sector Index Fund IYM             -1.89%   -0.13%
iShares Dow Jones U.S. Broker-Dealers Index Fund IAI                     -0.36%         17.48%
iShares Dow Jones U.S. Consumer Goods Sector Index Fund IYK       0.56% 14.49%
iShares Dow Jones U.S. Consumer Services Sector Index Fund IYC       0.36% 13.10%
iShares Dow Jones U.S. Energy Sector Index Fund IYE                      -0.42% 10.50%
iShares Dow Jones U.S. Financial Sector Index Fund IYF                        0.13% 12.26%
iShares Dow Jones U.S. Financial Services Index Fund IYG                      -0.30% 11.46%
iShares Dow Jones U.S. Healthcare Providers Index Fund IHF                3.78% 16.31%
iShares Dow Jones U.S. Healthcare Sector Index Fund IYH                        1.62% 17.69%
iShares Dow Jones U.S. Home Construction Index Fund ITB               -1.63% 11.06%
iShares Dow Jones U.S. Industrial Sector Index Fund IYJ                       -0.97% 10.61%
iShares Dow Jones U.S. Insurance Index Fund IAK                                0.37% 15.97%
iShares Dow Jones U.S. Medical Devices Index Fund IHI                        0.37% 13.62%
iShares Dow Jones U.S. Oil & Gas Exploration & Prod Index Fun IEO     -1.50% 13.91%
iShares Dow Jones U.S. Oil Equipment & Services Index Fund IEZ       -1.45% 11.01%
iShares Dow Jones U.S. Pharmaceuticals Index Fund IHE                        0.83% 14.15%
iShares Dow Jones U.S. Regional Banks Index Fund IAT                       -1.03% 10.22%
iShares Dow Jones U.S. Technology Sector Index Fund IYW       -0.64% 3.28%
iShares Dow Jones U.S. Telecommunications Sector Index Fund IYZ        0.37% 1.08%
iShares Dow Jones U.S. Utilities Sector Index Fund IDU                        0.01% 13.42%

Pretty striking underperformance on the tech, telecom and telecom.   Tech was weighted down by AAPL. Excluding AAPL, the rest of the sector was up about 7% which is not significant of a level of underperformance.

I think Basic materials is underperforming because of the lack of global growth prospects, but it also is a bit misleading as the Dow Chemicals, Freeport McMoRan and Newmont mining have hurt returns.

In any case, it can still be helpful to look at sector returns in order to try to puzzle together an overall picture if what is going on in the economy.

My conclusion is that the market was up fairly evenly across the board so this is a rally that has a lot of legs and not dominated by any one story.