I hope everyone came out ok with Sandy.  We were very fortunate in Eastern Long Island, I think.   I grow increasingly worried, considering the general lack of preparedness, that if we do ever get hit by a real hurricane, it will be a doozy in terms of life and economic damage.

As for investing, I have been quiet the last few weeks.  My equity exposure has remained about 15% and so I have lost sa bit of money this month, but kept it fairly small.  I will publish the numbers after month end.

Speaking of month end, there are some gains from the dividend payers, for example ETN and more consistently MRK and the energy stocks.

I continue to believe these are the best way to build a solid equity portfolio.  I am a bit concerned that AAPL is going to be taken out to the woodshed after having been the darling for quite a while.  I continue to hold it, but we are now down to only slightly above where I bought it a while a go.  I am kicking myself for not selling when the stock was higher as even though the stock appears cheap based on earnings metrics, it's earnings are still susceptible to any disturbances in it's upward trajectory of growth.  Most of the market has serious gains in AAPL and combining that with the rising tax rates, it may be subject to a serious sell off in the near future.

After pondering some more I really like the Sprint (S) deal.  Like any merger arb deal it is a delicate dance and can be thrown off track, but I believe that the deal will pass muster with the FCC and DOJ and receive regulatory permission.  Assuming that, there is over a 20% return to a potential closing date in the middle of the year.    Downside risk is probably in the 10% range, but I place a low probability on that.  A key component is to make sure and elect to tender all of your shares for the $7.30 purchase by Softbank.  You may end up selling more than your expected 55% at that price (and therefore earn a higher return).  I have bought some and will continue to buy regularly with a goal of building a good size position in the 3% range.

I jumped in a bit late to the mortgage bond game with my purchase of NLY and recently AGNC.  I think these are both solid companies but they are leveraged in the mortgage market.  They have suffered recently with the idea that more people are going to refinance and that will put pressure on their margins.  Their yield is outstanding and I still think they are worth a position in an income portfolio.

GE is well off it's high and I think this as solid a company as there is and it pays a 3+% dividend yield to boot.  It along with CAT have been brought down by renewed concerns with global growth.   That of course is a concern but I think the rewards outweigh the risks for GE.

To balance the growth concern I have taken advantage of the sell off in treasury securities (TLT) and bought a bit.  While I don't think they are the best long term investment, I cannot see explosive growth (real or nominal) coming out of nowhere in the near future, so I think the bonds at this price point offer some protection from nasty surprises.

There has been much discussion in the press about earnings dissapointments coming.

In my experience, when the pessimism gets that high and stockks refuse to sell off, then we have a rally coming.  Call options are still cheap.  Dividend payers are still a good buy and will keep growing.  I have brought up my equity exposure to15% from a low of about 7% recently.  The options I bought would increase my exposure to the 35% level if we continue to rally.

Banks continue to show some improvements despite rate pressuring their bottom line.  This is a direct result of the balance sheet repair imported from the QE.  This effect is also helping homeowners with refinancing and companies for the same reason.

Bonds have come off a bit (TLT) and I think at these levels provide a reasonable hedge against the market selling off due to a surprise.  In addition, with the low growth environment and QE, I do not think there is currently a risk of bonds having a big selloff.  That will come in time, but not now.


http://online.barrons.com/article/SB50001424053111904757804578032721106626626.html


A good article on ETF's and yield investing.  Please make sure you consider the premium to NAV when looking at funds.  MHN is one that I invest in and fluctuates considerably around NAV.  The issue with some of these is that it is hard to take advantage of fluctuations.  MHN for example, I wrote a few days ago that I was selling a bit when it was trading at a 5% premium.  I was correct, as it dropped to about a 1% premium, however, I only sold a small portion of what I wanted to sell because I impacted the price too much.  Even a few thousand shares of a stock that doesn't trade too much can have an impact.  So consider that as well when making your trading decisions.  Impact is why for me, this stock is a buy and hold and I only trade a small amount at the margin.

I am going to be taking a good look at the Sprint deal.  My first quick analysis makes it look pretty attractive.  The basic idea is that Softbank is going to be paying 7.3 for 55% and there will be some more support at 5.25.  With the stock trading at 5.75, the value for the remaining 45% seems to low to me.  It should be worthwhile looking through the prospectus.   Here is an article I found doing some of this analysis:

http://seekingalpha.com/article/926991-sprint-s-unreasonable-post-deal-valuation?source=intbrokers_regular

I updated September performance which I was quite happy with.  Outperformance attributed to stock selection versus the S&P as the dividend payers did well, except for LO, which is turning into a bit of a dog.  GE and VZ and KMB have continued to be stars.

Let's keep an eye on MHN.  I am starting to sell a little bit - 10% because the premium has reached over 5%.  A level that has proven difficult to maintain.  I think this is attributable to the market worrying about tax rates for next year.  The yield is still quite attractive - almost 6% tax free which is nothing to sneeze at!  But, I am trying to get a little cute and trade around - sell when the premium gets too large and buy some extra when it get cheap.

JCP is getting interesting again below 24.  If you recall, I liked it below 22.  After dipping to around 20 it rallied to around 29.  I missed the last dollar as I thought above 28 it was worth selling.  Well, as usual, as long as you can stay in the game, the market gives you new chances to make money.  This stock is turning into a bit of a canary in the coal mine.  Much like CAT with global growth.  Anything the threatens the macro environment will hit these stocks and vice versa.

I thought Mr. Bernanke's speech was quite good yesterday.  I think he is trying to do what he is charged to do with the tools he has at his disposal.  He has admitted previously that monetary policy is a blunt tool.   The consumer is still licking his wounds and pulling in overextended credit and the banks are still rebuilding balance sheets.  The best we can hope for is that we continue to rebuild and at some point we will be in better shape to expand.  Growth will continue to be slow and bond yields will stay low.  Stocks will still be subject to external shocks that would hit values but overall, they are a reasonable bet as corporations continue to get more efficient and benefit from low bond yields.

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.

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.


seekingalpha.com/article/881541

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.

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.

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.