Monday, January 5, 2009


Most inquiries about my posts arrive by email since my identity is known to some and I know who is asking me the question.  My purpose in writing these posts, which is an outgrowth of emails sent to some interested parties for years, is to provide a framework for evaluating and analyzing securities and the process that I use in forming and implementing an intelligent asset allocation model applicable to me, which may be helpful to others who are attempting to find their own way in the market.  There is of course no charge for accessing the post, to take whatever I am giving and I expect nothing in return.   If someone has some useful information or substantive disagreement with a point made, I am anxious to read it.   My purpose and intent is not to provide a research service but simply to identify many of the factors that I will follow in making investment decisions.  I do believe that many individual investors, even those who use financial advisors, would be better off forming and following a process of analysis and research before making an investment decision.   Unfortunately, most individual investors that I have met over the years need to know a great deal more than they do.  Part of the problem is lack of time, other responsibilities and interests, and  for many a total lack of interest.  This needs to be corrected as much as possible for anyone that has money to invest.  I hope that my comments in these posts provide some assistance to anyone willing to take this journey.  My comments about individual securities are not meant to be exhaustive. In many cases, I may mention a type of security like a Trust Certificate that many active investors have either no or little familiarity.  If my comments perk their interest, causing them to actually read the prospectus first, and then think about what to buy and what price to pay, when and how, using their own judgment and intelligence, then my extensive effort in writing these posts would be worthwhile to me.  Besides, they help me think through the issues in a more involved way, which is always a good thing to do.  I intend once again to beat the S & P 500 average with less risk and volatility which is always my personal goal.  For those who know me, I have been characterized by others as a sophisticated individual investor who is not now, nor will I ever be, nor do I ever need to be, a financial advisor.  

Most of my common stock buys, which will be recurring on a regular daily basis now after deciding to move away from other sectors,  will not be mentioned in these posts.  One reason is that I do not have the time.   When I am attempting to allocate capital that will give the best chance of securing a return worth the risk,  and my judgment now says that common stocks present the best value,  I simply have to act based on that opinion which may be wrong.  My intent is not to convince others to follow my path. I would hope that each investor finds his own.   I will pick stocks in sectors that I believe to be undervalued, and the stock simply may not be suitable for others.  Most individual investors need to stick with ETFs.   One sector where I was overweight last year was energy stocks.  I virtually eliminated all of my positions before 2008. Normally, if I wanted to up my allocation in the energy sector, I would probably start by adding one large cap name, possibly CVX or COP, and then a mid sized company.  I would consider adding an ETF that focuses on the energy sector and there are plenty to choose from now. (One owned last year and sold, which contains companies primarily engaged in natural gas, may be added back at some point this year, FCGFirst Trust -   I am not going to use mutual funds to increase my allocation in a sector which is what I used to do.   Now, I have been adding in baby steps shares in the Canadian energy trusts as my first allocation to individual securities in the energy sector. 

I have discussed some of them in prior posts. By baby steps, I am talking about adding 30 to 50 shares at a time. GOLD OIL and EURO CBOE VOLATILITY INDEXES I have now brought my position in Penn West Energy (PWE) up to 100 shares with a maximum possible allocation of 150 shares.   I discussed PWE some in this blog.  Home Prices/Lexington Realty (LXP) & LXPPRD/GXP/PWE/AAV
I would always try to become aware of downside issues first.  To reiterate, PWE has a monthly dividend of close to 26% annualized at the current dividend rate according to the data page at Marketwatch this morning. PWE Stock Quote - Penn West Energy Trust Stock Quote - PWE Quote - PWE Stock Price  The dividend is probably in danger of being cut later this year as several canadian energy trusts have already done, including ERF and PVX.   The reason for the large dividend is the same reason for one one of my concerns, these trusts are not now taxed by the federal government in Canada and hence can pay out most of their income in dividends.  This will change in 2011 when Canada intends to start taxing them as regular corporations which will ultimately mean down the road a lower dividend (sometimes these companies will be hurt by a change in tax policy by a province which happened last year with Alberta).   This factor about increasing taxes at the federal level is known.  The unknown and most important factor impacting their current price is how long will the downturn in commodity prices continue. For now at least, the dividend cuts have been due to the fall in energy prices rather than changes in tax policy.  I have already started to place some bets (and I call them bets rather than investments for a reason) that prices for both natural gas and oil were at or near a bottom, which could easily by proven wrong, and those positions consisted of UNG and UCO, with the reasons for their selection discussed earlier. Inching up my % allocation to commodities after being at 0% for almost a year My thinking was that the canadian energy trusts had been beaten to a pulp, far more than my alternative investments like a Chevron, with PWE, for example, being hammered from a high of 35 to a low of 9 and change last month.   It is still paying a good dividend and it is a worthy company likely to prosper in the years ahead, irrespective of the canadian tax issue, as long as energy prices resumed an upward trend in the years to come.  We are starting to see some upward movement in prices of these trusts today as energy prices started to rise some.  It is impossible for anyone to know whether the bottom in oil and gas prices has been seen or is yet to come, as industrial companies continue to cut back on their demand as the economy stalls.

Another negative issue now is that Canada withholds 15% of the dividend to pay Canadian individual income taxes, which makes this holding appropriate more for a taxable account in my view due to the tax rules for taking credits on foreign taxes paid.  Another negative issue, which may reverse soon, is that the Canadian dollar has fallen about 20% against the U.S. dollar over the past several months.  This makes the dividend worth less.  The movement can be played via the ETF for the Canadian dollar, FXC, which I previously owned an no longer have a position in it, although I have been thinking about getting back into it along with increasing my current position in the Australian dollar, possibly a few others.  Whatever, if the Canadian dollar reverses course and starts to rise against the U.S. dollar, then the dividends payable in Canadian dollars become more valuable to a U.S. holder.

There are a few decent reports available on PWE, with the best probably being the one from Morningstar.  I read the reports whenever a new one is written or a prior one updated.  Morningstar has it rated 4 stars.    Their report contains a good discussion of PWE's legacy assets, where Morningstar seems to lack enthusiasm, to the potential plays that it is or may develop in the future.    Again, putting in 1500 into this position is not a major issue for me.  It mostly fills certain holes in my asset allocation which are:  1. it is a stock, 2. it is an energy company and 3. it provides a good source of income that, along with many other sources, can be used to invest in other opportunities as they may arise in the months to come.   Possibly, some Canadian brokerage companies have reports on PWE.  The S & P report just has the data.  I am content to limit myself to a review of PWE's recent earnings releases (at least the last 2),  my existing knowledge base of canadian tax issues and currency fluctuations which needs to be acquired if not known, and a few articles that I have found discussing these trusts primarily at the seekingalpha site.  As I have said many times, all of that information needs to be read and analyzed before making any individual stock selection.  I have on occasion taken the short cut myself by buying ENY, a Claymore sponsored ETF for canadian energy companies that I dumped a year or more ago but I am considering buying now.  ENY - Claymore/SWM Canadian Energy Income Index ETF - Summary
The ETFs are just one way to quickly gain exposure to area that is under weighted in my asset allocation even now after making several purchases.  A problem with many of these narrow sector funds is that they have to be used in an asset allocation properly and the expense ratios are high for ETFs.  A lower cost option is XLE which just contains the energy companies in the S & P 500.  


  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 

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