Tuesday, March 31, 2009

A Good Month But Another Awful Quarter/Ingersoll Rand: Awful Guidance and a Dividend Cut/Can No Longer Rely on Dividends as a Source of Income/Alcoa

I am working on my tax return.  I placed a couple of orders today, neither was filled including one for Sanofi (SNY).  So I am not focused much on the market right now.

I thought this was an interesting article discussing the use of moving averages to make buy and sell decisions in a diversified ETF portfolio . -- Seeking Alpha
 Seeking AlphaPersonally I would have a hard time limiting myself to such mechanical decisions in a boring portfolio.  I would at least make some changes in the allocation and have a few different ETFs.  I might want to make some modifications on the timing mechanism, as for example requiring at least a 5% move below or above the moving average before implementing a change, simply to avoid excess trading and false signals.  

I do intend to dump most of my stock mutual funds and to substitute ETFs for them.  I may start buying the ETFs now and then dump the stock mutual funds later when the next bull market is well underway. This would be a slight change in my strategy where I had previously expressed a desire to wait for my VIX signal before starting to add stock ETFs again.  I will still follow that guideline for the bulk of my sideline cash, making an exception for the dollar amount that could be raised now by selling several mutual funds to be invested now in stock ETFS, and then I will hopefully sell those mutual funds later at a much better price after the stock market recovers.
I am reading David Swensen's book "Unconventional Success: A Fundamental Approach to Personal Investment".  Swenson runs Yale's endowment. He makes a case for substituting ETFs for mutual funds. He is critical of mutual funds for a variety of reasons, including their high fees and costs, frequent trading & turnover, conflicts, future tax liabilities and inefficient tax management of distributions,  and overall poor performance versus passive index funds. 

Prior to the onset of this bear market I had pared my stock mutual funds.  Now, I just need to decide when to finish substituting stock ETFs for the the mutual funds that I will later dump.  My first adds will be a couple of the Vanguard ETFs that have very low expense ratios.  Prior to 2008,  I owned IYY for exposure to the total stock market.  iShares Dow Jones U.S. Index Fund (IYY): Overview
I sold it along with most other stock ETFs before 2008.  Buy High & Sell Low /Retrospective on the Good & Bad 
IYY has  an expense ratio of .2%   Vanguard has a similar ETF with a lower expense ratio, VTI, and I may go with that one this time.  The expense ratio is just .07%, as close to no expense as I am likely to find.  It has 3386 U.S. stocks in it.  Vanguard has a similar fund for international stocks, VEU, with a .25% expense ratio.  I mentioned this one in a prior post, when VEU was trading at 31.49, and I noted that I was interested in buying it back, having sold my entire position in May 2007 at around 52. Asset Allocation Problems: foreign currencies, stocks and bonds 
It has not fallen much since that post, now trading at around 28, and it hit a 52 week low of 23.32 on 3/9 before the latest rally. VEU: Summary for VG FTSE ALLWD US ETF - Yahoo! Finance

Ingersoll Rand became another large industrial company to slash its dividend, reducing it to 7 cents a quarter from 18 cents.  The company also cut its full year's guidance to at least 45 cents per share below the bottom of its previous range, and is previous range was awful at $1.85 to $2.25 per share.  Reuters  Yahoo! FinanceI last added some shares of IR at $11.82. The Most Abused Word: Reform/Buys of IR & DD/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology I will not consider another add until the stock falls below $10 or I see a report that its business is improving.  I kept looking for an announcement this morning that IR's CEO Herbert Henkel and other top executives are taking pay cuts and eliminating some of their perks, but have yet to locate that company news release yet. 

I have mentioned just how disconcerting it is to me to see these dividends cuts by what used to be the cream of American companies.  We saw a record amount of dividend cuts last quarter that was surpassed by yet a new record in the first few weeks of this quarter.  These massive dividend cuts and eliminations come  on top of the failure or near failure of a number of former blue chips, mostly due to bad management.   For a lifelong investor who views dividends as important, this experience is making me far more circumspect about stocks over the long term by the day. Shared Sacrifice or Sacrifice by Everyone Other than Those Who Are Already Overpaid/ Mini Bernie Madoffs Coming out the Wazoo/More on AIG  

I do find it interesting that management never seems to freeze their own pay, let alone cut it along with a few of their many perks, while cutting the distributions to shareholders and laying off employees. 

When I look at the vast number of "blue chip" companies that have failed recently, including the living dead propped up by the government,  and then add the much larger number of the so-called blue chips that have eliminated or substantially reduced their dividends, I really have to have a long talk with myself about whether any dependence and reliance  can be placed on dividends as a source of income by me over the next thirty years.  Sure, I am gradually shifting to electric utilities, consumer staples and phone companies as sort of the last refuge of common stock dividend payers but some of them have cut their dividends too or may do so in the future.  Would it be rational to place reliance on dividends as a source of income in the future, let alone reasonable to do so?  Maybe it is barely rational at this point and certainly not reasonable to do so.   

AT & T and Verizon did declare their regular dividends.  Yahoo! Finance
I have gravitated to both of them in hope of no dividend cut. 

The FDA approved the kidney cancer drug, Afinitor, from Novartis. WSJ.com  At some point I will likely buy shares in Novartis. 

Turning back to AEB, the Aegon floater, I would like to posit a hypothetical that may seem outlandish to some, but it is certainly a possibility.  Assume a 3 month LIBOR of 10 1/8% and a purchase cost of $5, then the yield becomes  55%.  There is no cap,  which is one of this securities appealing features compared with GJN, GJR, or GJO, or at least a cap that I could find in the prospectus.  Admittedly, when reading through one of these tomes, my eyes start to roll back into my head. In a sense, that is the reason for going with the floater rather than an Aegon fixed rate preferred, the protection afforded in an inflation scenario.   

One of the rising entertainers on the Fox "News" channel is Glen Beck who incites the emotions of the True Believers with frequently inane rhetoric.  NYTimes.com  Wonk Room  Washington Monthly

The Brits are in a dither about their Home Secretary charging taxpayer's for a couple of porn movies.  Maybe they need to put that sum in proper perspective, since they also paid for two wide screen TVs at this cabinet member's home, a bunch of DVDs, a dining room table, an antique fireplace and a new kitchen sink.      CBS News 
I don't think any of that compares with the expense of John Thain's new office, curtesy of the U.S. taxpayer, or the amount of money "lost" or wasted each day in Iraq in the reconstruction fiasco. 

We could give the entire world lessons on how to waste money and countless ways to spend it inappropriately.  

Alcoa had a good move today based on an upgrade and takeover speculation. - Yahoo! Finance  Alcoa is just one of the stocks that I bought based on a recognition that a long holding period would probably be necessary. My last purchase at $5.6 was a price last prevalent in 1987Buys of DKF, AA and a Lottery Ticket in 50 shares of RF/Heinz & its Boston Market Line/, and I do not think the world has given up on using aluminum. 

I thought the report by Barclays on Brandywine Realty (BDN) was a good one. That report is the primary reason why I have avoided a purchase of its common shares even as a lottery ticket in the 2 dollar range.  

The S & P 500 Index closed the month of March at 797.87. Yahoo! Finance

For the quarter, it was pretty dismal. The first quarter was the sixth straight losing quarter.  The DJIA finished down 13% for the first three months. The S & P index lost 12% in the quarter. It would have to rise almost 100% to get back to where it was in October 2007, at the onset of the current bear market. WSJ.com

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