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

Monday, March 30, 2009

Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets/ Novartis or Sanofi

1. Bayesian Long Term Risk Analysis for Stocks: The article that I previously discussed in Sunday's NYT relating to the use of Bayesian techniques to analyse the long term risk of stocks is also discussed in this article, A Yahoo! Finance and in these blogs, Is it time to rethink how much stock you own? | Kevin Hoffberg's Blog Stocks for The Long Run — Riskier than Stocks for The Short Run? « The Guru Investor

If stocks are more risky than previously thought for a long term investor, as suggested by this analysis, then consideration needs to be given to reducing their weight, at least where an investor faces significant situational risk, that is, a need for capital unique to the individual investor based on their personal situation.

In the example that I gave in a previous post, I postulated what would happen to me if I lived another 35 years to the ripe old age of 92 and my stock portfolio suffered a horrendous meltdown at age 88, followed by a relentlessly long bear market lasting several years. What if that was accompanied by stagflation that reduced the value of my bonds, and I had to sell them at a loss?  Duality of Long Term Risks

Or,  what happens when I am depending on stocks to finance my retirement, and they fall 50 to 70% quickly soon after I retire? Another example would be having a heavy weight in stocks in a 529 plan with the child starting to enter college right now. There are countless situational risks where new thinking needs to be done to weigh the long term risk of stocks with the applicable situational risk even with a five year or longer time frame.  And, the end result of that analysis may be less weighting to stocks as an asset class than you would normally see in a target funds glide path.   

2.  Long Corporate Bond Purchases and Inflation Risk-Use of Floaters: One thing that I have done over the past two years is to buy bonds with maturity dates 20 to 30 years into the future that provide a steady flow of income, with many of the purchases made a deep discounts to par value.  So, I have been using the fear and volatility since October of last year to buy investment grade bonds that provide a high level of current income for two or even three decades.  I am going to continue looking for similar opportunities in the future, and I will try to hedge the inflation risk by a combination of tools.  These tools include the use of floaters, double short ETFs like PST and TBT, and inflation protected bonds.  Some of my purchases over the past six months are floaters that will pay a higher rate when short term rates rise, which provides a measure of inflation protection.


I have only become a bond investor during the past two years so this is still a work in progress for me.  

3. Critique of Siegel's Failure to Account for a Typical Investors Situational Risk:  I have been critical in the past about Siegel's views of stocks for the long run in light of situational risks and the often long periods associated with secular bear markets for stocks.

Stocks for the Long Run?/End to Irrational Exuberance for Now 
Part of my analysis was Bayesian without knowing anything about Bayesian techniques. It is obvious, a common sense observation, when one examines history since I have been alive, that there are prolonged periods when ownership of stocks is just painful.  In my life, those periods have included two long spans, from about 1968 to 1982 and 2000 to 2009 and counting.  

4: No More Bond Mutual Funds For Me-Awful Experience with Loomis Sayles in 2008: Are bond mutual funds the answer for me? I just had an extremely bad experience with Loomis Sayles last year.  I do not think that I will ever buy a bond mutual fund again under any circumstances.  I have enough funds to achieve diversity in a portfolio of individual securities, and I can always hold the bond to maturity if need be.

A bond mutual fund has no maturity.  Its net asset value fluctuates with changes in the values of its bond positions.  Even in periods where bonds have performed well, it is not unusual to find bond funds that continue to decline in their NAV. Even when you add the dividends back, you may easily realize a total return once the shares are sold in an amount less than the total dividends paid out (loss on shares subtracts from the dividend return).

It will get a lot worse when the long term secular bull market in bonds comes to an end, which will happen, and this major asset class starts to fail.  This will happen when inflation becomes a problem again, as in the 1970s and early 1980s over a long period of time and periodically thereafter. Then the decline in the NAV will far exceed the dividends paid out and the option of recovering your principle at maturity does not not exist in that ownership structure.  

So I have elected to buy individual bonds and to supplement my individual securities with four bond ETFs: TIP, WIP, BWX and LQD.  I will trade the ETFs but the first three are in areas of the bond market where I will most likely never buy an individual security. TIP is U.S. Treasury Inflation Protected Bonds; WIP includes International Government Inflation Protected Bonds; and BWX contains International Government Bonds. 

5.  Do Not Assume Bonds Will Always Rise in Value: I would not take for granted the safety of bonds as an asset class. In the 1970s, there was in my opinion a failure of both bonds and stocks in an asset allocation scheme over about a fifteen year period.  Yes, stocks may have presented a trading opportunity here and there, but you had to be nimble. The best investment was probably treasury bills from about 1968 to 1982.   

 It is hard to see how treasury bonds will provide decent income or appreciation at the current price and yield levels.  High yield bonds are notorious for their volatility and unreliability.  If inflation becomes a big problem, investors will find out that bonds will lose value and result in negative returns even after interest payments.  

6.  Meaning of Opportunity Risk: I have received a comment about my use of the phrase "opportunity risk" to describe the risk that shares might be purchased at a lower price, and any capital used to purchase at a higher price will not be available to acquire shares at the lower cost.

This risk postulates that every investor only has a limited amount of capital to deploy, the amount is not relevant. The query is whether the phrase would be appropriate to describe the risk of the price rising so much that the opportunity is lost.

I would say it could be used both ways but the more appropriate description for a bear market would be to use opportunity risk to describe the risk to the downside and the consequences of buying too early.  In a secular bull market, the risk would not be buying at all and/or waiting too long.  

So, in a clearly defined long term secular bull market, the risk of lost opportunity can be best described as not taking a full position in the security all at once. The reverse is true in the current market, where risk is managed by slicing and dicing orders into several parts, selling some securities on spikes, and repurchasing at lower prices on downdrafts using volatility to gradually build up positions at the lowest possible prices in preparation for the next bull market.  So, my use of the phrase, and the way I manage opportunity risk, will depend on whether the market is characterized as a long term secular bull market or bear market.  

7. Cash Allocation and My Vix Asset Allocation Model: My investable capital on the sidelines currently in cash will not be deployed until I am confident that a secular bull market has started, using primarily my VIX signal and other indicators, along with common sense and experience.  It would also be best to wait at least a year into the bear market before doing what I am attempting to do now in the consumer staples sector. The failure of the S & P 500 index to close above 815 for the month of March will also keep my cash flow from dividends and interest in cash until at least until May 1st for the reasons discussed in prior posts.  This is building up and I keep a log of the amounts so I know precisely how much to invest in common stocks when and if the S & P 500 index closes a month above 815. 

8. Recent Shift out of Short Term Bonds into Stocks in Violation of the Vix Model: I made a decision earlier this month to raise almost 30 grand  by selling several short term bonds (from GE, CAT, HIG, International Lease, BAC and one bond ETF-TFI),  and to allocate most of that capital slowly to consumer staple stocks for the most part (with some used to buy DD, NYX, IR, AA, DIS and a few lottery tickets).   I  am still  deploying that capital.  I picked consumer staples as my first major foray into stock purchases since 2007  due to their dividend yields, financial stability, and favorable prices for a long term hold.  My acquisition of them is being done under what I refer to as managing the risk of lost opportunity in a bear market. I also mentioned that I wanted to add one pharmaceutical company.  I have only a small position in Bristol Myers.   The only thing that I did today was to narrow my choice to either the Swiss firm Novartis (NVS) or the French firm Sanofi-Aventis (SNY).  Since both firms pay good dividends that would be subject to a foreign withholding tax, I will not buy one of them in a retirement account where the foreign tax paid can not be recouped.  

9.  Life Insurance Stocks: My decision to stay away from life insurance common stocks is being confirmed almost weekly.  I sold at a profit a small position in Lincoln National earlier this year, which was the last common stock position owned.  Lincoln fell almost 40% today after it withdrew its application to issue debt under the government's Temporary Liquidity Guarantee Program. MarketWatch   I was concerned enough about this sector that I also reduced my senior bond exposure by eliminating my Hartford financial senior bonds at a small loss.  For the U.S. insurance companies, my current exposure is small, consisting of some senior bonds issued by Prudential, a MET LIFE floating rate preferred stock and a small position in a Phoenix insurance company senior bond.  

10 Aegon Preferred Stocks & AEB: I recently sold one my Aegon preferred stocks in an IRA.  Give the AIG Masters of Disaster my New Medal of Chutzpah/Sold AEV in Risk Reduction Move   I am going to shift some of the risk of the Aegon floating rate preferred, AEB, out of my taxable account into my retirement account.  On  additional weakness below $5, I intend to add up to 100 of AEB to the 100 owned in the retirement account and then at some point sell 100 of the 250 owned in the taxable account. 

Some individuals do not realize that the interest on a preferred stock or a bond is calculated on its par value, not the market price or your cost.  The Aegon floater, which has been discussed many times, pays the greater of 4% or 7/8% over 3 month LIBOR.  It has a $25 par value.  At the 4% guarantee, the dividend would be .04% x 25= $1 per year for 1 share.  If you bought those shares at $5, you would receive that $1.  If you bought a share at par value you would receive $1.  If you bought a share at $10, you will receive $1.  Where you buy does not effect the dividend paid but it does impact your yield.  So at the 4% guarantee and a $25 price, the yield would be 4%.  At $5 which is where AEB traded today, the yield would be 20%.  Then I have shown how the yield is impacted in the event the float provision is greater than the guarantee.  The problem with this security, as I have said many times, is that it has no maturity, which is always a bad thing; Aegon is a life insurance company;  and it is senior only to common stock. The 7/8% over 3 month LIBOR float provision does provide some inflation protection. At a 5 1/8% 3 month LIBOR, the yield on the $25 par would be 6% but that translates to a yield of  30% at a $5 cost.

This is a link to the prospectus: http://www.sec.gov

These are links to some of my prior discussions:

Since I am concerned about inflation in the future, and the impact it will have on my large fixed rate bond investments, floaters have a coveted spot in my portfolio so I will place more emphasis on AEB than other Aegon preferred fixed rate securities due to its float provision. Similarly, in the J P Morgan floater that I have discussed, GJN, the 3% guarantee is worth 6.25% at a purchase cost of $ 12 since the guarantee is calculated on a $25 par value. 

11.  Forbes Article on Floaters and Canadian Energy Trusts: I received my issue of Forbes today in the mail and I noticed that Richard Lehmann  had an article recommending several floaters for their inflation protection, along with several Canadian energy trusts that I own. Forbes.com

DISCLAIMER:
  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  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.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. 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. 

Here and Now Valuations Versus the Reasonable Range of Future Forecasts/GM/

I would not view Obama's tough love approach to GM and Chrysler as a negative but as a net positive development.  Yahoo! FinanceSure, both of them may end up having to file for bankruptcy but that is the only viable option for them without more substantial changes in their business models and cost structures.   Chrysler is not a viable company as a stand alone, and trying to save it as a separate entity is not a viable option.   Maybe it would be a viable option if there was no Honda, Toyota or Hyundai.  I do not see any reason to create an alternate reality with taxpayer's money as if time had shifted back to the early 1970s.  I am actually glad to see that Obama is taking a sensible approach to them rather than just showering them with more money as wards of the State. 

Turning back to my discussion about managing risks for the consumer staple stocks from last nightDuality of Long Term Risks/Stocks Under $5: Per Se Lottery Tickets/, I have not yet taken full positions in most of the ones that I want to own for the long term period.   I still see opportunity risk.  When I am concerned about significant further downside risks, and a realistic possibility of being able to purchase shares at a lower price, I will frequently slice and dice the acquisition of a full position into multiple orders.  For example, Nestle would be a position where I would hope to own at least 150 shares, but I currently own just 30.    Another way that I manage risk when I am concerned about opportunity risk is to trade the position to arrive at lower cost basis.  The shares that I own of Coca Cola now, after my recent tradeSold 1/2 KO at 44.2: Risk Reduction/BOUGHT 30 WL=Lottery Ticket/Bernanke on AIG/Disney Downgrade by GS, have an acquisition cost of $38.72. Stocks & Politics: Buy of KO at 38.72/Newt Gingrich & GOP Ideology on Financial Regulations/UTX/

Sometimes I refer to the "here and now" method of valuing a security, to be distinguished from a rational valuation using reasonable predictions about the future.  Maybe if one starts to engage in predictions about the future, then you need to make a lot of them just to be right about one or two.  I am not so much as talking about a specific prediction, like GDP falling 6.15% this quarter or unemployment peaking during this down cycle at 10.2% in January 2010.  Instead, I am referring to a reasonable range of likely occurrences,  so there is nothing specific about the forecast except a reasonable range of probabilities.  An illustration may be helpful.  I have previously referenced Federal Reserve data on three month treasury bill rates since the early 1980s.  This is a link to the weekly data since the early 1980s.   http://www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_TCMNOM_M3.txt
What conclusion can I draw from this data?  Can I say that in December 2010 the rate will be 3.5%?  I can not make any specific forecast about the future course of this rate, except that it is likely to be low for several months.    I can say with some reasonable level of confidence that the rate will bounce all of the place over the next twenty five years, and an average yield of 3 to 4%, as a low prediction, over the course of that time span would be a reasonable forecast.   A 1% to 3% forecast would have a low possibility attached to it, while a 4 to 6% would be more likely than 1 to 3%.   Now what does this have to do with anything?

Recently, I bought a few floaters tied to the 3 month treasury bill.  One had a guarantee of 3% and a float provision of 1% over the 3 month treasury bill rate, GJN.  Another floater tied to the three month bill without a guarantee is GJR.   Now, if the three month T Bill was currently 5%, what is the likelihood that the here and now valuation would be $12 for this security which would then have a current yield under this hypothetical of 12.5%, plus another 100+% at maturity in 2035.    Now, remove the concern that J P Morgan may not survive.BUY 50 GJN/Japan Sinks Deeper into the Mire/CBG Upgrades/Law Enforcement On Vacation for Mortgage Fraud/New Home Sales Up   I suspect the security would be priced significantly higher based on the perceptions of those here and now assumptions.   When the three month treasury bill was higher than now, say in the summer of 2007 when it was close to 5%, and there was no concern about Morgan's survivability, this security was priced near its $25 par value GJN Stock Charts - Strats Tr Jpmorgan Cap Xvii Stock Market Charts - Free Stock Charts.  I would have zero interest in it at that price, because I am not looking at the here and now when making my decision whether or not to buy it.  I am looking at the range of possibilities over the life of the security, and then calculating my potential average yield taking into the consideration the discount to par value.   So, when I ignored the here and now rate and calculate instead a reasonable range of future possibilities based on past experience, I found that a mere 3.3% average treasury bill rate over the life of this security would generate a total return, if held to maturity with par value paid then, of almost 13.25% per year until 2035, with an acquisition at $12.    

 

Sunday, March 29, 2009

Duality of Long Term Risks/Stocks Under $5: Per Se Lottery Tickets/

Update 6/30/2009: I have collected my discussion of stock purchases that I characterize as lottery tickets in this Gateway Post: LOTTERY TICKET PURCHASES: LINKS IN ONE POST

************original post:


Holding a single security or an asset class over long periods of time can increase risk and reduce it, depending on the the duration of the holding period. I am going to call this the duality of risk. I would like to draw three examples from my weekend reading. 

First, I am starting to wade through Taleb's book "Fooled by Randomness" and made it to page 38 before starting to nod off and having an overwhelming desire to take a nap. Before dosing off, he recounted a story, which I will take some liberty in the retelling, of an eccentric billionaire who offered a 20 year old MIT statistician and recognized wizard 10 million dollars to play Russian roulette with one bullet in a six chamber revolver. The young man quickly calculated the risk/reward, accepted the offer and fortunately was lucky. The eccentric said that he would do this once a year for as long as the young man wanted to do it again. The young man came back the next year, calculated the odds which seemed to be in his favor, pulled the trigger and collected the 10 million again. Being a wizard, he developed complex mathematical models for esoteric trading in the market and before long he was on the Forbes 400 list of the richest Americans right behind R. Allan Sanford. But he could not resist coming back and playing that game, calculating that the odds were in his favor and lo and behold on the 15th time of playing the game his good fortune came to an abrupt and unfortunate end.  

The second article was one from the NYT on Sunday written by Mark Hubert. NYTimes.com

My much older older brother asked me today whether I had read the article, which I had, and then he launches into some statistical mumbo jumbo about Bayesian techniques. I never took a class in statistics, never will make an effort to understand it, but I did not need a statistician to tell me what was contained in the Bayesian statistical analysis of the long trends of the stock market. As Mark Hulbert said and my brother was explaining to me, Bayesian "analysis is often used to assess the uncertainty of future outcomes, based on a formula for updating probabilities of given events in the light of new evidence". The result of using this analysis is that the volatility of the market is 1 1/2 times greater at 30 years than at 1 year. Okay, I really do not understand statistical analysis but I may be a Bayesian myself nonetheless.

From my point of view, the longer the period an asset is held creates more risk that an unanticipated event may occur that will decimate the value of the asset. This does relate to what Taleb is saying about the black swan events. I may do okay in the stock market for 15 years and then something happens in year 16 that takes away 50% of my gains, something that I could not anticipate and model, no mater how many MIT pets that I employed or the sophistication of my models. Those who have been investing every year in the stock market since say 1996, with equal contributions every year, know first hand about the point that I am making and it may feel like the bullet was in the chamber. The bullet is always there and the longer the game is played, exactly as before, the odds increase of an unpredictable and potentially catastrophic loss. 

The third article is in Barron's written by Lawrence Strauss. Barrons.com The twenty year treasury bond has now outperformed the S & P 500 index from 1968 through February 2009. Bonds also beat stocks between 1803 to 1871 and 1929-1949. Now, if I change my measuring stick some, stocks handily beat bonds from 1932 to 2000. What does this tell me?  For one, it tells me to be suspect about those who are promoters of stocks as the magic elixir. My other conclusion would be that stocks may beat bonds for the next thirty years particularly when the twenty year treasury is yielding such a paltry amount and the S & P 500 index has just been shellacked.

So then I did a quick calculation, adding thirty years to my age, counting with fingers on both hands, and realized that I might actually live another 30 years. For the sake of argument let's assume that I live another 35 years. So, would I be better of  in a 3.5% 30 year treasury bond or the S & P 500 index, making the choice now, for the next thirty years as opposed to say making a choice between a ten year treasury and the S & P index for 10 years. Then, at the end of ten years, I would decide again. In the meantime, assume stocks had had a record similar to the 1990s and the treasury had been decimated in price and rising in yield to say 8%. What then? What would be the better choice if I had to choose one or the other?

My gut told me that stocks would do better than the 30 year treasury bond bought now with a 30 year time horizon but what if something unexpected happened  causing the market to fall 70% near the end of that 30 year period. The longer that I stayed with the S & P 500 index,  the odds of an outlier event happening increases which would decimate my returns. That might happen several times over the course of thirty years but would be devastating to me if it occurred in year 29 with only a few years left to recover.  So, in this example, the duration of risk becomes important in the long term analysis, so I would pick the S & P 500 over the 10 year treasury bond for just the next ten years, or stocks over the 5 year Treasury. So, I have in the last analysis more confidence in the risk with a shorter duration, but not so short as a day, a month or even a year.  

This big picture type analysis of looking at risk in duration terms is used by me when looking at an individual security. 

I mentioned the other day buying CB Richard Ellis at $2.39. I do not know whether this company will be around in 30 years. I do not know when there will be a recovery in the commercial real estate market. Maybe that will start to occur later this year or maybe in 2010. If I can hold the position for five years, then my confidence in a recovery goes way up, not to certainty but close enough for a stock selection. When that happens, then the price of this stock will recover provided CBG does not bankrupt before an upturn takes root. My choice to buy was based not on a 30 year probability forecast or even a 10 year. As far as I know, in another 10 years, we could be in the same soup that we are in now. Instead I am just suggesting that my confidence in a significant recovery starting sometime between the end of this year and 2011 is high and my lost opportunity risk arising from the possibility of acquiring CBG at less than $2.39 is low, insignificant or just immaterial. I can now hold for a possible 10 bagger. By being willing to hold this security now if need be for 3 to 5 years, I do not have the risk of the day trader, trying to predict the variations in price over short periods of time which is not possible on a consistent basis. If I had to make a new decision every day on whether to go long or to short, I would surely lose. By taking a longer duration approach, I reduced my risk compared to that assumed by someone trading the security since nothing has to happen tomorrow, this month or even this year. I can wait.  But the duration of the risk can not be 30 years because hundreds of adverse developments could occur over such a long duration that would actually increase my risk the longer I stayed with the investment. This brings me to the topic for this weekend which is risk assessment and management in an extremely small category of my portfolio.

For the hearty souls who venture into purchasing stocks priced at less than $5, an article in Barron's this week is worth a read. Barrons.com

Once that five dollar barrier is breached to the downside, the odds of finding a winner amid the rubble are slim.  Last year, of the 637 stocks that broke $5 and stayed over $1, the total decline was 61%.  I do venture into this area some, and I refer to my purchases as lottery tickets. While they have more potential to win then my powerball picks, the characterization is still applicable since many will ultimately fail or at least lose more after my purchase. To make this worthwhile, I will need to trade some that spike, and volatility in those low priced stocks is normal. More importantly, there will be a few purchases where I will need to hold for a long time for a potential ten bagger which is where the real juice comes with these kind of purchases. CB Richard Ellis is one of my recent buys that at least has the potential to return to its price from 2007 which would translate into a ten bagger. CB RICHARD ELLIS GRP Share Price Chart I do not have a clue whether that will happen or when, except that it will require a recovery in the commercial real estate market.  At my cost of $2.39, the odds are increased of a substantial percentage return. SOLD NADX IN IRA/BOUGHT Kraft & NESTLE/ Bought Lottery Ticket in CBG at 2.39/ Drags: TALF, AXP and GE  However, if it goes poof, I will have lost about $125, or more by adding the profit that I am foregoing by not selling it now.  By 10 bagger, I mean a $1250 profit on this $125 investment. That kind of gain would in all likelihood be harvested since I would not wait for the outlier event to come along and crush an unrealized gain to smithereens. I am playing with the house's money on that one too, with a profit realized in 2007 on trades of  $330. CB Richard Ellis/Mortgage Rates/PFX/ SLM-OSM

In 2007, at the prices bought and sold, and under the circumstances then existing, I did not have any confidence about increasing my gains based on extending the duration of the holding period.  

Some well known mutual funds rode CBG up into the 30s and down to 2 and change.  I do not see the wisdom of those decisions.  CBG: Major Holders for CB RICHARD ELLIS GRP

So, what makes venturing into this area worthwhile is to realize a few large percentage gainers with very little money exposed to the entire class of lottery tickets. It also helps to keep me involved during a major bear market without risking too much capital. Possibly, the one that I sold on Friday, AINV, for a quick gain would have potential for more gains, but I lack confidence in the duration of its potential upside.  

This entire asset class of low priced stocks is inherently risky and gains need to be harvested here and there simply to mitigate and moderate the overall risk of this sub asset class. And, it is also important to recognize that some may need to be sold at a loss to prevent a potential total loss. I will give more leeway on the downside to them as long as I am somewhat confident that the company will survive. The lottery tickets currently owned  include less than a $2,000 total exposure, contain many positions where I have already harvested more in gains that I currently have at risk or close to it, and include the following:

100 Sunopta (STKL)
100 Napco Security (NSSC)
100 Glimcher Reality (GRT)
100 Glimcher Reality Pr F  
100 C B Richard Ellis (added 50 in main account prior to last purchase)
100 Taseko Mines (TGB)  
100 CBL Properties (CBL) (added some since last mention)
100 Solta Medical (SLTM)
50 Ciber (CBR)
50 GP Strategies (GPX)
40 Given Imaging (GIVN)
100 Sinclair Broadcasting (SBGI) (bought at $1)
50 National Dendex (NADX) ( sold 50 on a spike)
50 Lexington Pr (LXPPRD) (sold 50)
100 Ariad Pharmaceuticals 
40 First Industrial (FR)
50 Regions Financial (RF)
50 Webster Financial (WBS)

Of those stocks, only CBG is being held now with a long term perspective, although STKL and LXPPRD are borderline and may ultimately be so classified. Sinclair could fall into that category whenever I become convinced the company has an handle on paying off or refinancing its huge debt. I am confident that there will be a recovery in advertising which is not my concern with it. The purchase of GRTPRF was at 2.9. GRTPRF: A WALK ON THE WILD SIDE/ KTN add I would not buy more at the current price.  It is an extremely risky cumulative preferred. GPX was bought at 4 and I will not buy more due to my concerns about its business with GM. Buy of 50 Shares of GPX: Limit at 4 filled-investing only cash flow The last buy of Taseko Mines was at 80 cents.  More on GE/Merrill Lynch Bonuses/Barron's Roundtable/More on AEB/add of TGB in IRA/tax law changes: property taxes


Sunopta is another one where I am well into playing with the house's money with close to a $800 profit on this security from a prior trade, and the last purchase was at $1.65.  The prior trade was not a lottery ticket but the last purchase definitely fit within that category. Madoff: Lawsuits starting to fly against advisors/Buy of Sunopta: Highly Speculative

Napco was bought at $1.02. ROK/Balancing Risk & Reward on SNTA/Buy 100 NSSC at $1.02/Electronic Medical Records & the Stimulus Bill/M & DKQ I am playing with house's money on that one and may buy more Buy of 50 Shares of GPX: Limit at 4 filled-investing only cash flow. I am also close to playing with the house's money on both CBR and GPX,  within  about a $100. Buy of 50 Cyber/Starting Position in CSCO Buy of 50 Shares of GPX: Limit at 4 filled-investing only cash flowI have one more that I am not going to mention since I bought 500 shares at just 26 cents, and I am barely positive on it so far. Webster and Regions, two large regional banks, were recently added this month and I have no trading profits in either of them. So a certain amount of opportunistic trading has reduced my risk in my mind's eye and makes me more willing to take the risk again, usually at a much lower price than my prior purchase which was sold.    

Some say do not combine longer term holds with trading. That many be good advice for many or most, but would be wrong for me. 

The ones sold this year so far include LXPPRD, SCMP, AINV, and NADX. The National Dentex was the best percentage move, going from $1.27 to 4 really quick.  

I certainly agree with the mutual fund manager interviewed in the Barron's article, Preston Athey that many of these low priced stocks will expire in bankruptcy. The risk of a total or substantial loss is omnipresent which is why I never devote much money to any of them with a current limit of $300 per name.  I was not familiar with the two that Atney mentioned in the Barron's article but I did add them to my list of potential lottery ticket purchases which has about 200 names on it. I will adjust the $300 (used to be $200 until RB change the rule) up by previous profits in the security. So I could buy a lot more of Sunopta, which I am not going to do, or another 100 of Cyber which would put me over $300 this round but not after the adjustment for the previous profit made on that stock. As RB said in an earlier post, LB has developed rules on top of rules, modifications and adjustments to rules, exceptions to rules, exceptions to exceptions, all designed to manage risk, and this is just some of the rules on purchasing stocks that are less than $5 and have been thrown out with the trash by most other investors. 

The duration of risk that I am willing to assume for the consumer product stocks that I have purchased is no longer than 10 years. I know that a fifteen year bull market is pushing my luck. At the prices paid, I am comfortable evaluating my risk/reward in a 2 to 5 year time frame. I can not say what will happen this month or this year with them. Just that I comfortable that my reward with them over a 2 to 5 year period  is likely to be better than 10% with their dividends, and I can pick my exit point later during that longer duration period to achieve that limited goal. With a little luck, it is possible that I may be able to harvest a double in five years with the dividends. With favorable economic conditions, I might hold for 10 years. The risk has to be assessed constantly, in that something unforeseen and extremely negative may happen causing me to reevaluate one or more of the companies.  But that is part of an ongoing risk analysis. The analysis that I made about them now is a duration risk over a relatively short period of years, not decades, not days or months. 

DISCLAIMER:
  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  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.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. 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. 

Friday, March 27, 2009

Sold AINV and DDT/UBS on DD

Dimon told reporters that business turned a little tougher in March. 


That one statement caused at least 1/2 of the decline today 

I went ahead and sold the 50 AINV bought in the IRA at 2.35 earlier this month at $3.50, a large percentage gain with the dividend but not much money. Buy 50 AINV at $2.35 in IRA/Revisions to top Twelve Causes of the Not So Great Depression

I could not resist the company at the price paid, but I do not have a lot of confidence in it.

I read a story in USA Today that a man was arrested for stalking Shawn Johnson. USATODAY.com He had a loaded gun in his vehicle. In Tennessee, it will not be long before you could be arrested for not having a loaded shotgun in your vehicle. The State Senate did recently pass an amendment to the State Constitution outlawing abortions under any circumstances, including to save the life of the mother.  Memphis Commercial Appeal
  
Most likely, when this amendment to the state constitution clears the legislature this year, and one other term,  which is the top priority of the state's GOP and likely to happen, it will have to be submitted for a vote.  I do not have a problem with voting on that kind of issue. 

I bought a few days ago a junior debt issue of Dillard's at $5.82. This was highly speculative when I purchased it. Moody's has downgraded DDS debt further into junk Forbes.com This one is questionable considering the large amount of debt that is senior to this junior bond. Fortunately, the company does not face any large near term debt maturities. I went ahead and sold my 50 shares of DDT at $7.4. LB says that the risks of the junior bonds with long maturities that are falling deeper into junk is not worth the risk now.  Investments in these lower tier junk issues have to generate a better total return potential, with a shorter maturity, to justify their heightened risk of loss-DKR came to mind as an alternative. 

UBS expects DuPont's agricultural business to record 15% annual growth over the next five years and account for 50% of earnings by 2013. Stocks To Watch Today 

UBS initiated DuPont with a buy.

Dupont was one of the first stocks acquired by RB on 3/6, bought at 16.68, when it started its frolic and detour. 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

A prior position was unloaded at over 45, but I am inclined to keep what I have bought since that last sale. AMERICAN INDUSTRY: END OF DAYS?

I suspect that the recent rally from the lows will run into some tougher resistance now. The DJIA has had a powerful rally, up 17.34% in three weeks.  Yet, it is not clear that a recovery has taken hold. At best, there are some signs of stabilization. Next week, I will concentrate on adding one or two names, possibly one pharmaceutical company and another consumer staple. The S & P closed the week at 815.94, just playing a mind game with my 815 rule. Maybe we should not have too much confidence in a rally that started with the number 666 on the S & P 500.  
The low happened intraday on March 6, 2009 at 666.79.   

I listen to what Whitney Tilson has to say.  CNBC.com

DISCLAIMER:
  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  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.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. 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. 

AINV Upgrade, TGB Share Float/Casinos & Debt/Risk Management for a Single Security/AIG Risk Managers

The WSJ reported this morning that many of the senior risk managers at AIG still have their jobs including William Dooley who has authority over the Financial Products unit.WSJ.com   I would certainly agree with anyone who advocates a complete house cleaning of AIG's risk managers.  One comment made by Liddy in his congressional testimony is fascinating to me.  He testified that the risk managers were "generally"  not allowed to go into the financial products unit to examine the risk.  Cordoning off this business from risk controls had to be done with the approval of senior management.   In other words, as with other institutions that failed, there was a deliberate effort at the top to undermine effective risk control that would hinder the Masters of Disaster from earning hundreds of millions for themselves.  Anyone who put their hand in front of the meat they wanted to devour would have their hand bitten off.  A similar problem happened at Merrill Lynch where anyone opposed to Stan's effort to pile on irresponsible risks had to find other work.
Take A Short Term Profit vs. Hold as a Part of an Asset Allocation Plan/ J P Morgan: Extreme Negativity on GE/ Liesman and Lewis/Buys: GRT & GIVN
This is why I would have suggested that firms like Merrill and Citigroup would have been better off with an African Grey parrot at the helm rather than Stan and Chuck.
I do understand why Americans are tired of hearing about the titans of finance receiving hundreds of millions for engineering colossal failures.

An economist at ING Bank, Rob Carnell, does not believe the economy has stabilized. WSJ.com

The casino industries current problems are a good lesson in what happens when a firm expands with excessive leverage that can only be serviced by a continuation of good times almost indefinitely. MarketWatch

Jon Markman makes a case against the consumer staple stocks that I have bought this month in this article.   MSN Money 
He claims there has been a "radical" shift from brands to low cost chic. 

I received an inquiry about why I viewed the sell of 50 shares of LXPPRD to be a risk reduction. When I made initially the decision to buy 50 shares last quarter, the initial risk/reward assessment for that security was to limit my exposure to around $350.  When I decided to transfer the risk to a retirement account, primarily due to the tax implications of a deferred cumulative preferred dividend, I waited for an opportunity to buy the security at a price close to my original purchase price which opportunity came a few days ago at $7.  So, temporarily, I had more than my allocation.  So, risk was reduced in two ways.  First, by selling 50 I went  back to my original maximum exposure level, but I also realized a profit of around $125 with one dividend on the shares sold.  When managing risk for one security, I will reduce my exposure limit by the amount of the monies previously received from trades and dividends, not for tax purposes of course, but simply to determine my net exposure to a particular security in my risk analysis.  So, looking at this way, risk in the existing position in LXPPRD was reduced from $350 to $225 and will soon be reduced further on receipt of additional dividends.  Ultimately, for many securities, risk will be reduced to nothing when examined in this manner. Then,  I revert to saying  playing with the house's money.  The recent smack down in Synta did not hurt as much since my position was financed with the house's money on trades, which is one risk reduction technique to use in a highly speculative security.  I view Synta as a wash even though my last position was a loss. I was still in it  due to a potential payday with the house's money that I viewed as worth the risk which ultimately proved unsuccessful.   SNTA BLOWUP/ Bought WR/Obama Screws Sallie Mae & Health Care Companies/Hyperventilating on Taxes/
I am revisiting Synta to highlight the reason for risk management of a particular position as part of an overall risk management strategy which would include broader categories such as shifts in the asset mixes, such as reducing stock exposure and moving to cash. 

One form of risk that is difficult to manage is short versus long term risk.  At the start of this month, I believed that the long term risk of buying securities when the DJIA was at 6600 was small.  That is, if I could wait and hold a position purchased in a quality company for five to ten years, my risk was negligible.  But, balanced against the assessment of the long term big picture risk is the short term risk of lost opportunity.  Every investor only has so much capital to invest, no matter how much money you have.  If I bought shares in DuPont at $16, a price last seen 20 years ago, then those funds would not be available to buy DD at 12.   RB, the one in charge of the big picture, abandoned the risk controls established by LB due to its big picture assessment of the balance of risks shifting decidedly in favor of the long term when the DJIA was at 6600, which means in effect a perception that the long term reward was high and the short term risk of loss opportunity was low.  The reward/risk of this long/short risk analysis is more in balance now.  I refer to RB as it because that is what it is, my Right Brain, engaged in constant chatter and dialogue with the other it, LB. 

Republicans blame black people for the economic crisis while the President of Brazil blames "white people" CNBC.com   Maybe both sides of that argument need to focus on other factors besides skin and eye color. 

Taseko Mines (TGB), a lottery ticket, floated almost 14 million shares in an offering at $1.45 Canadian.  Yahoo! Finance  I would much prefer companies to raise capital when the stock price is strong, rather than increasing the share base at depressed prices to raise necessary funds.  I assume that TGB needs the 20 million or so to fund expansion.   

BMO Capital Markets upgraded a recent lottery ticket purchase, Apollo Investment Mangement (AINV) to outperform. Buy 50 AINV at $2.35 in IRA/Revisions to top Twelve Causes of the Not So Great Depression AINV: Summary for Apollo Investment Corporation - Yahoo! Finance   The current dividend yield at my purchase was over 40%.  This one just went ex dividend after my purchase at $2.35.  It makes LB feel a bit queasy so there is a hair trigger on the position. 

Thursday, March 26, 2009

Phoenix Senior Bond: Too Wild for LB/

There has been recently a good rally in the Phoenix Insurance senior bond, PFX, that gained steam just by the company declaring the regular quarterly interest payment. When I last mentioned it, it was trading at around 3 bucks and yielding about 50% at that price. Buy of HNZ at 31.67/Tax Advantages of Equity Preferred Dividends/Foreclosure Acceleration/Disney Downgrade by Pali/Cap & Trade/NADX That was on 3/11/09. It goes ex on Monday and I still own 100 shares of this speculative bond. The common shares just passed a buck, having doubled from an even less soothing 20 cents. The Phoenix bond closed today at $8.46. RB likes that kind of movement, but LB is just unnerved by it. The sheer velocity and magnitude of that kind of movement is symptomatic of extreme risk and an inability to price risk with any degree of confidence. Having disposed of the shares in my retirement account, LB will keep the remaining position in PFX to humor RB, keep it distracted and occupied-like giving a toy to a tot so that serious adult business can be transacted by LB.

The 30 year mortgage rate has hit an average of 4.85%. CNBC.com
It would be reasonable that many will take advantage of this rate to buy and refinance. It is not often that a tremendous drop in price happens at the same time as historically low financing. This is the lowest 30 year rate since the survey was started in 1971.

Ed Yardeni says this rally has the feel of a bull market beginning. CNBC.com
Other pundits say it will end it a couple days as institutional investors finish their window dressing for the end of the quarter. Stock Market Insider: Bulls Could Rule for A Couple More Days - CNBC.com What we are seeing does have some characteristics of a bull market start including a major break from the downtrend, noted in a prior postAdded to UL/Sysco & Dupont Mentioned in Barron's Online, plus several strong follow though days, and intra-day reversals of downtrends to finish strong toward the close. It is still too early to know however. In any event, cash will not be committed to stocks from the 30% cash allocation raised in 2007 until the VIX signal is given, and the three month period for the all clear signal has not even started to run yet, not even close.

Sold 1/2 of LXPPRD: Risk Reduction and Risk Transfer/Bought SLGPRC: Anticipated Risk Reduction and Transfer

Today, I sold 50 shares of LXPPRD at $8.9 held in the taxable account that was bought at $6.6 last quarter. BEEPRA VIX LXPPRD/ More on VIX AND ASSET ALLOCATION  This was part of risk reduction and risk transfer technique for an individual security holding viewed as high risk. Buy 50 LXPPRD, Bought PG/ Lexington Realty/Outrage at AIG/ I decided to take the risk on this cumulative REIT preferred issue in my retirement account, where any deferral of the cumulative dividend will not have a tax impact. The stock is ex dividend tomorrow and I have already replaced the shares, sold today at a profit, with a purchase at $7 in a retirement account.  I am not concerned at this time about the security going to zero but I have to be aware of the potential for deferrals of preferred dividends by certain REITS.  This class of securities is both a high yield opportunity at the currently depressed prices and a high risk danger due to the credit crunch, large debt loads and the need to refinance debt coming due, and the drag the recession is having on their operations.  

My goal is to achieve a 10 to 15% annualized yield on cumulative REIT preferred securities as a sub-asset class, including dividends and netting profits and losses on all positions. This requires some trading to take advantage of their volatility.    

I am also going to shift my S L Green cumulative preferred position out of my taxable account to one of my retirement accounts.  I am going to wait for the position in the taxable account to recover from its recent swoon before selling it.  In anticipation of that event, I went ahead today and added more shares in SLGPRC in the retirement account by buying 50 at $10.50.  It goes ex dividend tomorrow, but I am not concerned by tax consequences of dividends in that account including buying a dividend shortly before the ex date.    This brings my total position in the retirement account to 80 shares, and I own 100 of S L Green's other preferred, SLGPRD, in my taxable account.  I also intend to increase my common share position to 100 shares as soon as I develop more confidence in the recovery of NYC real estate. Being a native of Tennessee, I am hardly an authority on NY, and Donald Trump is not in my Rolodex.  I have more confidence in SL Green, however, notwithstanding my  severe knowledge limitations being a member of the hoi polloi (not in the derogatory sense) from the hinterland, than Lexington Realty.  The dividend yield at my most recent purchase is around 18%. SLGPRC Stock Quote - Sl Green Rlty Corp Stock Quote - SLGPRC Quote - SLGPRC Stock Price

The prospectus can be found at: www.sec.gov

It is a typical REIT cumulative preferred issue. It is very negative to me that it has no maturity date. The dividend has to be paid in full as long as SLG pays dividends to the common shareholders. Par value is $25.  This type of security would be far more appealing to me if it had a maturity date, even one twenty to twenty five years from now, a time certain when I know that par value has to be paid by the company and not so distant in the future that I will not likely live to see it. 

I am not entirely sure why RB is being drawn to the beaten down financial stocks this month. I do remember the horror from the early 1990s when many of them melted down to near nothing, as now. For those that survived, that was a time to buy but LB has a lot of objections to the picks being made by RB as lottery tickets and the timing of the purchases now, when the darkness still envelops them. But RB was just fascinated looking at the charts of several financial companies after their near death experience in the early 1990s and started to beat his chest, howl and said maybe this time is not different-worse yeah, but not different in the long term sense of the word. LB just views the lottery tickets as a sop to RB and is always circumspect about the kind of cliches disguised as arguments advanced by RB.    

I think that I will go back to a profile picture from a few years ago that shows the essence of LB.  

The 7 year auction of treasuries was well bid today. WSJ.com

I am going to wait to add to my hedges in PST and TBT until I know that the Fed's manipulation of the longer dated treasuries is near an end. There was a good rally today in my TIP position which I do trade. 

So far, I have made a significant shift in asset allocation over the past 30 days out of short term individual bonds into stocks. The cash allocation will not be disturbed without a VIX signal. I am still keeping tabs on my cash flow, however, which will be invested in stocks as soon as I receive my 815 signal at the end of this month.  
  
DISCLAIMER:
I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. 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.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. 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. 

Freedom from Regulations and Irresponsibility/ Sold KXI and Bought GIS

Whatever regulations are adopted in response to Wall Street's latest foray into blowing up the world's financial system will last a few years until undermined or repealed by those who believe that any regulation of wild west capitalism for the profit of a few individuals restrains economic growth.   WSJ.com  Even now the GOP continues to assert that the current financial meltdown was the responsibility of poor minorities, Barney Frank and the Community Reinvestment Act and had nothing whatsoever to do with  their ideology.  Oddly, many of them are arguing that even less regulation would have been the magic elixir that would have prevented the crisis. So, even though they have just lived through the current meltdown, they have learned nothing from it and are already geared up to prevent any changes in the regulatory scheme.  Any information inconsistent with their pre-existing beliefs is just ignored, and there is an enormous body of evidence that must be dismissed by them to persevere in their beliefs, some of that overwhelming amount of evidence is discussed throughout these posts.  For many of them, it ultimately comes down to increasing the amount of money in their pocket and an constructing an ideology around that goal to justify the consequences to others.  Stripped of its verbiage, the ideology can be paraphrased as freedom to be irresponsible.   The same mindset, of a Tom DeLay who wanted to be free to spray pesticides without regulations, or the polluter who wants to dump harmful chemicals into water or air, or the company who wants to be free of rules for worker safety or the Masters of Disaster who want to do as they please, all regardless of the consequences, is the same, freedom to do as they please regardless of the consequences to others as the central core of their belief system.    

I continued building my personalized consumer product ETF by buying General Mills today at $48.52.  I am now far enough along in this endeavor to dispose of KXI, the ETF for world consumer staple stocks,  at 42.75 that I recently bought at  39.09 in the Roth on 3/11/09. BUY OF KXI/CXW, FRE, COMCSA, EBAY /FRUM on Limbaugh/Barton Biggs Back and Forth  My intent was to construct a personalized version of the ETF for world consumer staple stocks with my own selections and weightings, hopefully taking advantage of weakness in this sector to establish positions for a long term holding period, with some maneuvering to reduce risk in individual names by taking advantage of volatility, as shown in the recent Coca Cola trades. 
So, this month I have added new positions in Unilever, Kraft, Campbell Soup, Nestle, General Mills, Proctor and Gamble, Sysco, and Heinz, and sold 1/2 of the Coca Cola position already.  


General Mills recently had an unfavorable earnings report. Hedge Funds Receive Bailout Cash/General Mills/Lottery Tickets & NADX  No doubt this solid company faces headwinds in the months to come.  The stock got hammered pretty good after this report, taking some of the risk out of establishing a long term position at the current price.  I read the recent Barclay's report early this morning.  That firm has an overweight rating but reduced its price target from  $74 to $56, fair enough after that last report. But I wanted to illustrate a point with a comment made by this analyst.  He points out that GIS faces two headwinds, one is from currency exchange which now may be tilting in their favor.  Currency exchange issues, relating to the relative strength or weakness for the dollar, ebb and flow, back and forth.  Who really knows about next quarter or the remainder of this year?  But the other point made by the analyst shows the mindset of many institutional investors.  GIS plans to flow through to the 4th Quarter 2009  EPS from its extra 53rd week thus making comparison year over year with 2010 tougher.  Wow. Why would I view that information as important or having anything to do with the valuation of the company?  Now, that I know it, assuming that I do not forget about it which is what I should do with that kind of information,  maybe it will give me a long term advantage over those who buy and sell stock based on such considerations.  Whatever, I do agree with this analyst that GIS will be under pressure for an indeterminate amount of time until new information puts investors at ease about the problems reflected in the last report. 

DISCLAIMER:

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  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.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. 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.