1. 2010 Strategy: Well it was an excellent decade for HQ's trading operation, by being unconventional ( naturally contrary of course) and thinking outside the box. Outside of HQ, the DJIA average had its second worst decade falling 9.3%. And it was worse for the S & P 500 and Nasdaq averages falling 24.1% and 44.2% respectively. MarketWatch Barrons.com
And do not forget about money illusion, as Professor Schiller so ably discusses in his book Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. OG has been reading that book now for about 6 months and at a blazing speed for him, almost 1/2 of the way through it now with a scheduled completion date of 5/1/2010. One form of money illusion is the failure to take into account inflation or deflation as the case may be at a particular time in history.
It is not enough to climb back to the same level as 1999 to be even again. During the lost decade, inflation has increased and the purchasing power of the those stock market dollars has declined in real terms. So, it is far worse in reality than the headline numbers suggest.
HK was looking at his portfolio on Thursday, and the HTs did an okay job in 2009, up about 42% with 30% in reserve just like the Talmud recommended, but the allocation was more a result of the VIX Asset Allocation Model that gained considerable street creed with the Headknocker based on developments in 2008 and early 2009, saving HK a six figure sum. Admittedly, HK did not know about the Talmud's approach to asset allocation until the other day, but the LB appears to be on the same wavelength as the unknown writer of that ancient text. Item # 6: Roger Gibson's Book
But HK is bored with all of the conservatism reflected in the current asset allocation and security selection, with a boat load of bonds, floaters, preferred stocks, utilities, blue chip dividend paying stocks etc, and HK wants some more excitement now. So, HK has decreed that all cash flow from dividends and interest paid into the taxable accounts, starting on 12/31/09, and throughout 2010, shall be used to buy small positions in speculative stocks. HK wants some juice, and expects the HTs to improve on their performance in 2009.
The last day of each quarter is a good pay day, and there is more left over from 12/31 to invest in this more speculative stocks after buying VTAL, ACET, and HQS yesterday. Thus until further notice, the Old Geezer will be the HT, assisted by the RB, and LB shall be enlisted to perform whatever grunt work is required since that is not exactly the forte of our OG and RB.
Besides, as HK noted, the LB does not need any sleep anyway, being a 16 year old Stock Stud, and needs to start working 24/7 to advance HK's capital position by 50% in 2010, which caused a notable sigh by the LB. To assist our new HT for 2009 to achieve that goal, HK will grant one exemption per month to the LT maximum of $300, with that exception still requiring a less than $600 investment. Speculative investments such as the VTAL buy will also be tolerated by the HK. By speculative, HK also includes any large, more or less stable company, that does not pay a dividend, such as Cisco or low dividend payors like Corning. Actually, HK views anything other than a T Bill or a savings account as speculative, but views a nice consumer stable stock like Sysco or Coca Cola to be less speculative than a non-dividend paying technology stock like Cisco. Outside of the LT category in 2009, there were very few buys of non-dividend paying stocks, limited to small positions in Berkshire, Yahoo and Activision. This will increase by a large factor in 2010, though the exposure will be confined to the investment of cash flow, rather than cash reserves.
Some cash reserves will be used only if the VIX Asset Allocation Model flashes a green signal.
The shift in strategy for 2010 is due to the current outlook of staff. The reasons for the gains in 2009 are not likely to be repeated, so staying in the same groove as 2009 will not be that productive.
The first reason for the huge percentage gains was the performance of REIT preferred stocks, Trust Certificates, Trust Preferreds, floating rate preferred stocks, European hybrids, synthetic floaters and other bond like securities. For those who read this blog regularly, you might be under the mistaken impression that investing in TCs, TPs, European hybrids, & preferred stocks was something ordinary and business as usual here at the trading desk. Actually, prior to October 2008, I would doubt more than 10 grand was devoted to those sectors in total over the ten year period prior to 10/2008. Those types of securities were viewed as worthwhile during their meltdown period so concentrating buying activity in them was an exception to normal trading activity. So the shift of assets into those sectors was viewed more as a one off event, a brand new development, possibly a once in a lifetime opportunity for someone my age, a very spry 58 years old. This opportunity has now passed.
Staff here at HQ does not expect any further capital appreciation in these securities as a group, and will test this thesis by keeping a list of the year end 2009 and 2010 values. However, given the income generation, most of them will be kept.
The next major cause for the 2009 results was the shift into stocks in early March, primarily consumer staples and other blue chips, that had good runs, and have mostly reached what LB considers fair value.
The last major contributor was the decision to invest cash flow during the entire course of the bear market, with an emphasis on LTs, which has worked out better than in any other year, primarily due to the volatility in the market, both up and down and secondarily to stock selection. To achieve better than market returns with far less volatility, which is the goal, a different strategy will need to be employed in 2010. It is also currently expected that some long term fixed coupon bonds will need to be jettisoned during the year due to increasing issues involving interest rate risks.
Further, in HK's fiat # 3,495,339,530,753, promulgated on 12/31, the Great Leader instructed the LB to invest the proceeds of any LT sold in 2010 into an income generating security that passes its standards. This shows that the HK takes the interest and opinions of all the peon minions at HQ to heart. If the more speculative strategy is successful, then ultimately the number of securities producing income should be higher at the end of 2010, producing the desired compounding effect.
HK was satisfied with these pronouncements, as a guide to the assembled multitude of pion minions and minion peons at HQ, all the little people here at HQ, and now turns the trading desk over to the Old Geezer for the start of 2010. In conclusion, HK wanted to know whether the LB sent Leona Helmsley a Christmas Card last Christmas, thanking her for coining that memorable phrase which is much appreciated by the Great Leader. And it was that last statement that cause the most anxiety to the LB. Could it be, LB mused, that the HK and the OG were one and the same person or maybe in the process of a merger, and it could not be disputed that the OG was an embarrassment to the LB, for OG was way past his prime, a distracted mind turning to mush LB noticed long ago, and if this was so, that was a disheartening thought, and a dark cloud settled over the LB at the dawn of the new year. LB did not know for how much longer it could save the trading operation from falling into chaos controlled by that No Wit.
2 INTEREST RATE RISK & BONDS: I suspect that many individuals are not fully aware of how a rise in interest rates will impact the value of their bonds. This article from Seeking Alpha calculates the impact on the price of a $100,000 10 year treasury bond bought today at 3.8% . If the 10 year rate rose to 5.3%, which is where it was in June 2007 (weekly constant yield shows a high of 5.2% in 6/07: federalreserve) , the value of that bond would fall to approximately $89,479. This would not be an exact figure but I would expect it to be close. Of course the holder who buys the individual treasury bond can recover the full amount of the investment by simply holding the bond until maturity, and simply forego earning the higher rates offered by newer treasury 10 year bonds. The owner of a bond mutual fund does not have that option. The fund has no maturity date. The fund does not promise to pay your principal back on a date certain. It is conceivable that during a long term secular bear market for bonds for an investor to lose both principal and to suffer losses in the shares bought with reinvested dividends. I suspect that many individuals do not understand the consequences of interest rate risk and how that will impact their future returns in bond funds. I simply draw that conclusion by the very heavy inflows into bond mutual funds after a long bull run in bonds, which I would start in 1982 with a few hiccups which are always present in a long term secular bull market. That bull run has resulted in a rise in prices and a fall in yields to low levels. The danger is obvious. For BND: Is it Safe is not the Right Question. Instead Ask What are the Risks & Rewards/Assume Lost of Principal Possible
And, I recently said in a post that the most important asset allocation decision for the next decade will be the percentage allocation to bonds, and how the bond allocation will be structured among different sub-categories. For purposes of my bond allocation, I treat equity preferred securities as bonds, since I view their bond characteristics to be more dominant then their equity features. Equity preferred stocks are of course equity and are perpetual like common stock. But, there is no equity interest in the business represented by owning a preferred stock and investors rightly focus just on their coupon yields. The coupon yield is all that an investor has and that it is why I lump them with my bonds for asset allocation purposes, while recognizing their low seniority and other risk factors.
This is a link to a straight forward explanation of interest rate risk, and how it impacts investors in bond funds and individual bonds differently: Rising Rates and Your Investments
3. SCEDN (OWNED): I did not notice until yesterday that this equity preferred stock went ex dividend on 12/31/09 at $1.3373, payable on 1/31/2010. This will be the last coupon at the fixed coupon rate. This one is about to turn into a nice floater based on my $84 cost: BOUGHT 50 SCEDN AT $84
4. Bought 100 of the ETN LSC at $9.3 Thursday (see Disclaimer): This is a link to the web page for LSC: ELEMENTS ETN Products The note is a senior unsecured obligation of HSBC USA. This particular ETN will use a long/short strategy based on trends in certain commodity sectors. elements/Prospectus-LSC.pdf This one is discussed in a Morningstar report linked at Seeking Alpha. The web page for LSC only shows the long/short positions from November as of today, and apparently this ETN has no short positions representing a change from October when there were some short positions.
This is a link to a recent WSJ highlighting some of the differences between ETNs and ETFs. One main difference is that an ETN is in fact a note, which brings into the equation a credit risk factor. This is a relevant question particularly given what happened to Lehman. Another issues involves tax treatment, which is discussed in that article, and more detail is provided in this link from the ELEMENTS ETN site.
5. Bought 50 HQ Sustainable Maritime (HQS) at $7.04 (Rule Violation for Lottery Ticket Category) (see Disclaimer): Since HK is at the helm of the Trading Desk for the last day in 2009, with SUPREME POWER, at least within the confines of HQ or more appropriately the two square feet surrounding this Imac, LB's rules, all ten zillion or so of them, carry no weight. So, over $350 was spent buying HQS last Thursday, $50 or so over the Nerd's maximum limit for LTs and no exceptions apply.
HQS has its headquarters in Seattle, but is for all practical purposes a Chinese company. It was picked up in a screen looking for cash rich companies. HQS has about 55.22 million in cash as of 9/30/09. Form 10-Q The market cap is currently around 104 million at the $7.04 price, so it is selling near its cash on the balance sheet.
Price to sales is currently around 1.46 and price to book at .94. HQS: Key Statistics for HQ SUSTAINABLE MARITIME The current consensus estimate is for earnings of 74 cents this year and 92 cents in the 2010 calender year. HQS: Analyst Estimates When I started to research it, I went to YF as usual as my first stop and saw that Scott Black liked the company:MarketWatch.com The company earned $.268 per diluted share in the 3rd quarter.
HQS describes its business in the following manner:
"We are a leader in all natural vertically integrated aquaculture and aquatic product processing, with processing facilities located in Hainan, People’s Republic of China (“ PRC”). We market our products in Asia, America and Europe. We have two processing plants in Hainan, one that processes aquatic products providing all natural tilapia and other aquatic products, and the other processing marine bio and healthcare products. We seek to expand our operations through providing additional processing facilities (e.g. the construction of our third facility in 2009, which will process extruded feed) in China and increasing our marketing efforts throughout North America and Europe. Our current sales activities are primarily directed to distributors within PRC, rather than within U.S."
More can be learned about its products at the firm's web site: Our Products - Tilapia - HQ Sustainable Reuters always has a good summary: Reuters.com The key developments page at Reuters shows that HQS sold some stock last summer at $8.5: Reuters.com
Black said in the interview linked above that the company is attempting to expand its tilapia sales into the U.S.
6. Bought 50 Vital Images (VTAL) at 12.68 (see disclaimer)(New 2010 Speculation Category per HK Fiat): This was the non-LT "speculative" stock bought under the HK's new edict. The current year has not been kind to VTAL, and the analyst's expect another loss in 2010. VTAL: Analyst Estimates for Vital Images, Inc. Vital images provides the medical profession with software that allows for the creation of two-dimensional, three-dimensional and four-dimensional images from CT scans. A more detailed description of its business can be found at Reuters.com. This is a link to Reuters Key Developments page.
The stock is selling at a mere 1.25 times book value. VTAL has no debt and $8.74 per share in cash. The total amount of cash was 140.3 million as of 9/30/09. The market cap at my price is around 181.5 million. This company came up on a screen but I have been familiar with it for years.
In the last quarterly report, the CEO stated that there are "encouraging signs that our marketplace may be improving", and he further claimed that the firm's customers were "excited" about the launch of a new product.
The stock was trading at over $30 in 2006 and 2007, and I stayed away from it then based on valuation. Since early 2008, the stock has moved mostly in a stable 10 to 15 range, and has only recently broke above its 200 day moving average. Vital Images, Inc. Share Price Chart | VTAL Hopefully, this link to the 3 month chart will work which should have the 200 day line, and shows this break more clearly: Vital
7. Bought 50 Aceto (ACET) at 5.2 (Lottery Ticket Category)(see Disclaimer): I had never heard of this one 24 hours before it was purchased, and it came up in a screen. After researching it, I believed two things about it: the current price undervalued the company significantly and the firm was just uninspiring and lackluster. I will simply refer to the Reuters profile description, and highlight a few details. The reader may have a good idea about what I am about to say. ACET has no debt and about 58 million in cash: ACET: Balance Sheet for Aceto Price to sales is just .43. Price to book is .89. ACET: Key Statistics Finance The firm is profitable and the one analyst that covers it forecasts a 64 cent profit in its F/Y ending 6/2011, up from .29 in F/Y 2010. The current market cap is about 128 million at my price Thursday. And the Chairman and CEO just stepped down.
This is a link to the last quarterly report. 10q
The annual report was filed in September 10k