Playing Distributions in Closed End Funds

It's a year end. And it's time when Closed End Funds (CEFs) are making their yearly distributions. Many of these funds also have dividend reinvestment plans for some investors.
Sometimes funds had a good year and distributions are significant. In this case, price of shares on the ex-distribution date goes down about the amount of the distribution. But, if fund has a dividend reinvestment plan, fund management has to buy back shared in the open market to make those distributions. Usually CEF just can't issue new shares, that's why they have to buy them back in order to make DRIP distribution.
I had some experience playing big distributions before. Usually you need to look at a drop of 5% or more, otherwise market noise kills any profit.
OK, this is the theory. I made my first practical move today: bought shares of Morgan Stanley India Investment Fund (IIF).
I'm going to sell shares when they recoup between 30% and 50% of the price drop.

Full disclosure: at the time of publication author had a long position in IIF. Positions can change any time.

Selling Some BAM

I sold a portion of my Brookfield Asset Management (BAM) position today.
There are several reasons.
First of all, stock is up a lot. Stock shot up more than 50% since it's yearly bottom in July.
Second, I'm starting to dislike BAM. Company missed last two quarters, it trades at almost 30 future PE and projected PEG is way over 2. I'm going to do more research and determine if I want to get rid of position completely. But reducing it now looks like a good idea.
Third. We are in a strong year end window dressing mode. It's a good time to sell.
Last but not least. This portion was bought long time ago at higher price. Selling it actually creates a tax loss, which isn't that bad to reduce tax profit for the year.


Full disclosure: at the time of publication author had a long position in BAM. Positions can change any time.

Financials Are Up: Boom or Short Covering?

Banks are up last couple of weeks. I'd be happy to believe Cramer, who said that it's a great boom in financials. But something else draw my attention.
Bank common stocks are up, right. At the same time, bank preferreds are down. Just couple of months ago we saw the opposite: common down, preferreds up. It was the time when all fixed income boomed, including preferreds.
There are several explanations for current action. Maybe Cramer is right and banks just joined the Santa rally. Maybe funds are unwinding the pair trade "short common, long preferreds". Or maybe we will see a bullish action in financials next year. I don't know, my crystal ball is not showing anything.
Time will tell, so far I'm not planning any actions.


Full disclosure: at the time of publication author had long positions in banks: GS, USB and in bank preferreds: PGF, BWF. Positions can change any time.

Playing AGNC

I sold part of my position in American Capital Agency Corp. (AGNC). I bought shares of this REIT to enjoy a huge, almost 20%, yield. Why did I sell it then?
Simple. In the last 5 quarters, price of the stock fell after ex dividend day more than the dividend itself. Quite unusual, and quite inviting pattern. I think I can make more money buying it after ex dividend date around $27 and selling in the range $29.50-$30 right before next ex dividend date.
Why is it happening? Don't know and don't care. As long as this arbitrage is working, I'm running it.

Full disclosure: at the time of publication author had a long position in AGNC.

Buying Back EAD

Bought back Wells Fargo Income Advantage Fund (EAD) yesterday..I sold it July and October, when it was much higher than now and traded at big (up to 5%) premium to the NAV. Now it's just above $9 and trades at a discount to NAV. With yield almost 10%, it looks like a bargain.


Full disclosure: at the time of publication author had a long position in EAD.

Adding to Intuitive Surgical Position

I pulled the trigger today. Added to my Intuitive Surgical (ISRG) position.
Stock was going down lately. When I sold part of my position last year at $308, my target price for buying back was at $260, near today's price. I have a feeling that it's near bottom. Fundamentals are great, with future P/E at 25 and PEG at 1.15.
Of course, I can always be wrong. If stock is going down more, I am a buyer.

Full disclosure: at the time of publication author had a long position in ISRG. Positions can change any time.

Waiting for Santa Claus Rally

Things look gloomy. Markets are going down. We are bombarded by bad news. Europe is falling apart, again. States are gonna default on their debts. Banks are lying about their exposure to (choose any number of) Europe, bad mortgages, bad corporate loans, bad personal loans etc.
And I am turning optimistic. There are reasons for that.

First of all, there is one obscure technical indicator: 13-day moving average. Since July of 2008 it was pretty consistent showing current trend. When one of major indices (Dow, S&P or Nasdaq composite) crossed above it and stayed this way for more than 2 days, index went up for several weeks. Same thing (with opposite sign, of course) happened when index crossed under 13-day MA. So, last Wendesday, November 24, Nasdaq composite crossed above 13-day MA. And it closed on Friday and today above this line as well. This is a bullish sign. Dow and S&P are still under 13-day moving averages. But for the last couple of years Nasdaq Composite was leading Dow and S&P.

Then let's take a closer look at current fears. Europe is not going to fall apart. They have enough money and enough will to save their economies. Yes, several countries are under attack and can't refinance current debt obligations at reasonable yields. I think we see classic bear attack coupled with media hysterics. I don't know if press is hired by bears or acts on the premise that bad news sells better than good news, probably both. But reality is that Euro zone has a big fund, more than 800 thousand Euros of emergency funding and they can double this fund without much trouble. Add to that possibility (I think necessity) of European Bank doing its version of QE, that would be enough to cover needs of every country in trouble.
States are in more precarious position. But nevertheless, state bonds are selling well, yields are not that high. And I think Uncle Sam will come to help in case of emergency. Because default of a big state would be a disaster for the whole country. I can't even think what default of California would look like.

The main reason for my optimism is seasonal. Historically last month of the year is bullish for stocks. Santa Claus rally usually comes after Black Friday. I expect it this year too. Because economy isn't that bad. Because employment picture is improving, albeit slowly. Because life is still going on, despite all the gloomy predictions in media.

Full disclosure: author has long position in SNF, which is CEF invested mostly in Spain and in CEV, which is CEF invested in California state and municipal bonds..

Sliding Slope

Big day down. But that's not the problem. The problem is that all metrics are pointing down more.

Fundamentals


Not good. Economy is kinda growing, but slow. Unemployment is still high. Banks are not lending and businesses are not trying to get more credit. QE2 so far only managed to scare everybody into fixed income and commodities and now this trade is unwinding. Company after company predicts uncertain outlook. Worst of all, inflation is nowhere to be found, unless you listen too much GOP BS.

Technicals


Broken. Indices closed third day under 13-day moving average and closing to 50-day MA. Trend is fresh and good, probably all way to 200-day MA.

Sentiment


Too many bulls everywhere. That's not good either.

My take, this downtrend is going to continue for a while. We might get some reprieve (should get one tomorrow), but fall rally ran out of steam and markets need some time to readjust and recover. I still think that we might get another rally in December (Hey, Santa, where are you?), there should be window dressing.

Not Buying Cisco Back

I'm watching "Fast Money" right now and decided not to buy Cisco (CSCO) back for a while. Maybe some time later. But not now. The reason: just everybody on Fast Money said that stock is undervalued. Yeah, right. These guys are quite representative of Wall Street. If Wall Street thinks that something is a buy, I'm not a buyer. They probably already bought their positions (some of Fast Money guys did) and now waiting for stock to go up. Good luck, guys!
Apart from that, I absolutely don't like two points of Chambers interview on CNBC:
1. Most of the missed demand is from government entities. This demand isn't coming back any time soon.
2. Predicted growth is in range of 8-10%. Doesn't work for P/E 15. Not unless company starts paying sizable dividend.

Full disclosure: author was long CSCO until November 9 and doesn't have any positions in stock right now.

One More Junction

Stock market is at another junction point. We had a great rally which started in August. As many, I didn't like this rally initially, because of correlation of stock market to commodities and reverse correlation to dollar. But rally just somehow felt right. Couple more factors fueled this rally: elections with expectations of GOP big win and promised by Fed QE2.
Elections didn't disappoint. GOP shouldn't celebrate much though. People don't vote for, they vote against. In this case they voted against obvious socialist tendencies of the administration: healthcare reform (which is not going anywhere), attacks on big businesses, Wall Street and stock market in general. They did not vote for neocons, they did not vote for social conservative agenda, they actually didn't vote against stimulus and even the horror of horrors: higher taxes for rich.
QE2 didn't disappoint either. Uncle Ben even slightly exceeded expectations. I don't have much hope for it, but it's the theme of a separate article. Anyway, QE2 is a long term story. We need to know what to do now.
And it's complicated. If rally was mostly caused by elections and QE2, then market is going down: sell the news. If it was driven by stupid idea that dollar is going to be worthless and we are going to have hyperinflation, then it should continue. Of course, it's almost the end of the year, and various window dressing strategies should come forward. Most funds should be buying stocks, to make an impression that they participated in the rally.
Metrics don't say much. Technicals are great, but they are always the best at the top. Fundamentals are improving, but they still stink. Sentiment is about neutral.
We had several sharp corrections during the rally. That's how it should be: biggest days up happen in bear markets, biggest days down - in bull ones. But last two days are different. We are going down bit by bit, which is more consistent with the top.
I'm not sure it's a top. We might as well have the rally continue into the year end. But it's a possibility. So I decided to lighten up a little bit, it's time to get more careful.
Today I closed my position in Cisco (CSCO). Reason: stock was bought after last earnings report, when it was punished too much. Tomorrow is another earnings report, and I don't know how that is going to play out But my cash position is a little bit too big, so I decided to invest in a muni CEF: Eaton Vance California Municipal Income Trust (CEV). Fund trades at discount to NAV (a rarity among muni CEFs) and has a decent yield.

Where is WIT/Brent Arbitrage?

There is one thing I don't understand about oil market. There are two major standard oil contracts on futures markets. There is West Texas Intermediate, aka WTI aka Texas Tea, traded on Nymex. And there is Brent, which is oil extracted from North Sea and traded on ICE. Usually price difference between WTI (what is usually presented to us by TV networks and internet sites as a price of oil) and Brent is below 2 dollars per barrel. But quite often this price difference can jump to 3-4 dollars in either direction.
My question is: why such price difference can exist and why it can stay for several days? Historically, price difference is below 2 dollars, so why there is no simplest price arbitrage: if difference above 3 dollars, sell more expensive oil and buy the one which is cheaper. Close contracts when price difference falls below 2 dollars.
Things would be much easier if there was a good liquid ETF for Brent. The existing one, The United States Brent Oil ETF (BNO), is not liquid at all. There are days when it's not traded at all and average daily volume is just about 12000. If it was liquid, it would be possible to short BNO and long USO, or vice versa. Of course, oil ETFs don't represent price of oil very accurately, and such trade would be riskier than direct futures trade. Anyway, I consider this trade when (if) BNO becomes liquid.

So, why there is no arbitrage?

Full disclosure: no positions.

State of the Market Report

I'm still listening to the market. But it's time to come to some conclusions. As usual, I'm trying to watch market from three points of view: fundamentals, technicals and sentiment.

Fundamentals


Hard to judge. Some companies report great earnings. Some, not so great. Manufacturing fell in US in September, this is minus. Fed is probably determined to go with QE2: big plus. I'm going to judge fundamentals as slightly bullish, because "you should never fight the Fed".

Technicals


Screaming. Major indices bounced off 13-day moving average yesterday, for the second time during this rally. 50-day for major indices is just about to cross above 200-day MA, that's Golden Cross. The only technical indicator which is bearish is relative strength: markets are grossly overbought. But they are overbought for more than a month already. Besides, overbought condition (as well as the oversold one) can be worked out with time. Technicals are very bullish.

Sentiment


Despite very bullish calls made by such insignificant people as Warren Buffet, Legg Mason's Bill Miller, Jim Cramer etc., most calls are bearish to hysterics. However, there was some turn to bullish sentiment on CNBC lately. I'd judge sentiment as mostly bearish, but changing. Being contrarian indicator, it's bullish but changing to less bullish and maybe bearish.

Of course, there is something fishy in this rally. Still a silly reverse correlation between dollar and all (or almost all) asset classes. Still grossly overpriced commodities. But as Buffet, Miller and Cramer tell us, stocks are extremely cheap compared to bonds. Something gotta give. Another development: looks like fixed income is topping now. Not sure about Treasuries, but looks like corporate bonds are at the top.

Rally is great. You make money without moving a finger. The question: when and how it ends?

Back to Even

I missed this moment. Some day in the middle of September my portfolio got back to even, compared with the end of 2007. It's up several percentage points since.

One more illustration that somebody without Wall Street experience, not a professional investor, can beat major indices in the long run. I had years when my performance was below major indices, but in most years I managed to beat them. My portfolio beat major indices for any 5 year interval since 1998. I think it's even beat for any 3 year interval, but not completely sure.

It's not blind luck. It's not some system. Just a lot of work, at least 10 hours every week, usually much more. Searching for picks, trying to understand current state of economy and markets, trying to predict trends. Sometimes right, sometimes wrong. Huge successes, like with Apple (AAPL), Yahoo! (YHOO), Google (GOOG). Huge disappointments, like TheStreet.com (TSCM). Laggards like Home Depot (HD). It's all averaged out to nice 13% annual growth since 1998.

Cause for celebration? A little bit early. I'll get my bottle of good champagne on December 31st. For now, back to work.

Full disclosure: at the time of publication author had a long position in GOOG and no positions in other stocks mentioned. Positions can change any time.

Listening to Market

First week after vacation. First impressions: market is crazy. All dollar gains of last three months: gone. Commodities shot up. Old game: if dollar is down, everything (stocks, commodities, even bonds) is up. OK, I can lament and whine, but it doesn't make me money. Or I can take different position, and remember what Niels Bohr supposedly answered to Albert Einsteins's "God doesn't play dice". The answer was: "Don't tell God what to do".
I decided that instead of telling Mr. Market what to do, I should try to understand what is it trying to tell me.

First: panic about EU countries possible default has gone. Market forgot about the issue.

Second: panic about US dollar future is back in vogue. Never mind that we are still in deflation, everybody is worried about future inflation, buying gold, commodities, and, which is funniest thing of all, Japanese yen. It's funny, because Japanese debt/GDP ratio is much higher than ours and government and Central Bank are explicitly trying to bring yen down.

Third: the only trend of the last three months which is still alive is fixed income bull market. All bonds are up, even junk.

Fourth: stocks are going up. S&P 500 index broke through 1150 resistance level, Dow Jones is above 11000, and Nasdaq composite is above 2400. This is the most important trend, because as most of my money is in US stocks, I can just sit and watch it grow.

What am I planning to do?

EU stocks. I think they are dead in the water for a long time. No action here.
US dollar:. No action either. I don't feel current trend.
Fixed income. Already sold all junk. I will keep remaining bank preferreds and REITs.
US stocks. I'm bullish long term, but don't see anything I'd like to buy now. That doesn't mean there is nothing to buy, just that I haven't found what to buy yet. That's main direction of my research for the current week.

Trend I don't see: there is a high probability that Bush tax breaks are not extended, including capital gain and dividend taxes. Capital gain increase from 15% to 20% isn't that big, but dividend rate increase from 15% to the marginal rate is huge. Why high yield stocks are going up?

I'm listening to Mr. Market...

Back to the Game

Just returned from vacation on Hawaii. Fresh and rested, I'm back to the game.

First order of business, made some changes to my fixed income positions. Out goes Wells Fargo (former Evergreen) Advantage Income Opportunity Fund (EAD). Fund curently trades at more than 5% premium to its NAV, that's too much. I'm really surprised with the rush to buy any corporate bonds which I see in the last four months. I'm all for high quality corporate bonds, but junk is bought in high quantities as well. Since EAD holds mostly junk, I don't see any reason to hold it in risky environment.
In comes more of American Capital Agency Corp. (AGNC). This is a REIT with 20% yield. There is a small risk, this company is about 800% leveraged, but it's risky only if interest rates are going up, which is highly unlikely in the nearest 12 months.

Full disclosure: at the time of publication author had a long position in AGNC and no positions in EAD.

Tired, Dazzled and Confused

I'm tired. Thinking to take some vacation soon. It's hard to take a read on this market now. It's been in a range trading since May. If it stays there, maybe it's time to buy some downward protection. I'm thinking about options on some ETF.
On the other hand, September started great. No real down day yet. Three major indices are trading above 200-day moving average. We might get a breakout at last.
Dazzled and confused. I'm going to think couple of days and take some action. Probably some protective action.

Selling some PGF

Forgot to mention it in this blog: I sold part of my position in PowerShares Financial Preferred Portfolio ETF (PGF) last Friday. Reason: plain old profit taking. I'm still holding a significant position in PGF.

Adding to Intel Position

Intel (INTC) fell below 18 today. So much for my wise idea of holding for initially trading position. Solution? Well, I bought more today. Tech company with billions in cash, paying 3.5% dividend, still growing, with almost monopoly position in CPUs for almost all computers in the world, trading at P/E 11? It's a buy in my book.

Starting American Capital Agency

Market is down so much, I just had to start buying. But nothing on the shopping list hit my price target yet (yes, I am a cheap bastard, especially when buying stocks). So I decided to invest in a high yield REIT: American Capital Agency (AGNC). I have one REIT in my portfolio already: Annaly (NLY), which has huge dividend, 15%. It can't get any better, right? Wrong! AGNC yields 20%! I bought it yesterday. Company has the same model as Annaly: borrowing money for cheap and buying mortgage obligations backed by Fanny Mae and Freddy Mac. Current sharp drop of debt yields should be beneficial for both companies. I don't expect growth from this stock, it falls into "Slow growers/high yield" category. Honestly, 20% yield is all you need from an investment. Boring though, but I can live with it.

Full disclosure: at the time of publication author had long positions in AGNC and NLY and no positions in other stocks mentioned. Positions can change any time.

I Shouldn't Have Done This. But I Did

One of Cramer's commandments says "Thou shalt never turn trade into investment". Well, I just did. Not exactly to investment, but...
Some time ago, I bought Intel (INTC) on a signal from my 3.5x2 trading system (more on this system here). Today Intel was second day up, it's a sell signal in the system. Rule number one: discipline trumps conviction. But I'm in tech buying mode. Just bought Cisco (CSCO) last week. So I decided to take a closer look at Intel. Company has forward P/E of 9.3 and PEG of 0.72! Should be a screaming buy. When you recalculate forward P/E after taking cash out of the price, it comes to 7.3! Can tech be so cheap? Why is tech, the best sector in US for the last 40 years, is cheaper than banks or railroads? Especially companies like Intel and Cisco, which have a lot of net cash.
So I broke a lot of rules and decided to hold INTC. Maybe I'm wrong.

Full disclosure: at the time of publication author had long positions in CSCO and INTC. Positions can change any time.

Buying Tech

One after another, the whole sectors are getting crushed on the market. For a while, then they are coming back. We saw it with all European securities in May and June. Now the focus is on American tech. This is ridiculous. This sector is what America is about: enterprising spirit. It doesn't need TARP; best tech companies have full coffers of cash. It's not afraid of deflation: it's in its own deflationary environment since 1970s. It's not afraid of Chinese import: survived Japanese and Korean import threat in 1980s. Tech is positioned perfectly to survive.
That's why I was surprised by market reaction to Cisco (CSCO) earnings. Company beat on earnings, missed less that 1% on revenues and didn't predict any serious slowdown. Year-to-year growth is over 20%. Company has P/E of 18.09, forward P/E of 10.73 and PEG of 1.04. These are very impressive numbers. But I think that these numbers are too conservative. Demand for networking hardware is increasing, we have mobile internet infrastructure expanding now, Internet TV is coming soon, which also will require infrastructure upgrade. Besides, company has $6.85 cash per share. If you recalculate P/E, taking cash out of price, forward P/E comes to around 7.3. This is unbelievable!
That's why I bought Cisco on Thursday. And if price goes down more, I will buy more.
Cisco is not the only tech company trading too low. I'm looking for more tech to buy right now. So far, Broadcom (BRCM) and Xilinx (XLNX) are also on my screen. Honestly, even Apple
(AAPL) is way too low. I have my own reservations regarding Apple, but temptation might be too strong.
If you think that I'm taking my ideas from James Altucher: (CSCO and these 6 tech stocks will be higher a week from now), you are almost right. I agree with James on everything but HP. XLNX is his idea I am borrowing. I found other stocks using my own research. I don't like HPQ because of management problems. Even the greatest company can easily be killed by bad management.

Full disclosure: at the time of publication author had a long position in CSCO and no positions in other stocks mentioned. Positions can change any time.

Another Critical Junction

Crazy action on the market continues. I'm not very optimistic medium term, my thinking is close to that of Doug Kass, who thinks that this year will be spent in a range. But look at a short term picture!
Second week in a row, market starts with a boom. And then falls on Tuesday. And now we are coming to a critical juncture, in technical terms. If you take a close look at S&P chart, you will see that 13-day moving average crossed over 200-day MA today. At the same time, index is still trading just a little bit above 13-day MA. If we don't have a down day tomorrow, it would be a strong bullish confirmation. Yeah, and 50-day MA is going up lately, which is bullish too.
Of course, fundamentals, to put it mildly, suck. Which was confirmed by uncle Ben (Bernanke) today. But sentiment is quite bearish lately, which is bullish. So, if we have bullish technicals tomorrow, things will be looking bright. On the other hand, if S&P closes under 13-day MA, that would be a problem and possibly sign of another leg down.
Interesting picture in fixed income for the last three weeks. Everything is going up, Treasuries, munies, high-rated corporate debt, junk bonds, bank preferreds, everything! Looks like some big guys are gearing up for deflation, although it beats me how junk bonds can be any good in deflation and associated depression.
Staying focused, careful and hopeful.

Selling some stuff...

Yesterday sold part of Evergreen Income Advantage Fund (EAD) and closed position in
Helios Total Return Fund (HTR). Both funds are well above net assets value (NAV). Both funds are not depression proof: EAD holds mostly corporate junk bonds, when HTR holds mostly mortgage backed securities.
There is something strange going on the market last couple of weeks. All fixed income is going up. Looks like some funds are doing a lot of buying for reasons unknown. Well, when everybody buys, I'm selling and vice versa.
Maybe I will buy HTR back if it goes well below NAV. Not sure about EAD.

Midyear Portfolio Review

Usually I review my portfolio only once a year. Of course, some corrections are possible during the year, but they can be done without full portfolio review.

This year is different. I already changed my economic forecast from cautiously optimistic to quite pessimistic. Austerity measures in different countries and coming tax hikes will make situation worse. The only question is: how much worse. I already decided to open positions in depression-proof stocks (here's the link). But changing situation warrants full portfolio review.


Portfolio goal. Growth. This is high beta, unapologetic growth portfolio with some safeguards and some boring investments. The goal remains unchanged.

Basic Principles. Most of the stocks in this portfolio were chosen for long term investment, which, for me, is about 18 months. Every stock is under review all the time, with major review of portfolio once a year. I can trade around any position if I feel like this. Portfolio is not diversified by sectors. Maybe "diversification is the only free lunch" (Jim Cramer), but I'm big believer in TANSTAAFL (There Ain't No Such Thing As A Free Lunch, popularized by Robert Heinlein). Diversification reduces risk, but it also reduces potential gain. No change in basic principles either.

Paradigm Changers. These are stocks of companies that are changing business in sectors or even in the whole world.

Google (GOOG)
Ultimate disrupter. Google is changing the advertising world. Company is also agressively moving to mobile internet advertisement.
Risk: All great empires were destroyed by internal problems. But there is also a threat of internet fragmentation, with ISPs and device producers restricting the use. Example: Apple (AAPL) banning Google advertisements in applications developed for iPhone and iPad.
Plan: Hold

Intuitive Surgical (ISRG)
Robotic surgery that is changing surgery of internal organs. Company has monopoly on robotic surgery right now. No changes since last review.
Risk: new technologies are being developed, legislation changes can reduce demand.
Plan: hold.


Netflix (NFLX)
This company completely changed video rentals model. It's going to put Blockbuster (BBI) out of business soon, becoming almost monopoly. I was wrong in my previous review, NFLX is so far the leader in rentals over the internet. Since last review, stock shot up. I sold significant part of the position into strength.
Risk: Things on the Net are changing quickly.
Plan: hold, add on weakness.

VmWare (VMW)
Cloud computing is all the rage, and VmWare is on the frontline. If company wants to create its own cloud, VmWare is the way to go. Since last review, stock is up a lot.
Risk: it's not clear that internal clouds would win over external ones or over software as a service.
Plan: Sell some into strength, hold the remaining part of the position.

Banks. Change of course here. I don't think banks (with one exception) will be good investments in depression time.

US Bancorp (USB)
This is a very good bank. But it has to go anyway.
Plan: Sell into strength, probably after Treasury approves dividend increase.

Goldman Sachs (GS)
New position. Bought it before well known SEC investigation became public, I'm down on this position about 4%. This is not exactly a bank, more of a broker/trader. Absolutely best Wall Street company. Yes, it's living on the edge of law, hence a huge settlement with SEC. I think company can recover and bring more profits to shareholders.
Plan: Hold, add on weakness.

Since last review, I sold Citi Group (C) position. I don't consider it as an investment anymore, but can use as a good trading tool.

Steady growers / high yield. Companies with steady growth, high dividend or both. I am increasing weight of this group, such companies are best investments in depression times.

Annaly Capital Management (NLY)
Just started this position. Huge dividend and good management are main reasons. Company makes money on distressed mortgages, current holdings are mostly supported by US Government. Since last review added to position during May panic.
Risk: possibility of management mistakes, another real estate crash.
Plan: hold, add on weakness, reinvest dividends.

Brookfield Asset Management (BAM)
Company owns a lot of high income properties, including power generation and transmission, commercial real estate etc. It's also involved in financial asset management. Sometimes referred to as "mini-Berkshire". Canadian company, can also be in "International" category. I'm changing my mind here. Company has a lot of commercial (mostly office) real estate properties, and in depression this is not the best way of making money.
Risk: successful asset management is an art, and management changes, if happen, can kill any such company quickly.
Plan: Sell part or all into strength.

Altria (MO)
I don't smoke. I don't recommend anybody to smoke. But people do anyway, and they pay exorbitant prices for tobacco products. Altria grew profits steadily in any environment, ignoring tobacco lawsuits, tax hikes and anti-tobacco campaigns.
Risk: ban on tobacco, tobacco deregulation, both are highly unlikely. Possible huge legal expenses.
Plan: hold, reinvest dividends.

Phillip Morris International (PM)
Same reasons to hold as for Altria. Can be also put into "International" category. I added to position during May-June panic and then sold some.
Risk: same as with Altria.
Plan: hold, reinvest dividends

Pepsico (PEP)
Position was added after last review. This is a "staple" company. People are buying its products no matter what. Products sold in US are also addictive, because most of them contain caffeine.
Risk: management mistakes.
Plan: hold, reinvest dividends

General Mills (GIS)
This position was also added since last review. Another "staple", and local company headquartered in Minnesota.
Risk: management mistakes.
Plan: hold, reinvest dividends

International

Indian Fund (IFN)
India is the only part of BRIC which I like now.
Risk: political.
Plan: hold, add on weakness.

Spain Fund (SNF)
Since last review, I like EU, and Spain, even less. But this fund is still priced for Armageddon, and I don't think Armageddon is gonna happen any time soon. On the other hand, fund is not paying regular quarterly dividend anymore.
Risk: EU financial and political problems
Plan: Sell if trades at NAV, look for other EU opportunities

Since last review I sold my position in Brazilian bank Banco Bradesco (BBD). I don't like Brazil anymore, reasons are outlined here.

Fixed Income. Usually very small part of my portfolio, but increased sharply in size last year.

Blackrock Income Opportunity Trust (BNA)
I am changing my mind on this position. Don't want to sell it anymore, because this fund holds mostly high quality corporate bonds and Treasuries. Good depression hedge
Plan: hold, add on weakness.

Wells Fargo Capital Trust XII (BWF).
I use it to hold cash I don't need right now. Good yield.
Risk: Bankruptcy of Wells Fargo.
Plan: hold, sell when need cash.

Evergreen Income Advantage Fund (EAD).
Changing my mind here. Fund mostly holds junk bonds, risky in depression environment.
Plan: Sell into strength.

Helios Total Return Fund (HTR).
Fund holds mostly mortgage backed securities. With depression in sight, not so great investment. As a play on agency backed paper, Annaly is better.
Plan: Sell into strength.

PowerShares Financial Preferred ETF (PGF).
This is a bet on recovery in financials plus excellent cash management tool. I added to this position during May panic.
Risk: Another crash in financials.
Plan: Hold, sell if need cash, trade around position.

Nothing is sacred. Any position can be sold any time I feel like that. I can trade around any position when I see the opportunity.

Closed Banco Bradesco

I closed Banco Bradesco (BBD) position today.. Reasons for that decision were outlined here. Right now is a good moment to sell, because, for the second time this year, BBD issued 10% stock dividend, which is equal to 11/10 stock split. Which means that stock got diluted, but the fact is not reflected in price yet, probably because this information is only available through your broker if you own the stock. At least I haven't found it on usual sites, like Yahoo! Finance. You can see it on Google Finance chart, but it takes some digging to understand. Of course, dilution will make its way into price eventually, so it's better to sell now.

Selling Phillip Morris

Sold part of Phillip Morris International (PM) position at the open. Price is quite good now, and position grew way too big after I bought two chunks during panic in May and June. Profits are made to be taken.

Book Review: Trade Like a Hedge Fund by James Altucher

This book bears endorsements from several people, including Jim Cramer. But it lacks the warning: "Careful, geek stuff", which should be printed in big red letters on the cover.

I really like the book. There are a lot of quant strategies which can be used by almost anybody. Doesn't matter if you run ten thousand dollars or hundred million. The catch is: investing world is changing all the time. Some strategies aren't working anymore. Some need adjustments. To use this book for trading, you need to be a geek (or hire one) and run backtests for strategies you are planning to use. Most of strategies also require significant computational power to search for candidate stocks.

The best feature of the book: author is trying to provide reasonable explanation why this particular strategy might work. Some are based on psychology. Some on the way mutual and hedge funds trade during specific periods of time, like end of month, options expiration week, end of quarter. Some are based just on technical indicators.

One system which probably was changed by publication of this book (or maybe quant traders forced this change): Wednesday Reversal became Turnaround Tuesday. Is it tradeable? I'm going to run backtest soon and find out.

I am currently running an experiment: trading two variants of "four down days" system. This is a link to the article describing them. Planning to run them till the year end.

The most important chapter of the book: "TECHNIQUE 19 What Does Not Work?". It describes strategies which either never worked or worked in past but don't work anymore. You should be aware that any strategy described in the book (as well as any other trading strategy) can suddenly stop working.

Full disclosure: I received the book as a gift from author.

Spain!

Today is an exception. I only wrote about investment here before. But today I congratulate Spanish Football (OK, soccer for Americans) team with a World Cup! This is one of the greatest teams ever, I enjoyed every game. Final game was dirty, Holland fought hard and fouled without second thoughts, but, as it usually happens in World Cups, class prevails.

Back to investments now.

Selling Santander

Sold Banco Santander (STD) yesterday. Stock jumped more than 10% in two sessions and I still don't like this rally. Maybe I will reenter STD under 11.

Bought General Mills Last Week

Forgot to mention in the blog, I bought General Mills (GIS) on June 30. This is a part of my staples, preparing for a long depression.

Demographics and Money

Maybe we are all looking at the wrong things? Maybe we are not in Great Depression 2.0, but in something new?

Let's take Japan. Usual explanation of current Japanese nightmare (21 years of depression and deflation and counting). Usual explanations: real estate and stock markets were grossly overpriced in 1989 and then there was no next idiot to buy either. But usually depressions of this kind end in 6-10 years. Explanation for 20 years long depression is that Japanese, instead of fixing the problem, tried to hold brave face and sweep problems under the carpet. Partially true, there are still companies with lifetime employment, banks which should've been closed, companies which should've gone bankrupt long time ago.

But there is one thing nobody is talking about. It's not exactly in economy, more likely in politics. One feature of Japanese society is that it has very low birth rate. Population is actually shrinking and immigration practically doesn't exist. Add to that high life expectancy and you get society with very high proportion of people who don't work and live on pension and some kind of savings or fixed income. What's the most important for these people? Price stability, deflation is even better. And when you have significant and politically most active part of population interested in deflation, what do you get? Politicians might not declare deflation as their real goal, they might talk about fixing the budget, prudent money policy, something else. But in reality senior population will vote for deflation.

I understand that nothing is simple in politics. And currently Japan prints money and government borrows at scary rate. But they spent 1990s doing practically nothing and lost time was very expensive.

You'd think other countries would take Japan as an object lesson. Yeah, right! On the last G8 forum what was the main theme? Recession? Deflation? Hell, no! They talked about austerity measures and cutting budget deficits. Especially Europeans. Why? Because demographics of Europe aren't much better than in Japan. Birth rates are low, populations are shrinking. Immigration helps somewhat, but immigrants don't vote, not until they are naturalized.

It can't happen in US, right? Our country is younger, birth rate is at least covering deaths, immigration is much bigger than in Europe. But our government in its infinite wisdom is going to shrink budget deficit by reducing spending and increasing taxes. Remember, young people are much less politically active and immigrants don't vote until naturalized. Population is mostly happy to hear about austerity measures. Some are unhappy about rising taxes, but they don't want deficit to increase, they'd just prefer to cut spending. Six of one, half dozen of other. Cutting deficit decreases money mass in circulation, it's a deflationary measure.

Unfortunately, modern economies just don't work in deflation. They shrink. To support increasing population of pensioneers, we need economy to grow. So the deflationist policies are leading us to a trap: economy shrinks, but fixed income people increase their incomes. Such situation is not sustainable.

I'm hope I'm wrong. I hope that austerity policies is just a fashion based on false believe that "prudent" economies work better. There is no proof for that, prudent economies lead to depressions. But this is a belief, almost a religion, and when you try to speak to zealots, it's useless. It's even worse if zealots really win from advocated policies. Working people lose, because of high unemployment and non-existent wage raises, but why would most politically active people care if they win?

Preparing for Depression

Hope for the best, prepare for the worst. I still have some hope that we avoid Great Depression 2.0, but it's still the most probable outcome. Which means that I am switching my investment strategy.
What works in depression? Staples: food, tobacco (addictive product), soft drinks (a little secret: most of US made soft drinks contain caffeine, making them addictive too), cheap restaurants, high quality high yield corporate bonds. And, something which is the best in America: tech, if you choose the right tech, of course.
On my shopping list so far:

Staples: Pepsico (PEP), General Mills (GIS).

Restaurants: MacDonalds (MCD), Yum Brands (YUM), Panera Bread (PNRA).

Tech: TBD.

Today I started position in PEP, it was low enough to trigger first buy.

Full disclosure: at the time of publication author had a long position in PEP and no positions in other stocks mentioned. Positions can change any time.

No Time for Anything...

I'm apologizing to my readers for long silence. Between work, World Cup and investment there is no time left for this blog.

Market is the craziest I've ever seen. Last two weeks most stocks traded in lockstep. I didn't have any buy signals on my 2.5x2 and 3.5x2 screens. Looks like most of the trade was in ETF universe. Daily volume charts of stocks confirm that: volume during last half hour exceeds the rest of the day! Which means that ETF managers are buying or selling stocks en mass to conform to their models.
Short term, we are going to see some kind of window dressing. No idea how is it going to look like.
Longer term, I'm in a very bad mood. Everybody is talking about budget balancing, government spending cuts, austerity measures etc. Here is what I think about it. We are, at best, for a couple of years of depression, at worst, turning Japanese. Which would actually benefit, at least for some time, people on fixed income. Doesn't make me happy.

I am working on two articles right now, will publish this and next week. Please be patient.

Going Defensive

I'm loading on defensive stocks. Today I added to my Phillip Morris International (PM). I'm also planning to add some soft beverage stock (usual question, Coke or Pepsi, although I drink neither). I think Pepsico (PEP), looks like it has better management. Then I need some food company, local favorite General Mills (GIS) looks good. Can't find any good booze company yet, people should drink more when times are bad, shouldn't they?

Full disclosure: at the time of publication author had a long position in PM and no positions in other stocks mentioned. Positions can change any time.

Fork on The Road, Update 2

This is the third article in this series. First one was written in the end of March 2009. Market switched to a bull mode then and future seemed to be rosy. Next one was written in November of the last year. Future still seemed rosy, although a little bit darker. May of 2010 changed everything.

What happened in May? Europe woke up to the depression. They call it liquidity crisis, bank crisis, sovereign debt crisis. Wrong! This is full blown financial crisis, part of Great Worldwide Depression of 2008-?

Inflation and stagnation = stagflation

After last May, there is no possibility for this scenario. Inflation does not happen when banks don't lend. You can get inflation during crisis, but you still need banks to lend money for that to happen. Now banks in US and EU and many other countries just do not lend money. Worse, there are multiple reports from both US and EU that in many areas demand for loans is low, which means that banks can't lend more money even if they wanted.
Probability of stagflation any time soon: 0.

Great Recession

I wanted to believe it. Almost everybody wanted to believe it. US economy grew nicely in the second half of 2009 and in the first quarter of 2010. And in this scenario, we should be out of the woods already. But, again, May changed everything. Economy might still grow couple more quarters. But deep recession in Europe, which will definitely follow current financial turmoil, cancels the possibility. EU economy is as big as US one, when it goes down, it pulls down everybody, just like US. There might be tiny possibility that quick response from European governments and central banks can trigger quick recovery there, but I just don't see it. Instead of emergency spending, governments cut budgets. It's OK for Greece, with its bloated government sector, or maybe for Spain, but Germany, with relatively small sovereign debt, should not cut. They need emergency spending. There is always a way to spend money for a good reason. There are always roads to build and repair, bridges to rebuild, schools to improve.

Probability: around 5%, if we are lucky.

Great Depression 2.0

Here we are. This is just too much like version 1.0. Started in US, becomes full blown when Europe goes to pieces. Current scenario is different on one account only: neither US nor Europe is in the mood for trade wars. Which is great, because any kind of trade war between EU and US will make situation very bad very fast. Main problem: both regions are in deflation. And deflation was the main problem during Great Depression in 1930s. Latest information about M3 money aggregate in Euro Zone and US is awful. ECB and Fed failed, the last thing they should allow is falling money supply. Remember, what Bernanke said? That Fed can always increase money supply, having fiat money and printing press. So, where is the printing press when we need it? Or, as it happened during GD v1.0, every dollar coming from printing press goes directly to mattresses?

Probability: about 60%

Japanese disease (Zero growth with zero inflation or low deflation)

I still think this scenario has lower probability than GD 2.0. Maybe it's just my wishful thinking. Arguments against this scenario: US and even Europe are more dynamic societies than Japan, there is no habit of sweeping problems under the carpet and keeping them there for many years, voters kick out governments much faster etc. But there are arguments for this scenario as well. Demography: Population is not growing in Europe, it's falling in many countries, just like in Japan. Government sector is way too big in Europe, and government employees are not enterprising enough to pull countries from depression. US is different, our population is still growing, but mostly because of immigration.

Probability: about 35%

Conclusion

Most probably, we are in GS 2.0. It will last several more years. I hope that it will not end in a big war, like Great Depression did. In this case, and in case of ended Great Recession, the right investment behavior would be to buy stocks. Question is: which stocks? In case of Great Depression, best stocks are high yielders with relatively safe market. Tobacco, entertainment, food, cheap retail. In case of ended recession, it's fast growing companies, high tech first of all. The worst case scenario would be Japanese. In this case, the best investment is in cash.
I am going to change my portfolio this summer. Reduce or eliminate bond funds, leaving only bank bonds, because governments will not let majority of the banks fail. Add more high yield companies. Reduce weight of tech. And keep large cash reserves to play with opportunities.

Korea Kills Market

There is a lot of speculation around, blaming EU problems for the current state of stock market. Some people also blame coming US financial regulation.

Wrong! Both these themes are yesterday news. Yesterday news don't move market.

I think the news which sunk market today was from Korea. Situation there is really bad. Seoul is under constant threat from North Korean artillery, that's why South is usually very careful in everything they say and do. But now situation is crystal clear: Northen sub entered waters of South Korea and sunk a warship. Act of war, loud and clear. South has to respond. Question is: how? And US is under obligation to help South in case of war.

The main problem is Government if North Korea, if this gang of murderers can be called government. I have the impression that they are completely crazy. OK, they have maybe 5 nukes, they can kill millions even if one hits Seoul. But they will be wiped out from the face of the Earth in such case! Probably they don't know any other way than to bully and present themselves as fearless machos.

I hope that this situation doesn't lead to war. But hope is not an investment vehicle. That's why market sold out. I don't expect significant improvement until this situation resolved one way or another.

New Position: Banco Santander

Forgot to mention it before: I opened a new position last Friday, May 14: Banco Santander (STD). I think it was hit too hard and deserves better.

Buying More PGF

Today I added to my position in PowerShares Financial Preferred Portfolio ETF (PGF).
Financials are getting priced for another Armageddon. Some predict complete breakdown of Euro zone, some even think that end of EU is nigh. Ain't gonna happen.EU and Euro zone will be here tomorrow, a month later and a year later. With all problems, with all trade unions pressure and riots and other problems, majority of population in EU countries understand that without EU their countries are in much worse shape. They will keep it whole.
I'm holding PGF as a way of cash management. With 8% yield, paid monthly, it's a great tool to hold your cash. Price of PGF shares in normal times is close to $25, which is a usual buyout price of preferred shares of banks. So when I have some extra cash and have no idea what to do with it, I buy PGF or something similar.

Back From Vacation

Just returned from vacation. Been to London, UK, completely unaware what was happening here. The only news in UK last week was election and a little bit of Greece events. It appears I missed a lot of action. Well, you can't win them all.

I'm going to watch action for couple of days before making any decisions. To my taste, prices are still pretty good on some buy candidates.

Europe is awake, at last. Stupid, stupid, stupid! ECB has controlling inflation as task #1. As if Euro doesn't need a lender of last resort. Yeah, right. Situation could've been solved couple of weeks ago for about 100 billion dollars. Now it's trillion euros. Price of the delay: order of magnitude. The funniest thing, of course, is that most of this money will be simply printed. By ECB. I hope Trichet survives this experience and learns from it.

Deflation is not over yet. It can reappear at any moment. Repeat after me: printing press doesn't solve deflation if money moves from press into mattress.

Selling more Netflix

This is ridiculous! This stock doubled in three months! I expected it to go up, but now, with a parabolic chart, it's downright insane. I sold one more portion of it today. I might be wrong again, like I was when sold part at 75, but I have 100% profit and it must be taken. Now playing with house money.

Netflix (NFLX) is a great company. They created excellent DVD by mail distribution system, deliver a lot of movies over the internet, service is great, management is great. And forward P/E of 31 and change isn't that big, if we consider that company managed to beat expectations in the last four quarters. But parabolic chart is always a bubble. The only way of making money on a stock market that I know is to buy good stocks when they go down and sell them when they go up.

Full disclosure: at the time of publication author had a long position in NFLX. Positions can change any time.

Netflix: Parabolic Chart

Netlix (NFLX) just reported quarterly earnings yesterday and the are GRRREAT! What is not great is a pure technical perspective. The chart is absolutely parabolic and parabolic chart is always a bubble. I have a long position in NFLX, sold a little bit at 75 and now feel stupid looking at price above 100. How long can it continue? I am not complaining, remaining part of my position is growing at breaknecking pace. The question is: how long can you ride this tiger?
I'm holding my position for now. Maybe overbought condition can be worked out as a function of time... I doubt it though. The main question is: when to take more profits?

Full disclosure: at the time of publication author had a long position in NFLX. Positions can change any time.

SEC vs Goldman: Where's The Case?

Maybe I am stupid. Maybe my mind is clouded by the fact that I hold a small long position in Goldman Sachs (GS). But for the life of me i don't understand the case SEC is trying to make.
They say that CDO sold was created with purpose that it goes down in price. Please name me one company which creates and sells derivative it thinks will go up in price. This is how the derivative game works: there is a seller, who thinks that product goes down in price and a buyer, who thinks that products goes up. In derivatives, there is always a seller. Because every derivative is an artificial product, it only exists when somebody sells it short. Anyway, Paulson is not charged, so shorting derivatives is OK.
Apparently, the charge is that Goldman didn't disclose to buyers that derivative was sold short. What!!? Come on, derivative can't exist if it's not sold short. I am not sure Goldman has the right to name the seller to the buyers, but as far as I know, they just don't have to. SEC is waiving disclosure rule as a flag, but how much they really had to disclose?
SEC didn't file a criminal complaint. It's only a civil suit. But the most suspicious thing is timing. In the middle of option expiration trading session, just tell me why doesn't it affect market. If company releases material information in the middle of the day, usually stock is halted, why wasn't it done with GS this time? Is it legal for SEC to make announcements in the middle of trading day? If so, maybe it's time to make it illegal.
I think this whole case stinks with politics to high haven. Looks too much like a part of the push of financial reform package.

Full disclosure: at the time of publication author had a long position in GS. Positions can change any time.

Last Week's Quant Trades.

Monday, April 12:
2.5x2: sold RIMM at .23% profit.

Wednesday, April 14:
2.5x2: bought ETR, sold HTS at 0.79% loss.
3.5x2: bought ORB, WMT, sold HOLX at 1.88% profit and KMX at 2.42% profit.

Thursday, April 15:
2.5x2: sold OTEX at 1.09% loss
3.5x2: bought COST.

Selling Brocade

Sold Brocade (BRCD) on Tuesday. Was way too busy, forgot to post it. Just took profit and reduced number of positions in my portfolio.

This Week Quant Trades.

Monday, April 5:
3.5x2: bought PFE

Tuesday, April 6:
2.5x2: sold MS for 1.79% loss, ORCL for 1.43% profit.
3.5x2: sold CYTX for 5.78% loss.

Wednesday, April 7:
2.5x2: bought HTS
3.5x2: bought HOLX, sold PFE for 0.17% profit.

Thursday, April 8:
2.5x2: bought DHI
3.5x2: bought KMX

Friday, April 9:
2.5x2: bought SAY, sold DHI for 1.69% profit.

What Baen Universe Death Means for Internet Publishing

Not so great news: Jim Baen's Universe internet Sci-Fi magazine just published its last issue. Magazine is going out of business. One more internet failure.

But why? Can we assume that internet publishing doesn't work? Not so fast. Here is an article by Mike Resnik, editor-in-chief. In short, subscription based model of Baen Universe was beaten by advertisement based model of a dozen plus Sci-Fi magazines.

It's amazing. The model which shouldn't work, in opinion of all major publishers, like Rupert Murdoch etc., managed to beat the model which should. Instead of paying money for the stuff, people chose to get it for free. Surprise!

I don't know if this story can tell us something about other periodicals. Newspapers are in completely different world. News and entertainment magazines are very different from literary ones. But, at least in one area, free information model managed to beat subscription model.

I regret demise of Baen's Universe. I was a subscriber from the day one. But now I have a choice of multiple free high quality Sci-Fi internet magazines and learned something about internet publishing business.

This story doesn't affect any investment decisions. Not right now. But it might tell us something about future developments in internet publishing. It's possible that free model will coexist with subscription or paid model. But there is also a possibility that free will kill subscription. We'll see. So far I'm staying away from any company related to publishing, especially periodicals.

Taking Profit on Netflix

I took some profits last Thursday on my Netflix (NFLX) position. Still think that it's a great company, with huge growth potential. But it's up 50% in a little bit more than 2 months, such profits must be taken. I hold a significant long position, just in case I'm wrong. Planning to buy back shares if/when it falls below 65.

This Week Quant Trades.

Quant 2.5x2:

Tuesday, March 30: bought ORCL, sold MFA at 0.69% profit, GOL at 10.97% loss.

Thursday, April 1: bought RIMM

Quant 3.5x2:

Tuesday, March 30:

sold MDT at 1.94% profit, EXC at 0.89% loss

Quant Trades This Week.

Monday, March 22
2.5x2: Sold TGT at 1.05% profit, HMC at 0.25% profit
Tuesday, March 23
2.5x2: bought SSL
3.5x2: bought EXC
Wednesday, March 24
2.5x2: sold $CHKP at 0.52% profit
Thursday, March 25
2.5x2: bought $MFA
Friday, March 26
2.5x2: sold $SSL at 1.8% profit

Crazy Host of Mad Money

Cramer either ate something or just plain went bonkers. On today's show he declared that China is the main driving force of the world economy.
I have two main objections:
1. Chinese economy is export driven, US being the biggest importer. Whatever Chinese produce, where are they going to sell it?
2. Chinese stimulus is actually an unprecedented pumping of money into unneeded real estate and industrial projects . Idle steel production capacity exceeding full capacity of Japan and South Korea combined, new build empty city (for a million people!), biggest mall in the world with 99% vacancy, what other proofs you need? Chinese economy is in a bubble, huge bubble even comparing to US real estate. When that one bursts, nobody would be happy.

More Quant Trades

System 2.5x2: yesterday bought HMC, OTEX, CHKP, sold SSL at 1.32% profit, TDSC at 1.5% profit. Today bought TGT.

Quant Trading Last Two Days

I had the following quant trades last two days:

System 2.5x2: today bought GOL, sold ANGO at 0.1% profit, WM at 0.84% profit

System 3.5x2: bought CYTX, sold WAG at 0.72% loss, yesterday sold SRCL at 0.63% profit.