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?