Saturday, July 30, 2011

Game of Chicken

You would think that theatre of absurd around debt limit is senseless. Not at all. It's politics as usual, only at its worst.

On one side we see ideological idiots from GOP. They want nothing less than reversal of Roosevelt's New Deal. Don't be fooled by rhethorics. They tell you that they want responsible government, staying away from business making everything work. In reality they want the end of Social Security, Medicare, undemployment benefits and other things which construct social safety net. That's big business program running amok, desire to hire people as cheap as possible.

On the other side, mostly no less ideological Democrats, including President. They want big government running everything, clean energy (impossible), end of oil (impossible). Thanks God, they at last abandoned idea of "gun control", which in their lingo means total ban on firearms for population.

Until lately, both sides somehow found compromise in the last 30 years. It was messy, expensive, with a lot of unnesessary spending. Both sides are guilty in that spending, GOP sponsoring no less stupid programs than Dems. Government waste is an equal opportunity sport in Washington.

The problem now i entirely of GOP making. As much as I hate many things Dems do, current crisis was created by GOP. They voted for current budget, but now refuse to authorize increase of debt limit necessary to execute said budget. In fact, they are trying to hold the welfare of the whole country hostage of their interest.

They played game of chicken with Obama. They thought they can call his bluff and force him to agree to any extreme program they can think of. Their problem is that in politics they are children compared to Obama. He saw an opening which allows him not only to win White House next year, but also to soundly beat GOP in both Senate and House. He is going for shutdown of government and possible default. And he is putting the guilt sqaurely on GOP, where it's really belongs. They forgot that politics is an art of possible. They wanted impossible and already lost.

Next steps are obvious. On August 2, Treasury will declare which payments will be stopped first. Of course, accourdint to 14th Amendment, part 4, interest and principal payments to holders of Treasuries will be first priority. There will be a lot of hurt, thousands of people are going to be laid off. Next stage will be delay in payments to all government employees which will not be laid off. Then come payments to unemployed.

I hope that GOP will stop somewhere there. Because if everything is going out of control and US defaults on its debts to holders of Treasuries, all financial hell is going to break loose. It's a financial analogy of 6 mile wide asteroid. When it hits, nothing is safe.

Looks like current generation of GOP is done, losers. They are not going to survive this. It's a pity, because a landslide of Dems next year isn't any better for the country. We really need a divided government. But we also need a government which can compromise and find solutions. Well, that will have to wait until 2016 at least.

What's next? I hope that hard default isn't going to happen. GOP really doesn't have any justification for a hard default situation, they are going to be voted out and be happy that they are not rolled in tar and feathers before kicked out of Capitol. So let's hope that after some bickering they vote for debt extension before the end of August. Everything is going to be OK, right?

Wrong. Very wrong. We are going back into depression no matter what solution of debt limit crisis is adopted. Recovery, while it lasted, was triggered by Obama stimulus. That stimulus was tiny compared to what was (and is) really needed. We needed at least twice as much. And we need much more than that now. Instead, we are getting severe budget cuts. Ain't gonna help recovery. Budgets are cut in states, in counties, in municipalities. Now federal budget is going to be cut. Dozens of thousands of people are going to lose their jobs. Some "economists" and all GOP elected want to tell us that that's OK, that private business, facing less competition from governments, will pick up the slack. That's bullshit. Private business is doing nothing of the kind and is not planning to. We are in depression and business is not expanding, with just a few exceptions. There are no real competition for resources: interest rates are very low, wages are stale, unemployment is high. We are going back into deflation mode soon. The only little hope left is QE3, which is probably coming in October or November. I'm afraid that's not enough.

US got out of Great Depression thanks to World War II. World War III is unthinkable. What is going to pull us out this time? Or maybe developed world is going Japanese way for decades of depression?

What am I going to do with my money? I'm keeping big (for me) cash position right now and will keep it until debt limit crisis is resolved one way or another. I'm going to start investing right after debt limit is raised. Unfortunately, there aren't many places to invest in depression. It's going to be fast growing tech and some dividend paying stocks. Tobacco is out. Dying industries (paper books, newspapers, TV stations, movie studios, cable TV) are out of the question. As usual, I'll play it by ear.

Tuesday, July 19, 2011

We Need More Debt!

Somehow it's a common knowledge that debt is bad All kinds of debt, public, private and corporate. Every day you can see several articles crying: deleverage!

This is totally wrong. It's wrong for all kinds of debt. Reducing debt right now is bad for the country, bad for corporations, bad for the people.

First of all, reducing total national debt is bad for economy. All money is debt. Most people don't understand that, for details, look here:
Because money is debt, reducing total debt reduces amount of money in circulation. Which leads to low inflation, and in severe cases, to deflation. Well, many people, especially those living on savings and fixed income would tell me: what's wrong with the deflation? Our income can buy more things! True, but deflation increases cost of credit, depressing business activity. In severe cases (see Great Depression) high deflation leads to dozens of thousands companies closed, failed banks and very high unemployment. In the last hundred years, best growth was achieved in economies when inflation was between 2 and 5%. We are running around 1% right now. We need more inflation, more money, more debt.

Many people say that debt is a bad thing. It's almost from Christian church playbook of Dark Ages, when interest bearing credit was banned (usuty!). Economy was doing great in Europe between 7th and 13th centuries, wasn't it? In some Muslim countries credit is against the law, do they have good economies? Debt by itself is a good thing. It allows corporations to finance their expansion. It allows young people to start living comfortably, go to college, buy a car, a house. It allows government to pay for a lot of things, especially when economy isn't very good.

Word of the day: austerity. Why? Did anybody ever got richer by austerity? Did US escaped Great Depression using austerity measures in 1930-1932 or in 1937? You don't grow corporation using austerity, you don't grow economy using austerity. For people proper measure of debt is a relation between market value and debt. For a person it's a relation between income and debt. And for a government, GDP to debt. Ways to improve picture and grow in all cases is to increase income, not to cut expenses. I can understand austerity measures in Greece, where government sector was more than half of all economy. They need to cut budget and privatize like crazy. There isn't much room for privatization in US (USPS, ports and airports, anyone?) and government sector isn't that big. Main reason for US to take more debt: our government can borrow at outrageously low rate. If I could borrow at 3% for 10 years, I'd be loaded to the gills.

There is one more "reason" to reduce debt: someone sometimes will have to pay it. Well, corporations and governments can live many dozens of years with a big load of debt, just roll it over, preferably at good rates. And now is as good time to roll over debt as ever, at current low rates. Debt is only bad if you can't roll it over.

If we had booming economy, low unemployment and elevated inflation, I'd be first to call for debt reduction, especially government debt reduction. But we are in Great Depression 2.0, we need to pull our country (and the whole world, whether we want it or not) out of it. The only way to do it is to take even more debt.

Friday, July 8, 2011

Midyear 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 twice 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 a 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.
Added to position since last review.
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, trade around.
Intuitive Surgical (ISRG)
Robotic surgery that is changing surgery of internal organs. Company has monopoly on robotic surgery right now.
Reduced position 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 also the best internet movie delivery company. No position changes since last review.
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. 
Reduced position since last review.
Risk: it's not clear that internal clouds would win over external ones or over software as a service.
Plan: hold.

ARM Holding (ARMH)
New position. This is an example of a pure brain company. Company designs ARM CPUs for a wide range of mobile devices and licenses them to diferent companies. Most smartphones and all tablet computers I know run on ARM CPUs.
Risk: Tech world is changing quickly, somebody can invent a revolutionary new design and beat ARMH.
Plan: hold.
Goldman Sachs (GS)
This is not exactly a bank, more of a broker/trader. Absolutely best Wall Street company. 
No position changes since last review.
Plan: Hold, add on weakness.
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)
REIT. Huge dividend and good management are main reasons. Company makes money on distressed mortgages, current holdings are mostly supported by US Government.
No position changes since last review.
Risk: possibility of management mistakes, another real estate crash, rise of interest rates.
Plan: hold, add on weakness, reinvest dividends.
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.
No position changes since last review.
Risk: ban on tobacco, tobacco deregulation, both are highly unlikely. Possible huge legal expenses. New risk: contraband between states, because tobacco taxes vary a lot between states. This is a threat to the whole industry. Once smugglers are established, they can start smuggling cigarettes from other countries, including counterfeit ones. Another new risk factor: DIY tobacco planting. It's inevitable with current high taxes, can grow up to as big illegal business as marijuana or even bigger.
Plan: Reduce position on strength.
Phillip Morris International (PM)
Same reasons to hold as for Altria. Can be also put into "International" category.
Reduced position since last review. I think stock is overvalued at current price.
Risk: legislation changes abroad. World is quickly moving to smoking restrictions everywhere. Most of EU countries banned smoking in restaurants. I visited Czech Republic in 2008, it was impossible to breathe, restaurants were full of smoke. Such a big change. Many countries raised tobacco taxes as well, which will lead to smuggling and DIY growing.
Plan: hold, reduce on strength.
American Capital Agency Corp (AGNC)
REIT. Highest yield among the stocks I know.
Traded around position since last review.
Risk: company is highly leveraged, if interest rates are to go up, yield might suffer.
Plan: hold, reinvest dividends
Intel (INTC)
This is a tech company, but not a paradigm changer anymore and not a fast grower. But it enjoys almost a monopoly position, grows steadily and pays big dividend, which increases almost every year.
Risk: tech world can change fast.
Plan: hold, trade around position, reinvest dividends.
Since last review I closed General Mills (GIS) and Pepsico (PEP).
Indian Fund (IFN)
India is the only part of BRIC which I like now.
No position changes since last review.
Risk: political.
Plan: hold, add on weakness.
Morgan Stanley India Investment Fund (IIF)
New position. Also CEF investing in India. I
Risk: political.
Plan: hold.
Since last review I closed Ibero-America Fund (SNF).
Fixed Income
Blackrock Income Opportunity Trust (BNA)
Fund holds mostly high quality corporate bonds and Treasuries. Good depression hedge.
Added to position since last review.
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.
No position changes since last review.
Risk: Bankruptcy of Wells Fargo.
Plan: hold, sell when need cash.
PowerShares Financial Preferred ETF (PGF)
This is a bet on recovery in financials plus excellent cash management tool.
No position changes since last review.
Risk: Another crash in financials.
Plan: Hold, sell if need cash, trade around position.
Eaton Vance California Municipal Income Trust (CEV)
California munis are priced very low, and pay a big, federal tax free yield.
No position changes since last review.
Risk: mass bankruptcies of California cities and counties. I don't think it's going to happen
Plan: Hold, add on weakness.

Nuveen Municipal Market Opportunity Fund (NMO)
One more muni fund, this one invests around the country. Big, federal tax free yield.
New position.
Risk: mass bankruptcies of municipalities around the country. Highly unlikely.
Plan: Hold, add on weakness.

Helios Multi-Sector High Income Fund (HMH)
Bought this fund when it traded at big discount to NAV, as a replacement to EAD.
New position.

Since last review I sold Evergreen Income Advantage Fund (EAD), when it was trading at premium to NAV.
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.