Mid-Year 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 a major review of the portfolio twice a year. I can trade around any position if I feel like it. The portfolio is not diversified by sectors. Diversification reduces risk, but it also reduces potential gain. No change in basic principles either.

Strategy. No strategy change since the beginning of year. I made changes, reducing cash and fixed income since January. I am planning no strategy changes until elections at least. Any changes will take into account fiscal cliff (or lack thereof) in 2013.

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

Google (GOOG)

Ultimate disruptor. Google is changing the advertising world. The company is also aggressively moving to mobile internet advertising.

Risk: All great empires were destroyed by internal problems. There is also a risk of search ad market saturation.

I reduced position in the second quarter.

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.

VmWare (VMW)

Cloud computing is all the rage, and VmWare is on the front line. If a company wants to create its own cloud, VmWare is the way to go.

Traded around and in total added to 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)

Pure brain company. Company designs ARM CPUs for a wide range of mobile devices and licenses them to different companies. Most smartphones and all tablet computers I know run on ARM CPUs.

Traded around position since last review, resulting in net increase.

Risk: Tech world is changing quickly, somebody can invent a revolutionary new design and beat ARMH.

Plan: hold.

Red Hat (RHT)

New position. Company provides and supports Red Hat Linux, the most popular Linux distribution in enterprise world. Recently this OS became the most popular OS in clouds.

Risk: high valuation requires high growth. Any slowdown can crash the stock.

Plan: hold

Facebook (FB)

New position. The only social network company worth investing.

Risk: Wall Street hates the company.

Plan: hold, add on weakness.

DSW Inc (DSW)

New position. Yes, retailer can be a paradigm changer. Honestly, I wanted Zappos in its place, but instead of IPO company was sold to Amazon.

In any case, this is a great company and I like shopping there.

Risk: Any retailer is a high risk company. Anything can go wrong.

Plan: hold.

Qualcomm (QCOM)

New position. I bought it as a play on mobile network revolution. Now I'm having second thoughts.

Risk: there are not many hardware companies in mobile world. Loss of one customer can reduce sales and profits significantly.

Plan: watch.

Banks / Financials

Banco Santander (SAN)

Probably the best Spanish, and maybe European bank out there. High yield, big investments around the world. Bought it because I believe in resolution of Euro troubles. This is also can be placed in International part of the review.

Since last review I traded around position, resulting in net increase.

Risk: Currency fluctuations, more problems in Eurozone.

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.

Polaris Industries Inc (PII)

One of the best recreation equipment manufacturers out there. Local (for me) company as well.

New position.

Risks: another recession, people don't like buying discretionary items in recessions.

3M Company (MMM)

Most innovative company in Dow Jones index. Another company headquartered in Minnesota.

New position.

Risk: another recession, management mistakes.

Intel (INTC)

Returning position. I was wrong to sell it in the first place High and growing dividend, growing company.

There is a lot of fear that decrease in PC production due to mobile computing will decrease consumption of Intel chips. But cloud computing requires a lot of Intel chips, and server chips have higher margin.

Plan: hold, add on weakness.

Since last review I closed Annaly (NLY) and American Capital Agency (AGNC).

International

Indian Fund (IFN)

India is the only part of BRIC which I like now.

Added to position since last review.

Risk: political.

Plan: hold, add on weakness.

Fixed Income

I changed strategy in fixed income since last review. Now I have a group of closed-end funds, which are bought when at discount to net asset value or at low premium and sold at high premium. There are two groups of funds: corporate bond funds and muni funds. There are too many of them and they are rotating too fast to present them in the portfolio review. Watch my trades on stocktalk of Seeking Alpha.

Why People Make Idiotic Economic Forecasts? Because They Don't Invest

These two pieces about Niall Ferguson have been brought to my attention by Barry Ritholtz:

http://noahpinionblog.blogspot.com/2012/08/niall-british-empire-is-over-accept-it.html

http://www.businessinsider.com/niall-ferguson-has-been-wrong-on-economics-2012-8

Both show that Niall was completely, utterly wrong in his economic predictions. As far back as since 2004, if not much earlier. What can I say? Anybody can make forecasts in sport and economics not paying any penalty. In sport, it's an absolute truth. In economics, not so absolute. If you don't invest/manage your own money, you can say anything you want. But let's see what would happen if Niall followed his own advice:

2004: Niall thinks China is going to stop buying US debt. Logical conclusion: short Treasuries. Result: huge loss of capital.

2009: Niall predicts collapse of US Treasuries market. Logical conclusion: short Treasuries. Result: huge loss of capital.

2011: Niall predicts double-digit inflation for 2010s. Logical conclusion: short Treasuries, corporate bonds and stocks, buy gold. If anybody acted this way, s/he should be bankrupt by now.

My advice to Niall and anybody else making economic forecasts: put your money where your mouth is. And we'll see how it works.

About JP Morgan And MF Global

Just my opinion... There are a lot of publications crying for the prosecution of CEO and whoever else made decisions in these companies. I don't think so.

MF Global was an investment fund. As any investment company, it carried an implied risk. This risk was published in the fund business model: use leverage to buy short term government debt, mostly European and hold to maturity. What can go wrong if all governments (with small exception of Greece) paid all transhes in full and in time? Leverage. MF Global had to use debt securities as a collateral when taking loans. When those securities lost value because of another debt crisis, creditors required more collateral. It was classic margin call situation. Definitely, MF Global management made mistakes. Maybe somebody stepped outside the law, but only serious law enforcement investigation can prove it. So far it didn't. Investors lost money, but that's exactly the risk they accepted when investing in MF Global. I understand emotional aspect and lust for blood, but law is not about emotions. My advice to investors: research companies carefully.

JP Morgan (JPM) case is more complicated. The only reason they are not prosecuted now is repeal of Glass Steagall act. Banks, especially big, "too big to fail" banks, should not be allowed to trade like hedge funds. But they are allowed now and they are doing it. So, what JPM did was probably legal, but shouldn't be. Because if too big to fail bank fails, taxpayers will pay. You can shout, you can say "no more bailouts" but in real life, when there is a choice between a bailout of banksters and financial panic, any responsible government chooses bailout. That's why Glass Steagall act existed, that's why it should be restored in some form.

There is no evidence so far that JPM or some people there broke existing law. It means that nobody goes to jail, now. It also means that law must be changed. US (and, by extension, World) financial system should be protected from careless speculators.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Buying Back Fixed Income CEFs

Prices for fixed income closed-end funds are coming down. At last. Last month, I sold most of my positions in muni funds, leaving just small positions in BlackRock Long-Term Municipal Advantage Trust (BTA) and Invesco Van Kampen Trust for Investment Grade Municipals (VGM). Now prices came down a little bit and I'm establishing some positions.

Today I bought Helios Advantage Income Fund (HAV) and Invesco Quality Municipal Income Trust (IQI). Since the beginning of this year I was only buying muni funds, but at current yields, taxable fixed income funds make sense.

Prices probably will come down more. But now is the time to pick up funds if I want to get payouts in the end of the month.

Market action is interesting today. Most of the day all indices were down, but Nasdaq finished day in green. You can say that Google (GOOG) and Apple (AAPL) did that. Really, those two companies represent a big portion of Nasdaq. But for the last 4 years Nasdaq was a leading index, so for me this action is bullish.

Disclosure: I am long BTA, VGM, HAV, IQI, GOOG.

Additional disclosure: I have no position in AAPL. Positions can change any time.

This Is A Wrong Rally. Dom't Make Money From It!

If sentiment was the only indicator, I'd say that this rally has a long way to go. Everybody is telling you to be cautious. Careful out there! is the mantra. There are a lot of unknowns, fundamentals suck, Europe is going to crash etc. Oh well. My answer to it: never let your preconceptions to stay in the way of making money. This rally is making me money, because I'm long a lot of stocks. Yes, some of them under water. It always happen. You always make mistakes. The name of the game is to lose less money on losers than you are making on winners.

Unfortunately, sentiment is not the only indicator. Fortunately, technicals are great too. S&P is over 1380 level of resistance. Nasdaq is over 3000, again. Dow, who cares about Dow nowadays?

There is something to say about fundamentals. True, economy is slowing down. True, China is in trouble, and not only because of Europe. Europe is in crisis, US is barely growing, these are legitimate fundamental concerns. And so far I don't see which way chips will fall.

So, I really don't know when this rally is going to end. It looks different from June and July now. Then, we either had the beginning of the week down and rally on Friday or the week up and Friday drop. Now, it looks like overbought condition is getting worked out as a function of time. We'll see.

I am less bullish now than two weeks ago. But still bullish.