STI Hedge Fund October Performance

We begin with some advice given me in the very first week I began trading stocks from an older wiser gentleman who had been doing it for several decades. The gentleman was the CEO of a small community bank and I was hitting him with a series of questions and one asked by me was " I understand the concepts of trading and know experience is needed, how does a trader deal with the political angles.  His response has stayed with me all these years, " when democrats are in charge money is easy to make since they throw it out in the street for everyone to pick it up, when republicans are in charge making money is much harder because they make you earn it." So be it now as we end a third year of a democrat in charge and making money with trading has become easy and it is reflected in our third straight excellent month. Since I expect this trend to continue we will likely dump additional carryfoward loss positions in December to open up what looks to be excellent easy money opportunities in 2012.  Those opportunities could make 2012 possibly one of our best years ever.  Of course the grim reaper of a republican president looms on the horizon and working harder could be the option in 2013.

 

Despite having only about 40% of our positions open for trading this month we still had an excellent month producing a 21.59% annualized gain.  As has been the case recently dividend coverage was very positive to interest expense and also covered trading fees.  Large trading gains came from tobacco stocks including another very large one from LO, which continues to reward us from being our largest held position. Real estate stocks continued to perform well as well. We did take a position on a financial stock that assumes the European deal unravels and that trade might hit us with a year end loss if that does not happen.  Year to date through October annualized gain is 17.51%.            

 

Significant help again came from market volatility and our continued careful stock selection.  We also are pleased that our cash flow model is performing and allowing us to make decisions when we desire to exit positions that are in the money as opposed to being forced to do so due to margin calls or excessive debt and leverage.

 

As we head into November we have add back several trading positions that increase our trading positions to 75% open and could allow us to make additional profit this month. That could  be balanced by the normal year end decisions to exit unprofitable and no longer desired stock selections, which could dampen overall profit. December as usual will be the month we make final decisions on stock exits.

 

We continue to beat other hedge funds and hedge fund models for profit and maintain above average annualized gains in invested capital.  Year end as noted earlier should finish around 15% with expected sales and carryover in the money positions where we see additional profit opportunities. We might consider one or two additional sales that might bring the year end down to 13%, but still market beating results and certainly much better than bonds of any type.

 

 

 

                

Today's Relief Rally.

Do not be fooled. I repeat do not be fooled. Today's strong move up is what is known as a relief rally. Nothing more than relief from investors that Europe is going to bail out Greece. The problem is THAT THE SOMEONE that is being hit with the bailing out bill has bot been decided. Oh, I know you have heard the European Bank or maybe some private European banks, and maybe a country or two. In the country part that is read as Germany. In the end that someone will have to be the taxpayers of some country and that someone is likely to be German taxpayers and US taxpayers.

 

This patchwork of an agreement has been orchestrated by President Obama and Prime Minister Angela Merkel who both or protecting their political futures. Ms. Merkel who needs help for just a few months and Mr. Obama who needs help for a 13 month period. In the end it solves nothing and makes none of the hard decisions. Sooner or later someone has to take the bath in debt and losses of several hundreds of billions of dollars and that little detail is still a blank to be filled in.

 

If the parties involved can hold this gang together and keep the bail out money flowing until Obama gets reelected or at least past the election this house of cards will fall apart and frankly it might happen sooner than that.

 

As an investor consider holding off on your investments. As a trader use this up tick to lessen your load. I also caution that as we move closer to the US election ignore government economic statistics as they are prone to be hedged to protect incumbents of both parties. Best to rely on private reports and other economic data for your direction. Note that the GDP today was up to 2.5% growth and the market said whoopee, but expect revisions downward the next month or two. Note that several companies in the recent reporting period have reported disappointing earnings and that says we are not near the end of the economic troubles.

 

Full disclosure I took out a large option position against this rally this week.

               

Banks as Utilities.

My college senior year thesis was done on generational theory.  That subject has long held my interest because I believe that despite huge advances in technology, medicine, science, and the general improvement in lifestyle over the centuries mankind is still driven by the same human nature from the very start of human existence.  Basic human nature of sinful pursuit is only tempered by a faith in God and the enforced laws of man. This is the basis of our American constitution that this human nature must be held in check by laws and that the only way for self government to survive is to have equal power in three separate branches of government. So far it has worked, but we will see.

 

Anyway this generational theory accepts that about every four generations, or eighty years, we repeat the same mistakes since the people who made the mistakes have passed from the scene. So today we are dealing with similar problems from the early 1930's.   I expect about now you see where I am going since we indeed seem to be in a time warp with financial institutions, unemployment, and economic problems.  One of the biggest problems today are banks and the fact that our economy simply does not function well without solid banks which can make loans to customers. 

 

Banks were a problem back 80 years ago as well and many went under due to bad loans and most importantly they got into doing business in areas they should not have been at all. Banks were lending money for speculation on stocks and other risky areas of business. This led to what is known as the Glass Stegall act which limited what businesses banks could do and added the Federal Deposit Insurance Corp. to protect savers. Frankly this was good policy except for some over the top provisions such as control of interest rates. The act also made it illegal for banks to serve as what are commonly known as investment banks and regular banks at the same time. 

 

As time went by some of the provisions were weakened such as the interest rate provision in 1980, which were good.  But things started going wrong in 1999 when the wall between investment banks and regular banks was repealed.  It took about one decade to lead us to the same problems they had in the early 1930's and we got the 2008 financial crisis. Again, we forgot what and why people made the laws 80 years ago. This led to us passing Dodd-Frank Financial regulation law which as in the 1933 Glass Stegall act was over the top regulation. If I could find a way I would place a long term bet for my great grandchildren that around 2090 we will be repeating this mistake again.  They would be rich.

 

Frankly the problem here is that banks need to be treated like electric utilities, fully regulated and allowed to make a reasonable 10% to 12% protected profit.  I also believe our current banking environment has banks that are too big. Many have lost contact with customers and that is one reason we had so many bad loans. We also should require banks to keep in house every loan they make, service it and retire the debt themselves to be loaned again. All these are in return for the protection given savers via FDIC. Unfortunately Dodd-Frank is the death bill for small community banks with their over the top regulatory rules.  This is due to the lobbying power of the big money center banks who also make big political contributions mainly to Democrats. Oh, Republicans get in on the action too, just right now they are not in power.

 

If you would like to consider investing in banks as they should be consider the banks in Canada, which did not change their laws and did not deal with the financial crisis like the US. The Bank of Nova Scotia is an excellent example of a bank that does business correctly, symbol BNS.  But almost any bank in Canada will do nicely.

 

Banks as utilities would also allow investors to buy into the banks with the knowledge of knowing they might not make huge gains, but would get nice regular dividends and that would make banks widows and orphans stocks again.  There was a time in the 1980's and early 1990's when that was the case. Maybe about 2060 the generations alive then will get those few years with banks being what they should be.

 

I currently own GS as a option and long.

                

UAN..a new on the watchlist.

When Jim Rogers speaks I generally listen. Jim Rogers is the multi-billionaire who made his fortune with Geroge Soros years ago and then took his family and money overseas to Asia where he saw better opportunities. However Mr. Rogers still continues to be a sought out person to interview on news shows and business shows. One thing you can guarantee that Mr. Rogers will say in his interviews is that the absolute best investment opportunity for the next decade on the planet currently is agriculture. He opines that with a growing world population and most of them now starting to experience a better life due to capitalism food for people and food for animals to produce meat is the investment theme of the next decade at least.

 

If you have followed stocks that invest in this area such as Potash Corporation, symbol POT and Terra Nitrogen Corp. , symbol TNT,  two of my favorites, then you will see they have big investment winners. BIG winners !!  Mr. Rogers likes farmland and I do too, but as in war the real winners are not those engaged in war but the suppliers to the ones engaged in war. So if you are growing anything you need fertilizer in this high yield agriculture environment. POT is one of the biggest suppliers of fertilizer in the world and has almost a never ending supply in Canada to mine, but they pay a very small dividend.  A dividend is a absolute for my hedge fund to be considered. TNH does similar business in the USA and they have a nice dividend, but they security offers no options and options are a absolute for my hedge fund.  TNH is also a MLP, and I do not like complicating my tax return with K-1's that MLP's produce at tax time.  But this area of business is too good to ignore going forward and I have searched for sometime for an entry point.

 

Enter my new buy UAN, CVF partners, yes I said partners as in MLP.  UAN is a newly formed MLP, which owns a state of the art fertilizer facility in Kansas.  UAN has affirmed a $1.92 annual initial dividend which is about 8% at current stock price. UAN also offers options. This investment sector is a must to get into and enjoy some of the large increasing profits and I have decided to take the dive into UAN. 

 

Therefore add UAN to my watch list as I wait for an entry point closer to $20 per share. UAN is not for the people who can not take some risk, as a one operation company if that operation goes down so does the company. However with plans to double their output the chances for a doubling in price is there along with a nice dividend and option income.

 

As for the MLP and K-1 I suppose my CPA is smiling as well.

               

If you own a bond fund or considering buying one read this before you do.

Bond funds are normally very popular, they are even more now with savers and investors looking for safe places to put their money that might pay a few cents more than regular savings or even CD's.  There are many categories of bonds funds, US Treasuries, Corporate, High Yield, Municipal, Emerging Market, and the list goes on. There are also two types of funds within the categories, index and managed funds.  I have never owned and single bond fund other than corporate and only then it is an index fund. Here is why. 

 

First off let's be clear as I mentioned in a previous posting on this subject buying a bond or bond fund at current interest levels is money suicide. You are buying bonds or bond funds at the height of their value and if you sell later on the chances are you will be selling at the bottom of their value. There are small exceptions with higher yielding municipals, but careful selection is very important with municipals. There are many other places to find safe yield now. 

 

Bond funds typically buy bonds on a regular basis as funds come in from investors. Since this is a ongoing buy they buy bonds during periods like now when purchase is not wise and other times when purchase is wise as during times when interest rates are at a zenith. So it all evens out for the most part.  Still not a great purchase, but at least better than all right now. Unfortunately investors do as noted above and pile into bonds funds just when it is not wise and bail out when it is wise since usually bond interest rates peak when stocks are doing their best. Investors typically want some of the stock action so they sell bonds to buy stocks. Even if you are long term holder you tend to take your hits along with everyone else, just to a less degree. Bonds fund must invest funds as they come in and sell bonds as they cash out.  So in all stay away from bond funds for the most part.  Chances are the current low or lower interest rate environment is with us for awhile so the more you put into bonds funds now the more value you will lose later on.

 

Now there is one exception to this rule and that is when you buy the right type of bond fund. Managed bond funds as all funds buy and sell not only when investors are cashing in and out of the fund, they also try to buy and sell when they believe they have a good buy and sell accordingly . This rotation and churn costs money and you the bond fund investor pay for it. The average cost of managed bond funds is .98% or about 1.0% of your take here and when rates get down like they are now the cost is the same so your interest paid is hit even harder.  Frankly paying this kind of fee for a bond fund even when interest rates are higher is foolish since I can not see how anyone should be paid to "manage" a bond fund.  But trust me there are people who will pay for it and "managers" who will take their pay.  Add in that many of these bond funds have up front loads and you get hit even more. 

 

 The only bond fund I have owned and currently own is a index bond fund. Yes, I know some people and their advisors cringe when someone says index fund.  But index anything for the most part for stocks and bonds is the way to go for long term investors.  It is appropriate to put money in managed stock funds, but only as speculative plays not for long term holdings.  Managers of stocks and bonds for the most part have proven over decades they can not perform much better than the index and when they do you pay a nice high fee to get it both in good and bad years. Index bond funds hold the same bonds for long periods of time since they are matching an appropriate bond index. In any case if you buy index bond funds you get a much lower fee since you are not paying a high priced manager, good index bond funds average .22% which is just under 1.0% lower than managed funds. When investing in bond funds 1.0% of interest is serious money. 

 

 Lastly let me suggest if you are considering an index bond fund consider the cheapest operator which is Vanguard.

 

Full disclosure I own index bond funds in Vanguard funds and also JNK a bond ETF for reasons unrelated to this article, which is for longer term investors.  I also own individual NC municipals.

           

Three changes in the portfolio.

Effective with today's expiration of options we are deleting Reynolds America, symbol RAI, from the trading portfolio. RAI remains an excellent company, but it has moved up beyond a price we think comfortable for trading at this point. If it declines in price we will reconsider.

 

In the place of RAI we are doubling our exposure to AT&T, symbol T, and adding 25% exposure to Altria, symbol MO.  We also are doubling our exposure to Realty Income, symbol O,  since the of value of the hedge fund has moved up enough in the last month to allow room for an additional trading position.

 

All these moves is in response to the belief that the current move up in the market is temporary since the economy is now in an obvious downturn again which could lead to another recession in 2012.  The new stocks are more defensive in nature going forward.

 

We are still looking to end positions in RRD, FTR, GS, ARCC, and HTS as previously mentioned by year end. Today we adding SCCO as a possible sell candidate as well.

 

Low interest rates are in all a net negative.

This is a follow up to the posting on how low interest rates will not improve the housing situation.  Let's also examine how very low interest rates are also causing problems in other areas of the economy and might actually be impeding the recovery.

 

I can only think of two areas currently getting a net plus for low interest rates. One, the federal government gets to finance their ever growing debt with low and getting lower interest rates.

Two, if you are one of the few people considering buying a home your mortgage will be the lowest rates in about half a century. 

 

However there are many areas that are getting hurt by low interest rates.  First are retirees and savers who are getting virtually nothing on their savings deposits. Simply put retirees did not expect to be making less than 1% on their savings at this point in their life.  A point made this morning on CNBC is that many of the new mortgages that are delinquent now are from older citizens who no longer can use money saved over the years to pay for mortgages since the interest earned is so low they can not make the payments. Honestly these citizens who did what they were supposed to do and saved wisely are now being punished for their efforts. Maybe President Obama and Fed Chairman Bernanke need to consider that next time they think low and even lower rates are so wonderful.

 

Another of the areas getting hurt by low interest rates is the hit many pension funds take from having lower interest from their bond portion of the fund and how to make that up going forward.  Corporations and many US states and municipalities now will need to find additional money to fund their pensions to make up for lack of interest rate values when bond future values are reduced by lower rates.Money that could be going towards hiring people or investing in their business now goes towards pension coverage. Remember when the Congress and president passed the new regulations on pensions with lots of fanfare requiring pensions to fund their assets closer to what is expected, well now it comes to bite them back.

 

The point here is low interest rates might be a boom to some, but it hurts many that the press does not consider or cover.  

 

 

 

 

                

What is going on with the price of oil?

If you are keeping up with the price of oil by the barrel you likely have seen the price come down considerably from the around $120 per barrel to now around $87 per barrel WTI price.  I also expect you have noticed that gas at the pump has come down, but not as much as priced at the barrel head. There are lots of reasons for this, but here I will concentrate on three of most prominent.

 

However before I go to those reasons let's again put a few myths to bed.  The most prevalent myth is the peak oil theory. Peak oil does not exist, has never existed, and it is made up game from environmentalists to alarm people about running out of oil so we better invest in other energy sources. Of course oil interests played along with this game since they were being hit with bad PR about opposing it, besides peak oil theory helps hold up the price of oil you are selling so why not go along.  Another myth is that we are running out of oil and frankly that is not true either. There are trillions, not billions, of barrels of oil in the earth and only price decides if it is worth drilling and getting out of the pools. The US itself has more oil locked up in rocks in the Rocky Mountain region than Saudi Arabia has in all it has underneath the sands there.  Currently it is too expensive to mine. Similar oil resources are all over the earth.  Another myth is that oil is not renewable, because no one really knows what makes oil. Yes I know you have been taught it is decaying fossils, but that itself is a unproven theory pushed by those who again have interests in saying oil is a dirty fuel.  Oil very well might be nothing more than some of the molten core of the earth seeping up to the surface. Same argument can be made for natural gas.  Last myth is Big Oil controls the price of oil and wants to keep it high. Yes Big Oil, and I use that term loosely here, does want to keep oil prices high.  But large oil companies no longer have much say in the price of oil. Note that even the largest oil companies control no more than 3% or 4% of the world's current supply. Most oil is controlled by national oil companies like Saudi Arabia and Venezuela.  Chavez has more say on the price of oil than any of the largest five stock owned oil companies in the world combined. Note that if the price of oil gets too high then other energy sources become more viable and with all market driven situations if that occurred either by choice or by lack of oil the free market would quickly find and deliver and alternative. Now to the three factors mentioned earlier.

 

 

Cost ...The cost of oil coming out of the ground varies greatly. Saudi Arabia can pump it up for pennies on the barrel. So they have a seriously high profit margin. They need it to keep their people happy to preserve the royal family there.  Cost at most drill heads now is around $40 to $50 per barrel, and you need to get around $80 per barrel to get most drillers going, at $60 per barrel or less most drillers stop work.  Note that many oil pools never stop producing, the price decides if the pool is worth getting out of the ground. Therefore we are very close now to what would be about the right price for the most oil to be produced at current costs. So unless some other factor changes the price you see at the pump now is what it will be long term.  One other note there are some oil drillers out there now who are developing ways to get the final barrels out of old abandoned pools and that in itself is what is helping the US increase oil onshore and holding down costs.

 

OPEC..As mentioned earlier Saudi Arabia can pump for pennies, but due to the high cost of keeping the people in the kingdom happy means there is little room for downside on price for them.  Ditto this for many of the OPEC countries. So even with high profit, there is high cost in another way. Therefore they have strong incentive to keep prices high. But not too high, since higher prices means supply will increase from the first factor above and they lose control of the cartel price structure. So there is a delicate balancing act here to keep prices high enough to allow for nice profits, but not to cause increasing supply and not to tip the world into recession where demand drops as well.  OPEC, recently has been watching the oil sands of Canada begin to ramp up production and there is worry that that huge oil resource could hurt OPEC's pricing structure. To try to put some pressure on that scenario, they have been buying up some of that resource to control supply. Note that China has been doing likewise.

 

Political.. This factor has as much control as any here. Political control means control of where countries drill, quality of the drilling, and when it can be done. Countries like Russia have large oil resources, but due to the problems with courts and legal issues there most knowledgeable oil companies avoid drilling there so the quality of the drilling is average at best. Hence the actual amount of oil coming out of the ground now is less than it was several years ago. Canada, on the other hand has decided to fully develop it's oil sands resources, add in the legal stability of Canada and you get first quality and first rate supply growth.  The United States has hampered it's resources. Frankly making it next to impossible to recover the large oil pools in the arctic as well as the oil in the Gulf of Mexico as well. Recently North Dakota has seen an oil boom since there is a Democratic Senator there who has cut the political impairments and the large pool there has been allowed to be recovered.  The US has large pools as noted but likely will never get developed due to political interests. Also note the large difference between West Texas Intermediate price of $87 per barrel and the Brent European price of $115 per barrel.  If you think the world uses the Brent price give yourself a gold star.  The reasons for the difference is very well known. There is a glut of oil coming from Canada at the Cushing Oklahoma terminal where there is not enough pipeline capacity to get the oil to the Texas refineries, so the glut means the oil sitting in tanks in Cushing is priced less since it has to be trucked out to refineries. That extra step means that oil is priced less since there is considerable extra cost to truck in to refineries instead of using a pipeline. Here again political concerns about not allowing pipelines to be built and refineries to be built cause prices to be abnormally high here in the US.

 

To sum up the price of oil and the price of gas at the pump is likely near a bottom now. There could be another 10% or so, but with the above noted factors the only way oil price can go is up.  The one outlying factor here is demand and if the worldwide economy picks up and supply and demand become unbalanced on the demand end prices could move up strongly. However that would offer opportunities for additional resources to be found and drilled to again offer balance in supply so upside could eventually come into balance at an even higher price.  Only a out and out double dip worldwide recession would cause oil to oversupply and dip significantly in price, but only for a small time frame as drillers would stop drilling the most expensive wells and supply would dry up quickly.

 

I again mention some investments to take advantage of these pricing factors such as ERF a Canadian driller that continues to impress.  Many of the larger oil companies such as Exxon, symbol XOM are also good considerations here.  BP offers higher risk investment opportunities. Add COSWF, which has a presence in Canadian oil sands and CVE which has Canadian interests as well.  Investing in oil resources will continue for many decades longer to be a viable way to make money.

 

I own either as a option or long ERF.

                

The Big Pipeline Merger and what is really going on.

Sunday evening investors were hit with news that Kinder Morgan and El Paso would be merging their pipelines and assets for future development.  The combined company will have the largest pipeline network in the country. Also note that the announcement made clear that the combined company would be selling off exploration assets and use the proceeds to reduce debt. What is to be made of this merger and if you own pipeline assets via MLP's how does effect your investment.

 

I believe this merger makes clear one thing, natural gas is here to stay as a viable energy source. It also makes clear that the use of fracking is here to stay too. Most states that possess natural gas assets that can be got at via fracking have either approved or in process to approve this technique.  Pennsylvania is the latest to approve and is diving in full bore, Arkansas, Texas, Louisiana, Oklahoma and many others have already done so. I expect Ohio, where the most recent finds have been discovered, to do likewise. New York is holding back due to extremist environmental concerns, but once New York start seeing the tax flow I would expect New York democrats will want to get in on the bonanza too.  When you are dealing with tax revenue such as is starting to flow now most government interests find a way to get at it. Other states, like North Carolina, where the gas pools are less, might allow these extremists environmental interests to prevail. Such is the way of politics. 

 

 KMI and EP are combining pipeline assets to get at these natural gas sources. You can expect other pipelines have taken notice and can expect additional mergers forthcoming if the companies can find ways to make assets work for delivery from the new natural gas fields. Bigger means cheaper and that is where this is going. Now one thing is left out here and that is if we in the US are going to either use these new energy resources and pipe them to terminals in Texas and Louisiana to have them shipped to Asia where the countries there are willing to pay higher prices to use the energy.

 

Either way the new combined company of KMI will be able to take advantage, either flowing to utilities and industry here or offshore. The opportunity to use our own natural gas here in long haul trucking is also there as well. It would reduce costs of hauling, reduce costs at the consumer level, and also raise even more tax revenue. Here IS where the federal government has a role to play. Obama is currently allowing extreme environmental interests to prevail in the use argument, but he also is being pushed hard by union interests who want the jobs and dues from the use of natural gas onshore. Only time will decide if we use our own energy or sent it in ships to Asia. Note Obama is ramping down on coal use in the US, but the same coal is being shipped to China for use there, so what is the difference environmentally?

 

The new natural gas fields offer an investor so serious long term plays. You can invest in the actual drillers in the field or you can invest in the pipelines who take the energy to the user. I personally do not see any advantage in investing in the end user, since the only difference here is the switch from oil or coal to natural gas. If, and this is a big if, Obama relents and allows trucks and others end users to use the new fuel then that is a game changer and the consumer suppliers become serious investment opportunities.  

 

Investing in the drillers is a good opportunity in getting a solid source of long term income. Many of these new finds will be turned into royalty trusts where the wildcatter sets up the new find as a trust and moves on to new drilling opportunities. Some of these trusts exists now.  SJT, HGT, LINE, and MTR or some of them. They are set up as trusts that essentially pay out monthly to holders. The "distributions" as they are called essentially are cash flow after costs and depend strongly on the current price of natural gas.  Currently natural gas is selling very cheaply. If you do not believe so check the new competition in propane gas delivery and the much lower pricing structures. Buying into these trusts is a bet on the price of natural gas and with natural gas per BTU is about one third the cost of oil the bet there is quite good as gas usage worldwide ramps up. But note, as with oil, there is lots and lots of natural gas out there.  Also note that royalty trusts distributions can sometimes be a tax favored event since the trusts are partnerships and with the depletion allowance most of the distribution is considered nothing more than returning your money to you since the gas field is a finite resource.  Payout's average 6% plus.

 

Investing in the pipelines offers different investing opportunities. As with the trusts the pipelines are generally partnerships and distributions can be tax favored as well since you are participating in the write down of pipeline assets.  The difference with pipelines is that you become an owner in delivery of the natural gas to the end user and charge a fee for that delivery via your pipeline. Most partnerships increase their fees regularly and increase the distribution to partners as well. The recent announced merger noted above pre-announced an increased distribution and a 7% annual increase for four years up front.  Since payout's for pipelines average around 6% plus and most are increasing their annual payout's you stand to get regular growth in your capital investment as well. 

 

The big difference here is that royalty trusts offer significant upside capital gain and distributions if natural gas takes off and Obama allows the resource to be fully used here in the US. Pipelines offer steady increasing payout's with smaller capital gains potential. Either way you an investor will do well I believe.

 

 Note that both of these investments have K-1's to deal with a tax time, so have a good CPA. I do not own either as a option or long investments in either of these areas. I am considering buying into the pipeline sector.

 

 

              

Two ETF's I like. Good income and likely capital gain as well.

Almost from the start of the STI Hedge Fund two ETF's have been in the holdings.  Both of them pay monthly dividends and if you know me you know how I like monthly dividends. Both of them have never missed a monthly payment and both of them have preformed as I have expected.  Currently both of them are also attractively priced in my opinion. The ETF's, JNK and PFF.  An ETF, for those not familiar is nothing more than a market traded mutual fund.  The difference is that the market decides the price of a ETF during the day's trading versus with a mutual fund the price is set a day's trading end when all the underlying stocks are priced and the mutual daily asset value is set. ETF's have the advantage of high liquidity and can be anytime the market is open.

 

JNK...Which basically stands for Junk, as in junk bonds, is what is considered a high yield ETF.   The ETF has over 200 holdings that are more considered industrial than anything else. Industrial in this case could range from a true industrial business, to a hospital, or a casino operation. These are corporate bonds that are generally not BBB rated or above, even thought the ETF does not some of the higher ones as well. Most are BB and below.  However with that said defaults are rare and missed payments on bonds are rare as well. The beauty of this ETF is that risk is spread over so many holdings, even if one or two default the value will not collapse. I also consider high yield corporate bonds as a hedge against inflation as when inflation heats up the underlying companies can raise prices and pay the bonds off easier with cheaper money. Of course you might see some decline in value, but that could be offset with the lessening of risk default. JNK is currently paying around 8.3%, note the monthly payout varies some due to the timing of underlying corporate payments.  I also like the low expense ratio of .40% due to the lack of rotation in bond holdings. JNK would make a good selection to diversify your holdings and add some nice yield.  One final note, if a bond defaults the holder normally is first in line for assets, so all would not be lost. JNK is currently selling around $37.50 and I believe fair value is around $40.  You could have bought JNK at $26 about three years ago.

 

PFF..Is a preferred stock holding ETF.  In this case the majority of the preferred stocks are financial stocks, mostly banks.  There are some international holdings as well such as HBSC. Frankly this ETF might be as safe as they come unless you are of the opinion that banks are going out of business.  Preferred stocks are a step below bonds on the stack of who gets the assets when companies bankrupt,  However again the risk is small that anything in this ETF is going to default. PFF pays out a current yield of about 7.2% and again since the underlying stocks pay on a staggered basis the payout's are not the same each month.  The expense ratio is low at .48% as well.  PFF is selling around $36 and fair value in my opinion is around $39.  You could have bought PFF at $18 about three years ago.

 

All note that neither of these ETF holdings missed a single payment during the recent financial crisis.  Of course as noted you could have bought them much cheaper a few years earlier and be sitting on some nice capital gains as well as much higher invested capital yield.

 

As noted I currently hold long or as options JNK and PFF.

Be careful with Electric Utilties

As a dividend stock investor I was one of the first to invest in electric utilities over a year ago when most investors were selling them off due to concerns over pending cap and trade legislation on the federal level. Indeed there was reason there for fear since cap and trade would hurt utilities profits significantly by increasing costs and not having a release on the other end for regulated electrics to pick up the added costs in added rate increases. But I was confident at the time the votes were not there to pass the onerous regulation.  I mention regulated utilizes because regulated utilities are tied to state regulators for their rates and costs adjustments. Unregulated, where I no longer invest due to the high uncertainty, could likely have added the additional costs into their rate structure. But since many unregulated's do not have a monopoly position in their markets you can be sure customers would have looked for other sources for their energy needs. Recently investing in utilities is popular, since people see them as safe higher yield and a option for those who would normally invest in US treasuries. With all this noted you still need to be very careful when investing in regulated utilities. 

 

When considering investing in regulated utilities all states are not the same. The regulatory atmosphere for many states is downright negative for many regulated electric utilities.  Many states in the western and northeastern part of the country have basically inserted loads of harsh environmental rules on generation of power, some have even placed some social regulations as well. For instance First Energy, symbol FE, is regulated by Maryland regulators who are some of the most hard edged in the country. California can be added to that list. So selection is important so below are the only electric utilities I would consider currently.

 

Southern Company...symbol SO... absolutely the best utility in the country, maybe the safest stock in the country. SO not only has a good growth area in Georgia, Mississippi, and Alabama, they have the best regulatory atmosphere period.  Best management in the utility industry.

 

Scana Corp...symbol SCG...maybe the best regulatory situation in the country being based in South Carolina. If the service area for SCG was as large as SO I would deem it the best utility investment. Still a safe investment for safety concerned investors. SCG just does not do anything stupid.

 

Duke Energy/Progress Energy..symbol DUK..Duke and Progress will be merging soon despite all the hoopla over the merger not going through. It is difficult to argue that customers will not be protected when a company is regulated.  DUK will get improved management once the merger is completed. The current DUK CEO is just not top drawer in my opinion, while the current CEO of Progress who is taking over after the merger is top drawer. The only thing holding the combined company back is the silly rules requiring investments in bio mass and solar energy production in North Carolina. Of course the company will get to add the costs back to rates so customers foot the bill for these rules. New leadership in North Carolina will likely lessen these rules and if so will move DUK to the top of the list.

  

UTG..Reeves Utility Fund...I opined on this closed end fund earlier. The fund contains a good number of solid electric utilities as well as other stocks for solid dividend yield.  Good fund for diversification of investing in this sector. For full report check out my blog for earlier posting.

 

I either own as a long or option SO and DUK.

A sweet little income producer.

Realty Income, symbol O, has been in my portfolio for many years. I learned of this company from Morningstar research and liked what I read. Further research confirmed to me their belief that Realty Income was as good a company as you could buy when it comes to being shareholder friendly. Realty Income does shareholder reports that lets you know everything that is going on in the company, good and bad. They continually look to squeeze every single dollar of profit out of their portfolio of real estate holdings.

 

The triple net leases they use basically puts any increases in property taxes and many expenses on the local renter. It also, in my opinion, makes the renter a partner with the building owner and that makes for good relationships long term.  Realty Income in return will work with renters to keep them renting since they like and encourage long term leases and long term partners.  This real estate investment trust specializes in single tenant free standing buildings such as convenience stores, small restaurants, and other retail that are in high traffic locations. They have in the last year bought some larger multi-tenant buildings, but for the most part it is single tenant. They also are mortgage free desiring to buy buildings with shareholder money and free cash flow without taking on debt.

 

However the thing I like most about Realty Income is that they pay a monthly dividend. Now that is what I call shareholder friendly. The company says right up front they like shareholders who are buy and holders and reward such shareholders. They also increase their dividend quarterly and have done so for so long I no longer keep count. Oh, it is a small increase, but it IS an increase. Currently the stock is selling around $31.80 per share and pays a $1.74225 annual dividend about 5.5%. It is not a tax advantaged dividend, but it is solid and growing. For many retirees who have monthly bills this stock helps you pay for them.

 

Realty Income has traded between $30 and $35 per share for a good bit now and frankly I believe it is fairly priced in that range. A reliable dividend payer with very low risk should trade about 5.0% dividend or so and that is where it is now. If the market trends lower Realty Income will continue to pay you a nice dividend, if the market trends higher you could sell for a nice capital gain.

 

Now if you trade call options, and basically anyone who has an account can qualify, there is a sweet little kicker here to boost your income.  Realty Income has monthly call options and generally the option price runs from a low of 15 cents per share to 75 cents per share. Of course the price varies depending on volatility in the market and how close Realty Income gets to the $35 strike price. But added to the current 14.5 cents monthly dividend you could double, triple, sometimes more your monthly take.  Add in if the stock hits $35 and gets called away you get the $1.50 or so of capital gains too.  Then you just wait until the price drifts down again and buy in and do it all over again. As a monthly dividend there also is no need to deal with call options and ex-dividend dates  As a trader this is one way I make double digit annual profits on stocks and frankly you can too.

 

I own Realty Income long, and as a call and put option.

40 Year Class Reunion...Richlands High School Class of 1971

My high school class just had our 40th high school reunion this past weekend. We had our first one 30 years ago, a less attended one twenty years ago,  and had not had one since.  Your high school classmates are people who you grew up with you,  sometimes attended the same church , and who most likely knew your parents.  All of you lived in or near a town or city where most people even at age of late fifties still have links.  I suppose they are like long lost family in a way.

 

That late 50's age thing makes your thinking different. I watched my father attend his last class reunion, which happened to be his 70th and the thinking there was different too. Most people who make it to a 70th class reunion are just glad to be alive, everything else in life has faded in importance. At our 10th reunion classmates wanted to know where you were living and what job you had at the time, and have some fun. Our 40th class reunion found most people past what lifestyle someone has created, and more towards just thrilled to see you. A most common question is " have you retired", usually followed with " be glad when I can". Seems careers and jobs, which meant so much 30 years ago have now become a means to an end. Maybe that was what they were all along?  

 

I had a head start on this reunion since I was part of the steering committee that helped put it together .  Early on we had all kinds of ideas about what to do, how to structure the event, and how to create fun there.  All the planning for activities to do fades fairly quickly in importance when you just find the most enjoyable thing is to catch on one another's life.  You tend to want to know if one another's parents are alive, catch up about what is going on in the home town, and most importantly how is your health.  At 58 years old if you got reasonably good health you know you have won the real lottery in life. Anyone who is worried about how they look or some regrettable action they have done that might come out find out quickly those things mean nothing anymore.  I expect they meant little all along we just did not know it .

 

Many of us did some of the reunion stuff, attended the high school homecoming game as a group , toured the hometown, had a nice BBQ dinner the second night of the reunion and had a DJ who played some of the "old songs" . Of all the things we did frankly two of the most enjoyable was when we took over a local restaurant in town after the annual Homecoming game and just got to talk and laugh and Saturday night when everyone just enjoyed each other's company.

 

I attended my home church in town Sunday morning and got to see people who I have known at the church since being a youngster.  Being " home" I had lunch at the one of the few restaurants in town that was there when I was in high school,  Arnold's Family Restaurant.  Arnold's is old enough to be legend now and I took in the place's famous "Big A burger".

 

I find myself emotionally attached this town and it's citizens and to these 50 plus people at my reunion.  They know my past, they know many of the mistakes I made when young, and they care for me anyway. Sorta like family as I noted earlier.  You also find out that you now want to keep up with these people with whom you share a common past.  As you narrow life down to what you really like to do and learn to not waste precious time on things that do not matter.  You have proved the things you needed proving and lost the friends you needed losing.

 

Like my father's 70th reunion at my 40th you can now see that other common destiny down the road.  Nothing like knowing that life ends to focus your mind on the important.  The important is relationships and in this case people with whom you have known for over half a century.  You also understand that whatever you have gained from life blessings that those blessings have little value unless you can share them.  

 

In the end I think back to when I was part of my high school basketball team. Win or lose just being part of the group gave you a sense of belonging, a sense of sharing the same destiny, the sense of enjoying each other as much as possible.   My hometown high school in 1971 could easily be mistaken for Hickory High in the movie Hoosiers.  Same small basketball gym and same small number of students in school. So in the end I want to say to my classmates, and many others I grew up with there in Richlands,  what coach Norman Dale said to his team at the end of that movie, "I love you guys".

 

 

Municipal bonds vs. US Treasuries

Try as I may I can not understand why investors and savers buy US Treasuries at  .10% which is in all truth paying the US government to hold your money when the same investor can buy North Carolina municipal bonds in the 4.0% to 5.0% range from AAA rated issuers. Add in unlike US Treasuries municipal bonds are triple tax free if you live in North Carolina.  The State of North Carolina and many state agencies can not declare bankruptcy and must pay interest and indebtedness on a timely basis, just like the US government.  These bonds are safe and with the tax advantages of no state and federal tax the effective rate on a 5% bond is 7.35% in a 28% federal and 7% state tax bracket. 

 

 The bond scarecrows of last winter have been proved wrong as most municipals have regained their capital value standing and continue to pay dividends.  In my municipal bond portfolio currently there are well over 50 different issuers in the state of North Carolina and not a single one is even near default and all have never missed a bond payment in over 30 years of my owning municipal bonds. In fact if you had kept your cool back in this past winter and even more so in the big panic of late 2008 and early 2009 and bought municipal bonds then you could also be sitting on some fat capital gains. For instance I bought some Carteret County school bonds in late 2008 for 75 cents on the dollar with a coupon paying 4.5% and now they are valued at 105 cents on the dollar.  That is a 40% gain in bond value in three years again pointing out the time to buy bonds is when people are either selling them in a panic or when rates are higher than normal.  Of course I am not selling as my bond interest on capital invested is what would be a 8.8% taxable yield. Try getting that in a no risk environment nowadays. When the bond matures in 2025 I will get 100 cents on the dollar for the 75 cents invested so I will still get my capital gain.

 

There are two types of municipal bonds, revenue bonds and general obligation bonds known as GO's. Revenue bonds are based on entities like airports, hospitals, electric utility systems or nursing homes. The interest is paid out of operating revenues of these institutions and the principal paid back when due via a sinking fund that pays off the indebtedness over time as required. Revenue bonds are considered as having more risk, but I consider them safe if you choose wisely. Take an airport bond.  An airport like Raleigh-Durham builds a building and pays for it via tickets from passengers and frankly can raise prices on tickets anytime needed to pay for the bonds. Safe bond in my opinion unless the airport goes out of business which frankly will not happen.  Many county hospitals issue revenue bonds,  the hospital just adds into the cost of service the cost of bond payments.  Of course you again do some research and choose carefully when buying.  For instance I own some Wake Med bonds and we all know that hospital is not going out of business. General Obligation bonds such as the Carteret County school bond I mentioned earlier are considered super safe, since schools are here forever and the county pays for these via general property tax. So when the county decides the tax rate they just add in bond service into their annual budget and raise taxes accordingly.  Other GO's include water systems and road bonds. 

 

One other category of municipal bonds that many overlook are federal mandated triple tax free offshore bonds.  I currently own bonds issued on Puerto Rico, Guam, and the Virgin Islands.  To help the economy in these areas the federal government long ago passed law that makes the interest on these bonds triple tax free to anybody in any state.  The risk here is a bit greater, but so is the coupon on the bonds.  Rarely do you find one paying less than 5%. A good bond portfolio could mix in some of these and be considered good diversification. 

 

 Smart investors use municipals to do what I suggested back in an earlier posting and "salt" away some safe money into these for future income and good sleep at night.  So next time you consider US Treasuries take a look at municipals first. 

 

Full disclosure: I own NC municipal bonds.

 

 

                

Getting my picture on the front of Rolling Stone.

This posting is not about getting my picture on the front of Rolling Stone, but the more mundane thought of having my picture or name somewhere inside some corporate annual report.  Taking that a step further the fact is that I likely have absolutely no chance of either ever occurring and that my readers is one reason why corporations are not liked by many people.

 

Let me explain. I have over 36 years of business experience. During those over three decades I have worked with small business extensively and know I have as good an understanding of how they operate and the daily problems with which they deal as anybody. I have operated a small business for a time as well.  I have worked in over a dozen different county business environments from growing to stagnant. Have been a member of and chaired several professional and civic boards and still currently sit on a few.  Finally I likely know as much about investing and corporate structure as anyone having been an active investor for over 32 years .

 

All that is not to blow up my resume, but to point out I believe I am qualified to sit on any corporate board most anywhere in the medium to small company range. To be honest I have actually applied and sent my resume to some just to see if they would consider me out of curiosity.  At this point not a single one has offered me to sit on their board. No one has even considered me for all I know.

 

Now it is not necessarily me that is not being offered to sit on these boards, it is many others in the general public who have even more qualifications to sit on these board who do not get invitations either. These boards make decisions about the business direction of companies, make decisions about corporate pay, and make decisions about issues where these companies interact with the public relations. Unfortunately for the most part almost no PUBLIC sits on these corporate boards. No one who actually lives and works in real public environments has any influence and say on these boards.

 

These same corporations wonder why they are so disliked by the public and this lack of public representation is a good reason why.  This frankly is the REAL reason why CEO pay is out of this world and make many in the public angry.  This is how companies make stupid marketing mistakes as well. You would think some of these corporations would actually want to avoid these PR problems. Truth be told corporate boards, both big and small corporations, are populated with friends, close business associates, and others who CEO's know will do their bidding.  Add in that many of these people who sit on corporate boards sits on several boards at one time as well. Actually many CEO's sit on each other's board. So we really have no real public oversight of corporations, and lots of "you take care of me I take care of you" relationships. There would seem to be room for some smart attorneys to take many boards to court over fiduciary responsibility, but maybe the legal side is in on the game too.

 

Let's add in here too that many government, semi-public, and educational boards have the same problem, but not to the extent that public corporation boards do however.

 

When doing research for my hedge fund I spend time reading many annual reports and  note who is on these boards and take into account such when deciding if the company has anything close to decent oversight. When I see decent oversight you will note I will say these boards are shareholder friendly.  Maybe I am wasting my time, but I fill out annual board voting and an selective about who I vote for and against.

 

Now back to the original point of this post, how about one or more of you people who pick corporate boards pick me for your board and make me a liar here. Since I do full exclosure I will note that too.  Besides I could use the income and perks:)

                

Fourth Quarter Trading Portfolio

Twenty two holdings to be trimmed to 17 by year end.  We continue to take out non performers and concentrate on blue chip dividend stocks. That concentrates holdings in each stock at a higher value, which not perfect is good for this economic environment.

 

 

AGNC...I continue to like the agency reits in this interest rate environment. High dividend and solid capital preservation. Nice high options.

 

ARCC...This stock is slated to be sold out of the portfolio by the end of the year. However I still like it as a holding once the economy improves.  This BDC is the best of the breed.

 

BCE... Has held up very well in this market. Continues to produce portfolio income and is in Canada away from political issues in US. Like owning AT&T in Canada.

 

CTL..great value stock with high dividend. I own it at too high a price but will keep it due to value. Is best of breed for legacy telecom carriers and is doing a good job with assets.

 

DUK..has also held up well in price during tough market. As merger gets closer investors begin to consider upside in stock via expense savings and CEO change.  Possible upside here.

 

ERF..I am deep in this stock as well price wise, but will keep it for it's high dividend and value. Keeps producing income for portfolio. Second largest holding.

 

FTR.. to be sold out of portfolio by year end. Has had some earnings problems of late.

 

GS.. What a huge trading mistake. Deep in the money here and will sell out of portfolio by year end.

 

HCN... another stock that has held up well. Good dividend and income producer for portfolio.  Continues to be undervalued.

 

HTS... another agency reit. I bought this one before I decided to prefer AGNC.  Will likely sell this one out of portfolio. Good stock however. NC based company.

 

JNK.. continues to be a good monthly dividend, despite not being a solid income producer for the portfolio. Will keep for future recovery. Third largest holding

 

LO..largest holding and solid performer income and dividend wise. Has held value plus since stock market downturn. Keeper. Is also undervalued. On a side note LO makes the brand of cigs Obama smokes.

 

MO..Ditto for holding value during downtown and good income producer too. Government guaranteed annuity.

 

NNN..Solid Solid Solid. This stock continues to be a pleasant surprise as it has gained value during downturn and just keeps on being a great performer. Might now be best real estate company in the country.

 

O..A tad bit overvalued, but the monthly dividend and solid performer due to shareholder friendly company makes it a long term holding.  I continue to like O very much.

 

PFF..down a good bit since it has financial stocks in the portfolio. But I will keep it for recovery and monthly dividend. 

 

RAI...Tobacco stock that just hold values and keep adding income to the portfolio.

 

RRD..Has been a disappointment the last quarter. Good dividend, but I am likely selling it out of portfolio by year end.

 

SCCO..way down in price and I am deep in the money. But I like copper and will keep it for recovery.  Frankly the market has made a mistake on copper use and this stock should rebound once that becomes apparent.

 

SO..My vote for safest stock on the planet. During downturn, during upswing it just does what it does best and keeps rewarding shareholders. Makes you sleep like a baby.

 

T..newest addition to the portfolio for safety and it has been just that. I added after t-mobile merger was put on ice and price got hit.

 

WIN,, Good dividend and ok options. Will likely keep it for awhile since it should recover. Good company fundamental wise.

 

PM..Phillip Morris is on the watch list as it gets sold off due to currency concerns and we might enter this stock if the price drops  more. PM is just a fabulous company with great management.