I-95 Are tolls neccesary?

Looks like the NCDOT has trotted out their "let's toll I-95" again.  Last time they did about two years ago they got serious pushback from NC citizens who live, work, and do business along the path of the road.  NCDOT went back and regrouped this time bringing out a two stage approach in hopes to divide and conquer those opposed to tolling.  Make no mistake the power brokers in Raleigh, NCDOT, plus others aligned with those power brokers who live in counties along I-95 are determined to keep pushing this issue until they win. There is belief in their ranks that they just know better than everyone else about the effects of tolls on I-95.  What I find discomforting is that many people in those counties and many of these power brokers actually think that tolling I-95 would not hurt business along the road. They are wrong.

Almost all my working life has been along I-95.   I have lived in Lumberton, Fayetteville, Sampson County, and Smithfield and likely have put as many miles of driving on this road as anyone.  I understand this road and it's economic impact on businesses in counties along the path and those adjacent to it. There is also the positive impact this road has on adjacent economically depressed counties in eastern NC.  I-95 is the lifeline that has helped keep many smaller towns and cities along and near the road from falling completely into economic despair during this downturn.  Do not tell me that charging $40 for a round trip for tourists, truckers, and residents will not have a serious effect on use of the road and businesses along it. Just using it one time per week will be over $2000 in tolls annually. Imagine the cost for average hard working citizen who uses it to drive to work daily to Raleigh or other towns along the road. Of course those working citizens are not as wealthy as those in Raleigh and many power brokers wanting to toll the road. I expect many of those pushing for tolling just can not understand the economic hardship many would face from tolling since $40 is something they would spend on a average meal for an evening out in Raleigh. Think about how it will change the routes of truckers who use it to deliver goods along this path, and those who stay in our hotels and dine at the restaurants.  How about the effect on new truck stops like the one in Kenly, the new jobs created by Sysco and Food Lion who use this road daily.  Are Raleigh and the ones pushing the toll road willing to reimburse the towns and counties for the loss of sale tax revenue?  Would they be willing to give economic help to the motels, restaurants, and outlets that will get hurt badly from tolls on I-95?

Let's note that even with the $40 two way tolls only $28 of that will actually reach the cost of upgrading the road since there is a 30% cost of just administering the toll. If we used our money wisely we would use that huge 30% to buy pavement and rebuild bridges along the road instead of wasting on administration toll costs.  Let's also note that for years NC Governors and NC Legislators took hundreds of millions of transportation trust fund money from the trust fund to pay for other favored spending that could and should have been used to upgrade I-95. 

All this points out that those in Raleigh, NCDOT, and power brokers want to get I-95 and and the needed improvements off their plate so they can get on to other road building needs for more politically influential areas of the state. Other needs such as continuing to upgrade US 70 to near interstate standards which is a priority of Gov. Perdue.  Is anyone asking about tolling US 70?  Is anyone asking about tolling the desperately needed bridge over the Yadkin River on I-85?  Did anyone consider tolling I-85 on all the recent upgrades on that road. How about tolling on the Charlotte loop? No one has asked and no one will since those areas are considered more important and frankly more of our wealthy citizens use these roads.  Could here be some racism in the efforts to toll I-95 since it is used by local lower income and minorities more than other interstates in NC? 

The argument that only Yankees use I-95 is also being trotted out for this road and that makes no sense either. Yankees are really tourists, which would be considered important economic sources of revenue in other parts of the state, but since they are along I-95 they are just Damn Yankees to many in Raleigh and frankly to many who live near I-95.  Of course our gas tax is so much higher now than any other state around us so maybe these Yankees should just fill up at the border and drive right on through the state. One would think all that high gas tax would help us build roads without tolls, but the NCDOT and power brokers in Raleigh waste much of that money on unused passenger trains and for road building political favors.  Do not tell me that NC has the largest state supported roads network in the country, others do it with less revenue even when you consider the way it is funded. The issue is setting priorities for the funds we have now. 

This week there was a point of discussion on NC Spin that favored tolling made by my friend John Locke that those who use I-95 should pay for it. Well where was this argument when we were upgrading other Interstates in NC?  No one said that when I-85 was upgraded,  no one said that when the urban loops were being built. I wonder now if when I-40 West from Statesville to Asheville which now needs upgrading like I-95 is considered if tolls will be considered there?  My spouse had a great idea about a Transportation Lottery to pay for these improvements.  While I am opposed to lotteries, since the NC Legislature pushed the so called Education Lottery through a lottery for road upgrades should make sense to them too. Outgoing Gov. Perdue who was such a fan of the Education Lottery could make this one of her legacy legislative achievements. 

Now one place I do agree with NCDOT is with the idea of doing this road in segments. That idea is one I pointed out when this toll idea was first trotted out. Many segments of I-95 do not currently need upgrade. For example the portion below Lumberton mile marker 20 is in excellent shape. By the way when the portion around Lumberton got upgraded two years ago why did NCDOT not go ahead and increase the road to six lanes then? The same people who are telling us they got the plan for I-95 now missed a perfect opportunity to save money there. There are other portions not in immediate need of upgrade as well. The portion needing the most immediate work is from mile 81 south to Fayetteville, about 30 miles or so.  That segment is the busiest and could use a 6 lane upgrade now so let's appropriate some money and get it done. The next segment needing improvement would be from Fayetteville north to Kenly. Once those are done you could move on to 20 to 30 mile segments and get this road done over a decade or so using current reoccurring funding from regular road improvement revenue sources.  South Carolina has I-95 too and they seem to be using the segment at a time approach to get their portion upgraded and they have more miles than NC. 

Here is a fact no one in Raleigh or NCDOT wants to acknowledge many of the miles along I-95 do not need to be 6 or 8 laned now or in the foreseeable future. The current approach is to turn I-95 into a super road Cadillac style where that is not needed. Did you know the current idea is make the road concrete and not asphalt? That is a significant increase in upgrade price. There are other such Cadillac road ideas in the planning as well that could and should be eliminated. NCDOT officials even admitted that to me when I questioned them on this road the first round of attempted tolling. $4 to $5 billion as we are lead to believe is not needed here, a good bit less would do the work if we did not build a top of line road.  We could take $300 to $500 million annually and make it happen over a decade. The reason again they do not want to do it this way is they want to use those funds somewhere else in the state. Well sorry power brokers but I-95 has served this state well over the many years of use providing jobs, tax revenue, and a economic lifeline to a poorer part of NC and now needs help to begin upgrades and improvement.  For years this road has been neglected for more politically favored routes when timely upgrades would have solved the current situation. Raleigh, NCDOT,  and power brokers you owe it to this road and the people who use it who have paid taxes and made investments over the years to pay them back for doing their part over the decades and not hitting them with economic pain for a job well done. 

What can you do? Call your NC legislators, call your US congressional representatives, contact local officials and elected representatives, go to the upcoming meetings and let your voice be heard.  That last one going to the meetings and expressing your opinion is what backed off NCDOT last time so do not neglect attending the meetings.  A schedule of these meetings can be found at www.driving 95.com.   Despite what you hear you can make a difference as many of you did last time this tired old idea was trotted out.  Maybe it is time to ask Gov. Perdue and Mr. McCrory what their policy would be on tolling I-95.  Are there any reporters out there who will take this question on? 

The writer is a current resident of Smithfield and VP on the Johnston County Visitors Bureau. My opinions here do not necessarily reflect those of the Johnston County Visitors Bureau. 

Low Rates now through 2014

Chalk another year up for those of us who like Agency Reits.  We already knew that the Fed was going to hold interest rates near zero until late 2013, now we know the current rates are good for three more years. Think about that for a moment for those who have concerns about all the uncertainties regarding Obamacare, federal regulations, new Dodd Frank issues, or anything Obama might throw at you or your business, the fact is you now can count on one thing being good for a three years. 

We have been following the Federal Reserve for over three decades now and never in our wildest imagination would we expect them to come right out and put in writing that there will be no rate increases for three years. Lots of issues to be addressed if you are investing in your private business or your considering putting some money at risk in the bond or stock market, but having stable interest rates helps one category of stocks more than any other Agency Reits. 

It also makes for good corporate expense savings as bonds mature corporations are locking in low rates for years to come. 

This news will make us reconsider our dropping of HTS from our portfolio and adding to our already sizable position in Agency Reits. One can not lose when getting 14% or so on your investment for three years virtually guaranteed. 

We own options on AGNC currently and will now look to add to our position either by adding to AGNC or picking up HTS. 

Very Low Risk Option Selling.

Our fund is basically a short term options play on the market. Doing options on 30 day cycles increases risk and makes research and watching stock movement intra day imperative to success and profits.  Short term options increase percentage profits significantly and one can increase the number of sold positions in your portfolio thereby maximizing profits for the portfolio.  However one should not take risks like these unless you are an experienced trader willing to spend the research time and constant work that makes outcomes profitable.  Even professionals lose money and make errors in judgement, but professionals know that the goal is to have more gains than losses. Most regular investors have trouble with taking even one loss.    

There are plays available for home gamers as Cramer calls them that are frankly as close to slam dunk options as one can get.  First of these are call options. Call options are simply selling a position in your stock to someone else who pays you a premium. You already own the stock so have accepted the gain or loss in the stock, call options offer additional profits to the owner of the stock.  Using a call option to exit a stock is like having someone else pay your sales commission. The beauty of call options is that you can sell them over and over with little risk to your position other than increasing profits. 

The other plays that are very low risk are far forward in the money put positions in blue chip megacap stocks. For instance let's take McDonalds Corp., symbol MCD,  which is currently selling for $100 and change. The stock has been on an up trend for many years, is one of the best managed companies on the planet, and is continually eating it's customers lunches so to speak. The chances of this stock falling to $80 per share over the next twelve months is virtually zero.  A $80 put for January 2013 expiration currently sells for $2.31 per share. So for every 100 shares you are willing to sell a put on your make $231 of option premium.  That is about a 3.0% return on our money, while you still get to keep your money in the account to back up the option purchase.  If you are earning 1% or so on your funds you have a almost 4% income with almost no risk. Better yet you get the $231 the first day of the option sell to use all year.  The best time to do these put trades is when the market has taken a significant loss and prices are less expensive for great companies. 

The put option approach is what Warren Buffett does with his huge cash and security hoard daily. Imagine what kind of cash flow he can generate from his assets and he gets to use these option premiums all year for other purposes to make even more money. There are numerous stocks likeMCD that offer similar opportunities for slam dunk option income.  XOM, T, JNJ, MSFT, SO, and PM just to name a few. So if you are looking to trade like Warren Buffett with much less risk then maybe long term in the money put options might be your ticket to profits. 

Full disclosure we use long term hedging put options such as noted above in a personal account not related to the STI Hedge Fund.

           

 

Portfolio changes. Three drops and two increases in exposure.

Options expiration this past Friday allows us to make some changes in our portfolio for the coming month. These changes continue to reduce the number of stocks in the portfolio since the continuing rise in stock prices is making it harder to find stock values. We are now down to 12 stocks in the portfolio.  LO continues to be our largest holding. GG has now moved up to second place. CTL is number three. JNK is number four. AGNC is number five. 

Southern Company, symbol SO, has long been our favorite stock for safety but has reached $45 per share reducing the yield to 4.2% which makes it harder to do derivative plays going forward. We continue to believe SO is a super safe stock which the market has now noticed with the rise in the stock price. 

Health Care Reit, symbol HCN, continues to be one of the best medical real estate companies out there. However it has reached a price of $55 which brings the yield down to right at 5.0%.  A yield of that size for a medicare payment risk stock and a non qualified dividend makes this stock no longer a value. 

Hatteras Financial, symbol HTS, continues to be an excellent agency reit which is well priced for value.  However we believe the increased exposure to AGNC we took on last month adequately covers our fund for this sector. 

Goldcorp, symbol GG, we have doubled our exposure to this gold miner which we believe offers good risk compensation going forward and has excellent upside price potential. 

Realty Income, symbol O,  we have increased our exposure here by 50% due to the market concerns about a couple of tenant bankruptcies that has weakened the stock price. We believe this company will adjust well and continue to move forward in dividends and stock price. 

             

Earnings Reports...

Today's numerous earning reports  had one thing in common, many corporations reported higher or meet the street earnings, but drop offs in revenues.  Google might have been the only one reporting better revenues, but lower earnings.  Significant that IBM and Microsoft reported lower revenues and Intel barely beat revenues tells me that the economy is still quite soft. If the economy was accelerating you would see much better revenues instead of lower or dead progress in sales from these technology firms who would see gains from people and businesses buying new machines and add ons for new employees. Again many firms reported continuing expense cuts, which means they are buoying stock prices with telling investors they will hold up earnings with cuts.  No one ever got rich cutting staff and expenses. 

Not sure what to make of GOOG, which would be a leading sign of economic growth. They had better revenues and lousy earnings. Their costs are increasing without any accompanying improvement in profits and that could either be lousy financial management or lousy expense controls. The stock is getting punished for the earnings miss.  I do love to listen to the talking heads who know little, but want you to think they know exactly what is going on. Wish I was so smart. 

As noted earlier I keep a close look on SCCO for expected improvement in the economy and the stock has moved up from $30 to now about $35.  If it stays there that could be a sign of real economic growth, but only time will tell as most of the movement so far is anticipated improvement in the economy. We remain hesitant to commit new capital currently as we still are not convinced of the up tick in the economy. Employment reports, while positive, now have so many fudges, adjustments, and weightings no one with any sense trusts them. We do not believe it is some plot by Obama to make his reelection prospects improve, we believe government reports have become like all government totally unreliable short term and only moderately ok long term.  Reports have been prettied up to help reelection for all of Washington, now just the President. 

The only places we would consider new money would be ERF as we suggested yesterday and once again the agency reits. Maybe we will miss part of any early upturn, but so be it, we would rather be right than sorry.  

ERF...how short sellers and their inside sources work.

Enerplus, symbol ERF, has been in our portfolio for as long as we can remember. The company domiciled in Canada is one of our favorites.  It pays a nice monthly dividend with a annual yield approaching 9%.  The derivatives of this energy producer tend to be excellent income as oil and gas prices can go up and down quickly. The fund has likely made as much money off this one stock as any other security over the years. ERF is almost like owning a portion of an oil or gas well since they derive almost all of their income from these sources. ERF has some assets in the US as well in the east coast shale gas regions and some in the Bakken energy play in North Dakota. In all we continue to like the company and particularly at the current $23 price. 

In the last month or so ERF has drifted downward in price from the upper $20's to now today around $23. Most traders and investors had considered the reason was due to the significant natural gas assets the company owns since natural gas prices have drifted downward due to the warmer than normal winter and the increasing supply of gas in the US. Shale gas in the US is so plentiful that the oil derricks in North Dakota not owned by gas companies have begun to flare off gas to get rid of it. So over the last few months short sellers have been bearing in on ERF in hopes that the gas situation would drive the price of the stock down and they could make profits from the lower price. Nothing wrong with this scenario as it happens all the time on Wall Street and many times these short sellers are proved wrong and they have significant losses. However most people considered the stock to be over sold at this point. 

 This morning however we find out that is not the case. ERF has been planning for some time to issue new equity or shares to expand their business that was unknown to most investors or traders. Issuance of these securities will be at $23.50 per share is just above the current $23 share price. If you are wondering how short sellers knew to drive the price down just below this price consider yourself smart. Short sellers this morning are taking profits from what is known as insider information. Not only did they know the strike price they knew the date of the announcement. We are willing to bet that insiders in ERF likely told people in Washington DC and others about the stock offering and of course the info spread to the short sellers who are taking significant profits from the info. 

If your are also wondering if someone has reported this to the SEC, they have, but expect absolutely nothing to happen. After all the hoopla and talk of cleaning up this kind of insider business Obama and Congress are doing nothing and will do nothing to end this kind of trading. We suppose if you are in on the profits why kill the golden goose. This happens regularly, but since our portfolio is small in numbers of stocks held we rarely see it happen to us. Last time was last summer when Lorillard, symbol LO, was insider traded by someone in the Obama administration on news that no action was forthcoming on menthol regulation. 

The STI Hedge Fund currently holds 3600 options at believe it or not $23 per share expiring in January 2012 or this Friday. With the stock trading just over this strike price we got lucky in our put option. Trust us we had no insider info, because if we had the position would have been a lot larger. But we do not like this kind of trading and again wonder if someone in power does not see or care what it does to the average investor when they are looking for honest dealing. 

Lastly if one is looking a nice investment going forward ERF would likely be a good buy at this price. The upcoming stock issuance is price in and in the next couple of days the short sellers will be gone. Yes, the natural gas decline is there, but the risk at this level and dividend is good for most investors. ERF is 76% oil versus 24% gas. We continue to have it in our portfolio and will going forward.  

                

Three stocks we are warming up to again.

Altria, symbol MO, was deleted from our portfolio last month when it reached valuations that were over our limits for tobacco stocks. We have opined constantly about MO being nothing more than a government sanctioned monopoly, but even those get too high for our liking.  In recent trading sessions MO has backed off breaking the $30 per share barrier and moved back down near $28.50 which could again make this stock a holding to consider. The current yield of about 5.75% is better than the under 5.5% that over $30 per share brought. I know that is a small number, but when we are looking at a stock for basically dividend and derivative income that small amount matters.  Being closer to $28 per share matters too since this security offers little capital gain wise and getting caught in a stock at $30 versus $28 is significant when one is dealing with 2000 or more shares. There is also the obvious fact it is a tobacco stock and being based in the US where cigarette smoking is declining, albeit slowly, the business model does have some limitations. If MO drops down another 25 to 50 cents per share we will again consider moving into it again. 

Ares Capital, a business development company, after dropping into the $13 to $14 dollar range late last year, seems to have regained it's footing around $15. The reason for the drop off was concern about the economy going forward and thus as a BDC which loans money to emerging small business companies there was real worries about pay back of principal and interest. Those worries have abated for awhile and we are again taking a look at ARCC.  I would not go as far to say we are including it in our portfolio again, but if you are looking for a nice 9% plus yield that is fairly secure with some capital gain potential this might be a good choice. ARCC is best of breed here and has done well throughout the economic downturn. I would advise a position below $15 would be appropriate. 

Stifel Nicolaus, symbol SF, continues to intrigue me as well. SF got into some legal trouble last year when it was trading at near $50 per share. I will leave it to you to do your due diligence on that news, but it's stock price got hammered down to near $25 then.  In recent months it has quietly moved back up to the low $30's or so. SF is a conservatively managed broker from the midwest that has been buying some smaller brokerages of late.  However it has not been overpaying for assets and has a good reputation for keeping to it's knitting. In the last month there was talk of a buy out of Morgan Keegan,  but yesterday Raymond James finally bought Morgan.  What I feel good about is that as banks exit some of their stock trading units via Dodd Frank this firm might be getting some bargains in upsizing their business.  Stifel is making what should be considered a fair offers for what is basically the customer accounts of the other broker. If Stifel continues to make these kinds of assets purchases as they have done in the past few years this stock might have some good upside of about 50% increase in price. Might be worth your attention going forward. 

We do not own any of the stocks listed here either as a option or long. We currently do business with Stifel as a broker, but have no inside information.

                

 

Morning thoughts and one stock for your consideration.

The list of people who stay on past their prime is almost endless and generally involves males who allow their competitive risk taking nature to get the best of them. Michael Jordan made a fool of himself with his continued returns to the basketball court. In the same vein Coach Dean Smith showed the correct way to leave the competitive arena and won much praise and exalted status for doing so. In the investing world we have Warren Buffett, who has made more money and made more correct calls that about anybody ever in stocks. However recently Mr. Buffett has begun to make some foolish errors.  His investment in GS could likely expire with absolutely no gains. The preferred stock in BAC looks to be a big dud. Add in his continued outlandish statements regarding politics and you get a man with lots of cash gunpowder and nowhere to shoot it so he has taken to shooting off his mouth. Smart business people know you straddle the fence when dealing with politicians. Yes, you also know you have to pay out some serious contributions to both sides to keep them off your back. But in the end the best policy is no policy. Mr. Buffett in our opinion has stayed in the investing game past his prime and it is past time for him to exit stage left before he makes a statement even dumber than this week's challenge to Republicans to match his debt contributions. We fear the next statement could confirm Mr. Buffett has jumped the shark and make clear his mental capacity has left the normal. 

Quietly this week there have been a number of high level layoffs in the US. The list includes banks such as RBS and BAC.  Sears and Food Lion added in this past week as well. Several pharmaceuticals added some as well. Not sure if this will show up in the highly managed and adjusted initial jobless claims or the similarly adjusted employment report, but what it does show is that the economy is still in stall mode and that is not a positive sign. Speaking of the employment report I find it fascinating the the press ignores the adjusted and adjusted some more jobless number when everyone knows the number purposely has been tinkered with to help politicians for both sides keep their jobs. Just shows how ignorant and in the game our press has become. 

Potash of Canada, symbol POT, has been in the tumble since fall due to worries of business prospects going forward. The stock price has gone from around $60 to now $40 in a matter of three months. That in my opinion is a way over reaction to any news of farming cutbacks.  There has been an oversupply of fertilizer in the past year. This is nothing more than the free market reacting to the prior under supply of fertilizer and adjusting by producing more goods. POT could very well be a good capital gain prospect at this level and with the northern hemisphere starting the growing season right now could be a good time to take a position for profits.  Even if the oversupply remains POT has likely hit a point where the stock price will not decline further and offers a low risk upside for traders.  One could buy the stock here around $43.50 and sell a June $45 option which will net them an over 10% return if the stock moves up not including the dividend. If the stock does not move up you still get the $3.50 option premium, dividends, and 8% profits.  Not bad for a 5 month investment.  Remember the free market weeds out the higher cost producers at some point and POT is best of breed.

We believe the point has been reached where bond values are high enough to be considered a bond bubble. Rates have declined so far that even the silliest of bonds have value beyond what is real value.  The majority of bonds in our municipal bond portfolio are now valued much higher than par.  Normally we would expect most muni bonds to be valued near par or just above par to be considered right, but with US Treasuries going down in yield almost daily 5% muni yields are now being bought to the point investors are pushing their face value beyond reason.  Not sure how this will all end, but if I was in a bond fund I would consider lightening my position and taking some capital gain profits now. 

The door is closing on CVE.

We have alerted readers to CVE in earlier postings as to the potential for future profits from an investment in this Canadian oil company.  Unless you believe the world is going to give up using oil or that Obama will be made dictator CVE merits your consideration.  CVE is similar to another of our recommendations COSWF in that both have huge pools of oil from which to draw. CVE is different in that the company is only starting to tap their oil pools. Both are in Canada away from Obama's anti-business approach, but in a stable political environment. 

Cevonus Energy, symbol CVE, is a integrated young oil company. CVE uses state of the art steam assisted gravity drainage drilling to get at large pools of oil deep in the oil sands of Canada.  The company spun out of Suncor just over two years ago is slowly ramping up production and likely will not get to full production until 2021. However much of the big increases will occur between now and 2016.  In addition to the oil pools CVE also produces natural gas from it's areas of operation. Unlike the natural gas in the Bakken areas of North Dakota where much of the gas is considered nuisance to the oil delivery, the natural gas in Canada is being used there and eventually will be be shipped to Asia. CVE also has interests in two refineries based in the US. However the low price of natural gas has hurt the profits of CVE currently. 

Judging from what we read there should be an additional 75% increase in oil production from current levels going forward. That kind of increase means serious dividend increases and resulting capital gain in the stock price.  The current payout is 20 cents per quarter or around 2.4% so you are paid nicely to wait for the future payouts too.  Current per barrel costs of around $50 per barrel means CVE should be good for the long haul profit wise since most non-Opec oil producers can not produce for less than $50 as well. 

The reason for this posting is that we have seen two brokerages post opinions on CVE in recent days and We would expect many investors who do not know about CVE will not take a look at the potential in the stock and company.  Taking a position at the current price of around $33 plus would be fine for a longer term horizon, however if you are considering a shorter term trade under $30 would be preferable.  This would be a good selection for those looking to stuff something in their children's or grandchildren's stocking for the future. Note that dividend tax is paid in Canada prior to your payout and can be credited against your IRS filing in the US. 

We do not have a position either long or as an option in CVE, but are considering taking a long term derivative position here. 

Current valuations cause concern.

 We find ourselves in a minority here and it will be so until events or circumstances change our mind. The continued chasing of stocks, and most notably dividend stocks is pushing valuations beyond what we consider prudent. Many of the stocks in our hedge fund portfolio are reaching limits we are uncomfortable with as well.  The markets are currently ignoring European worries, US budget concerns, and continue to trade on the greed side of the fear/greed equation. As earnings season begins this week in earnest we will get our first indications of the economy going forward. Concentrate on expectations going forward by companies, not what earnings were the past quarter. 

Doug Kass, who is followed by many traders, came out this week with a all is clear and buy away posting which is likely pushing this move upward.  Doug is a committed bear and anytime he sees positive trends many believe is must be true with his credentials.  It also helps he made good calls twice before in the last three years. So use this info as you will.

As the markets move upwards here we are pleased that the fund is positioned strongly to the fear side of the equation. Maybe we will be proved wrong, but good sleep and profits here go hand in hand.  We find very few bargains or even good valuations here so we will stay put through the end of next week's derivatives expiration day. 

The one point that plays in the favor of the greed side is that SCCO has begun to make a move out of it's lower trading zone.  SCCO, the copper producer, is a direct play on the world economy getting better.  If SCCO moves up into the mid-30''s that could signal the currentuptrend is correct. 

We still consider GG and the agency reits here as the only place to place new money. 

Bond Ghouls coming to a bond auction near you soon?

The late great Louis Rukeyser used to call bond traders, bond ghouls.  The reason is that bond traders always see things from the worst point of view, assuming that the economy is going to hell in a hand basket. Thus the only way to keep your money safe is in bonds, not stocks or any other asset.  A more pessimistic bunch you can not find.

 

Bond Ghouls are currently assessing bonds in country after country in Europe as unable to make debt payments and default as being the obvious next step. The last one was Italy and if you have been following our postings you know Italy can not pay interest rates above 7% and survive long. They currently are nearing 8%. The only country left in Europe currently considered stable financially is Germany and the bond ghouls have taken a different approach there today. 

We have talked about EFFECTIVE negative interest rates on US Treasury bonds when you take the impact of inflation and the low low interest rates paid. But for the first time in my life government bonds actually traded at NEGATIVE interest rates.  The rate was .01% negative and it was even oversubscribed by almost four to one. This traders and investors is what is called real fear that Europe is going to collapse. You give Germany $10000 and in six months they give you back $9995.  Go figure. 

 

 

                

Gold, Small banks, Munis, and Natural gas.

Selected thoughts on some investing opportunities for the new year. 

Gold, which we have avoided in the past, now is in our portfolio via a low cost producer GG. Goldcorp being based in Canada is also a plus. What we find another plus is not the implied safety of gold, but the fundamental fact that people have begun to buy and stockpile gold for reasons of concern for their future.  We expect this is in conjunction to the huge increases in gun sales. Investors and now non-investors have begun to worry about where Washington DC is taking the country and gold is a natural store of value. What this has done is increase demand for owning the actual metal to a point suppliers can not keep up with demand. Once this info becomes more mainstream I would expect investors to move into gold stocks to take advantage of the increasing profits of gold producers. GG is our pick here due to it's nice cash flow and the prospect of increasing dividends. 

Small banks still continue to intrigue us with investment possibilities. Banks are returning to their natural place in the investment and economic world of being lending institutions and basically utilities as an investment. The only holdback is Dodd Frank which is killing all banks and putting some serious costs onto small banks. However if one considers Obama gone in 2013 and Romney president things could indeed change with some important alterations to Dodd Frank and the reduction of costs for small banks.  If this occurs the relationship factor with customers will again become the bank standard and no one does this like small and some regional banks. Lending money for cars and homes purchases, seeding money for small business startups and home improvements would be made locally and the loans would be kept locally. If the economy picks up small banks could again be good payoffs for investors.  Now this is not a place to gain serious capital appreciation, but the prospect is there for 3% plus steady and growing dividends. Our CPA talked with us on this last week and got us to thinking about where one would place bets now for a bank future as painted above.  How about BB&T, a small regional which stuck to it's knitting during the recent downturn and still has a nice bank dividend.  A couple of smaller ones which trade with some liquidity would be ECBE,  East Carolina Bank, that has some solid financial's and is all but begging the FDIC to let it take over some of the problem banks. How about FBNC, which also has solid financial's and good  political ties too.  One could buy a thousand shares of these and sit back and see what happens. The last two offers decent dividends as well.  Investing in banks is a true contrarian play so be careful. 

If you own municipal bonds you know valuations have moved upward quite rapidly lately. Take a look at MUB, the muni bond ETF, and you will see a steady graph upward since Meredith Whitney made her comments about coming defaults in munis. Needless to say she was wrong big time and investors seeing nice tax free interest have piled back into these bonds. Our portfolio of bonds have increased in value over 5 % in the last six months and adding the over 5% interest we earn you are talking serious money. Add in that if one had been smart and bought munis back when Ms. Whitney did her prediction one could have bought good quality bonds on the cheap for sometimes 85 cents on the dollar.  Buying bonds when things are good or the market is saying trouble has always been smart. Buying bonds when the economy is in the tank, like right now, has always been not smart.  Even with that said there are still some decent values in munis if you do your homework.  Credit here to our many evenings of listening to Louis Rukeyser on bond buying for understanding bonds and our bond guru noted back in salting money away posting. 

Natural gas vehicles are not currently being pushed by the Obama administration since they still hate anything that might be considered fossil fuel.  God bless him but Boone Pickens has tried and tried to get Obama to listen to no avail. Mr. Pickens started a company to move long haul trucking to natural gas and it has not taken off due to the fact Obama could care less. So in the end Mr. Pickens company, CLNE,  has not done well despite huge injections of cash.  Now that does not mean there are opportunities for stock gains in CLNE, I just expect it is down the road a bit. Obama and extreme environmentalists only see electric as the way to go with transportation, never mind the environmental dangers from spent batteries and increased pollution from more power production. Stupid is stupid we suppose. Anyway there is a company that has stepped into the void, which seems to be doing all the smart things while we continue doing hopey changey. WPRT, a Canadian company (there's that Canada thing again) has more than doubled in two years, might be the leader in the natural gas transportation field. They have yet to make a profit, but they have a bunch of patents and have alliances with GM, Ford, and Cummins. So for a long term view of this industry and a chance to make some real money WPRT might be a good bet. 

               

 

COSWF at a bargain price.

This stock has again reached bargain price stage. Unfortunately since it does not offer options it is not included in my fund. There has been discussion of COSWF moving to the NYSE and offering options, but that action is still not pending. 

COSWF offers the shareholder significantly dividend value with the current 30 cents quarterly yielding over 5%.  That dividend is very safe due to two reasons. One, oil prices would have to decline significantly before the sands that COSWF digs and refines oil from to be non cost effective. Two, there is at least a 30 year pool of oil at current and expected increases in production at the Syncrude site. 

Most investors, and even many oil specialists,  know that COSWF is producing light sweet oil from it's pools. This makes the oil easy to refine, highly sought by refiners, and more highly valued out of the ground. Again all of this makes the 30 year supply a shareholders friend.  Canada has decided to do their best to be environmentally sound with their resources, but they have also put getting at those resources above all concerns going forward. The US currently is Canada's largest export market for oil products and wants to do more if Obama can be persuaded to build the Keystone XL pipeline. However if that pipeline is not built, Canada has said they will build a similar line to the Canadian west coast and begin selling it's oil to China.  So as a shareholder you win either way. 

COSWF currently selling at around $22 per share should be selling in the high 20's due to the almost inexhaustible supply and solid politics of Canada.  The company has said they will not be expanding as rapidly as had been suggested earlier due to the weakness of demand in a worldwide economic slowdown. This has lead some to believe COSWF might consider using some of it's significant cash flow to increase dividends since the company only has one area of capital expenditure and that is the oil sands it owns. That cash horde much be either used and paid out. 

Frankly owning COSWF is like owning a share of your own oil well. 

I do not own COSWF either as a long or option.

                

First trading morning of 2012.

Noteworthy this morning is the downgrade of Realty Income and Southern Company from top picks to holds. As expected none of the reports say either of these companies are doing anything wrong or even that they are not good buys, just that they have moved up enough to make their price no longer attractive. Following my post a couple of days ago and yesterday about dividend stocks taking on higher valuations this is no surprise. I expect we will see some more of these reports in coming days as investors continue to plow money from other low yielding assets into safe dividend payers yielding 4% or more. Tobacco stocks have already seen downgrades for valuation reasons and I would not be surprised to see DUK,  HCN,  and other blue chip dividend stocks to see such soon. Rich valuations make me nervous. 

I also find the movement upward in stock futures this morning to be maybe illustrative of the coming year. Again feelings instead of thinking is taking hold. European troubles seem to have abated and China is reporting good prospects so traders are signaling all ahead looks good since it feels good now.  Europe is not going away and is likely to get worse before it gets better and US and China depend on those countries for lots of export activity. Therefore unless we are going all hopey changey again the worries there of an impending recession, if not already in one, will revisit us again.  Keep a watch on SCCO for a sign if there is real economic improvement happening since nothing in this world now can be built without copper. 

2012 should be wild ride with lots of opportunities for profits. Let the ride begin !

2012 First Quarter Trading Stocks.

(One edit note. We have enabled the mobile version of our blog for our mobile readers. Hope you like it. )

A new year and a significantly trimmed down list of trading stocks. When faced with the uncertainly going forward in 2012 we consider it prudent to reduce risks in stock selection, but do expect an above average performance for the coming year. We are now down to only 15 stocks in the portfolio from around 25 normally. 

 

 AGNC...Agency reit that should perform well in 2012, plus big dividends to add to the cash flow. as I opined in a earlier posting with the federal reserve buying MBS securities there should be a floor in this stock.  Agency reits are one of the few areas left that are in my opinion undervalued. 

 

BCE...Canadian telecom that continues to reward investors with shareholder friendly dividends and stock buyback's. I like owning companies in our business friendly northern neighbor away fromObama's non business friendly policies. 

 

CTL...An excellent choice for capital gains going forward. This stock pays above average dividends and one should eventually be rewarded with price appreciation as well.  Note the the federal government is activity supporting their rural business ventures with incentives.

 

DUK...I continue to expect once this company is merged with Progress Energy the merger savings will produce nice added profits and dividends. Look forward to having a CEO with some smarts too. Current price is fully fairly priced. 

 

ERF..Despite the pullback in price this stock continues to pay above average monthly dividends. Add in that it is domiciled in Canada and I like it even more. I took a loss in this stock at year end to gain back the oil premium in options going forward.  Priced fairly with anticipated appreciation. 

GG...Gold stock that tracks the gold market well, has a nice monthly dividend and a very low less that $300 per ounce cost of production. Headquartered in Canada too.  My expectation is for dividends to be increased significantly this year resulting in capital appreciation. 

 

HCN..Healthcare reit that has done well in assembling a nice set of assets.  It seems to have stabilized around $50 or so and the only worry is what could happen with Medicare payout's. 

 

JNK...High yielding ETF that continues to produce good income and solid option premiums. Carryover holding from 2011 that should perform well in 2012. 

 

LO..Currently largest holding and has been so for some time.  Good dividend income and continued high option premiums.  Another government protected monopoly. Only worry is the pending menthol  status, but as long as Obama needs black votes we should be fine.  Note that I have dumped all other tobacco stocks due to price appreciation. 

 

NNN...This stock held up better than any non utility I have in the portfolio. It's holdings of solid retail real estate keeps on producing rents and profits for shareholders.  Might be a bit undervalued. 

 

O...This little baby just keeps on producing dividends, increasing them quarterly, and adding additional bang with option income.  

 

PFF...This ETF has been beaten down significantly over the last year due to it's holdings of bank stocks. But note these holdings are PREFERRED stock.  There is some risk here with Europe, but I believe some exposure is acceptable. 

 

SO..Still commands a higher PE than most utilities since it is in my opinion one of the safest holdings on the planet.  Careful buying at a lower price is suggested. 

 

T...Despite our concerns over the merger being canceled we begin AT&T is a core holding.  Also with all the hoopla over Verizon being the better company the market still values T as a 55% larger market capitalization than VZ.  Note if Obama is not reelected AT&T can reapply for the merger. 

 

WIN...We continue to hold this stock in a portfolio that is not part of the STI hedge fund, but wanted to acknowledge the holding for full disclosure.  This company continues to produce nice dividends and we look at it as a long term holding. 

                

 

STI Hedge Fund 2011 Performance

As we have pointed out on our blog profile one of the reasons we believe we are good at running a personal hedge fund and trading with the big boys is that we have made about 90% of all the mistakes one can make trading and investing. The year 2012 will push that level up to around 92% or so as we made another big mistake that hopefully we will learn from and move on. That mistake is holding onto underwater positions too long. This goes under the rule we pointed out in trading mistakes as not being able to take a loss. Oh, it is hard to begin with, but even more so in our fund since even with a paper loss carried forward many positions we were holding still produced positive cash flow.  We take great pride in the fact that unlike other hedge funds ours is built to avoid the worse killer of profits in hedge funds and that is forced liquidation.  However in 2012 we took that too far and continued to carry forward losses that should have been taken earlier. 

 We could have continued to carry forward a good portion of those losses into 2012 and produced regular monthly cash flow and recovered some capital paper losses. However since we believe there will added opportunities to make higher monthly cash flow and profits going into 2012 we made a decision to dump all but three positions in our fund in December. The last three positions are losses but they are so small we would not be able to start a put position on them now so keeping them was a normal decision for the fund. So the losses we took in December will result in a much below normal year for the fund.  However we are highly encouraged by the much higher than normal cash flow for December that should move us into 2012 in a solid position for additional higher profits. 

The final net percentage gain for 2012 is 8.7%, which as noted is much lower than our expected annual results.  Frankly this is not a performance to be proud of in any year. Of course if we take the three years the fund has been in existence it does look much better. 2009 the results were 32.2%.  2010 results were 17.2%.  The average for three years is 19.4%.   We also note that almost all hedge funds operated at a loss for 2011 so we still beat the market averages and anything one could do investing in bonds or stocks alone.  We also enjoyed the competition this year as usual. 

As noted going forward we anticipate a better than average 2012. That coming from a tighter universe of trading stocks now down to 15 from our normal 25 or so. Even thought that will concentrate our holdings into larger shares of each security we believe the stocks we have selected to continue forward are much stronger and less volatile in a very unsteady market. Europe will likely continue to shake up things in the US with the ECB printing money it simply is a fact that using more debt to cover up debt Europe already can not service is a losing bet. Sooner or later that house of cards will fall. 

We also believe the economy in the US will only get marginally better. Nothing in Obama's plans, or actually lack thereof,  bodes well going forward.  I do believe there are more risk takers taking chances with capital investments.  However much of that is not long term investing, just people taking short term trading positions. The small uptick in housing is nothing more than some investors picking up serious bargains at what some believe is near the bottom of the real estate market.  Much of the improvement in the stock market of late has been mutual funds taking window dressing positions for the coming year end reports.  It is also a fact that many savers have completely given up on extremely low CD savings rates and low government US Treasury rates and finding other vehicles for yield. Note that most of the movement in stocks in the last month has been higher yielding DOW stocks and electric utilities which are considered safe investments. Tobacco stocks have made a huge move upward and now in our opinion have reached dangerous territory with their implied risk profile.  Utilities are reaching that level as well. 

There are actually few real values in stocks currently in our opinion excepting for one area.  That area is agency reits, yes we are noting them again.  The fund now has it's largest position in thesereits it has ever held and we are looking to add to that position in January likely making it our largest position going forward. The Fed is likely to do a QE 3 in the first quarter and those buys could be in mortgages so that will buoy these stocks even more than the implied Fed's point that rates are going nowhere until 2013. The only risk for two years is if Obama goes nuts and decides to end US government guaranteed mortgage programs, which we think highly unlikely. So why not earn 15% on your money via dividends even without the added derivative premiums. 

We will be posting our trading stocks and a brief summary soon so others can see where we will be placing our capital in 2012.   The addition of GG is the most obvious add and we opined about that addition in an earlier posting.  If risk profiles improve in 2012, we will look at SCCO as an add back. Otherwise we will stick with the updated trading stock list.