STI Hedge Fund February Performance.

As noted last month we have entered 2012 in a more cautious stance.  We have only10 trading positions in our portfolio having exited PFF and JNK just this month. We also continue to take additional margin on our trading positions to make them less vulnerable to market downturns. The result of the extra margin means less profits per trading position. Even with that margin and more concentrated positions we continue to have good results. February trading ended with a 13.786% annualized cash flow net of all expenses. Trading costs and margin interest continue to be very low. Our year to date gains are 19.473% net of all expenses and are above our stated yearly goal of 18%. The year to date figure as noted in January's report includes all net gains and losses either realized or on the books as unrealized. 

We only traded 8 positions in February and thus the lower number from January. ERF and LO were our leading cash flow producers.  We could have traded two additional positions but found the additional profits not worth the risk involved.

Looking ahead to March as of now we will continue to keep a cautious stance from what we see as a highly valued market and do not plan to go beyond our current 10 trading positions.  We do continue to explore opportunities for longer term put positions should stocks in our watch list make moves that offer profitable cash flow. 

We are in process of posting our entire watch list as we posted the first part earlier this week and will post the second part later this week if time allows.

                

Stocks on our Watch List. Part One.

In addition to our regular trading portfolio which we update quarterly we have a watch list that we keep an eye on for various reasons. These are not necessarily stocks we would buy but sometimes stocks with exposure to certain areas of the economy that have our interest. 

ARCC...Ares Capital is the best of breed business development company in the country. The do an excellent job picking and choosing from among the opportunities that come their way. Solid 9% dividend that you can count on makes for an excellent income producer.  If it was nearer $15 we would buy it now. 

AT....Atlantic Power has a 8% solid dividend that is paid out monthly. We have long admired the niche market in which this company does business. They provide the bio/renewable energy that many states now require of main line utilities by going in the state and setting up their operations and selling to the utility. As long as there are silly environmental mandates this company will do well. Domiciled in Canada which we like as well. 

ASPS..Would, shoulda, coulda, is what we see when we look at ASPS.  This company does business as a single source provider of dealing with all those foreclosed housing units in the US. They take the dirty work off the hands of banks, legal institutions, and others how want these assets off their books. As you would expect business is booming and we had a chance to buy this stock in October 2011 at $38, now $63. We wish it would pullback some so we would feel better about a purchase here, but expect we will be wishing too when it hits $100 in 2012. 

BBT.. We keep an eye on about three very small NC banks just to know what is going on in this depressed business. Frankly I can not see why anyone would want shares of any bank due to the Dodd Frank regulations making banks nothing but weak earning utilities.  No need to mention the other small banks here, but we will note BB&T that came through the financial mess in pretty good shape, has excellent leadership, and might be the first bank to figure out how to make some decent profits going forward. Keep an eye on the dividend for clues. Lower $20's gets our interest. 

BP...The day will come when this company will finally get past the Gulf disaster and when it does this stock will be a good one to own. The pressure in the UK to up the dividend is enormous due to the high percentage of people there who depend on it for income. BP has basically turned around it's profits and headed forward, but still has the legal overhang depressing the price. $40 and we are in. 

COSWF..Never has a company so rich in assets been such a poor user of such.  Canadian Oil Sands which this company is the majority owner of has arguably the largest concentration of oil in the world.  They could almost dig forever and never run out. But the management of this company can not get going and continually makes financial mistakes. Still pays a good dividend, but should be paying a lot more.  Long term the price is right now. 

CVE...Unlike the above oil in Canada company Cenovus is getting it done right. This company sits atop a huge pool of oil and is ramping up production and making money. Increasing production, increasing dividend, increasing profits is the reason we have repeatedly said get on this capital gain train now before it hits $100 per share. CVE has even found a way around the Obama turndown of the pipeline by finding another pipeline to the Canadian west coast to ship crude via Vancouver port just this week. Selling right at $39, we would buy on a small pullback of around $35. 

CYS...Best little agency reit out there, value priced too. We will not bore you with another agency reit description here as one can read about them extensively on our blog posts. We will say we are looking to sell a long term put here as the stock edges closer to $13. 

DM...My last employer who we have no contact with nor any inside info. This company used to be a big player in business and legal publishing and still does that business. But what might set this company's prospects going are it's legal process business in foreclosures of which there is a huge backlog of business. If and when the federal government turns loose the foreclosures a good bit of the legal work will get processed by Dolan. 

HCN..,One of the very best healthcare reits out there. But we like it under $50 and until it gets back to that price we will wait. 

HTS...Agency reit which is the lowest cost operator among the group and we like that a lot. If we were not already highly positioned in another agency reit we would likely take a position in this one as the price is right currently. 

I-95 and the Toll Deniers.

Seems we have a new kind of deniers among us and it is those who believe that toll roads are not bad for business but actually good for business and will have positive effects on future business along I-95. Heck if that is true let's turn every road in the state into a toll road and reap the profits of increased business everywhere.  That is one of the arguments for the toll road we heard at the I-95 Toll Road road show put on by NCDOT in Smithfield Monday. We also found out that the words "conditional approval" inserted into the NCDOT press release last week and regurgitated by a compliant media actually meant I-95 toll was not a done deal.  What it means is that NCDOT has been approved to do a study on a toll road on I-95, not toll it yet.  Such is the game that the power brokers and elites in Raleigh play in getting you to think their way all the while pushing this toll idea.  

Another theme we heard is that I-95 is the "deadliest road in North Carolina."  Well hells bells why did not someone tell us this before so we all could avoid the road to save our own lives. Reminds us of the time when the newspaper office we were working in at the time and the higher ups got threats of a bombing, so instead of telling those of us who worked there and especially those of us who worked there later at night they just kept the news to themselves. We suppose not improving I-95 before now and certainly RIGHT now is worth the few hundred lives that it would take to make us all beg NCDOT to give us a toll road. 

 NCDOT also either keeps changing their story or just leaves pieces of pertinent info out to be throw in when needed since the press has mostly moved on from this story.  For instance Ms. OConner told us yesterday that the road which had previously been slated to be all concrete is now being considered to be asphalt. Also that the new roadbed where there is to be 6 lanes might not need much additional land since they are considering using the middle portion of the road and constructing a barrier. Well how about that everyone NCDOT is looking to save money now when needing you citizens on board their toll idea, maybe you the citizens are being heard.  Enough savings and we will soon not need a toll period.  We have yet to get an answer to why NCDOT, after trying repeatedly Monday, did not go ahead a 6 lane the Lumberton section just completed that would have saved millions. The reason is simple they needed to have a carrot to dangle in Robeson County to try and get them on board the toll idea too. 

We also see where NCDOT and the Raleigh powers have bequeathed upon Rocky Mount a new exit. Could it be that the power crowd is using our money to bribe us again. Buying off citizens with a new road is certainly a time honored tactic in North Carolina, but using toll money to do it upon an already existing interstate takes bribery to a whole new level. Why not promise every county a new exit, or maybe your very own museum on the exit while they are at it. Just raise the price of the tolls and have at Christmas time in the state along the I-95 route.  Like the toll deniers said more tolls means more business.

 How about the buying off, or maybe just making sure the legislative local gang is on board in Fayetteville by stating that portion of the I-95 would be build first.  How much you wanna bet that if your county decides to scream loud enough about opposing the toll that it will be 2039 before you get your road portion fixed all the while paying the $20 toll bill.  

How about my local chamber folks who are considering endorsing the toll take our bet that we will not see a inch of concrete, opps pavement,  on the Johnston County portion prior to 2030 if then?  Jimmy V's Steakhouse will do nicely for us on the payoff since most of the power brokers will be long gone and dining there about that time you are figuring out they have taken you and your money one more time. At least you will be among friends. 

The point we can not grasp is that the power brokers in Raleigh and in local counties and towns seem to just do not seem to care one bit about the lost business along the interstate and the high impact the toll will have on property valuations there. Do not seem to care one bit about the huge county and town sales tax budget holes that will come from less sales tax collected due to at least 35% less road traffic. Do not seem to care one bit about the huge property tax holes in county and town budgets that will come from the less property valuations and less property to tax period that is being taken for building the road, and do not care one bit about the bill boards that are certainly coming down to the expanded road bed. Yes, billboard owners be prepared for significant loss of your revenues too. In case you the citizen are wondering why they are not caring understand they just plan to raise tax rates to meet expenses and guess who ends up paying for the loss of tax revenue from that toll road.  Those of you on county and city boards along the path are you prepared for the angry voters from the property tax increases?

Add in the NCDOT has not even figured in the loss of tourist traffic that will not get off the road due to not knowing what is off the road due to no info from billboards. Billboards might be ugly to sensitive pretty boy and pretty girl eyes in Raleigh but they keep business along I-95 humming. Just for the record the crowd in Raleigh has been wanting to rid us from billboards since the first road was built. 

This past week NCDOT spokesperson Ms. OConner pointed out that once the toll is put on the road no further gas tax money would be spent on the road. How about that for taking your money and running? Any leadership in the areas around the Interstate is a fool if they buy into and support this scheme now knowing that I-95 will be starved of state gas tax money going forward.  What this means is once the toll is up and running it is never coming down. Yes we am talking about you if you think we might be Mr. or Mrs. leader. 

We have yet to find anyone among the liberal toll road crowd and you know who you are to explain to us how a toll on I-95 is not a highly regressive tax on the poorer working class that uses I-95 to get to work in Raleigh and other towns. Maybe you are finally showing your true stripes with a we do not give a crap about these folks when we can get to the beach faster by spending more money on other roads that we would have be spent on I-95.  We all knew this all along, but so help us we never thought Ms. O'conner would actually admit this fact in print in the News and Observer last week saying roads like US 70 would get additional funding from the toll taking the funding needs off I-95. ( By the way Mr. Gene Conti how about manning up here and going out and taking some of the abuse from citizens at the meetings instead of putting a subordinate out there?) Here is the well hidden fact these folks do not care about the working class who will shell out big bucks just to drive I-95 to work, they care about their own power in Raleigh more and how fast they can make it to the Coral Bay Club to party with their friends.  Oh, the horrors of not making tea time at the Coral Bay on Fridays due to the stoplights along US 70. 

Now toll deniers we got another bet for you. Wanna bet how soon the power brokers and institutional banks and government agencies that support this toll road will be saying so sorry and be nowhere to be found when the your soul is sold and the I-95 businesses start closing.? 

CTL, GG, HTS, CVE.

CTL.. Legacy telecom company continues to report solid earnings and continues to make us believe it is undervalued at $39.  It is not as good a buy as it was at $34, but should find it's way to the low $40's over the next year and pay you a very safe handsome 7% plus dividend.  We can not find anything not to like about CTL. The free cash flow makes the dividend payout around 50% which in the legacy telecom market is the sign of fiscal strength. The integration of the last three mergers is running smoothly and the cost savings being found.  Frankly we still love this stock and wish we had placed a higher position in it earlier. 

GG...Posted a fabulous earnings report that safely beat the street.  They also noted the continued opening of new mines and the ramp up of the old ones. GG is the lowest cost gold producer on the planet and with new mines opening every year through 2015 if you want to own gold then this is your ticket. If gold prices remain anywhere near where they are now GG will have a floor in the price and should move upwards with increases in profits. Pays a monthly dividend that is percentage wise maybe tops in the gold business. That payout should increase as well since profits are headed up. One of our largest positions and we are happy as we can be holding this security.

HTS...One of our favorite agency reits. Yes, there we go again talking about these reits. But with a slightly lowered dividend that still pays out over 12% what is not to like. HTS is another low cost company that watches it's pennies and that is shareholder friendly. Good price, good stock and what should be a 90 cents per quarter payout for at least one year. You can keep your gambling capital gains stock and we will take the safe and secure 12%. 

CVE... We have opined about this Canadian oil producer several times before and like it even more after the latest earnings report. This company now is in the late staging of start up phase of getting at their huge underground supply of oil in Canada. This is safe secure and Obama free oil in Canada where you can settle back with CVE in your portfolio and relax.  In return CVE will pay you a current dividend of 2.3% which just got increased. Those increases will keep coming as the company begins to ramp up production. There is no reason this stock should not be at $100 or more in 8 years or so and continue to reward investors with capital gains and dividends for many decades. 

We own positions in CTL and GG.

                

FTR... inside of a trade.

As we mentioned in our last monthly report we had taken a trade position in FTR.  We normally do not disclose specific trade info due to our decision to keep proprietary trading knowledge and approaches to ourselves and only said we had placed this trade on in separate account due the size and volatility of the trade. Since this trade was specifically mentioned we have decided to fully disclose this trade for those who might have interest and want to profit themselves from such trades. The trade was a put option position of 100 contracts, or 10000 shares,  at $4 expiring in August 2012. The sale price was 55 cents. Basically a $40k trade with full loss potential for a up front cash flow of $5500.  The trade is now 23 days old and could be sold today for a $3500 profit or 1383% annualized profit on equity.  Options are not money manipulation, but people and investors assessing risk forward and offering stock value insurance for those desiring to purchase such insurance. 

Thursday after the market closed FTR reported earnings for the quarter. The earnings report was moved up two weeks due to the huge short position in the stock which had pushed the stock down below $4 at one point earlier this month. The company thought that the early release was necessary to relieve pressure on the security and wanted to get full info out into the public. Our interest was based on the our continued research and considerations in the security and we leveraged that by a longer term horizon of 6 months. 

The earnings report was good and the recent integration of the Verizon assets was ahead of schedule. Cash flow was strong and frankly this report beat expectations and made most traders and investors feel positive going forward. We expect there was some insider info here since the stock moved sharply higher the day prior to the earnings report which signaled that short sellers were getting out prior to the earnings report.  That is always a risk you take and must consider in trading. 

The stock was trading somewhat lower in after hours market trading due to what is considered the one negative reported. That negative was a cut of the dividend to 10 cents per quarter from 18.75 cents per quarter. However long term investors saw this cut as positive since the company will still pay almost a 10% dividend and the $348 million in freed up cash flow will help with the debt load. 

Here was our thinking on the trade prior to execution.  If FTR cut it's dividend to 12 cents or 10 cents that would be a long term positive so the $4 put option should be a sound trade. As a legacy telecom there was no way the dividend would be cut completely. Our thought is that $4 was a floor and our highest profit would be $5500 upon expiration in August.  Our worst case scenario would be the stock trading down to $3.45 per share where we would basically be net zero in the stock and we saw that as a complete disaster in the earnings report that likely would not happen so we would have profit almost assured. Even if we were put in the stock with it below $4 we would be still be positive in the capital and have a nice 10% dividend going forward. Simply put we saw an almost 90% chance of not losing anything. Therefore we made the trade. Currently we see almost a guaranteed full $5500 profit and an option that will expire in August unassigned. We could buy back the position now for a $3500 profit since the options are now selling at 20 cents and deploy assets elsewhere, but we are of the belief that the entire $5500 profit is assured due to the good report and are willing to wait on the expiration date for the full net. 

We would consider stepping up our position in FTR if there is renewed appearance of scared money noted in high option premiums. Some key stats from the earnings report. One, the payout is now around 40% of free cash flow which is very low for legacy telecom.  Two, and this is the big one, over 60% of revenue is coming from business and broadband which means this company is not getting the bulk of it's money from wireline. Three, the company by cutting their dividend has essentially doubled down on paying off the debt load.  We might double down on our position in this stock provided weakness in share price. 

Our thoughts to be completely open with this one trade was to show how one does extensive research and due diligence to make a excellent profit on a position.  

We currently own a option position in FTR. 

              

Fools rush in where angels fear to tread.

Again as we have posted earlier unless we are truly into an economic boom the valuations on stocks, and notably dividend stocks are too high.  This is and has been a FEEL good rally about lots of anticipations and hopes that inflation will stay low, unemployment will be under 7% or less by the end of the year, companies will report nicely better profits, and that huge budget deficits and non paid for additional budget items are not a problem.  Sorry but we THINK differently. 

People can talk all they want and commentators can issue rosy reports all they want and fools will rush in where angels fear to tread. We have been here before and we have fears that override animal instincts. Sure we may miss the rest of this rally, we may even miss the continuing rally, but prudence and experience tell us to back off a good bit on our bets and wait for a pullback. When markets are rallying on feel good and constant pushing of good news by media the fools will buy and buy. 

As we enter another options expiration day and prepare for taking positions next week the positions will allow for additional space between current pricing and what we consider value buying.  That means less profit, but it also means less risk of getting slammed when all of a sudden the feel good crowd begins thinking that the economy does have issues. 

Smarter and wiser traders and investors have already taken money off the table to conserve capital and unless you believe that Obama and Congress have truly made the world a better place you might want to think before you leap here. Agency reits and a couple of stocks I have mentioned earlier are good places to hide out now. 

               

SCCO is getting close to a value price.

We opined this week on a recommendation to buy ERF a Canadian oil producer.  We continue to like the agency reits, and suggest AGNC, HTS, and CYS as your best selections there. This posting is about another stock that has been backing off lately and is getting close to a purchase price that represents value. 

SCCO is a copper producer with mines in Mexico and Peru. This company is almost exclusively copper and no other metal. What that means is that is highly reflects the current world economy. When business is good the stock can be seen at $40 or higher, when business is slow you will find this stock at $30 or below.  It closed today at $32 and change which and we will consider a position anytime it gets to $30.  Yes, we bet some of you will say that sounds crazy but smart traders and investors make buys when there is value not when the stock is fully priced. 

Not only do we like SCCO when you can get it cheap, we also like it because it pays out a nice dividend generally in excess of 6%.  SCCO's dividend can vary a good bit quarter to quarter as this company adjusts it's payout to profits.  The current payout last quarter if extended for four quarters would be just over 2%, but do not assume that will be the dividend going forward. 

SCCO also offers above average options for those who like to trade. So a good value price, a good dividend, and nice derivatives one has a stock that is an aggressive buy on the world economy.  Keep an eye on SCCO and consider taking a position at or under $30. It might slip a bit from there but the stock should reward you long term at that price. 

Traders could take a put position in Sept. 12 at $25 for $2.00 per share. The stock rarely trades at that level. But if it does you can pick up an outright steal in this stock and pocket your $2.00. If not you still get $2.00 or about a 13.68% annualized gain. Nice either way. 

We do not own SCCO as an option or long, but as noted will consider a position at the suggested price level.

                

 

ERF now moves to a recommendation for purchase.

If you have read our blog for any time Enerplus, symbol ERF, is a stock you know. This Canadian oil producer continues to make us money and has been in our portfolio from the start.  We did take a capital loss in it last year at year end to clear the slate and start over at a lower options price, but even with that we have made a good bit of money on this security. My favorite oil analyst McDep had a update on ERF this weekend and it leads us to believe there is significant value in the shares now. Thus we now suggest you outright purchase of this stock in your portfolio. 

ERF has been in business a long time producing oil and gas in the Canadian territories where oil is abundant.  The last few years the company operated under the trust structure there until the government had enough of companies using the trust idea to evade taxes. Last year ERF converted to corporate status with one exception, they kept the monthly dividend payout. Keeping the monthly payout just makes owning this stock so much sweeter and makes selling options on it sweet as well. 

What also makes this stock sweet is all the sweet light oil it is producing from it's wells in Canada and now from it's oil plays in the Bakken region in North Dakota. Add in that at current price the dividend yield is above 9%.  The dividend to cash flow payout is at 57% and the debt load is fairly low at about 21% of market capitalization.  Maybe I am missing something but it seems to me the company is well set to continue to pay good dividends for awhile to come. 

So why the sell off from the low 30's to now the low 20's?  There are several reasons.  One it that most people still have the opinion that ERF is the majority natural gas company it used to be, but not anymore, as it is now 74% oil and 26% gas so the exposure is much less. Understand natural gas is now so plentiful in North American that the price is about 20% of the same BTU value of oil pricing and many drillers are now burning off gas at the wellhead to get rid of it when drilling for oil.  There is also the concern that the Obama administration's anti-business and anti-oil approach is going to hurt ERF and other Canadian oil producers.  That might be true short term, but after Obama decided against the Keystone Pipeline the Canadians have begun doing what they said they would do and only last week inked a contract to sell certain oil products to China.  The funny point about this Chinese buying North American oil is some of the Bakken region oil in North Dakota will now end up used in China as well due to the pipeline rejection, we expect no one has mentioned that to you. The last reason is the overhang of an equity offering at $23.45 per share that just closed Feb. 8 that has kept shares held down.  

ERF offers the opportunity to be exposed to the oil patch with a dividend yield basically matched by no oil company currently being traded. Owning shares here also keeps you away from any concerns about what Obama will do to hurt your oil investment as the Canadians has announced publicly it is full speed ahead on taking advantage of their oil resources.  But the most important plus about ERF is the now low price to value ratio of the stock.  ERF closed Friday at $23.45 per share and anywhere in here below $24 per share is an excellent buy.  The beauty of buying stocks that have sold off is you get a chance to buy in at what should be near a  bottom, so even if the stock stays where it is you get a 9% dividend and paid to wait for the market to produce a fairer value in price.  Of course with any security that has sold off there remains the risk of insider info being there that maybe someone knows that has caused the price point. 

One caveat about buying ERF is to watch the ex-dividend date that occurs monthly around the 6th or 8th of the month to avoid buying before the date and getting hit with the extra value in the stock prior to ex dividend. Also Canada takes out a 15% investment tax from those residing in the United States so your 18 cent per share monthly payout is reduced by the tax and it is also adjusted somewhat for the currency exchange ratio.  The 15% tax can be recovered when you file your taxes here in the US.  Nice touch that you get to pay taxes in Canada and keep it out of Obama's coffers. 

We own options on ERF and it is one of our largest holdings. We plan on expanding those holdings sometime later this month. 

             

Our largest holding continues to impress.

Lorrilard, symbol LO, released a stunningly good earning report today.  Profits were up 26%, which is almost unheard of in the current market.  What impressed us even more was that the had a 10% price increase and sales volume actually went up about 6%.  Rarely does a tobacco company increase price and expect NOT to lose sales volume.  The reason for us is fairly simple however and most analysts will not say this but we will. The largest user of menthol cigarettes made by LO are blacks and the poor. These people are getting added welfare payments and a good bit of unemployment now and they are not spending it on healthcare.  LO however is living on the edge with the continued real concern of menthol regulation or outright banning.  But we believe that will not happen prior to this year's election. Obama has done some foolish things of late to antagonize his voters but I can not see him banning these from his best voting block. 

We dumped all our other tobacco holdings due to high valuation issues  We will continue to hold LO as our largest holding for awhile longer unless the price bump of today unexpectantly holds above the $120 level. 

Boooooring but profitable

We continue another week with a boring market. The fund's positions daily are up 8 cents and down 6 cents on $40 and $50 dollar stocks. This will put one to sleep if you are not careful. There is little to move this market and little to expect that could move the market. Europe is on hold with Greece and US is on hold until the election and maybe afterward too. So what you get are nvestors and traders with no conviction. No conviction means little capital is put to work and thus no movement in stock prices.  We have one stock today that has moved more than 5 cents and that is GG. Goldcorp moves a bit more since the underlying asset is gold. Earnings reports continue to show no trend except being somewhat less than expected and with the prevailing opinion of less economic growth forward that keeps people from deploying assets as well. 

For the stocks on my watch list, CYS reported a good number today and we are looking to find an entry point for a long term option there.SCCO continues to meander around $35 which says no one really know where the economy is going. I consider SCCO backing towards $30 bearish and moving towards $40 bullish.  T has moved up a bit and cut into the small bargain it was earlier this month when we added to our position. LO which had backed off about $5 earlier due to worries about menthol regulation is back to the low teens. So unless you have interest in the two names I mentioned earlier this week the best thing one can do here is sit and wait. However people who add regularly to mutual funds via work related 401-k's are getting to add money with no appreciation so that is good. 

For traders like us this market makes for boring profit. Our set positions in options that expire the end of next week mean another chance to sell for maximum cash flow. May the force be with us or at least for another 7 trading days. 

Two stocks for consideration this morning.

If one is looking for a safe harbor stock that pays an above average dividend one could hardly go wrong with National Retail Properties. We continue to admire this company for many things, they raise their dividend annually and have done so for something like 20 plus years, they have high occupancy now above 97%, and they just keep reporting good earnings.  Add in that the triple net lease structure is good for those who lose sleep over real estate investments. 

NNN is the symbol and we will remind readers that during all the economic turmoil the share price has bounced back to above previous levels. This company protects your capital and increases your income what is not to like. Today they reported another solid quarter with above consensus earnings and more good news on leasing to new tenants. 

Now NNN is fully valued paying a 5.6% dividend currently. Note that dividend is not qualified so you pay full tax rate since NNN is a reit. However if you have a long term view NNN could be a good addition to your holdings. We have maintained a $25 put on this stock for as long as the fund as been in existence and never lost a dime. 

Another stock on our watch list raised it's dividend yesterday that being BP.  We continue to believe this company is worth consideration as it moves past the Gulf incident and into more normalized operations. The $20 billion dollars set aside now more and more look to be adequate for payments and BP might get some of that back. The quarterly report yesterday was encouraging.

 One final hurdle here is the pending consideration of a Federal Government lawsuit over "environmental damages". These too have been much less than the press wanted readers to believe.  The hurdle here is if Obama wants to open up this healing wound that might actually be more trouble to him that BP. Environmental leaders want some more skin, however the prevailing wisdom is that the Federal Government which took over management of the cleanup made a mess of things and shares more blame now than BP. So Obama having fed Keystone to the left wing fanatics might just take a hike on this lawsuit. 

Back to the dividend. Once all this lawsuit business gets resolved you can expect BP to hike it's dividend considerably. There is pressure in the UK to do so with so many pensioners having BP as a income producer.  With that pressure and the need for tax money in the UK this will come sooner rather than later so smart investors might want to take a position now before the dividend hike and the expected increase in share price.  Yes, there is risk, but also reward for those willing to take the plunge. 

We own options on NNN. We currently have no position in BP.  

Quiet Market and Few Bargains.

The stock and bond markets seemed to have settled into a holding pattern since the first of the year. Even the better than expected job report last week only moved the market some over 100 points.  The last few days have been a slow drift back of double digits daily so even that bump was only temporary.  We believe there are two situations that are making the market behave this way. One is that there have been and continue to be no events that would drive the market either way. European debt scenarios are on hold as Greece is making up it's mind about bankruptcy. There is no movement in the US towards any improvement in our debt situation.  The middle east is on hold with Iran. Two is that most investors and traders are of the belief that the market is overvalued. Dividend stocks have been driven up in price and this week investors seem to have discovered high yield bonds funds and are now driving them up as well. 

The only thing we find fascinating and could move the market near term is the lack of cohesion in the policies of the Federal Reserve and the supposedly improvement in the unemployment situation. One of these views is plainly wrong as they can not exist in the same economic environment.  Sooner or later one of these economic views will take hold going forward, but even then the fact is there is not going to be a all out economic expansion due to the current lack of movement on debt in the US.  Like it or not the expanding national debt is a drag on expansion and wise investors are holding their resources to protect capital. 

With all this in mind there are few stocks we like in the current environment.  The agency reits remain our favorite choice, but even those are now at the mercy of the above noted lack of agreement between the rate of economic expansion and the Federal Reserve's scenario.  If the Federal Reserve is right and the economy is basically dead for three years hence stocks like AGNC and HTS make perfect sense now. If the economy is expanding quicker than expected these Reits will find a shorter time frame before losing some capital value.  We also like ERF at this price, since the pending issuance of stock to fund future capital needs is at $23.45 per share there is a floor in this stock currently. The annual yield is over 9% and there is a monthly payout so what is not to like. 

Otherwise this market remains a traders delight. If one is into derivative investing via a hedge fund profits are plentiful in this environment and it is showing with the nice January reports coming from hedge funds.  

We own options on AGNC and ERF.

                 

The Federal Reserve is buying 91% of 20 and 30 Year US Treasuries.

Read that heading carefully and think about it a moment.  I have been wondering for some time now how US Treasury Auctions were finding enough buyers to take care of all the debt being piled up month after month by the Obama administration.  President Bush, no piker himself, was piling it up at the rate of about $40 billion monthly and when he left office the auctions were being covered by about  1 to 1 meaning there were enough buyers but not a horde of buyers.

 So when the Federal Reserve announced last June they would cease buying US Treasuries on June 30 2011 I figured we were in for some serious times in this country as we had to find enough buyers of US bonds so as to not push rates through the roof.  Lately I have noticed that the Obama deficits that make Bush seem like a frugal guy since they run upwards to $125 billion monthly were be covered 3 to 1 at auctions and I figured where are all these buyers coming from and despite the stupidly of buying bonds at rates such as near zero to 2 % I thanked them for keeping rates low. 

Now comes the news that the Federal Reserve has been buying 91% of all longer term bonds and we now know why rates are not only being kept low, but from where the buying of bonds is originating. Obviously the purpose here is make the only bonds available for investors are short term bonds and to force the rate curve to bend to a point home mortgage and consumer borrowing rates are kept ARTIFICIALLY low. It also serves to force investors to find other options for their cash like stocks and houses.  Note that this artificial rate is only good as long as the Federal Reserve keeps buying and they own about 3 trillion plus of bonds now. 

Now here is the real terror in this situation what happens when the Fed not only stops buying, but when rates go up which they got to do eventually in this scenario. How would you like to be holding an account full of $3 trillion plus of bonds paying 2 % when the real rate for such bonds is not ballooned to say 3%.  Talk about a case of heartburn from the huge losses that the Federal Reserve would be facing and guess just who is on the hook for those losses? 

Sooner of later somewhere some adult has got to stand up and say enough of this madness. 

          

 

STI Hedge Fund January Performance

Starting off a new year of trading one always has hopes for good trading year ahead and with us 2012 certainly does especially after January results. We begin with significantly reduced expenses from margin costs and brokerage fees which were the lowest we have seen in well over a year. We add in the solid trading and dividends which provided a base to begin another year. The final results for January are a net gain of 24.96% and a nice cash flow position to begin 2012.  One note here for clarity, we will no longer be carrying unrealized capital losses going forward as a year end adjustment, but include them in any reports as year to date.  This will make our reports more realistic for readers of our posts.  With that in mind we did take an already announced small capital gain loss in HTS to exit that position during January and that is reflected in the month results. 

Trading profits this month were spread out among many sectors with oil, gold, and tobacco leading the way, symbols ERF, GG, and LO.  We did sell one very large long term option that will be carried on an outside balance sheet due to the size of 100 contracts and 7 month term of the option.  That option for FTR is a long term bet on the viability of the company and should not be considered by less than very experienced traders since there is significant risk in the position.  Once this trade is done we will explain the details. 

Fully 10 of the current 13 positions are 30 days or less reflecting the our desire to keep most positions short term and with less risk.  The seemingly extra position, since we have 12 trading stocks, was an additional option we sold right after AT&T reported their loss and with the stock down opportunity ringed.

January's balance sheet ends in pristine condition with no net longs and most option positions in short duration.  This should offer excellent cash flow going forward unless there is a significant market move downward. As we have acknowledged we reduced positions in trading to only 12 stocks due to what we consider as higher market valuations. The portfolio is also quite conservative in stock selection as well.  Looking ahead our goal for 2012 is to end the year at a 18% gain if market conditions remain similar to today.  This year could give an excellent idea of how conservative hedge fund trading could produce above average results. 

February therefore leaves us with 10 trading positions, but no dividend payments, so cash flow will almost assuredly be less than January. However margin costs will be zero so we could have another gain in the mid teens.  We left open about 5% of the fund's margin this month since we could not find a trade we liked and that is carried forward to February. 

                

One year anniversary of blogging.

Today marks one year of posting on this blog.  Honestly I had no idea I would doing it for one year, I had told others I had better things to do. But here it is 12 months later and 219 posts done and it looks like we will keep going. Frankly this is not one of those big time blogs in that the hits generally average about 400 monthly or 100 a week or so. But again I was not expecting too many hits since this blog concentrates on a very small portion of the financial community and we do no advertising other than a facebook post. Derivative investing and trading is for the rare few willing to take big reasoned chances to make above average returns knowing the losses could be significant. I do know there are some readers who read this blog for the purpose of taking advantage of the heavy research I do on a regular basis and that is fine too. 

If you have been a regular reader you by now know my political persuasion and how I consider such when taking positions. As I said at the start good traders use even bad political environments to their advantage.  One old seasoned investor one time told me that if someone wants to make a fool of themselves and offer you opportunities do not quibble with them, just take the opportunities and smile. So be it in the current situation.  

Some stats for the interested.  12 month figures. Just over 4800 hits, 10 countries with US by far the largest and Russia number two, mostly Internet Explorer with Firefox browsers next, very few mobile hits, " High Cost of Electricity" highest readership due to a link with the Beaufort Observer, 

As we move forward in this blogging adventure I want to thank those who read these postings as the numbers give me some appreciation that maybe something I post has some meaning and help to those reading them.  I am most pleased that as 2012 begins the numbers for each posting seem to be moving up. Maybe that is due to everyone starting a new year and being optimistic.