Pimco CEO Bill Gross pointed out in his monthly column this week that never before have we seen an economy quite like this one. The past thirty years the investing approach has been borrow someone else's money and make more while paying the other person back. This is nothing more than a takeoff of our long ago posting about our mentors where we said we learned how to prosper using someone else's money. Back thirty years ago this was not insane investing since offensive investing was the way to go and if one was smart they could prosper. Mr. Gross also pointed out that wise people now use more defensive tactics than offensive tactics to make money and that includes highly considering safety when looking for yield. Mr. Gross believes as we do that AAA state municipal bonds are a good bet for yield. But the key thing here is anyone who came out of the financial mess unleveraged the opportunity to borrow at almost zero rates makes for enticing opportunities going forward. For the first time ever the common person can make investing plays like Warren Buffett who uses his considerable cash flow via insurance premiums to make solid investments. Of course the forward capital gains and yields will be less than earlier expected.
All this plays into the stock market and the fact it makes absolutely no sense for a stock market to be above 13000 and the ten year US Treasury now below 1.9%. What makes for normal times is a higher valued stock market and rising interest rates. Thus the market insanity. We have been posting for some time now the concern about market valuations and profit expectations not meeting what will actually happen in the economy. Most investment houses have lowered and lowered again their expectations for stocks under their umbrella regarding profit growth and overall economic growth with many below 2% now. This again makes for even better stock selection and risk aversion when one is considering where to place assets. An economy growing at the current rate can not create jobs or profits fast enough to ever make for anything close to full employment.
As mentioned in our last monthly report we are down to 11 stocks where we are confident in placing trades going forward now. Among those only a few stand out as ones where the downside risk is small. Accordingly we have reduced our exposure to LO, and increased our exposure to ERF and AGNC, Next month we will likely increase our exposure to GG, since gold seems to be a current hedge against downside risk.
ERF is an most interesting risk play. ERF is widely believed to be paying an unsustainable dividend and thus the current price is offering a 9% plus yield. We have invested in this security for almost a decade and frankly can not definitely answer the payout question, what we can say is that with a 9% yield and lots of oil assets we are willing to take the risk. This stock reminds us of the FTR stock situation a month ago where even if they reduce the payout the stock might go up since investors will consider that a positive for cash flow. Either way an above 6% payout is sustainable forever and that makes the opportunity good for capital gains and dividends.
AGNC stock price was hit about a week ago due to a capital stock sale. The opportunity for purchase below $30 is rapidly eroding as investors see this stock for what it is a great opportunity for purchase and high yield at a price with little downside.
GG continues to intrigue us with little downside risk and lots of option premium. In a situation where risk is high the chance to make profits with little downside risk is hard to ignore.
FTR our latest long term option play offers significant downside protection here and for those who want to do some buy and hold this stock can be somewhere safe to hide.
Last week we offered a list of watch list stocks and several of those are high on our list for a long term derivative play when the right chance comes forward. What we consider a good risk play is when a stock gets hit hard in price down to level where the downside risk is minimal. We and if we make a long term option move we will offer that risk play as a separate posting for those interested.
Another area where we believe is prime for asset allocation is good location real estate. None other than Donald Trump is going around the country buying up golf courses on the cheap. Other investors such as Warren Buffett have noted single family homes being a good bet long term here. Shortly we will be finalizing our first purchase into this opportunity area and will be posting on the selection. Frankly this might not be our last asset purchase in this real estate area.
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