Sunday, November 11, 2012

Wiped Out?


Hardly a day passes that we do not see that a hedge fund has closed.  Many of the long time hedge funds in the past year have taken significant losses and the resulting exit of investors.  The reasons are many but mostly they revolve around a market where placing hedge bets increasingly result in losses.  Since these losses are hedged the loss factor can sometimes be many times the bet made.  Hedging in it's simplest essence is stock insurance either on the bull or bear side.  Any insurance market where losses become unacceptable or more importantly where the writer of the insurance can no longer see some reasonable assumption that the majority of the hedges will end up making money the writer stops making insurance shop. 

This is exactly what has happened in the US stock markets as more funds are as I said exiting the market.  Without the insurance protection, but more importantly without the insurance protection with reasonable premiums investors are left totally naked.  Like it or not lack of hedging in the stock and bond markets mean a much more unstable investing market going forward. Imagine automobiles and homes where insurance companies will not write insurance or where the insurance cost is higher than most people can afford.  

Our fund has in the last year taken some losses as well, but even into the last quarter we were positive cash flow. Much of this is due to the structure of our fund in that we hedge only certain kinds of stocks and then only a dozen of those that make the cut. We have been selective and our structure has always made cash flow a priority with a built in planning where even when we might be sitting on losses we could cover interest and trading fees until the market improved.  The key was to make enough cash flow via premium gains to make money.  However there has to be some solid base of reliable stock pricing to make this plan work.  In the past year the constant unreliability of stock pricing has made placing hedges almost impossible.  Much of this is due to a political environment where one has no idea where Obama or some other politician makes doing business for this or that business much harder by some policy move.  In the past year be it oil, tobacco, telecom, real estate, business development, and finally utilities have been hit by some form of policy change that resulted in stock price hits that could not be hedged via the normal news cycle. 

The last one utilities is by far the most extreme in that for years those businesses operated as boring regulated dividend producing widow and orphan stocks.  No longer is that the case.  Southern Company the first company we ever blogged about was as boring as they come.  This past week they finally succumbed to the global warming/climate change policy and took a earnings hit.  We honestly believed that was impossible up to now since the regulatory environment they operated in was most positive. 

The past week following the re-election of Obama the full force of the unreliability of earnings and dividends has come forward in a large sell off in the stock market and the pending losses in our fund are now more than our accumulated cash flow over the past year.  We are hoping their will be some relief in the brutal sell off of the past week the next five days prior to the options expiration cycle ending next Friday that will at least bring us back to even for the year. Even if it does not we are now considering ending our hedge activity after many years of doing so since the Obama environment makes it too difficult to do planning with so many unknowns involving policy decisions. 

We have always played with house money and used other people's money to make insurance coverage decisions.  Therefore if we do indeed decide to exit the trading market we leave with no more assets or no less assets than we brought in, just the loss of cash flow.   Frankly in a political environment where common sense and logic are replaced with emotion and cronyism we just prefer not to play.  Over the next couple of months our blogging will be much less as we continue to survey the current trading environment.  We will take this time to unravel our positions and begin an orderly exit of the options market.  We suggest others consider removing assets from danger as well. 

               

Wednesday, November 7, 2012

Searching for that Helen Keller moment.


This post was put openly online today and I am reposting it here for purposes of my readers to see since many who read my posts DO get the point. 


Yes I have seen many of your posts from my liberal Facebook friends who supported Obama regarding some mean spirited posts on FB you said you noticed by some of your and maybe even my conservative FB friends.   First off I have checked back and did not see any of my posts I considered mean spirited, but maybe you took them that way.  If they came across that way I apologize now.  All my posts either in jests or just pointed on a subject were purposed in finding that "Helen Keller' moment with those of you who I believed did not grasp the seriousness of the election. 

By saying that Helen Keller moment I meant that moment in the life of Ms. Keller where after a long and tortuous effort by her teacher Anne Sullivan where she 'gets it' and begins to frantically want to learn all she can after the light goes off about her situation.  if you have seen the movie you know her teacher was at her wits end trying to communicate but as a teacher knew IF she connected the quest would be worthwhile. 

Not to be overly cocky here, but for most of you reading this post I understand the American free market system better than you do.  I talk regularly as I have for over three decades with small business owners and I connect with their concerns and hard work they put in to survive and sometimes hopefully thrive. Most small business people take great risk with saved capital to make a go of it. Most of you frankly do not since you only see most of this from the outside. I can tell it by hearing you talk or just seeing your posts. You might even think small business people are rich SOB's who either make too much or do not hire you because they want to keep the profits to themselves. Nothing could be further from the truth as the vast majority of small business support local charities, schools, and employ local people.  They also enjoy making life better for their communities as well and like to grow and hire more employees. It is just in their blood.  Something most people do not grasp to be honest. 

Over the past four years most of these small business people have suffered significantly due to the recession as have their employees.  They want things to be better economically and know that the regulatory environment and downright mistrust Obama has placed on them has done nothing more than make things worse economically. They also know Obamacare is the doom to many of these small businesses as they can not afford the costs and stay in business.  To that point Obama had to go to make things better.  Anything else the media tells you or you believe frankly is not true and my efforts on Facebook has been to try and make that point get home.  

Add in the simple fact that Obamacare long term ends your liberty of choice regarding your own health care decisions.  Like it of not that is simple fact.  Your vote for Obama meant that you were willing to throw away your liberty and continue the slow death of small business.   I frankly am sorry I could not connect as I have opined on my blog smalltowninvestor.com which most of you do not read that this election does not effect my personal well being much as I am old enough to literally run out the clock and live life before things really go bad.  In going bad means we can not go on as Obama and some believe forever spending like drunk sailors and not go broke.  Trust me on this one taxing the so called rich there is not enough money to tax to solve the problem.  So to that end I failed in helping most of you see the "Helen Keller" moment.  I am not mad at you I am sad for you for the pain and problems will be yours.  At this point there is no hope and to that I am very sorry.  





 

Thursday, November 1, 2012

EXC...Looks like we are wrong again.

In at least two postings in the last couple of months we have mentioned that EXC looked to be a good buy.  The price was depressed and the dividend solid.  Well we look to have called a position wrong once more this year.  

Today EXC took a pounding.   The stock after reporting somewhat weak earnings actually was headed up in price due to some positive comments from the CEO regarding future earnings prospects.  Then the CEO should have shut up, but nope he went on to casually suggest they might consider lowering their dividend payout down the road.  That led to a over $2 sell off in the shares now selling at just over $33.   

Frankly we seem to have laid another egg here with a call and since we own put options on this one it will cost us several thousand to exit the position.  We expect that the stock will recover some since the sell off was quite sharp.  But that will likely be temporary since once said dividends generally are cut.   Also note the stock will go ex-dividend Nov. 15 so if you are holding this stock make that consideration in your decision. 

Our surprise is this stock is a regulated utility and even with the costs of the Hurricane Sandy clean up the regulators would likely allow them to recover the costs via some rates adjustments.  But today the CEO said that former rate adjustment requests were not looking good either.   Since EXC and Barack Obama have some tight connections should we take today's action as a sign Obama is going to lose?