STI Hedge Fund and the big selloff.

Several times in the past week I have been asked how are my investments doing?  I am down approximately 11.7% overall on the valuation of the stocks either long or in options held in the hedge fund as of Tuesday close. . Cash flow for the year is around 10% net, so I am down less than 2% overall. Most stocks are holding up well so that in itself validates my selection process, which requires almost all selections to meet certain criteria.  I can not say I am happy at this past week's action since it could limit my options going forward and most importantly could cut down on opportunities to produce cash flow.  My hedge fund is cash flow based. For the record I have one stock green on my screen, SO, good ole SO, which on my very first posting I said was the safest stock on the planet. Got one right.

 

I am pleased and proud that the structure of the hedge fund has held up just as I planned for so many years of trial and error building an approach to be prepared for a moment like this one, when a big sell off happens. I have taken some time to model scenarios going forward and find that the scenarios I envisioned for large market corrections such as this one work out with a continued positive cash flow, however currently a smaller cash flow. This is not to say that they WILL work out right. The pride here comes from the fact I only know of one hedge fund not down big for the year, and that one bet big on a downturn and won.  If the downturn had not occurred then they would be down as well.  I believe I include one element that so far saved my fund from drastic losses and makes my model scenarios going forward work right. A hedge fund is a highly leveraged approach that allows one to make outsized gains in most markets, it also can produce outsized losses if the market is down big. And no I am not about to come right out and say what that element is or any other of the unique approaches I take to derivative investing. If you had worked for over three decades to get something you know works and make you money would you give it away. I expect not. 

 

Anyway only time will tell here. You will notice in my monthly reporting if it works by noticing if I continue to report positive results each month. Positive results that are above what you can get in any other investment currently. Since I am doing 16% plus going into August that is way above anything you can find elsewhere.  You can also note the December report and see if I have had to take losses in carry forward items too. The final point here is that the model requires that the US economy comes back to normal sometime down the road. Under the current leadership that frankly is in doubt, so there still could be a fly in the ointment. Running my own personal hedge fun is still exciting to me even when it is scary like the current environment.  I can assure you of that if you ask my wife about being around the house with me this week. On the other hand she did not seem to mind too much when we went to the new car dealership last week.

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Federal Reserve Stunner

Right when you think the Federal Reserve can not say something new, they pull one out of their hat. This afternoon they said they do not plan on considering raising interest rates until Mid 2013.  Take that in for a moment, that is two years from now. Never has the fed ever said something like that.   Add to that the fact the US Treasury auction today was heavily subscribed, or had a 3 to 1 cover ratio. People being afraid bought treasury bonds thinking their money is safe there. The three month bills are trading at 0.043%, basically nothing. Lending your money to the government for that period of time, considering inflation, or for free. !0 year bonds are selling at 2.37% which is saying I am willing to take on huge inflation risk for 10 years out and lend my money to the government for basically little or nothing.

 

The Federal Reserve by this action is also saying they expect the country to be in a very slow recovery, if you can call this a recovery, for some time to come. Finally as I have noted before they are also saying you need to find somewhere else to put your assets because we will pay you nothing lending it to us. This again is an effort to force assets elsewhere in an effort to get the economy moving forward. Buy a house, buy some stocks, invest in a business, anything but lend it to the US government. Of course people who are fearful will ignore this and continue to give the government their money.

 

This could put a floor under the market for the time being. It could also make investors and traders think things are REALLY bad if the Federal Reserve is ok with interest rates basically zero for two years. But macro economic conditions of no economic growth could continue to limit capital investments. Add in the negative political atmosphere you will likely continue to see nothing happen until the next election either changes things or embeds current no growth conditions.  

 

This does make investments in blue chip dividend stocks more attractive. It also continue to make buying a home for your own living a solid investment too. Finally as I have noted numerous times this makes agency REITS a great buy. Take our pick, NLY, HTS, CYS, AGNC, or any of serveral more. I have a postion in HTS and will likely take a position in AGNC sometime in the next week or so.

 

One final note, this for all intents and purposes takes the Federal Reserve out of the 2012 election. Nothing you do will change our direction.

                

A Suckers Rally.

Today is what as known in the business as a "suckers rally", and the best advice is do not bite. Nothing fundamental has changed, except maybe some of the Democratic grownups have told Obama to sit down and shut up. The administration canceled all appearances today. What you are seeing is a bounce caused by those who are either trading for the day making some quick profits or some bargain basement buyers looking cheaper stock values. I would fully expect the market to sell off towards the end of day since the day traders will take profit and go home.

 

The reason I see this is first experience, but also some evidence. Note that two stocks that have held up very well during the huge sell off of recent days, SO and LO, are trading down today. Traders who hung out there because of the relative safety are leaving those stocks for short term trades. Now that might offer some the opportunity to take a look at SO and LO, but be careful here. I do find LO a very compelling value at the current price myself.

 

Otherwise wait out some time here and see what happens. The Federal Reserve is meeting today and I frankly can not see much they can do. Of course the market will wait and listen to every word said by Bernanke. Bottoms are only reached when it is tested again to see if the sellers are out of the market and values so compelling at the price buyers step in. No sin not catching your buys at the absolute bottom, like not allowing greed to make you feel sad because you did not get the top price when selling.  If this turns out to be a bottom you will lose little by waiting.

 

Gun to my head, I personally think there is some ways down to go. Even though a lot of the last two days action was computer driven trading.

                

Jobs Mr. President, you want jobs..here are thousands that can be had now.

If you would like to see what a real growing economy looks like check out North Dakota. The answer is energy jobs and drilling for oil.  If you are scratching your head and asking how can anyone drill in this political environment did I mention the Senior senator from North Dakota is Kent Conrad, who just happens to be a powerful Democrat.  Just yesterday Obama said he was going to "redouble: his efforts at creating jobs. First off, no politician ever has "created" one single job and he will not be either. Businesses and entrepreneurs create jobs. Without business there would be no government jobs either as someone has to pay for them. The reason there is no growth in jobs is the poison filled political environment and most importantly the jobs that can be "created" now are jobs Obama does not want.  Below are about half a million jobs plus that could be "created" overnight if Obama would just say OK.

This week is exactly one year to the day since the oil well in the Gulf was capped.  Heard anything from the media lately about the "disaster in the Gulf"? You will not, because there is not one. For the most part the environment, seafood fishing, and tourism in the area has returned to normal. What has not returned to normal is the 230000 people who were employed by the offshore oil drilling business. One signature, one overnight change of policy would immediately put these people back to work, drilling for oil, processing oil, supplying the derricks, and providing food and such for the people who work on them. Cuba is drilling in the Gulf, Mexico is drilling in the Gulf, but as yet the USA is not. The reason is that Obama is allowing environmental extremists to dictate his policy there.

Let's add the Keystone XL pipeline which would bring Canadian oil to the USA. The Canadian company, TRP,  that wants to build the pipeline has said they would hire up to 250000 people for this project, add in the people who have to service the workers on this pipeline, feed them, cloth them, make the steel pipe, and you likely got 400000 new jobs. Only Obama's signature is holding this pipeline project up. Why is he not doing this, again environmental extremists are telling Obama we do not want oil, any oil, to keep us from pursuing wind energy and such. 

Lastly, the shale gas revolution is being held up by Obama. Shale gas, cheap energy is all over the USA. I count 33 states in the country who have recoverable supplies of this energy.  Youngstown Ohio just OPENED a new steel plant there to do one thing, make pipe for drilling shale gas. Folks that is unheard of in this country. opening a new steel mill.  With enough shale gas underneath us to power this country for about two hundred years we can say goodbye to Middle East oil if we just get drilling and get it out of the ground. Add in the thousand of new jobs that would come up to service this new energy, such as the steel jobs noted above.  Why is Obama not telling his EPA to allow this drilling to commence at full speed, again you find environmental extremists.  They believe that the sand, water, and some chemicals that are injected into the shale rock in the earth to push this gas out COULD pollute the environment. Note that there is not in any case where shale gas is being drilling where there has been any proved pollution. Add in that other countries in the world or doing this too and not adverse problems there either. The water solution that is being forced down is DEEP in the earth, like 20000 plus feet deep, under rock that does not leak upward. Again, the extreme environmentalists do not want anything to stand in the way of forcing us to other higher priced, unproved energy sources. 

Lastly let's note all these jobs are HIGH PAYING, mostly UNION jobs that normally Obama would like. Also think about all the current government benefit payees could be converted to taxpayers here helping the current deficit. Ask yourself, does Obama REALLY want new jobs, or is he actually "redoubling" his efforts to make sure we only have jobs he wants, or environmental extremists want.       

Full disclosure I am either long or hold options on ERF, DO, and have in the past TRP. All these securities prosper from the lack of action by the Obama administration on the above policy matters, therefore I have a vested interest in the continuation of no action.       

Monday Market Action..1929 redux.

Looks like I should have stuck with my original posting on the current market, noting we could be having our generation's 1929 since it now looks to be the case. Like anyone I can get caught up in hopeful thinking and indeed I did with the Eurpean Bank's action and not expecting the S&P downgrade to be significant.  Fact is as I mentioned in last night's posting the downgrade is for real. Today's action continues the selloff from last week and I expect it will not abate tommorrow and maybe not this week. The market has not found a bottom and technical analysis is not positive. Add in that President Obama everytime he gets up is the Grim Reaper, no inspiration, no positive talk and you get a market that sees nothing but going down.  He remains arrogant and condescening to others.

 

Anyone who buys in this market needs to be committed. Yes, I see some good buys, and again I mention the agency REITS.  But even now there is no bottom in their prices either. Today for the first time this year I have gone negative return on my hedge fund.  There just are no buyers in this market and that is reflected in the bid ask spread. Two years ago I bought heavily into a bond panic such as this and made money, you will note I am not buying into this panic.

S&P downgrade..some humor and some effects.

Let's give S&P some credit here and I have given them little recently. They did wait until right after all trading, including after hours, had ended for the weekend to downgrade US government debt. Can you imagine what would have happened Friday if they had throw this little grenade into the market carnage then?  Anyway this was not unexpected, they had been telegraphing it all week and obviously had given a heads up to the Obama administration since the administration had worked the last couple of days to get ahead of the news by putting out comments prior to the official release. Without a doubt the thing that hits me in the gut most is that our national debt is now not considered top notch. I am sad for the moment, but happy most of the World War Two generation is not around to see this, since they spend so many years sacrificing so their children could have this inheritance. Like spoiled kids the generations since have used and spent this inheritance and not been willing to do the same for their children.  We get days on end of it is "not fair" from these supposed grownups who are actually behaving like spoiled brats on the playground.  The downgrade is expected and frankly in my opinion long overdue. If you have been a reader of these posting I have for six months saying a US bond is not the safest savings instrument anymore.

 

The humor here is this downgrade is the direct result of the Dodd-Frank Financial Regulations bill passed by the Democratic Congress  last year and hailed by President Obama as the end of financial problems as we know them. If you remember the rating agencies were taken to the woodshed over the lack of oversight on the federal housing agencies and institutional banks during the 2008 financial crisis. The were accused rightly of having basically embedded ratings on such agencies, banks, or other financial businesses and not taking a due diligence approach to their ratings. Let's also remember none other than the world renowned Warren Buffett, who is loved by the media for his tax raising desires, thought the rating agencies were hunky dory while he had very sizable investments in them. So now the rating agencies, led by the top one S&P, are doing due diligence and downgrading where they believe it is justified. Darn if they do not think that US Government debt is not AAA anymore and downgraded it. Hmm.,somehow I expect Senator Chris Dodd  Congressman Barney Frank and President Obama did not have THIS particular downgrading in mind with the new law. Unintended consequences again.  Also note that the Obama administration went after the messenger here and not the message. They know  the downgrading is on their watch. So slur the messenger in hopes it hurts the integrity of the message. Hillary Clinton would be proud.

 

Now to the effect of this downgrade. I would expect little of no long term effect on the stock market Monday Morning. Maybe an initial sell off then back to business, or whatever business as usual is today. The effect on US Bonds is another matter, They could see some selling early on as institutions and pension funds who are required to hold only AAA bonds have to dump the treasuries and go to something else. That will cause some updraft in rates and loss of some principal. But note if people this week respond to the European crisis like they did by buying one and two year US treasuries, with inflation included,  by paying the government to loan their money TO the government then prices will not be effected too much. However you could see some improvement in corporate AAA bonds since they are now considering safer than US treasuries. Add to that the fact that many state governments now have a better rating than US treasuries and they will benefit as well with cheaper borrowing costs. Strange that individual US state municipal bonds would now be a safer investment than US treasuries. That my readers is why I ONLY hold municipal bonds. States must balance their books and can not print money. I also see some lift in very blue chip stocks that pay good dividends as investors will take another look at them as well.

 

The end result here is that S&P noted that this is the first step towards a likely continued downgrading of US Treasuries. Also note that nowhere in the official 8 page S&P document does it say anything about raising taxes as helping improve the situation. It actually states that "spending" is the problem and must be addressed soon. I would expect the first signs of this on consumers will be increased borrowing rates for credit cards, houses, and cars since the downgrade will force the US to compete with more instruments when asking to borrow money. Most people in the US are right now oblivious to this downgrade action and just going on about their lives. Frankly they better begin paying attention, especially if you are young, since time to change to trajectory of the US financial situation is running out. With a forecasted one trillion dollar INTEREST only payment due in 2020 for the federal government  lifestyles and choices as we know it are about to change in meaningful ways.

Afternoon Delight

In the three decades of investing this week is only matched by Oct. 1987 and the Spring of 2000, and of course the fall and winter of 2008 and 2009.  When markets lose confidence in the economy and governments we get this kind of action. What is going on is the market is looking for a bottom, A bottom where investors believe we have fair value. Friday began as I expected a early move up from people believing there was a bargain to had and then experienced traders using the up trend to get out at a higher price. That is always followed by intense selling pressure and big sell offs.  We had a 400 point swing today and were rescued by a little afternoon delight from the European Bank which said they would back up Italy in buying it's bonds. The collapse of Italy would be catastrophic for the world's economy because we are talking big money there, the eight largest economy in the world. Now the ECB backing came with a price, immediate passage of a balanced budget amendment.  Who knew that a BBA would help so much? Obama take notice here my friend. Anyway the problem here is no one knows where the ECB will get the money for the buying spree, but the market needed the news and responded favorably. I expect Germany will be get screwed here again by forwarding the money for these bonds. Wonder how long the German people will put up with this paying everyone else's bills? Hope Angela Merkel has some skills for a day job.

 

I also am pleased that even with some last hour selling today the market kept it's legs. We desperately need the weekend off with good news to give investors and traders a chance to think.  I would expect another run at 11100 level to find out if really have found a bottom. Expect that to be scary as well. If we go through 11100 level on the retest we could see selling like 1929 as I mentioned in an earlier post.  We also will find out shortly if the ECB can find the money for Italy. The USA is seeing what could happen here in a small measure if the federal government does not get their fiscal house in order soon.

 

All this action is the long overdue de leveraging of the massive debt of the world economy. Greece has defaulted, Italy has taken serious measure to put it's house in order. Britain did likewise a few months ago. We have Spain, Portugal, Ireland, and yes France in Europe to go. Then the USA the big one for a finale. Socialist is on the wane and we are seeing the dying pains each day. 

 

My hedge fund finished the day where it began 3 green stocks. Net I am basically where I began the day as well and I take that as a win since I was expecting much more carnage. Same stocks I mentioned in yesterday's post continued to hold up well. I will not be buying anything here soon since I expect a retest. But if you are a risk taker and brave soul CTL, and the agency REITs still look good here. If you are looking safety SO continues to impress. 

 

As I have mentioned many times there is no replacement for market experience. I envyed those who had it when I was a younger investor. I suppose I am the one with it now. Even with the experience weeks like this are just plain scary.