Current Trading Portfolio July 8, 2012

Our current trading portfolio.  At this time we have positive positions in all these securities.  Note that we trade these stocks as options and they might not be good long term holdings.  However we believe at our strike prices noted below they represent good entry point values. 

AAPL..... Continues as our largest holding at just over $150k.   Apple has had such bad press of late we see $390 as a bottom now.  Yields about 3% at the current price.  Nice premiums on options and little downsize risk. 

AFL... We like this insurance carrier that is near the bottom of it's price range.  Insurance benefits from rising rates since they the can produce additional income from asset holdings.  We use a strike price of $50. 

BP.. Sooner or later BP will break free of the lawsuit agony.  The current price near $40 is most favorable long term in our opinion.  We might even like it better at around $37. 5% yield make the wait worthwhile. 

CTL..The one legacy telecom that has begun to grow and gain market share.  Not to mention the nice 6% plus yield.  Our strike price is $33, but we might back it off to $32 shortly for additional safety. 

FB.... Remains a company in limbo.  If they can figure out how to convert all those Facebook accounts to some advertising revenue they could grow quickly.  Strike price of $20. 

HFC....Continues to prosper from the lack of a pipeline for mid continent oil which keeps the price below the world price.  So they get to resell refined crude at the market price with the nice cushion of additional profit. Do not overlook the special quarterly dividend.  Strike price $35. 

LO...The only cigarette maker we like currently due to the growth factor in the US.  Nice dividend too.  Strike price of $37.50. 

NOV...Supplier of oil drilling equipment and most importantly gas drilling equipment.   Warren Buffet is buying shares.  Strike price of $60. 

O...Since it has sold off back towards $40 we have added this stock back to our portfolio.  We love Realty Income and it's monthly dividend. Strike price of $40. 

SHLD... Lousy retailer. Fabulous real estate portfolio.  Our strike price of $40 seems to be a good value price for this stock.  We might back off to the mid $30 is the stock continues to show weakness here. 

SO...The recent sell off has brought this stock back where it is a value again.  Our strike price of $41 makes for a good entry point. 

T....Stable big telecom company we like at $33.  

            

We took a good sized loss today.

We did something this morning we absolutely hate to do,  take a loss, a nice sized loss at that.  

The scenario was simple we sold an option to buy 2400 shares of Baytex Energy back in March of this year for $816.  The strike price at the time looked quite good at $40 with the stock at that time selling at around $45. The stock has a solid 7% or so dividend backed by a huge oil inventory in the ground and a nice spread in the margin of cost of extracting versus market crude price.  Frankly we figured the option would never get assigned and the $800 premium was safely in our bank account. 

Once again politics reared it's head and Obama instead of approving the Keystone XL pipeline like most figured he would shortly after the election decided to put the decision off again.  This meant for the time being all that oil Baytex is producing will get bottled up in Oklahoma and Illinois until rail cars owned by Warren Buffet,  Obama's cronyism buddy in this case,  can move it to refineries mostly on the Gulf Coast.  The resulting glut of oil and no hope of any long term relief means Baytex can produce all they want but only as much as can be transported will get sold. 

Add in the resulting drop in price due to the glut cut into Baytex's profit margin and you get a drop off in stock value.  The stock price has been as low $35 in the recent month which meant we were sitting on a $12000 loss in capital if we could find no upward move in price.  Fortunately for us the Egyptians decided to have themselves a government overthrow that sent oil futures moving up and Baytex stock price up with it.  Today the stock is selling for just under $38 with options at around $2.50 for the $40 strike price.  Not knowing where this revolution in Egypt is going and sensing a chance to cut our loss in half we bought back the option at just that $2.50.  A $5200 net loss, but it looks good compared to the $12000 we were seeing just a month ago. 

The point here is something you can read back over two years ago in my trading and investing rules.  I call it the "Jefferson Strickland rule".  Many years ago my old car dealer friend told me one of he worst things to deal with is a bad car trade where you sit underwater in a car value.  Each day you come in thinking about the loss to come is like a bad tasting medicine sitting in a bottle on your desk.  

Every day you come is another day you taste the bad medicine even if you do not actually take it.  So the best remedy is to take the bad tasting pill sooner rather than later getting it done and moving on with a brighter outlook and looking for better opportunities.  Therefore today we took the bad medicine and already feel better thinking about using the now open resources for better trades ahead. 

Taking a loss is the hardest thing most investors and people have to do, but it is a must do and something best learned sooner in your life so as not own depreciating assets and missing on better opportunities. This rule can apply to your old car or bad real estate buy as well.  The asset each day depreciates, sell the asset, take the loss, and save your capital.

                

Some current income bargains.

In the last month or so there has been a sell off in dividend paying stocks.  Frankly many of those securities were formally priced significantly above value.   The fear that interest rates are headed up is confirmed in the huge run up in mortgage rates in just the last two weeks.  Mortgage rates are up almost one full percentage point from around 3.5% to 4.5% now.  Note that in the last week they have moderated some back towards 4.25% and we believe they will moderate a bit more before stabilizing around 4%.  The real key here is the 10 year US Treasury that has now moved up strongly to around 2.5%.  That rate was about 1.5% just some over one month ago.  That rate is likely to stabilize here around 2.5% for the near term.  Unlike the mortgage rate that will be affected by lower mortgage activity at a higher rate, treasuries still have significant buying from the Federal Reserve.   All said good dividend stocks look like a good buy here due to the fear of higher rates. Below are some of our favorites. 

Realty Income, symbol O, has always been one of our favorite picks.  Superb management,  shareholder friendly, and a monthly ever increasing dividend.  Current yield of just over 5% is solid long term.   Realty Income is a triple net leaser and like many REITS have lowered their long term cost of capital with significant reissuing of debt.  Buying O here in the $42 range is a nice income producer for most portfolios. 

Southern Company, symbol SO,  is the preeminent electric producer in the country.  Great management and a rock solid dividend.  Add in that they operate in a area that is the best place in the US for a regulated utility.  Like Realty Income this company has done a good bit of reissuing of debt at much lower rates long term.  Here at around $43 per share it yields just under 5%.  This stock is what used to be known as a widows and orphans stock and owning it makes me sleep well at night. 

AT&T, symbol T,  this stock has drifted back down to around $34 now and yields over 5%.  You might not get a lot of capital gains, but with their business model and rock solid finances this one is a good buy at this price for future income. 

All three of these are not big winners if you are looking to make a big gain. However each one beats CD's, US Treasuries, and most bonds at current prices.  Little downside risk, dependable income, and sleep well at night safety make for good investments in current market conditions. 

               

A Life Well Blessed

Good morning I am Bob Dixon son of Bonner Hugh Jones and Wilma Dixon Jones long time members of this congregation and the namesakes of the scholarship being awarded today.  I would like to note this scholarship is now an endowed scholarship having been funded by my wife and myself to be awarded forever.  Since it has now been almost 6 years since the passing of my father and I expect some new members of this congregation might confuse the names Jones and Dixon let me clarify that my birth mother passed on early in my life and I was raised by my aunt and uncle who became my mother and father in love and law. 

While corresponding with the pastor about this mornings proceedings he suggested a few comments might be in order.  Well he does comments almost weekly and they might come easy, but for a lay person such as I not so much.  So after some prayer and thought here are some comments.  They contain some history, some personal testimony, and finally hopefully some inspiration for the young people in this congregation. 

My comments today are entitled "A Life Well Blessed."   And I do mean blessed by God and not lucky as my wife constantly reminds me.  

The scholarship we are about to present is named the Bonner H. Jones and Wilma D. Jones Leadership Scholarship but frankly it might actually be better named The " I Am From Richlands Scholarship".  My father a lifelong Richlands resident and my mother who came here in 1936 exemplify what it means to be "from Richlands". He loved the town and this church and was proud to tell people he was from this place.  My mother was perhaps the first women entrepreneur in town as she started a beauty shop downtown here in the late 1930's.  Many in this congregation today are here because they went away and came back to the blessings of living in Richlands.  All these people lived or are living a life well blessed.  Sorta like the Marines who are our neighbors and unlike big cities such as Raleigh or even Jacksonville, we are "the few, the proud" and might I add "the blessed". 

Now I would like to speak directly to the young people in this congregation.

There is a song from 1983 that I carried in my mind for many years after it was recorded.  As a young 20 some year old person then I was thinking where my life might be going just like the young people in this audience today. The song by Irene Cara has a line in it that says "take your passion and make it happen".  It is about a young woman who believes in herself and her craft and knows if given half a chance she can do as well as anybody else.  She uses her passion and does make it happen. 

 Let's speak about your future and where it leads you.  More importantly let me speak to the opportunities you have before you because that vision you might have in your head right now IS possible and YOU can make it happen. 

I was raised in this little town of Richlands just like you. I went to church at this church just like you. I attended Richlands High School like most of you.  Today I stand before you with a life well blessed by my parents, my wife, my children,  this town, this church,  RHS, and most importantly by God.   Little did I know early on that over many years of work and life long learning I would come to the point I could offer a endowed gift to the FBCR like the one being handed out today.  But I did have the passion to work to make it so. Materially I have been blessed more than I deserve and as Mr. Bonner Hugh would say it is time to "Pass It On".  Frankly instead of the fact growing up in this little town of Richlands being a hindrance to me it was my making. 

The honest down to earth values instilled in me and now you in this small town and this wonderful church if you keep them for your entire life you will find they will help your visions come true as well.  Note I said Visions and not Dreams.  Dreams are for those who have dreams they hope can come true, Visions are for those who envision what they and God can make come true.  Anyway envision what you want out of your life and apply some of that passion and it will happen.  Be it a wonderful new family, be it a great job, be it a owner of a business, be it monetarily wealthy, be it just the happiness of living in Richlands,  or be it all of these and more.  Success in life is measured by God and what you make of the gifts that God gave you and not what you have at the end of life or how others measure that success. 

With your faith in God, your Richlands upbringing, your family, and some passion someday you might stand up here and talk about your life as a life well blessed.

              

Portfolio change since this morning's post.

We have dropped BRK.B from our trading list due to the opportunity we find in Sears Holdings, symbol SHLD.  Sears has been sold off significantly since the poor earnings report last week.  Our strike price on SHLD of $40 makes for a fine entry point if our option is assigned.  Sears might be a lousy retail business, but the real estate is top notch and we believe worth more than the current price of the stock.  Add in the number one appliance business and best of breed Craftsman tool business and the price is too good to ignore. 

Current Trading Portfolio

Our current trading portfolio with strike prices.  Note these are trading stocks for us, but the strike prices we note would make fine additions to any portfolio for long term holdings. 

Risk happens fast is an appropriate term for this stock and bond market. Valuations are stretched to the max in our opinion and any event that scares nervous investors will send many for the exits so caution is the operative word. 

LO..Continues to be a good stock to trade.  We consider it the only tobacco stock with growth opportunities.  Our trading price is $40. 

AAPL..Now our largest trading position with $161K in our position at $425 and $400 per share.  Apple has been beat up so badly we believe these price targets stand well now.  It is not the largest phone seller, but it remains the most profitable. 

BTE..The only stock in our portfolio where we are below our strike price of $40.  However the option premiums remain so rich that if we end up having to own the position we consider the risk worth the income.  Canadian oil and gas remain the US best choice for an independent future from the middle east.  BTE is knee deep in this business. 

TCAP..We currently have an option out at $22.50, but once the option expires we will move up our strike price to $25.  Our comfort in this business development company remains strong despite the worry over the Fed ending QE.  Higher interest rates hurt these companies since borrowing costs increase, but TCAP is the lowest cost operation out there and continues to offer investors good income. 

CTL..Our strike price of $33 is conservative, but CTL has a history of surprising with corporate events.  With that said CTL continues to improve their business model and cloud infrastructure and remains a good income producer. 

T...AT&T  is a solid low risk producer of premium income and remains in our portfolio.  Verizon has likely taken the lead in wireless service but T remains bigger than VZ.  Strike price is $34. 

BP...BP has some serious litigation issues, but we like our strike price at $40.  There is risk, but the premium income is good and we will be glad to own it at $40. 

HFC...Superb oil refiner which is in the sweet spot for profits due to the difference between the world oil price and North American mid continent land locked lower prices. Then gets to sell at the higher world refined gasoline price.  Strike price at $41 gives us plenty of safety. 

NOV..One of our latest additions. Our strike price of $60 gives us plenty of safety with this oil and gas drilling parts and equipment builder.  There likely is not a single drill derrick in the world that does not have some part provided by NOV.  The real deal is NOV is the leading provider for the rapidly expanding gas industry in North America and the reason Warren Buffet owns it. 

BRK.B...Speaking of Warren Buffet we are now trading his stock at the strike price of $105, but currently do not own it as we wait for a pullback that gives us more comfort. 

AFL..Another new addition where we have a position at $50.  We believe AFL has a low valuation in a nice cash flow industry.  The major business here is Japan where the population is getting old and needs this insurance. 

FB..The sell off in FB has made us more interested in taking a position.  Our strike price of $20 is a great entry point. If someone here can figure out how to take advantage of all those eyeballs they will make tons of money. 

BCE...We like BCE, but at near $50 the price is too rich for us and we will be exiting our position in June. 

SBY..Our comfort factor in this housing rebound play has weakened due to the huge buying of large hedge funds and we will exiting our position in June. 

O..A great stock and great company that has gotten more than fully valued at over $50. We will exit our position in June. 

Farce in Smithfield

We attend the Smithfield Town Council meetings with some regularity.  We have witnessed some strange things and some out of bound comments by both citizens and commissioners, but last Tuesday night might have taken the cake. 

Bear in mind that these meetings go on far too long and due to the problems with past hired management the town council deals with too many mundane issues that should be handled at the town dept. level.  One such one was Tuesday night when a church was before the council getting an ok to put up a tent for a revival.  This is absolute silliness that this decision made it to the council chambers. It should have been a form filled out and rubber stamped for approval and be done at dept. level.  Similarly the issue that night regarding putting up signs for a charity event.  Just get it approved in some fashion at the town hall and move forward.  But now it seems the council must deal with such minor things and the town council meetings go on for hours of needless discussion. 

Speaking of needless discussion council members Emerly Ashley and Andy Moore spend at least a half hour on if FOR SURE will NCDOT and/or the project developers were responsible for IF a turn lane was to be needed for an soon to be built apartment complex and to make sure the town would not be on the hook.  We understand  Mr. Moore's and Mr. Ashley's concern there after so many snafus of recent where the town's taxpayers ended up having to pay the freight where they should not have had to and we appreciate their efforts.  With that said this issue too took way more time than needed.  Put your dept. head in charge with instructions and if they do not perform fire them.  Issue solved.  Most competent department heads expect no less and frankly desire the responsibility. 

Of course none of the above discussions come close to the absolute farce that transpired about 45 minutes into the Tuesday meeting when District One Commissioner Charles Williams all but accused Downtown Development Director Chris Johnson of stealing $50000 from his district.  This in public with no evidence but hearsay and the desire of Mr. Williams we suppose to look good.  I tell people my job after retiring in Smithfield is to keep Chris Johnson's ego in check and Mr. Johnson jokingly tells me I got a full time position.  However Chris is not a thief, rather more a huge given of time to the best interests of Smithfield, most times without just compensation.  Oh, he got the nice person of the year award from the SS Chamber this year, but that with about $1 will get you a coffee at his local downtown hangout Melody's.  Fortunately Councilman Moore said basically that in standing up for Mr. Johnson sorta kinda anyway.  Uhhh...just where were the other council members and mayor here in standing up for the Downtown Director?  We think we know why they did not stand up, but will leave it at that here. To further point out how bizarre these moments were note the audience was turning to each other and behind them to ask something like "do you believe what just happened".  To the well known person sitting in front of me I just said "hey this is why I come to the town council meetings better entertainment here than I could see on any of my vast cable channels at home."  It was all I could do but not stand up and let it all hang out and that without even being sword in, but modesty kept me at bay and THAT as others can tell you took a lot of willpower.  So here is what I would have said to Mr. Williams if I had stood up. 

 " Mr. Williams I have served on the Smithfield Downtown Development Board with  Chris Johnson, I know Chris Johnson, Chris Johnson is a friend of mine, and Mr. Williams YOU'RE NO Chris Johnson."