STI Hedge Fund October Performance

We begin with some advice given me in the very first week I began trading stocks from an older wiser gentleman who had been doing it for several decades. The gentleman was the CEO of a small community bank and I was hitting him with a series of questions and one asked by me was " I understand the concepts of trading and know experience is needed, how does a trader deal with the political angles.  His response has stayed with me all these years, " when democrats are in charge money is easy to make since they throw it out in the street for everyone to pick it up, when republicans are in charge making money is much harder because they make you earn it." So be it now as we end a third year of a democrat in charge and making money with trading has become easy and it is reflected in our third straight excellent month. Since I expect this trend to continue we will likely dump additional carryfoward loss positions in December to open up what looks to be excellent easy money opportunities in 2012.  Those opportunities could make 2012 possibly one of our best years ever.  Of course the grim reaper of a republican president looms on the horizon and working harder could be the option in 2013.

 

Despite having only about 40% of our positions open for trading this month we still had an excellent month producing a 21.59% annualized gain.  As has been the case recently dividend coverage was very positive to interest expense and also covered trading fees.  Large trading gains came from tobacco stocks including another very large one from LO, which continues to reward us from being our largest held position. Real estate stocks continued to perform well as well. We did take a position on a financial stock that assumes the European deal unravels and that trade might hit us with a year end loss if that does not happen.  Year to date through October annualized gain is 17.51%.            

 

Significant help again came from market volatility and our continued careful stock selection.  We also are pleased that our cash flow model is performing and allowing us to make decisions when we desire to exit positions that are in the money as opposed to being forced to do so due to margin calls or excessive debt and leverage.

 

As we head into November we have add back several trading positions that increase our trading positions to 75% open and could allow us to make additional profit this month. That could  be balanced by the normal year end decisions to exit unprofitable and no longer desired stock selections, which could dampen overall profit. December as usual will be the month we make final decisions on stock exits.

 

We continue to beat other hedge funds and hedge fund models for profit and maintain above average annualized gains in invested capital.  Year end as noted earlier should finish around 15% with expected sales and carryover in the money positions where we see additional profit opportunities. We might consider one or two additional sales that might bring the year end down to 13%, but still market beating results and certainly much better than bonds of any type.

 

 

 

                

Today's Relief Rally.

Do not be fooled. I repeat do not be fooled. Today's strong move up is what is known as a relief rally. Nothing more than relief from investors that Europe is going to bail out Greece. The problem is THAT THE SOMEONE that is being hit with the bailing out bill has bot been decided. Oh, I know you have heard the European Bank or maybe some private European banks, and maybe a country or two. In the country part that is read as Germany. In the end that someone will have to be the taxpayers of some country and that someone is likely to be German taxpayers and US taxpayers.

 

This patchwork of an agreement has been orchestrated by President Obama and Prime Minister Angela Merkel who both or protecting their political futures. Ms. Merkel who needs help for just a few months and Mr. Obama who needs help for a 13 month period. In the end it solves nothing and makes none of the hard decisions. Sooner or later someone has to take the bath in debt and losses of several hundreds of billions of dollars and that little detail is still a blank to be filled in.

 

If the parties involved can hold this gang together and keep the bail out money flowing until Obama gets reelected or at least past the election this house of cards will fall apart and frankly it might happen sooner than that.

 

As an investor consider holding off on your investments. As a trader use this up tick to lessen your load. I also caution that as we move closer to the US election ignore government economic statistics as they are prone to be hedged to protect incumbents of both parties. Best to rely on private reports and other economic data for your direction. Note that the GDP today was up to 2.5% growth and the market said whoopee, but expect revisions downward the next month or two. Note that several companies in the recent reporting period have reported disappointing earnings and that says we are not near the end of the economic troubles.

 

Full disclosure I took out a large option position against this rally this week.

               

Banks as Utilities.

My college senior year thesis was done on generational theory.  That subject has long held my interest because I believe that despite huge advances in technology, medicine, science, and the general improvement in lifestyle over the centuries mankind is still driven by the same human nature from the very start of human existence.  Basic human nature of sinful pursuit is only tempered by a faith in God and the enforced laws of man. This is the basis of our American constitution that this human nature must be held in check by laws and that the only way for self government to survive is to have equal power in three separate branches of government. So far it has worked, but we will see.

 

Anyway this generational theory accepts that about every four generations, or eighty years, we repeat the same mistakes since the people who made the mistakes have passed from the scene. So today we are dealing with similar problems from the early 1930's.   I expect about now you see where I am going since we indeed seem to be in a time warp with financial institutions, unemployment, and economic problems.  One of the biggest problems today are banks and the fact that our economy simply does not function well without solid banks which can make loans to customers. 

 

Banks were a problem back 80 years ago as well and many went under due to bad loans and most importantly they got into doing business in areas they should not have been at all. Banks were lending money for speculation on stocks and other risky areas of business. This led to what is known as the Glass Stegall act which limited what businesses banks could do and added the Federal Deposit Insurance Corp. to protect savers. Frankly this was good policy except for some over the top provisions such as control of interest rates. The act also made it illegal for banks to serve as what are commonly known as investment banks and regular banks at the same time. 

 

As time went by some of the provisions were weakened such as the interest rate provision in 1980, which were good.  But things started going wrong in 1999 when the wall between investment banks and regular banks was repealed.  It took about one decade to lead us to the same problems they had in the early 1930's and we got the 2008 financial crisis. Again, we forgot what and why people made the laws 80 years ago. This led to us passing Dodd-Frank Financial regulation law which as in the 1933 Glass Stegall act was over the top regulation. If I could find a way I would place a long term bet for my great grandchildren that around 2090 we will be repeating this mistake again.  They would be rich.

 

Frankly the problem here is that banks need to be treated like electric utilities, fully regulated and allowed to make a reasonable 10% to 12% protected profit.  I also believe our current banking environment has banks that are too big. Many have lost contact with customers and that is one reason we had so many bad loans. We also should require banks to keep in house every loan they make, service it and retire the debt themselves to be loaned again. All these are in return for the protection given savers via FDIC. Unfortunately Dodd-Frank is the death bill for small community banks with their over the top regulatory rules.  This is due to the lobbying power of the big money center banks who also make big political contributions mainly to Democrats. Oh, Republicans get in on the action too, just right now they are not in power.

 

If you would like to consider investing in banks as they should be consider the banks in Canada, which did not change their laws and did not deal with the financial crisis like the US. The Bank of Nova Scotia is an excellent example of a bank that does business correctly, symbol BNS.  But almost any bank in Canada will do nicely.

 

Banks as utilities would also allow investors to buy into the banks with the knowledge of knowing they might not make huge gains, but would get nice regular dividends and that would make banks widows and orphans stocks again.  There was a time in the 1980's and early 1990's when that was the case. Maybe about 2060 the generations alive then will get those few years with banks being what they should be.

 

I currently own GS as a option and long.

                

UAN..a new on the watchlist.

When Jim Rogers speaks I generally listen. Jim Rogers is the multi-billionaire who made his fortune with Geroge Soros years ago and then took his family and money overseas to Asia where he saw better opportunities. However Mr. Rogers still continues to be a sought out person to interview on news shows and business shows. One thing you can guarantee that Mr. Rogers will say in his interviews is that the absolute best investment opportunity for the next decade on the planet currently is agriculture. He opines that with a growing world population and most of them now starting to experience a better life due to capitalism food for people and food for animals to produce meat is the investment theme of the next decade at least.

 

If you have followed stocks that invest in this area such as Potash Corporation, symbol POT and Terra Nitrogen Corp. , symbol TNT,  two of my favorites, then you will see they have big investment winners. BIG winners !!  Mr. Rogers likes farmland and I do too, but as in war the real winners are not those engaged in war but the suppliers to the ones engaged in war. So if you are growing anything you need fertilizer in this high yield agriculture environment. POT is one of the biggest suppliers of fertilizer in the world and has almost a never ending supply in Canada to mine, but they pay a very small dividend.  A dividend is a absolute for my hedge fund to be considered. TNH does similar business in the USA and they have a nice dividend, but they security offers no options and options are a absolute for my hedge fund.  TNH is also a MLP, and I do not like complicating my tax return with K-1's that MLP's produce at tax time.  But this area of business is too good to ignore going forward and I have searched for sometime for an entry point.

 

Enter my new buy UAN, CVF partners, yes I said partners as in MLP.  UAN is a newly formed MLP, which owns a state of the art fertilizer facility in Kansas.  UAN has affirmed a $1.92 annual initial dividend which is about 8% at current stock price. UAN also offers options. This investment sector is a must to get into and enjoy some of the large increasing profits and I have decided to take the dive into UAN. 

 

Therefore add UAN to my watch list as I wait for an entry point closer to $20 per share. UAN is not for the people who can not take some risk, as a one operation company if that operation goes down so does the company. However with plans to double their output the chances for a doubling in price is there along with a nice dividend and option income.

 

As for the MLP and K-1 I suppose my CPA is smiling as well.

               

If you own a bond fund or considering buying one read this before you do.

Bond funds are normally very popular, they are even more now with savers and investors looking for safe places to put their money that might pay a few cents more than regular savings or even CD's.  There are many categories of bonds funds, US Treasuries, Corporate, High Yield, Municipal, Emerging Market, and the list goes on. There are also two types of funds within the categories, index and managed funds.  I have never owned and single bond fund other than corporate and only then it is an index fund. Here is why. 

 

First off let's be clear as I mentioned in a previous posting on this subject buying a bond or bond fund at current interest levels is money suicide. You are buying bonds or bond funds at the height of their value and if you sell later on the chances are you will be selling at the bottom of their value. There are small exceptions with higher yielding municipals, but careful selection is very important with municipals. There are many other places to find safe yield now. 

 

Bond funds typically buy bonds on a regular basis as funds come in from investors. Since this is a ongoing buy they buy bonds during periods like now when purchase is not wise and other times when purchase is wise as during times when interest rates are at a zenith. So it all evens out for the most part.  Still not a great purchase, but at least better than all right now. Unfortunately investors do as noted above and pile into bonds funds just when it is not wise and bail out when it is wise since usually bond interest rates peak when stocks are doing their best. Investors typically want some of the stock action so they sell bonds to buy stocks. Even if you are long term holder you tend to take your hits along with everyone else, just to a less degree. Bonds fund must invest funds as they come in and sell bonds as they cash out.  So in all stay away from bond funds for the most part.  Chances are the current low or lower interest rate environment is with us for awhile so the more you put into bonds funds now the more value you will lose later on.

 

Now there is one exception to this rule and that is when you buy the right type of bond fund. Managed bond funds as all funds buy and sell not only when investors are cashing in and out of the fund, they also try to buy and sell when they believe they have a good buy and sell accordingly . This rotation and churn costs money and you the bond fund investor pay for it. The average cost of managed bond funds is .98% or about 1.0% of your take here and when rates get down like they are now the cost is the same so your interest paid is hit even harder.  Frankly paying this kind of fee for a bond fund even when interest rates are higher is foolish since I can not see how anyone should be paid to "manage" a bond fund.  But trust me there are people who will pay for it and "managers" who will take their pay.  Add in that many of these bond funds have up front loads and you get hit even more. 

 

 The only bond fund I have owned and currently own is a index bond fund. Yes, I know some people and their advisors cringe when someone says index fund.  But index anything for the most part for stocks and bonds is the way to go for long term investors.  It is appropriate to put money in managed stock funds, but only as speculative plays not for long term holdings.  Managers of stocks and bonds for the most part have proven over decades they can not perform much better than the index and when they do you pay a nice high fee to get it both in good and bad years. Index bond funds hold the same bonds for long periods of time since they are matching an appropriate bond index. In any case if you buy index bond funds you get a much lower fee since you are not paying a high priced manager, good index bond funds average .22% which is just under 1.0% lower than managed funds. When investing in bond funds 1.0% of interest is serious money. 

 

 Lastly let me suggest if you are considering an index bond fund consider the cheapest operator which is Vanguard.

 

Full disclosure I own index bond funds in Vanguard funds and also JNK a bond ETF for reasons unrelated to this article, which is for longer term investors.  I also own individual NC municipals.

           

Three changes in the portfolio.

Effective with today's expiration of options we are deleting Reynolds America, symbol RAI, from the trading portfolio. RAI remains an excellent company, but it has moved up beyond a price we think comfortable for trading at this point. If it declines in price we will reconsider.

 

In the place of RAI we are doubling our exposure to AT&T, symbol T, and adding 25% exposure to Altria, symbol MO.  We also are doubling our exposure to Realty Income, symbol O,  since the of value of the hedge fund has moved up enough in the last month to allow room for an additional trading position.

 

All these moves is in response to the belief that the current move up in the market is temporary since the economy is now in an obvious downturn again which could lead to another recession in 2012.  The new stocks are more defensive in nature going forward.

 

We are still looking to end positions in RRD, FTR, GS, ARCC, and HTS as previously mentioned by year end. Today we adding SCCO as a possible sell candidate as well.

 

Low interest rates are in all a net negative.

This is a follow up to the posting on how low interest rates will not improve the housing situation.  Let's also examine how very low interest rates are also causing problems in other areas of the economy and might actually be impeding the recovery.

 

I can only think of two areas currently getting a net plus for low interest rates. One, the federal government gets to finance their ever growing debt with low and getting lower interest rates.

Two, if you are one of the few people considering buying a home your mortgage will be the lowest rates in about half a century. 

 

However there are many areas that are getting hurt by low interest rates.  First are retirees and savers who are getting virtually nothing on their savings deposits. Simply put retirees did not expect to be making less than 1% on their savings at this point in their life.  A point made this morning on CNBC is that many of the new mortgages that are delinquent now are from older citizens who no longer can use money saved over the years to pay for mortgages since the interest earned is so low they can not make the payments. Honestly these citizens who did what they were supposed to do and saved wisely are now being punished for their efforts. Maybe President Obama and Fed Chairman Bernanke need to consider that next time they think low and even lower rates are so wonderful.

 

Another of the areas getting hurt by low interest rates is the hit many pension funds take from having lower interest from their bond portion of the fund and how to make that up going forward.  Corporations and many US states and municipalities now will need to find additional money to fund their pensions to make up for lack of interest rate values when bond future values are reduced by lower rates.Money that could be going towards hiring people or investing in their business now goes towards pension coverage. Remember when the Congress and president passed the new regulations on pensions with lots of fanfare requiring pensions to fund their assets closer to what is expected, well now it comes to bite them back.

 

The point here is low interest rates might be a boom to some, but it hurts many that the press does not consider or cover.