We did our hypothetical buys at the close today of the stocks mentioned last week and will track these separately in a Yahoo account.
PWE -- 750 shares at 26.
CMO -- 1500 shares at 13.19.
JSM -- 1100 shares at 17.51.
KSK -- 1400 shares at 14.70.
PEP -- 273.7 shares at 75.90. (The fractional total is so the total starting portfolio value comes to just under $100,000.)
Disclosure: I am long all of these stocks.
Pepsico is always compared to Coca-Cola, but it's really more diverse -- Frito-Pepsi would be a more accurate name, and you'd need to add Quaker, Gatorade and some other brands to get a real expanation of what this company sells.
This stock pick doesn't look much like the first four -- it's a common stock with no special tax treatment, you
can trade it readily, everyone's heard of it. But hey, everyone needs a safe holding. Look at this chart for the last 30 years. If the economy collapsed, the stock market shut down, livestock took over lower Manhattan and you couldn't trade for five years, you'd still probably be make money holding Pepsico.
Penn West Energy Trust is a Canadian oil royalty trust, meaning it pays out its income in dividends. Recent changes in Canadian tax laws have hammered Canroys. Penn West won't be able to keep that juicy 15 percent dividend forever due to the tax changes next year, but it's managed conservatively (even if oil prices come down to $60 a barrel, the company says the pre-tax payout is solid) and many analysts think it's undervalued at the current price of $26.22.
Penn West Energy Trust operates as an open-ended, unincorporated investment trust in Canada. The trust, through its subsidiaries, engages in acquiring, developing, exploiting, and holding interests in petroleum and natural gas properties and assets. Its oil and gas properties are located in the western Canadian Sedimentary Basin and within the provinces of British Columbia, Alberta, Saskatchewan, and Manitoba. As of December 31, 2006, it had proved plus probable gross reserves of 482,560 million barrels of oil equivalent; and had working interests in 20,480 oil and gas wells. Penn West Energy Trust was founded in 1979 and is headquartered in Calgary, Canada.
Unlike my first two picks, Capstead Mortgage has done well in 2007. It should -- it's almost a pure play on the spread between short- and long-term interest rates. Under our economic outlook discussed in an earlier post, the Fed will be almost forced to continue to cut to keep the financial system from major dislocations. That will reduce CMO's cost of funding its government-guaranteed mortgages, boost its spread and inevitably, the dividend (as a REIT, it must pay out most of its income). Since there's scarcely a chance that the Fed will raise rates, the only real risk for the next few months is headline risk -- if people get too scared of ARMs, CMO will go down with the rest of the financials, even though the actual credit risk is low.
Capstead Mortgage Corporation operates as a real estate investment trust (REIT) in the United States. It primarily invests in real estate-related assets, which include residential adjustable-rate mortgage securities issued and guaranteed by government-sponsored entities. Capstead Mortgage has elected to be treated as a REIT for federal income tax purposes and would not be subject to federal income tax, if it distributes at least 90% of its REIT taxable income to its shareholders. The company was founded in 1985 and is headquartered in Dallas, Texas. (From Yahoo)
This is a structured product offering senior debt of the Ford Motor Co., packaging it so it's available in $25-par shares instead of hard-to-trade bonds. KSK regularly trades under the value of the underlying bonds, and at the current depressed price of $14.57 yields 12.7 percent. Yes, Ford has had its problems for decades, but it has a good CEO from Boeing with a plan, a health care deal with the UAW and even some hot models like the small Escape SUV. Unless you think it's going to go broke, how can this not be a good deal? Even if it doesn't get back toward par, you're making over 12 percent.
SECURITY DESCRIPTION (from Quantum): Structured Products Corp., 7.4% CorTS (Corporate-Backed Trust Securities) Certificates, principal amount $25 per certificate, issued by CorTS Trust for Ford Debentures, the Trust. The underlying securities are the 7.4% Debentures due 11/01/2046 issued by Ford Motor Co. (NYSE: F). The CorTS certificates will pay 7.4% ($1.85) per annum interest semiannually on 5/1 & 11/1 to holders of record on the day immediately prior to the payment date. The CorTS are redeemable on or after 2/28/2006 under the call warrants at $25 per share plus accrued and unpaid interest.
For our model portfolio for 2008, we intend to buy $20,000 at the close Dec. 31 of JSM which is SENIOR debt of Sallie Mae (SLM). SLM has gotten whacked lately on a failed merger, fallout from the credit crisis being expected to raise student-loan defaults, ill-tempered comments and by the CEO, and most recently, common dilution to offset an ill-timed put sale
But the senior debt, yielding over 8 percent, looks solid and there should be some capital gains in here too as it moves back toward the par price of $25.
SECURITY DESCRIPTION from Quantum: SLM Corp., 6% Senior Notes due 12/15/2043, issued in $25 denominations, redeemable at the issuer's option on or after 12/15/2008 at $25 per share plus accrued and unpaid interest, maturing 12/15/2043, distributions of 6.00% ($1.50) per annum are paid quarterly on 3/15, 6/15, 9/15 & 12/15 to holders of record on the 15th calendar day prior to the payment date.
As we prepare to pick our five stocks for next year, it's good to start with a view of where the economy is going. In general, most analysts think the U.S. will skirt a recession but that there is a lot of pain yet to be felt in the homebuilding and financial sectors.
If the Goldman Sachs analysis of $400 billion in financial writeoffs is correct, there's a lot of pain to come. But thus far, institutions have been able to avoid bankruptcy by getting new capital, as Countrywide did from Bank of America and Citigroup did from the United Arab Emirates.
Those kinds of bailouts come with a cost to stockholders -- their investments are diluted by the convertibility of the investments into common shares. Hence, we'll be looking higher up the capital ladder for financial investments, to busted preferreds that are going to be nursed back to health.
Market's been poor lately, obviously, but today was a little different in that winners like Google did the worst (a smaller-cap example from my portfolio is Steel Dynamics). This indicates that the decline is near an end.
Probably what's going on is that institutional investors who have made their numbers for the year and selling and going home before they lose more.
I got this from a post by doggydoggy world on an IV stock board I frequent -- what a clear explanation!
These CDOs were just silly attempts to circumvent mathematics. Think about it, you put a billion dollars worth of mortgages into a pool and issue 800m of AAA tranches and 200m of CCC. Securitizing didn't really change the overall risk profile, it just redistributed risk away from the 800m and concentrated it in the 200m. Fair enough.
Now let's drop a little acid, and take the 200m of CCC from five different MBS pools and make a billion dollar CDO. Once again we'll issue 800m of AAA and 200m of CCC. Hey, it worked before! (If something seems awry you clearly didn't drop enough acid).
The MBS merely redistributed risk, but the CDO actually ERASED risk! Now that's something Wall Street can sell. CDO every mortgage security in the US and 4/5ths of the risk disappears. Do it again (with CDO-squareds) and get risk down to 1/25th of the original level. Then again with CDO-cubeds. By the time you reach the sixth power all risk in the entire US mortgage market is concentrated in a single 200m CCC tranche. It's magic!
Wall Street knew this was a scam, of course. The running joke was the debt of the entire free world was supported by a single low grade CDO tranche sold to a guy in a mud hut in Tonga. Ha ha.
Here's a media joke I told as the MC of the Friends of the Stanford Daily banquet on Saturday night after Stanford's glorious Big Game victory. The joke comes from reddit.com's joke section, but I changed it a little to improve the parallel structure. However, I made a mistake in phrasing. See if you can figure out what my mistake was:
Napoleon, Hannibal and Alexander the Great were hanging out in heaven, or wherever it is that generals go, and talking about modern technology. Hannibal said, "If I'd had tanks instead of those elephants, I could have conquered all of Italy." Alexander said, "Well, if I had cargo planes so my troops didn't get so homesick, I would have conquered all of India." Napoleon said, "Mon dieu, that's nothing. If I'd have had Fox News, no one would ever have known that I DIDN'T conquer Russia."
I hate retail. You buy something like the Gap or Abercrombie & Fitch and it suddenly hits and air pocket, then you find out months later that they ordered the wrong color or something for the fall season -- something the industry knew all along. So I generally stay away, except during one period when I was following Arne Alsin.
But it's getting awfully cheap. The prices of some of the stocks are discounting a consumer recession, or maybe the worst Christmas since the Grinch last showed up.
In that vein, consider Best Buy. Beta's a little high, 1.64. But the company is killing Circuit City and then there's that little matter of 60 million TV sets becoming useless in Feburary 2009 unless they're converted from analog to digital. At 46.84 with a forward P/E under 13 BBY looks awfully attractive.
If you look at a 50-year chart, Altria (the old Philip Morris) is the No. 1 stock on the NYSE as Marlboro has steadily gained market share. But some of the other recession-proof consumer products companies aren't bad either. It's a good way to get rich slow -- if we could all live to be 200, it would be a slam dunk to buy these.
My favorite in recent years has been Pepsico, PEP. It's really misnamed -- Frito Lay produces more of the profits. And recently Gatorade has been their fastest growing brand. Selling at just under 20 times earnings, with a 2.0 percent yield, it's not cheap. But management seems to understand that colas is a declining business and new products. including healthy ones from the Quaker Oats family, are key. And the beta, 0.16, is nice and low.
Starting to think about starting my Beta Breakers portfolio for 2008 -- a few stocks that will perform well without excruciating ups and downs for the full portfolio that often tempt investors (including me) into buying and selling at the wrong times.
The main way to produce a less volatile portfolio is to buy stocks with low betas (correlations to the S&P 500) -- preferably a diverse portfolio that will do well under different economic conditions. For example, if we're going into a recession, a consumer staple company like P&G should be expected to perform well, but if the economy is accelerating, P&G would just sit there while a growth stock like Apple would probably outperform the indexes. So if you own both, you should do OK no matter what the economic conditions.
Right now, stocks I'm considering include a financial -- Bank of America perhaps, which has been beaten up but doesn't seem to have the mortgage meltdown risk of Washington Mutual. And its beta is only 0.4.
Oh yeah, for those of you not from the Bay Area, Bay to Breakers is a well-known footrace you can run in costume, or even naked. And if this portfolio doesn't work out, I'm going to feel the latter.
The market has been choppy lately. I notice a difference in the way the credit and equity markets are pricing risk. When Ford announced better than expected earnings, its stock went up -- but Ford's KSK, which something like a synthetic preferred but is secured by senior debt -- went down. Stock people are just more optimistic.
With the market so choppy, I've been looking at fixed-income investments. One interesting one is AO-PA (a U-haul preferred) which pays 8.5 percent and rarely deviates from par. U Haul is a somewhat strangely run company that ran into trouble a few years back, but it's a solid business.
Read a book on baseball's Negro Leagues. Their last profitable year was 1946. The next year Jackie Robinson went to the Dodgers, the fans started deserting them and they never made money again. But -- here's the interesting part -- for the next decade, the owners in the shrinking league thought that all they had to do was reorganize, drop a team or two, and they'd be fine. Didn't happen.
I bring it up because of what's happening to my industry, newspapers...
The recent declines of both the A's and the stock market have been a concern. In the market, the speculative things in my portfolio sold off, the energy and utility stocks lost their gains, and anything financial (including preferreds of all stripes) or real estate related has gotten killed due to the subprime crisis and the flight to quality.
I had only one stock directly related to the crisis -- Countrywide (CFC) -- and got rid of it when it announced bad earnings and increased loan losses. It dropped about 3 points that day, to 31. Now it's in the low 20s. I've found that when the market is melting down, the only thing that makes sense is to sell stocks with fundamental problems -- not those that are just declining because of high betas.
As for the A's, their crisis is more a function of injuries than any other cause. Still, they don't seem to have the lineup that can compete, even for 2008, without improvement at shortstop and in center field.
Why do the best weeks in the market often feel so bad? Because it's so hard to keep up with fast-rising averages.
Some of the more speculative stuff in my portfolio, like Sandisk, had great weeks, but the better-quality stuff, especially the high-dividend paying preferreds, lag the market badly.
There are entire eras that it paid to be dumb and blindly chase growth -- 1995 through March 2000, for example. True, you pay for it in the end. The Nasdaq is at a ridiculous 41 times earnings, but as we remember from that era, it can get a lot more ridiculouser.
Pains me to say it, but I can see the A's having a losing season this year. With three players who can't hit in the lineup, they're at a big disadvantage -- and after magnificent first halfs both Haren and Gaudin are showing signs of returning to Earth. Haren's orbit is considerably higher, though.
Here's an anecdote from the AP:
Steven Jungman, director of recruiting for Houston-based ChaseSource LP, told of a young woman his firm helped land a job with a company working on a sensitive project.
"This was a project that had to be kept secret, that if the competition found out about it or the media wrote about it before it was rolled out, it would be very bad for business," he said. "It even had a secret nickname.
"Every day, twice a day, the company did a ... search for that title, just to make sure nothing was getting out about it," Jungman said. "One morning, an interesting link came up, to someone's My Space page. It went, 'My name is so-and so, I'm working on such-and-such for so-and-so.' And right next to that were photos that would make Anna Nicole Smith blush, and Paris Hilton go, 'Whoa!'"
The market is weak today after Home Depot and Sears reported poor earnings. Sears is having problems with sales of big-ticket appliances, Home Depot is geared to construction.
On a macro note, the housing slump is finally getting down to the consumer level as the ATM of refinancings has been shut down. That's not all bad -- the weakness implies lower interest rates, which will the seeds for a recovery.
On a micro note, it will be interesting to see Lowe's report -- the two stocks usually trade in lockstep, but HD has been the stronger lately. A paired trade, long LOW and short HD, might work here.
A distant memory tickled by Mick LaSalle's blog entry asking for a first political memory. The day after the 1960 election, riding the school bus as a first grader, kids singing:
Whistle while you work
Nixon is a jerk
Eisenhower's lost his power
And Kennedy's going to work
Long have liked that Ira Gershwin lyric:
They all laughed at Rockefeller Center, now they're fighting to get in.
One report says iPhone missed its sales targets and sold less than 700,000 units. Another is much more bullish, saying that all but two Apple stores are sold out and around 1 million units have been activated.
The stock, meanwhile, is exploding, hitting 130 today after lingering in the low 120s during the intro period.
When a stock faces a time of confusion, there's a chance it will either go a lot higher -- or a lot lower -- when the truth is revealed.
Stocks are strong again this morning. It looks at if last Thursday's Fed meeting was the kickoff to the rally. When they weakened their anti-inflation language, that was all the bulls needed -- as long as interest rates don't rise, the market should go up.
So what looks good? Conoco Phillips (COP) is incredibly cheap, as Robert Marcin points out on thestreet.com. It's selling for only a bit over seven times full-year earnings. Yes, they're going to get kicked out of Venezuela and their drilling programs are something of a disaster. But they can buy oil cheaper than they can drill it -- as with their Lukoil stake -- so they're not in terminal decline.
This would seem like the ideal day to sell Apple. The monthslng iPhone runup is over, AT&T had some problems hooking up customers, the stock is priced for protection, according to Barron's.
Yet the Barron's report barely knocked it down today. It might be wise to take a profit, but it's very hard psychologically to sell such a big winner.
Let's say Einstein was the greatest person of the 20th century and Hitler was the worst -- at least in terms of what they did for mankind.
Now let's look at the way they treated women. Hitler, not surprisingly, could be dick-tatorial toward Eva Braun but he was faithful to her and toward the end of his life started to appreciate her for her devotion to him and doing her main job (getting him to relax a bit), according to a recent biography of her.
Hitler could be a thorough bad guy even in the personal arena -- he had somebody murdered for talking too much about his apparent affair with his own niece Geli, who committed suicide in the '20s, probably because she realized she was losing Uncle Adolf to Eva. (Interestingly, the guy who carried out the murder was Hitler's former chauffeur, who'd had an affair with Geli too that Hitler knew about but didn't stop.)
But Hitler also had middle-class values, and he wasn't highly sexed. It added up in the end with Eva getting 36 hours as the one and only Frau Hitler before being quite satisfied to end her life in an operatic flourish, standing by her man.
Einstein didn't have middle-class values, having been described as an "unkempt philanderer." He left his first wife Mileva for his cousin Elsa, ruining his relationship with his two sons, and went sneaking around on Elsa too, with several women.
What can we conclude? Monogamy in men is not necessarily a test of moral character. It has more to do with cultural morays and the strength of sex drive.
Is the future of the newspaper business to give up print editions and all those expensive plants, paper and circulation expenses, as Rupert Murdoch recently suggested?
Then you'd just hire reporters and programmers and put the news out there free, selling ads to support the business.
Unlike my former boss, the Newsosaur Alan Mutter, who believes newspapers need to stop putting content online, I suspect Murdoch will be right, eventually, with an intervening step -- free circulation tabloids. Right now, the free online model is still not universally accepted ... but those who think readers will pay for content ignore the facts that there will always be free news put out by who a) crave attention b) have a political point of view or c) brazenly think they can attact enough advertising to make a business out of it.
Interestingly, I've heard that the free-replacing-paid model is happening in another industry as well -- online porn.
one of the best investors I know on the Internet, Boston Bill is up 22 percent year to date. These are what he reports as the largest positions in his portfolio.
31% ASI
27.6% KSK
18.1% YRCW
15.1% ELN
4.2% CMO-B
hmm, may have to buy some more ASI. It's a reinsurer that does things like construction liability. It's been hot lately.
here's my post in the Drumbeat about the David Del Grande column alleging racism in the Milton Bradley situation. I thought the column was pretty appalling, nonetheless, the A's have to know that there's a signficant proportion of the East Bay fan base that agrees, you can hear it on talk radio.
If I were starting a new portfolio today, which of the 30-some stocks and funds that I own would I begin with. How about KSK? -- the synthetic Ford CORTS that are supported by senior bonds. They're still yielding 10 percent and haven't gone up with the common. In fact, they're trading for a buck less than the underlying value of the bonds. At 18.30, there's quite a bit of room before they return to par (25) and the common is signaling that the company is recovering. It's pretty unthinkable that the Ford Motor Co. would go bankrupt.
I have about a 20 percent gain in these already over the last couple of years, plus that high dividend. Looking for it to go up some more with relative safety.
I've used the handle baycommuter on various message boards for at least 10 years. Plan to blog about three things, mainly: investing, the Oakland Athletics and whatever else I'm interested in. (As it turns out, the third thing has mostly been books.)
