December, 2009

"The easiest way for your children to learn about money is for you not to have any."

- Katharine Whitehorn

The Professional Opinion

S&P 500 Index: 1095.63

LEI  - Leading Economic Index

The LEI has risen for seven straight months which translates into an annualized rate of a bit better than ten percent.

Six of the ten leading economic indicators advanced in the month of October

2% - 3% real GDP growth is predicted for 2010.  This should advance next years S&P 500 earnings considerably higher than what transpired this year.

ICEI - Index of Coincident Economic Indicators  (Learned a new Acronym today)

What is it?

It is a compilation of  statistics which are merged together to produce one number for tracking the economic environment.

Statistics Factored In:

The Unemployment Rate
Real Earnings
Average weekly hours worked in manufacturing.

The current reading is 99.8 

Now you know as much as I care to know.

The Economic Recovery

1. It has been sideways for a while
2. Slow growth, zero inflation and low interest rates should keep the recovery moving forward.
3. Industrial production rose less than expected in October - a whopping .1%
4. The soft US dollar has continued to help exports.
5  The Capacity Utilization Rate rose again in October, but is still well below its long term average of @ 81%
6  Low Capacity rates mean high unemployment which if you factor in those under working or have given up looking is about 17.5%
7. Housing starts fell 10.6% in October but existing home sales were at their highest levels since 2007.  The number of unsold homes declined to 3.5 million.  That's still a lot of unsold homes.
8.  The Consumer Price Index rose .3% in October, which brings the annual deflation rate down to .2% (it was 1.3% the month before).


The usual
.  Buy on the dips.  Single digit pull backs are expected to be the norm for the remainder of the year.  Buy Suncor in the low 30's as an inflationary hedge against energy prices.  I might add PGH as a suggestion as well, although it does have foreign tax consequences.

Restrict individual holdings to no more than 4% of the portfolio, which helps ensure adequate diversification.

Hope and Change
So how's that hope and change working out for us?   I'm sure Teleprompter sponsored health care and Cap&Tax are going to make huge improvements to this less than rosy scenario. Can you believe that in light of of the Climate Change fraud recently uncovered that the Teleprompter is actually still attending a Climate Change meeting?  Guess I shouldn't be surprised though - a fraud attending a fraud does make a certain amound to sense.  At least it's consistent.

Personal Portfolio
Not a bad month, all in all. Can't believe the returns on Fidelitie's GNMA.   Doing better than GE .  Can't believe the returns on Fidelity Growth and income either.  63.92% for a growth and income fund?

Probably would have done a bit better if I hadn't taken positions in HBAN, RF and MBI.  I am regarding these as longer term holds and am now a bit overweighted in this sector.  


This mix has been working quite well. I am thinking that when finance normalizes, that will be rapidly be followed by commodities and then manufacturing.  

If the consumer doesn't end up getting clobbered by ObamaCare and Cap&Tax, we could even have something of a recovery.

The Year So Far

It looks like I'll be closing up somewhere over 50%
for the year and that is with an 11% position in fixed income so I am pretty pleased with myself.  

And then this comes along:


The Dow

Just because you have a lot of money, it doesn't necessarily mean you have a lot of sense.  I have zero sympathy for this crowd.

What do you think the odds are of a Teleprompter sponsored bailout?

Morningstar's Instant X-Ray


Morningstar's Instant X-Ray does a pretty good job of showing you what you actually own vice what you think you own.  

A couple things I'd point out here:

Cash at 1%:

This of course means most of your money is working for you.  What would this mean if say the cash position was at 5%, excluding personal cash reserves?

It would tell me that one or more mutual funds I own are holding cash and that can be a good or bad thing depending on how the fund is doing relative to its peers.  If the fund is under performing, holdings lots of cash and it is trailing its peers then you might want to consider another fund.  If the fund is matching or beating its indexes and holding cash,  odds are the fund is going to invest that cash at an opportune time.

Interest Rate Sensitivity - Not Classified at 45.29%

I would be looking into this if I didn't know what it was, and I do.  The culprit here is PGH, the Canadian Oil Trust.  X-Ray doesn't do a very good job at rating Foreign securities sometimes and I am comfortable with this one.  If I didn't know,  I would be for finding out in short order.  


This section is self explanatory.  It looks at the make up or your portfolio compared to the make up of the S&P 500 index.


I am considerably overweight in Manufacturing stocks as compared to this index because I think the market is going to recover and this is one of the sectors I think that has to recover first and has lots of opportunity for adequate diversification.


Next is the services sector.  I think the most room for profits going forward is in Financial Services and it is the only one I am looking at in this group at this time.  My focus is on a couple large banks, a couple regional banks and a bond insurer.

Health Care services............wouldn't touch that with a 10' pole if it looks like the Teleprompter and his liberal minions win the day.  

Business and Consumer Services

Not interested while this recovery continues to be a jobless one. I'd consider investing in this area when employers stop working their existing employees more and more, and have to actually hire people to fuel their expansion


Decent returns this year for not having much at all in speculative, aggressive or classic growth. 

I think what powered the returns was having cyclical, extremely undervalued growth.


North America is where I plan on being for the near future.  I will probably use a mutual fund or two, or maybe an ETF when it looks stable enough to up the allocation in foreign stocks. 


This looks pretty good, I think.  I don't get the Average Market Cap figure at all.  That looks totally out of whack.


The traditional line of thinking in 'Normal Times' is that for adequate diversification one should have no more than 4% in any one stock, which would in theory spread the risk around to at least 25 stocks and that makes sense to me.

However in these abnormal times, I believe that rule should be waived for a while because it limits one's ability to recover losses. 

Case in point:

I originally bought a lot of Huntsman at two and change, and I mean a lot.  When the stock started moving, it moved fast.  It rapidly became 10% of the portfolio and I got concerned about that so I sold about 3%.
It went on to become about 14% of the portfolio again in short order so I sold another 6-8%. 

Then I got to thinking about it....If you own stocks that you are believe are of quality which got creamed during the sell-off, and you believe the market was grossly oversold (which I did), why sell anything until the market normalizes and with it, the share price?

If I keep rebalancing to keep within normal allocations and I believe I have cheap quality, am I not minimizing the possibility for outstanding potential?  I think I am.

The big question to me is:

"What is going to be the future normal and how do I price future normal?"  

"How much of the pricing we've seen is the result of a credit driven economy. Sans credit, what is reality?

I think I will digress here a minute because that reminded me of something else:

We used to walk our dogs a couple blocks west and up in the sandy hills where we let the dogs loose to run to their hearts content.

Several years ago the nearest hills turned into a high priced housing development, minimum 500K to get your through the front door. This got you a two story house on a landscaped acre looking down on the Carson Valley and up at the Sierras.  The highest priced homes came in around 800k.

We ended up walking the dogs through this development to get to the hills and in the course of doing so, met a number of owners of these high priced, gorgeous homes.

Quite a few of these people were in there mid 20's to early 30's. There were at least two brand new vehicles in the driveway, most had a couple of quads, some had boats and other toys.  All of this was new.

The guys looked like Northern Nevada styled Metrosexuals and the women had equally impressive wardrobes.

This was one of the first major disconnects where what we were seeing didn't make a lot of sense.  Median income in our area is around 30-35K.  Multiply that X 2 and you get 70K for a couple.  I know some of these home buyers had incomes very close to that range.  

My wife and I don't exactly make chump change and we were at a loss to explain how many of these people could possibly afford what was out of our reach.......unless we made frivolous use of credit and cut down on saving and investing.  It was the topic of many conversations.

Quite a difference from 2-3 years ago and recently one went under 400k.  Major haircuts here.

Two years after the bubble burst, the high priced housing development is floundering. We looked at several of these homes and talked to Realtors sitting outside these homes in the summer heat with less than hopeful looks in their eyes. 

Turns out a number of these homes were financed with interest-only loans and all the new toys these people had were financed by taking a second or third or fourth on their home.  The logic was that it didn't matter because housing prices would only go up. 

I am sure the outcome of most of these questionable loans ended up in broken marriages, broken lives and broken dreams.

One of the homes originally sold for $675K to a couple half my age.  That lasted until the first mortgage reset.  Several months ago the home was purchased in the low 4's as the result of a short sale.

The new owners differ quite a bit from the buyers we were used to seeing in the housing heyday.  I would put them in their mid 40's, they have a couple teenagers and they drive cars which have seen better days. I see several mountain bikes in the garage and in terms of toys, that's about it.  I'll bet they put at least 20% down on the property as well.   

The above example is doubtlessly taking place throughout the country and is being experienced by thousands, or 10's of thousands, or 100's of thousands of home owners. The only difference is in terms of degree.

The result of this is going to be one huge reset and we are in the middle of it right now.

I'll bet the words Walmart and Target which were once anathema to those living credit driven lifestyles are now the words of choice.

It is a tough lesson to learn and it will stick for a while but being the kind of people we are, there will always be another bubble further down the road.  Hopefully most of us will see it for what it is and not get sucked into it.

Is that overly optimistic?


Now Where Was I?

"What is going to be the future normal and how do I price future normal?"  

Huntsman (HUN)

I am sure there are complex mathematical models and simulators for this kind of question.

Me, I prefer to keep things simple.

I pulled up a 5 year price chart for Huntsman and used some precision eyeballing to estimate a fair, median price for the stock.  Looks to me like $20.00 is a decent figure and if I am buying the stock under $10.00, I am getting a bargain in share price and am collecting dividends to boot.

There are other factors of course but I think unless allocations get totally skewed to where risk becomes a major consideration, the balance of shares are going to ride and provide more shares in the form of dividends along the way.  

Williams Cos (WMB)

Williams Companies I got for 14 and change. 

After the Dot.Com bust, I was trading this in the 2's.  Should have held on to it. 

I figure this is worth somewhere around $30.00 a share in normal times so I have the possibility of a 100% gain on this stock + more shares in the form of dividends in the interim.

If you make use if this rather crude methodology and employ some prudence, and take the longer term perspective you could end up sitting on a gold mine.

Closing Comments

If one looks around for quality stocks trading well below their 5 year average, there are still quite a few floating around. 

The financial institutions to me are the big question mark.

Take Bank of America for example:

Bank of America (BAC)

This stock I bought in the 3's, chickened out and sold in the 7's, and then ended up buying at 9, sold some again because I chickened out again, and then bought more in the 10-14 dollar range to hold for the duration.

Now in the midst of this financial fiasco BofA made at least two acquisitions, Merrill Lynch and Countrywide. One of them I think was forced on BofA.

Look a year or three down the road as the economy recovers and the excesses are drained from the housing market.
Let's say the credit markets return to normal as well.

Bank of America will probably be the largest home mortgage provider in the country and it will have a nice investment arm to boot.

What might a reasonable value for BofA?  I'd say a conservative $40.00, a speculative return to the $60.00's and possibly quite a bit higher if its two acquisitions once again become profitable members of society.

Extend that thought to some of the other under performing banks still hanging in there and a few other stocks from other under- performing sectors.....

Dare I think 'Early Retirement?'

It's fun to dream.


Denver can be one or the more problematic airports during winter.  The original flight out of Denver got canceled.  10 hours later, I finally got on board and spent another 1/2 hour or so not moving because the plane's wheels were stuck to the ground - ice.  Once the wheels got unstuck there was another half hour wait to get de-iced, courtesy of the machines on the right.  Not a lot of fun.