A Reader Asks, I Answer

A reader asks;

The comment stream is asking you to elaborate as to that portion of your statement wherein you said owning 'dividend growers exclusively' is risky or not advisable...exactly what are the dangers of having an income stream as a primary goal instead of capital appreciation?

My answer;

I have tried to address this before. This is in part a philosophical issue. My first hand experience with capital markets goes back to 1984 (worked in the industry for a year before starting college) and I have tried to learn about stock market history from before 1984.

In my time I have seen plenty of things that could never blowup or otherwise hurt people in fact go on to blowup and otherwise hurt people. I believe you are around 70 but I do not know how long you have been a market participant but you have probably seen more of this first hand than I have.

For whatever reason I have a pretty good memory for how the psychology around these things has worked and I believe I see a lot of the same behavior repeating in many of the comments.

It may be difficult to believe but the can't go wrong idea was also applied to the Nifty 50 and Junk Bonds--yes, you can say it was different for this or that but the behavior is not different. In the 1990s Fannie and Freddie were must holds because of how incredibly safe they were.

It is simply a matter of philosophy based on personal observation that too much of anything, ANYTHING, increases the risk taken. The debate that we all have is actually not whether the risk is greater (IMO) but whether or not there will ever be a consequence for that risk and for that, I have no idea. I do know that some event that I can't imagine that somehow does blow up whatever segment of dividend stocks you care about won't blow up our clients.

Frankly I would be more concerned about the blowup I CAN'T envision as opposed to the one I can envision.

My own preference is to be segment agnostic (so dividend stocks would be one segment, for example). There are many segments in the market, they all rotate in and out of favor and occasionally something truly awful happens to some stray market segment. Something truly awful could happen to any segment. This is of course improbable but it is not impossible. The individual consequence of "truly awful" depends on the amount of exposure in the portfolio.

I don't think you all see it this way but I think my comments in this thread over the last couple of years have been ones of moderation.
Read more!

More On "Just Don't Lose It"

I wanted to delve a little further into the Just Don't Lose It cover story from this week's Barron's. The article included some sort of model portfolio that US Trust is apparently recommending to its clients. There were a couple of different things in there so this will focus on the "long term benchmark" which was as follows;

Cash 0%
US Large Cap 16%
US Mid Cap 7%
US Small Cap 4%
Developed Foreign 9%
Emerging Market 6%
US Investment Grade Debt 25%
Foreign Developed 2%
US High Yield 3%
Hedge Fund 12%
Private Equity 4%
Real Estate 6%
Tangible Assets 6%

Again the above is put forth by US Trust not me or my firm.

First is that there are a couple of things I would do differently. The way the numbers work out, US Trust is suggesting a little over 1/3 of the equity allocation go into foreign. In thinking about the long term and how things are evolving I would want more exposure to foreign equities (we have more exposure than this) and I would reiterate that the terms developed and emerging have become meaningless as many so called developed nations have banana republic-like debt loads.

I would also want more foreign exposure in the fixed income allocation, without going nuts. Some foreign exposure can help increase the yield of the portfolio. We love Aussie debt but we have a small allocation which does help the yield but we do not own so much that we are chasing yield. While I do not think the US Trust portfolio does chase yield, a lot of investors do and this usually ends badly for not having understood the risk taken ahead of time.

US Trust is suggesting more than 1/4 of the portfolio go into alternatives (it may not be right to characterize the RE that way, but the article did not clarify what they had in mind) which I think is way too much. US Trust caters to seriously wealthy people. I don't know if they have proprietary products in the above alternative category that they sell to clients or if they bring in outside products for clients but most of us will never have access to the next hedge fund that goes up 450% in one year because it shorted the right thing right before a panic of some sort. It is also unlikely that any of us will have access to the private equity fund that makes billions on, and sells just in the nick of time, the next bubble.

That is a long winded way of saying most people should be wary about these types of funds. On the other hand we can access plenty of exchange traded vehicles that effectively capture an absolute return result and offer a place to hide with part of the portfolio during bear market phases.

Just because I would want to do a couple of things differently than what US Trust offers above does not mean it is not a sophisticated portfolio (it might be or might not, you can decide for yourself). Anyone thinking it is sophisticated and wanting something very similar can get most of the way there with exchange traded products which supports the idea that ETPs are democratizing to a point. I would mention that Barron's also had an article which noted that hedge fund replicators don't really deliver hedge fund results--they can be good but hedge fund-like is probably unrealistic.

One last point is that the idea that the above is a "long term benchmark" is flawed in my opinion. I was taught that changing benchmarks is likely to result in chasing a previous winner. By having a long term benchmark with specific targets for different segments of the market sets a stage for impatience which ultimately leads to chasing heat. I think benchmarks should be very simple and easy to follow. The idea that mid caps should always be targeted at 7% seems ridiculous. I think someone may have used the word benchmark incorrectly. I think the above is a portfolio or maybe an asset allocation but not a benchmark.

As for the pictures; my brother got us courtside seats to the Washington State/Arizona State basketball game on Saturday afternoon. The seats were great and the game was exciting.
Read more!

Sunday Morning Coffee

The Barron's cover story was titled Just Don't Lose It and it tried to explore the extent to which investor psychology has shifted to being more skeptical or distrusting and the article also tried to offer some solutions. Candidly the article was a little thin but the questions raised are interesting as is the pursuit for a solution.

There was an interesting stat about how many Gen Ys don't trust stocks and so have a high portion in cash. Also mentioned was how well dividend payers did in 2011 which is supporting evidence of people eschewing growth in favor of something more predictable; the dividends.

My take on these issues has been the same for a while. I do believe stocks and markets still work but there has been an evolution. Plenty of markets and plenty of individual stocks have carried on even as the SPX has floundered and there will continue to be plenty of markets and individual stocks that carry on if the SPX continues to flounder.

Certainly this means the task is more difficult and it is reasonable that people don't want to spend more time on their savings and their investing than they used to but success probably means just that; spending more time than they did 15 years ago. Fortunately the tradeoff is very simple to understand even if not easy to pull off. If 2-3% annually is a more likely outcome then more needs to be saved or you need to work longer or spend less or any combo of the three.

As far as the actual title of the article; people feel losses far more than they feel gains. This is no doubt something you've heard before but probably pertains more to specific holdings but another aspect if just don't lose it is the permanent impairment of capital (I know this as being James Montier's term) which is where people are forced to go back to the drawing board with their financial plan which is a bigger deal than buying a few shares of Netflix (NFLX) at a bad price.

The article notes the extent to which this has happened to people and the extent to which people are now more aware of this possibility and fear of it is keeping them out of stocks. This is where the work needs to come. Obviously I am biased toward a defensive trigger point (the 200 DMA) and avoiding big bets within the portfolio by staying diversified. One thing that I think helps me do my job is that I have respect for whatever clients did to get their money and take the regard for their money very seriously.

It is much easier for an advisor to explain why we didn't make more than it is to explain why we lost it all. This applies to people managing their own money too.
Read more!

The Big Picture for the Week of January 29, 2012

A friend posted this on Facebook and I thought it was a very useful quote. As a matter of personal philosophy I believe that investors have a much better chance of portfolio success once they figured out what makes them tick, what is really important to them.

We all know people like whom the Dalai Lama is referring to or maybe we have been that person or maybe we still are that person. Often in this context I have quoted our friend Bill from here in Walker (Bill is not my neighbor with the backhoe, that is someone else) in saying that you can figure it out now, or you can figure it out later but you'll be much happier if you can figure it out now.

One simple example of this might be figuring out that instead of an $8000 (net) monthly lifestyle happiness and fulfillment can be had for $4000-$5000 per month instead. There is nothing that says an $8000 income (just an example) must result in an $8000 lifestyle.

This can lead to a readjustment of how much risk needs to be taken in the portfolio while still accumulating and then in retirement. Using the 4% withdrawal rule as a benchmark a $1 million portfolio should be able to generate $40,000 but if a $1 million portfolio only needs to generate $30,000 then perhaps fewer chances need to be taken. Contrast the $30,000 to $50,000 coming out of a $1 million portfolio which probably means having to take more chances with the portfolio. If possible I'd rather take fewer chances (obvious statement).

On an unrelated note I found a curiously titled post at Seeking Alpha; How I Morphed Into A Dividend Zealot. It captures how one investor started out seeking capital gains. He then went on to describe his transformation--his word. To read the congratulatory comments I think the idea of a religious type of devotion stands up--I believe it is correct that I am the one who coined the term dividend zealot. My own preference is to avoid that sort of devotion.
Read more!

MarketWatch Says Retirement is Endangered

Robert Powell from MarketWatch posted a reasonably thorough assessment as to why retirement in the US is "endangered" with topics ranging from Social Security not being able to meet its obligation to why various demographic segments should expect a higher retirement age, smaller payouts and means testing.

This has been a popular topic here and from 50,000 feet something is going to have to have, actually a whole lot of somethings will have to give. From 30,000 feet a solution is probably going to include some combination of the above three ideas (higher retirement age, reduced payouts and means testing).

On the ground this means we all need to be out in front of this threat as part of our own solution. We all have our own emotional vulnerabilities and one of mine is being dependent on someone else or more precisely a bureaucracy that most people believe is grossly dysfunctional.

Consistent with past blog posts, for most people it is easier to control expenses than to go find an ever higher paying job meaning expenses are a function of our own discipline and that most of us won't find a job that pays us $50,000 a month.

One vague suggestion in the article was about giving more in the way of tax incentives for retirement savings. This might help but to the extent that people don't have enough saved I wonder if there is a way to stop taxing IRA distributions for retirees. I don't recall mentioning this here before and I am not sure if anyone else has talked about this but if someone has $300,000 saved and they take out $15,000 a year they might be paying $2250 in taxes on that money which sounds like a big number in relation to $15,000. Having access to the total distribution would be a difference maker for a lot of people (I realize some folks would pay more in taxes and some would pay less).

Most of my ideas on this subject focus more on things that people can do for themselves because, again, we have more control over the outcome than we do from positing what a dysfunctional bureaucracy should do but if we are in store for some combo of higher retirement age, lower payouts and means testing then not taxing IRA distributions could help smooth over the ill will that will come from social security austerity.
Read more!

Japan has a Trade Deficit

Yesterday was a busy day for me so I am not sure how much attention this got but Japan recorded its first trade deficit since 1980. Japan has always exported a ton of stuff and imported all of its oil. The earthquake on March 11, 2011 shut down the nuclear industry and so now the country needs to import more for all its energy needs, so much so that it caused the trade deficit.

This article from the Telegraph makes the case for the trade deficit to persist which can't be huge shock given the state of the nuclear industry there. The back drop for Japan has been poor for many years and I have thought this would continue to be the case long into the future even before the earthquake.

Japan has always been an interesting destination. It seems like every year, maybe not 2012 though, there is a contest for market pundits to come out and say that this is the year that Japan finally turns it around. There have been years here and there where Japan has done well but it never turned it around.

The problems with Japan appear to include an aging population, an enormous debt load and they seem to be getting undercut on manufacturing. The generally poor results, I believe, reveal a long term weighing of the fundamental backdrop with the conclusion being there is no visibility for a sustainable recovery. The Nikkei is down 76% from its high 22 years ago. That is a mind boggling nugget and the market is still not cheap. I remember from 1990 Japan's PE ratio being in the 50s and according to the iShares website the iShares Japan ETF (EWJ) has a PE ratio of 18.

PE ratios aren't necessarily a great predictor of future prices the combination of being relatively expensive (again, relying on iShares for this) and lousy economic fundamentals leaves little to be optimistic about. Simple avoidance of this type of trouble spot remains the path of least resistance.
Read more!

A Foundation to an Investment Philosophy

Josh Brown had a fun post up yesterday about his Twenty Common Sense Investing Rules. While I would probably frame some of the points differently and don't necessarily agree with all of them there is plenty of utility in the post.

Josh's number 4;

The moment a stock disappoints you or makes you wish you hadn't bought it, sell it. Immediately and regardless of price. Life is too short to hope a bad decision reverses itself.

This is tricky because there have been many exceptions over the years. Actually too many for me to take this rule at face value. When a stock misses earnings by a few pennies and takes a 10% drop selling might be the right thing but it may not. What I mean is that some sort of disappointment might merit revisiting the investment thesis to see if it is still valid and then making a decision.

For example in late 2002 and into 2003 Altria (MO) was facing some serious problems as this was the height of the law suit frenzy around tobacco litigation. The market was generally doing poorly but MO almost cut in half during this time. This was a bad stretch for the stock but for the last ten years it is up 151% (per Morningstar which I believe includes the dividends) compared to 16% for the S&P 500 (SPX including dividends might be about 36%).

The other side of the coin might be Yahoo. At some point it went from owning the world to something akin to a no growth utility. The reason to mention these two specifically is because I have owned both for clients. We sold Yahoo a few Mays ago when MSFT wanted to buy it but Jerry Yang famously said no and we kept Philip Morris International as an across the board holding but some clients still have some MO.

While no one can be right 100% of the time, this part of the management process requires understanding not just the stocks that you own but also the respective industries that your holdings are in.

Josh also has several bullet points about not being emotional; don't get too excited and don't get too angry. This is of course correct. No matter what type of investor you are or what you own there will be times that you are wrong. This is guaranteed to happen. If you know this ahead of time then it should lessen the emotional toll when it happens. Similarly there will be times when the market goes down a lot. We know this rationally but we seem to forget our well reasoned understanding of large declines when they actually happen.

It probably takes some training but the extent you remove the emotional highs and lows, the better your long term result will be.

The other point to share from Josh is don't blow up. Any market segment, I'll repeat that; any market segment can blow up. Blowups are improbable but they are not impossible. You might be heavy in some area that has a very low probability of blowing up but if it does then you will be in a world of hurt. Trust me when I tell you things that could never blow up have indeed blown up in the past and this sort of blow up will happen in the future. Your weighting will determine the magnitude of the consequence.
Read more!

Barron's on Dividends

The Barron's cover story was about seeking a 4% yield from stocks. It was a broad look across many sectors in the S&P 500 at stocks that have the room to increase their dividends substantially or in some cases initiate a substantial dividend.

My take on dividends has been consistent; they are crucial to long term portfolio success but I do not believe in owning high yielders or dividend growers exclusively. There was one point made early in the article that I think needs to be dissected because I think it distorts how markets tend to work.

During 2011, high-dividend payers were the top-performing group in the S&P 500, with the top 50 yielders at the start of 2011—all with 4%-plus yields—returning more than 8% (not including dividends), compared with a flat showing for the entire index, according to Birinyi Associates.

Further down in the article is a table that notes the performance of each of the sectors in 2011. Utilities did the best at 14.8% followed by staples at 10.5% and healthcare at 10.2%. While there can be no absolutes it is a good bet that in a year where the S&P 500 is flat, and some might say it was lucky to have been flat, it is going to be the defensive sectors that do better.

Things like utilities, healthcare and staples do better in years like 2011 for two reasons; the dividends of course and more fundamentally the steadiness of the demand for the products.

So far in 2012 the S&P 500 is up 4.58% which is pretty good for three weeks. In that same three weeks utilities are down 3.8%, healthcare is up 3.3% and staples are down 0.2%. Again, there are no absolutes but if 2012 is somehow a repeat of 2009 then these three sectors will very likely lag and the dividends won't mean much as was the case in 2009. Of course 2008 was a terrible year for stocks and all three of the dividend sectors mentioned above outperformed.

For the long term there is no question in my mind that dividends are crucial but the assertion that dividend stocks will have a good year in 2012 because...is simply the wrong way to frame this. The other day I mentioned about the importance of thinking in long term increments like complete stock market cycles or even decade long chunks. The importance of the yield of the portfolio can be better understood in those time frames. In one year time frames the more correct framing is that in a great year for stocks dividend payers will usually lag.
Read more!

Sunday Morning Coffee

Bernie Schaeffer had a write up in Barron's in which he referred to an article from the New Yorker. There was one line in there that intrigued Bernie that was particularly interesting;

In effect, [investors have] decided that, in a market as volatile as this one, the only way to win the game is simply not to play.

The cash that is built up on the sidelines has been talked about for a while with some believing that it will provide a big lift to equities. I tend to discount the argument because the cash we hear about includes money that was never and will never be put into the stock market.

The more interesting nugget is the psychology or impatience that leads to people giving up. Many believe that capitalism is broken and that capital markets no longer work. I hope I have been clear that I disagree with that idea. Clearly some things have changed with economies and debt levels such that it has weighed heavily on equity market returns for many of the largest markets but long dry spells have occurred in the past--this is not unprecedented in terms of how the market has reacted.

That we are 12 years into this for the US and almost 23 years in for Japan certainly makes the slog long in the tooth but as pointed out in many previous blog posts there have been plenty of other markets that have had normal returns or better than normal over the last 12 years.

The extent to which the above New Yorker quote has any merit it expresses people's inability to see the long term and to understand why they are actually invested. I contend that for most people the real objective is to have enough money when you need it which is usually upon retirement. Then of course the money needs to last during retirement.

In that context the time horizon becomes decades and for many of those decades there are two elements of portfolio growth; price appreciation and savings. Periods where the growth is not so hot needs to be met with more savings. Some will say that this is unknowable but I don't think that is exactly right.

It is not terribly difficult to look at some basic macro economic indicators and see whether things look relatively healthy or relatively unhealthy. Looking at the big picture and concluding things aren't going well and that an increase in savings, if possible, is warranted is not a form of wild speculation. Similarly concluding that things look ok and maybe the normal 10% 401k contribution might suffice is also not reckless. Neither scenario guarantees success but this is not black box type work.

Taking one step further I think that people can also look at macro economic indicators for several countries and see where things might look promising and perhaps favor those and see where things look bad (unfavorable demographics, lousy debt situation and so on) and either avoid underweight those markets.

Again there is no guarantee of success but I do believe in the long run the market weighs these attributes accordingly with the last decade as supporting evidence and for most people it makes more sense to think in terms of decades not years.

The picture is from yesterday's fire training.
Read more!

The Big Picture for the Week of January 22, 2012

One of the first ETFs for Latin America is the iShares is the iShares S&P Latin America 40 Index Fund (ILF). I am pretty sure that iShares Brazil (EWZ) and iShares Mexico (EWW) predate ILF going back to the WEBS days (WEBS=world equity baskets).

A few days ago iShares came out with a surprisingly similar Latam fund with its new MSCI Emerging Markets Latin America Index Fund (EEML). Obviously the index provider is different but the I can't imagine there is any real differentiation.

Brazil is by far the largest country in both at 57% in ILF and 66% in EEML. Mexico weighs in at 24% and 20% respectively and Chile, Colombia and Peru round out the rest of the funds. Peculiarly, Peru accounts for 3.9% of ILF but lest than 1% in EEML. The sector weightings for the largest sectors are virtually identical with financials and materials being the largest.

ILF having only 40 stocks means the holdings are larger; America Movil (AMX), Petrobras (PBR) and client holding VALE are the largest in ILF at about 10% each and those three are also the largest in EEML.

iShares has done something similar in other segments. For China it has the FTSE Xinhua 25 (FXI), FTSE China (HK Listed) Index Fund (FCHI) and the MSCI China Index (MCHI). There is a lot of overlap under the hood and the performance has been identical.

On the other side of the coin iShares has all sorts of unique funds or at least funds that are not identical to there own funds; with examples including iShares New Zealand (ENZL) and iShares Small Cap Hong Kong (EWSS). At the same time as iShares launched EEML it launched iShares Emerging Market EMEA Index Fund (EEME) where EMEA stands for Europe, Middle East and Africa. I think the fund is unique to broad based emerging funds (but maybe someone else has a similar fund?) in that it weighs heavily to South Africa and Russia (those two add up to 73%) and energy is the largest sector at 28%.

iShares is due to come this week with iShares Norway and iShares Finland. Global X already has a Norway ETF (NORW) but Finland would be a first and I think that Finland would be a huge beneficiary (after the initial puke down) if the euro were to breakup.

Obviously iShares has the scale to create more funds even if there is little chance that they will gain traction or offer much that is new (the essentially perfect correlation of the three China funds can't be a surprise to anyone at iShares). It is more difficult for smaller ETF providers to mass produce funds.

I think part of the equation here is that iShares can create a lot of funds such that it might simply be trying to crowd out the smaller companies. This is of course what competition is often about but as users of ETFs we should hope that smaller competitors survive.
Read more!

Market Favoring Risk Assets Right Now

A few weeks ago I shared an opinion (or hunch if you prefer) that I thought the US market was going to be in for a range busting rally that I think will then retrace. It is too early at this point to know whether this is yet correct or incorrect but I have made an observation that I hope is useful even if not original.

If you've been reading this site for a while you may be familiar with my preference for owning stocks with all different types of attributes, I think it makes for better diversification. The stocks at the riskier or more volatile end of the spectrum are up a lot of late. This is not a comment about what we own but about the recent performance of things like emerging markets, some tech, some financials (we do not own US banks but they are on a good run), some materials, some energy and some industrials.

Again, although not an original thought, when these types of areas outperform for a while like now it is often a sign of some sort of confidence being expressed and this can last for a while, like several months and many percentage points. As a bit of a contrarian nugget, it seems like many pundits were looking for a lift in the second half of the year and one outcome of that consensus being wrong is that the lift comes in the first half. Another contrarian outcome of course would be no lift, that the market in fact drops instead.

For all I know this run could of course end today but I think there is merit in assessing the current mentality of the market because occasionally you will make a change in the portfolio on this.

Short post, busy week.
Read more!

Filtering Content

A very long time reader left a comment on Monday's post telling me that he had read a bunch of content from William Bernstein and concluded that Bernstein's approach seems more rational than my sort of approach. The reader said he didn't really get top down and that things like country selection takes way too much time. The reader said he was going to move on from reading this blog and wished me luck.

This was a very positive comment (I'm not being sarcastic). There are quite a few facets here that deserve attention. As an end-user of stock market content, so here we are presuming that you are interested enough in the subject to seek out stock market content, you take in some range of opinion and method for the purpose of trying to learn, trying to improve some aspect of how you invest or some similar objective.

Along the way you take in information that is useful to you and information that is not useful, you filter that information and move on. Personally I find no utility in the articles that are along the lines of five stocks that famous money manager is buying. I know that plenty of people love those articles and find them useful. Like the reader mentioned above not getting top down, I don't get those types of articles.

To beat my yoga metaphor to death; there is plenty of room in the yoga studio for the reader's mat of indexed investing, along with my mat of active, top down along with everything else. Active, top down has flaws but seems easiest and most logical for me. Likewise with indexing for the reader. Both have positives and both have flaws. All investment approaches have positives and drawbacks. Not understanding the drawbacks to your approach is bad and I think prevalent unfortunately.

As far as not getting top down, for as long as he read this sight I think he does understand what it is about but maybe doesn't see the utility. It is simple, look at the big picture first. There are several competing studies that conclude the same thing which is that the majority of your return is determined by whether or not you are in the market and then making the correct sector and country decisions. Stock selection, the studies conclude, only accounts for 10% of the eventual return. Top down would say it is more important to figure out to avoid France, own China and be correct about oil prices (just a random and abbreviated example).

As far as taking too much time, investing is a pursuit where you can put in as much or as little time as you want. Obviously there is an entire industry of people that make it a full time vocation and there are also many 401k participants who simple select a portfolio from the administrator and spend no time on it. In between those extremes are all manner of investors with wide ranging interest spending varying time. To say one approach takes too much time would probably be more accurately captured by saying "too much time for me."

I wish the reader luck and thank him for his contribution in the comments over the years.
Read more!

Reuters Says Invest In Yourself

For many years I've been writing about the extent to which retirement will not be the same for people as it was for their parents (obvious observation) and that this has created a problem/challenge for each of us to solve for ourselves--meaning everyone needs to weave together their own personal solution. The other day Yahoo Finance ran an article from Reuters saying pretty much the same thing with some ideas very similar to what I've been talking about all this time.

I make no claim of originality as I think just about everything I have ever said on this subject is common sense that most people would ultimately come to on their own at some point. One item from the article that I had not thought of was bartering. The article had an anecdote of a woman who traded work for free access to a vacation home.

One of the ways the article suggested to "invest in yourself" is to try to beef up your investment knowledge. This doesn't typically come up in an article like this that is not really about investing. It makes sense to do this for a couple of reasons. One is that most people are likely to go it alone, at least I think most do it on their own, and given the importance the more you know the better off you'll be. And although not mentioned in the article there is no end to what can be learned about investing which seems like a pretty good way to stay engaged. There are of course lots of interests where you can always learn something new.

One suggestion I really liked from the article, and that I have written about, was having a "money making skill." The article talked about eBay sales, handyman work, cooking, babysitting and driving as ways to make money which of course can work but the ideas here are limitless. In past posts I've talked about how to monetize a hobby which could take years of pre-planning but would be worth it. I've mentioned my wife's uncle getting offered office work that tied into his career with a major league baseball team (not high paying but something and he could go to games for free), seasonal work for all sorts of things including state and national parks and of course backhoe work. There are many others.

There was even a don't drink soda shout, sort of, but comments about staying fit. The book assigned for my EMT class had a chapter on geriatrics which went into detail about the things that start to happen as we get older--but that start when we aren't that old. We start to lose muscle mass at 28. The loss of muscle mass when we are much older can start to cause various problems. That is just one little thing, there is a lot here but things like serious and regular exercise can make a big difference. Even just staying active doing stuff can help here--my neighbor with the backhoe as exhibit A. To repeat from past posts, he reported to a smoke call when he was 79. At 77 he worked the fireline on a serious fire up a steep hill.

The thing behind the thing with this article is the extent to which these types of suggestions can, to use my term, relieve a portion of the burden that would otherwise be placed on the portfolio. In my opinion these types of issues need to be sorted out before getting to how manage an investment portfolio as life choices and life circumstance factor heavily into asset allocation.

My brother took this picture the other night when Oregon State played at Arizona State, I thought it was pretty cool.
Read more!

Sunday Morning Coffee

Big news on the personal front; yesterday I was appointed Fire Chief of our volunteer fire department here in Walker. I've never had many goals but this has been one of them and while I am beyond thrilled it will be a lot of work. Long time readers will know that this is something I love being involved with and is all kinds of fun.

This will not meaningfully change my schedule or routine as I've been assistant chief more often than not since 2005 but now I will be making a few more decisions and hopefully getting help from my colleagues within the department.

Tying into monetizing a hobby in retirement I hope to never need to monetize this hobby as I hope to manage money until I am very old, but you never know what the future holds and you never know what you will need in the future. Hopefully you all have something that you enjoy as much as I enjoy firefighting (the calls, helping people, interaction with the rest of the group, continuing to learn new things and problem solving).

Yesterday was an amazing day for NFL games. As for the picture; sports fans, is Rob Gronkowski going to turn out to be the greatest tight end ever? Serious question.

I should have a regular post tomorrow.
Read more!

The Big Picture for the Week of January 15, 2012

In the middle of the day on Friday we executed a trade for most of our "large" clients. We bought the Global X Fertilizer & Potash ETF (SOIL). Long time blog readers may recall my long term belief that the growth rate of the world population combined with an ascending middle class in countries where there previously was no middle class creates a long term catalyst for increasing demand. This is a theme we have owned in the past. The stocks in this group are volatile but I believe the demand has been and will continue to increase at a steady rate.

SOIL is an upstream, to borrow a term from the energy patch, sort of exposure. I considered buying a farm/plantation company which would be a little further down stream but felt fertilizer and the global footprint of SOIL would be a better way to capture the space but obviously that is the type of thing we will continue to monitor.

As for the fund I've always thought it is very well constructed index. It covers 15 countries in 25 holdings and owns many companies I've mentioned on the blog in the past. Comparing SOIL to the last couple of purchases for the portfolio, the last two have generous dividend yields and will probably not add a lot of volatility to the portfolio. SOIL on the other hand will be a relatively volatile holding and will not be a meaningful source of yield (it paid out less than 1%).

The fund, as with most stocks in the area is down a lot, 15.8% since inception last May. Obviously it could go lower but for now we have bought low. This contrasts with our recent purchase of KLAC where we bought strength. I am a fan of owning various attributes in a portfolio is and this is one example; the willingness to buy weakness and to buy strength.

There is obviously a potentially depressing Malthusian aspect to this investment but it strikes me as an area then benefits from a steady demand and while I do expect volatility with the position I believe that the demand underlying the theme will prove out to be significant in driving returns.
Read more!

What Type of Buyer Are You?

Yesterday a reader left a question about where I was on investing in the banks. My answer was probably not a surprise in that I said I still believe the fundamentals stink, assuming he was talking about the US banks, because of a lousy real estate market, a slow moving economy, muted loan demand, the job market is still struggling and I do not believe that the book values being reported will stand up.

Right or wrong that is my take and I acknowledge there will be short bursts where they trade well as appears to be going on now.

Something occurred to me though as I was answering the question. Does it ever make sense to buy a stock if you believe the fundamentals stink? And if so when? Everyone has their own way of doing things and my way is to not buy things that have no fundamental justification or I should say not buy things where I perceive there is no fundamental justification.

What about people who buy distressed companies? There have always been investors who have bought into companies when things look very bleak and had success in doing so. The ideas here appear to include that something that was once great can be great again with the right management or that there is something there to be salvaged, again by the right management and so one way to think of this is a bet that somehow someway the business can be restored even if it is not clear how or when.

I'm not knocking that, some people have great success with this (repeated for emphasis) but it is not something I'm comfortable doing and to be clear, what I have in mind here is not a stock that is merely down in price but where something fundamental has changed or appears to have changed truly distressing the asset. Sears (SHLD) might be a current example of this. Sears appeared to be on the way down, then Eddie Lampert breathed some life into it (or at least he appeared to deserve credit for this) and now it appears to be waning again.

We have a Sears where I live. We went in one time when we needed a refrigerator a while ago and they were not competitive on price (as a personal belief I think price matching is a sham; we'll charge you this but if you can find it cheaper will give it to you for that price?). Our Sears is very close to our house and so I go by it on occasion (our Fire Department does driving training in their parking lot) and any time I go by it is always easy to get a parking spot very close to the door. We also have a K-Mart here which I've never been in.

Given the history of the brand and where some of the locations are I could easily see where someone could make a convincing turn around argument of some sort, even if the stores in Prescott have to be closed, and either that argument would be right or not. This is a valid way to invest but not my way. Is this your way to invest?

This post is really about knowing yourself. Investors have always had success with every form of investing imaginable. Buy high-buy low, buy and hold-actively trade, indexing-stock picking, dividend strategies-momentum strategies; the choices are endless and they all can succeed. They also can all fail.

I believe the utility of investing blogs is about taking bits of process from many sources to create or improve your own process. I think too many people don't know what type of investor they should be which often leads to poor results and sometimes catastrophe. This is an important thing for people to figure out for themselves.

Finally a couple of more pictures from the CHL All Star Game in Prescott Valley on Wednesday night. These were with the "good" camera, yesterday's pictures were with my phone. The first one I think I caught a kick save by the Sun Dogs goalie and if anyone could get an artistic picture at a hockey game, Joellyn could--the second one is hers.
Read more!

Re-Equitization

Over the last couple of weeks I've disclosed a couple of trades we've placed for our large accounts that started the process of moving toward being fully invested. Yesterday we executed trades for most of our small and mid sized accounts with the same goal in mind.

Large account are ones where we believe using mostly individual stocks is suitable. This is usually a function of account size. If there were no trading costs then we could put 40 positions into any sized account. In mid sized accounts we still build the portfolio at the sector level using mostly ETFs but include a small number of individual stocks and with small accounts we use mostly broad based funds in an effort to capture weightings to foreign versus domestic, large cap versus small cap and defensive versus fully invested.

Part of our defensive approach for the mid sized accounts was to meaningfully reduce our exposure to the industrial sector. In the face of a bear market or recession industrial stocks are often one of the hardest hit sectors and reducing exposure to this sector is something we did in the large accounts also. Defensive action in this sector is a way to get more bang for your defensive buck by taking a lot of beta out of the portfolio.

To put the exposure back on we bought the Industrial Sector SPDR (XLI). If my thesis about a range busting rally (followed by a retracement) actually happens then it is likely that industrial stocks will be one of the leading sectors and so we are slightly overweight the benchmark S&P 500.

In many instances XLI will not be the only industrial holding. Sorry if this is confusing but larger accounts within the mid sized tier may own the PowerShares Water ETF (PHO) and/or the iShares Emerging Market Infrastructure ETF (EMIF). The specific holdings in any account are dependent on the planning/screening process for new clients.

For small accounts our defensive strategy was to cut small cap exposure in half as similar to the industrial sector, small cap tends to feel bear markets more than large cap. We got defensive when we were still using Schwab as our custodian and so we used Schwab ETFs where applicable because they were commission free. At Ameritrade there are other commission free ETFs, a lot more than Schwab, and so we bought an iShares ETF that is commission free so clients have a split position for the same asset class.

For small and mid sized accounts I waited a little longer to re-equitize in hopes of minimizing the chance of getting whipsawed, and of course that could still happen and we'll deal with it then if that happens. But with the flirting back and forth between the SPX and its 200 DMA and then slow move above the 200 DMA I felt as though I could move a little slower.

The CHL All Star Game was here in Prescott Valley last night including a visit from the Stanley Cup and Pete the Stanley Cup guy from the Peggy credit card commercial--Pete's real job is to be the keeper of the Cup. We sat right behind the Sun Dogs bench right on the glass (the format was the Arizona Sun Dogs versus all stars from the rest of the league.
Read more!

Could Happen To Anyone

Over the last couple of weeks or so I've disclosed buying two new individual stocks for most of our large client accounts (in this context large means accounts where we believe using mostly individual stocks is suitable). A hopefully amusing thought occurred to me that actually relates to a potentially serious issue, certainly a frustrating issue.

Using individual stocks in a portfolio offers the chance for outperforming a relevant benchmark index with the trade off being that the single stock risk goes bad for turning out to be a bad choice. I've talked about this many times before of course in the context of a particular stock not working out over some reasonable period of time.

Occasionally something will go wrong immediately after purchasing a stock (fortunately not yet with the last two I purchased). You may need to click on the image to see what is going on there but yesterday WD 40 (WDFC) had a pretty good day during the regular trading session.

It chugged higher most of the day, there was relatively a lot of volume in the last hour of the day as the stock kept going up. Then after hours the company missed by what seems like a lot on earnings and by what seems like a little on revenue which lead to an 8% decline after hours.

I follow the stock only to the point of merely staying in touch. Over very long periods of time the stock generally has gone up but occasionally it gets clobbered. It seems like a fine company, we all have a can of the flagship product somewhere in our house and many of us have at least one other product as well. I can't quite get my head around why it gets hit so hard, again only occasionally, and so we've never owned it but it does have volume and a real market cap; $650 million.

Buying the stock may or may not work out but it is not absurdly reckless. It just so happens that people who bought in yesterday had it go badly immediately. Clearly this caught the market by surprise and while the report might alter the prospects for the next few months it probably does not change the prospects for the next five years.

Sometimes of course news can come out of nowhere and meaningfully change the prospects for years. Obviously people bought Union Carbide on December 2, 1984. Later that night a gas leak at the company's facility in Bhopal, India killed, by one count, 3787 people and lead to other related deaths. The stock immediately fell 30% in the face of the news, was never the same and was bought in what might be called a take-under by Dow Chemical (DOW) in 2001.

That is not something that can be factored into a forward looking analysis of a stock other than anything can happen so I'll only buy 4%. More realistically someone who bought Union Carbide on December 2, 1984 or WDFC yesterday was just unlucky and that can happen to anyone. If you have a 40 or 50 year investing career using individual stocks it will probably happen two or three times. To the extent this sort of blowup cannot be reasonably predicted it speaks for avoiding big bets which is of course something I have been preaching here for years.
Read more!

Apples to Apples

A reader at Seeking Alpha left a comment on my "Revisiting Yield Products" post from the other day noting that ETFs have recovered much better than CEFs, aka closed end funds. Generically speaking this is probably true but not the best way to look at it.

I mentioned in the post the amounts a few products were down but noted that I had not factored in the yields but that I thought it was still an apples to apples because I did not include the dividends for any of them. In that context, within the same group it gives some idea of relative return but does not give an idea of relative return compared to other segments as implied by the comment comparing ETFs and CEFs.

One of the call writing/put selling CEFs I looked at was NFJ Dividend and Premium Fund (NFJ). For the last five years the price is down 33%. Compare that to another call writing fund and you might be able to make a comparison but comparing it to something like the SPDR S&P 500 ETF (SPY) probably does not deliver an accurate comparison.

Five years ago NFJ was at $24.79 and it closed Friday at $16.61. But in the interim it made 20 "dividend" payments totaling $7.12 per Google Finance. I put the word dividend in quotes in that last sentence because I do not know what portion, if any were capital gains or returns of capital. Adding the payouts back in leaves the fund down 4.2% for five years which although lags the S&P 500, once dividends are added back in, does paint a different long term picture.

For me this does not change the short term picture. For calendar year 2008 NFJ was down 45% and although the payout had not yet been cut I would not say the fund offered much shelter which is not to pick on the fund because most of them did not offer any shelter, actually I don't know of any call writing CEFs that did.

ETFs on the other hand are the market, the broad ETFs anyway. If the SPX were back at 1565 then SPY would be back at its high (or thereabouts). The managers of the CEFs may have done a good job or a bad job in the face of the crisis but they are actively managed funds and even if they made good decisions during the crisis they could have made bad decisions in subsequent years. There are a lot of variables to this including portfolio decisions and factoring in the payouts.

CEFs can be complicated products as outlined and we've made no mention yet of premiums or discounts to NAV which is yet another layer of complication.

I've always limited our exposure to these as there is value in tweaking up the yield (this can apply to equity or fixed income) but they can and occasionally do blow up in spectacular fashion. Things may go smoothly for them collectively for years with people getting more and more comfortable with holding increasingly more of them and then whammy (Ron Burgundy reference) they come unglued. This was the case in 2008. This will happen again at some point and the impact it might have on a portfolio will depend on the amount of exposure in that portfolio.
Read more!

Sunday Morning Coffee

No post today just a (hopefully) cool picture of the Grand Tetons through the window of the Cunningham Cabin.
Read more!

The Big Picture for the Week of January 8, 2012

Yesterday we executed a trade for most "large" accounts buying KLA-Tencor (KLAC). The pick is more of a top down decision (more on that in a moment). The company makes equipment used in manufacturing many types of semiconductor; data storage, LED, solar, nano and several more. The company has been around for quite a while, its history has generally been to outperform on the way up and lag on the way down. In the last few years it has evolved into a dividend payer, currently yielding a little under 3% which is very good for a technology company. Similar to our other recent purchase, there is far more cash than debt, its PE ratio is around 10 which is low and earnings and revenue estimates point to meaningful growth over the next couple of years which paves the way for dividend increases as the company has done a couple of times before. The company's fundamentals in terms of ratios and balance sheet stacks up favorably with its competitors.

I think the more important aspect of the trade are the big picture effects on the portfolio. You may be aware that for quite a while my thesis has been for below "normal" GDP growth and below "normal" US equity returns over the course of the decade and that has been playing out. This makes increasing the dividend yield of the overall portfolio increasingly important. Additionally it looks as though GDP growth will be a little better in 2012 than it was in 2011 although still below "normal." If that plays out then it makes sense for technology to do relatively well with slightly stronger GDP so we have chosen to increase our weighting slightly to technology.

The above is from an email I sent to my colleagues in case any clients had questions about the purchase except as I sent the email yesterday the first word was today-referring to Friday. To add a little more color this is part of a series of trades to generally increase the yield of the portfolio which I've been telegraphing for a while. I spelled out the logic for this above but I think this speaks to the long term focus I try to place on the portfolio and long term themes I try to embed.

A few days ago I made a comment about the longer term slog I expect from the market in terms of looking back on this decade at maybe something like 4% annualized growth and that for the last couple of years that is what it averages out to. Then I remembered that 2007 was up only slightly; something like 3.5% plus another 2% or so for dividends.

If this continues then as I mentioned increasing the yield will make sense as will owning countries that appear to not be facing systemic threats (Latam, Antipodes, Scandies, parts of Asia as some examples).

During the week a reader asked why so much attention lately on dividends, why not focus more on total return. My answer was that I do focus on total return but that I've been interested in writing about yield lately. The reason for the interest is that we have been increasing the yield of late but there are still quite a few holdings that don't have much of a dividend.

Consistent with what I think I have been saying for years here; there are times where yield doesn't mean much like 2008 and 2009 but that most of the time yield does matter. In this instance where I have an opinion about the next few years it makes sense to tilt in that direction. I am not making a lopsided bet as I could be wrong. The threat to the dividend thesis is if interest rates go up a lot, I mean really a lot. Yes, that is unlikely for a while but that is one of the threats.

Also part of the total return question is that if it turns out there is less price appreciation then more of the total return needs to come from dividends.
Read more!

Revisiting Yield Products

This blog started in 2004 and back then markets were functioning normally (mostly). Equities were mostly moving higher even if returns were lumpy and there was no speculation about which would be the next country to need a bailout. It was not a riskless environment but the risks confronted were rather pedestrian compared to what they have been since 2007.

Back then I used to write a fair bit about what I'll refer to as yield products. My take on these was that owning one or two types of products in moderation was a good way to kick up the yield of the portfolio and if something horrible happened then a modest allocation would not devastate the portfolio. We owned two of these in a very modest weight, like 2% each; a call writing fund and an infrastructure trust.

Both of them worked for a very long time, as did most of these types of products in the various yield product segments. Then the crisis started to unfold and the market started to rollover and many yield products blew up in dramatic fashion. These types of products have blown up before but before 2008 a blow up was 20-30% which was then usually recovered over some length of time. In the financial crisis many of these products dropped by 50-60% and have not come anywhere close to recovering their pre-crisis levels. Many of them have been "working" as one might expect or hope for since bottoming out in that they have been making their payouts and trading with pre-crisis volatility but still down a lot from 2007.

If they are making their payments and the volatility is back to "normal" then it is reasonable to take another look at these and decide whether any exposure is warranted. Just like 2004-2007 anyone wanting to dabble in these should keep allocations modest because at some point they will blow up again. A 2008-style blowup is probably (hopefully) unlikely but every few years it is likely that they will take a 20% or so hit. When you have a 5% exposure to things that blow up, and again, in the past they usually came back, it is merely a source of frustration not a back to the drawing board situation.

So what the hell am I talking about? Here is a overview of a few segments in the yield product world but there are more than the following.

First is the call-writing, put-selling closed end funds. For a while these things were insanely popular with CEF IPOs coming just about every week there for a while. I looked at a chart of four of them (these are easy for you to find on your own and they are mostly interchangeable), I chose the symbols randomly from memory and in the last five years three of them are down 50-60% and one was down 33% so they all fell a lot had some comeback in 2009 and then have meandered sideways for a while but then rolled over in 2011. For the last year they are down 20-30%.

I also looked at a few airplane leasing companies. This business seems simple enough in that many airlines lease planes but the companies are very transaction oriented, similar to infrastructure trusts, and markets need to be functioning in order for the companies to do what they do. Markets ceased up for a while there in 2008 and these stocks got crushed. The three I looked at bottomed out with 80-90% declines but for the last two years are up an average of 20%. Only two of them pay dividends and they have been paying them.

Next I took a peak at three large closed end high yield bond funds. They have all traded fairly closely together; down 60-80% at the worst of the crisis, down 20% for the last five years and for the last two years they range from flat to up 10%. The yields all range from 7-11% and the funds have been paying consistently.

Lastly I looked at a few of the tanker stocks. Again these seem simple enough but collectively they are overly cyclical in terms of reacting to economic activity. They seem to have been punished every which way but loose, some are paying dividends now, some are not--they've really been on a wild ride including over the last year where the declines for the few I looked at ranged from 35-50%.

If you are interested in any specifics they are easy to find. The idea with this post is merely to revisit the space. These types of products worked just fine then they blew up, the blow up is over and they might work again (you can decide for yourself). One point that I've tried to make before is that occasionally you need to go away from some market segment for a while (I've felt that way about treasuries for several years and we don't own any now) for whatever reason but that does not mean you should completely lose touch.

In terms of owning just one yield product, the above seem to have different fundamentals driving them, have some vulnerabilities in common and some unique vulnerabilities and they also have different volatility characteristics; the shipping stocks are shockingly volatile for my tastes, I'm surprised that the airplane leasing stocks have done well and impressed by the resiliency of high yield funds.

Obviously the various ups and downs of the products mentioned above did not include dividend. If you actually investigate any yield products you would factor in the yield in order to get a more precise understanding of the total return but for purposes of this post the numbers are apples to apples.

This was about process, about revisiting things that I used to pay a lot more attention to in order to start figuring out whether any of these have a place in the portfolio and should be investigated further.
Read more!

Chasing Heat

Yesterday I was in Phoenix for a client meeting. In the meeting I was asked about whether I would ever try to seek greener pastures and while the answer is I can't envision a better scenario than what I have now it got me to thinking about the extent to which investors (including professionals) seek (chase) greener pastures in their portfolios.

This is really about patience and the potential consequence of losing patience. A big part of what I do with my typical day is to try to learn about other people's process, companies that are new to me, developments in companies we own, countries and themes. Like many people I am interested in getting a little better at what I do and so the overall portfolio approach evolves over time. If you read this site then you probably have some similar interest in learning in the manner I describe.

This might be difficult to articulate but the above describes the honing of a process. You probably have some sort of investment process that you have a basis for believing will give you a decent shot of having enough money when you need it. Over time you learn a lot of things about markets and investing and maybe incorporate some of what you learn into your portfolio and so it evolves.

The flip side potentially comes in a year where some particular process doesn't work so well (no approach to investing can be best for all market conditions) and patience is lost. This is what leads to panic selling and panic buying. An example might be last April with silver. At one point last spring iShares Silver (SLV) was up 60% for the year (at that point) while the S&P 500 was up 7%. Seven percent is pretty good but it's no 60%.

There was quite a mania around silver at the time, hopefully you remember, and while it seems obvious now plenty of people bought above $50. This repeats in dramatic fashion like blowoffs in things like silver or Netflix (NFLX) or far less dramatic like canroys or REITs. People get caught up in the excitement, feel like they are missing out but instead of learning about something and then incorporating a modest allocation they end up going too heavy.

Gold is another example of this. Many believe in a 20% allocation to gold which I think is way too high. Like all of these things the good times can last for a while and then the rug gets pulled out. Jim Rogers has made some comments about gold having been up for 11 years in a row, being due for a correction and that he would buy more at $1100-$1200. I have no idea if it will go that low but it is a pretty good bet that if it does there will be all sorts of people with regret over having too much.

Some exposure to the manias is reasonable but it is important to realize when it is a mania. It is also important to stick with the strategy that gave a reasonable basis for having enough money when needed. Whatever strategy chosen probably needs to evolve but it was chosen at a time not clouded by the lure of the latest mania. Manias and the behaviors that accompany them will repeat over and over and there is a difference between adapting to new things and chasing heat.
Read more!

Vote For Pips!

An update on Pips, the dog that Joellyn and I took to the University of Washington last March to join the Conservation Canines program.

United Animal Friends, the animal rescue that my wife volunteers for, entered Pips' story into a contest being run by PetFoodDirect where the winning rescue gets a $5000 grant for food and related supplies.

Pips' story made the top ten which is the finals for this contest. If you have a Facebook account please go to the page for PetFoodDirect, "like" the page and then please vote for Pips--the page to vote will load onto the screen.

That Pips' story made the top ten is probably a big deal because PetFoodDirect has over 50,000 followers on Facebook.

The picture is from Clear Lake with a view of Mount Rainier as we drove Pip to the Conservation Canines facility which is actually in Eatonville. Thank you for your consideration on this.

If you would like to read something market related please visit my page on the 2012 Bespoke Investment Group Roundtable.
Read more!

The 5% Solution?

A few years ago I wrote an article for theStreet.com where I tried to construct a diversified portfolio that yielded 4%. While the overall yield came in just below 4% it covered a lot of bases toward being diversified. The objective was not that anyone should have bought that portfolio but I wanted to try to illustrate my point from the other day (I have been making this point for years) about managing the yield of the overall portfolio, at least that was the intention.

The other day I also mentioned that there are now a lot more stocks that yield 3% than there was four years ago, at least this appears to be the case. With yields generally higher I thought it would be interesting to update the 4% portfolio from a few years ago in search of 5%. The names are stocks that I generally keep tabs on (a couple of exceptions) but don't own which should tell you something.

Financials-

Westpack Bank (WBK) 7.8% yield; This is one of the big four Aussie banks. If I am wrong about the risks in the housing market then this would be a good hold. The big difference between WBK and ANZ (ANZBY) that I sold in May is that ANZ has a lot more business throughout Asia than WBK.

Annaly Capital Mortgage (NLY) 14.2% yield; I am quite certain I am never going to own a mortgage REIT but the name has been a good hold more often than not and many people do recommend the name. I could easily be wrong but whatever happens it will happen without me. The thing with mortgage REITs is that they chug along just fine and then something catastrophic happens. My introduction to this came with Northstar Financial which had symbol NFI before it blew up, fortunately I never owned that one. NLY has cut in half twice in the last ten years. Anyone who thinks they can be out in front of the next time that happens might be willing to take the risk in exchange for the yield.

Energy-

Enterprise Products Partners (EPD) 5.2% yield; EPD is one of the big gorillas in the MLP space it is relatively low in volatility. There are plenty of MLPs with much higher yields, generically speaking going in higher in yield should mean taking on more volatility. This would not be my first choice but I don't believe there is any realistic threat of the name hurting anyone in some unique fashion (if all MLPs cut in half for some unforeseen reason EPD would not be immune).

Total (TOT) 6.32% yield; Total is big French oil. I am not a fan of Europe from the top down but it held up much better than iShares France (EWQ). TOT was down 4% in 2011 versus a 19% drop for EWQ. If I am wrong about Europe or if Europe goes up a lot in the face of a lousy fundamental backdrop then TOT should participate. TOT is also cheap, Google Finance has it at 7.4 times earnings.

Healthcare-

AstraZeneca (AZN) 5.8% yield; AZN has a PE of 6.3. Like all of the big drug companies it has a bunch of products that you have heard of and has a few interesting things in the pipeline. There are always patent issues with these companies and to the extent the company is pretty generic, its five year chart looks a lot like many of the other large drug companies although most of these stocks lag the broad ETFs like Healthcare SPDR (XLV).

Sanofi (SNY) 4.8% yield; Pretty much everything about AZN applies to SFY but SFY's PE is 15.9.

Technology-

Taiwan Semiconductor (TSM) 4% yield; within semiconductors there are many 3% yielders to be found. TSM has always had a high yield. The stock has done relatively well over the years compared to the iShares Taiwan ETF (EWT). There are a couple of other easily accessible Taiwanese semiconductor names but TSM appears to be on the surest footing.

DDi Corp (DDIC) 5.1% yield; This name got mentioned once in passing on CNBC, it makes printed circuit boards which can be thought of as a commodity which embeds some risk into the name and this is reflected in the price over the last few years but for a microcap it did not go down as much as you might think in 2008. Also the PE is just below 10 and it has very little debt (far more cash than debt). Obviously this would a pretty aggressive hold but the stock has been around for a while and after blowing up in 2004 seems to have matured.

Industrials-

Douglas Dynamics (PLOW) 5.6% yield; PLOW makes equipment and material for snow removal. Similar to DDIC this is a very small company but has a much shorter track record than DDIC. It has done very well since coming out a year and half ago, outperforming iShares Russell 2000 (IWM) by about 25%. Its end market appears to be small business owners that are contracted by municipalities, HOAs and the like. In Yavapai county (where I live) the country owns the vehicles which would seem to be more prevalent. Given the state of the states perhaps there will be more outsourcing of the work and the repair headaches which might be a slow moving catalyst for PLOW?

Lockheed Martin (LMT) 4.9% yield; From the top down LMT is not much different than the other large cap defense contractors but LMT has the highest yield. I prefer Northrup (NOC) and know that name much better but these stocks, add General Dynamics (GD) to the list, seem to take turns being the best performer from year to year. While I continue to prefer NOC long term LMT should hold its own without hurting anyone.

Staples-

Reynolds American (RAI) 5.4% yield; Obviously Altria (MO) and Philip Morris (PM) are the big names in this space. I prefer PM, we own it for clients, because there are less obstacles to smoking in other countries than in the US but RAI has held its own price wise. In addition to tobacco stocks offering high yield in this space there are plenty of booze stocks with high yields also.

Discretionary-

Leggett & Platt (LEG) 4.8% yield; It is difficult to find yield in this sector. LEG makes a lot of stuff, components for products such that it is unlikely you would see their name on anything, at least I cannot recall seeing the name on anything. This sort of company reminds be of a company from a long time ago called Applied Magnetics which made the arm that went on disk drives back then but with LEG the products are much simpler. The stock is a small cap, went down every bit with the market during the crisis but has come back a little faster. The stock is not cheap but the dividend is well covered and earnings are forecast to grow meaningfully in 2012 setting the stage for an increase in the dividend.

Telecom-

Telstra (TLSYY) 8.1% yield; This is the Ma Bell of Australia. It is not riskless. There have been issues with the future of broadband not going favorably for the company. It went down much less than the ASX 200 during the worst of the crisis, then lagged the index in 2010 but lately has outperformed. I would also note that its chart has never looked much like the US telecom sector as measured by Vanguard Telecom ETF (VOX) which we own for clients.

Utilities-

National Grid (NGG) 6.1% yield; NGG is a UK utility but has a presence in the northeast US as well. For a utility it went down a lot in 2008, almost as much as the iShares UK (EWU). It then hugged the index for a while but in mid 2011 when EWU turned lower NGG actually drifted higher and had a much better 2011. The dividend is easily covered by earnings, the current PE is 10 but not surprisingly it has a lot of debt. This is not riskless but as with many of the others, unlikely to turn out to be a house of cards.

Materials-

Terra Nitrogen (TNH) 8.2% yield; This is probably a common name but I don't know if people realize that it is a partnership. It has no debt, pays out almost all of its earnings (by definition) and is a volatile stock. Southern Copper (SCCO) is also a high yielder for anyone not wanting too much exposure to partnership stocks. To be clear, one is not a substitute for the others, the two charts look to be almost negatively correlated but SCCO also yields about 8%.

Again, we don't own these stocks for clients. If a portfolio is built with nothing but these types of stocks then the risk becomes finding out they are leveraged to the same types of unpredictable risk after they have all gone down a lot. I generally would be more concerned about risks I can't see coming. This type of threat is reduced when you make sure you take in holdings with all typed of attributes. With NLY, again a name I can't imagine using, I could be overly concerned versus the reality which is fine but complex dealings in mortgages is not an area I want to own.

A practical application could be summarized in the following example. It would be reasonable for someone to own Fedex as a proxy for industrials. In 2009 it trounced the Industrial SPDR (XLI) and has since tapered off versus XLI. Fedex only yields 0.6%. After a great 2009 for the SPX it made sense to think that the market would not do as well in 2010 making yield more important. A swap from something like Fedex to something like LMT obviously increases the yield of the portfolio. A few trades like this would be enough to meaningfully increase the yield of the entire portfolio. The difference between a 2% yield and a 3.5% yield won't mean much in a year like 2009 but did mean a lot in years like 2010 and 2011 and I think will mean a lot in 2012.

As a bit of a disclaimer on the stocks mentioned, I keep tabs on these stocks I do not know them cold and don't own them. My opinion is that none of them will prove out as frauds or truly hurt anyone relative to other stocks in their respective groups (if all mortgage REITs go down by 75% NLY will too but it don't think it would go down 75% if the group goes up by 5%).

One more point is that generically speaking there comes a point higher yields lead to more risk. A 5% yield is pretty modest these days for an MLP but there are plenty that yield 9%. Not that you shouldn't own a 9% yielder but a portfolio full of them has a high likelihood of ending in tears.
Read more!

Dakar Rally 2012

For anyone who forgot, the 2012 Dakar Rally has started, there is daily coverage on Versus NBCSports Channel. If you care about this you might want to record the coverage as it is on at odd times.

The big news is that Volkswagen is out of this year's rally which I am guessing is a business decision and not a competitive decision because they have dominated the race for years.

Among others displaced by the Volkswagen decision is last year's winner Nasser Al-Attiyah. He has joined up with Robbie Gordon's Hummer team for 2012. Last year I mentioned the extent to which the H3 appears to be the wrong vehicle for the Dakar's terrain of dunes and mountain roads. Obviously this is based on the performance turned in by Gordon year after year. It would be very funny if Al-Attiyah somehow won the race in the H3.

The coverage on NBCSports is starting out much better than last year. Last year they gave the studio host a lot of face time and had what amounted to a sideline reporter who did a segment every day on the town that the race was near or something like that and of course any time devoted to the studio host or the cultural segment was time not spent covering the racing and actually the racing not covered was my favorite class which is the big trucks (pictured above).

Speaking of the big trucks they've updated some of the vehicles and this Vladimir Chagin is not in the race. I think he won that last 30 Dakar's in a row (slight hyperbole) so someone new will have a shot.

The reason to post this is that the scenery is spectacular, similar to the Tour de France and the action is usually exciting, the race stages take hours but the show is 30 minutes and you have to figure they are not going to stuff the show with the boring parts. If you've never seen this before, I encourage you to try it.
Read more!

Right Place Right Time

A little anecdote from my weekend that I think can be applied to investing;

The dog in the picture is a pitbull named Blue. While watching bowl games and reading Barron's on Saturday afternoon our dogs starting barking up a storm as they occasionally do. I went outside and there was Blue on the other side of our fence.

I went outside the fence and Blue came right up to me. I brought him in to where the dogs could sniff through the little gate you see in the picture and because the barking was more "hey I want to meet you" as opposed to "hey I want to kill you" I let Blue in to meet everyone and it went just fine, actually he fit in better than Wiley (dog number six who after a year and half still doesn't quite fit).

Blue had a tag with his name and a number in Phoenix so I left a message hoping the people would check their phone once the realized Blue was gone. I then called Joellyn who was where she is almost every Saturday, a UAF adoption event at Petco, to tell her what was up and see if maybe she knew the dog (not impossible) but she did not.

I took Blue out for about half an hour walking around the mountain to see if anyone was looking for him, I ran into people here and there but no one knew Blue. I brought Blue back and we all hung out for a while, he was so well adjusted he was even able to eat with everyone for our normal 3pm feeding time .

Our neighbor, also a dog person, coincidentally had an errand at Petco. Joellyn told our neighbor about Blue because maybe the neighbor knew the dog (not impossible) but no dice. As our neighbor was just about to drive up the road we live on as she was coming home she ran into people looking for the dog. One thing lead to another and she was taking Blue back down the hill for me to the dog's owner (the owner did not have a four wheel drive vehicle and you need one in the winter to get up our road) for a happy outcome.

There were several things in this little story that had to go just so for Blue to be returned so quickly (this all transpired over the course of two hours). Take from this whatever you think can be applied.

Enjoy the football.
Read more!

New Years Day Morning Coffee

Just a couple of random thoughts this morning.

My base case for 2012 is some sort of range busting rally that then mostly retraces. If this scenario plays out then I think we would be lucky to finish out 2012 100 SPX points higher but I think a smaller gain is more like it.

That being said one idea that I believe many subscribe to is that US equities have benefited because of what is a lousy backdrop in Europe. The idea is that money that might have otherwise gone into European equities instead went into US equities because as shaky as the US fundamentals are, in my opinion, the fundamentals in Europe are far worse.

If the above is true then it stands to reason that some sort of recovery in Europe, real or perceived, could come at the expense of US equities meaning that US equities get sold to buy European equities perhaps leading to a reversal of the 2011 result where the US was in the green by a whisker and much of Europe was down in the low teens, or worse, percent wise.

We lagged by a small amount in 2011 (talking specific numbers makes a blog post a marketing piece subject to a lot of compliance stuff) as foreign mostly lagged domestic. I talk a lot about foreign because we own a lot of foreign because I believe in the long term fundamental outlook for foreign but in any given year where domestic outperforms then we obviously will lag the benchmark but over the course of an entire stock market cycle (which is our objective) I have unyielding faith that foreign will continue to be the better hold. We still have domestic exposure in case I turn out to be wrong.

2011 was a good year personally, we finally went to Yellowstone National Park, I became an EMT and our trip to take Pips the dog to University of Washington would have been awesome even without going to the town where Northern Exposure was filmed . Hopefully 2012 will be an even better year for everyone, I hope one personal highlight will be my project with AdvisorShares coming to fruition.
Read more!