I am retired and take educated guesses on all things financial.

November 10, 2011

November 10, 2011: Long Live The ETF Permanent Portfolio

I believe that many retail investors (and probably pros, too) entangle security investments so as to render them impractical at best, hopelessly confusing at worst.This is why it is wise to divide one's portfolio into three distinct parts. I recommend an Income Portfolio, a Permanent Portfolio and a Speculative Portfolio - kept at three divorced discount brokerages. ETrade, Schwab and Scottrade will suffice nicely. Why three brokerages? Think diversification if sophisticated hacking invades, which is not if, but when. Keep a paper trail of each account as a backup.

For relatively conservative investors, 35% of assets in the Income Portfolio, 55% in the Permanent Portfolio and 10% in the Speculative Portfolio makes sense. Regarding the moving parts, I defer the Income Portfolio to the "experts" that regularly grant one the wisdom of their knowledge (plus a healthy dose of self-esteem) on sites such as, and your own taste for yield. The Speculative Portfolio should only contain funds that are not precious to you and are limited to "bets" based upon solid research from multiple sources, which abound. The three portfolio approach encourages self-discipline.

I will focus upon the Permanent Portfolio, which is a must core holding for all investment seasons. The objective should be preservation of capital with modest total appreciation. Probably the best model is the Cuggino Permanent Portfolio Fund, which has stood the test of time. My bias against investing in this fund is the large cash position it maintains to account for redemptions and portfolio rebalancing. And the fund expenses, of course. Establishing a Permanent Portfolio on your own using ETFs and rebalancing every five months or so is a better idea if your nest egg totals $50,000 plus (maybe less). With no cash wasting away my experience has been that performance will be superior, even adding the modest transaction costs.

The following portfolio is not new for my readers, and has been favorably commented upon earlier by fee-based investment professionals and others. Granted, some think it sucks, but it admittedly gave them pause to think and devise their own.


Precious Metals: 20%

iShares Comex Gold Trust ETF (IAU) 15%
iShares Silver Trust ETF (SLV) 5%

Swiss Franc Assets: 10%

Currency Shares Swiss Franc Trust ETF (FXF) 5%
iShares MSCI Switzerland Index ETF (EWL) 5%

Singapore Assets: 5%

iShares MSCI Singapore Index Fund ETF (EWS) 5%

Worldwide Real Estate and Natural Resources: 25%

iShares North America Natural Resources Index ETF (IGE) 5%
Vanguard Energy ETF (VDE) 5%
iShares FTSE EPRA/NAREIT Developed World Real Estate ex-US ETF (IFGL) 5%
Vanguard REIT ETF (VNQ) 5%
Market Vectors Agribusiness ETF (MOO) 5%

Dividend/Growth Stocks: 20%

Vanguard Dividend Appreciation Fund ETF (VIG) 10%
iShares Morningstar Small Company Growth Index Fund ETF (JKK) 5%
Guggenheim Frontier Markets ETF (FRN) 5%
Schwab Emerging Markets Equity ETF (SCHE) 5%

U.S. Treasury Bills and Bonds: 20%

Vanguard Total Bond Market ETF (BND) 10%
Vanguard Intermediate Term Government Bond ETF (VGIT) 10%

In hand with this model, I recommend subscribing to an excellent, unbiased predictive world intelligence service. Stratfor ( is a worthy choice.

I also recommend that securities be not one's sole place to park all investments. Multiple income streams are needed to keep on track. Find them.

We live in challenging times on many fronts.

June 21, 2011

June 22, 2011: PNC Moves Into High Gear

PNC Financial Services Group (PNC)has acquired RBC Bank (USA) for $3.45b, a $112m discount to tangible book value. PNC will likely start making money on this transaction sometime in early 2013. The stock presently trades at $56.80 with a fifty two week range of $49.43-$65.19.The transaction is to close in March, 2012.

One appreciates the long term potential of this deal. PNC has a track record of successful assimilation, notably the National City acquisition. By acquiring the well-placed branches of RBC Bank, PNC moves out southeast, primarily North Carolina, also Virgina, Washington D.C., South Carolina, Georgia, Alabama and Florida (where PNC already has assets from the National City transaction).The direct competitor appears to be BB&T (BBT), the North Carolina-based entrenched regional bank. If PNC employs the characteristics of it's operations elsewhere, BB&T is in for a tussle. BB&T is plagued with spotty customer service, many dated branches and technical problems, not the least being poorly attended ATM machines and check posting service. PNC on the other hand excels in customer service, making banking online and on site a quick task. While this contrast between the two regionals may not translate into an enhanced stock price,it could have a long term impact as loyal BB&T customers discover banking with less annoyance.

The deal between PNC and RBC gives PNC a great entry point into the southeast, and includes $19b in deposits and $16b of loans. PNC has been stellar cutting costs without sacrificing service. RBC had cost containment issues.Thus,investors should expect PNC to substantially improve margins at RBC branches as standard systems and efficiencies are implemented.

PNC is taking into account bad loans with a fair value mark on RBCs loan book of 12.5% ($2.2b). The most aggressive marks were taken on consumer portfolios, including home equity loans.

The deal makes PNC the fifth largest bank by deposits in the country. BB&T is eighth. PNC will be a top ten deposit franchise in North Carolina, Georgia and Alabama with RBC assets in these states.

A price target twelve months hence of $70.00 is not unreasonable, which may include dividend hikes. PNC is set to provide a long term growth and dividend story.

May 23, 2011

May 24, 2011: Gas Breaks Wind (Power)

Ignacio Galan, chief executive of the Spain-based energy group Iberdrola, was quoted in the Financial Times (May 23, 2011)stating that the rise in United States shale gas production has transformed the country's power-generating industry, driving down gas and electricity prices. "Shale gas makes the production of electricity from other sources not attractive enough".

This bodes poorly for investors hoping to profit from further wind power development in the United States, and perhaps elsewhere.Even U.S. government subsidies for wind farm construction is insufficient, "It's hard to make an attractive return on investment on these (subsidized) prices".

Although some analysts and wind power industry executives are more optimistic than Mr. Galan, his viewpoint illustrates the realities of the competitive marketplace facing the U.S. wind industry. The wind power industry in the United States lost an estimated 10,000 jobs last year and now employed an estimated 75,000 workers. Evidently, a percentage of these jobs are now in jeopardy.

According to Alex Klein of IHS Energing Energy Research as expressed to the Financial Times, "It's going to be very challenging for the next couple of years. There are a lot of issues hitting the industry."

Iberdrola (IBDRY) is the largest investor in new wind capacity in the U.S. and the second largest wind generator after NextEra Energy (NEE),the owner of Florida Power and Light.

Other companies with a vested interest in seeing this subsidized energy source remain viable include MidAmerican Energy (owned by Warren Buffett's Berkshire Hathaway BRK.A,BRK.B), EDP (EDPFY) of Portugal and Eon (EONGY) of Germany. General Electric (GE) also has a footprint in this endeavor. Investors should be looking carefully at these companies and ETF Funds that bet the house on wind power, such as FAN and PWND.

For the cynics among us, it would be interesting for a bright investigative journalist to tackle the money trail funding current efforts to discredit shale gas extraction in the United States.

Hat tip to the Financial Times for the thrust of his article.

May 19, 2011

May 23, 2011: A Stockless Portfolio? Yes We Can

Yes, it is possible to run your portfolio sans stock. I have toyed with this notion on and off for a while. A recent article by Money Morning Chief Investment Strategist Keith Fitz-Gerald addressed this concept quite well.

According to Fitz-Gerald, the allocation model looks like this:
Bonds 45%
Master Limited Partnerships (MLPs) 25%
Commodities 10%
Gold 10%
Preferred Stocks 10% (true, they are stocks but their performance is more bond-like)

Bonds should be split between high-yield corporate bonds and intermediate/short term investment grade municipals. IShares IBoxx $ High Yield Corporate Bond ETF (HYG) is recommended as is Vanguard's Short-Term Corporate Bond ETF (VCSH). PIMCOs Municipal Income Bond Fund (PMF) is an appealing choice to round off this portion of the portfolio.

Gold hedges the principal value of bonds. This is especially true, according to Fitz-Gerald, in a stockless portfolio. A good choice is the SPDR Gold Trust ETF (GLD).

Fitz-Gerald adds a healthy dose of Master Limited Partnerships. MLPs may trade like stocks, but technically they are different in character. J.P. Morgan's Alerian MLP Index ETN (AMJ)provides reasonable coverage for this portion of the portfolio, until a better method and index comes along.

Commodities can be covered by a stake in MarketVectors Agribusiness ETF (MOO) and PowerShares Deutsche Bank Commodity Index Tracking Fund (DBC). A higher yield commodity security is the Pimco Commodity Real Return Fund (PCRDX), yielding over 8%. In all likelihood, the long term trend for commodities is bullish.

Preferred Stocks are needed to include relatively high fixed dividends or inflation protected dividends present in some of these investment vehicles. The ETF choice here is the IShares U.S Preferred Stock Index Fund (PFF).

There are obvious downsides to a stockless portfolio. Fitz-Gerald points out the major hurdles. The current Fed zero interest policy is bullish for common stocks. Investors interested eliminating stocks are introducing additional risks to their portfolio by reducing the level of diversity and balance . Thus, I believe a non-stock portfolio is a significantly more volatile investment using the past four generational metrics for the market.

The much divined dividend appreciation method many investors flock to with common stocks is lacking, although this stockless portfolio appears to contain plenty of fixed income. Those seeking consistently rising dividends from stocks depend upon a company's track record to justify their dividend shill. Since the 1940s, they are correct. But bitter and unforeseen surprises may be in store for those absolutely, definitely sure beyond any doubt that this trend will continue - usually when it is least expected.

Importantly, Fitz-Gerald points out that by cutting common stock from a portfolio, it is definite that one would have to significantly increase personal savings to make up the difference with common stock's century-long historical performance. A 32 year old earning $50,000/year aiming for about $3200/month retirement would have to increase their savings from 12% to 16% of their annual salary. I am of the opinion that saving 20% of gross income is necessary regardless of one's retirement nest egg approach.

The objective of this unusual exercise is not to convince the reader that this type of portfolio is the best road to riches. It is published to encourage investors to think of alternative ways to manage and design a portfolio - to resist following the herd instinct chasing "sure bets" with common stocks, or a sector investment, as we lurch into an uncertain future. The past is littered with foolproof stocks and investment schemes gone awry.

April 22, 2011

April 24, 2011: Portfolio Gridlock, Diagnosis and Treatment

The word "gridlock" has several peripheral definitions. Perhaps the best definition for this post is from Webster's New World Dictionary which defines gridlock as "a complete lack of movement or progress resulting in a backup or stagnation; any obstructed condition or impasse".

Does this condition exist in your investment world? If the answer is yes, rest assured you are not alone. I have floated the investment gridlock condition to disparate individual investors over the past month. The admittedly unscientific result appears to indicated that investment gridlock is not uncommon.

I speculate that investment gridlock occurs when too many investment choices are accompanied by a gut feeling that the world is changing, with our(United States) government out of control both at home and abroad. Is "the full faith and credit of the United States" meaningless? Do adversaries - economic and other - view us as weak? Have we traveled a bridge too far trying to police the world and thrown good billions after bad trillions to many nations who show no gratitude? Are we overwhelmed by thousands of investment choices and financial articles so as to throw the best fundamental portfolio intentions into a quagmire? In short, investment gridlock may be a symptom of fear from all of the above.

A typical response I received from investors experiencing portfolio gridlock is not in the construction or allocation into the initial portfolio itself. It occurs when funds piling up in cash or cash equivalents await investment. The trigger to allocate these funds is not pulled because of the fear factor of our present investment and geo-political world. Gold? Already $1500. Silver? North of $40 - is this a bubble?? Foreign stocks? Europe, practically bankrupt. Asia? Inflation, China, war and peace.South America? How many more Chavez's are there to bring that continent back to the days of Juan Peron? Energy? Sector stocks are one tsunami or blown oil rig away from a stock collapse. Alternative energy? With no government subsidy, no profits. U.S. stocks? What if the taxing idea on soaking the investing class actually becomes law - and once it starts, when will it end? Bonds? Commodities? Currencies? Wealth Confiscation?

Mutual Funds, Exchange Traded Funds and the like will spread out risk. But will they withstand global recessions and major armed conflicts? The German stock market was hot in the 1930s. The Russian stock market was hot in the early 20th century.Japan? The place to invest in the 1970s - they were poised to own the world. We know how that ended.

All risk cannot be mitigated. Serious global conflicts, including cyber warfare which would likely compromise and/or destroy all electronically stored financial records along with your internet brokerage will create mayhem. Reality check: one U.S. Air Force facility in Colorado fends off over 15,000 cyber intrusions per day (thank you,China).

No wonder personal variations on the portfolio gridlock theme abound!

How does one treat this condition?

My assessment is to simply keep within your comfort zone with a diversified portfolio.A three-legged stool concept works well for most investors as it promotes both discipline and clarity. Balancing a Permanent Portfolio using ETF's for assets you cherish could include gold (iShares Comex Gold Trust,IAU), Swiss Franc exposure (Currency Shares Swiss Franc Trust,FXF;iShares MSCI Switzerland Index, EWL), Singapore "the Switzerland of Asia" (iShares MSCI Singapore Index, EWS), US and International stock ETFs, REITS foreign and domestic (Vanguard Domestic REIT,VNQ;iShares Developed World Real Estate ex-US,IFGL; Vanguard Dividend Appreciation,VIG; Vanguard Energy,VDE;iShares Morningstar Small Company Growth Index JKK; Schwab Emerging Market Equity,SCHE),a small percentage in U.S. bonds (Vanguard Total Bond Market, BND;Vanguard Intermediate Term Government Bond, VGIT; iShares Barclays Inflation Protected U.S. Securities, TIP), and a commodity ETF (Power Shares DB Commodity Index Tracking Trust, DBC). I would encourage an Income Portfolio consisting of foreign and domestic TIPS, short term bonds and selected preferred securities that have inflation protection features (such as Aegon NV, AEB;Metropolitan Life preferred A, METpA and Deutsche Bank Contingent Capital Trust II,DXB). The final leg of the stool is the Speculative Portfolio, which should be limited to no more than 15% of you total securities funding. This portfolio is where you place bets based upon informed hunches such as the PowerShares ultra long/short ETFs, or to store cash waiting for a compelling buying opportunity. You may find a better product mix that accomplishes an effective result for each of the three portfolios.

Don't vary from your portfolio strategy of sensible allocation. Keep a paper trail of all transactions. Make peace with yourself,as you are executing a prudent investment scheme even when the world around you seems to be falling apart. And maintain a sense of humor - after all, in the long term we're all dead.

April 07, 2011

April 7, 2011: March Housing Stats Weak

Credit Suisse released their March housing data yesterday, and the results are not promising. This survey rates the climate for single family home transactions in fifty major U.S. markets coast to coast. I have found this survey to be both timely and predictive.

Significantly, buyer traffic slipped in March from previous months, which were already low. The survey suggests that buyers lack confidence and are continuing to believe that home prices will continue to decline. The survey notes the "wide divide among potential buyers, with the most distressed markets finding significant investor interest whereas (traditional) buyers in other markets are still cautious and plan to wait for home prices to bottom." Investors are paying cash as they take advantage of homeowners caving in to low ball offers and investors who jumped in too early in the housing decline and are cash strapped. Home buyers planning to live in a home are finding it very difficult to obtain an appraisal that meets their home offer price and then are faced with extremely tight lending practices that close the mortgage window. Foreclosures are still a high percentage of property transactions with no letup scene over the next several months.

With this scenario, prices will trend lower, but perhaps not in as rapid a decline as 2009/10.Credit Suisse anticipates additional weakness in the coming months (generally a good sales season). This poses continuing problems for home builders.
The latest home builder stock ratings from Credit Suisse reflects this scenario:

Beazer Homes (BZH) Neutral, Target $4.00
DR Horton (DHI) Neutral, Target $10.00
Hovnanian Enterprises (HOV), Underperform, Target $2.00
KB Home (KBH), Underperform, Target $12.00
Lennar (LEN), Neutral, Target $19.00
M.D.C. Holdings (MDC),Outperform, Target $28.00
Meritage Corp (MTH), Neutral, Target $22.00
NVR Inc. (NVR), Neutral, Target $650.00
Pulte (PHM), Neutral, Target $7.50
Ryland Group (RYL), Underperform, Target $15.00
Toll Brothers (TOL), Neutral, Target $20.00

Of concern looking ahead is the possibility of real estate deductions (especially mortgage interest deductions) being on the table as Congress attempts to control the budget deficit,a double dip recession sparked by inflation and the cost of gasoline and heating oil, competition in the rental market from construction of new apartment complexes to accommodate increased public subsidized housing patrons and a new class of renters that ordinarily would finance/purchase a home, and the overall concern of uncertainty with the economy in general and personal income in particular.

Investors itching to pull the trigger on home builder stocks may want to wait a while longer. Hands-on landlords who can fathom a solid return even without long-standing preferential tax treatment of rental real estate may want to selectively purchase well-located property if the price is compelling.

March 27, 2011

March 28, 2011: Everyone's World and Your Permanent Portfolio

Last May, I suggested that for safety a Permanent Portfolio be considered as investors continue to be held hostage to fickle politicians and unpredictable events here and abroad. I designed a Permanent Portfolio using low cost ETFs to closely replicate the portfolio of Michael Cuggino's 5-star Permanent Portfolio Fund. The goal of this ETF mix? To retain absolute value and rise approximately 2% more than the Citigroup 3-month U.S. Treasury Bill index, re-balanced semi-annually or annually.

As Michael Cuggino has massaged the Permanent Portfolio Fund from his predecessors, Harry Browne and Terry Coxon, to reflect different investment avenues and long term trends,I have done likewise for my current ETF Permanent Portfolio. This begs the question, why adjust the allocation and moving parts of a permanent portfolio when it is designed to be permanent? The answer is that the world is changing at warp speed compared to fifty or even five years ago. Investment products better reflecting the world are available to capture long trends while defending against your best intentioned stock selections going haywire (generally, when you least expect it). Whereas the original Browne portfolio relied on stock warrants, physical possession of precious metal to be held in Switzerland and Swiss Francs in banknotes, and Mr. Cuggino's supposition of pure U.S. Dollar assets to be worth 30% of the portfolio, I have attempted to fine tune the portfolio further using low-cost ETFs and acknowledging that, quite possibly (but not certainly), the U.S. dominant position in the world and concurrently the U.S. Dollar are heading south with dispatch. This would favor such Asian banking and corporate areas such as Singapore.

The investor certainly wants exposure to areas presently out of favor. The intent of the ETF Permanent Portfolio is to protect against placing too many eggs in what the best investment basket du jour is for a given cycle.


Precious Metals: 20%

iShares Comex Gold Trust ETF (IAU) 15%
iShares Silver Trust ETF (SLV) 5%

Swiss Franc Assets: 10%

Currency Shares Swiss Franc Trust ETF (FXF) 5%
iShares MSCI Switzerland Index ETF (EWL) 5%

Singapore Assets: 5%

iShares MSCI Singapore Index Fund ETF (EWS) 5%

Worldwide Real Estate and Natural Resources: 25%

iShares North America Natural Resource Index ETF (IGE) 5%
Vanguard Energy ETF (VDE) 5%
iShares FTSE EPRA/NAREIT Developed World Real Estate ex-U.S. ETF (IFGL) 5%
Vanguard REIT ETF (VNQ) 5%
Market Vectors Agribusiness ETF (MOO) 5%

Growth Stocks: 20%

Vanguard Dividend Appreciation Fund ETF (VIG) 10%
iShares Morningstar Small Company Growth Index Fund ETF (JKK) 5%
Guggenheim Frontier Markets ETF (FRN) 5%
Schwab Emerging Markets Equity ETF (SCHE) 5%

U.S. Treasury Bills and Bonds: 20%

Vanguard Total Bond Market ETF (BND) 10%
Vanguard Intermediate Term Government Bond ETF (VGIT) 10%

It is likely that investor's will have a speculative portfolio divorced from a permanent portfolio, the size to vary depending upon investment style and temperament. Having a permanent portfolio anchor allows the investor to place more focused bets on areas of conviction. While you may agree or disagree with my selections, the concept itself may spur you to elect this strategy.

Having a grip on the geo-political landscape becomes more important day by day. A service such as STRATFOR should become a tool in equal measure to your daily perusal through the stocks charts and gurus.

The author has no position in any of the above stock ETFs and has no profit relationship with STRATFOR.

March 12, 2011

March 12, 2011: Dividend Reservoir: Bank Stocks

Are you a dividend investor? For many of us the answer is yes. Most of the articles within Seeking Alpha pertaining to dividend-oriented investing have a tendency to look backwards, projecting an income stream through the assumption of what happened in the past to a company's fortunes (and the ability to pay dividends) will continue to occur. Most of us don't have a problem with that concept, especially if one's income portfolio is well diversified.

Jane Kim, in The The Wall Street Journal, presents a well crafted article suggesting that dividend seekers should also look forward and seriously consider within a dividend portfolio securities that are apt to resume or significantly increase their quarterly payout. She focuses upon bank stocks.

Banks, out of federal coercion or corporate necessity cut or suspended dividends due to the financial crisis. It appears that many of these institutions are chomping at the bit to resume healthy dividend payments, contingent upon their receiving a passing grade on the Fed's stress test.

In the article, Gus Zinn of the Waddell and Reed Core Investment Fund states that the investor "will see stronger companies come out with decent-sized dividends and articulate road maps to potentially doubling (dividends) over the next couple of years." According to Zinn, his fund is building up positions in J.P. Morgan (JPM), Wells Fargo(WFC) and Capital One Financial Corp(COF). The fund has increased it's financial stock exposure by 50% from the summer of 2010. Another fund manager quoted, Dave Ellison of the FBR Large Cap Financial Investor Fund, likes banks because of their significant improvement in earnings,warranting a significant dividend increase. "We are on the cusp of seeing some dividend enhancements" says Ellison. Companies such as Bank of America(BAC), J.P, Morgan(JPM),Citigroup(C),PNC(PNC)and U.S. Bancorp(USB) each make up around 5% of his fund.

For those of us that prefer to mitigate risk through diversification, ETF's will, to a degree, participate in this dividend revival. Vanguard Financials ETF (VFH), and iShares Dow Jones U.S. Financial Sector (IYF)show promise. The best pure play ETF to focus on bank stocks may well be the SPDR KBW ETF(KBE) which tracks the nation's largest banks. Investors should also know that according to this WSJ article, the preferred stocks of banks are also being accumulated, which stands to reason since better earnings indicate the ability to pay those preferred dividends which in many instances are not secured. Perhaps the best total return may come from banks "on the margin of being strong" such as Bank of America (BAC).I admit to a personal bias for individual security selection towards banks most likely to resume or raise dividends. ETFs or mutual funds may paint with too broad a brush to gain benefit from selected banks electing to return a share of their increasing profits to investors.

Hurdles for this scenario? Dividend payout ratios by banks have traditionally been in the range of 35%-45%. Stock dilution, with 92% more financial common stock shares than in 2008, is one issue. Secondly, banks, which had been used to paying 35-45% of their after-tax net income pre-2008 out in dividends will be limited to 30% after-tax net income. More will almost surely trigger Fed scrutiny.

For dividend investors, the attractive total return banks that increase dividends will likely provide will add not only zest, but common sense to the dividend portfolio.

March 05, 2011

March 5, 2011: Coal, Not Yet A "Fossil"

Most of us know coal as a dirty, black, smelly fossil fuel that has made investors some clean, green and sweet profits recently. I believe that investment in coal remains bullish,and here's why:

1. While the media focuses on new energy technologies, the truth is that less than of power produced worldwide is through solar and wind. While there is obviously growth potential, the cost outweighs the hype in our present economic environment.

2. Natural gas supplies only 20% of electricity globally.

3. Steel production uses over 10% of world coal production. 70$ of the world's steel
production requires coal as the primary energy source. It takes approximately
1300 lbs. of coal (coke) to produce one ton of steel.

4. Over 40% of the world's electricity comes from coal-fired plants.

5. China,the worlds largest consumer of coal, with even more coal-fired power
plants coming online, is betting on fossil fuel even as it sells alternative energy technologies to the West.

6. Coal usage is expected to trend up over the next decade. Cleaner coal technology
is already showing improvements in carbon and other pollutant emissions.

Over 10% of United States coal production is slated for export. This figure may rise to over 20% over the next few years as China continues to grow, India begins to provide more power options and third world economies ramp up to satisfy the increasing power needs of their people. Michael Kijesky, a Senior Research Analyst for the closed-end fund Petroleum and Resources (PEO), continues to hold the following in PEO's portfolio for continued profits: Cliffs Natural Resources (CLF), Consol Energy (CNX),and International Coal Group(ICO). Some investors will recall that PEO is the other closed-end fund within the Adams Express(AEX) brand.

While coal is appealing, my view is investors should be selective about the companies in the sector they select for portfolio inclusion. The quality of reserves, type of coal and easy access to transport are important. This is why I do not subscribe to Market Vectors' Coal ETF (KOL) as the best coal investment vehicle at this time.

February 11, 2011

February 11. 2011: Housing: Traffic Up, Prices Down

Credit Suisse has issued their monthly Real Estate Survey. The data from over fifty major markets across the United States indicates that buyer traffic has increased and home prices continue to soften.

For the third straight month buyer traffic has increased. The level for January was the highest since April, 2010 (the last month of the homebuyer tax credit). However, the buyer remains focused on bargains. This creates trouble for new homes, as homebuilders have not reduced prices by as much as existing home prices have fallen. This is in stark contrast to several months ago, when new homes were selling on par with existing homes - evidently home owners to a large degree are now throwing in the towel and selling at what the market dictates.It is noted that much of the increased homebuyer traffic is in warm weather locations such as Arizona, California and Florida.

In addition to the above, positive trends are occurring in Charlotte, Dallas, Minneapolis, and Washington, D.C. As a whole, here is how buyer traffic stacks up over the past twelve months (50 is normal, below 50 graduated weaker, above 50 graduated stronger)

Feb. 2010 41.1
March 2010 43.1
April 2010 48.7
May 2010 31.5
June 2010 19.1
July 2010 16.9
Aug. 2010 17.0
Sept. 2010 17.9
Oct. 2010 16.3
Nov. 2010 22.1
Dec. 2010 29.1
Jan. 2011 39.1

The Home Price Index sits at 26.9, compared with 43.4 in April 2010. This indicates a continued capitulation of sellers to rid themselves of property. The Time To Sell Index sits at 29,2 compared with 43.1 in April, 2010. This indicates that it is taking longer to sell a home compared with April, 2010 even at reduced prices.

My observation is that another avalanche of foreclosed homes will hit the market during March-June. This will add yet another reason to predict continued falling home prices. Homebuilders will continue to be squeezed between falling existing home prices and rising commodity costs that must be factored into new homes. Investors who thought they were getting "deals" a year ago are learning the hard way that market forces are unpredictable. Most of these investors are likely to pause instead of doubling down ,which may create even more downward pricing pressure. Another issue will be inflation and home mortgage rates. At what point will investors or primary home buyers throw in the towel because of continued stringent stips and higher mortgage rates?

The Credit Suisse monthly Real Estate Survey is a dense, boots on the ground compilation of local practitioners who have been shown to be an excellent predictive resource, based upon the success of this survey over the past few years.

February 07, 2011

February 9, 2011: Investors, Use Intelligence

Since I began to invest in 1972, the universe of tools available to assist both professional investors and the rest of us has increased exponentially. I recall going to the public library and pawing through the bible-sized Value Line Investment Survey (Arnold Bernhard) and putting life on hold to watch PBS' Wall Street Week With Louis Rukeyser to gain both stock tips and investment insight for my embryonic portfolio. Computers were a novelty and news was ABC,NBC or CBS. There was also The Wall Street Journal and Barrons as they are today.

Today, investors of all stripes are barraged with news networks, talking heads, scores of investment vehicles and plain hype with enough kill power to make one's head explode.Yet one source has yet to be explored by most investors and that is worldwide intelligence reports from experts in the field. Why this type of service has not been promoted to investors escapes me.

Google "investor intelligence" and "business intelligence" and you will find a plethora of sites featuring charts, graphs, security reports, analyst findings and newsletters telling you what and when to buy (or sell) securities. What you rarely find is pure intelligence to alert you to social,political and international military event probability in the future.I have found one service out of several that should be useful to investors. That service is STRATFOR (,

Founded by George Friedman, STRATFOR provides timely intelligence pertaining to worldwide security, financial and economic events, regional issues, regional/ worldwide defense and energy reports,making this service a valuable investigative tool for investments here and abroad.

A sampling of articles posted today on the STRATFOR site includes China Security Memo, U.S Strategy Toward Preserving the Egyptian Regime, Nordic-Baltic Alliance and NATOs Arctic Thaw, U.S. 2011 National Military Strategy, China and the Offshore Yuan Market, Australian South Pacific Ties, ASEAN and the Geopolitics of Trade Agreements,Egypt and Israel Strategic Reconsiderations, Japan's New Military Units and Military Stance, Guinea Government Revising Mining Laws, Japan Looking to Invest Billions in Africa,China and Iran Railway Network Deal Signed, South Africa Unlikely to Nationalize Mines, U.S Panel's Decision to Raise Drilling Pipe Duties Up To 450%, of many. Importantly, investors receive in-depth intelligence and predictive data which, combined with the usual financial idea and research tools such as Seeking Alpha, should result in a more informed investment decision.

Investor's interested in exploring what STRATFOR predicts nationally and internationally for the next decade may want to read the "hot off the press" book by George Friedman entitled The Next Decade. His pronouncements may surprise investors obsessed with China and the Pacific Rim. Russia again will menace the West. Germany may again look eastward and "new Europe" countries of Poland, Hungary, The Czech Republic and Slovakia become more importsnt to U.S interests. Brazil will be problematic.

Investors not reaching for another valid and useful source of information as worldwide investing becomes the new normal for even the smallest of investors could be making a tactical mistake.

January 24, 2011

January 25, 2011: WIN (Whip Inflation Now) With Inflation Protected Preferreds

As investors struggle selecting appropriate income streams for their portfolios, I believe that consideration should be dedicated to the under followed and under appreciated realm of inflation-protected preferred stock.

First,a basic explanation of preferred stocks:

A preferred stock is somewhat of a hybrid security instrument, with characteristics of both stocks and bonds. The investor is promised a stated and enticing yield (or terms as per the Prospectus) in lieu of not capturing a company's growth (as with common stock) and without the same guarantees of interest and certainty of principle as bonds.In some instances, the issuer of the preferred security can defer dividend payments at their discretion. Like bonds, preferred securities usually are blessed with a rating from a recognized rating agency.

There are three dominant types of preferred securities:

Fixed-Rate Preferred Stock is the most common type of preferred stock. If dividends are deferred for "cumulative" preferred shares, the funds accumulate and must be paid to the investor unless bankruptcy occurs.

Non-Cumulative Preferred Stock is less desirable than the cumulative preferred shares. The company does not only may defer dividends, but may escape paying them altogether. In trade-off, yields on these type of shares are usually higher than on traditional preferred securities.

Trust-Preferred Stock is a hybrid preferred security essentially constructed to exploit a loophole in the U.S. tax code. Issued beginning in 2000, these shares are created by an issuing company (or a brokerage house)which places bonds issued by that company into a trust. The trust creates preferred shares that are bought by investors. This process provides certain tax advantages to the issuer. For investors,trust preferred stock is considered safer than other preferred's because dividends are paid, essentially, from interest paid to the trust by underlying bonds.Trust-preferred's generally have a certain fixed maturity date schedule.

Preferred stock issues may be treated differently for tax purposes, have a call price and feature many other qualities which are peculiar to the security. The investor absolutely MUST understand the qualities of a preferred security prior to investment. As many preferred stocks are thinly traded, the investor should always buy with a limit order. Selling some thinly traded issues could be problematic in a market free-fall.

There are approximately thirty investment-grade preferred securities with inflation protection characteristics in the market. Many of these securities offer a more handsome payout than TIPs.Buying below the call price could result in a modest capital gain if the security is redeemed. Here are a few favorites:

MetLife Preferred Series A (METpfA): $23.57/share, currently yields 4.29%. Inflation protection is 4.00% plus 1.00% over the three month LIBOR rate. Call price is $25.00 after 9/15/2010. Rated BBB-.

Prudential Financial Inflation-Linked Notes (PFK): $25.98/share, currently yielding 3.44% (interest paid monthly). Inflation protection is 2.40% plus the current U.S. Consumer Price Index (CPI). Matures 4/10/2018. Rated A-.

Tennessee Valley Authority Series A (TVE): $24.75/share, currently yielding 4.55%. Inflation protection is 0.84% plus the thirty year constant maturity rate (CMT). Not redeemable, matures 5/1/29. Rated AAA.

U.S. Bancorp Funding Trust IV (UBSpfD):$22.11/share, currently yielding 4.06%. Inflation protection is 3.50% floor or .60% plus the three-month LIBOR rate, whichever is higher.$25.00 call price after 4/15/2011. Rated BBB+.

Note: The few ETF's (such as PFF)featuring preferred stocks that are popular with retail investors do not make my recommended list at this time, because more than a few portfolio selections are trading over their call price. When inflation kicks up, that spells trouble.

January 11, 2011

January 11, 2011:December Housing Traffic Up. Why?

Credit Suisse has issued their time-tested monthly housing survey which covers over fifty major real estate markets in the United States. Credit Suisse compiles survey results from boots on the ground brokers who know their markets well. With this survey, after all data is put into the hopper, a score of 50 is historically average, with scores below 50 worse and over 50 better. The CS survey is my favorite housing tool. It is accurate, predictive and free of twisted jargon.

For December, 2010, home buyer traffic was modestly higher which was still at a very weak level, but better than the previous few months.Brokers reported that buyers were brought into the market by combination of negotiating a good deal and a fear that mortgage rates would continue to tick upwards (inflation tremors). On the downside, continued high stipulations for conventional mortgages have left even more buyers without a source to borrow funds. Overall, the traffic index increased to 29.1 in December from 22.1 in November. Home prices were up marginally to 23.0 in December from 21.6 in November. Credit Suisse does not believe that there will be any meaningful price increase for homes in the Spring, due to continued weak demand and a new wave of foreclosures slated to hit the markets, Credit Suisse also states the recent court mortgage documentation issue is apt to be resolved quickly.

Importantly, no markets showed abysmal traffic in December. Markets with the greatest improvement included Atlanta (to 33.0 from 19.0), Austin (to 39 from 23), Denver (to 35from 12), Houston (to 41 from 26), New York (to 33 from 18) and Seattle (to 41 from 23).

The CS home index pertaining to buyer traffic,home price,buyer incentives, home listings and the time to sell a home remain well below average except for home listings (to 51.2 in December from 41.3 in November).

For investors interested in home builder stocks, an interesting part of the survey had brokers nationwide rank twelve prominent home builders in order of preference (quality, price, value). From worst to best:

12. KB Home (KBH) (5%)
11. Beazer Homes (BZH) 2%
10. Hovanian Ent. (HOV) 5%
9. MDC Holdings (MDC) 8%
8. NVR, Inc. (NVR) 10%
7. Ryland Group (RYL) 10%
6. Meritage Homes (MTH) 13%
5. Standard Pacific (SPF) 16%
4. Lennar Corp (LEN) 17%
3. D.R. Horton (DHI) 22%
2. Pulte Home (PHM) 26%
1. Toll Brothers (TOL) 29%

January 04, 2011

January 5, 2011: Cuba Drills Deep, Losers And Winners

Well, well. In early March, Cuba will commence with deep water drilling under contract with Repsol (YPF)and Statoil ASA (STO), using an older rig that was recently rehabbed by the Chinese. Reports indicate that it has fewer safety features than the BP's infamous Deepwater Horizon. The site is located a scant sixty miles southeast of Key West, Florida.

How can this be? Thank President Jimmy Carter, who etched a 1977 agreement essentially splitting the Straits of Florida 50/50 between the US and Cuba. Expect scores of deep water wells around Cuba's multi-billion barrel oil pool over the next few years. Eight companies are presently working to quickly expand Cuba's fossil fuel capacity, including Brazil's Petrobas (PBR) and Sherritt International (SHERF.PK).Venezuela,India and China oil interests have diminished Sherritt's originally large role, thanks to providing Cuba with goodies necessary to keep the Cuban economy afloat. Spain has done likewise, based upon my observations as a legal visitor to Havana indicate.Many foodstuffs in the state-run groceries were Spanish and Brazilian in origin.

Winners in the deep water projects are the above-named companies and government-owned oil production companies, Hugo Chavez (he is already being thanked with billboards in and around Havana) and the Castro Brothers, for whom the oil revenue comes in the nick of time to avoid further economic distress.

Losers will be the unprotected, rich fishing areas and beaches of coastal North Carolina, which is where oil spilled from the first deep water drilling projects will almost certainly have a profound impact. Ironically, a modern Wilmington, NC container port that would have provided that economically depressed area with thousands of jobs and an enhanced Coast Guard environmental presence to contain oil spills has been effectively shut down by Democratic Congressman Michael McIntyre, environmental extremists and an organization called NoPort. So much for unintended consequences. Additional losers will be American deep water drilling companies that are not able to extract oil in and about Florida, which may be drawn into some Cuban deep water wells, all American coastal areas adjacent to the Gulf of Mexico (Cuba is planning wells from east of Havana to the western tip of the island near the Yucatan Peninsula), and the Cuban people who will see small benefits at the market but a further entrenchment of the communist regime.

Investors are likely to see opportunities in developing the woeful Cuban infrastructure with companies such as Halliburton (HAL) and interior mineral extraction by companies such as Freeport-McMoran (FCX). Certainly, the situation warrants investor interest, with many companies bidding to partner with the Cuban leadership to tackle problems on an island with one foot in the 1950s and the other foot implanted in the groin of the U.S. as the money from oil rolls in.

December 18, 2010

December 19, 2010: Bait And Switch, Time To Exit (Most) Bonds

Every investment has a season. For bonds, the season is "Fall". The vast majority of bond holders of almost all sorts have seen their values head south. What to do? Odds are, one should not take the bait of doubling down on bond holdings, but should rotate to a portfolio containing a hefty percentage of dividend-paying common stocks that hold hope of maintaining absolute value plus a capital gain.

I believe that being flexible is superior than being locked into one strict index ETF as the world economy moans, groans and lurches forward. Asia should be overweight,Latin America should be underweight as history tells us that periodic confiscatory politics of our southern neighbors have often times destroyed the best-laid Latin American investment scheme. Europe as a stand-alone is also off limits, although investors know that there is a bleed-through of many Asian and North American companies with Euroland. Within these arbitrary (some would argue, capricious) parameters, here are a few ETF investment ideas to pursue:

POWERSHARES DIVIDEND ACHIEVERS PORTFOLIO ETF (PFM): This $188m market cap fund corresponds to the price and yield of the Broad Dividend Achievers Index. A minimum of 80% of the fund's holdings have raised annual dividend payments for ten or more consecutive years. Trading at $13.98/share PFM has a 3.75% yield. It features a 4-Star Morningstar Rating.

GUGGENHEIM MULTI-ASSET INCOME ETF (CVY): This $356m market cap fund corresponds to the Zacks Multi-Asset Income Index, which includes U.S. stocks, ADRs, REIT's, MLP's, CEF's and traditional preferred stocks, all paying dividends. Trading at $19.91/share,CVY has a yield of 4.50%. It features a 4-Star Morningstar Rating.

VANGUARD DIVIDEND APPRECIATION INDEX ETF (VIG): This $4.4b market cap fund corresponds to the Mergent Dividend Achievers Select Index.Trading at $52.80/share, VIG has a yield of 2.02% The index measures the investment return of common stocks of companies that have a record of increasing dividends over time. It features a 5-Star Morningstar Rating.

POWERSHARES DYNAMIC SMALL CAP VALUE PORTFOLIO ETF (PWY): This small $65m market cap fund corresponds to the Small Cap Value Intellidex. Trading at $15.08/share, PWY fund has a yield of 3.45% This index is comprised of 100 U.S. small-cap value stocks selected primarily on the basis of their capital appreciation potential as identified by the AMEX (the Intellidex provider). Morningstar has it assigned only a 2-Star Rating, however, I believe this index hits a sweet spot as we head into 2011.

WISDOMTREE PACIFIC EX-JAPAN EQUITY INCOME ETF (DNH). This small $77m market cap fund self-servingly corresponds to the Wisdom Tree Equity Income Index. Trading at $59.01/share,DNH has a yield of 6.51%.Morningstar has it assigned a 4-Star Rating. Finding a high yielding far eastern fund is not common. The yield should mitigate serious downside risk compared too other funds focusing on that region.

VANGUARD HIGH DIVIDEND YIELD INDEX ETF (VYM): This $1.0b market cap fund tracks the performance of the FTSE/High Dividend Yield Index. Trading at $42.32/share, the fund has a yield of 2.61%. Morningstar has it assigned a 4-Star Rating.

WISDOMTREE EMERGING MARKETS SMALL CAP DIVIDEND ETF (DGS): This $879m fund tracks WisdomTree's own Emerging Markets Small Cap Dividend Index. Trading at $52.91/share, the fund has a yield of 3.42%. Morningstar has it assigned a 5-Star Rating.

The investor is encouraged to examine the moving parts of each fund (and any fund, for that matter) so there is not unintentional overlap of sectors or individual holdings. I have deliberately avoided TIP funds. I prefer to buy TIPS directly from the Treasury to avoid dilution and unnecessary expenses. Further, investors can find some preferred stocks with better-than-treasury inflation features. Metropolitan's MetpA and the Prudential' PFK come to mind.

Even though the Fed speaks of holding interest rates close to zero, the money printing presses here and elsewhere in the world are minting 24/7. Inflation is the easiest way for a government to monetize extreme debt to (in their mind) a resolvable level. This bodes disaster for bond holders, but is a mild blessing for holders of companies who can raise prices (and dividends). For investors diversified with dividend stocks in strong economic regions and sectors, opportunities to be successful are self-evident. Despite higher expenses,appropriate traditional mutual funds should also be on your shopping list to accomodate this portfolio scenario.


December 08, 2010

December 11, 2010: Momentarily, Housing Barely Trends Up

The November Credit-Suisse monthly housing survey of fifty U.S. markets was released yesterday. Although the sector is still a mess, there were a few bright spots, as illustrated below. Still, interested parties in my world are not celebrating yet. They see banks continuing to withhold foreclosures from the auction block, maddening tight policies on foreclosures, short sales, financing stips and the availability of amortized credit. The unemployment rate,job insecurity, the sum of all local/state/ federal taxes and a sense that property values will continue to drift lower adds further angst to the mix. On the plus side,a temporary taxation regimen may be emerging from the carnage of the Beltway and may propel some further positive movement in the housing sector.This, along with buyers sensing that current interest rates and home prices may be a close-to-final opportunity to execute real estate deals.

Here is some selected data from the exhaustive and proven forward looking report: With a score of 50 being the norm, the overall foot traffic index moved upwards to 22.1 from 16.3 in October. pressure on home prices continues, with high inventory likely to add to challenges to sellers. The home price index crept upward to 21.6 from 20.5 in October. Credit Suisse expects this will continue for the next several months as many sellers choose to lower prices in order to complete a sale, and also into 2011 when foreclosures will likely return to the market, The home listing level (inventory) index stood at 41.3 vs. 35.5 in October.

In major markets, the survey indicated that Dallas (traffic index up to 28 from 14) and Houston traffic index of 26, up from 3 in October) along with better trends in Atlanta, Ft. Meyers, Jacksonville, Phoenix, the Inland Empire and Washington, D.C. Many other markets are problematic with a declines in all categories mentioned above at odds with the modest still-below norm results for the areas mentioned above.

The takeaway is there is no apparent lasting trend upwards that some have been predicting. The percentage improvement in all areas remains well below historic norms. No builders or sub sector material providers to the construction industry are recommended. On a valuation basis, investors may want to look at Home Depot (HD) as the home improvement business is picking up in property interior repairs, perhaps in part because of new home buyers and investors fixing up the trashed foreclosed homes purchased.

November 11, 2010

November 11, 2010: Credit Suisse Nixes Housing Optomism

The monthly Credit Suisse Housing Survey was released for October. This dense, reliable document reports on each of the fifty largest real estate markets. Relying upon boots on the ground seasoned contributors, the monthly survey is considered essential for many real estate practitioners. The October results overall show continued snail's pace traffic and sales volume. With a score of fifty(50) being the norm, buyer traffic declined to 16.3 from September's 17.9 - a fresh multi-year low. This comes at a time when there are generally more homes on the market than in September.

Specifically, CS reports that the down tick in October prospective buyer traffic guarantees that the next several months will not foster any hope of a recovery in the non-commercial real estate market with seasonality factored in. Brokers cite buyer uncertainty, an anticipation of still lower price points and worries about the ramifications pertaining to the backlog of foreclosures as major issues. CS believes that home prices are apt to fall even through the Spring of 2011 as banks unload further inventory after the traditionally weak sales months of November-March. Of all the markets surveyed, Austin, Texas showed noteworthy improvement while Ft. Meyers, Florida and Washington, D.C. worsened from previously depressed levels. A strong majority of the regions have seen increased buyer incentives, perhaps mitigating even a larger market downdraft.

Here are a few markets in greater detail. A score of 50 is average:

New York-Northern New Jersey buyer traffic fell from 22 in September to 16 last month. This is the lowest level recorded since November of 2008. Home listing were marked at 23 vs. 15 with sales time increased - both negative indicators. "Sellers are unwilling to accept reality. Buyers know prices are falling", according to a CS source. Another source reports "Buyers know the economy is not improving and that scares them."

Seattle, Washington buyer traffic came in at 30, which was below brokerage expectations given the current price points. Home prices continue to fall, scoring a 25 which reinforces continued lower prices. Homes are taking longer to sell with a score of 25. A quoted source for CS states that "the poor job outlook does not sit well with buyers. They have little confidence."

Chicago, Illinois buyer traffic was unchanged from September at 12. Reports from the field indicate that "the foreclosure freeze dampened the market and the new investor guidelines have hurt substantially." The home price index checked in at 11, the lowest ever on record for Chicagoland. The time to sell a property was ranked a 18, indicating an almost stagnant market. As with many of the markets, "buyers are waiting for things to bottom out."

Miami, Florida buyer traffic decreased to 19 in October from 29 the previous month. The economy and consumer confidence topped the list of reasons not to buy. On the bright side, home listings remained stable compared to September. With increased time necessary to sell a home, further price declines appear to be in store for this area (and almost everywhere else).

Denver, Colorado showed slightly better traffic with a 16 compared to a 13 in September. Both numbers are abysmal. Lower mortgage rates in this area are listed as the primary reason to buy. Prices declined to a 18 from 22 the previous month. A weak employment situation and financial insecurity are high on the list of why homes are not moving in spite of continuing price cuts.

Dallas, Texas showed slightly improved buyer traffic, increasing to 14 from 12 in September. The home inventory appears stable, but CS believes that falling home prices and a more stable inventory rank of 46 may be a temporary statistic pop because of seasonality and the removal of foreclosed listings due to bank re-evaluations. Time to sell came in at 11 from 17 in September, so the data in total is poor.

The takeaway for October is that economic stability,consumer confidence,properties priced to market and low mortgage rates may not be enough to jump start the industry until the mass of foreclosures dwindles and the national mood is encouraged by positive workmanship from political leaders at all levels.

October 24, 2010

October 25, 2010: Five Overlooked Dividend-Rich Stocks

Investors are generally a creative lot. We yearn for our inner voice to approvingly utter the classic Indiana Jones line when the old knight tells Indiana Jones, upon selecting the correct chalice from the many pretenders, "You Have Chosen Wisely". But there is more to the passion for many. I enjoy reading old predictions from the likes of Barrons, Forbes, Fortune, The Wall Street Journal and Money print media - and in retrospect find humor in how most did not stand the test of time. I also enjoy a few bloggers and journalists such as Roger Nusbaum and Malcolm Berko, and brief moments of the talking heads on CNBC and the Fox Business Channel (much improved in recent months with the addition of Charles Gasparino). Financial opinions and chatter, for me, is therapeutic. Saturday,I read an article touting a long term retirement portfolio strategy. While I did not agree with the allocation and diversification model, five securities appealed to me for high income with growth potential. Perhaps you may find them worthwhile to explore. Here they are:

Copano Enerrgy LLC (CPNO):Yielding 8.10% and trading at $28.60, this $1.9b energy company provides a myriad of essential and value-added midstream services to natural gas producers. Copano's hard assets include 6,400 miles of natural gas gathering and transmission pipelines and seven natural gas processing plants. CPNO also operates over 300 miles of NGL and crude oil pipelines. The company operates in Oklahoma, Texas and the Rocky Mountain region.

Atlas Pipeline Partners LP (APL):Yielding 7% and trading at $20.07, this $1.1b energy company is a provider of natural gas gathering services in the Anadarko and Permian Basins. It owns and operates eight natural gas processing plants with a capacity of over 900 million cubic feet/day and a treating facility with approximately 200 million cubic feet/day. It partners with other companies such as Laurel Mountain to leverage interests.

TC Pipelines LP (TCLP):Yielding 6.20% and trading at $48.43, this $3.2b company was formed by TransCanada Corporation to manage energy infrastructure businesses in North America. TCLP earns revenue from the transportation of natural gas through investments in natural gas pipeline systems in the United States, Eastern Canada and Mexico. Partners include the aforementioned TransCanada and other such as ONEOK Partners and the Northern Border Pipeline Company. It owns Tuscora Gas Transmission Company and North Baja Pipeline.

Compass Diversified (CODI):Yielding 8.22% and trading at $16.55, this $691m company acquires controlling interests in businesses and actively manages them. CODI has six business segments, Compass AG Holdings, American Furniture Manufacturing, Fox Factory, Anodyne Medical Devices, HALO Branded Solutions, and CBS Personal Holdings.Recent acquisitions include Liberty Safe and Security Products and Circuit Express.

PennantPark (PNNT):Yielding 9.37% and trading at $11.10, this $351m company is a closed end, eternally managed non-diversified investment company. The investment objectives are to generate both current income and capital appreciation through debt and equity investments, primarily in the United States using such techniques as mezzanine debt, senior secured loans and equity investments.

October 11, 2010

October 11, 2010: Credit Suisse First Boston September Housing Survey: Ouch

Amongst the first to release valuable data and forward-looking prognostications on a comprehensive roster of nationwide real estate markets is CSFB. I have followed this report and have found it to be long on facts and observations from those with boots on the ground and short on political spin.

September results were released late last week, and they vividly present a toxic brew of falling sales, prices and a malaise present in buyers, sellers and intermediaries that is too ingrained to be wished away.

Real estate agents noticed a marked decline in prices at the end of the summer. With a score of "50" being average, the scale stood at "22". CSFB anticipates a continuing drift downwards as builders attempt to capture as much business as possible before the winter months. An already high (and rising) inventory is apt to worsen the situation. Look for increasing incentives and a lowering of prices, which is not good news for stockholders of big box builders such as D.R. Horton, NVR, Pulte and Beazer.

Although the overall home market was very weak, there was a slight monthly uptick in Washington D.C. and Phoenix. Worsening conditions prevailed in areas such as Dallas, Jacksonville and Southern California. No sign of a rebound is detected by CSFB nationwide.

Of increasing concern is decreased buyer traffic. The following is illustrative of the magnitude of this issue. With "50" being the norm, here is a bi-monthly sample:

January 2009: 36.5
March: 36.0
May: 45.4
July: 43.4
September: 44.8
November: 43.0
January 2010: 43.5
March: 43.1
May: 31.5
July: 19.1
September: 17.9

Here are comments from the field:

Atlanta - "Poor economic conditions and higher unemployment translates to terrible traffic."
Austin - "People have pre-election jitters. They want more clarity before they buy."
Charlotte - "The number of showings on my listing has dropped 60%. There is no motivation."
Chicago - "Buyers think there is still more downside to price."
Denver - "People are giving up hope because they don't think they can get financed."
Ft. Meyers - "Buyers keep mentioning the economy. They are concerned."
Las Vegas - "My clients are waiting for the bottom. They don't think we are there yet."
Los Angeles - "Buyers are taking their time to make a decision because they have such as selection to choose from."
Minneapolis - "Economic uncertainty has been a major problem."
Washington D.C. -"Move up buyers can't sell."
Boston - "Economic uncertainty has people not even thinking about new homes."
San Francisco - "There is no urgency and consumer confidence is awful."

There has been recent chatter about the halting of foreclosures by financial institutions due to technical issues. Several of my mortgage banker friends have an interesting take on the action. In their view, there is such a backlog of foreclosed properties dead on the market, and so many in the pipeline, banks have concluded that it is better to keep people in a house than leave it to plethora of bad things that can occur if it is unattended. Under this scenario, banks are not stopping foreclosures for any reason other than to mitigate losses.

September 30, 2010

October 1, 2010: 12-Pack, Worthy Dividend Income Portfolio

I have been a long time proponent of a two portfolio investment approach. Following in the footsteps of Harry Browne, who brought the idea to the fore in the 1970s, I assembled a Permanent Portfolio which was designed as an all-season capital preservation, modest appreciation vehicle, and a Speculative Portfolio which was designed to place bets on high risk securities that offered the possibility of high reward. Given the era in which we live, perhaps it is time to adjust the mindset of the concept and add a third leg to your investment scheme. You may want to consider an Income Portfolio which would be designed to obtain a current satisfactory yield using a mix of ETF's and stocks, with an awareness of the possibility of deflation, inflation and currency fluctuations.

If this tweaks your curiosity, examine the following twelve securities for starters in your search:

PIMCO Enhanced Short Term Maturity Strtegy ETF (MINT) $100.83/share 0.84% yield
Best used as a money market-type fund.

IShares S&P U.S. Preferred Stock Index ETF (PFF) $39.78/share 7% yield
Nice yield, but more than a few securities are trading over the call price, which
could negatively impact long term performance.

SPDR Barclay's Capital Convertible Securities ETF (CWB) $38.87/share 3.99% yield
Ditto the PFF red flag.

Guggenheim International Multi-Asset Income ETF (CVY) $19.18/share 4.69% yield
The old "yield hog" ETF. Excellent basket of US (78%) and International stocks.

Vanguard Short Term U.S. Bond ETF (BSV) $80.74/share 2.34% yield
Vanilla, ultra low expense ETF.

Market Vectors Emerging Markets Local Currency Bond ETF $27.03/share 4.79% yield
Interesting foreign currency exposure with an attractive stated yield.

One to watch:

Alerian Master Limited Partnership ETF (AMLP)
Basket of twenty-five midstream energy MLP's.

Preferred Securities may well be an integral portion of the Income Portfolio. Here are four rules to follow in their selection:
Yield a minimum of 2.25x that of the Vanguard Short Term Bond Fund ETF.
Investment grade rating.
Purchased below the call price.
Sufficient share volume to facilitate a reasonable trade (buy on a limit order, sell when security trades 3% above the call price), such as:

Deutsche Bank Contingent Capital Trust Fund II (DXB) $24.56/share 6.65% yield

National City Capital Trust II (NCCpA) $24.91/share 6.63% yield

KeyCorp Capital Enhanced Trust IX (KEYpE) $24.94/share 6.77% yield

Securities with a degree of inflation protection are in order, such as:

Metropolitan Life Preferred A (METpA): $23.32/share 4,36% yield with inflation protection features.

PIMCO 1-5 Year U.S. TIPS Index Fund ETF: $52.28/share 1.58% yield +/-, providing a conservative measure of inflation protection.

Certainly, there is a universe of common stock that provides dividend income, be it more or less. There are many avenues to devise an income portfolio - different from the somewhat eclectic teasers above. My belief is that total returns from a common stock portfolio will be nowhere near the 8% assumed by pension funds and other investors over the coming years. Tangible returns from a separate Income Portfolio, coupled with the Permanent and Speculative Portfolios will add both discipline and thoughtfulness to your investment scheme.