September 29, 2008: The Pain, The Pain

On days like today, I recommend old sit-coms, Pink Panther movies, some James Bond....

and, a bottle of Jack.

Time to sit and do nothing until the air clears. If you had to do something late today, it was already tardy!

September 28, 2008: Who Is The Fearless Leader?

As many of us followed the BAIL OUT - oops - RESTRUCTURING of financial markets here, there and everywhere, I was reminded of Rocky The Flying Squirrel, his companion Bullwinkle The Moose, Dudley Do Right, Aesop and their arch enemies with strange accents, Boris and Natasha, following instructions from their Fearless Leader.

The Squirrel? Hank Paulson - trying to beg/plead everyone into a deal to save the peace.

Bullwinkle? Bumbling and stumbling Ted Bernanke finally getting it right to help Rocky.Pulls a squirrel out of his hat.

Dudley Do Right? He may resemble John Kerry, but I say George Bush - determined to win the day in spite of himself.

Aesop - Barack Obama, the Most Merciful and Magnificent, Our Savior - who left his white robe at the doorstep of the White House, but not his copy of the Republican draft counter proposal that was sent to him in a clandestine way by a Goldman Sachs democratic lapdog. Barry then tried to take over the meeting, which of course ended in abject confusion Thursday past. Can't wait to see him negotiate with Putin.

Boris and Natash - Harry Reid and Nancy Pelosi. For reasons too obvious to bother listing.

Fearless Leader - Who else?? Barney Frank. Lollipop himself. After being the architect of the subprime loan programs that got us into this mess, Barney stakes the high gwound, er, ground and shows his masculine side becoming the obstinate expert on solving the crisis.

John McCain? Mr. Magoo. I'll reserve the right to hit him over the head later.

Does it get any sweeter than this?

My bet. Tepid markets, but by incorporating aspects of the Republican plan, it turns into a bi-partisan affair.

So much for my late night stab at humor. You either laugh, or you cry.

September 27, 2008: A Good Example

I was fortunate to have a teacher who played under the greatest symphony and opera conductor of the 20th century, Arturo Toscanini. A brilliant tyrant, he never conducted using a score on the over five hundred works in his repertoire.Entire works, includind full operas, were memorized. You can Wikipedia or Google him to review his amazing career.

In his mid-70s during the 1952 NBC Symphony season (yes, there was culture on mainstream television at one time), one of his orchestra principal players had lunch with the Maestro:

"I played for him for six years. He yelled at me a lot, but as a father. After awhile I became, from those in the orchestra, possibly closer than anyone else to Toscanini. Away from the podium, he was like a child. He loved music. In his study, he would show me Puccini's snuff box (he premiered many of Puccini's operas), Verdi's eye glasses (ditto) and the like. He treasured those things.

One day I was visiting him and he asked me to stay for lunch. I could tell he was very tired, and when we had finished our business, I told him that I didn't have to stay. I said, "Maestro, you look tired. Why don't you take a nap?

He said, "I've been up since five o'clock this morning studying this symphony". The symphony was Beethoven's Fifth.

I said, "How many times have you conducted that?"

He answered, "Oh, hundreds."

I said. "And you're still studying it?"

I loved his answer. He said. "Well. I'm always afraid I may have missed something." This is how he really felt about music."

And that is how all of us should feel about our approach towards investing.

September 25, 2008: A Port In A Storm: TDX Independence In Target ETF

Most of us agree that it will take time (the length of time, who knows?)for world markets to settle, and for the acts necessary to restore confidence in U.S. financial leadership to take hold. During this time, what is an investor to do?

I have written extensively in my blog about ideas to cope and profit in today's tough markets for the past few months. Most strongly, I feel actively managed rental real estate (homes to apartments) or, passively managed real estate through iShares' NAREIT Residential Real Estate Fund (REZ) is a winner. I have also mentioned attractively priced ETFs like PowerShares' Preferred Financial ETF (PGF), and others for safety such as iShares'Lehman 1-3 year Treasury Bond ETF (SHY), iShares' iBoxx Investment Grade Corporate Bond ETF (LQD), Vanguard's Short Term Bond Fund (BSV) and a thinly traded micro-sized ETF that deserves more respect, PowerShares'Autonomic World Growth ETF (PTO).

Another appropriate investment for consideration now is XShares' TDX Independence In Target ETF (TDX), a $25m Fund that is a great place to park some of your hard-earned money. This ETF is actually billed as a one-stop solution to target date investing, using Zack's In-Target Lifecycle Index as it's measure. The index draws from three broad asset classes: international equities, domestic equities and fixed income securities. The fact that XShares touts TDX as an ETF "designed for investors who are at or near their target date of retirement at the time of investment" gives you a certain idea that this portfolio is designed to be conservative and wealth-preserving, while throwing off a dividend. Approximately 85% of the ETF is in fixed income, primarily U.S Government obligations with a dash of AAA Corporate Bonds. The remaining 15% is in U.S. equities with a world presence, Foreign Securities and A through BB-rated Bonds. TDX is rebalanced annually, or quarterly in volatile times. The present dividend is about 3%. I like this mix for the time being.

Trading at about $25.00/share, TDX holds 368 securities and has a volume of approximately 16,000 shares per day.

There is a time and place for prudence. TDX will not make you rich. But it will allow you to sleep at night as a holding within your diversified portfolio.

September 22, 2008: Ruminations

Is it only me, but do you sense that the current crisis of confidence in our economy is going to manifest itself in ways we have not witnessed for decades?

Every generation or two, a financial panic rips through our country. Panics in the nineteenth century were quite horrid. Without a basic social safety net, thousands died or had their lives fractured in unalterable ways. The sleaze on Wall Street was worse than today in terms of totally unregulated greed. Not only were stocks manipulated, but the entire stock exchange system was in the hands of a few men.

This time, the financial mess is international and moving at warp speed.No one can predict with certainty how things will be sorted out. I believe we are in for a few years of depressed economic activity, and perhaps a realignment of the world monetary system. After a very long run, the dollar may have seen its best days. With the printing presses humming at the Treasury, look for a spike in inflation. A big spike.

That said, to panic is to court financial disaster. I have started to write about potential safe havens for your investments. I would begin to look at ETFs or Mutual Funds that diversify your currency to other countries and that pay a dividend. I strongly believe that rental real estate, appropriately purchased, will be a huge winner in the new economy. And, I believe that generally accepted portfolio diversification models will be adjusted significantly to include more foreign exposure.

This crisis shall pass. The investor who succeeds will be an individualist that will insist upon more than domestic stocks and bonds in a portfolio - and who will think holistically about portfolio investments in vehicles other than paper securities.

September 21, 2008: Swiss Gnomes: EWL To Relieve Portfolio Turmoil

As reported, during the unraveling of the worst of last week's financial crisis, money was looking for safe havens. Certainly, precious metals will fit that category, but I believe that for many investors a healthy dose of IShares' Switzerland (EWL) may worth a look to cure high anxiety.

First, the currency if Switzerland has traditionally been viewed as solid and less prone to wild the gyrations of a volatile financial crisis elsewhere. Second, I have always liked the portfolio of this ETF. The companies are gold standards in their league from top to bottom (EWL holds forty-one securities). EWL, while under performing modestly over the past several years, is poised for growth in a new, more fiscally regulated world. Third, EWL has never been a disappointment to me as a core holding in my permanent portfolio. Long term, being able to sleep at night is a feature not lost on the portfolio holding this ETF.

Currently, about 45% of EWL's holdings are in three stocks:

Nestle (19%)
Roche Holdings AG (13%)
Novartis (13%)

other top holdings include:
UBS (5%)
Credit Suisse (5%)
Zurich Financial (5%)
ADD Ltd. (5%)
CIE Financial (4%)
Syngenta Ag. (4%)
Swiss Reinsurance (3%)
Synthes Inc. (3%)
Holcim Ltd. (2%)
Swisscom Inc. (2%)

Sector breakdown includes:

Health Care 31.87%
Financials 21.90%
Consumer Staples 18.64%
Industrials 10.80%
Materials 7.94%
Consumer Discretionary 5.57%
Telecommunications 1.91%
Information Tech. 0.77%
short term securities 0.06%

I think the sector balance, Swiss Franc currency and stability of the companies in the holdings of EWL lend to serious consideration of the ETF at this time. Even UBS, the one company that has flopped on this index, appears to be headed in the correct direction.

EWL,following the MSCI Index, features total assets of over $392m. The ETF trades at $22.41/share. Expenses are .51%. As with almost all ETFs. I recommend buying using limit orders about a penny above the last trade. Spreads on ETFs can be nasty for the less knowledgeable investor.

September 16, 2008: Lehman, Merrill, AIG and ?...the new WMDs

The obvious focus by just about everyone is on the domestic ramifications of the collapse of some of Wall Street's storied financial giants.

It is my belief that the decision on what financial entities to bail out and what financial entities to let sink into oblivion is being orchestrated with an eye towards international power politics. The United States and all of our allies will suffer to a greater or lessor degree - but all will recover in comparatively short order from the present market turmoil.

What is going on within our two main international adversaries, Russia and China? Chaos.

In fact, when it comes to containing both countries, the selected demise of companies such as Lehman may be as potent as a WMD.

Tightening access to international capital and huge stock losses are hurting the government-selected wealthy in these countries as well as state-owned enterprises. In fact, according to Bloomberg, there are calls by "businessmen to heed Western complaints over Kremlin policy" concurrent with the sharp drop in the value of their assets - hard and soft. The stock market is plunging, capital is fleeing and there is a severe shortage of liquidity in the banking system. And look at the recent commodity price downdraft, especially in oil.

China is in the same boat.

Both countries may well hold a lot more debt in or contingent to companies that are being allowed to fail than is known by the average analyst - but not lost upon our government agencies that serve to protect us.

I have not heard a convincing case as to why the United States Federal Reserve and Department of the Treasury are selectively allowing financial failures. With our troops spread thin and China and Russia acting in an increasingly belligerent fashion, the financial crisis may well be an opportunity to inflict a powerful warning shot across their bows. As with Reagan and Star Wars bankrupting communist dictators in the 1980s, Bush and Selective Financial Failures may have presented an unintended opportunity to smack down our primary adversaries.

September 14, 2008: Spreads Encourage High-Yield Risk

Most readers of my almost daily blog are aware that I have been searching for securities that promote a high yield without assumption of even higher risk. Until recently, the risk/reward basis for these issues, especially financials, was not worth the yield stretch. I admit to being early on several financial securities and paid the price. Investors know that the best time to buy distressed high-yielding instruments is when yields are going down, which indicates that the worst is over. I admit that this is not yet the case, but better to be prepared to strike when things improve rather than play catch-up to the cycle.

With the drumbeat of companies going belly-up, the spreads are now wide enough between high and not-so-high quality issues to warrant some investigative research leading to speculation. The strength of the dollar has also opened up opportunities to invest in blended worldwide higher-yield funds that are managed rather than indexed.

One fund I like now that the Fannie Mae and Freddie Mac situation is close to becoming resolved is the Fidelity Strategic Income Fund (FSICX). FSICX has been around over ten years and has a decent track record with the current portfolio of over $5.4b well-positioned to lurch forward with both good income and modest capital gain returns. I especially like the fact that only 4.5% of the portfolio is in the financial sector. Match that against other worldwide income funds. Granted, about 12%of their holdings are rated junk, but FSICX does maintain about 39% in government and AAA corporate securities. Nice blend for the aggressive income investor. 15% of their government holdings are in Fannie Mae and Freddie Mac bonds, which should be whole by the time Uncle Sam bails the bums out of hock. Expenses are higher than ETFs, presently at .74%. I believe it is worthwhile to have these type of funds managed given the current environment and will pay up for active management at this juncture. FSICX's 30-day annualized yield is 5.74%.

If you are considering individual issues, I strongly recommend you stick with short maturities and companies that have a track record of digging themselves out of holes. Examples of these would include:

Sealy Mattress 2014 yielding about 12.50% with EBITA of 4.1
MGM Mirage 2014 yielding about 10.30% with EBITA of 5.7
Dole Food 2010 yielding about 11.40% with EBITA of 6.7
Unisys 2012 yielding about 11.80% with EBITA of 1.7
Royal Carribean 2016 yielding about 9.90% with EBITA of 4.4
Beazer Homes 2011 yielding about 18.00% with EBITA of 17.8

If a bailout or financial package comes the way of the big three automakers, I would take a look at the ultimate roach hotel security, GMAC SmartNotes. Priced in $1000.00increments, they are all over the map in yield. Many are very difficult to sell at any price because they are not secured, so you had better plan to hold them until maturity. With so many customers (GM employees, retirees and small investors) holding SmartNotes in pension accounts, I think General Motors and Cerebus of GMAC Capital would be reluctant to leave these folks holding the bag. If you believe that notes will be redemmed at maturity, take a strong look at those due to mature from 2009-2011. The investor willing to dig through the mass of SmartNotes may be rewarded with individual issues that are mispriced vs. other SmartNotes, thus presenting a potential excellent highly speculative opportunity. These are not for money you hold precious to your financial and mental health.

September 11, 2008: Bank Exposure To FNM/FRE Securities

Much has been made of bank exposure to FNM and/or FRE securities exposure. This is to be expected given the current state of affairs. The following examples of financial institutions and their exposure, as disclosed on or about July 20,2008 should be noted and applied towards any financial security considered for investment.

1.$Exposure 2.Pref. 3.Debt. 4.% of tangible equity


Wells Fargo (WFC) 480m 480m 0 n/a
Fifth Third (FITB) 68m 68m n/a 1.2
U.S. Bancorp (USB) 97m 97m 0 0.9
BB&T (BBT) 310m 0 310m 4.4
Sovereign Bancorp (SOV) 823m n/a 623m 14.5
M&T Bank (MTB) 352m 162m 190m 11.3
Synovus Financial (SNV)100m 100m 0 3.4
Huntington (HBAN) 350m 0 350m 14.8
WestAmerica (WABC) 45m 0 45m 16.4%
Valley National (VLY) 70m 70m 0 9.2%
EastWest Bancorp (EWBC)45m 0 45m 6.3%
Wilmington Trust (WL) 42m 0 42m 6.2%

These are but a few examples of financial institution equity tied up in the FNM/FRE situation. The point being, investors should inquire as to financial institution exposure to risky securities, and especially the amount of FNM/FRE exposure, before speculating in the stock. The latest available data may an incorrect picture of current circumstances. But one has to start somewhere, and the financials with the cleanest balance sheets should reign supreme as portfolio candidates.

Being able to raise capital presents another issue. Two days ago, I listed several regional banks that I believe are worthy of research leading to speculation. While there are doubtless others, many other banks simply will not be able to raise sufficient capital to maintain operations. 19% of the top fifty banks have cut dividends this year, and more may follow as the dividend payout rate for large banks is now at 62% of the historical median, compared to 42% norms of previous eras. BAC and SNV appear highly vulnerable to a dividend cut, to name but two. Total return of many will be limited.

Banks exposed to GSE preferred stock and other potential capital pressure are out there,but overall I believe the situation is manageable. Certain small banks that have problems raising capital and/or have a high exposure to GSE's may flop.Most at risk appear to include EWBC, MTB, SOV, VLY, WABC and WL.

This is not to say that the investor with a speculative inclination should not take a flier on banks that may turn out to be winners with total returns to make one appear to have been brilliant. What I am stating is that careful examination of current exposure to what amounts to piles of financial manure needs to be researched to avoid stepping into the dung as some proclaim the worst to be over in the financial sector.

September 8, 2008: Following A Genius

Some advisors, commentators and talking heads seem to have the touch, and some don't. No one is correct all the time, nor is anyone always wrong.

Individuals on occasion have a special talent for imagining possibilities for the future that others overlook. However, that doesn't mean they can predict the future reliably or in any profitable detail.

Even the best speculator will be wrong a good part of the time. For this reason, however great the talent may be, the speculator will not succeed without a strategy that allows for losses.

Unfortunately, many gurus who may have a good feel for the market are unconcerned about strategy. Following their suggestions consistently could lead you to bankruptcy.

You can't succeed by simply doing whatever the genius is doing. Nor should you automatically bet against the chronic loser. The loser now and then will miscalculate and actually do something correctly.

It's worth knowing what the above are up to. When you are about to stake a speculative position in the market, you'll want to re-examine your plans if you find a guru you respect is taking an opposite position - or if you find you are marching hand-in-arm with a perennial loser.

Using independence with constant checks and balances, you can learn to be a smarter speculator (and investor) who will not lose the farm.

September 8: Time To Dabble In Regional Banks

With the financial landscape shifting under recent news, especially the quasi-nationalization of Freddie Mac and Fannie May, I believe that it is time to speculate on selected regional banks for both dividend and total return over the next few quarters and beyond. Notice that I say speculate, as investors deep down inside know that there will be a continuing fallout as worthy financial institutions survive and those fatally contaminated flop.

Here are a few regional financial choices for you to research. They shed a nice dividend that appears supported, trade at a decent volume per day and have a successful niche market, excellent management, or both, indicating hope for future prosperity.

S&T Regional Bank (STBA) trading at $35.23/share with a yield of 3.44%.

Sterling Bancorp (STL) trading at $16.80/share with a yield of 4.52%.

First Commonwealth Financial Corp. of PA (PCF) trading at $12.59/share with a yield of 5.40%.

FirstMerit Corp. (FMER) trading at $21.82/share with a yield of 4.93%.

UMPQUA Holdings Corp. (UMPQ) trading at $15.49/share with a yield of 4.61%.

First Horizon National (FHN) trading at $12.47/share with a yield of 6.42%.

Evans Bancorp (EVBN) trading at $16.85/share with a yield of 4.87%.

Colonial BancGroup (CNB) trading at $8.00/share with a yield of 4.75%.

Imperial Cap Bancorp (IMP) trading at $10.25/share with a yield of 6.22%.

PacWest Bancorp (PACW) trading at $27.27/share with a yield of 4.24%.

Regional banks make a sensible investment. As the big box banks are hampered adjusting to local markets and tastes, those above and other regional banks should, by nomenclature, be more familiar with the markets they serve and thus able to offer product and risk avoidance techniques that may prove to be more adaptable and profitable. Studies show that people and businesses often choose banks for their accessibility and familiarity in the neighborhood. In the present financial environment, loyalty counts, and regional banks that have successful business and marketing models should shine.

September 7, 2008: Uncertainty

It's easy to think that you know what the future holds - whether inflation will rise or fall, which investments will do well and which poorly, what the political shape of the U.S and the world will be in a few years, etc.

But the future invariably contradicts our expectations. Often you can be correct in your general expectations, but wrong about the specifics - so that investments you bet on don't work out.

Over and over again we are proven wrong when we bet too much on our expectations, and yet each time we're tempted to believe we have found a "sure thing". Sure things don't exist in the real world. Every economic event results from the motivations and actions of literally billions of people. To assume that you can predict what all those people will do is not only presumptuous, it is dangerous to your financial health.

There is no way you can eliminate uncertainty or obtain exclusive direct contact with the future. You have to let the future unfold as it will. Uncertainty is a fact of life.

One does have expectations. You believe that some things are more likely to happen than others. It would be foolish to treat those expectations as certainties. It would be equally foolish to ignore them, since disregarding them would leave you exposed to the dangers you see and unable to profit from what you believe will happen.

Uncertainty doesn't mean that you know nothing at all - that your opinions have no merit, or that you are helpless to prepare for the future. It does mean that you should allow for surprises. Never take anything for granted and never treat an investment as a sure thing.