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

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.

September 19, 2010

September 20, 2010: Fantasy Football and Your Income Portfolio

Is there a potential Bill Gross or Sir John Templeton who consistently assembles the winning fantasy football team? Effective portfolio selection and constructing the moving parts of a fantasy football team utilize similar concepts. The list below illustrates the premise.

1. Admit you are probably not the most astute member of the league. You probably aren't. Warren Buffett is fond of saying "if you are playing poker and ... don't know who the patsy is, it's you." A well prepared investor knows that there are many investors who know more about any given acquisition at any time, given the advanced information gathering techniques available. Play to win, but don't get cocky.

2. Be prepared in advance for acquisition. Have a plan. You should know your risk tolerance and begin to implement a strategy to suit your long term needs.In fantasy football roster assimilation, one does not chose a tight end, kicker and an aged running back with the first few selections to form a core holding. The core holding for stability is a quarterback. For most investors a portfolio of relatively stable, diversified low cost income etf's should be at the center of one's portfolio. Other, more speculative securities may be added to provide zest for your planned acquisitions to fill out the portfolio.

3. Acquire proven quality with your first picks. Don't speculate at this stage. You need Drew Brees, not Seneca Wallace. At this time, Vanguard's Short Term Corporate Bond ETF (BSV), Templeton's Global Income Fund (GIM) and PIMCO's Short Term Maturity Strategy ETF (MINT) fit the bill.

4. Create a balanced roster. Don't overload in one yield field. Drew Brees alone won't guarantee your fantasy football team a victory, nor will government bonds do likewise for your portfolio. You need a productive running back, wide receiver, tight end, kicker, defensive unit and a flexible bench. Weak or under-represented income sectors will cause you to under perform. Solid picks in this category are IShare's U.S. Preferred Stock Index ETF (PFF), Powershare's Commodity Index Tracking ETF (DBC),Barclay's Capital Convertible Securities ETF (CWB), Barclay's Capital Aggregate Short/Intermediate Bond ETF (LAG),IShare's Emerging Market Debt ETF (EMB) and for your defense, the Permanent Portfolio Fund (PRPFX). In a previous column, I outlined a "do-it-yourself" permanent portfolio fund using etf's that will likely mimic PRPFX. Gold alone as a hedge is best purchased through IShare's Gold ETF (IAU).

5. Work hardest to find overlooked acquisitions. Sweat the details. Some of my finest fantasy picks and securities have been chosen by digging through details to discover overlooked gems. Arian Foster and Wes Cooley come to mind. High yields can be achieved through disciplined acquisition of preferred stocks, especially structured preferreds. My criteria for selecting these 6.75-8% gems is a multi-step process: investment grade, decent trading volume, yield is compelling (you will regularly find mispriced preferreds as the computer model fast traders generally don't appear to hit them hard), buy below the call price and sell when the stock price is 5% or greater over the call. An example is Deutsche Bank Capital Trust II (DXB). I also like preferred securities that play a nice dividend plus have inflation protection over and above TIPS, such as Prudential Financial, Inc. Preferred (PFK).

6. Always look to upgrade your roster. Don't hesitate to jettison a weak performer, but don't churn your roster. When an acquisition goes down due to injury or poor performance, dump it. Why hold into a Ryan Grant or Sidney Rice, hoping against hope they return from an injury? Why hold significant positions in long duration bonds or solely in U.S. Dollars just to tweak yield when the present economic climate begs for future inflation to pay off our trillions of dollars in debt with cheap dollars? Explore select Master Limited Partnership's individually, not bundled into an etf at this time.

7. Be gracious in victory. Learn from your defeats. While winning with well-chosen acquisitions provide a measure of wealth (monetary, ego or both), defeat - losing with your best laid strategy - offers an opportunity to learn and better prepare for the next round of opportunities.

8. Luck does play a part in success. Remember that the more prepared you are, the luckier you get.

September 08, 2010

September 8, 2010: August Housing Data Miserable (Again)

The August Credit Suisse First Boston Survey of Real Estate was released today. The results of the comprehensive (fifty major residential markets), boots on the ground, reliable yardstick for residential home predictive behavior paints another gloomy picture for the housing market despite record low mortgage rates.

Home prices are declining across the country at a faster rate and are now at early 2009 levels, which correlates to the depths of the (first) recession plunge. Key factors are depressed buyer traffic which has forced sellers to become more realistic about their bottom line selling price,rising inventory, a sense amongst many buyers that prices will continue to slide, additional foreclosures and, anecdotal fears about government policies that may impact taxes and job prospects.

The lowest major market traffic readings were in Minneapolis, Chicago, Phoenix, Denver and Charlotte and in foreclosure-heavy markets such as the New York metro area and Ft. Meyers. Investors, data indicates, are not buying as they were previously.

CSFB expects further home price weakness in the coming months based upon the trends outlined in their survey. With 3.98 million existing homes for sale nationwide and more foreclosures to come, I suspect that stocks of companies in the home building (new construction) sector should be in no hurry to be bought for inclusion within your portfolio.

The CSFB Survey did not recommend a time frame for buying into the residential home market as a customer or investor. I view this as a significant and persuasive omission.