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

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.