Performance Vs. Guidance

 

Today we did not make any trades AGAIN. Right now we are playing a game of volatility. It is the ONLY way to make money in a sideways moribund market. We suggested a correction this week and set up our trades accordingly. We are down about 3% over the last two day while the market inched up a wee little bit. Some of our put options are 20-40% down in two days, but such is the life of an option trader.

 

We are convinced that the blah blah out of Europe will not end on a good note and the probable healthy correction we should have had on Monday will exacerbate to a sizable meltdown on Friday. Out option on both sides of our bets need that kind of volatility.

 

Let me give one more reason behind this logic that buying and holding is probably not a great strategy at the moment. Despite the fact NO ONE cares about the fundamentals, (Ok maybe Buffet and few other multi-billionaires, but what do they know.) you have CEO who are reporting respectable earnings and then closing their earnings call with less than enthusiastic guidance (Guidance is how they see the next 3-12 months.) let me tell you something about CEOs, as I know one. Their job is to scan every relevant scenario for competitive, geo-politcal, and economical threats and tell their Board what they think is going to happen over the next 2-12 months. Then they lead a team to strategically capitalize on that information or manage risks based upon that information. It is that simple.

 

However when you are the CEO of a publically held company, you have the added pressure of having to be accurate or you become liable for misleading share holders. That is a Bozo No No. So in order to protect their arses, CEO will usually report conservatively. Example Jobs of AAPL knew he had some block buster products coming down the pike, but would not over emphasize any in advance.

 

When you hear a CEO provide guidance to the down side, it is not a good thing as they will not usually provide down side guidance unless of they are real sure they is going to be a drop in earnings or margins. Their guidance will usually be worse than actual, but they would not report negative guidance if they we confident earnings were going to be positive or flat.

 

So as an investor in this crazy day of volatile markets and technical drivers, even doing your homework and due diligence can lead you to lick a solid stock and a CEO who is protecting his credibility will give poor guidance or even a lower than expected positive guidance and not 10-25% off the value of your stock.

 

If you find this frustrating, there is something you can do. Get out of the game, (Don't opt out of the e-mail as I am terribly insecure and need all of the readers I can buy.), and play BONDs. In these turbulent times, it is a relaxing way to generate income and spare the craziness of what is going on in the equity markets.

 

The Salve Lucrum Portfolio has about 31% of its assets in bonds. (This year, that section is the best performing part of our holdings.) Everyday we get info on great bonds. We define great as earning at least twice the 10 year yield and is not Junk rated. There are entire books written about Bond Investment Strategies, (One of the best is the Bloomberg Book Bonds: The Unbeaten Path to Secure Investment Growth by Stan and Hildey Richelson).

OOOPS, Wrong Bond Book, My Bad

 

We have read this book and it will play a crucial role in our retirement planning. We can highly recommend one of our occasional readers and friends is you want to have a serious discussion about setting up a bond based laddered portfolio. Drop me a note and I will pass on his contact info to you. He is in Wealth Management at UBS so you might not be dealing directly with him as he manages ultra high net worth individuals. He is where I get a constant flow of great bond ideas.

 

(For those unfamiliar with bonds, when a company seeks capital-cash, it can offer stock which is a share of ownership of the company or it can borrow money. When a company decides to borrow money it can take out a loan at the bank, but it can also offer to borrow money from investor's via a bond. A bond can have many features, but there is a face value of the bond which can be $100.00, but are typically sold in blocks of 10, it will have a due date, saying when the company will pay back that $1,000 and the interest rate at which it will pay back that money. Terribly over simplified, but in essence that is a bond. Another feature of the bond is that it usually is higher up the food chain when things get paid off. In other words bond holder's will usually get paid before other equity or other debt holders of the company. Bonds trade like stocks, based upon the $100.00 face value. For example we have some General Motors Smart Notes issued in the 1990s with a face value of $1,000 and an interest rate of 6.00% If we had bought this upon issuance we would earn $60.00 a year for each bond we bought yielding 6%. We however bought these at the depth of the GM problems and paid a discounted $520.00 for each $1,000 dollar bond. Our Yield to Maturity (YTM) was in the 9.7% range when we bought the bonds. Currently, these bonds are selling for $83.75 providing a YTM of about 7.5%.)

 

My Bond Guy at UBS always has some nice offerings so from time to time, I will mention them or other bonds I have run across. Again, read about bonds as they are not as sexy and exciting as equities, but in these volatile times when you don't want or need the headaches or stomach aches of the crazy market bonds are a good way to drive respectable income. For example, the Bond Guy just told us about a Ford (Automotives are doing well so it has a sound company behind the debt) bond yielding 4.75% (More than double the 10 year yield) and it matures in 2016. Anyway if you have interest, let me know and I will hook you up with the Bond Guy.

 

Salve Lucrum