I Have A New Toy

One of our regulars has entrusted me with one of their accounts to oversee. That brings the total to 18 accounts, plus one across the pond. It sounds impressive, but about 10 of them are almost identical so We can stay on top of our core equities and not need to know 700 individual stocks.

This was exciting because this portfolio has some new and different stocks. Overall, the portfolio looked pretty good. Last year's realized gain was a minus 1.59%, which considering the market was not that bad. The Salve Lucrum account was down a little more than 2% due to the options learning curve. Anyway in kicking the tires on the account it looked pretty good. Overall the account was up (unrealized), but some of the holdings have been held many years (More than two). Many of the holdings were there because of the dividends they throw. These people chose to reinvest the dividends (Good thinking.)

Some things we can learn form this account. They were enjoying huge gain in MCD McDonald's. The gain was in the near 90% range, but remember they have had it a long time. Boys and Girls, we don't get natural doubles all that often in life. There are times when it is good to take some money off the table. Once you are over 40%, do the type of homework that got you into the stock and make sure its where you want to keep your money. If the chart is looking queasy, take all of your money out and love the 40%. Watching 40 become 60 and 60 become 80 without due diligence is called_________. I'll give you a hint. It is one of the two motivating pshychological factors behind the movement of the market. Fear and Greed.

We sold half of their MCD holdings and moved the "house money to YUM. It has a great story to tell fundamentals are good, chart is OK, I have to do some homework because it seems we are above a recent buy point. We placed stops on the YUM position and tightened their stops on MCD.

Then they had some COP, Conoco Phillips. I am glad they are in an energy stock, as we feel this is going to be wild but good sector this year, but there are some real issues with COP. Fundamentals are not pretty, the charts even uglier. They liked the 3.5% yield, but that is pretty run of the mill for the energy sector. We are suggesting another energy stock but have spent the last 40 minutes trying to find one better than XOM and it is hard. They have XOM in another portfolio so they wisely do not want to double up. (More about XOM later.) We spotted one out of Colombia we found interesting called EC Ecopetrol Sa ADR. There is a lot to like about this stock except it is in Colombia. (Sorry to any of my friends in Colombia. Anyway we are still looking.

Then there was AA Alcoa. Now I was trusted with this account with the understanding that I could only make changes after talking to them. Well, the Devil himself grabbed hold of my mouse hand and made me dump their Alcoa holdings. My bad. Come on, I did a whole hit piece on Alcoa a few weeks ago. While I did not bore you with all the details, in summary and in the good news column, the bauxite mine and refinery in Brazil is now almost online and are cost competitive, if the global recovery continues (a big if considering the stuff going on in Europe), and the Saudi joint venture is moving along smoothly and should be operational in 2014. Now for the bad news, the price of aluminum is directly impacted by global demand and the macroeconomy and that is a bit wobbly, there is excess capacity in their system as noted by remarks after their earning reports that have shut down 17 plants world wide (BTW shutting down an aluminum smelting plant is not like locking you a Walmart for the night. The decision to shut one down is carefully taken as they can remain shut for years.), and AA is in a squeeze between the demand for low grade aluminum and bauxite raw materials costs.

All that means is revenues are in trouble and so are the margins. Now hear is the lesson we can all take away from this. It is easy to see Alcoa trading for 10 a share and say its cheap. Yes it is cheap with a 7.4 PE ratio. BUT it is cheap for reason, because it is struggling to make a profit and should continue to do so for another 12-18 months. I would suggest we will see 8 before we see 12 on this stock. Their thinking is "This is going to comeback and do a lot better." I would agree, but let's wait until we see some signs of life.

What's A Conservative Gonna Do

Don't run away, its not a political question really. I could do ten minutes on political stuff like Romney kicking butt in Florida and the Presidents State of the Union Address last week. I actually had to read it because although they LOVE our President in South Africa, his speech was not live. The set a new record for the use of the word America. The previous record was George W. at 72 times. President Obama used it 84 times a new Worlds record. At least we know where we live.

No I was talking about conservative investing. Now pay attention boys and girls because there is some good news hidden in here somewhere. Ok what is considered the safest investment you can make. The safe have of global investors. Give up? The Ten Year US treasury note. Currently yielding 1.79% as of today. We may have closed at 1.8. Now take that and compare it to the Feds inflationary target of 2%. Our core rate is currently 2.2%. So if I am conservative or I am a hedge fund manager or an MF manager who is trying to build a conservative portfolio I will be heavy in treasuries earning 1.8% while inflation is 2.2%. What am I going to have to do to close the gap? Think about it. They will have to buy something other than treasuries. Some of those funds are going to go to corporate bonds and equities. That boads or bodes well for the overall market for the next 12-18 months.

Today, the market handled all kinds of bad news really well. Housing prices, consumer confidence, and manufacturing numbers all disappointed today, but the market took it in stride. It dipped a bit, but should not impact the confirmed uptrend we are in.

In our portfolio, we did what we set out to do. XOM missed as we suggested, but only by one point. The calls we sold on XOM yesterday we bought back today for a 21.1% gain. When XOM only missed by a penny we trimmed our expectations and got out at $4.00 a call. We made the right decision as they only went down to $3.90. We added to our CELG and NUAN positions.

And with that we wish you a lovely evening.

Salve Lucrum