Stocks

angelo-mozilo-head-of-countrywide-financialAngelo Mozilo, former CEO of CountryWide Financial was fined $67.5 million to settle charges of insider trading and civil fraud. Of this, $45 million or 66% will be paid by Bank of America, who acquired the toxic asset and must now indemnify the former head. As I mentioned back in early 2007, CountryWide insiders were dumping stock as fast as they while simultaneously publicly pumping it. Mozillo made about $134 million from insider trading and then another $100 million on the sale of the company to Bank of America. Having profited over $200 million, being fined a mere $22.5 million doesn’t seem like much of a punishment.

Of course, being a CEO of a major US financial institution seems to provide immunity against any wrongdoing.  Now and then, the SEC will prosecute someone to make an example of them, but the most part you can get away with far more than the average white collar criminal.

Meanwhile, Bank of America’s stock has been whacked this year, down 20% year to date. If Bank of America really did buy Countrywide for the tax losses, this investment just got better!

Last week the internet was buzzing with rumors of Apple coming out with an iPhone that would work on the Verizon Network. If you decide you wanted to trade this rumor what would you do? Would you buy Apple (AAPL) or would you buy Verizon Communications (VZ)? What if I told you Apple didn’t pay a dividend, while Verizon had a 6% dividend yield. Would that make a difference?

As it turns out, I decided I wanted in on this trade. I’ve been wanting to buy an iPhone for a while but the AT&T network is severely congested in major cities and the sound quality for calls is terrible. So I’ve been holding out for the iPhone until it’s available on the Verizon Network.  I did however get myself a 32GB iPod Touch that is simply amazing.

I didn’t buy either of these two companies. Instead I bought Vodafone (VOD) with a dividend yield of approximately 5.3% based on my $23.10 purchase price. It’s not widely known, but Vodafone owns 45% of Verizon Wireless. The remaining 55% of Verizon Wireless is owned by Verizon Communications.

Verizon Wireless borrowed billions of dollars from its parent company to build out its infrastructure and for the $30 billion purchase of Alltel. It’s been generating nearly $10 billion a year in free cashflow and has been paying back the loans. These loans will be completely repaid in a few months. So what will it do with all the money its generating? It’ll start paying dividends to VZ and VOD.

Verizon needs the money for its own dividend payments. In addition to the wireless division, it runs a landline division that isn’t anywhere as profitable as Verizon Wireless. And last week, Vodafone publicly asked Verizon to either spin off Verizon Wireless or to start paying dividends as soon as it was done with the loan repayments.

By itself, Vodafone generates $8 billion a year in free cashflow. It’s 5.3% dividend seems pretty safe and has the potential to see a massive increase if Verizon Wireless decides to pay out a major portion of its cash flows.  In addition to its stake in Verizon Wireless, Vodafone owns a tiny stake in China Mobile and a 44% stake in some French Telecomm company who’s name I can’t pronounce.

This way you get exposure to a global Telecomm player with exposure to the growing US wireless market and no exposure to the US landline market.  You also get a 5%+ dividend yield with exposure outside the the US and the US Dollar. If we do see inflation, this dividend is likely to keep up with it and is probably a better bet than a treasury bond (which would lose value if we saw high inflation).

For the time being, the “Can you hear me now?” dude is a little less annoying!

Disclaimer: I entered a 50% position in VOD. If the price drops from my purchase price I’ll double down.

Today the baby Berkshires (BRK.B) split 50 to 1. And it’s up 4%! This was to be expected. The stock is now affordable to many small investors and there is talk about it being added to the S&P500 index.

When the stock split was first announced, I had a brilliant idea to sell my baby Berks on the news and then re-buy them just before the split. I figured that the euphoria of the split news would push the stock higher and then the enthusiasm would die down and I could buy them back lower.  So the stocks that I bought at $2,550 (split adjusted price of $51) were sold at $3,500 (split adjusted stock price of $70).

My plan worked. The stock drifted down to $3,250. I would’ve been happy to buy them at $3,300. Especially since the current price is $72.25 or just over $3,600 pre-split price. Unfortunately, with my busy school schedule, I totally forgot to put in a buy order and ended up buying the stock back at $71.

Sometimes it better to not try and optimize everything! How many of you are buying BRK-B now that it’s more affordable?

In October 2008 I bought Annaly Capital Management (NLY)  at around $13.  Annaly Capital is a REIT that buys mortgage-backed real estate securities that are essentially guaranteed by the government via GSEs (or government sponsored agencies).

According to Google finance “it owns mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other securities representing interests in or obligations backed by pools of mortgage loans. The Company is focused in generating net income for distribution to the stockholders from the spread between the interest income on the investment securities and the cost of borrowings to finance the acquisition of investment securities”.

It basically borrrows money and invests it in MBS and CMOs. When the short term borrowing rate is hovering around 2% and mortgage yields are around 5%, the spread is pretty juicy and it can afford to pay out pretty decent dividends.

At the time I bought it, I think it had ~10% dividend yield and it looked like interest rates were going to stay low for quite some time.  The Federal Funds rate which was 1.50% in early October 2008, bottomed out at close to 0% in a few months and has stayed in the 0-0.25% for most of the past year. Since then, the dividends have increased to about 21% based on my purchase price. At its current purchase price, its still yields around 17-18%.  That is still a pretty stellar dividend, especially for a company that’s in the real estate financing sector.

However, if interest rates raise, its spread decreases and it no longer throws off enough cash flow to maintain its dividend yield. Will the rates rise any time soon? I don’t think so, but over the long-term, rates cannot stay this low. The country cannot keep on issuing new debt at 3-4% indefinitely.  At some point, demand for low rate debt will dry up and rates will start creeping up. When this happens, NLY will cut dividends and its stock price will tank.

During the 15 months that I’ve held the stock, it has appreciated 30% and I’ve received ~20% in dividends as well. Not a bad return (though it’s beaten the S&P500, its not my best trade of last year). Many people think that the economy will continue to stay weak, interest rates will stay low, and NLY will continue to do well. Maybe. But I’d rather book some profit and build up some cash reserves in case the market pulls back. I sold 100% of NLY in my brokerage account and 50% of it in my Roth IRA today. With this sale, the retirement account is currently 50% in cash. Its time to go stock hunting!

NLY_stock_return_compared_against_S&P500

This guest post comes from Kevin at 20smoney.com, a blog covering financial topics such as investing, money management and the development of income streams.

Despite the fact that most people tend to think that a market that has already booked a 60%+ rally is a great time to be invested in stocks, I tend to lean the opposite direction.  With such a massive run already in place, the risk/reward scenario is not nearly as good as it was when compared to earlier in the rally.  So, how should you play the current environment?

The sectors with some of the largest gains this year have been technology and financials.  As such, these sectors warrant extreme caution if you are currently long or are getting long any companies within these sectors.  If you want to be long the sector, but aren’t sure of specific stocks, consider mutual funds or ETFs such as Financial Select Spider (XLF) and Technology Spider (XLK).

If you’re looking to gain exposure in these sectors, I strongly encourage you to monitor some basic technical signals so that you can identify a clear exit point in case the broad market and/or these sectors reverse and head lower.  Watch the 20 and 50 day moving averages.  If the stock (or ETF) breaks through these key averages, be ready to exit the position.  If you don’t feel comfortable with such a strategy and want to take a more long term focus, I would then wait for a significant pullback, at least 5%, to enter your position.  Remember, you’ve already missed a large run in stocks, and you need to be careful entering a position at these levels.

If you have held stocks this year, especially in the sectors named above, you may consider actually selling some of your positions to lock in profits.  Taking profits is never a bad idea, and if you don’t want to pull out completely, simply sell half or maybe a third of your position.

If you are looking to enter other long term positions, I would point you towards dividend paying companies that will pay you to hold them.  This will help offset any losses in share price if there is a reversal in the markets.  Also consider multi-national companies that generate a significant portion of their earnings from abroad (this will help you hedge against weakness in the U.S. economy).  In this category, consider Philip Morris International (PM), Wal-Mart (WMT), McDonalds (MCD) and perhaps Microsoft (MSFT).

For me personally, I’m pretty bearish on the economy and the markets.  I’m skeptical on the strength and durability of the recovery and the stock market rally.  I believe that we have structural issues with our economy that have not been addressed and therefore will prevent real growth.  I’m not adding to any positions in the current environment, rather I’m “keeping my powder dry” waiting for much more attractive buying opportunities.  I do own gold related instruments such as GLD and GDX because I think gold has the potential to perform well in both an inflationary recovery and a deflationary environment (pretty much the only asset with this ability).

As I mentioned above, if you’re looking to try and make a few bucks on the continued rally in the broad markets, be extra careful and be ready to exit by monitoring some key technical sell indicators.  Protecting your money is a better strategy, in my opinion, than chasing returns, especially today.  If you’re a long term believer in the recovery and the future of the economy, get long some solid companies, but don’t be afraid to be patient and wait for better entry points.

The following is a guest post by Saj Karsan. Saj regularly writes for Barel Karsan, a site dedicated to finding and discussing current value investments.

Stocks with higher dividend yields do outperform the market. Having said that, however, it’s important to be able to determine if a company’s dividend yield is sustainable.

Consider World Wrestling Entertainment (NYSE: WWE). CEO Vince McMahon’s antics are well known, both in the boardroom and as an entertainer himself! For those unfamiliar with his antics (or those who enjoy re-living WWE moments), a video example of McMahon in action is portrayed below:

WWE pays a dividend yield above 10%. However, the following chart demonstrates why you can’t choose a stock on dividend yield alone:

wwe

Clearly, WWE has been paying out more than it has been earning! Over the last four fiscal years (“2006 T” representing an 8-month transition year to a new fiscal year-end), WWE has paid out $1.06 more per share than it has earned!

How does it do it? Balance Sheet strength! The company has virtually no debt, and more than $2.80 of cash (including short-term investments) per share. That means it could continue to pay out cash over and above its net income by 25 cents per share for the next 10 years!

Does that make it a buy? Not quite. At a share price of $14, even if management immediately paid out that entire $2.80 to shareholders, one would still be paying $11.20 for a company that earned 62 cents / share last year, representing a P/E of 18.

When a dividend yield looks appealing, make sure it’s not too good to be true!

Disclosures: None

If you enjoyed this article, consider subscribing to Barel Karsan.

The market has been defying gravity this summer, with the S&P500 up 49% since March. But most of the appreciation has been in what I consider lower quality stocks. Many homebuilders with doubtful prospects have doubled from their recent lows, while stocks that are somewhat recession proof like McDonalds, Walmart, Coca-Cola and Procter & Gamble have bounced a mere 15-20%.

According to Bloomberg, “companies with the worst earnings led the 45 percent gain in the Standard & Poor’s 500 Index since it fell to a 12-year low five months ago”. It might be a good time to sell some of your winners that have exceptionally well and either wait for a pull-back, or if you’re trigger happy, buy solid investment-grade companies.

Given the current economic environment with the US Dollar likely to devalue against foreign currencies and the high probability of inflation, you want to invest in a company with exposure to foreign markets, a stable business model that is non-cyclical and a history of growing dividends. You also want to avoid luxury brands or businesses that sell expensive goods.

Here are a few of the companies that I would consider looking at, along with their dividend yields.

  • Verizon Communications (VZ): 5.87%
  • Johnson & Johnson (JNJ): 3.21%
  • Procter & Gamble (PG): 3.28%
  • Colgate-Palmolive (CL): 2.41%
  • Unilever (UL): 4.39%
  • Altria Group (MO): 7.10%
  • Philip Morris International (PM): 4.61%
  • McDonalds (MCD): 3.55%
  • Walmart (WMT): 2.51%
  • Enerplus Resources Fund (ERF): 9.56%

While I don’t own any of these yet (except ERF), I do own some ETFs that hedge against dollar devaluation and inflation:

  • CurrencyShares Australian Dollar Trust (FXA): 2.04%
  • Morgan Stanley Emerging Markets Domestic Debt Fund (EDD): 7.45%
  • Market Vectors TR Gold Miners (GDX): 1.90%

If you are going to buy currency ETFs or currencies you might want to also check out some of the risk-free currency CDs offered by Everbank. At the very least, definitely subscribe to their free newsletter, the Daily Pfennig. It’s quite informative and very interesting.

ETFconnect.com is a great site to find out more information about ETFs.  Having some exposure to foreign currency and gold miners isn’t a bad idea. I’ve been worrying about the effects of the Federal Reserve printing money like its going out of style and the CEO of Coeur d’Alene (CDE), a silver mining company that I happen to own, predicts that Silver will jump 29% by the end of the year because of this.

Demand from investors seeking a store of wealth accounts for more than half of silver’s 23 percent price jump this year before today, Wheeler said in an interview in New York. The metal will reach $18 an ounce with supplies little changed and demand buoyed by purchases from exchange-traded funds, he said.

“We have this crushing new debt and dollar weakness,” Wheeler said today. “The outlook for precious metals is very positive, and silver will be No. 1.”

The U.S. government has pledged $12.8 trillion, an amount that approaches U.S. gross domestic product, in a bid to stem the longest recession since the 1930s. The spending will erode the value of the dollar and boost the appeal of silver and gold as alternative assets, Wheeler said.

“There’s a lot of anxiety out there over this debt,” Wheeler said. “Around the world, there are a growing number of investors who want protection. They’re going to want silver as part of their portfolio.”

If you believe any of this, you might want to increase your exposure to silver miners like CDE, SSRI or SLW, although these don’t pay any dividends.

Disclosure: I own ERF, CDE, FXA, GDX, EDD, physical gold and silver.

Today’s guest post is by MoneyEnergy.

Unless you’ve been on vacation on one of the earth’s poles for the last month, you’ll know that the last few weeks have been great in the markets.  More than four straight weeks of gains have led many commentators to begin asking whether we’re starting to see signs of a recovery and have caused many market-timers to wince with the knowledge that they missed out on one of the quickest and gainliest recoveries in decades.  But how long will this bear market rally last?  Is it just the short-term booster effect coming from the trickling-down of the Obama stimulus throughout the US economy?
Whatever the reasons and however long it’s going to last (I’m still reading articles about the imminent “recovery”), I think it’s safe to assume that we may yet retest the lows.
I take the commentary of analysts like Peter Schiff and Gerald Celente seriously.  Schiff was wrong about the manner in which the dollar rallied owing to so much investment looking for a safe haven, but that’s because Schiff overlooked the effect produced by not everyone’s knowing about the state of the US debt – or even if they did know, investing in greenbacks anyway because of a perception of them as being more of a relative safe haven compared to the Euro (here I interject: why do these discussions on currency options always ignore the Canadian dollar?  Canada’s balance sheets completely upstage those of the US, and Canada’s banks are more sound even than Europe’s).
Peter Schiff hasn’t changed his vision much over the course of the economic debacle.  He sees things as basically proceeding par course.  Sooner or later those Chinese and Japanese won’t want to buy any more US securities. In a sense, Schiff’s view still makes sense – as we saw just a few weeks ago the Chinese Premier Wen Jiabao proposing a new world reserve currency.  So Schiff’s prognostications could still be right on course.
Gerald Celente has been in the mainstream media much less than Schiff, and maybe for good reason – although he holds the same views, his visions of the future are much, much bleaker than Schiff’s.  Celente isn’t afraid to say he thinks we’re going to see a major rise in bad crime in the US and that we’re headed into the Greater Depression.  I’ve heard alot of doom and gloom stories, but only Celente really scares me.
So what if Shiff and Celente are still right?  They’re ignoring this bear market rally – maybe you should too.
Here’s what I recommend doing now while the markets are still relatively stable and there is less overall volatility in trading.  In other words, because we’re in a period of slightly more optimism about the economy and slightly better consumer sentiment.

  • If you need to move money in and out of accounts, do this now while all banks are still open and there is less fear of runs
  • If you plan to stock up on any key items/supplies, do it now while supply lines are still running
  • If you have been waiting to cash out of the markets, now is a good time while values are back up (I don’t recommend market timing, but sometimes we do need the cash)
  • Take a look at your gold dealers – might be easier to place orders now and get them quicker
  • It’s a good time to sell off that “stuff” you no longer use: ebay, craigslist, garage sales
  • Make sure you have your emergency cash in place

In other words, treat this moment as a brief sunny respite on a rainy day, a chance to run across the street without getting soaked.  Because we shouldn’t be so foolish as to think the rain is not going to come back. At the very least – even if you don’t think we need to be thinking about more survivalist scenarios – stock up your cash savings now and keep them aside for more bottom-fishing when the time is right.

Tim Geithner is just another Wall Street lackey. His plan to bail out the bank through taxpayer-guaranteed private buyouts of toxic assets is yet another stupid idea. Called the “Public-Private Investment Program”, its going to spend between $500 Billion and $1 Trillion on toxic purchases (euphemistically called “assets”).

Ceny Uygur from The Young Turks, does a great job at explaining the latest plan and why it is terrible for the American taxpayer.



Which idea is dumber?

Buying $300 Billion of Treasuries or up to $1 Trillion in Toxic Assets?

Here’s an interesting article from Bloomberg. I don’t agree with it, but then again I didn’t make 74% returns last year, nor do I run a multi-billion dollar fund.

Steven Leuthold, whose Grizzly Short Fund makes money for investors by betting companies will fail, says he wouldn’t invest in his own fund now because the U.S. stock market is close to bottom.

Leuthold, who helps manage $3.2 billion as founder of Minneapolis-based Leuthold Weeden Capital Management, told investors to keep money out of the Grizzly fund last week; it rose 74 percent in 2008. He joins Bill Fleckenstein, who shut a 13-year-old bearish fund in December, and Marc Faber, who covered bets against U.S. stocks, in talking down short selling.

Leuthold says the Standard & Poor’s 500 index, which has lost 54 percent since October 2007, may rise 40 percent this year because the U.S. economy won’t fall into a depression and stocks are the cheapest they have been in 24 years.

“I personally would not have an investment in the Grizzly fund because I think we’re so close to a major market bottom,” said Leuthold in an interview. “Every investor ought to be considering putting money into equities.”

Short sellers can profit from falling stock prices by borrowing a stock and then quickly selling it. If the prices then fall, they only have to pay back the stock at the lower price, pocketing the difference.

SP 1,000?

The first simultaneous recessions in the U.S., Europe and Japan since World War II pushed the price of the SP 500 as low as 10.2 times earnings from the past year, the cheapest since 1985, according to data compiled by Bloomberg. About $1.2 trillion in bank losses tied to subprime mortgages sent financial companies in the SP 500 down 82 percent from the February 2007 high, making them the cheapest relative to book value, or assets minus liabilities, since Bloomberg began tracking the data.

Leuthold, 71, said investors have become too concerned about the economy. Comparisons between the current slump and the Great Depression are exaggerated, said Leuthold, who predicts the SP 500 will rally to at least 1,000 this year.

Fleckenstein, president of Seattle-based Fleckenstein Capital Inc., says that while stocks may advance in coming months, they’re likely to lose the gains as the recession worsens and unemployment climbs.

The 55-year-old investor, who plans to open a fund that bets on both stock declines and gains later this year, said if he were managing a fund today he would be “doing a whole lot of nothing” and would have few short sales.

So what am I invested in? I still think gold and oil stocks will outperform in the long run. I’m also shorting a few companies that I think will go bankrupt. One of them is a American College Communities (ACC), which provides luxury student housing. They bought an awful lot of real estate at the peak. Check out this great analysis at Stripnomics blog.