Traderbill's Financial Markets Weblog

…and where is the pain…after yesterday’s dissertation on the blame (didn’t even get to the entire real estate and mortgage sector where 226 mortgage lenders have merged or gone out of business since Oct. 2006), TB decided to try to find some bright spots. Since everyone else is telling you where to invest, TB will take a stab at it. David Swenson, Chief Investment Officer of the Yale Endowment Fund did it last week and in a good column offered some investment tips (including TIPS), as well as a vicious blow at CNBC’s Jim Cramer. TB agrees in general but has a few contrarian thoughts  …what, you thought he would agree with someone?

Mr. Swenson gave some very good ideas for investors especially on the need to keep rebalancing and global diversification (15% international and emerging markets). He also recommended TIPS as TB has and even small investors can buy using the ETF (TIP). Of course his winning performance among all other foundations last year was also due to alternative investments including hedge funds which he does not recommend the average investor play in or anyone without a skilled staff.

But where TB differed was the same advice you get from everyone: invest for the long term, don’t panic and sell. 98% of the time that is true but it failed you in 2000 as even the best of stocks lost money and many such as GE and Bristol Myers Squibb (BMY) have done nothing for the past five years! It will also fail you this time if, as TB suspects we are in a secular bear market…not just a cyclical one and even if it is the latter we could double our losses over the next quarter. How can you invest for the long term in a world that thinks and is dominated by short term thinking? The answer is you can’t! Not profitably. This does not mean selling all of your stocks but look at each of them and ask yourself if you really want to own them…or would buy them today…remember when that comment was made about a house? Had we all done that, we wouldn’t have had the bubble we did…OK that’s wrong, Wall Street would have found a way.

Among those stocks you should want to hold are DIVIDEND producing stocks…greater than 3% and preferably more than 4% with double digit growth rates. A plus if they reported weak earnings but increased the dividend…a sign of confidence and an even better sign if insiders are buying the stock.

Let’s compare the two dead stocks mentioned above. GE has returned 7.6% over the past 5 years which becomes 10.6% with reinvested dividends, BUT all of that gain came from 2003 to 11/5/04. Since then it is -2.4% or 0.7% annualized and by reinvesting dividends you only get back to +2.1%. Pretty bad, huh? The indicated dividend rate is 3.61% according to Bloomberg but they increased the dividend in Dec by 11% so TB is going with the 12 month yield of 4.25%. P/E is 14x, Beta is .85, the PEG rate is 1.3x so it is ‘fairly’ valued AND the growth rate of dividends over past 5 years is 14.9%.

OK, now battered BMY trading well below its 40 day which is way below the 200 day and it gapped down on Jan. 22 and has not been able to close it (GE is trading right on the 200 day). BMY had a charge of $275M announced 2/6 along with firing the Treasurer (misreported as CFO), over auction rate securities of which $142M were subprime yet rated AAA. The rest of those ARS will pay off although they can’t get out of them now and so the reserve will likely go right back into income as well as some of the subprime so things are not as bad as they appear…note that the stock declined before the three weeks before the announcement and has treaded water since. Bristol Myers price return over the past five years has been zero BUT with dividends reinvested it is 24.1% or 4.42% annualized…not great but the stock has done nothing yet that 4.99%, 12 month dividend which was also increased 11% on 12/5 (true before the bad news), giving a 5.38% indicated yield looks attractive. The growth rate of dividends is 0.5% (much less than GE) while the P/E is similar at 13x Beta is slightly higher at 1.03 and the PEG rate is 1.03x…so all in all they are pretty similar and proof dividends will get you thru. TB has made a similar case for AT&T (T – which he recently bought, probably too early), yields 4.66% with a 6.29% growth rate, P/E of 11, Beta of .89 and PEG of 1.17…fits with the other three. Over the past 12 months it is -7.7% and -4.25% with dividends reinvested, so it seems closer to a floor. The return over the past 3 and 5 yrs has been double digit, yet since peak 10/31/00 the stock is down 60%, 50% w/divs which is -13.2% annualized. Over the same period GE is -41%, -33.5% and -7% annualized while BMY is down 69%, -62% and -15.8% annualized. These are some of the top…safest?…companies and that is how a buy and hold strategy would have served you.

How about the ‘hot’ HPQ which announced blowout earnings yesterday and bounced up to NEAR the 200 day m/a? High yesterday was $47.44 while the 200 day is $47.81…so if it doesn’t continue today, we may have a problem (200 day is below 40 day too). Since its peak on 7/14/00 Hewlett is off 49%, 44%, or 9.9% annualized. The dividend yield is just 0.7%, Beta is 1, P/E is 14x and the PEG is 1.00%. Again, similar to the other three.

TB firmly believes that since 2000 life has not been good for the big growth stocks and that that will continue for the foreseeable future. Therefore, expect more of the same if you buy and hold. We are now in a cycle of ‘hit and run’ momentum where the best become the weakest and vice versa, over and over. Yesterday we saw that as tech rallied sharply but meaninglessly, and healthcare sector sold off. Both merely reversed the prior day’s losses. The Nasdaq 100 was 22.64 or +0.9%…10 of those points came from the former but now bashed “four horsemen” stocks…please, TB hopes you can see a pattern here!

Swenson also recommended ETF’s as TB has for nearly five years. But they are not working generally as the Dow Select Dividend ETF (DVY), which has an indicated dividend of 4% is down 15% over the past year and 12.1% with dividends reinvested. The S&P 500 is down 6.7%,-4.9% for same period. TB still believes in ETF’s but by sectors and only if carefully evaluated for exposure and diversification, not in things like the QQQQ’s (NDQ 100) or Spyders which will not help since IF we are in a bear market the higher weighted stocks will be hurt the most proportionally. Even the Ryder S&P 500 Equal Weighted Index (RSP) is -10.1% and -8.9% respectively.

If you are using mutual funds they are a minefield. Furthermore, TB has been disappointed in Morningstar as well as brokers over their rating system as with both he keeps seeing touted funds as having high front loads…5% or more, fees of about .8 to 1%, and some with back loads, and many with 12(b)1 fees…the gift that keeps on giving to your broker. Of course American Century did a number on their zero coupon funds by eliminating the 25 basis point 12(b)1 fee and doubling the management fee to 50 basis points…all for funds that are buy and hold! TB is equally wary of the new improved target maturity funds which are expensive and foolish as well as the lifetime funds and ETF’s which purport to know your needs forever and with the target funds have a narrow window of expiration which could hurt badly in a market selloff.

Even more important are muni bond funds. Many…most?…of these funds buy municipal bonds at a high premium…to inflate the current yield while eroding principal…and may are also leveraged with auction rate securities which could lower returns and if the market for these shrinks as TB expects, they will force sales of some of the leveraged long term assets creating taxable capital gains while the fund manager reaps healthy fees. TB likes the new municipal ETF’s which are obviously not leveraged and based on a broad index of national, New York, or California bonds…Fees are fair too. They are new but TB fully expects them to track the index closely.

Lastly, hedge funds. While there are some very good funds and funds of hedge funds, TB believes the fees are excessive given the volatility of returns, and the lack of transparency makes them a poor investment for most unless they want to lose money…you need someone knowledgeable or stay away. The founder of the Lancer Group in Miami has been indicted for defrauding investors of $200 million by manipulating market prices….some mutual fund managers have also done this including a prominent SF boutique manager. Hedge funds have also added to volatility by using naked shorts, aided and abetted by the SEC who last July eliminated the uptick rule for shorting…look at market volatility since then.

Fees are starting to fall, funds are closing, some are refusing customer withdrawals and at least one could be forced into bankruptcy for doing so. This comes on top of the worst January for equity hedge funds in years. Sadly, many public pension funds eliminated their unfunded liabilities by investing in hedge funds, and are now underwater again…amid a slowing economy and budget cuts….Schwarzenegger is trying to cut $100 million by June 30….this on top of a $2B mid year budget reaction last week.

It’s a jungle out there and listening to the Cramer’s of the world will not only not help you but hurt you. His recommendations get runup overnight then they short them as you are buying…and he doesn’t count commissions, inflation or taxes either…all of which will kill you. Don’t trust TB, think for yourself! Also, remember that your money manager might be better than you think but may be hampered by working with all long, fully invested guidelines.

Poor ‘old’ John McCain…now he has some sort of relationship with a woman who went to work for a lobbyist as a secretary and rose to a senior position due to her relationship with McCain who used their jet several times. He says he terminated the relationship…with her?…at least the firm…yet he is grousing that Obama might use matching federal funds…let’s cut the crap,  John…we don’t need this. Where are the heroes?…TB asks again…

All the best,

TB