Investing

Dividend Stocks in Barron’s

Alfred King — Tue, 15 May 2012 14:56:20 +0000

Barron’s is a weekly magazine, published by Dow Jones which also publishes the Wall Street Journal. I read Barron’s every week and there is a lot of good material on investing. You still have to make up your own mind, but at least it points you sometimes to things you might have missed.
This week, in their weekly column on dividends, the editor quotes from the investment officer at AFAM who has a list of 10 stocks with good dividends, companies which AFAM also considers undervalued. If right, this would suggest that you could obtain a reasonable return (more than on a bank CD, for example) and perhaps have some increase in the price of the stock.
I am listing the companies, as shown in Barron’s, but explicitly warn you not to invest solely on the basis of the Barron’s listing. Some of the companies may not be in growth industries, and others may be exposed to some business risks, as for example Lockheed Martin may suffer from a decrease in defense spending. Nevertheless this is a good point at which to start your investigation.
Anworth Mortgage ANH 12.4%
Hasbro HAS 4.0%
Intel INTC 3.1%
Lockheed Martin LMT 4.7%
Merck MRK 4.4%
Navios Maritime NM 7.0%
Newmont Mining NEM 3.0%
PepsiCo PEP 3.2%
Total TOT 5.7%
Waste Management WM 4.2%

Alfred M. King

Greece and France

Alfred King — Mon, 07 May 2012 16:52:10 +0000

I hate the phrase “Kick the can down the road”, but this is exactly what has been happening in Europe ever since the Greece crisis first showed itself. Now with this weekend’s votes in France and Greece, it is apparent that voters in Europe are turning their back on ‘austerity’ and voting for business as usual – retirement at 55 or 60, high wages, no layoffs, don’t pay your taxes, and so forth.
Many observers, including a very astute analyst at 4:00 am this morning on CNBC, say there are three alternatives to the debt situation in Europe:
1) Pay the interest as it comes due
2) Withdraw from the Euro zone, devalue and in effect further default
3) Inflate their way out of the debt.

Unfortunately the last alternative is what the analyst thinks is likely to happen, despite Germany’s morbid fear of inflation, because Germany fears even more the breakup of the Eurozone. The first alternative is totally unrealistic in today’s economic environment.

Then in today’s WSJ there is an indication that the Federal Reserve is being encouraged by Paul Krugman, (an ultra-liberal New York Times Nobel Award economist) to “inflate gently, say 3% or 4%” to encourage economic growth in the U. S.

This is a truly toxic mix – inflation in both Europe and the U.S. – because there is no such thing as “a little inflation”. In 1980-81 inflation reached almost 20% before Paul Volker put us into a recession to choke off the inflation. Once people see the value of their savings disappearing, yes they do start to spend money to get goods, but history has never showed us a ‘controlled’ inflation which then reverts back to the status quo without drastic steps having to be taken.

At this moment I am in a state of shock, just thinking about the inflation to come. In coming days and weeks I will try to pull my thoughts together and come up with some concrete actions we can take. Meanwhile, get down on your knees, and pray.

Alfred M. King
May 7, 2012

Analysts’ Forecasts

Alfred King — Thu, 03 May 2012 13:40:51 +0000

In the short run, at least, the single most powerful impact on stocks comes from whether a company’s
reported results ‘meet’, ‘beat’ or ‘miss’ the consensus predictions of security analysts. So, rather
than look at actual results, say in comparison to last quarter, or last year, investors see how close the
company comes to what security analysts had predicted in prior weeks or months.
This is NUTS. For a CEO or CFO this behavior by investors means the company has to arrive at final financial results that meet or exceed what someone else (security analysts) thinks the company should accomplish. Meanwhile the analysts are trying to ‘guess’ what the company can, or will, accomplish.
In practice this sets up ‘goals’ for a company, assuming it wants its own stock price to rise. Such ‘goals’ set by people outside the company, may or may not reflect the underlying economics of the business, considering the economic and competitive conditions in which the business operates.
If the analysts are too conservative, the company may hold back some earnings, building up an earnings ‘cushion’. If the analysts are too optimistic, and the company feels an obligation to try and meet expectations, then the company probably has to engage in some unnatural accounting gyrations. In either case the company is effectively manipulating its financial statements because of the perceived power of the analysts.
Don’t think I am making this up. Numerous examples come every quarter during ‘earnings season’. A ‘miss’ of literally one cent per share can cause a stock price to tumble 5% or even 10%. A ‘beat’ of the same magnitude will probably lead to a rise in the stock price, but at the same time increase the difficulty of meeting expectations in future periods.
Having said this, analysts are going to continue trying to forecast earnings, and managements will continue trying to meet those expected earnings. While a vicious circle, I do not anticipate any basic change. As a shareholder you have to ‘go along for the ride’ and simply disregard short-term price fluctuations. If you try and ‘trade’ based on how actual results will compare to analysts’ forecasts, you are going up against some of the smartest guys in the world who work in Wall Street. As they say, “lots of Luck!”
Alfred M. King

“Sell in May, and Go Away”

Alfred King — Sun, 29 Apr 2012 15:58:46 +0000

Wall Street is full of catchy phrases, such as the title of this Blog. The concept here is that traditionally stock prices fall in May, and do not recover for several months. Thus if you sell early in May, hold on to your funds, then in a few months you will be able to buy back those same (or other) stocks at lower prices. In short, you will have accomplished the trick of “Sell High, Buy Low”. What’s wrong with this picture?
The adage is trustworthy only to the extent that future prices, in May and beyond, behave the same way that prices have behaved in other past months of May.
Is there any reason to suppose that the market has a collective memory that will cause it to drop in this coming May? As a friend once said, about bridge hands after a string of poor cards, “The cards have neither a memory nor a conscience.” The stock market, likewise, has neither a memory nor a conscience.
Statistically perhaps there have been significantly more Mays when stocks fell, than that they rose. But there is absolutely no reason to believe that this May, in 2012, will repeat the past. The world economy is different, the U.S. economy is different, the election cycle is different, the Federal Reserve’s policies are different, and not last current technology (Apple’s smart phones or Amazon’s Kindle Fire) is different.
If you actually plan to sell part or your entire portfolio on May 1st, hoping to buy back in later at lower prices, this actually forces you into two equally difficult decisions. The first is reasonable assurance that prices will, indeed, decline. The second is how will you know when stocks hit their low and it is time to buy in? Another Wall Street saying is: “They never ring a bell at the bottom, or top.”
If you sell in May, you will be gambling with your money that a) prices will fall; and b) you will be smart enough to identify the date when you should re-invest.
How confident are you in your own abilities to predict whether either or both of these will happen?
Let me leave you with a final Wall Street saying: “Bulls make money, Bears make money, and pigs get slaughtered.” You are being a pig if you think you can ‘time the market’ in two out of two attempts.
Alfred M. King

Real Estate as an Investment

Alfred King — Fri, 27 Apr 2012 11:41:54 +0000

I had lunch with a local real estate professional, Michael Colangelo and it was interesting to compare the stock market with the real estate market. Many people have been extremely successful in real estate investing, and while I personally have never been tempted, I know enough so that for those interested real estate can be a sound long-term proposition.
What are the major differences between investing in stocks and investing in real estate? For many people the first difference may represent a critical barrier. It is possible to invest $1,000 or even $500 in a stock. In fact over the years many a parent has bought a single share of Disney ($45.00) to frame and hang on the child’s bedroom wall. There is no such thing as a $1,000 investment in commercial or residential housing, unless you call buying a share of a REIT (Real Estate Investment Trust) getting into real estate.
Besides a substantial down payment, most real estate investments are financed in part with borrowed money. Depending on economic conditions it may be easy, or difficult, for first-time investors to borrow money for straight investment property, at least as contrasted with your own home; lenders look quite differently on an owner-occupied home as contrasted with investment in a small apartment building — which requires maintenance, insurance and taxes, offset of course by rental income.
The third difference is ‘liquidity’ which means the ability to sell property quickly and with little expense. You can literally sell 100 shares of any NYSE stock, get your money in a week, and pay only a nominal commission. Trying to sell an apartment building, or a strip mall, could take six, 12 or even 18 months, require advertising and substantial brokerage commissions.
The fourth difference is that many real estate investors are actively involved in the management of their property, or have to hire a third party to undertake those function. I have always been afraid of that 3:00 am call from a tenant that his toilet is clogged, and “come and do something about it.” That life style is not for me, but my wife’s nephew personally built a very substantial empire starting small and ending up with several 30-apartment units.
Now let’s look at the positive side of real estate. As one wag put it, “they aren’t making any more land”, implying that land was a scarce resource and if you owned it, and put buildings on it, then as population expanded the value was almost certainly going to go up over time.
Many of the great American fortunes have been built on real estate, think John Jay Astor and the Rockefellers, both in New York City. If you are actively engaged in real estate you will be given opportunities to invest and you can pick and choose whatever fits your investment profile. There is an active market in real estate; anything can be sold, even if it takes time, so as a buyer you also will have many choices.
The bottom line: Over a period of 20 years knowledgeable real estate investors will probably come out ahead of knowledgeable stock investors. In the short term, however, it is much easier to get in, and get out, of stocks.
My final advice: If you are thinking of real estate investments, get in touch with an experienced and knowledgeable professional. This is not the place for do-it-yourself amateurs. For further information I would welcome a call at 540-972-4704.
Alfred M. King

Corporate Governance – What Is It and What Does It Mean?

Alfred King — Wed, 25 Apr 2012 02:04:50 +0000

Governance is how a company is run, the ethical and business standards that a company, and its employees, follows on a day to day basis. Wal-Mart, Netflix, and Chesapeake are only the three of the latest public companies to receive unfavorable publicity about the actions of high level executives.
Did we know last week that Wal-Mart might have broken the law by bribery of Mexican officials? Did we know that Netflix in a seemingly arbitrary action, completely disrupted its long-standing customer relationships through an ill-advised price hike pushed through by its CEO? And then had to back off and apologize? Did we know that the Chairman and CEO of Chesapeake was literally $1 Billion in debt personally for personal investments he had made in his own company’s wells?
Corporate malfeasance has been with us as long as there have been corporations. Many organizations have attempted to bring higher ethical standards to U. S. business, and the common theme in these attempts is to foster an ethical “tone at the top”. Much research has demonstrated that when a company’s top executives act ethically, and insist that all other employees do so, companies rarely get in trouble. When, to the contrary, top executives seem to be interested in their own personal affairs, at the expense of the company’s, then employees at all levels tend also to look out for their own interests – and shortcuts such as bribery, personal investing or wild strategic moves appear to be approved.
Frankly, there is little that we as individual investors can do to determine what is the “tone at the top”, until it is too late. But once you see an ethical problem at a company, it is like cockroaches, if you see one problem, there are many more out of sight just waiting to be exposed.
My advice when you see an ethical problem: SELL. If the “tone at the top” is bad, it is going to take years to restore. As an investor you have many other places to put your money.
Finally, since it is impossible to anticipate whether a company does or does not have a problem with the “tone at the top” your only real defense is to spread your investments among several firms – after all they can’t all go bad at once!
Alfred M. King

Does the Federal Reserve Know What It Is Doing?

Alfred King — Sat, 21 Apr 2012 21:51:21 +0000

A very useful publication for investors is Barron’s, which comes out every Saturday after the market has closed Friday evening. Published by Dow Jones, which also issues the Wall Street Journal, Barron’s utilizes the physical facilities of its parent company to provide absolute up to the minute analysis. You go to Barron’s to see how others are viewing the market, not to obtain the latest news flash.
In this week’s issue there is a very provocative letter, discussing the possibility that the Fed will soon undertake its third round of monetary easing, often referred to as Quantitative Easing, or in the vernacular of Wall Street, “QE”, the initials of a famous ocean liner. The third round, if it were to come to pass would be known as “QE3”; the letter writer commented: “The mere fact we are discussing a third round of QE should tell you something about the success of QE1 and QE 2. Imagine if a CEO suggested we should do the same thing that had been tried twice before to solve the same problem. We would question his credibility, and perhaps his job would be in jeopardy.”
Certainly the viewpoint expressed is food for thought.
But that was not all in the current edition of Barron’s (full disclosure: I have no financial interest in the magazine or the publisher) because there is a fascinating interview with Economics Professor John Taylor of Stanford University. In the words of the writer “He has also become an outspoken critic of both fiscal and monetary policy as practiced over several years.” Taylor’s criticisms are technical, not political, and he casts no specific rocks at Republican or Democrat administrations. Unlike many talking heads, and candidates running for office, he bases his points on logic and reason, not emotions.
Taylor recently wrote a book “First Principles” where he argues for 1) Rule of law; 2) Strong incentives; 3) Reliance on markets; 4) Clearly limited role for government; and 5) Predictable fiscal and monetary policies. Needless to say, Taylor is somewhat concerned that we are missing the boat on all five principles.
I will obtain, and read, Taylor’s new book and report on it shortly.
Alfred M. King

How Efficient Is the Market?

Alfred King — Tue, 17 Apr 2012 18:31:38 +0000

How Efficient is the Market?

A critical assumption of most stock market analysts and observers is that the market is “efficient”. In this context ‘efficiency’ refers to the belief that market participants, taken as a whole, quickly incorporate in the current stock price all news about a firm. Under this scenario it is very difficult consistently to ‘beat the market’ because unless you possess unique information, information not known to others, there is no way to achieve superior returns over any period of time.
Most mutual funds, over a period of years, actually do less well than the S&P and Dow Jones averages, if for no other reason than trading costs and expenses of running a fund. And when a hedge fund manager does obtain ‘inside information’ there is more than a small risk that he can be indicted – as a number of hedgies have found out to their personal dismay.
This brings me to the events of the last two days. Two of the most active stocks have been Google and Apple, and each has had very substantial price action recently.
Yet yesterday both stocks were way down. The talking heads on CNBC were opining yesterday that this ‘might’ be the ‘beginning of the end’ for these now unloved stocks.
Surprise! Sentiment today now has turned around 180 degrees, and both Apple and Google are up, almost erasing yesterday’s losses. As I write this, Apple has gained today more than 4% from yesterday’s close.
So, what great news came out yesterday that was so efficiently processed that these two stock collapsed? And then what even greater news came out today that caused them to soar?
Maybe the market isn’t so efficient after all, and investment gurus who repeat the mantra about an ‘efficient market’ don’t really know what they are talking about. If you sometimes feel baffled by the stock market, just think – so are the ‘experts’.
Alfred M. King

Closed-End Funds

Alfred King — Sun, 15 Apr 2012 16:55:47 +0000

Closed-End Funds
These are a little known investment vehicle that can have some significant advantages for investors looking for relatively high yields.
The concept is that a sponsor, such as Legg Mason or John Hancock, sells stock. These shares of stock represent ownership in a sizable pool of investable funds put together by the sponsor. The sponsor then takes the proceeds of the initial stock sale and invests the funds in a basket of securities, usually common or preferred stocks, and/or fixed income securities. This basket is the total pool of funds, and unlike a mutual fund where new shares are continually sold and redeemed, the existing shares of the closed-end fund can only be traded in the stock market. Put another way, the term ‘closed-end’ refers to the fact that there is a finite dollar amount of assets which belong to the shareholders. However the shares in the fund are fully marketable and can be bought or sold in the stock market.
One of the peculiarities of closed-end funds is that they often sell at a market price which is BELOW that of the Net Asset Value. In other words, a fund may have $10 of securities per share outstanding, but the market price of the stock itself on NYSE or NASDAQ could be $9.50, for a 5% discount. So you are able to buy $10.00 of assets for $9.50. If that sounds too good to be true, there is a catch. There is no way for you, as an individual investor, to access that $10.00 of underlying securities. Further, because closed-end fund stocks are traded, their price can rise and fall, sometimes irrespective of the value of the underlying securities. Warren Buffett’s Berkshire is a good example, albeit its shares sell at a premium as people are willing to pay for Buffett’s supposed investment skill. Further, the “Discount (Premium) to Net Asset Value” can increase or decrease relatively quickly.
There is one further twist. Some closed-end funds borrow money to increase the size of the pool of funds managed by the sponsor. So the initial offering might be 10 million shares at $10.00 per share, realizing an available pool of $100 million. But if the sponsor then borrows an additional $20 million, each share would have $12.00 per share of securities as an underlying asset, offset by $2.00 per share of underlying debt. As with any equities purchased with debt, gains are magnified, but so are losses if the sponsor picks too many losers.
Many closed end funds currently yield in excess of 6%, with discounts to Net Asset Value of 8% or more. Investors desiring current returns above that of Government Bonds may be interested in closed-end funds.
However, as with any investment, listen to Jim Cramer who always advises, “Do Your Homework”.
Alfred M. King
April 16, 2012

When My Stock Goes Down, Have I Lost Money?

Alfred King — Mon, 09 Apr 2012 17:36:27 +0000

When My Stock Goes Down, Have I Lost Money?

There is a school of thought that says if you bought a stock at $20.00, and yesterday it closed at $19.00, you have not lost money until you actually sell the stock at $19.00. Then, of course, you do have a recognized loss.
But if you have not sold the stock, and have no intention of selling the stock, do you have a loss? This is not the place for medieval scholastics arguing how many angels can dance on the end of a pin. Rather it is a simple matter of definition of what you mean by ‘loss’.
If you are measuring the current value of your total assets, you obviously have fewer assets with the stock at $19 than when it was at $20. You have ‘lost’ part of your net worth when the decline took place.
On the other hands if you define ‘loss’ only when you have recognized the diminution of your total assets through sale, then in terms of ‘original cost’ you lose money not when the stock goes down, but when you actually sell it. So, if it went from $20 to $19, and then back to $21 a week later, you have recognized neither a gain nor a loss.
From the perspective of your net worth, you lost $1.00 when the stock went down, and gained $2.00 back when it went back up to $21.000.
The answer to the question in the headline, then, do you define a loss as diminution in your net worth, or is a loss only recognized after a sale?
There are people in both camps, and it is very hard for people of one persuasion to switch to the other approach. Having said that, I personally look at a loss or gain from the perspective of my overall net worth. Therefore on a day when the market goes down, I am a loser, and similarly on days when the market goes up I am a winner.
Interestingly, my wife takes the alternative perspective. She thinks I am nuts and wonders why I look at market prices every day.
Bottom line: Theoretically, I believe I am correct. Practically, my wife is correct.

Alfred M. King