Thursday, December 16, 2010

16 December 2010 Diversity can be Diverse


16 December 2010 Diversity can be Diverse

I can’t believe that it is only a little more than week until Christmas. That is until I walk in the door at the end of the day and see the woman who manages to pull off the Holiday Miracle with grace and poise. There are boxes everywhere, packages every- where, wrapping papers in very corner of every room, enough scissors around the house to make Edward Scissorhand jealous. And some how it will all come together and turn out fabulous, assuming I stay out of the way. Thank you Dear.

I am telling you about holiday goings on because their ain’t a whole heck of a lot to talk about in the market. We got our Inflation numbers on Wednesday and I was wrong, there was no increase, there was actually a decrease and within minutes the talking heads on the Finance channels were floating the D word. Deflation. Personally, I think some people just look for the bad in every situation. If we, the optimists of the world were the only ones in the world allowed to trade, we would never have a downward correction. It would be the epitome of the bigger fool theory. I could pimp my stock, you would buy it for me tell how great it is, and I would buy it back at a higher price then convince you how great it is, and then sell it back to you at a higher price. Anyway, there were enough people who either knew or were comfortable with the downward direction of inflation that the market just yawned.

We projected an improvement to Industrial Production and we missed that one too. It did what it was expected to do so the market just yawned.

Today, new housing numbers were released and it was a schosch (Financial term for teeny tiny bit more) more than expected. When you break down the numbers, single family homes did much better than expected while multi family units dragged the number down. We were hoping for a drop in the number to clean out the inventory of homes so at face value this did what it was expected to do and, the market just yawned. (Worth noting is the fact that finished home was lower than new starts for the first time in several months. That means that contractors will now have a place to work and it should help the employment figure to come. This is my interpretation of the numbers but I did hear a similar comment on Bloomberg today.)

The little bit of pin action we had in the Salve Lucrum Portfolio included some nice dividends (got Bob’s attention) on BOH, BMI, KO and MCD. Interesting note, since 1960 60% of the value returned in equities were the result of dividends and the reinvestment of those dividends. Food for thought.

We started a new call position on GE. It’s a March 2011 18.00 call position. We have been connecting the dots of some fairly promising press releases and feel that the Jan 17 earnings call should be good. Well good enough to make this call profitable. We got in at 65 cents a call and we are looking for a 30% upside by earning release.

We mentioned JOYG Joy Global here last week and suggested looking at some 90-120 day calls in the 80.00 ball park. We hope you did your homework and agreed. We picked up an April 90 dollar call at $3.65 each and we were rewarded yesterday when we cashed out at $4.80 each a nice 31% gain before fees.

We did sell out of a AAPL put which we bought to cover our long position, but when the put went down 8% we got out. AAPL seems to be doing everything right at the moment, so my downside concern was short lived.

And on December 1, we pointed out some $40 March calls for CAH Cardinal Health. We got in at .85 a call and we got out today at lunch at $1.35 a nice 53% gain.

Diverse Diversity

If you are a Cramer aficionado you know he plays a little segment once a week called, “Am I diversified?” It is an interesting segment, and it is based upon a couple of chapters in a couple of his books. In essence he is teaching us that in order not to be come victim of one good or service or product category we should evenly disperse our holdings across about 5 distinct categories. He used to use the acronym BOATS. Banking, Oil, Aerospace, Tech, and Speculative. Each category should hold about 20% of the portfolio. If you are talking about a portfolio in the $10,000-50,000 range, that is extremely good advice. The categories do get a bit blurred. Aerospace might also include large industrials. Tech might include internet stocks. You get the point.

We would make an argument that if your experience and resources confine you to that model, and if you use true value metrics like low P\E ratio, a good sustainable dividend, good cash flow, low or non-existent long term debt, stock buy backs, and strategic acquisitions, that is an equation for probable success.

However if you have the resources and the experience you can diversify by having 20% of your portfolio in a portfolio as described, 20% in commodities, 20% in bonds, 20% in options, and 20% in Forex (International Currency Exchange).

A couple of people have asked how we get so crazy on options and still espouse a value driven portfolio. Again, it is my definition of diversification. Our core portfolio is made up of great value/growth stocks ie KO Coca-Cola, AMZN Amazon, CVX Chevron, AAPL Apple Inc., MCD McDonald’s, WM Waste Management, IBM, FLS Flowserve, and MSFT Microsoft. Knowing that these are the workhorse of our portfolio, we use Katenelson’s ideas to actively manage those holdings. In essence that means we look for buying opportunities, but realize there are times to take some profit off the table.(Sorry, FINVIZ.COM is down for some reason so we cannot provide links)

We have several bonds currently enjoying a nice profit from where we bought them and throwing an average of 7-9% yield based upon today’s evaluation.

We currently have about 7% in put and call options. Ironically that 7% is controlling a portfolio a lot bigger than the entire SL Portfolio.

We have commodities that are about 18% of the overall package. We DO NOT TRADE FOREX. It scares me and I am way to dense to figure it out. So the balance of the portfolio (about 15%) is in a cash type account that allows us to get in and out of opportunities as we see them.

So that is what we mean by diversified.  It really is simple.  All you have to understand is the details of the chart that my buddy "The Pirate"  Preston James put together and I use here without permissions. 

Salve Lucrum


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