That Was The Week That Was-1st Week December

 Dogs of the Dow -Value Investing Lesson 2: Investing in the Dogs of the Dow has been around ever since Dairy Queen put a curly-cue its first cone. Dog investing is Value investing at its simplest and easiest. There are two problems with this strategy: One holding substantial amount of money in only ten stocks is not for the faint of heart, (the system calls for investing in only 10 of the 30 Dow stocks), and  if you only have a few dollars to invest the Dog method is not for you. A lot of the old-timers used Dog investing as a method to provide dividend income. Here’s how it works, and if you want me to help set up a Dog portfolio please call or e: At the end of the year research all the Dow stock histories and sort them to determine those stocks that paid the highest dividend and had the worst performance for the preceding year. Out of that list choose the worst ten performers and those are your Dogs. Invest equal amount of money in each stock and over the next year you do not sell, modify or change anything in the portfolio. At the end of next year you do the same calculation and invest in the new 10 Dogs. Every year you will own the 10 best dividend performers of those with the worst annual stock performance. Since there are only 30 stocks in the DJIA you may have a stock or two that carries over from the year before. The dividend yield helps in the total return and is currently twice as high as the 10-year Treasury. The dividend may be paid in cash or reinvested in additional shares. The total returns, including dividends, have not been shabby considering Dog investing has lost considerable cache the last decade or so. Over the past five and ten year the Dogs of the Dow management style has outperformed the S&P 500 index rather handily.

Last week best week for the markets in three years, even though Friday finished basically flat. News of Central Banks providing liquidity to beleaguered Europe was just the ticket. Small caps up 10% and S&P +7.4%. Beaten up bank stocks were strong with Bank of America posting a 8% gain and Morgan Stanley up 17%.  Even the jobless numbers ( although this will get some revisions) was at lowest level since 2009 and fell to 8.6% from 9%. So how do you play the markets where central banks are the backstop?  JP Morgan analyst Thomas J. Lee wrote that this rally has legs and suggested buying cyclical stocks. He went on to say, ‘It’s still hard to argue that the market is screaming “Buy!” Every time Angela Merkel sneezes, the markets wince. That kind of volatility isn’t for everyone.”  Tom’s list of cyclical stocks is listed further down into today’s blog. Here’s the news as the week unfolded…

‘Tis  the Season…when window dressing reaches Wall Street.  What exactly is ‘window dressing?’ It’s when mutual funds load up on those stocks that produced well for others the previous eleven months (and not for them) and now managers want you to believe they were on it all the while. Smart Money magazine pointed out American Funds Growth fund sold their stake in Oracle and Microsoft and added to their positions in Amazon and Apple. The fund said it was part of their long-term investment commitment. Pssst, got a bridge to Canada for sale- cheap…

 Bullishness on Chinese Company’ stocks is amazingly strong even though the Chinese market has skidded. Analysts are so sold on Chinese companies that for every sell on a Chinese stock they have 19.2 buy recommendations. Compare this to U.S. companies where the ratio is 10.5 to 1 and for the rest of Asia 7.3.  The WSJ reported that it is the analysts belief that the Chinese cannot fail attitude. The only other bull-like country for analysts is South Korea. One Asian analyst, James Antos, said of his counterparties who never can say a bad thing on Chinese banks, ‘In Europe you have some guys who have been covering banks for 20-years. It wouldn’t be a bad idea to have at least lived through one Chinese banking bear market…’

A 1-2 Punch  Monday as markets cracked 300 points mid-day and still the Dow closed  +291 and Nasdaq +86!  All based on Europeans saying they had a plan and Black Friday being a huge success. Cyber Monday was also huge- up 24% from the year before with over a billion dollars in sales on-line. (If it isn’t on-line or at QVC I don’t buy it.) CNBC at the closing bell thought the beginning of the rally was sustainable…. It’s just a plan….nothing inked…! Expect more volatility before this is over.

Fitch Affirms AAA for U.S.A. but revised outlook to ‘Negative’ because of declining confidence in sustainability of government finances.  Ex-Super-Committee peoples listening? Fitch was directing its ire to Congress.’

Barney Frank- egotistical- bright-smarsy-liberal: Color him Gone! The Massachusetts Congressman is packing his bag and either heading home or into the open arms of a Lobby Firm. Frank was one of the main architects of the mortgage meltdown.  His political ties and unwillingness to put a leash on the mortgage monsters Fannie Mae and Freddie Mac ( they were huge contributors to his political campaigns) gave banks and investment houses the ammunition to put the nation into the second worst Depression of its 200 plus years. His idealized  notion that people with no money, little income and no history of paying their bills should be able to own a home with little or no money of their own invested was a Utopian nightmare . Frank headed the chairmanship of the Financial Services Committee and was supposed to oversee the remaking of the financial industry. But, as the WSJ wrote in its editorial Tuesday 29th. that was like asking Charlie Sheen to teach anger management classes. 

Morningstar Installs New Rating System….For years investors looked to buy only those Morningstar rated four and five star mutual funds. With over 7500 mutual funds available to American investors Morningstar announced a new forward looking rating system- how funds would perform in the future versus how well they did in the past. Their belief is that fund managers offer a better opportunity going forward than analysts or talking heads. The problem is that initially Morningstar only has analyzed 300 mutual funds and hope to offer analysis on 1,000 funds by the end of 2012. That still leaves the vast majority uncharted. The ratings will be based on  Gold, Silver and Bronze. This rating will be based on how well a fund will do in a certain group versus its competition. The problem is only 300 –1,000 funds will initially be rated-a small sample that could influence planners and investors to bloat assets of those named Gold rated funds. And yes, I have subscribed to Morningstar since its inception and will be sharing this information with clients.  The methodology Morningstar will use is based on (1) People running the fund (2) How the fund selects its holdings (3) The parent company stewardship (4) Risk adjusted performance (5) Expenses in relationship to others in its category. Funds will still be rated 1-5….

Lots of Stuff Happening Tuesday: Iranian students storm British embassy (deja vu only different) , American Airlines files for bankruptcy- stock worthless, Steve Liesman at CNBC says to wait for the December Global Leaders meeting on the  9th before anything of substance takes shape over Europe, Markets were mixed at the half-way mark, Tech was leading the losers, Tiffany’s had great global numbers but weak European sales figures and the blue box stock was punished along with other high end retailers Ralph Lauren, Coach and Sax (Just last week the high-end retail giants got rave recommendations- so watch the bounce as European news breaks.). Tiffany has a growing presence in China and in Russia. Barrons reaffirms its love for Tiffany in its Wednesday ‘Barrons Take’ blog. Finally, technician Michael Ashbury warns of specific resistance: S&P 500- 1215-1230; Nasdaq-2590-2600 and Dow resistance around 11,500. whew! pooped…

Tick-Tock…Uber-Analyst Meredith Whitney, earlier in the year, warned of states going belly-up…and issued dire predictions on owning tax-free muni’s. The clock is running on the supposed melt-down that hasn’t happened. 

U.S.A. net Exporter of gasoline, diesel and other oil based fuels. From 2005, where we imported as more than 900 million barrels of fuel to 2011 where we are a net exporter, the United States provides emerging markets and others with refined oil products. According to WSJ this trend is not likely to change over the following decade. 

 

Missing $1 billion MF Global customer money just shrank as solid detective work discovered $500,000,000 parked in an account at a defunct broker-dealer, according to Huffington Post. Just another $600 million missing…pshaw…a mere piffle.

Face-Book Gearing for IPO… this coming spring the company anticipates issuing shares and is pricing the company in the neighborhood of $100 billion. Before you start  digging behind the coach cushions for spare change you may want to wait a bit until the IPO luster fades before buying. At $100 billion the company would be valued $15 billion more than (sob) Amazon and $85 billion less than Google. Facebook in 2011 will have an estimated $4.3 billion in world-wide revenue and possibly (according to WSJ) $7 billion in 2012. Still the company has some massive numbers: In October Facebook has some 790 million visitors who spend an average of 6 hours on site. Compare that to LinkedIn (a recent IPO) that had 92 million visitors in October and spent 15 minutes. The Globe and Mail interviewed Chris Nagy at TD Ameritrade who suggested waiting before buying shares in Facebook and allowing the hype to cool. Don’t forget all those swells that got in at the beginning and own substantial amounts of  private shares in Facebook. They’ll be selling, you betchum.

Toyota Announced that their allegiance to Emperor and Country may be at an end. The company is being hit with softening U.S. sales and an extremely strong yen.  The strong yen makes exports more expensive. The company is toying with the idea of moving some of its small car production to Baja California and Mexico. Moving auto production out of Japan is being discussed but nothing is firm at the moment. The stock TM closed at its yearly low of $64.30 Tuesday.

Wednesday Markets surged almost 500 points on the Dow! The Central Banks ( Letting you know in case you were out of town or the TV was broken.) of U.S., Canada, England, Japan, Swiss and (let’s not forget) European Central Bank, all got together and launched a joint action to provide cheap, emergency loans to banks in Europe and elsewhere if and when needed. This is exactly what the markets wanted to hear. This is not the first time a coordinated action by all Central Banks was initiated. Similar action was taken in 2008. It was the news that governments were taking the European problem seriously and not acting like politicians that motivated investors. Before everyone gets excited the volume was light considering the huge upside on world and domestic markets. This action does not solve anything. Deep problems still exist.

$’s or Swaps-what the Central Banks did was announce that they had a plan to get dollars or any currency to local banks. The banks really didn’t do anything on Wednesday but made the world aware that the global financial central banks were aware of European issues and confirmed that with their announcement that the banks would do what they needed to do if and when a severe monetary crisis erupted. It was more of a I’m-here-if-you-need-me gesture…(even investors need a little reassurance once in awhile).

Hedge Funds Call it Quits! According to CNBC many hedge funds in 2011 are calling it done, cooked, finished, stewed and put on the shelf until 2012. Michael Murphy, CEO of hedge fund Rosecliff Capital summed it up, ‘ The uncertainty coming from the Eurozone has  created an environment where almost all asset classes have traded in tandem and fundamental analysis has been almost irrelevant.’ Mikey, I’ve been singing the same song for months.

Autos- Crushed Numbers- Again! GM =+7%, Ford = +13%, Chrysler= +45% and Toyota=+7% and still institutional and fund investors ignore them as auto share prices are at this year’s lows. Consumers again flocking to SUVs and Trucks as Ford sales confirm were up 29% and 23% respectively. okay, a modest pop Friday ….

Tom Lloyd, Sr in MarketWatch blog reports on six Dow stocks oversold and may be trending higher. Actually Mr. Tom said they’d be trending higher- here are his picks: American Express, Chevron, Johnson & Johnson, Coca-Cola, Microsoft and Proctor & Gamble. 

Morningstar List of Mutual Fund Losers (Believe me when I say that these are all managed by educated experienced people who devote their lives to managing money!) Birmiwal Oasis –(negative) 55% for the year. (it had a 63% loss in 2008- you wonder if any assets remain),  The USX China Fund (negative) 54% (how you can be negative in China when the average China fund is up 5% is head scratching), Apex Mid-Cap Growth (negative) 35% ( the fund charges an obscene 7% expense ratio- and calls itself a no-load fund), Finally ( yes, dear reader there are more but enough is enough), Legg Mason Capital Management Opportunity (negative) 29% Bill Miller, one time uber-manager and heading for the pasture after this year called Kodak a $100 stock and today it’s hanging on to $1.25. His top holdings have been horrible in 2011: Boyd Gaming, Synovus Financial, MGIC Investment and Clearwire (being kept on life support by Sprint!).

The Center for Science in the Public Interest warning of a health hazard that causes a violent reaction after consuming a popular meat substitute. Over the past decade CSPI has received 500 U.S. complaints and 1200 from Europe and Australia. The product is sold under the name Quorn. It is actually Mycoprotein, a fungus fermented and mixed with vegetable flavoring and ingredients like onion and egg white. It is then shaped into nuggets or cutlets and  frozen. It is sold as a chicken substitute and has a high fiber content that may be responsible for consumer complaints. Some people love it. The product is sold at Whole Foods and Kroger. Others will never eat it again. Ginny Lineham dined on Quorn ‘Turk’y Style Roast’ this Thanksgiving. Within three hours she broke out in a cold swear, vomited and passed out in the bathroom, hitting her head. Critics say  packaging does not state, ‘This is a vat-grown fungus that could cause severe allergic reactions.’ Fans of the product say it is chewy like chicken with a distinct mushroomy flavor. Probably yummy with lots of ketchup, huh?  Bon appetite!

Cyclical Stock Lesson: A cyclical stock is one that rises rapidly when economic growth is good and falls when growth slows. Tom Lee of JP Morgan suggested the following cyclical stocks to buy this cycle: Bank of America, MasterCard, Wynn Resorts, Las Vegas Sands, Apple and Macy’s.

The I.P.O. market has gotten scarce with the continuing market volatility. Lost in the hubbub of a Facebook IPO this spring is game maker Zynga that derives a good portion of their income from being associated with Facebook The company has decided to offer 14% of its stock in the offering and expects its initial investors to lose money! The Zynga IPO will be priced $8.50 to $10.00. Paper losses are expected for mutual funds run by Morgan Stanley. Fidelity and T.Rowe Price.  These companies bought preferred shares in the neighborhood of $14.00 a share, according to news released by Zynga. The IPO share price is expected to be $8.50 to $10.00 a share. The IPO market has lost some of its froth as shares of previous companies have tanked after being issued. Groupon lost 28% after issue and LinkedIn are down 38% from post-IPO peak. The difference between Zynga and the others is that Zynga is profitable. The company has 200 million players on line at Facebook. 

One-Stop Shopping for IPOs Zynga, Facebook & Twitter: Yes, dear investor, there is a stock that invests in start-ups and has cash invested in Zynga, Facebook and Twitter- getting the real pre-IPO price before the IPO.  GSV Capital buys in the secondary market (as do some mutual funds and hedge funds) and into the incubation period of these so-called hot issues. Evaluating share price is nearly impossible and no analyst is covering the stock. Currently, according to Barrons.com, GSV has 16% in Twitter, 14% in Facebook and  5.5% in Zynga. Shares in  GSVC closed at $14.44 Friday last.

Finally, FDIC closes two banks in Georgia. The total banks closed year to date: 90.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.