Market Update For Week Ending 2/24/2012

February 27th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 12,982.95         +32.85         0.25         +765.39         6.26        
NASDAQ 2,963.75         +11.97         0.41         +358.60         13.77        
S&P500 1,365.74         +4.51         0.33         +108.14         8.60        
Russell 2000 826.92         -1.76         -0.21         +86.00         11.61        
International 1,573.82         +25.38         1.64         +161.28         11.42        
10-year bond 1.98%        -0.03%          +0.11%          
30-year T-bond 3.10%        -0.06%          +0.21%          
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
More market data

Market Wrap
U.S. stocks edged higher in a holiday-shortened week as investors cautiously embraced progress toward a solution for the euro zone’s woes. The Dow industrials ended up 0.25%, briefly regaining the psychologically important 13,000-point level in the process. The technology-rich Nasdaq gained 0.41% and the S&P 500 added 0.33%, but the economically sensitive Russell 2000 gave up 0.21%. Foreign shares surged on Europe’s good news while rising tension in the Middle East depressed bond yields. For more on recent trading activity, please read:
http://money.cnn.com

Surging Fuel Prices Raise Alarms For Households, Economists
The prospect of a protracted boycott of Iranian oil has already started to push fuel costs upward for many families. Economists are now worried that $109-a-barrel petroleum could push global economies toward recession and even weaken the U.S. housing market if it translates into $5-a-gallon gasoline. As geopolitical risks replace economic risks, where are investors to turn? For more from the energy markets, please read:
http://www.bloomberg.com

Greece Finds A Plan To Restructure $450 Billion In Toxic Debt
After years of drifting deeper into debt, the Greek government has finally come up with a compromise that may satisfy private creditors. While this is a welcome sign of progress for investors, timing is now extremely tight. If Greece fails to get at least 75% of its creditors to accept the terms on the table, the deal may not go through. And on March 20, the country’s next debt payment comes due. For more on the latest developments in the euro zone, please read:
http://finance.yahoo.com

copper

February 26th, 2012

This week, as planned, I invested in copper. Copper is down a bit right now because of a weakening market as Europe’s finances decline, and Chinese manufacturing slows down. My thinking is that this is a temporary lull, and that the demand for copper will go through up uptick cycle within a year or two.

On the one hand I bought JJC, a copper ETF, at around $49 a share. It moved up a slight bit in the past couple of days, which of course doesn’t mean anything.

On the other hand I wrote a put spread on Freeport-McMoRan Copper & Gold, (FCX) -NYSE, a mining company whose stock tends to track the copper and gold markets. I sold 10 of the May 40 puts and bought the May 30 puts as a hedge against disaster, and took in a premium of $1,200 net. If the stock goes from $43 down to 40 I would be OK to buy it, and would then sell the long position to recoup some of the cost.

I am now canvassing the market looking for large cap high yield stocks. More on that next week.

mlh

THOUGHT FOR THE DAY

February 20th, 2012

I just went into the online access for one of my brokerage accounts. The account has a number of put spreads and call spreads in it.

It was not very helpful. First of all, the underlying price of the stock used in the options was not listed, so I had to go into Yahoo Finance
separately to find that.

Secondly, my cost was not displayed, just the current market value. So I couldn’t tell if I had a profit or a loss so far.

My point is simple: with the DYY portfolio manager, by going into “preferences,” I can have all that information available on all my accounts
at one time. It’s much better.

Merv

some new thoughts

February 18th, 2012

Two sectors of recent discussion in the investment press have been homebuilding and copper.

In accordance with my current reluctance to invest too heavily in individual companies, because of high volatility from purely psychology, not value, I am looking at ETFs in those areas.

In HOMEBUILDING one could consider XHB. I have been watching it for a while, as it has gone up from $12 to $20. It might still be a good value at 20, for a long term (3 years or more) holding. But I am waiting to see if perhaps it dips in a market correction before buying it.

There is not enough premium in the puts to warrant selling a put, and if I buy it at current call premiums that hardly seems worthwhile as well. That is one of the reasons I haven’t bought it yet.

Regarding COPPER, one could consider JJC, the copper ETF. That seems to have gone down in the recent past, and now is holding steady at around $48. This looks good to me and I probably will pick up a few shares soon.

mlh

Market Update For Week Ending 2/17/2012

February 18th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 12,950.10         +148.87         1.16         +732.54         6.00        
NASDAQ 2,951.78         +47.90         1.65         +346.63         13.31        
S&P500 1,361.23         +18.59         1.38         +103.63         8.24        
Russell 2000 828.68         +15.35         1.89         +87.76         11.84        
International 1,548.44         +23.47         1.54         +135.90         9.62        
10-year bond 2.01%        +0.04%          +0.14%          
30-year T-bond 3.16%        +0.04%          +0.27%          
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
More market data

Market Wrap
Global stocks rebounded this week even though a long-awaited rescue for the Greek government failed to materialize. The blue-chip Dow industrials gained 1.16% and the broad S&P 500 added 1.38%. An improving U.S. economic outlook gave the technology-rich Nasdaq added upward momentum, sending that index up 1.65%, while the economically sensitive Russell 2000 surged 1.89%. Foreign shares kept pace, up 1.54% in dollar terms. As money flowed into stocks, demand for U.S. Treasury debt declined, allowing bond yields to edge upward. For more on recent trading activity, please read:


http://finance.yahoo.com

Surging Oil Prices Reflect Strong Economic Growth, But Could Climb Too High
Oil markets have demonstrated that global investors feel better about the world economy’s health. After all, as the pace of industrial activity accelerates, so do consumers’ demands for energy of all types, especially petroleum. However, oil markets can become too robust for the world’s comfort. Are we near that level now? For a discussion of what the energy sector is telling us about the broader economic environment, please read:
http://bottomline.msnbc.msn.com

The Clock Is Now Ticking For Greece
After last week’s eleventh-hour budget compromise failed to earn approval from Brussels, Greece is back on a tight timetable to do whatever it takes to make the European Union happy. Otherwise, the country will be unable to make its next $20 billion bond payment, due on March 20. With the window for pleasing all of the continent’s finance ministers — not to mention private investors — now extremely narrow, some analysts are worried that the negotiations have dragged on too long. What is going on in Europe, and how might it affect global investors? For more, please read:
http://money.cnn.com/2012/02/17/markets/greece_bailout/index.htm?iid=HP_LN

Some trades this week

February 14th, 2012

This week my colleagues and I are discussing a couple of interesting issues.

The first one has to do with the price of oil. Some think that it has peaked. So, since it is certainly high, I sold some oil stocks and wrote puts at a slightly lower strike price than current market price to replace the stock. If the stocks stay up for the 90 days of the puts, I will just keep the profits and the premium. If the stocks go higher I probably made a bad decision. If the stocks drop, I made a really good decision, caught the high (which I rarely do) plus took in a premium and perhaps will automatically repurchase the stocks at a lower price.

The second discussion has been about volatility. With Apple and Whirlpool moving so much, this is an issue. So I have moved some money out of individual stock companies and into sector indexes instead. I will post some more information about these decisions in the near future.

Merv

Market Update For Week Ending 2/10/2012

February 11th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 12,801.23         -61.00         -0.47         +583.67         4.78        
NASDAQ 2,903.88         -1.78         -0.06         +298.73         11.47        
S&P500 1,342.64         -2.26         -0.17         +85.04         6.76        
Russell 2000 813.33         -17.78         -2.14         +72.41         9.77        
International 1,524.97         -4.49         -0.29         +112.43         7.96        
10-year bond 1.97%        +0.02%          +0.10%          
30-year T-bond 3.12%        -0.03%          +0.23%          
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
More market data

Market Wrap
Global stock markets foundered this week as investors opted to take some profits and wait for conclusive progress in the euro zone’s ongoing debt crisis. The Dow industrials and broad S&P 500 shed 0.47% and 0.17%, respectively, while the technology-rich Nasdaq was only minimally lower on the week. The economically sensitive Russell 2000 languished after weeks of outperformance, giving up 2.14%. Foreign shares sank 0.29% while long-term Treasury yields were mixed as investors adjusted their portfolios. For more on recent trading activity, please read:
http://finance.yahoo.com

Greece Finally Reaches A Budget Deal…But Workers Protest
After weeks of bickering, the Greek government and public sector debt holders finally came to terms on the budget cuts Athens will make to satisfy investors. Unfortunately, the European Union is demanding more concessions, private bond holders have yet to sign off, and the Greek people have gone on strike again to demonstrate their unhappiness. Whether progress from here will be fast enough to prevent Greece from missing its looming debt payment on March 20 remains to be seen. For more on the unfolding situation in the euro zone, please read:
http://money.cnn.com

U.S. Consumers More Optimistic About The Job Market Than Ever
The monthly consumer sentiment survey from the University of Michigan reflected continued optimism among the American people, especially where the job market is concerned. While the broad view of the economy’s health dipped slightly in February, hope for new hiring ahead actually reached the highest levels on record. After years of gloom, Americans are now hearing about job openings or simply feeling better about their own situations. For more on the public mood and what it entails for investors, please read:
http://bottomline.msnbc.msn.com

Debt and Taxes

February 11th, 2012

Greece is again in the news, finally passing reforms that will probably enable them to receive the second round of bailout funds. Although they gave in to most of the IMF’s and the Eurozone’s (i.e., Germany’s) demands, even after this round of funding, it won’t be the end of the crisis for Greece or the rest of the PIIGS (Portugal, Italy, Ireland, and Spain). But the loans will buy time while everyone continues to prepare for the possibility that Greece leaves the Eurozone (I give it 50/50 odds). In the meantime, the ECB continues to shower the banks with liquidity, Portugal struggles to avoid Greece’s fate, Ireland is recovering nicely, and the big boys—Italy and Spain—make slow but steady progress. I predict the Euro experiment will eventually be declared a success, but not without a few more years of pain on the Continent.

Unlike last year, the financial markets currently appear to be taking all this in stride. The ECB’s massive $650 billion liquidity injection (the LTRO) has certainly helped, as has better than expected economic and employment news, both here and abroad. While we still have a long way to go until the global economy reaches normalcy (whatever that looks like), loose monetary policy by central banks around the world, coupled with governments that seem to have finally become serious about deficit reduction, is helping put a floor under stock prices (and a ceiling over interest rates).

Don’t fight the trend: the financial elite are doing everything they can to make “risk” assets enticing and “safe” ones unattractive. Ten-year US Treasuries at 1.98%? That’s -1.53% after taxes and inflation: $100,000 shrinks to $85,725 after 10 years at this rate. Instead, try a high-yield bond fund. At a current yield of 6.86%, JNK (SPDR Barclay’s High Yield ETF) turns $100,000 into $115,333 after taxes and inflation, a difference of $29,608 or nearly 30%. Better yet, put JNK (or a similar fund) in your IRA or pension account and have $144,470 after 10 years. (All this assumes no change in interest rates or inflation over the next decade.)

Stocks, many yielding well north of 3% (Pfizer currently pays 4.2%, and even Intel yields 3.1%), offer the prospect of rising dividends and rising prices over time, both at a rate that has historically outpaced inflation. You want certainty? Nothing’s certain in finance except debt and taxes—both of which will still be with us long after we’ve developed the technology to cheat death—and about which I’ll be devoting the rest of this newsletter.

How to make debt and taxes your friend (and let inflation work for you, too)

Greece is a perfect example of how not to use debt: they borrowed above their means and never established a clear path to service it, let alone pay it off. Many individuals have ended up in the same boat, borrowing more than they could afford and having to negotiate reduced payments or even losing their homes and/or filing for bankruptcy. While we have all heard ad nauseum how debt can get you into trouble, we rarely hear about the flip side: how to use debt to your advantage.

As you know, there are individuals and groups who are philosophically opposed to debt. But where would we be without the ability to lend and borrow money? How many people do you know who could afford to buy homes, not to mention cars and quite a few other things? And most companies could never buy the factories and equipment they need to make the products we find essential, including the generation of electricity. While unlike taxes, you have the option of avoiding debt, doing so is only rarely the shortest path to wealth.

Aside from the ability to purchase big-ticket items you otherwise couldn’t afford, the creative use of debt enables you to use both the US tax code and inflation to your advantage. How? In many cases interest is deductible, reducing your taxes and increasing your cash flow. As for inflation, while it increases the cost and value of most items, it decreases the cost of debt over time.

For example, at 3% inflation, a $500,000 mortgage, even if you don’t pay down a penny, is only worth $200,505 by the end of its 30-year term, and a $2,000 monthly payment falls to $802. During that same period, the equity in your $750,000 home would increase from $250,000 to $549,495, even if your home’s value merely kept pace with inflation. The magic of leverage + inflation has enabled you to double your home equity even with zero real appreciation of your home and zero payment of principal. And all the while, you’ve deducted the interest from your taxes.

This is why I’ll probably never pay off my mortgage, even when I’m 90 years old. Inflation doesn’t stop when you retire. So long as you’ve managed your debt and cash flow properly (something I emphasize with my clients), a mortgage is not a burden. Such is particularly the case now, with interest rates at historic lows.

Creative use of mortgage debt can also involve “equity stripping,” where you refinance your home and take out additional equity to invest elsewhere. How much more you take out, your ability to support the monthly payments, where you invest that cash, what kind of mortgage to use, and the current level of interest rates are just a few of the factors you need to consider when doing this. And don’t try this by yourself! Unless you’re a financial professional, you need a qualified advisor to guide you through the process and make sure you don’t end up like Greece.

Lots of people got into trouble doing just what I describe above. Why? Because most of them “invested” their money in additional real estate or even worse, cars, vacations and big screen TV’s. Using your home as an ATM rather than as an investment asset is one of the best ways I know to end up as a renter rather than a homeowner!

Other forms of debt can also be your friend, such as business loans, auto loans, student loans, and occasionally even personal or credit card loans. The best loans obviously have the lowest interest rate, but also have predictable payments (i.e., no surprise resets), are properly matched to their purpose, and have tax-deductible interest. (Every time the tax code is revised, the latter seems to become increasingly scarce.)

One other creative use of debt I’ll mention is the funding of pension plans. Many of us would like to save more for retirement but don’t have enough extra cash flow. With the proper use of debt, you can significantly increase your retirement nest egg and save a bunch in taxes at the same time. Again, this is not a do-it-yourself project, as there are lots of potential pitfalls.

In our blog, we’re currently writing about the creative use of debt, with several specific examples. I invite you to peruse the articles and ask questions about the strategies. With interest rates at their lowest ever and both taxes and inflation likely to be on the increase in future years, now is the best time in history to take on a prudent amount debt. Of course, lenders remain stingy, and these strategies are likely to be of most benefit to those who really don’t need to borrow more. So while the rich continue to get richer, this is one case where the smart can get richer, too.

Make debt, taxes and inflation work for you! I know I am.

Dr. Ken Waltzer MD, MPH, AIF, CFA
Founder and President – Kenfield Capital Strategies (KCS)

Kenfield Capital Strategies™ (KCS) is an SEC-registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with comprehensive financial, estate and tax planning services.

UPDATE ON WALGREEN

February 9th, 2012

When I read the annual report on WAL I was quite impressed. They continue to expand, and claim to make a profit on every new square foot.

But the stock is not performing, and the news about their contract relationships is discouraging. I’m afraid management is not up to the task.
CVS seems to be kicking their butt.

Even when the market is hot, as it is now, WAL does not perform. So I’m getting out of it. It’s been good for covered call writing, but I fear for
the worst in the price of the stock going forward.

Merv Hecht

Market Update For Week Ending 2/3/2012

February 6th, 2012
Index Close Net Change % Change YTD YTD %
DJIA 12,862.23         +201.77         1.59         +644.67         5.28        
NASDAQ 2,905.66         +89.11         3.16         +300.51         11.54        
S&P500 1,344.90         +28.58         2.17         +87.30         6.94        
Russell 2000 831.11         +32.26         4.04         +90.19         12.17        
International 1,529.46         +33.88         2.27         +116.92         8.28        
10-year bond 1.95%        +0.05%          +0.08%          
30-year T-bond 3.15%        +0.09%          +0.26%          
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.
More market data

Market Wrap
U.S. stocks surged this week amid much better-than-expected economic news and a sense that the world’s central bankers are moving closer to claiming victory over the long recession. The economically sensitive Russell 2000 led the way with a 4.04% surge and the tech-heavy Nasdaq jumped 3.16% to its highest level since 2000. The Dow industrials climbed 1.59% to their post-recession peak and the S&P 500 gained 2.17%. Foreign shares joined the rally, up 2.27%, while bond yields edged higher. For more on recent trading activity, please read:
http://www.cnbc.com/id/46251590

Unemployment Plunges To A Three-Year Low
U.S. businesses continued to expand their payrolls in January, giving economists and investors alike welcome confirmation that the improved numbers they saw in December were more than a holiday aberration. In all, employers added 243,000 jobs in January. As a result, the broad unemployment rate dropped all the way to 8.3% — its lowest level since the 2008-9 credit crunch was still devastating the global economy. For more, please read:
http://money.cnn.com

Ben Bernanke Sees Stimulus Working, No Need For Austerity Yet
The Federal Reserve’s chairman came under fire from Congress this week when he argued that years of loose monetary policy have done their job without generating above-trend inflation. While lawmakers insisted that now is the time to reduce government spending, Ben Bernanke pointed to the numbers — and the economy’s still-fragile state– to make his case. For more on the Fed chairman’s latest testimony, please read:
http://www.usatoday.com