Monday, September 20, 2010

RSY VIII: Oh no no no I'm a rocket man

The RSY portfolio entered into a long position on MRH of 400 shares at a strike price of $16.69 near the opening of the markets on Friday, 9/17/2010. It gapped up slightly from the close the day before and then met the strike price within the first 10 minutes. A summation of our portfolio on the close of Friday is below. {Click on tables for clearer images.}

So far, this is a gain of over $1200 and about 5 3/4% gain based on our ending balance. The chart below gives a different perspective with the added position of ANAT that was closed.

The only loss, so far, is just the slight down position that we just entered on Friday {MRH}. Since Friday this has also changed into positive territory. Knock on wood that that will continue. That is one reason to be extra diligent to enter and exit positions at the prices we want and not what the market desires to give us. The averages {per position} of percent return and dollar profit are interesting but averages can be deceiving as length of hold matters and size of each holding, but at least this gives us a snapshot of performances so far. As of the 17th, dividends have been paid out for ANAT of $77 which is reflected in the table above.

The RSY portfolio has not yet recommended any options as the volume on options have been low and there is low returns for the ones observed. This has been mostly due to market caps being on the low end. RSY also has not engaged in "harvesting profits" or hedging positions. One way to describe the hedging is simply by rebalancing the account for the ones expanding as a percentage of the portfolio. These decisions will also be put off until at least past the dividend dates. MRH and NGPC both have ex-dividend dates on September 28th and GAIN is today.

PS: After close of markets today, IVR announced its next dividend payout.
The Board of Directors of Invesco Mortgage Capital Inc. (NYSE: IVR) declared a dividend of $1.00 per share for the third quarter of 2010. The dividend will be paid on October 27, 2010 to shareholders of record on September 30, 2010. {BusinessWire}

That is good news indeed.

Oh no no no, I'm a rocket man
Financial markets often appear to have their own set of economic rules that other markets do not show. The Capital Spectator discussed some of those issues at HOW TO THINK ABOUT ECONOMICS, PART II which linked to a blog post at The Economist titled A special case The demand for financial assets is not like the demand for iPods. Below is a quote from The Economist post.
Financial markets do not operate in the same way as those for other goods and services. When the price of a television set or software package goes up, demand for it generally falls. When the price of a financial asset rises, demand generally increases.

Why the difference? The reason is surely that goods and services are bought with a specific use in mind. Our desire for them may be driven by fashion or a desire to enhance our status. But those potential qualities are inherent in the goods themselves—the sports car, the designer sunglasses, the fitted kitchen. Such goods may be means to an end but the nature of the means is still important.

Part of that discrepancy, in the rising are prices driven higher, is momentum players. As an asset is increasing in value there is a derived return on investments. The assumption is that if an asset is increasing at X percent per year or unit of time that it will continue on that trend line. Of course we all know about "past performances do not dictate future returns" but some market participants seem driven more by the "animal instincts". The Capital Spectator states that as in the following section:
Overall, such differences between physics and economics “helps explain why large economic models, which are based on the same laws, fail to make accurate predictions,” Orrell advises. In fact, this is old news. Economists have been telling us for a long time that stuff happens and so the standard theories of what should happen are susceptible to, well, temporary insanity, heightened risk aversion, chaos, or whatever you’d like to call it.

While the quote from The Economist was pertaining to markets as described by microeconomic theory, the Capital Spectator quote was about the macroeconomic analysis in determining the direction of the whole economy. Remarks by Governor Ben S. Bernanke also addressed these macroeconomic concerns and where he stated the following on March 2003.
Why have inflation-targeting central banks emphasized communication, particularly the communication of policy objectives, policy framework, and economic forecasts? In the 1960s, many economists were greatly interested in adapting sophisticated mathematical techniques developed by engineers for controlling missiles and rockets to the problem of controlling the economy. At the time, this adaptation of so-called stochastic optimal control methods to economic policymaking seemed natural; for like a ballistic missile, an economy may be viewed as a complicated dynamic system that must be kept on course, despite continuous buffeting by unpredictable forces.

Unfortunately, macroeconomic policy turned out not to be rocket science! The problem lay in a crucial difference between a missile and an economy--which is that, unlike the people who make up an economy, the components of a missile do not try to understand and anticipate the forces being applied to them. Hence, although a given propulsive force always has the same, predictable effect on a ballistic missile, a given policy action--say, a 25-basis-point cut in the federal funds rate--can have very different effects on the economy, depending (for example) on what the private sector infers from that action about likely future policy actions, about the information that may have induced the policymaker to act, about the policymaker's objectives in taking the action, and so on. Thus, taking the "right" policy action--in this case, changing the federal funds rate by the right amount at the right time--is a necessary but not sufficient condition for getting the desired economic response. Most inflation-targeting central banks have found that effective communication policies are a useful way, in effect, to make the private sector a partner in the policymaking process. To the extent that it can explain its general approach, clarify its plans and objectives, and provide its assessment of the likely evolution of the economy, the central bank should be able to reduce uncertainty, focus and stabilize private-sector expectations, and--with intelligence, luck, and persistence--develop public support for its approach to policymaking.

If we are the rocket men, as Elton John sings, then although we do not want to be irrational buyers and sellers, we do want to be aware of forces outside our rocket ship {i.e. our portfolio}. We need to focus on our destination and not be bothered by every small jostle of our portfolio but be aware of the forces that could derail the portfolio. A good place to find information about the market forces affecting our rocket ship is our Sabrient blog with its various voices on how the market works. Whether it is microeconomic, or macroeconomic factors including long term structural concerns, the average investor has a lot to consider in how to invest for long term growth.

Misc. Links:
Rocket Man (I Think It's Going To Be A Long Long Time)

5 Companies That Doubled Earnings While Their Stocks Went Nowhere (GOOG, JNJ, MSFT, WLP, WMT)

Why History Says Stocks Are the Best Buy Right Now

Why These Companies Need Higher Dividends

Very Low Post-Labor Day Volume a Bad Sign



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