Monday, October 25, 2010

RSY XV:Update, Div. IVR, Partial Harvest CODI.

The above table shows realized gains {or losses} on the RSY portfolio. It reflects the recent dividend payout by IVR of $1 per share and a $400 deposit for the model portfolio. Overall that is good with a realized gain of over 4% based on last balance of holdings for just over the last two months. (Click on tables for clearer images.)

That is fine except for that one major collapse of LZ with over a 9% drop today. That's the bad news, the good news is that our option gained, that is lost value of what we sold! If the option continues to slide down, RSY might want to buy back the option. The low was $4.50 today on the option but now the theoretical value is a little over $2. The news was not all bad even on the press release. Their 3 quarter profits were up 24% but missed analyst earnings estimates, and gross margin fell more than 3 percentage points to 32.8% from last year.
Volume rose 1% during the quarter, and the company provided raised guidance for the full fiscal year -- $10.35 to $10.55 a share, up from $9.60 to $10 a share. They also expect strong growth over the next few years, predicting earnings of $13.50 a share in 2013. {From Motley Fool, Lubrizol Shares Plunged: What You Need to Know}

One piece of advice that I always try to practice is not to execute trades based on what you bought a stock for, but to consider only this moment as the decision point. That is, do I want to buy LZ at this new price or not, irregardless of what I did in the past. If the underlying fundamentals of a company materially changed then it is natural to come to a different decision but if the analysis still stands then standing put is the most prudent set of actions. LZ has shown to have highly volatile price movements and thus we should not panic on every move.

One thing that RSY portfolio does use to determine changes in its portfolio is when Sabrient changes its ratings. CODI has recently been downgraded to hold from buy. We are also just past the record date for the last dividend on the 22nd. Thus RSY will partially harvest the small profit by putting in a limit order to sell 200 shares at $16.89 {GTC}.

The Dividend Puzzle: The Relationship Between Payout Rates and Growth | AAII: The American Association of Individual Investors

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Thursday, October 21, 2010

RSY XIV: Update.

Today, our trades were executed at the price points recommended. Just a review of the RSY recommendations:
1. Writing a covered call of LZ of the June 2011 contract at a strike price of $120 and the price today was $8.60.
2. Partial harvesting of GAIN by selling 200 {out of the original 400} shares at a strike price of $7.29.
3. Partial harvesting of NGPC by selling 300 {out of the original 500} shares at a strike price of $9.99.
The table below shows the most current positions held by the portfolio. (Click on tables for clearer images.)

And below is a table of trades that include realized gains.


Wednesday, October 20, 2010

RSY XIIV: GAIN's Gain;Stock Picking is Dead, Long Live Stock Picking...

Rock Solid Yields {RSY} recently recommended a buy on LUBRIZOL CORP {LZ} at a limit price of $112.51. Yesterday, the market gaped down on opening at a price of $112.37 and then continued to slide for the first 15 minutes to as low as $110.75. RSY will record this trade at the opening price of $112.37. As mentioned before when recommending the buy, LZ options could provide us opportunities to enhance our returns and reduce downside risks. Of course it should be pointed out that writing covered calls reduces upside gains as well.

I think there are three possible contenders for a good contract earning substantial profits. March 2011 has two contracts above the strike price of LZ at $115 and $120 that could get us around $7.50 and $6 respectively per share. For RSY though, I think the longer term contract for June 2011 at a strike price of $120 is a better deal at about $8.50 per share. For holding the contract 3 more months we net around $2.50 per share and also collect one more dividend payment at 34 cents. That works out to just over 2 1/2 percent gain on initial investment over the three month period.

Sabrient Systems recently changed data providers, and as a result of some of our changes, we dropped some from our universe of covered stocks. It just so happened that two, that RSY recommended, were in that group. Luckily for us they have gained value since being added to RSY portfolio and were paying handsomely in dividends. Instead of completely selling out of these positions, I think it is best to do some "profit harvesting". RSY recommends a sell order of GAIN at $7.29 of 200 shares of the initial 400, and a sell order of NGPC at $9.99 of 300 shares out of the 500 shares {both GTC}. This will leave us with a smaller portion of each, but allows more diversification of the portfolio while still holding on to some good performing dividend stocks.

Stock Picking is Dead...Long Live Stock Picking.
The Wall Street Journal recently had an article titled 'Macro' Forces in Market Confound Stock Pickers. When Tom Lauricella and Gregory Zuckerman talk about stock pickers he seems to be talking more along the lines of institutional investors compared to the individual type of investor, but much of the same analysis would pertain to them as well. The heart of the analysis lies in this portion of the article.
In recent months, stocks have been moving in lock step to an almost unheard of degree. A widely followed statistic called correlation measures the tendency of investments to move together in a consistent way. Between 2000 and 2006, on average, the correlation of stocks in the S&P 500 was 27%, according to Barclays Capital. That meant that most stocks were moving independently of the index, driven more by company fundamentals, says Barclays stock-market strategist Barry Knapp.

In the run-up to the Iraq war in 2003, correlations approached 60%, suggesting that the looming war was driving stock prices, says Mr. Knapp.

Between October 2008 and February 2009, at the height of the financial crisis, correlation hit 80%, meaning lots of stocks were moving in lock step. When stocks rallied last year, the figure fell to 40%, then it spiked back over 80% during the European debt crisis, according to Barclays. What has caught many investors off guard is that correlation stayed high over the summer. In mid-August, correlation was 74%. In recent weeks, it has drifted down to 66%.

It certainly gives reasons to throw in the towel and pick index funds or as Matt Koppenheffer says at Is Stock Picking Dead?, "the market has its ways of grinding down on investors until they cry uncle and agree to do what is probably not in their best interests." Also picking funds, that are based on someone's interpretations of which stocks would perform best based on a set of macroeconomic forecasts, has not fared so well also.

One way to think about these macro factors that are driving the whole market is that the stocks are not converging but maintaining their relativity to each other. As the underlying factors change in the individual companies then eventually this "divergence" will catch up to the market and eventually investors will again start pricing based on fundamentals and growth prospects. As Matt states, this should be a great opportunity to pick stocks and then wait for the market to catch up with us. He also agrees with the RSY portfolio that dividend yielding stocks is a good answer for when markets are driven by the macroeconomic factors more than individual company performances. This way, no matter which direction the economy goes, a portfolio will be benefiting from dividend payments, or as Matt says, "collecting a healthy, growing stream of cash payouts."

For myself, I realized that macroeconomic forces can control the direction of a portfolio, no matter if it is well diversified or even diversified away from idiosyncratic risks.
Referring to legendary stock pickers Benjamin Graham and David Dodd, he says: "I'm a Graham and Dodd value investor, and geopolitical issues didn't matter 10 years ago. But they sure matter now." {WSJ}

Ten years ago makes it after the dot com bust, and then the next year was 911. They were certainly wake-up calls then. For the first event, I felt I was not exposed to much of the high flying tech-stocks, and the second event, I was not into airline stocks. Both ultimately adversely affected my portfolio as the whole market took a serious beating.


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Sunday, October 17, 2010

RSY XII: Update, Div. MRH, Buy 100 LZ @ $112.51, Earnings Growth and Stock Prices

The above table is a snap shot of current holdings of the RSY model portfolio. RSY received an alert that the MRH dividend was added to the account, which was 9 cents per share with 400 shares for a total of $36.00 deposited. (Click on table for a clearer image.)

Since we are still sitting with cash on the sidelines {earning almost nothing} let us examine some possible moves to earn some healthy returns. We talked about the Lubrizol Corporation {LZ} on RSY before.
The Lubrizol Corporation {LZ} is a large-cap stock in the Chemical Manufacturing industry and has a strongbuy recommendation from Sabrient Systems. There is a lot of good things to say about the company and the purchase would allow the RSY portfolio to diversify more. But with such a low dividend yield at 1.29% and volatile prices then it may be best to hold off for now on this selection. The day's price range was over $3 and dividend payouts have been 36 cents per-quarter. This goes to show that even good dividend paying stocks need to be cautious about entry and exit points. It would take over two years in dividends to pay for a single day's swing in prices. For now RSY will add LZ to its watch list.

LZ has a lot of recent insider activity but most of it is related to exercise of options for officers of the company. Sabrient analysis states, "Top growth and momentum scores and an above-average value profile indicate strong performance in the market and earn LZ a Strong Buy rating." Even with an amazing Sabrient growth score of 94.4, it also boasts an impressive value score of 74.4. Earnings, balance sheet, and fundamentals scores all rank among the highest at 96.3, 85.7, and 91.3 respectively. The dividend is relatively low to what our goal is, but I think the RSY portfolio can achieve good safer returns with a strategy of using covered calls. The options market looks liquid enough for the portfolio with potential decent prices on writing covered calls.

RSY portfolio recommends a limit order of 100 shares of LZ at a strike price of $112.51 {GTC}. Just like the price movements on Friday being volatile, RSY hopes to catch it on a dip. Another price point might be to set the limit at $112.01 and hoping for another rapid drop during the day at some time.

Earnings Growth and No Cheese?
As individual investors, we have a limited number of choices to make. Daily we have no or little control over share prices, but we can decide when, and at what price to either buy or sell a specific stock at. Morgan Housel at Motley Fool spells this out in his article at 5 Companies That Doubled Earnings While Their Stocks Went Nowhere.
There are two important parts to successful investing: finding the right company, and finding the right price. In any market, singling out good companies isn't terribly difficult. They're usually well-hyped. But finding the right price can be painfully elusive. Thankfully, the pool of good companies selling at good prices today is about as deep as it's been at any time during the past decade.

While earnings growth is important to the RSY portfolio, we are also interested in how earnings growth helps propel growth in dividends per share. First let us eliminate the two non-dividend paying stocks on Morgan's list, being Google {GOOG} and WellPoint, Inc. {WLP}. Next looking at the 3 other stocks, I looked at dividend growth compared to changes in the price of the stocks. Over the last 10 years, Wal-Mart Stores {WMT} has increased dividend payouts from 6 cents per quarter to 30 cents most recently. The stock price has drifted in the range of around $45 to $60 and October 23, 2000 it closed at $47.31 compared to the close on last Friday of $53.35. Thus in the example of WMT, dividend payouts increased 400% while stock prices increased marginally. JOHNSON & JOHNSON {JNJ} has increased dividends from 16 cents to 54 cents while prices have gone from a closing price of $45.78 on October 23,2010 to a close on Friday of $63.75. Thus, an increase of nearly 250% on dividend payouts and the stock price increased to around 40%. MICROSOFT CORP {MSFT} started paying out dividends of 8 cents per share at the beginning of 2003 and on the most recent dividend payout paid 13 cents. Prices have increased marginally for around $24 to $25.54 on Friday's close. Thus, dividends increased over 60% and stock prices increased a measly 6.5%.

Mr. Housel provides 3 explanations for why there can be a disconnect between growth of earnings per share and stock prices. For RSY analysis, we were most concerned with dividend growth per share and stock prices.
1. The current valuation is too low.
2. The starting valuation was too high.
3. Future growth prospects have suddenly taken a nosedive.

For the first two, they most definitely question the validity of a strict interpretation of efficient-market hypothesis. As individual investors, we can only understand and take advantage of What the Market Wants. For the third point, RSY tries to pick solid performing stocks over the long-run that hopefully growth prospects will not be adversely affected by the systemic risks of the macroeconomy.

ETFs dividend yielding: pfm {attractive}/pid iro {not Etrade} {most attractive}/NFO {Neutral} {High-Dividend ETF List: Complete List from}

Is Stock Picking Dead?

Don't Chase These 20% Returns


Tuesday, October 12, 2010

RSY XI: Update, Dividend NGPC

The Rock Solid Yields portfolio is recording a dividend from NGPC paid on last Friday, October 8. The model portfolio held 500 shares at 17 cents per share which figures at $85 deposit to the account. Let us look at a few tables to see how the RSY portfolio is doing. The first is a summary of transactions in account and running balance of account {assuming $100,000 to start with}. (Click on tables for clearer images.)

The next table is a summation as of close of markets today of RSY portfolio holdings as a broker might display.

Even though the market was up overall today, RSY had a loss for the day. Still it's looking good at over $2150 in total gains. The last table below provides us with average returns and profits per position in the RSY portfolio since inception.

The Lubrizol Corporation {LZ} is a large-cap stock in the Chemical Manufacturing industry and has a strongbuy recommendation from Sabrient Systems. There is a lot of good things to say about the company and the purchase would allow the RSY portfolio to diversify more. But with such a low dividend yield at 1.29% and volatile prices then it may be best to hold off for now on this selection. The day's price range was over $3 and dividend payouts have been 36 cents per-quarter. This goes to show that even good dividend paying stocks need to be cautious about entry and exit points. It would take over two years in dividends to pay for a single day's swing in prices. For now RSY will add LZ to its watch list.

Misc. Links:
These Dividends Are Bigger Than You Think

Your Best Shot at a Home Run Dividend Stock

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Monday, October 11, 2010

ISM September: Structural Rigidity in the Manufacturing Sectors.

In the blog category of a "Macro View of the Markets", I have been discussing structural rigidity. So when economists on the blogosphere started talking about structural concerns, that peaked my interest. Even Paul Krugman is getting into the fray with a blog post titled Structural Impediments. There he tries to create a simple dichotomy that the economy is either signified by a weak aggregate demand or that the only problem with the US economy is structural rigidity. In later posts he backs away from a strict either or, but still insists that increasing demand, with any means necessary, is the only way out of the present extremely weak market economy. This is how he sets up the analysis:
What he doesn’t say explicitly, although it’s clearly implied, is that these two theories have very different policy implications. If it’s aggregate demand, we should be doing everything we can to raise demand, including fiscal expansion and unconventional monetary policy. If it’s mishmash mismatch, we should do nothing, because any effort to create jobs leaves part of the work of depressions undone. {emphasis added}

But it should be clear that the two approaches are not mutually exclusive. Sector impediments by its very nature would lead itself to having discussions of the microeconomic effects of government at all levels. Laws and regulations should be considered in the context of whether they hinder the markets unduly. This still leaves room for aggregate demand stimulations including monetary and fiscal policy instruments. The US government could even include subsidies and direct support for sectors that it finds the economy having bottlenecks in.

Presently, the US already has an implied industrial policy with the Federal government focusing on renewable energy resources. The problem is whether this is the direction that the markets are creating or just the government is "picking winners" for the mean time but ultimately those industries fail in the long-run. There are plenty of white elephants that governments have supported. Cellulosic ethanol has been subsidized for over 30 years, but the US still has no substantial growth in this sector of the economy.

Paul Krugman: Spend, Spend, Spend like it's 1945.
Paul Krugman, at the opinion piece titled Structure of Excuses, provides his opinion about how to solve our present high levels of unemployment.
I’ve been looking at what self-proclaimed experts were saying about unemployment during the Great Depression; it was almost identical to what Very Serious People are saying now. Unemployment cannot be brought down rapidly, declared one 1935 analysis, because the work force is “unadaptable and untrained. It cannot respond to the opportunities which industry may offer.” A few years later, a large defense buildup finally provided a fiscal stimulus adequate to the economy’s needs — and suddenly industry was eager to employ those “unadaptable and untrained” workers.

But now, as then, powerful forces are ideologically opposed to the whole idea of government action on a sufficient scale to jump-start the economy. And that, fundamentally, is why claims that we face huge structural problems have been proliferating: they offer a reason to do nothing about the mass unemployment that is crippling our economy and our society.

So what you need to know is that there is no evidence whatsoever to back these claims. We aren’t suffering from a shortage of needed skills; we’re suffering from a lack of policy resolve. As I said, structural unemployment isn’t a real problem, it’s an excuse — a reason not to act on America’s problems at a time when action is desperately needed.

Krugman is using a logical fallacy by assuming that the economy of the 1930s is identical to what it is now. He could even be correct that the USA is in a "liquidity trap", but there clearly must be more than one answer to the questions facing the US presently.

The experts might have been right back then, especially concerning the constraints they were living under and thus the basis for their assumptions. It was only the declaration of war that allowed the political economy to have the will to make the radical structural adjustments. It is hard to believe that Krugman can not in fact recognize the major structural adjustments that go into changing from a peace time economy to a full fledged war economy. It is pretty obvious that putting 12.5 million men in uniform and increasing the female labor force by 6.5 million is a major structural change.

The question that Krugman should be asking is what is the role for government if each of respective models are believed. He rejects anything can be done if structural rigidity is the problem. But as above, this could mean an active industrial policy is needed, and especially with respect to training or retraining the work force for new jobs. If Krugman's scenario is correct, that the only way to exit this recession is to do something similar to what the US did during WWII, then we would need to make the necessary, structural {although temporary} adjustments. Some of the steps might include, taking workers out of the work force by violent means if necessary, having these workers produce nothing of real value to society, rationing consumption items, and thus having a forced high savings rate. Steps that would be antithetical to his major push for spending by all segments of the economy, even if it means higher debt levels.

Most of these discussions are centered on the labor markets. While it is true that this is of most vital concern especially since unemployment is staying at such high levels, but structural rigidity may be present in any market. One reason to consider all the other markets is that if the needed inputs for the "new economy" {undiscovered country} are in short supply or increasing in relative price terms then the jobs that would have been created become lost opportunities. Human capital is very important in a developed economy but it is not the only input. Human capital is much like any other input, there are many complementary inputs that are needed also for production. If any are in short supply or rising too fast in price then risk taking entrepreneurs or even corporations may not risk capital to increase output.

This discussion was a prelude to the prime purpose of this post, which was to look at the ISM report on manufacturing. That is to see if the report may show signs of this "structural rigidity".

Structural Rigidity and the September Manufacturing ISM Report.
The ISM manufacturing index for September was "still quite positive" at 54.4 percent. MarketWatch calendar reported their consensus at 54.0% and Econoday reported it as 54.5% with a range of 53 to 55.5%. Econoday gives a good summary of the report as follows:
New orders are decelerating, and perhaps abruptly, while inventories climb and hiring slows. The ISM's new orders index, in prior months having already showed signs of slowing, fell two full points to 51.1 to indicate only mild month-to-month growth. Inventories, which had already been going up, really spiked, up more than four points to 55.6. This will raise concern that a significant part of the inventory build is more and more unwanted. Employment, which had been very strong, fell nearly four points to 56.5.

Backlogs are another bad sign, falling five points and showing month-to-month contraction at 46.5. The headline composite of 54.4 is still solid but orders are now a central concern for the manufacturing outlook. This report may prove to be a negative for today's stock market.

If it was taken as negative news, then the report proved only to be headwinds as the Wall Street Journal noted that the ISM Report Keeps Leash on Dow. Steven Russolillo stated the reaction to the reports as "jittery" and some of the data points were showing weakness. Let's now look at these data points more closely.

The index with the largest percentage point change was the price index. It jumped a whopping 9 percentage points to 70.5%. This is not to say this is unfamiliar territory for the index, as it was over 70% for March, April and May of this year at 75, 78, and 77.5 respectively. Only 4% of firms are reporting lower prices and 45% reporting higher prices. On an industry wide basis, it is not much better with no industries reporting lower prices and 13 reporting higher prices.

Higher prices could definitely signal structural rigidity by preventing the free flow of resources to the most efficient uses. Price changes {especially suddenly} can alter the input factors of production, which in turn raises uncertainty in the markets. Just as in March, April and May, the higher price indexes were accompanied by more commodities up in price, with 13 more commodities added to the list, and more commodities in short supply, with 4 more added to the list. One respondent from the Food, Beverage and Tobacco Products industry stated that, "Commodities continue to be the main concern heading into 2011." It is one thing to have an inelastic supply curve for inputs but also facing shortages could lead to rigidity in changing output patterns.

The second most dramatic percentage change in the report was "backlog of orders" with a 5% decrease to 46.5%. The story looks like the manufacturing sector is overestimating the rate of growth in their respective markets. They are ready for increased levels of orders with the number of backlogs being lower and inventories building which increased 4.2% to 55.6%. They also believe that their customers have too low of inventory which dropped another percentage point to 42.5%. A respondent in the Transportation Equipment summed this up as, "Customers seem to be pulling back on orders."

The third most dramatic percentage change was "supplier deliveries" which just edged out the absolute percentage change of inventories with a 4.3% decrease to 52.3%. Not only are prices rising for the manufacturing industries and commodities are increasing in short supply, but the suppliers were slower in delivery to the manufacturing organizations.

Structural Rigidity conclusion.
All this spells out structural rigidity in the manufacturing sectors and very little to do with labor market rigidity. If it actually became a problem with labor, manufacturing could in fact use some of the H1B visas that were unfilled. One of the things government could in fact do is to reconsider the lists mentioned about before:
Commodities Up in Price
Aluminum; Caustic Soda (2); Copper (2); Corn; Corrugate; Corrugated Containers (7); Lubricants; Plastic Resins; Polyethylene; Polypropylene; Rubber Products; Stainless Steel; Stainless Steel Sheets; Steel*; Sugar; and Wheat.

Commodities in Short Supply
Capacitors (3); Cocoa Powder; Electronic Components; Lubricants; and Titanium Dioxide.

Some of the inputs constraints are in raw resources. China has busy trying to secure raw resources all over the world. It might be time for the US to consider opening up more resource development here. If the US wants high paying jobs here, then not many jobs pay as well as minerals and raw resource extractions for semi-skilled labor than those sectors.

Even if the US does not have a policy of "Drill, Baby, Drill", there could still be an industrial policy to address bottlenecks for the manufacturing sectors. Waiving our collective hands and dreaming that spending will solve all these problems, is not the solution. Good ideas should be the driving force in politics now and not some analogy about the R and D on a car stick shift.

September 2010 Non-Manufacturing ISM Report On Business®

Econoday Report: ISM Non-Mfg Index October 5, 2010

Consensus Consensus Range Actual
ISM Mfg Index - Level 54.5 53.0 to 55.5 54.4


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Friday, October 01, 2010

RSY X: Update, Dividend Disasters.

On Friday, RSY portfolio recommended a long order of 400 shares of CODI at a strike price of $16.24. Looking at the stock chart at opening, this seems to be a reasonable price point for someone wanting to get a position. Hopefully, you got even a better price point. Let us now look at our model portfolio through a variety of tables. The first table, as a broker would display, is the open positions of RSY as of the close on Friday, 9-29-2010. {Click on tables for clearer images.}

It certainly has taken a drop in total gain of around $500 since Friday, 9/22/2010. As mentioned before, this was mostly due to IVR dropping after the ex-dividend date. The next table shows the executed transactions, so far, for the model portfolio. It also provides a running total of cash on hand (based on $100,000 portfolio size). RSY portfolio will also only record the dividends when the broker informs us of the deposit. For most transactions they need to be cleared within three days and thus the time value of money might be negligible, but some dividends are paid out over a month after the ex-dividend date. Thus we want to keep track of the dividend payouts when the broker tells us of the deposit.

Dividend Disasters:
The Motley fool recently gave some advice on
How to Avoid Dividend Disasters. The first point that Matt Koppenheffer considers is, "The balance sheet [reveals] a poor current position, or funded debt is growing too rapidly". The RSY portfolio considers this an important consideration and a reason to pick Sabrient rated strongbuys and good looking buys for the portfolio. RSY also look at the forensic accounting reports and the score of individual factors that Sabrient ranks on. To be selected for purchase in RSY, a stock must possess a strong score in one of the following: 1. Earnings Score [which] assesses a company's overall earnings performance and projected outlook; 2. Balance Sheet Score [which] measures a company's liquidity and debt issues, as well as receivables and inventory quality; 3. Fundamental Score [which] is the broad measure of a company's financial health,
including its balance sheet, cash flow, revenue, and earnings quality. For example, a few from our present portfolio show that: CODI has an excellent earnings quality score {about twice the industry average}; IVR has good earnings score above industry average and a very high fundamental score; MRH has extremely high fundamental score at 99.5 along with balance sheet score of 98.9.

Koppenheffer goes on to address two more concerns about choosing dividend stocks. He states them as: "Dangerous new competition [is] threatening or ... the company [is] losing ground in the industry", and "Reason to fear for the future of the industry as a whole". For simplicity they both lie within the aspects of microeconomics and sectoral analysis. This is good reason to have some idea what the company does and how it relates to the overall economy. Understanding their business model is one step toward this goal.

The next table shows the gains from the current positions and the closed position of ANAT along with dividends paid out.

Unfortunately the date was not updated to 9-29-2010 and average dollar profit should have been $267. But it does show that every position is positive so far, although of course some are very low.