Friday, March 18, 2011

RSY XXXI: Update

It is about time for an update on RSY's positions and trades since the last update. Since our last update: RSY has unwound its position in MRH in two trades as Sabrient downgraded it to sell for profits of around $978; RSY unwound its position in LZ by first buying back the covered call at $14.30 and selling LZ for around $133.83 netting a little over $1500 profit; and LZ provided a dividend of $36. The time premium for the June calls narrowed to around 50 cents. That did not give enough justification to hold it any longer as even the remote possibility that Buffett would walk away would expose us to losing all the gains from the offer. Below is the summary of trades for the RSY portfolio with $5230 in realized gains. (Click on tables for clearer images.)

RSY also recommended a bid for DLN but it gaped above our limit price and since we were going to miss the next ex-divended date, RSY decided to wait on adding an ETF to the portfolio for now. One of the reasons for choosing an ETF is to diversify the portfolio more than just select individual stocks can do. Below shows the RSY portfolio positions and the relative percentages of each stock to the total portfolio.

Even with holding some of the partial positions, this does show a fairly lumpy portfolio. The table below shows the same portfolio with cash holdings assuming a $100,000 portfolio.

The last table we should look at is the performance of our positions in the portfolio.

David Brown suggest a "Craziness Index"
RSY was designed to capture good solid dividends by investing in stable growing companies, and as such it is long positionally with options as a way to increase gains. Given that, current global events have not built up confidence that the economy has turned the corner. Like Brown, I also wonder if the markets are not seeing the risks and uncertainties that US and worldwide equity markets are exposed to. He ponders this in the following passage:
All that, despite yesterday’s report of a very sharp decline in durable goods that was totally unexpected, interest rates that are inching higher, and oil prices that are at a two-week high. All that, despite the imponderables in Japan and Libya, as well as most of the Middle East. All that, despite Wednesday’s vote by Portugal to eschew austerity in favor of a bailout by the European Union, which does nothing but aggravate the global markets.

You may find this as hard to believe as I did, but both the short-term and long-term “fear indicators” – the VIX and VXX -- have dropped seven consecutive days in a row and are almost back to their levels before the global chaos began in late January.

What is this market on, anyway? Xanax? Maybe there should be a craziness index. If there were, it would be off the charts.

While it is true that jobless claims continue to drop and GDP was revised upward, it is difficult to imagine the market equating what few positives we’ve had recently to the economic environment I just described.

Is there a logical reason behind this ‘irrational fearlessness”?
All risks and uncertainties presents opportunities and there may be positive outcomes out of the current global events. For example, Japan may be changing fundamentally as they adapt and face the tragedies they must now coop with. This may reduce and adapt their structural rigidity in their society, politics and of course economics to more flexible structures and more open to change.

Also the unrest in the Middle East and Northern Africa could be beneficial for not only those countries but also the world economy. If these revolutions result in the formation of more liberal democracies and thus more freedoms for their citizens then this would create better and more stable trading partners. While the claim is often that big business like autocratic regimes, the reality is that they prefer liberal democracies as contracts are more likely to be protected as overall private properties are protected and defended. But all those prospects are under great uncertainty and are not a simple process that third parties can easily determine the outcomes. For example, Libya could just as easily end up like Algeria or Iran rather than Israel or India.



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