It Was the Worst of Times, It was the Worst of Times

I thought the holiday season was a good time to pull out the Dickens and not just because the market will, it seems, finish the year flat or slightly negative. Another reason for the Dickensian title is that market pros and amateurs alike, as they have correctly called equities all year, expect nothing from the stock market for the next few years. Many, in fact, expect another Lehman-like near collapse of the financial system beginning in Europe and then a contagion spreading throughout the globe to bring even the mighty China to its knees. That, at least, is the bear case for next year. And everyone, even down to the last bull, fears what will happen in Europe.

At a recent local stage production of A Christmas Carol, which was, as far as I can tell, faithful to Dickens' original, there seemed to be an addition to the montage of memories from Scrooge's Christmases past, an addition that included a financial report on how Scrooge's year had been. Haunting phrases like You have nearly doubled your money, Scrooge; The stock will surely double next year; and Profits are up nearly 80 percent, Mr. Scrooge rang through the theater. Wait. Haunting? I suppose that the director's motive in adding this surely modern commentary to a staging of A Christmas Carol was to demonstrate that Scrooge's Christmases past had all been about profits and business and not about giving and family. Fair addition, I'd say; still, what I took home that evening was further proof of the anti-finance and anti-stock-market rhetoric that saturates nearly all U.S. media today. The fear and loathing of Wall Street and the stock market has hit a crescendo this year, so much so that local directors are rewriting Dickens to include their disdain for finance.  

Add the worries about Europe's finances to the contempt for all things financial here in the United States and you have a market that seems destined for losses in the new year and beyond. I, however, will be taking the other side of that argument and that trade, for, as I've written previously, the market works in a way that ensures that the majority of investors (and non-investors) get it wrong. How can almost everyone be right about the stock market? Could this be the first time in market history that retail investors, who want nothing to do with equities, have actually been correct? Probably not, I'd say. That is why buying the stocks of good companies that others sell in panic or apathy is the best way to make money in the stock market, as long as you are willing, if you must, to hold those shares (almost) forever.

What, then, should we do with our money? We should buy good companies with international exposure that will pay us a nice dividend while we wait for Europe and the United States to sort out their accounting problems. Dow Chemical (DOW) is just such a company. I traded DOW during the past few weeks with some success, buying at about $26 and selling at $28; since then the stock has run the cycle again down below $26 and currently trades at about $28. Dow Chemical is a diversified chemical company with a global presence and a $0.25 per share quarterly dividend, which amounts to 3.7% yield at its current price. This past June DOW raised its dividend from $0.15 to $0.25, which indicates that the company is confident in its future profitability, although, one could argue, that was before concerns about a European recession flared in August and have, of course, been seething ever since; yet, a u-turn in the dividend is unlikely, I think, unless Europe drags the United States into a recession.

Dow Chemical has very good support at $25. I'll buy on dips.

I wouldn't necessarily jump in at $28, but I certainly would buy DOW again below $26, when the dividend will be 4 percent or higher. January and February may prove dicey in Europe, inasmuch as Wall Street seems skeptical that European leaders have the mettle to devalue the Euro, which is what must be done to solve the liquidity and debt crisis looming over there. I, for one, will take advantage of any dislocation in the market to add to positions of companies like DOW whose shares, without a doubt, will be higher five years from now.

Using Z-Scores: Buying Closed-End Funds, Part 2

Since the time of my last writing, a little over a week ago, the market has switched its obsession from Greece to Italy. Wall Street is worried that with Italian bonds trading at extremely low prices, their yields are too high (7 percent) to make future borrowing from the market using bonds practical. Since the swoon Wednesday, Italian bond markets have recovered, probably because of the European Central Bank (ECB) purchasing them, even if indirectly through European banks, which will eventually make Wall Street traders even more nervous than they usually are (and by that I mean petrified), when Italy, like Greece, eventually must default and the European banks are forced to write down all of their losses and recapitalize. Sound familiar? That's exactly what the U.S. endured in the fall 2008 and 2009 unpleasantness, from which we as a country have never really recovered.


Wednesday I bought some MGM Resorts (MGM) at about $10.00, and during the past few weeks I have been buying the closed-end funds Wells Fargo Advantage Global Dividend Fund (EOD) and the PIMCO Corporate Opportunity Fund (PTY), the former boasting a 13 percent dividend yield and the latter sporting about a 7.5 percent yield. Closed-end funds (CEFs) can trade at a discount or a premium to net asset value (NAV), that is, the value of the assets underlying the shares. For example, EOD is currently trading at about a 7.5% discount to NAV, and with its high yield, I find it a promising addition of my (nearly) permanent portfolio.


Unlike EOD, PTY almost always trades at a premium to NAV. Currently, the fund's premium is 22.68%, and, therefore, you are paying 22.68% more to own the fund than it's worth. Now usually overpaying for an asset is not my style, especially overpaying for CEFs, even one like PTY with a nearly 8% dividend yield, because many CEFs routinely trade at a discount to NAV. Why not just pick a different, cheaper CEF? In the case of PTY the fund almost always trades at a premium to NAV. In fact, according to cefconnect.com, PTY's NAV has ranged between a discount of 2.17% and a premium of 29.49% during the past year; however, PTY only traded at a discount to NAV briefly. The question remains: How are we to judge whether a CEF that is trading at a premium already is overbought and too expensive? The answer: statistics.


Now we're going to get a bit technical, so hold on. PTY's one-year z-score is currently 0.94, according to morningstar.com. In this case, the one-year z-score = (current discount - average discount)/(standard deviation of the discount) computed with data from a year ago to today. Now if your statistics is a little rusty, let me sum it up for you with the following statement: under certain conditions, we expect PTY to trade at a premium of 22.68% or more only about 17 percent of the time. That's a little alarming; the percentages do seem to suggest, then, that the fund is too expensive, if we ignore the 7.5% annual yield that we are paid in the form of a monthly dividend.

Here's a one-year chart of PTY: on dips I'll buy some more.

Truth is that my average purchase price on shares of PTY is $17.12 compared to its current trading level of $17.85; in fact, I bought the my shares when PTY's premium was much lower and the one-year z-score was close to 0, which means that I bought by shares when the fund traded at about its average premium over the past year. I plan to hold on to my shares of PTY until the fund gets obscenely overvalued at around $20, which may happen sooner than you think with so many investors grasping so desperately for yield. I will buy more if PTY drops below $17, and especially $16, again, which may happen as the markets swoon anew if the Italians or the Greeks don't dance precisely the way Wall Street wants them to while they try to reduce what is perceived as profligate European spending.     

The Wages of Fear: Buying Closed-End Funds, Part 1

In the Clouzot's great French existentialist film The Wages of Fear, four down-on-their-luck workers agree to transport a truck of nitroglycerin across the Amazon to an oil well, a harrowing ordeal that only one man, Mario, survives. Because Mario is forced the whole journey to the oil well to drive slowly and with painstaking caution, so that the nitroglycerin would not explode, on the return journey he drives his empty truck with such gleeful abandon that he sails the truck right off a cliff. Thursday's more than 300-point rally in the DOW reminded me of that last scene (up to the falling-off-the-cliff part) of the film; equity traders for the last few months have been so stymied by fears of a double-dip recession here in the U.S. and concerns of a banking collapse in Europe, that they have been, since August, driving their trucks cautiously across what they considered perilous terrain.

Last week's announcement of a 50 percent haircut for Greek bondholders and more solidarity from the French and German leadership than the world is accustomed to caused a short-covering rally that surprised many of us. Equity traders gleefully jumped on board the rally and, like Clouzot's Mario, pressed the accelerator because they finally felt free to do so. My guess is that as soon as the Europeans utter some cautious remarks or look at each other funny, the Wall Street traders will run for cover again, and shares will erase much, if not all, of the roughly 1000-point Dow advance thus far accumulated in October. I'm afraid that the market is more than a little overbought here, and a pullback would be healthy and wouldn't be very deep, inasmuch as traders will remember the vehemence of the market's ascent last week. If the market goes much higher without a pause or pullback, we may live the last scene of The Wages of Fear: you know, the falling-off-the-cliff part.

As I watched most stocks last week rise almost indiscriminately, I felt a pang for all those stocks I could have bought at a lower price, like MGM International (MGM), a casino stock, which just weeks ago I traded when its price was toggling between $9.50 and $10.50 and which, Friday traded above $12.00. If you missed the big move last week in the market, you'll probably, if you did not chase the momentum money Friday, get a chance to buy, in the coming weeks, all those stocks whose dramatic move sent a tremor of jealously through your gut. This week's early market retreat seems to suggest that your chance to pick up your favorite shares at a more reasonable price may be even sooner than I am suggesting (yikes! I'd better type faster). This is the time to make a shopping list for stocks that you would like to have for the next short-covering rally.

Over the past few years, I have become increasingly interested in closed-end funds (CEFs), which are collections of shares that track an underlying collection of assets, like bonds or global dividend-paying stocks, and which rise and fall in price based largely on the value of the underlying assets, called the net asset value (NAV), and, specifically, whether or not the shares are trading at a discount or premium to NAV. That's really the greatest attribute of CEFs: their shares sometimes trade at a discount to NAV, so immediately, you can better ensure that you are not overpaying for shares, as opposed to shares of a company, whose true value is so difficult to quantify. Often a CEF's net asset value is updated daily, so you can track easily how its shares are trading relative to NAV.

Let's get specific. Currently, I own two CEFs, PIMCO Corporate Opportunity Fund (PTY) and Wells Fargo Advantage Global Dividend Fund (EOD), two very different funds that, owing to their differences, offer an excellent introduction to CEFs. Let's start with EOD, which I would consider by far the riskier CEF. The Wells Fargo closed-end fund, as of Halloween, traded at around $8.35 per share, but its NAV, according to Morningstar.com was around $9.00, which amounts to about a 7% discount.  EOD shares have traded during the past year between $7.45 and $10.73, and the fund's NAV has ranged between a -10.52% (a discount) and 5.26% (a premium) differential from its share price, according to the useful site cefconnect.com; therefore, while a 7% discount is nice, if we wait for a steeper discount, namely closer to its 52-week high discount of about 10%, then we might do better. The best part about EOD is its roughly 13 percent annual dividend, which amounts to a $0.28 quarterly payout. While that high dividend may be signaling that the EOD may have to reduce its payout soon, I find it difficult to believe that the reduction will be so significant that the share price will be affected that much; after all, if the NAV is correct for EOD, any future dividend cuts should be factored in already to the value of the underlying assets. EOD typically trades at a discount, so we shouldn't necessarily hide under the typical Wall-Street-must-know-something-that-I don't blanket and pass up a potentially rewarding opportunity. Perhaps Wall Street is wrong, and EOD won't cut its payout after all.

Next time I'll talk about how the Normal Model and z-scores can help us time the buying of CEFs, and I'll outline the very different closed-end fund PTY.

At the time of this writing (Tuesday morning), the market is indeed falling off Clouzot's cliff.

Could This Be the Market That Everyone Called Correctly?

If you take a look at the dates of my postings, you'll conclude (and correctly) that I have taken a month off from writing about the market. I always forget how busy October is in the mathematics department on campuses around the world, with all of our students panicking about math they should have learned last semester. Also, I took some time off from writing about finance to let, as I predicted in my last post, the smarter money of the bond and currency markets drive the stock market lower; yet, the movement of the S&P 500, for example, was not just lower, it was range-bound between about 1100 and 1250.

During those ups and downs, much has happened in our country. The outrage over the U.S. banks has spilled from dinner parties---where I have gleaned that urban professionals, pockmarked with NPR rhetoric, are furious about the banks' plan to charge monthly fees for their services---to Wall Street in the form of the Occupy Wall Street (OWS) movement. The OWS claim is that only one percent of the population make most of the wealth in the U.S., whereas the other 99 percent have been reduced to mere serfs. As a mathematics educator, I was delighted that this crowd got its arithmetic correct; however, as a logical human being with the capacity to employ deductive reasoning, I was disappointed that they have misidentified the upper 1 percent. The real 1 percent are: our doctors, who are writing us a collective overpriced prescription with one hand while emptying our wallets with the other; the U.S. insurance system, which uses mathematical statistics very well to predict how much unregulated profit they can milk from us through premiums; and the lawyers, who will take any side of an argument for a profit, usually a large profit at the expense of consumers in the form of higher costs for all services, especially health care, and insurance premiums. Oh, as it turns out, not much has happened in our country since I last posted an article.

Not much has happened in Europe either, which is perhaps the real source of the recent market diffidence. European banks are experiencing our Fall 2008 now but in slow motion, which has infuriated market participants in the U.S., who are largely short the U.S. indices with the hope of a European Lehman moment, when the world's banking system teeters on the brink of collapse, so that they can profit from a sympathy stock market crash on this side of the Atlantic. When the Europeans don't panic the way Americans would about the need to recapitalize their banks, those traders who are short the U.S. market must cover, and the market action of the last few weeks ensues, a range-bound exercise in hysterical boredom.

I would be careful during the next week establishing new short-term positions except on significant pullbacks; however, if you, like me, are willing to hold your shares (almost) forever, now is at least a decent time to put money to work. During the past few weeks I have added to my (nearly) permanent portfolio by buying more shares of Alcoa (AA), Bank of America (BAC), and PIMCO's closed-end Corporate Opportunity [Bond] fund (PTY), which currently boasts an 8 percent annual dividend yield. With all the negativity around the world (even some caution coming from China), investors and especially traders are more frightened than usual. Historically, such periods of hand-wringing and teeth-gnashing are great times to buy, but could this be the market that everyone (that is, the shorts) called correctly? Probably not, but does the fact that a typically contrarian investor can even suggest that the ubiquitous bears on Wall Street are finally correct point to a near-term bottom?

Following the Smarter Money Lower

If you caught the market action Friday, you already know that the fear among global traders that had been churning under the market's surface has now bubbled to the top. Sure, we've endured some wild swings in the market lately, but Friday was different, because the currency and commodity traders started to get nervous along with their always-jittery, often-downright-craven cousins, the Wall Street stock traders. During the past few months I have claimed that, since the euro/dollar (how many U.S. dollars it costs to buy one Euro) has hovered consistently around $1.45, concerns of a Greek default (and subsequently a Spanish and Italian meltdown in the bond markets) were merely traders looking for an excuse to sell U.S. equities. Also, I have maintained that the fears of a U.S. double-dip recession were overdone because oil prices have remained stubbornly high. These two more accurate predictors of future unpleasantness than stocks, the currency market and oil futures, began to turn lower Friday, which means that the smarter money has begun to show concerns that a default in Greece will, within the next year, cause a contagion similar to the Lehman plague from a few years back, from which we have yet to recover.

The euro/dollar plummeted Thursday and Friday from $1.45 to $1.36, which by currency volatility standards, is an enormous move in two days. Less spectacularly, light sweet crude oil, now called West Texas Intermediate (WTI) to confuse everyone, traded between $89.50 and $85.64, which although still stubbornly high if we are indeed headed into another recession, nevertheless is moving in the right direction if we are about to see a European contagion induced double dip, which is, of course, the wrong direction for the handful of us who are long stocks. Here's what to watch. If the euro/dollar dips below $1.30 and stays there for an extended period of time and if WTI falls to a 70-handle and closes there, that means the smarter money believes the whole European contagion issue is more than just a media event on CNBC. That's when stocks will see even deeper declines (and fast) than we've been enduring this summer. If you are assembling the (almost) permanent portfolio as I am, you'll want to take advantage of the market turmoil by initiating or adding to existing positions of strong, large, cash-hording, dividend-paying U.S. multinational stocks, such as General Electric (GE), Pfizer (PFE), and RPM International (RPM), all of which I have recommended previously.

Last week I recommended RPM as a stock that has raised its dividend 37 years consecutively and that has an impressive list of global and industrial brands, like DAP and Rust-oleum. In the interest of full disclosure, I must tell you that Friday, in the midst of the market mayhem, I traded that stock successfully by buying a whole bunch of shares at $17.75 early in the afternoon and selling my shares at 3:57pm for about $18.05. This sort of trading, which is not really day trading, because I only traded with a relatively small percentage of my portfolio (and not all of it), is only for those of you with cash you are willing to have trapped in a stock for a long time, in case the trade does not work out in your favor. For the short-term trade I find a stock that I have wanted to own for a while with a strong dividend, a stock like RPM, that I would be willing to add to my (almost) permanent portfolio if the stock falls precipitously, and I buy many, many shares during the day at a time of extreme panic in the market (in Friday's case resulting from rumors that Greece was going to announce a default on its debt this weekend, which still hasn't happened yet at the time of this writing). I will sell the stock, all of it, that I'm trading once I have reached a predetermined profit on the trade (minus commissions and fees, which should be under $10 per trade if you're using the right broker). This sort of trading is not for the meek, especially in these uncertain times. Some call this gambling; I call it trading.

You are probably better off to keep adding to solid positions that you are willing to keep (almost) forever. This week we may see a European meltdown, and I might use the volatility to trade RPM again because my guess is that Germany does not want to cast out Greece, its prodigal son, yet, from the Euro zone; Germany will probably wait until later this month or October, when most stock market crashes seem to occur. If that happens, I'll roll up my sleeves and buy, buy, buy.

Reward and its Ugly Stepsister Risk

Remembering that I promised never to talk about politics in my articles, I will not mention the disturbing development this past week that the U.S. Government has now decided to sue the large U.S. money-center banks with two separate agencies and two separate lawsuits. Are these the same politicians who are wondering why U.S. banks are not lending and why U.S. consumers are too petrified to borrow, even those with good, stable employment? Economics has never been a strong subject for American politicians, maybe because it involves so much math, but surely someone, somewhere in the U.S. Government regulatory agencies can follow this (I'll even type slowly): If banks were reluctant to lend to consumers and business two weeks ago, they will be even more loath to lend now that, after regulators have forced them to increase their capital reserves to ridiculously high levels during the past three years, they will have to replace that capital after what can only be a sham of a trial, or more likely an expensive shotgun settlement. Oh, the Europeans have always been better at economics (and math) than we are.

Because of policy mistakes in the U.S., we now are facing the increased probability of a recession. What should we do? If you have a steady stream of investable savings, you should, as the stock market makes new lows, keep adding to positions of large multinational companies with good, stable dividends, like General Electric (GE) and Pfizer (PFE). Therefore, when the U.S. finally comes out of its slow-to-no-growth slump, the shares in your (nearly) permanent portfolio will swell with a healthy, wealthy glow. This is when your risk-tolerance is tested as an investor, and even if you never buy bonds, risk in finance is defined in terms of U.S. Government bonds.

A bond price and its yield are inversely related, that is, when the price of the bond decreases, it's yield, or its payout as a percentage as the bond price, increases. So, when bonds get cheap in value, their yields rise, and that's one way to determine how risky a bond is as an investment. You simply look at its yield compared to Treasuries, bonds issued by the U.S. government, and if the bond is trading at 5 percentage points above the Treasury yield, then it has a credit spread, sometimes called a risk premium, of 5%. A bond trading with a risk premium of 5% would be a very risky bond in the eyes of the market. In other words, the bond market, with such a high risk premium, is betting that the bond may not be able to pay its promised interest to investors and, therefore, might default.  

We also can apply the concept of risk premium to stocks and their dividends, more or less. Let's say that a stock, based on its current price, boasts a 7% annual dividend yield. The market is betting that in the future the company will not be able to pay the dividend that it currently offers; otherwise, investors would dive into the stock, driving its share price up and thereby pushing its dividend yield lower. What is a good dividend yield for a stock? That depends largely on market conditions and the company's industry. Currently, dividends are relatively high owing to a general disdain for stocks and the lack of ownership of stocks among investors like us, referred to in the financial media in the aggregate as the retail investor. For example, you can get a health care company's shares, like Pfizer (PFE), which pays a 4% or 5% annual dividend yield or a utility such as PP&L (PPL). Most dividends in these industries are safe because we are coming out of a once-in-a-generation-financial collapse, when all companies who would have had to reduce their payouts would most likely already have done so. Dividends will rise in the coming years with stabilization in the global economy.

RPM's chart is ugly, but at these levels the stock is interesting.

Years ago I traded RPM International (RPM), and lately I have been interested in building a new position in the company's stock. Friday in the general sell off, the stock closed at $18.64 and currently pays a dividend of $0.21 or a 4.5% annual yield, which, at roughly 2.5% over Treasuries, indicates that either the market sees significant downside ahead for the stock price, namely another recession, or that traders have indiscriminately sold off RPM shares owing to their general disdain for stocks. I think that the latter is more likely the case, and that the current sell off in RPM shares presents a good opportunity to begin building a position in the company. RPM International is basically an industrial chemical company that sells all sorts of specialized  sealants and coatings. The company's most recognizable brand is Rust-oleum, but you probably have other products of theirs in your basement, workshop, or garage, like Dap, which is a popular brand of caulks and sealants. What will happen to RPM if we have a recession next year? RPM's stock price will go down, but chances are the company will do everything in its financial power to keep paying and increasing its dividend. For 37 consecutive years, RPM has raised its dividend, and that means it even raised its dividend during the Great Recession we just went through (and are still feeling). That sort of streak of dividend raises, of course, continues until it doesn't anymore, but RPM, with a streak that impressive, will likely continue it through the next recession, whether it occurs within the next year or five years hence.

Warren Buffett is Smarter than You are; No, Really, He is

Last week somewhere between an earthquake and a hurricane, Bank of America (BAC) seemed like a stock headed to zero, especially to those of us who have previously, namely 2008, witnessed such behavior in bank stocks. Last Monday BAC shares had been hit with a crescendo of selling owing to a number of factors, not the least of which was a blog post claiming that BAC was roughly $200 billion under-capitalized. The implication was, so the rumor flew, that BAC would, if not go under completely, dilute shareholders to oblivion with a capital raise many times larger than the bank's recapitalization during the last banking crisis, from which, of course, we have yet to recover. Investors exited from the shares, and the short-sellers flowed in, borrowing shares of BAC just for the purpose of selling them and selling them and selling them. Then Wednesday morning, so the story goes, Warren Buffett emerged from the bathtub with an idea to invest in BAC, placed a call to BAC's CEO Brian Moynihan, and, bingo!, a mere twenty-four hours later, the greatest investor of all time owned $5 billion of preferred shares of BAC stock sporting a 6% annual dividend yield.

BAC shares jumped on Buffett's purchase but may revisit lows.

Warren Buffett has played deus ex machina in the past for the markets. As a deep value investor, he invested heavily in General Electric (GE) and Goldman Sachs (GS) during the oh-so-recent unpleasantness of 2008, when short-sellers raided the firms over liquidity and solvency concerns similar to the fears stirred last week about Bank of America. The difference? For both the GE and GS deals, Buffett received a nice, round 10% annual dividend yield, much higher than the still impressive 6% from the BAC deal. That difference shows me that the banks and businesses in general are much better capitalized than they were in 2008; otherwise, Buffett would have been able to demand a higher yield than 6%. Now, don't misunderstand me. As a BAC investor, I'm not thrilled with paying 6%, even to Warren Buffett, for capital that Brian Moynihan has claimed and claimed again that the bank did not need. He was, of course, protesting a bit too much.

The financial media has been split over the deal. Of course, the terms are good for Buffett, but in a nearly no-rate interest environment, 6% is an expensive bill for Bank of America to pay every year for under-needed capital. Of course, the shares rallied considerably in an ugly market Thursday and rallied nicely into the weekend to close the week at about $7.75. Not bad, I'd say, for a company whose shares traded at nearly $6 recently. I think the stock will retest its recent lows, despite how respected Warren Buffett is as an investor. Yes, he is hands down, the greatest stock investor of all time; yes, over his investing career, he turned roughly $200,000 into $45 billion; yes, he has an uncanny ability to recognize value where Wall Street doesn't. Yes, yes, yes, but Warren Buffett is no trader, as he himself will admit, and in both the GE and GS deals he did not call the bottom of the stock. He does not call bottoms. He simply holds onto shares of good companies forever and has more patience than the short-sellers and can outlast any recession or depression or credit crisis. Whereas I hold a (nearly) permanent portfolio, Warren Buffet devotees hold a (truly) permanent portfolio.

What's the plan, then? You could either buy now and hold as long as Buffet, or you could wait for the stock to test the lows and then buy, because, as I mentioned, Buffett doesn't usually buy at the bottom. Even if $6 is the bottom, traders and short-sellers will make sure BAC tests that low at least once more. I first recommended BAC shares on June 21, 2011, at a price of about $10.50. I liked the stock then, and I love it now at about $8.00. I will add to my shares closer to $6.00 and hold them for (almost) as long as Buffett. If the shares make their way down to a 5-handle, I'll double my position. Either way, as I have mentioned in previous articles, without the banks' participation, any substantial recovery in the stock market or the economy is as evanescent as the bubbles in Buffett's bath.

What Tolstoy Would Say About the Market Plunge

Considering the market action this week, I suppose this is as good a time as any to pull out the Tolstoy quotations. My wife, along with many of my former colleagues, will say with a collective sigh, "Not Tolstoy again." Yes, Tolstoy, one of my favorite novelists, has much to say on all things human and universal, and his first line from Anna Karenina is perfect for what we've been witnessing in the market over the past couple of weeks: All happy families are alike; each unhappy family is unhappy in its own way. What does that have to do with the recent unpleasantness in the market? I say unpleasantness even though it has only been unpleasant to those of us who actually still own stocks and are still bullish, which I guess means about a dozen or so investors in this world of bears. All week I have been hearing market pros in the financial media tell me what the beginning of a bear market looks like; what capitulation (when nearly all investors finally give up and sell all their stocks seemingly at once) looks like; what financial contagion from Europe looks like in the U.S. stock market. I would like to suggest to the experts that, All happy markets are alike; each unhappy market is unhappy in its own way.


No one has ever called the market bottom and then called the top perfectly, despite what you might hear from some trader-turned-teacher peddling his stock market trading secrets in a book or website guaranteed to take the risk out of trading assets like equities. Investing in equities is by its very nature a risky endeavor, so these peddlers, despite their claims, didn't get it right either. Perhaps there once was a trader who timed the bottom perfectly, but I bet the next day he was struck by lightning three times. The point is this: the only way to increase substantially the probability of making money in the stock market is to buy quality companies with solid earning and investor-friendly dividend policies during market dislocations, like the one we're currently suffering, and hold on to them until the panicky traders come back to you and say sheepishly, Um, excuse me, but can I buy those shares back from you that I sold you when I thought the stock market was going to zero? Pretty please? To which plaintive query we will say, No, not until the market is ridiculously overbought. In the long run, if you buy what others are selling, you will make money in stocks, but you must have patience and unflappable nerve.

This week I've heard a whole bunch of people in the financial media arguing over whether we are witnessing the bottom of a correction or the beginning of a new bear market, a fruitless exercise that only worsens the panic in the traders' twitchy fingers as they sell their equities at a steep loss only so that they won't lose more. What is wrong with selling halfway down and buying again at the bottom? It's surely better than losing everything, isn't it? No, don't sell. If you sell now and lose a whole sack of money, you probably won't have the nerve to buy lower, and, as we've already mentioned, you can't time the bottom; furthermore, the market will skyrocket from the bottom, whatever it may be, as it did in March 2008. You'll simply miss it. Those market experts who try to compare the past few weeks to similar time periods of the past will be doomed to the false-positive mistake that we are headed into another recession. I still deem it unlikely with so much, but not too much, money in the U.S. financial system that we will see another recession within the next year; nor is the Euro signaling a financial collapse in Europe, although all U.S. traders seem certain that the Euro will soon cease to exist and that the return of the Deutschmark will signal the fall of Europe. That's unlikely, with the Euro still trading at $1.44.

What should you buy? All the stocks I have suggested over the past few months I like even more now. I bought even more Alcoa (AA) shares last week, and if they turn out to be worthless, I'll use them to wallpaper my basement, but my guess is that in a year, they'll be worth considerably more than they are worth now. If not, I'll buy even more. We want to be well-positioned for the next top, which may not come for a long while, but when the market gets there, we'll be happy to have bought along the many bottoms we have experienced in stocks over many years' unhappy markets.

Is the Sky Falling? No, Just Your Stocks

All over Italy starting in July and extending through August, retailers mark down their wares to clear out the previous year's inventory. All over Italian towns, bright signs announce sales or saldi, discounts of up to 70%. Italians are clever shoppers and wait to shop even more than they normally do during these times of fabulous savings on shoes and lingerie and hats. This year Wall Street has decided to offer some saldi of its own after the great Italian tradition just in time for Ferragosto, the month of vacation that Italians take in August. In truth, most Italians don't actually take a month off, but the tradition is a beautiful one in the abstract. All of the stocks that I have recommended over the past few months are now trading considerably lower than they were when I recommended them, and last week I took advantage of the market chaos and added to positions in Alcoa (AA) and Bank of America (BAC). Are we really going back into a recession after not fully recovering from the last, the proverbial double-dip? Will the European debt crisis really send us back into a global recession?

This DOW chart does look scary, but the low might be in for a while.

My claim is that we are not going back into a recession and that now, while the Wall-Street Chicken Littles are running around trying to get everyone to panic and hide under rocks and the financial media's art departments are preparing graphics to depict financial Armageddon in anticipation of another market collapse---yes, now is a good time to buy. Of course, you must be willing to hold your shares in your (almost) permanent portfolio and continue to add to positions if the market does sink again to or even below levels that we assumed were generational lows in March 2009. Still, I consider the probability to be fairly low that we will have another recession next year, despite European debt fears and despite the frustration that most Americans feel toward all, and I mean all, American politicians. Germany won't allow the Europeans to default, which is good news for the entire world, and the currency market tells us that. I still need about $1.45 to buy one Euro and if the European crisis is truly as bad as Wall Street Chicken Littles want you to believe, the Euro will fall precipitously. Stocks are historically a pretty bad indicator of the future, whereas currencies usually get it right.

Also, although we still are operating on a limited supply of U.S. dollars in the financial system, there probably are still enough to keep the stock market from going down too much more, as opposed to the dearth of dollars we encountered in 2008 when much of the money in circulation went to money heaven. As I've mentioned in previous articles, we are not facing inflation but still must fight against deflation, and the recent market sell off is solid evidence of the lack of U.S. dollars in circulation. If the stock market gets too scary over the coming months, the Fed will step in with a clever way to prop up the markets with a cash injection into the economy, further infuriating the Adam Smith zealots, who secretly pine for the days like those portrayed in the Grapes of Wrath. And eventually government banking regulators, the creators of the financial bottle-neck currently keeping our economy in a coma, will allow the big banks to lend money again.

Right now you should buy stocks that have stable dividends and that generate a whole lot of cash selling their products. One stock that I own whose company fits this description is the consumer products company Unilever (UN), which is currently trading at around $31.50 and which boasts an annual dividend yield of over 4%. So while all those Chicken Littles are fleeing into 10-year U.S. Treasuries, whose annual yield is currently a paltry 2.6%, you can own a global company with global growth potential and a very safe dividend. Unilever has at least 10 brands that you know well (Lipton, Bertolli, Hellmann's) and probably another 20 that you don't. Furthermore, because Unilever is a European company, you get exposure to the European contagion fear without owning a bank.

Unilever's two year chart. There's resistance at $33.50, but the dividend is solid.

If you are adventurous and have a high risk-tolerance, you could buy some industrials like General Electric (GE) or Alcoa (AA), but whatever you do, don't sell your stocks. Wall Street is counting on your selling at the market low so that when someone gives the all-clear signal over an expensive Manhattan lunch in the coming weeks and the Chicken Littles come out of their holes, the Wall Street traders can buy your shares on sale.

Where Did All the Money Go? To Money Heaven?

Have you noticed recently that, compared to a few years ago, very few people have any money? Of course, the astute reader will say, that’s because we’re coming out of the Great Recession; unemployment is 9%; and Americans no longer have, or are no longer using, that great cash-printing machine called their home-equity loans to buy expensive purses and extravagant dinners and new cars. Furthermore, I have noticed that people, even people with well-paying jobs, seem to have much less money than they did a few years ago. Recently, I have been out with friends who are well-paid professionals in stable jobs, and even they claim not to have any money. What’s happening to their money? Are they burning it at night? Are they saving it? Are they paying down debt? The financial media claims that even high-end consumers are getting crushed by rising inflation owing to an over-accommodative Federal Reserve, which is a fancy way of saying that the Federal Reserve is printing too many dollars. What’s the correct answer? The money went to money heaven.

In general, the U.S. Economy toggles between periods of varying degrees of inflation and deflation. Inflation results when assets go up in value, and deflation is when asset values go down relative to the underlying currency. We just endured an extreme deflationary period, the Great Recession, which resulted from a global financial crisis. Remember that? My claim is that the reason so many Americans have so little money, even those who are still earning it at the same rate as before the financial crisis, is that the economy is still leaning more toward deflation than inflation, despite the Federal Reserve’s attempt to replace the money that went to money heaven. Most think that inflation is bad because the word connotes some of the hyperinflation catastrophes that you might remember from your middle school history classes: governments inflating their way out of debt until their currency is worthless, and then printing ridiculously high denominations of their currency. But a little inflation is necessary to keep an economy afloat; inflation helps your money grow in value, unless you have it parked in U.S. Treasuries or in cash. No, we’re definitely still feeling deflationary pressures. That’s why there’s not enough money around.

There may be enough money in the system now after the Fed’s action during the past few years, but the cash certainly has not made its way to the consumer or even to many businesses. When the money does make its way thoroughly into the monetary system, there will be a re-inflation of the currently deflated economic balloon. That re-inflation is called reflation. I would now like to suggest a stock for your portfolio for the future reflation that must occur after a deflationary period or, indeed, for inflation, when we finally see some growth in the global economy. Baltic Trading (BALT) is a global shipping company that transports dry-bulk around the world by sea using large container ships. BALT currently trades at about $5.50 and recently has seen its share price dip to a 4-handle. This week BALT raised its dividend from 6 cents to 10 cents, which has given the stock some buoyancy in an otherwise sinking market. A few years ago, when China was buying everything that wasn’t nailed down, dry-bulk shippers were making loads of money. Companies like Baltic Trading, the most-followed being Dryships (DRYS), saw their shares skyrocket to near $120 or more and then plummet to single digits after the global financial crisis.

Baltic Trading is only a few years old, so the company missed the last boom-bust cycle. That’s good for us, inasmuch as BALT did not do what almost all other companies do at an economic top: expand. Most of the shipping companies added vessels during the economic expansion. It’s a natural reaction to want to expand your business during good economic times; the only problem with adding container ships is that when demand dries up for shipping goods globally by tanker, there are too many ships, which drives down the rates that shippers like BALT can charge for their vessels. What’s the good news? BALT has virtually no debt and a brand new fleet. When the larger companies start to shed their aging fleet to the scrap yard, Baltic Trading will see its profits rise. Also, when the world economy reflates, dry-balk shipping rates will increase again. Baltic Trading is kind to investors with its dividend. The dividend may fluctuate from quarter to quarter, as may the stock price from day to day, so this investment is not for the timid; nevertheless, over the long term, BALT should do well.

And for those of you who might believe that the current shortage of money in the system is a modern phenomenon, I leave you with the following quotation from I, Claudius by Robert Graves, which was first published in 1934. The passage refers to an event that occurred in 32 A.D, which we just went through again in 2008.

The result was that all debts were at once called in, and this caused a great shortage of current coin. Tiberius’s great idle hoards of gold and silver in the Treasury had been responsible for forcing up the rate of interest in the first place, and now there was a financial panic and land-values fell to nothing. Tiberius was eventually forced to relieve the situation by lending the bankers a million gold pieces of public money, without interest, to pay out to borrowers in exchange for securities in land.

Buying Citi (or Driving on the Wrong Side of the Road)

If you are American or continental European and you have ever been unfortunate enough to drive a car in the United Kingdom or another of the very few places on earth that force you to drive on the left side of the road, you will be familiar with the following gut-dropping feeling: for a moment, just a split second, after you have finally become comfortable with the idea of driving on what is for you the wrong side of the road, your mind suddenly reverts to its former state of consciousness, and you are convinced that you are now driving on the wrong side, the left side, which is, of course, the correct side in England. Sometimes the reflex reaction to return to the right-hand side of the road is so strong that you nearly swerve into oncoming traffic. Investing in the banks after a global financial crisis results in the same unpleasant feeling.

I have recommended recently the purchase of Bank of America (BAC) at what will turn out to be exceptionally low levels in hindsight. Now I would like to recommend a financial company that is even more hated than Bank of America. I can hardly read a paper or listen to a financial media broadcast without hearing some reference to too big to fail, which is an expression that has become mainstream largely owing to one company, a company so large and intricately involved in the global financial system that it was too big to fail in the following sense: if Citigroup (C) or Citi, as it is usually called now, had failed, the official unemployment rate would have topped out at 20% rather than at 10%; instead of talking about the great recession from which we are currently dragging ourselves, we would be talking about another Great Depression, or, as I claim, a Greater Depression because the world would have taken decades, rather than years, to recover.

The past few years have been painful enough, and that is why I find it infuriating when the Adam Smith purists proclaim that we should have let Citigroup fail; these financial zealots are rather like those Armageddon hopefuls who are disappointed that humanity wasn’t all violently exterminated on the prophesied date. I have owned shares of C for a long time, and, yes, I owned them through the global financial crisis as part of my (nearly) permanent portfolio. I watched my shares drop to a buck and then rally (if you want to call it that) back to $4.00. Now it trades at about $39, but only because of a 10-to-1 reverse-split fake-out. I think of the shares as priced at one-tenth of their current value to undo the fake-out factor. Therefore, the shares today would trade at a level of about $3.90. I added to my C position at about $1, which was a very difficult purchase to make. It seemed that the whole investment community was praying for Citi to go under, as Lehman was failing, but I figured that regulators knew more than puritanical traders about the catastrophe that would have resulted.

When I bought shares of Citi at a buck, I had that driving-on-the-wrong-side gut drop. During the past few years I have had the unpleasant feeling a few more times as I’ve watched not only the financials but also the broader market dip to absurdly low levels. Each time I would say to myself, “What if I am wrong this time? What if the stock is signaling that the company is truly spiraling into bankruptcy?” And that diffidence I felt about the market or an individual stock invariably turned out to be unfounded. The career traders were wrong. Now I treat that gut-drop as a good sign, that I am actually making the correct investment choice when I purchase the shares of a good company when everyone else, it seems, is selling them---that is, when I drive on the wrong side of the road.

Now back to Citi. Professional traders and capitalism zealots hate Citi so much because the U.S. Treasury and the Federal Reserve stopped the company from failing. Forget why Citi was saved or whether it should have been for a moment. The simple fact is that the U.S. Government kept Citi from going under, which is the major reason for professional investors’ profound hatred of the stock. As purists, they cannot invest in a company that took government help. Now even U.S. bank regulators hate Citi, and all U.S. banks, forcing them to adopt stricter capital reserve requirements and threatening fines and fees and lawsuits. Also, with such strict new regulation, the financial media has piled on and currently refers to U.S. banks a nothing more than regulated utilities. Still, the U.S. government will grow tired of running the banks eventually, and banks, like Citi, need to succeed in order for the economy to grow. Without the participation of the banks, any long-term rally is doomed.

With the broader market more or less trading range-bound this summer as professional traders take their vacations and as sovereign debt difficulties in the U.S. and in Europe work themselves out, C has been toggling between $38 and $40 (now we’re talking about the stock price after its reverse split fake-out). The stock has strong support at $38 and, unfortunately, strong resistance at $41; however, when C breaks through that resistance level, the shares will shoot up in price, because all the traders are watching that level and will not commit until the stock breaks out. If you would like to trade C, you could buy it near $38 because the shares have rebounded nicely from that level; then you could sell it as it fails to break through resistance under $41. If, however, the stock holds above $41, stick with it for a year-end rally in the bank stocks.

Still, I prefer Citi as a long-term holding, not as a trading vehicle because of its status as one of the most-hated stocks in history. If you are willing to hold shares for more than five years, the probabilities are on your side for an impressive return, especially when the company reinstates its once-substantial dividend.

The (Nearly) Permanent Portfolio: A Case for Stocks

I collect antique clocks and currently own 15 of them. I have a vague idea of how much I paid for them and, for the most part, I believe that they are now worth more than I paid for them; yet, I wouldn't be surprised to find out that they have depreciated in value since I bought them or that I paid too much for a few of them. I never worry about losing money on my clocks. I'm not sure that I'll ever sell them.

What if we apply the techniques for collecting clocks or books or paintings or baseball cards to collecting shares of stocks? We will be as smart as we can be about which stocks we buy and when we buy them, but once we have purchased them, let's make a pact that we aren't going to check our portfolio balance many times per day (yikes, I'm guilty of that one), and let's not worry about whether our stocks decline in value, because we plan to keep them, as I plan to keep my clocks, forever (almost). If the stocks we own go down in value, we might just add to our positions. Holding onto stocks despite short-term fluctuations in the markets was the popular investment strategy during the past couple of generations, and it worked pretty well for long-term wealth building. It used to be called buy-and-hold investing, and if you pay attention to the financial media, you would know that buy-and-hold is dead because of the lost decade for stocks, when we had two painful bubbles, the Internet and housing disasters. Those are scary things, right?

When most investors think that buy-and-hold is dead as an investing technique, it's the best time for us to employ the strategy anew. Sure, I love to trade on the intermediate time-frame, which for me means weeks or months; still, I have a group of stocks that I bought at what I think are fair valuations, and I plan to keep them forever (almost). Some of the stocks in my permanent portfolio are Bank of America (BAC), Alcoa (AA), Cisco (CSCO), the utility PP&L (PPL), and General Electric (GE). I bought all of these stocks in layers, building up a position by buying a few hundred shares at a time and over the course of several months or even years to ensure that I bought the shares at a reasonable average price. They all pays dividends, and all will probably increase those dividends over the next few years. I bought the shares when stocks were largely out of favor, so I am almost guaranteed capital appreciation over the long term. I am still buying these stocks when I can on dips to add to my (nearly) permanent portfolio.

Now what do I mean by nearly permanent and almost forever? Let's go back to my clock collection. What if suddenly, strange as it might sound, everyone wanted antique wall clocks? Suppose that someone came up to me and offered for my clock collection double or even triple what I thought it was worth. I like my clocks, but I would sell them, let the market for clocks calm down a bit, and then start collecting again. That's exactly what we should do with our (nearly) permanent portfolio. Eventually, and I mean maybe not for ten years, there will be a new bubble in stocks. Your mechanic, your hair-dresser, your child's school teacher, your neighbor, and people you meet walking their pit bulls in your neighborhood will all be talking about stocks, and their voices will tremble with maniacal excitement. When everyone is enthusiastic about buying stocks (not just a few of us, as it stands now),  I will sell my (nearly) permanent portfolio, just as I would my clock collection in a similar scenario. I will put my money in bonds or cash and wait for the bubble to pop; then I will start all over again.

PPL is a solid utility company that you can own for years.

Perhaps I will say a few words about the stocks in my (nearly) permanent portfolio. I have written previously about GE, BAC, and AA. Cisco Systems (CSCO) is a formerly-beloved, now-thoroughly-hated tech stock that provides the infrastructure for the Internet; it currently pays a pathetic quarterly dividend of 6 cents, but the dividend and stock price have plenty of room to grow. PP&L Corporation (PPL) is a utility that currently trades around $28 and boasts a quarterly dividend of $0.35, which amounts to, at the current share price, an annual yield of 5%. Both CSCO and PPL deserve more of our time, but we will save those words for a different day.

Have you noticed that most people aren't investing in stocks now? People look at you funny if you talk about stocks, as though you should not be talking about money when so few have enough of it after the great recession of the past few years. That disdain for building wealth will fade in the coming years, and when people become interested in saving for retirement again and the stock market is reaching new all-time highs, you'll want to make sure that you already own the shares that you will gladly sell them.

Love Your Pit Bulls, Not Your Stocks

Many years ago in Baltimore, the pet of choice among the widespread criminal element became the pit bull, because, among other marvels, it is a scrappy dog that can fit easily into a duffel bag full of cash. Noticing that criminals were enamored of the breed, regular folks, aspiring to be like the criminals, also began to adopt pit bulls as their representatives of man's best friend; finally, a few of the criminals went to jail or died in gun fights, and many of the regular folks who had pit bulls as family pets lost their homes or could no longer feed those big, hungry mouths. Now pit bulls roam the alleys of Baltimore as strays, waiting to be adopted by the few people who do not already own too many pit bulls. I have heard that your pit bull will steal your heart, and I agree that a pit bull might steal your still-beating heart with its angry jaws someday and swallow it with a quart-of-warm-blood chaser.

I suppose there should be an economic indicator that measures the number of stray dogs in cities across the U.S. With that statistic perhaps we would find a positive correlation between numbers of strays and economic stress felt by families. At the risk of mistaking correlation with causation, I would like to suggest that I have received fewer emails lately from neighbors and friends about stray dogs and, in particular, pit bulls. My sense is that in my city the economy is improving modestly in Baltimore, and if it is improving here, perhaps the economy is also improving around the country, where people also love their pit bulls.

I have never loved the stock Pfizer (PFE), but I have like it well enough. Wall Street hates Pfizer. I first traded PFE about 6 years ago when the company had fallen out of favor with investors because of the looming patent expirations of blockbuster drugs like Viagra and Lipitor, the former in 2012 and the latter later this year. Investors priced into the stock the loss of earnings on those drugs early. I bought PFE at an average purchase price of $24 and sold it at about $28, so the trade was a positive one but nothing to get too excited about. When the stock dipped again soon thereafter, I bought again and have held the stock ever since. The stock is hated and has been for about seven years or more. I like that part; the more hated a stock is by the investment community, the more, in general, I like the stock. A hated stock is always under-owned, and we want to buy stocks that are under-owned and then sell them back at a profit to the fickle traders who sold us the shares. Currently, PFE trades at around $20 and dipped into the mid-teens as recently as summer 2010.

What I find interesting about PFE is its under-owned status and its potential to generate dividend income for its investors. The quarterly dividend is $0.20, about 4% annually at the current share price. The company had to cut its dividend years back from $0.32 to complete the mammoth purchase of Wyeth. Since then Pfizer has been interested in raising its dividend as quickly as possible; it won't return to $0.32 any time soon, but we may be surprised by what future blockbuster drugs Pfizer will patent. Wall Street has been trading Pfizer as though the company will never again produce a significant drug, which is a ridiculous assumption. Furthermore, Pfizer has been restructuring and cutting costs to ensure that the dividend will increase or, at the very least, remain steady, and that will help the share price.

There are a few technical hurdles, however, for Pfizer with respect to its stock chart. For example, the chart shows the stock may be stuck under $21 for a few months at least. A double top is when a stock reaches a certain stock price, the top, then falls back only to make another attempt at exceeding the top again but fails and falls back again. Of course, you can have triple tops and quadruple tops and many-many-uple tops. The higher the uples, the more difficult the stock will have breaking out above that top, and that's bad for you if you own the stock because the top serves as a cap for the stock's price, especially in the short term. Why do we know this? Statistics. A double top decreases the probability that the stock will break out above the established top's resistance. A triple top decreases the probability further, and the higher the number of the top, the more difficultly the stock will have overcoming it from the standpoint of probability. See if you can see the tops in Pfizer's recent chart.

PFE's three-month chart looks terrible, but the company's prospects are improving.

Oh, so many tops. There is resistance at and below the $21-level. Here is another reason traders won't touch this stock: the more-than-triple top, a death knell for a stock according to traders. Still, using tops to identify resistance for a stock can be misleading. For example, the statistics only holds the stock below an established top if there is no big news to drive the stock past the resistance. For example, if Pfizer released news next week of FDA approval of a new potential blockbuster drug, the stock would pop and break through this $21 resistance level. Also, good news for the overall market might also help PFE over the $21 hurdle, but with the many worries we face near the end of the summer (for example, the U.S. debt ceiling, the European debt woes, etc.), a general stock market surge is unlikely until closer to the end of the year.

But there's a benefit to tops that many traders ignore, namely, that a stock tends to try to break its resistance at significant tops many times before it actually succeeds, so PFE presents an excellent short-term trading opportunity if it dips significantly below $20. You can buy the stock, for example, with a 19-handle and then sell it when PFE tries to break $21 again. If you had used that strategy many times during the past few months, you would love PFE, perhaps more than your pit bull. If PFE ever drops to the $17 or $18 level, I will add to my position significantly. Otherwise, I will hold the stock and collect 4% annually waiting for the stock to blow its top, which will happen, I think, within the next two years.

If Loving Gold is Right I'd Rather Be Wrong

I just finished a unit on finance in a math-for-non-math people course I'm teaching this summer. In the finance unit we cover some models and equations that determine the future value of investments, and after class, over several days, three different students asked me what I thought about gold as an investment. One student told me that her uncle was converting all his savings into gold. I blinked hard, twice. Recently, almost every other commercial on Sirius-XM's CNBC channel urges you to buy gold directly from a company that will ship it to your door or help you convert your savings to gold stored in one of their vaults. More than once during the past three months I have talked to someone who is converting a meaningful part of his 401(k) to gold. Gold, gold, gold. With the governments around the world printing so much money, shouldn't we just buy gold, gold, gold? Everyone is doing it! 

We should not do it precisely because everyone is doing it.

I had a boss in 1997 whose only investments were shares of Apple (AAPL) and gold ingots in his safety deposit box, two assets that, at the time, had been left for dead by the investment community. Well, if he still has those assets, he has done quite well on both. If he bought gold for about $300 per ounce, he is up about 400% versus about a 20% gain in the stock market, if that. My former boss knew precisely when to buy gold (or any investment): buy it when no one else likes it, when everyone scoffs at it. Ha, ha, investors said in the mid-nineties, I won't dirty my hands with gold. Yet, gold runs in long bull-market cycles, decades long; however, my claim is that even if gold doubles from $1500 to $3000 per ounce over the next three years, you are still better in stocks, many of which will do better than that. The steepest part of gold's run we've already seen.

What does gold really do? Gold is primarily used as a hedge when investors fear currency will loose its value because of inflation, but inflation is not always bad. A little inflation is actually good for investors. After all, it's ugly cousin, deflation, destroys wealth by reducing the value of all assets. A little inflation lifts the value of most asset classes. It's hyperinflation that we don't want. My claim is that we won't see hyperinflation (think Weimar Republic in the 1920s), which would force us to use scientific notation to order a coffee.  Still, the truth is that even in moderate inflation, stocks do well, especially stocks that can pass on their input costs to consumers. If you hold cash or bonds during inflation, you loose money at a very fast rate. 

Most people think that the U.S. Federal Reserve's current monetary policies are too loose and are introducing too much money into the system; that flood of currency, most claim, has forced commodities like oil and gold to shoot up in price. I disagree. If there were truly too many U.S. dollars in the system, gold and oil would not be going up in value in terms of other currencies as well. The Federal Reserve is introducing money into the system in order to replace all the dollars that went to money heaven during the economic disaster of the last few years and hasn't come close to replacing all that lost money; finally, oil is high because fear of future unrest in the Middle East (or whatever other fear you want to insert; oil traders are a panicky lot) and because of too much oil speculation by investors, not inflation. So inflationary fears have caused the appearance of inflation, not real inflation. Gasoline costs so much, in part, because people like us can trade oil futures, and that is scary. Gold costs so much because investors and citizens alike are afraid of inflation; hence all the commercials urging us to buy gold.

This gold bar is worth about $600,000 at today's gold price.  

Now I'd like you to imagine that you did what my student's uncle is doing, namely, convert your savings to gold. How big a nugget would you have? The picture above shows a gold bar that is worth roughly $600,000 using today's market price. Do you have $600,000 to invest in this gold bar? Would you be satisfied putting this in your safety deposit box? It won't pay you dividends; it may increase in value but probably not at the same rate it has over the past several years. It is pretty, though, I guess.

Here's what I'm buying instead of gold: the not-so-shiny metal aluminum---or, actually, Alcoa (AA), a producer of aluminum. If the Federal Reserve is creating inflation, then AA shares will increase in value. If the inflation we think we're seeing is just the expectation of inflation, brought about by speculators, then AA will also increase in value. The stock trades at around $16.00 and has run up a bit too much in recent days because of an oversold bounce in the stock market in general. But you'd be safe initiating one quarter of a position in AA at these levels and waiting for pullbacks this summer to add to that position and, therefore, lower your average purchase price of the stock. The stock with a 14-handle or below is a clear buy.

A one-year chart of Alcoa. I will be adding to my position on any pullbacks.

You see, Alcoa, historically has been a cyclical stock that trades in the lower teens in a recession and then trades in the mid-thirties when the economy is roaring. I plan to collect many shares of AA in the low teens and then sell them at thirty or beyond in a few years. I may not even get the chance to wait that long. If the global economy takes off again in a few years, which I believe is the case, a large international miner or industrial company may buy Alcoa, paying us shareholders a nice premium on our shares before the cyclical top of the economy. Furthermore, the company typically increases its dividend as the economy starts to grow. Right now the dividend is a paltry 3 cents per share. When the stock traded around $40, Alcoa paid a quarterly dividend of $0.17. As the economy and earnings improve, Alcoa will want to return more cash to shareholders, which will boost its share price.

Gold doesn't pay a dividend. It's just shiny, and the only reason gold stores any value is that we've all agreed to let gold store value. My bet is that by next summer aluminum will outshine gold.

GE's CEO Needs to Raise Your Dividend (or He'll Be Fired)

One of the many benefits of buying stocks after a financial crisis is that, because of the sheer lack of money in the financial system, even traditionally stable dividend-paying companies must slash or eliminate their dividend payouts to keep their corporate balance sheets viable. Where's the benefit? The company will raise the dividend again, eventually. One such company that was forced to cut its dividend owing to the financial unpleasantness a few years back was the airline leasing company Aircastle (AYR). After paying a $0.70 dividend late December 2008, Aircastle cut its dividend to $0.10 in 2009 and has kept it there ever since---ever since Monday, that is, when the company raised its dividend by 25% to $0.125, bringing the annual dividend yield up to around 4%. Four percent is a nice yield on a company whose stock price may increase substantially as well over the next few years, especially when the dividend is raised even further.

What I find interesting is that even when AYR traded at what will probably be a generational low of around $2.80 during March of 2008, Aircastle did not eliminate its dividend. After all, what companies would ever need to lease planes again, since the world was plunging into the second Great Depression? The market was essentially pricing in bankruptcy for the company, but Aircastle didn't believe the financial media. If you had bought the stock then, not only would you have quadrupled your money (as AYR currently trades around $12.00), but you also would have locked in an annual dividend yield of roughly 14% with that ten-cent quarterly dividend on the shares you purchased during the lows. If you still owned your Spring-2008-bottom shares today, your annual yield on those shares would be nearly 18% after Monday's quarterly dividend increase to 12.5 cents per share.

Now what if we apply this strategy to other stocks? Are there stocks that will soon (within the next year or two, let's say) raise their dividends? The idea would be to buy the stock now so that the low purchase price of the stock will make our annual dividend yield higher. A stock that I own in my (nearly) permanent portfolio is General Electric (GE). Different from the appliance behemoth you may remember from the nineteen-seventies, GE is a conglomerate whose business now centers around energy infrastructure, finance, and entertainment. Before GE cut its dividend to $0.10 in 2009, the company paid a respectable $0.31. During the past year or so the company has raised its dividend three times, signaling to investors that as soon as cash on the balance sheet becomes available, GE will reward its shareholders with an increase in the quarterly dividend. The dividend stands currently at $0.15 per share, but my sense is that by the end of the year it will be significantly higher.

GE's CEO Jeff Immelt has hinted that GE Capital, the finance arm of the conglomerate, may start paying a dividend again to its parent company as early as the end of 2011, but certainly by 2012. That dividend will be added to the current 15-cent quarterly dividend. Shares of GE currently trade around the unimpressive level of $18.50. If you buy the shares around that price and the quarterly dividend rises even to $0.20, on those shares you will have an annual dividend yield of 4.3% ($0.80/$18.50). If the dividend eventually goes back to $0.31 and you bought the stock at these levels, your yield on those shares will be 6.7% ($1.24/$18.50). At that dividend yield, the stock price will also have appreciated in value to at least $35 because the increase in dividend will result from increased profits, which will move the stock price.

Finally, most money managers who hold GE currently have held it for a long time and have watched the stock plummet and the dividend all but disappear. They have held the stock because in the past GE had been a stable income-producer with its steady dividend. If that dividend doesn't rise enough to be a viable income source for investors, the pressure will be on Jeff Immelt to step down, and his replacement, having witnessed the demise of his predecessor, will increase the dividend post-haste.

Never Underestimate a Billionaire Genius

There are a fair number of billionaire geniuses out there running companies, but few who started the company that made them billionaires and in the process made them geniuses at running their own companies. Here are a few: Warren Buffett, arguably the greatest investor of all time, of Berkshire Hathaway; Howard Schultz, who built Starbucks; and Larry Ellison from Oracle. If you bet against these billionaire geniuses over the long term, chances are you'll lose money. And although I haven't exactly lost money betting against Larry Ellison and Howard Schultz, I have, nevertheless, failed to make as much profit as I could have if I hadn't underestimated them, which I suppose is a wordy euphemism for losing money betting against them.

I started buying Starbucks (SBUX) in 2007 when it traded down to $30 from $40, after founding CEO Howard Schultz had stepped down and someone less talented had taken over for a while. It was my style of trade. A quick few points, a revision to the mean of $39 or $40, and I would be out. Then, of course, financial Armageddon and the Lehman-Bear-Citi-AIG unpleasantness occurred, and the stock bottomed at about $10 in  March 2009. Now forced to consider SBUX a long-term trade, rather than a six-month trip to the cash machine, I lied to myself (and my wife) that I had always considered SBUX a long-term holding.

The negativity against Starbucks descended during the throes of the recession. The financial media claimed that, despite Howard Schultz's return to the CEO post, no one would ever be able to afford a coffee at Starbucks again. The claim was that McDonald's McCafe would drive the SBUX shares down even lower. Yet, the stock rose off its lows, despite the taste tests in which journalists swore that McDonald's coffee was better than Starbucks', various surveys claiming the American populace agreed with the journalists, and interviews with government bureaucrats talking about a $5 cup of coffee as emblematic of American profligacy. Had Americans really mortgaged their homes to buy venti half-caf lattes?

The stock started to climb back to the mid-teens a few months after the March 2009 capitulation in the stock market. I began adding to my $30 position with new layers of SBUX shares around $18 and $19, enough to get an average purchase price in the low twenties. And consumers like me started going back to Starbucks, slowly at first, then more steadily while Howard Schultz stopped the over-expansion of stores and tried to purify what had become a diluted brand. I sold all of my SBUX shares at about $25 a little while later, thinking the quick rebound in the stock had been a little premature and hoping to take some profits and then buy again on a pull-back in a few months; however, the sell-off in the shares never came, and now, even after this summer's market swoon, SBUX shares are trading, as of Friday's close, at $37.35. What was my trading mistake? I listened to the financial media and underestimated a billionaire genius.

I am proposing a stock purchase not of Starbucks but of Oracle (ORCL). My history with ORCL shares is much shorter. (Whew!, says the weary reader.) I bought them at $18 and sold them at around $24, underestimating Larry Ellison, the billionaire founder of Oracle. The stock rose to $36 about a year after I sold them. Recently I bought Oracle again at $34. Thursday after the market closed, Oracle reported solid earnings, but the stock tanked after hours because sales of high-end computer hardware were worse than expected and because of the violent Greek crisis, etc. The stock closed at $31.14 Friday. I plan to buy it this week under $31, or, even better, with a 29-handle, if I can.

Also, I would buy Starbucks on a significant pullback, say to a price under $30, but I may be making the same mistake again by underestimating Howard Schultz in assuming such a big pullback in the shares is even plausible.

You Never Forget Your First (Double)

When I first started trading equities, I read an article about how special it is the first time you double your money on a trade. At the time I was skeptical that I would ever see the double in my own portfolio. But just the following week, I was researching biotechnology companies for my fledgling portfolio and fortuitously looked up at the television when there was a biotechnology analyst talking about his top picks on CNBC.

I am fairly skeptical of stock analysts' reports. Often the relationship between a company and the analysts following a stock seems a bit too close and, therefore, unseemly to me. Also, analysts as a group tend to be wrong about individual stocks, and so if most of the analysts following a stock rate it as a buy, I wonder whether the stock can go any higher with all of the cheery optimism about the stock price. Usually on such an occasion of over-optimism I would rather sell the stock than buy; yet, I do find analysts' picks to be a good place to start research on individual stocks. On this day the analyst recommended Genentech (DNA) as his top biotech pick. I had a friend who recommended Amgen (AMGN) and who already owned some shares of AMGN. I had been about to go with Amgen as my biotech choice when at the last minute, owing partly to the analyst's tip, I bought Genentech instead. Then fortune smiled upon that pick, because the following week Genentech's cancer drug Avastin showed more promise than most of the analysts had previously expected, and almost overnight the stock doubled in price. I had bought the stock at about $40, and now the stock was trading above $80. It was luck, just glorious luck. I sold.

Now I'd like you to get your first double, unless this isn't your first, in which case I'm sure you won't mind another. I suggest that you buy Bank of America (BAC), one of the world's most hated stocks. There is so much pessimism surrounding this stock that you may have gasped when you read the name. Do I mean the hated bank whose fate is tied to the deflated American housing market? Yes. Do I mean the company that was involved in the near failure of the global financial system? That's the one. Do I mean one of the evil banks that everyone hates after we bailed it out because it was too big to fail? You betcha. Lately, in addition to being hated by the investment community, the federal government has piled on with threats of strict interpretation of new regulations for banks as systemically important as Bank of America. Also, everyone is nervous about Bank of America's potential exposure to bad Greek debt. Haven't you noticed the violent Greek crisis we're going through? 


My claim is that Bank of America will double within the next three years. It may even double by the end of 2012. Here's why. I think the housing situation can't get much worse. If it does get worse, you'll have a lot more to worry about than having to wait a little longer for Bank of America to double. Also, betting on a BAC recovery is basically betting on an eventual recovery in the U.S. economy. Neither the stock market nor the jobs situation can recover without the banks lending at a healthy level, and when the banks lend at a healthy level, BAC will be your double. Currently, BAC is trading at about $10.50. The last time the stock traded at levels this low was during the first four months of 2009, when we narrowly avoided a depression. The stock should not be trading at such generational crisis levels now. We are not going back the dark days of a near-depression for a long time, if ever in my lifetime. I own many shares of BAC, and if the shares get much more depressed, I'll buy more. It's a good candidate for your first double.

Oh, so Genentech was later purchased by the European drug giant Roche; therefore, DNA no longer trades as a stock, but I shall never forget her.

The Worst Time to Buy is the Best Time to Buy

Most people are wrong about investment most of the time. A couple of years ago, if you had held on to a large diversified portfolio of stocks through the vicissitudes of the prior decade, your return had probably been about even or slightly negative. Right after the lows of the bear market a few years back I heard and read scores of people in the media dismissing stocks because of their historical lack of return. I can remember when, at the booming crescendo of a stock-market bottom, people, even smart people, even good investors, even people on the news who knew nothing about markets, told us that we might want to consider selling our stocks, even after the market had plummeted and those sellers of stocks were going to take losses, sometimes life-changing losses. I said to myself, "This must be the bottom." And, yes, I was buying stocks there at the bottom, but I already had much of my savings in my deflated portfolio and didn't have as much capital as I would have liked. That is why I am still buying today.

Even recently I've heard people dismissing stocks both in the media and in everyday interactions. Of course, those who claim that stocks are no longer a good long-term investment are horribly wrong. That stocks are so under-owned as an investment class is the best argument for holding stocks for the long run. I look for superlatives in the media, negative superlatives, and buy stocks when I hear them. You've heard the negative superlatives, like longest weekly losing streak since 2001, which almost happened this week, and crisis, like the Greek-crisis, you know the violent Greek crisis, whose footage we were forced to watch all week. Shouldn't we be nervous, very nervous as investors? After all, CNBC says we should be nervous. Shouldn't we sell?  No, we should buy. The media has been so negative lately on stocks that we must be close to some sort of near-term low, which we may revisit later this year but which I am going to exploit to earn a little money.

If the Greek crisis really is a crisis, why does it still cost me about $1.50 to buy one Euro? Perhaps Euros are so expensive because they're colorful and come in different sizes or because the smaller the denomination, the smaller the rectangle the currency is printed on; that's all truly amazing stuff, but the currency market usually doesn't get valuation wrong. And the currency market is signaling with the strength of the Euro that the Greek crisis isn't a crisis.  If I'm wrong and the market tanks because of a Greek restructuring or default, I will roll up my sleeves and buy equities, as many as the panicked traders on Wall Street will sell me.

Last week while investors nervously watched the violent Greek protests and nearly everyone interviewed on CNBC was predicting that markets would fall precipitously, I added to my portfolio. I bought Nucor (NUE), a U.S. steel-maker. In early April the stock traded at about $47.50 and now trades just under $40 on slowing global growth concerns and a perceived slower future demand for steel. Like the broader market, NUE is oversold. I have owned the stock before and traded it within a few weeks of purchasing it for a profit. My sense is that I will again be selling NUE for a profit within the next month on a bounce after Wall Street's erratic pendulum swings to the all-clear-stocks-look-cheap signal (to mix metaphors thoroughly). If the stock does not rise to the level that will give me the profit I want, I will hold it and collect a dividend yield of 3.66%.