Sunday, August 22, 2010

I Prefer Watching A Bull Elk Rather Than The Bear Market

August has been a lazy time for Crusty. More lazy than normal. The market has meandered and my portfolio decisions seem sound. Or, if not sound, void of new ideas.

A couple of weeks ago a deer jumped over my back fence and bounded towards the neighbor's yard and the lake. I'm used to pheasants and an occasional raccoon in the yard, but the deer was a first. I see them in the parkland surrounding the lake so I'm aware of their presence but, as I wrote, seeing a deer in the backyard surprised me. It also made me want to go to the mountains. So, we packed up the car with the wife and the dog and headed to Colorado.

Around Estes Park you can't miss the elk. They are everywhere. They seem to be particularly fond of yards, shade, and flowers. I sure enjoy watching those beautiful animals eat other people's flowers and shrubs. Elk, deer, aspens, pines, peaks, canyons, rivers, and mountain cabins all provided outdoor enjoyment. Why spend time thinking about investments? But I did sometimes.

Mountain forests got me thinking about Redwood Trust [RWT], a holding of mine that, at present is working fine. RWT is a REIT that invests in mortgage loans, bonds, and securitizations. It sells for about $14 and yields 7%. It actually returns more as the dividend is classified as "return of capital" since RWT has no accounting taxable income. So, the income stream is attractive and will remain so for another year or so before the dividend starts being ordinary income again, but, by then, I hope Redwood can pay a higher dividend like they once did.

RWT isn't without risk as real estate investing isn't surefire. But, they have made it through the worst of their portfolio decisions and have huge reserves put aside against their likely losses. They have plenty of cash, capital, and good credit controls. They don't take interest rate risk. They take credit risk and are good at it. Wally Weitz thinks so and so does Crusty. RWT provides both income and upside.

Another REIT that has done well by me as the Fed has held interest rates down is Annaly Capital [NLY]. Just the opposite of RWT, NLY doesn't take any credit risk as it buys agency securities, but it assumes lots of interest rate risk as it borrows short and lends long. And leverages itself about 5 times. But it does all that well so it can pay a hefty dividend. Currently 15%. It should remain a good position until rates start climbing which will obviously impact its spread and stock price. NLY is a different animal than RWT, but that's why they are both worth owning.

All REITS are not the same, so if tempted by their yield, do some homework. I hope I've done mine correctly. If I haven't, I may have to return to Colorado and live in a trailer, not a chalet.

Monday, August 2, 2010

Prepare For Disappointment

I had great hopes that last Thursday would be a good stock market day for me. I was sorely disappointed. Mentally I was ready for some lousy results on three of my companies that were reporting earnings that day, but the rest of Wall Street wasn't as sanguine and brutally punished those securities.

The percentage moves were huge for a one day period. Bunge had been trading around $54 and was pummeled to $46, Neutral Tandem was taken down from $13 to $10.50, and Brunswick moved up from $14 to $17.50 [ a short put that stopped working ]. Lots of shares changed hands, probably lots were momentum driven, as the market reacted first and studied, if they did, later.

If a person's investing time horizon is longer than a nano-second, BG and TNDM were, and still are, attractive at those lower prices. The negative bet against BC will also still work, but it will work better for new money as it continues to act strongly. It will take another couple of quarters before company results start looking promising and I feel smart again. Bunge has already climbed back to $52; that's up $6 from the day of panic.

Nap time.

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