I started writing this newsletter in late July with the intention of publishing it in August but fell sick in the first week of August. While I recovered in less than a week, it was almost mid-August before I could burn the midnight oil again and I decided to just wait until September to publish it with updated data. Instead of picking a stock this month, I figured I would try something different and get a read of the pulse of the economy and determine if I should revise my bearish outlook in light of recent economic data and the rise of the market.

On March 9, 2009 all three indices, the Dow Jones Industrial Average, the Nasdaq and the S&P 500 simultaneously hit lows that could very well end up becoming the low of this bear market. The Russell 2000 (^RUT) and the much broader Wilshire 5000 Total Market Index (^DWC) also confirmed this bottom amid a backdrop of fear that the entire system could collapse and we might see the second great depression.

While configuring a Dell (DELL) laptop earlier this month, I noticed that Dell was now offering WiMax as an option for the wireless card in its Inspiron line of laptops. To borrow a line from a comment following Dell's May 5, 2009 announcement regarding the availability of WiMax on two of its computers, "if Wi-Fi is a beard then Wi-Max is like a full body beard, with all over coverage."

It has been a long journey for some of us early WiMax investors but it looks like mobile WiMax may finally be within reach of consumers. Whether WiMax continues to benefit from its lead in the consumer sector or gets eventually eclipsed by competing standards like LTE and HSPA+ remains to be seen.

I received a question from a subscriber earlier this week that resonated with another question I received from a subscriber shortly after I sold one-half of our position in Indian mining company Sterlite Industries (SLT) for a gain of 95.12% a couple of months ago. Both these questions were related to the trading axiom "Let your winners run but cut your losses quickly". In the eyes of both these subscribers I had violated this axiom.

The subscriber who wrote to me about Sterlite Industries and Tata Motors (TTM), wanted to know if I felt any seller's remorse after selling 100% of my position in Tata Motors and 50% of my position in Sterlite right before a rally in Indian stocks that saw Sterlite's stock move up to $11.57 just days after I sold it for $9.19. He was quite clearly referring to the "Let your winners run.." part of the trading rule of thumb I mentioned above.

Investing is a lot of hard work. The time one has to spend staying current on existing positions, analyzing candidates for new positions and staying on top of macroeconomic events that could take a heavy toll on your portfolio despite the quality of your individual investments, can quickly add up. While we have been blessed with a number of powerful tools, we have also been cursed with access to so much information that the signal to noise ratio is rapidly diminishing.

When looking for new investment opportunities, I have found it useful to look back at positions I once held but are no longer in the portfolio. If an old position is now at an attractive price, it saves me the time required to familiarize myself with the company, the sector it operates in, seasonal effects if they exist and the price history of the stock.

This was an article I published on the iPhone app review site AppStruck.com that I am in the process of launching with some friends. I figured I would cross-post it on the SINLetter for some light weekend reading, especially for investors who own an iPhone or are considering buying an iPhone.

The siren song that tempted me to switch from using a Blackberry (RIMM) to Apple's (AAPL) iPhone was the native Stocks application on the iPhone. The ability to rapidly scroll through the list of stocks to view quotes and charts was in itself worth the price of admission.

Preferred shares are a special class of investments that have a higher claim to a company's assets than common stock but do not have the voting rights that common stock holders have. They also tend to pay a higher dividend than common stock and companies would normally cut or eliminate common stock dividends before they consider cutting preferred share dividends. Some preferred shares are convertible into common stocks. You can learn more about preferred shares here.

In light of the strong rally we have experienced over the last few weeks in the broad stock market and the financial sector in specific, which is up nearly 90% off its March 9 lows, I recently sold my preferred share ETF, iShares S&P U.S. Preferred Stock Index (PFF). While I am attracted to the 11% yield of the preferred shares ETF, over 80% of PFF's portfolio consists of financial stocks. In the uncertain investing environment we live in, preferred share funds have seen highly volatile swings, losing nearly half their value in a matter of weeks and rebounding just as quickly.

iRobot (IRBT), the company that makes those lovable and sometimes efficient Roomba and Scooba line of robotic vacuum cleaners, reported results that are most likely going to clean out short sellers today. The company reported results that were 10 cents better than analyst estimates, an increase in gross margins and revenue that only declined 0.9% to $56.9 million in this tough environment.

Sales were buoyed by international Roomba sales, which were up an astounding 69% when compared to the first quarter of 2008. Government and industrial product revenue dropped year-over-year but was offset by home product revenue and government contract revenue. The company posted an adjusted EBITA loss of $0.3 million and operating cash flow of $14.3 million.

Micro-blogging site Twitter has exploded in popularity in recent months and more than doubled its unique visitors in March 2009 to 9.3 million. This is not year-over-year growth or even quarter-over-quarter growth. Twitter increased its traffic 131% from February to March. I knew I had to give it a shot when my barber asked me "What is this twitter thing?". I created the account @specialsin and got sucked into twittersphere.

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A lot of attention was focused on Intel's (INTC) first quarter earnings, which were released yesterday and came in better than expected on all three fronts: revenue, margins and net income. The company reported earnings of $647 million or 11 cents per share on $7.1 billion in revenue at 45.6% gross margins. Sure, expectations had been lowered to a great extent in recent weeks but the focus was on Intel's outlook and what that outlook implied for the rest of the tech sector.

With Intel's stock up more than 32% since its Feb 23rd low of $12.08 and the Nasdaq up over 28% since March 9th, a strong outlook from Intel, which happens to be both a Dow and Nasdaq 100 component, was integral for the rally to continue. Beyond Intel's comments that the PC industry had hit bottom in the first quarter, the company did not offer much in way of guidance. The company expects Q2 revenue to remain flat when compared to Q1. With inventories down significantly in the first quarter (down $699 million or 19% from Q4), the company expects gross margins to be much higher in the second half of the year. The company reduced its headcount by 1,400 in Q1 and net margins are likely to improve through the rest of this year.

On a recent call with a regional manager from web conferencing company WebEx, (WEBX) I asked him how things were going at WebEx and he told me that business was great. It reminded me of the last recession when business travel fell off a cliff after the dot com bust and web conferencing companies were doing brisk business. That brisk business attracted networking giant Cisco, (CSCO) prompting the company to acquire WebEx in 2007 even as it eyed bigger fish with its more expensive high-end videoconferencing product called TelePresence.

WebEx generated $380 million in 2006 annual revenues, the year before Cisco's $3.2 billion acquisition. Even if revenue has more than doubled since then, WebEx would account for less than 2% of Cisco's $39.54 billion fiscal 2008 annual revenue.

If you are familiar with merger arbitrage, please feel free to skip straight down to the deal metrics section below. Merger arbitrage is a process akin to picking up a few pennies and nickels along the way while panning the river for the big prize, gold. You are basically trying to pick up a few short-term and hopefully low risk dollars in your journey to your long-term investment goals. To explain merger arbitrage, I am going to borrow from a blog entry I wrote on January 11, 2007 titled A Merger Arbitrage Opportunity, where I wrote,

2006 proved to be a banner year for global mergers & acquisitions with $3.79 trillion worth of deals, which even surpassed the deals made during the height of the dot com boom in 2000. As you may have noticed, when a merger or acquisition is announced, the stock of the company getting acquired usually jumps up and closes the day at a price very close to the acquisition price but often a little lower. For example when private equity firm Genstar Capital announced the acquisition of International Aluminum Corp yesterday, the stock jumped up more than 4% to close the day at $52.08. This is almost a dollar less than the acquisition price of $53 per share in cash that Genstar is offering. Here are a few reasons why this occurs.

It is often said that turnarounds rarely turn around and yesterday it looked like Blockbuster (BBI) was going to be no exception. The stock, which had already been battered over the course of the last year, declined sharply yesterday to 22 cents before trading was halted on news that the company had hired restructuring specialists Kirkland & Ellis to explore bankruptcy. According to this Forbes article titled "Blockbuster Not Bust", the reports of Blockbuster's demise were a little premature and the company refuted claimed about filing for Chapter 11 bankruptcy. With over $854 million in debt on its balance sheet and only $35 million remaining on a $400 million line of credit, the company was hoping that Kirkland & Ellis would help it refinance some of its loans. The stock rebounded nearly 60% or 13 cents to 35 cents in after hour trading.

The picture for Blockbuster has been bleak for some time now but for a few brief moments it looked like new management at the company might be able to turn the company around. The company posted an 11% improvement in same store sales numbers, cut back on aggressive marketing for its online subscription service, acquired the movie download service Movielink for a fraction of the money spent by the large studios developing it, closed down unprofitable stores, inked a deal with Live Nation to sell concert tickets and even managed to post a profit earlier this fiscal year after several years of red ink.

In keeping with the carnage in the real estate sector, REITs have lost over 70% of their value over the last two years. Despite such a precipitous drop, I still will not touch the sector with a ten-foot pole. With occupancy rates running around 95%, apartment REITs appear to be the one bright spot in this sector and the sharp drop in prices has left many of them very attractively valued.

AvalonBay Communities (AVB)

As a follow up to the October 2008 newsletter where we discussed the importance of asset allocation and the December 2008 newsletter with its focus on timber as an asset class, I figured it would be a good idea to revisit another asset class that we have briefly discussed in the past. When discussing the water ETF Powershares Water Resources (PHO) in the November 2007 edition of SINLetter, I wrote:

Clean water for domestic consumption as well as industrial use is not only going to be an important trend of this decade but explosive population growth combined with higher standards of living could make it the biggest trend of this century.

With the model portfolio almost fully invested at this point, I do not want to make any changes to it just yet and figured this would be a good time to revisit The Dogs of the Dow strategy. According to the Dogs of the Dow theory if you were to pick 10 stocks with the highest dividend yields from the Dow Jones Industrial Average (DJI) at the beginning of the year and hold them until the end of the year, your average returns over a period of time should be higher than the returns of the entire Dow Jones Industrial Average (DJI).

The shocking terrorist attacks in Mumbai last month that targeted The Taj Mahal Palace hotel amongst various other locations were unlike any other India has experienced in recent years and deeply affected the psyche of a nation. These attacks are going to have a direct impact as well as indirect ramifications for the Tata group of companies. The Taj Mahal hotel belongs to the Indian Hotels Company (BSE: 500850), one of 96 operating companies that constitute the large Tata Sons conglomerate. The hotel not only suffered physical damage caused by the attacks but also from the negative spotlight thrust upon it on an international stage. These inhuman attacks painted a bleak picture of India's ability to respond to an enemy that is agile and defies the normal rules of engagement. This video footage (some graphic images) of two cops, a shared rifle and a chair against an AK-47 shows just how inadequately prepared India is to respond to both domestic and international threats.

India is likely to see an increase in government spending on defense, intelligence and infrastructure in the months and years to come. The Tata Group of companies that manufacture everything from steel to military vehicles made by Tata Motors (TTM), will most likely benefit from an increase in defense spending, which is currently under 2% of annual GDP. However, armored trucks and plans to develop a new platform for Land Rover to win defense orders are probably no more than a drop in Tata Motors' $9.126 billion annual revenue bucket.

Investment objectives are as varied as investors themselves with some looking for short-term gains, while others are looking for long-term growth and yet another segment seeking a steady stream of income from their investments. Wouldn't it be great to have an investment that not only increased in value but also grew physically as you held it? Imagine purchasing a troy ounce of gold on January 3, 2008 for $288.50 and watching its value increase 183% to the recent $816.3 per ounce. Now imagine how thrilling it would be to have that one ounce of gold become two ounces while you were holding it.

Timber is one such investment that can not only increase in value but can also physically grow as you are holding it. The kicker is that you also get a green investment as many timber companies harvest planted trees as opposed to harvesting old-growth trees, hence preserving timberland.

We started the month of December with the National Bureau of Economic Research officially declaring that the recession we are currently in started in December 2007. The Dow reacted with a massive 679.95 points or 7.7% sell-off, only to recover most of that drop over the next two trading session. The crazy volatility we have been experiencing is very much alive and well. At this point, the current recession is already longer than the 8 month recessions we experienced in 2001 and 1990/1991. The interesting thing about this declaration is that if we consider the classic definition of a recession, which is two quarters of negative GDP growth, we are still not in a recession. Second quarter 2008 GDP increased 2.8% before falling 0.5% in the third quarter. Quite clearly the official version has gotten it right and many stocks like Emerson Electric (EMR) and Precision Castparts (PCP) in the cyclical Industrial sector started falling last December.

In this environment, I am sure that the last thing the majority of you want me to discuss is even more stocks. But instead of participating in the doom and gloom (I already went into that in great detail in the December newsletter), for those you who still have capital and are still bargain hunting, a company that a subscriber brought to my attention recently is worth sharing with all of you.

The 12% surge in the Dow over three trading sessions was certainly welcome but has hardly alleviated the level of anxiety felt by most investors as it could easily turn out to be a bear market rally. It is interesting to see from the adjacent table by Paul Kedrosky that out of the 13 biggest two day advances in the Dow Jones Industrial Average that have occurred going back to the stock market crash of 1929, 11 of them took place during the great depression and 5 of these occurred before the Dow hit its bottom in July 1932.

In this uncertain environment it is easy to find companies not only selling at low single digit P/E ratios (with earnings in jeopardy, investors are looking at low P/E ratios with a wary eye), but often below tangible book value. A quick stock screen I ran brought up 2,181 companies that are trading below book value. However there are only a handful of companies that are trading below book value, have little or no debt and are actually trading below the cash they hold on their balance sheet.

With the volatility in the market making it difficult even for the most experienced inventors to pick winners, I figured it would be a good idea to explore new ideas and broad investment themes. We discussed the importance of asset allocation in the previous newsletter and I would like to discuss an investment vehicle called a Master Limited Partnership (MLP) and then discuss Suburban Propane (SPH), a publicly traded MLP with a distribution yield of 9.5%. If you are familiar with MLPs, feel free to skip the next five paragraphs.

What are MLPs?

The reason I used the word distribution instead of dividend is on account of the fact that MLPs are not like regular corporations and do not get taxed on income. Instead they tend to return most of their income (typically 85 to 90%) to investors or partners through quarterly distributions. This shifts the tax responsibility to the partners, who are taxed at their ordinary income rates. Since ordinary income rates of investors are typically lower than the income tax rates of corporations, this proves to be advantageous to the MLPs and hence their investors. One of our portfolio companies, Marcus (MCS), paid 39.21% of its fiscal 2008 income in taxes. When you compare that rate against the rate you paid for your 2007 personal income, the tax advantages of MLPs are laid out in sharp relief.