Jim Farrish

Investment advisor, etf investing, portfolio strategy, long/short equity
Jim Farrish
Investment advisor, ETF investing, portfolio strategy, long/short equity
Contributor since: 2010
Company: JimsNotes.com
The telecom sector is in a state of flux and growth opportunity. Sounds crazy, but the changes are happening faster than the wireless providers can keep up. Thus, the acquisition of T-Mobil USA by AT&T. I expect volatility and a move back to the top end of the current trading range on IYZ. Relative to T, initial response positive, but this is a 12 month acquisition process with many hurdles to jump. The stock is likely to remain in the current range with the upside being a move to $30 over that period. They are paying a 6% dividend and the combined return would be 7% growth ($30 target) plus 6% dividend over 12 months. If you are comfortable with the risk/reward relationship hold T. As I stated above in the article scanning the sector would be are worthy task for finding other worthy opportunities such as Verizon.
Gold Breaks Support
Yesterday morning I posted the outlook for gold. The challenge currently facing the metal is two fold. First the price erosion is due to profit taking and second, stabilization in the global economies. The second is a bigger influence when you consider the risk appetite of the investors is growing. They are willing to take on more risk in their portfolios and thus the flight to safety and alternative currency trade is unwinding.
One concern I voiced earlier was breaking support at the $129 level. Yesterday we closed below that level which technically is a big negative, and if you look at the volume on the bottom of the chart below, you will note it was two times the average trading volume. This brings to light another concern of the impact on liquidations from ETFs which physically hold the gold.
Think in terms of the bond sell off in 2008 when fear set into the credit markets. The acceleration to the downside exacerbated the price of bonds. We could see an acceleration in the selling based on the amount of supply hitting the gold market. Not saying that as a gospel fact, but it is food for thought on the downside risk.
The chart gives the levels to watch short term relative to gold. We would have to consider playing the downside if there is a follow through on the downside break of support. DGZ, PowerShares DB Gold Short ETN is the unleveraged short ETF. The move above $16.28 shows the break above the trading range reflecting the selling in gold. Make sure you are disciplined if you attempt to play the downside in gold. Our ETF Watch List covers more on this topic.
Technically speaking the 30 day moving average is support for the uptrend, from that view, I would use it as my stop and let it move higher based on the sector momentum.
Relative to investing in a stock such as Hess, it is important to define your entry point, your exit (stop) and your target. Armed with those points prior to putting your money to work, you can better answer the question of how to handle the stock when it hits a new high or exceeds your target.
An additional discipline to develop is, what do you do with the stock if it hits your target? Sell it? Sell half and hold half? Set your stop at your target and let it run? My point is simply to plan prior to investing and define your discipline in such as way as to accomplish your goal for owning the stock.
Thank goodness we all have opinions relative to dividends and stocks. The reality is each investor has to make a decision based on their specific goals and risk tolerance. The initial question on how to protect the downside risk in the ETFs mentioned is to simply use a stop. For example, HYG shows support at $88.30 which is near the 200 day moving average. A stop just below that level would work to protect the downside risk should the ETF erode in value. I appreciate the concern voiced in the comments relative to risk, in fact I stated you have to filter through the various opportunities (some mentioned in the comments as well) and determine if the risk fits you as an investor. I believe we all have to define risk of any investment prior to investing.
I used ETFs in this article as examples to diversify the risk across the asset sector. They trade intraday allowing you to set stops and the transparency of the holdings allow you to see exactly what you own, unlike a mutual fund. If you use individual stocks to generate dividends you are willing to take on more risk exposure in your portfolio in addition to time to manage the positions. It can and is done very effectively by many individuals. The key is to address the risk according to you and you alone.
In Response to the question on REM and the dividend the yields are higher on the underlying asset than 4-5%, for example NLY which is 21% of the fund pays a 14.4% dividend. You have to dig into the ETFs (thus the benefit of transparency) to see if you like the approach of the fund as well as your comfort with the risk. Dividends are nice, but as one individual stated, you want the return of your principle (thank you for the typo correction) as well as the dividend.
The risk of HYG is you own high yield or junk bonds. The risk of the assets themselves are higher relative to their credit rating and potential for default. 99% of the fund is BB rated or lower. The key is diversification when looking at high yield bonds. If you don' t like the potential of a drawdown of 10% on principle while holding the fund I would avoid owning it.
The comments all have validity and offer insights into learning about the dividend, stock and income strategies. Good investing to all!
Thanks for taking the time to comment, Sometimes objects are closer than they appear in those rearview mirrors... How is the short doing?