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Ray Merola

 
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  • Holding High-Yield Dividend Stocks Too Long Could Wreck Your Portfolio [View article]
    If a stock encounters accounting issues or the CFO abruptly resigns, I would sell first and ask questions later. LNCO or LINE fall into this catagory.

    However, other stocks ride various economic cycles; it's often difficult to time them. Some investors prefer to hold throughout the cycle.

    For the long-term investor, I believe mREITs are not as bad an investment as some make them out to be. Experienced players like Annaly Capital have weathered interest rate fluctuations in the past; I see no reason why they cannot do so in the future.

    Perhaps some of the aversion to these names come from, 1) a less than full understanding of how the company makes money, and 2) swing trader thinking.

    mREITs make money by borrowing the short end of the curve and buying long MBS. The short-long spread is key. Interest rate stability is key; not that interest rates necessarily stay low. Via hedges and leverage, a well-run mREIT can navigate interest rate changes. What they do not tolerate well is rapid changes in rates. We broke records for that between May and September of this year.

    Perhaps my personal aversion to swing trading is biased by my general inability to do so. It seems I get a few right, and get a few wrong never really making any money. Just churn and commissions. Selling NLY or AGNC earlier this year was a great move. However, buying NLY or AGNC now may also prove to be a great move. While no buy-and-hold investor, I have found that unless one is convinced the investment is "dead" for at least eighteen to twenty four months, trying to game "in and out" is tough business. I am not so sure that Annaly is dead money through 2015.

    I am long Annaly. A reasonable strategy to me appears to be the following: reinvest dividends so long as the stock trades below net book. I also took a calculated risk and bought a few more shares at $11.25 since the price-to- book spread got very large. In any event, the significant dividend, when compounded, tends to mitigate the share price fluctuation considerably, thereby leaving a patient investor (over time) with an ever larger position generating a rising income stream.
    Sep 20 06:43 PM | 29 Likes Like |Link to Comment
  • The Calm Before the Stock Market Storm [View article]
    I am fascinated by the exchange of views.

    However, I believe it's a big leap of faith to go with the speculation and conjecture out there. I don't buy into the depth and breadth of the conspiracy. Historically, such a negative reaction was also widespread after the Great Crash; a generation of investors never trusted the market again.

    Indeed, I believe the SEC has sold out the small investor. This is a separate issue and has been ongoing for more than ten years. I wrote about this on SA recently. The elimination of the uptick rule, permitting naked shorts, dark pools, creation and lack of regulation around double and triple-short ETFs, etc. all have skewed the short-term game against the small investor.

    I also believe the big picture is about the same: there has ALWAYS been market manipulators. It's never been PURE game driven entirely by a free market.

    But it's been the best game in town for a long, long time.

    Do you recall odd-lot differentials, having to deal exclusively with high-commission brokers, inability of the small investor to obtain timely investment information/detail (no internet), and investment banks swinging the low volume market? That's not exactly free market, either, but it went on for years. History marches on.

    In my nearly thirty years of investing, there have been several consistent benchmarks: 1) earnings and cash flow really do matter, 2) cash dividends to investors are real, and 3) value always drives the market in the long-term.

    I recall the events and results of the 1987 crash (caused by computer driven trading models), the 2001-02 dot-com crash ("the new investing reality"), and the 2008 real-estate / banking / stock market crash (unlimited upward real estate prices forever and ever; with no cash down!). In each case, folks took their eye off the ball: cash and earnings. "New realities" always turned out to be bogus. The market always reverts to the mean.

    People will invest based upon the expectation of a future stream of cash flows.

    Therefore there has been a lot of money to be made since the March 2009 S&P500 generational low. The earnings and cash flow have begun to return, so the market has responded accordingly....a similar epilogue to other crashes and panics.

    Reading the works of guys like Warren Buffett, Peter Lynch and Benjamin Graham is a good tonic. It helps me to keep my eye on the ball. Highly recommended.

    One of the best ways to make money is to uncover well-managed companies that generate real top / bottom line cash growth and have a history of disbursing and raising dividends. Buy when others to panic, become fearful, and bailout. Sell when the values get out-of-line. Rinse and repeat for twenty or thirty years. Re-allocate assets appropriately as you age.
    Oct 3 02:42 PM | 25 Likes Like |Link to Comment
  • The Periphery Is Failing [View article]
    While the author raises some good points, the article does not address the flip side: what would have happened had the Fed has NOT flooded the markets with liquidity.

    The answer is not too difficult to imgaine. Simply review U.S. economic history between 1929 and 1935: the first portion of what's called the Great Depression.

    While some believe (likely correctly) that the current society knows little about today's monetary backdrop, I contend they know even less about the Great Depression. The hardships and despair were unimaginable for most Americans today. My view is such circumstances very well would lead to civil disorder and rioting in most major cities.

    Ben Bernanke's actions have been fairly easy to anticipate: read what the Fed did in 1930-33 and do the opposite. Then counsel the White House and Congress to propose 1930s polar economic measures.

    One other historical note: in 1937, a second-term president and congress thought the recession was ending and it was time to 1) balance the budget, 2) raise taxes on the rich, and 3) empower labor unions. It created the "Roosevelt Recession," or "a recession in a depression." The economy, jobs, and markets tanked to a scale almost on par with 1931.

    Aug 27 07:23 PM | 22 Likes Like |Link to Comment
  • The Active Quest for Alpha: A Loser's Game [View article]
    Interesting article, but I don't agree that the small investor cannot beat the market averages.

    The problem with active mutual funds, brokers and hedge funds is their underlying objective is to accumulate investors' assets. However by doing so, they begin to create a "ship" that becomes too large to steer. In addition, they are always under the gun to show results on a quarterly basis. A bad year can cause a mountain of cash to be pulled out; causing them to cash in sound longer-term investments. It's a losing game that few can win.

    ETFs or Index Funds are fine for passive management, and often are a very good choice for the average investor. However, why settle for the "whole index" when with a bit of effort one can pick off the best-of-breed? Furthermore, few indexes can assemble a dividend-value lineup comparable to what the individual can do for him/herself. Dividends are skimmed right off the top as part of the "management fees."

    I agree that the individual who is unwilling to spend at least an hour per stock per week, should simply index or ETF. However, for those with the time and inclination, a combination of sound investment analysis is a good recipe. It does not have to consume your life. In addition, as an individual investor, I do not have to please others, "window dress" for the quarter, etc.

    Taking another step from the pack, those who use option strategies (even just simple covered calls and cash secured puts) can further distance themselves from the averages.

    My objective has been to allocate liquid assets into specific target ranges, place about half into ETFs or indexes, and actively manage the other half. My target is to meet the S&P500 Total Return annually: while typically holding around two thirds of the investments in equities (the remainder is cash, fixed income, etc.). This creates a goal of attempting to attain the S&P500 return, with less volatility. I have been largely successful at this for many many years.

    Years ago, immediately after college graduation and upon the eve of my first full-time job, my aunt asked me, "You will now spend 40 or 50 hours a week making money for a living. Likely you will do this for the next 30 or 40 years of your life. How much time do you intend to spend learning how to invest and manage it?"

    I never forgot that that conversation.
    Apr 8 05:07 PM | 21 Likes Like |Link to Comment
  • I Love My 'Magic Pants' And My Partners Wear Them Proudly [View article]
    Interesting articles both: Swedroe and Carnevale.

    Chuck did an excellent job of defending himself and his position courteously and professionally. I would expect nothing less.

    I found many subsequent comments outstanding; adding to the discussion.

    I teach an informal class about investing and one of the things I note is that much of the academic literature written about investing lacks key points-of-view: how underlying markets work and investor psychology. Academics often attempt to take enormous volumes of data and trying to create a thesis based upon it. Practical investors focus upon making money. In my younger days, a wise investor told me, "Do you want to be RIGHT, or do you want to MAKE MONEY?"

    During the dot-com era, another investor (perhaps more likely a trader) told me, "Dividends indicate that the company's management can find nothing better to do with excess cash, so they dish it out to investors and they pay taxes on it." Over the years, I have reflected upon that statement. While sounding good, I suspect it's more of a false choice. It supposes that management will be more prudent and efficient handling excess cash versus permitting the investor to utilize it. Unspoken, there's also an inference that Mr. Market will recognize any of it in the price of the security.

    For the record, I'll stick with Chuck's viewpoint and the dividends.

    Mar 20 08:51 AM | 18 Likes Like |Link to Comment
  • Preparing for Crashing Markets [View article]
    Nice article, Tim.

    While I agree with many parts of your article, I believe sections are too harsh: the average investor does have a level of control versus "going for a ride."

    It appears to me (having been through several bubbles and crashes over 30 years), that if one invests in large, well-managed businesses that have good balance sheets, strong cash flow, and increasing dividends; then you will do ok in the long run. The long run is not usually a few weeks, nor does it have to be ten years. I do not espouse "buy and hold," as the market rewards and punishes those who do not consider the business cycle and sector; including the specific events that come and go naturally in the course of a business or within the economy.

    Nor do I find "trading" a worthwhile endeavor, other than for an occasional, speculative position. Investing and trading are not synonyms. I find myself squarely in the camp of Benjamin Graham in this respect.

    One note: once a position is taken on an equity there are several things a prudent investor can do other than be tossed about like a cork in a storm.

    First, a good investor scales in and out of a position. Going "all in," from the get-go is a recipe for disappointment, along the lines of what you espouse in the article. Second, the use of options to juice returns, particularly when scaling in or out can offer considerable market "action" short of just sitting and waiting. Options can also be used to leverage new positions or hedge existing ones.

    While it's not part of my strategy, some investors find shorting stocks another way of mitigating overall market moves.

    Qualitatively, my opinion is that investing in the stock market is 50 percent contingent upon the overall market; 25 percent determined by being in the right (or wrong) sectors, and 25 percent by picking the right stocks in that sector.

    Scaling in and out of a position and options provide some steer. As you pointed out, good dividend stocks are a natural buffer to the apparent randomness of the market. Their cash dividends hold up the price when markets are down (yield support), as well as encouraging investors to stay long or accumulate additional shares when the prices are low. Good investors like a bargain.
    Nov 21 10:26 AM | 17 Likes Like |Link to Comment
  • Natural Gas Looks Intriguing From a Long-Term, Contrarian Perspective [View article]
    Along with a lot of new North America supply, here's a primary reason gas is in the doldrums now:

    The current Administration has shown very little interest in it. The Greens don't particularly like it. It won't buy votes. Rarely does Obama or his staff talk up natural gas. They continue to talk about wind, solar, geothermal, etc. These alternatives are great for political speeches (and tax subsidies), but general losers from a business and economic standpoint.

    The nat gas lobby is trying to crank up, but it's late to the ball. The Big Coal lobby, on the other hand, is one of the strongest on Capitol Hill. Certain states are *already* tied into coal economically. Gas is competition for current jobs; not just simply a way to create new ones.

    The Big Oil lobby isn't far behind, but many of these companies also have interest in gas, plus they are hated from the get-go, so it's a quieter effort.

    Watch the November elections, and ultimately 2012. Wholesale changes in the political landscape may prove a boost to nat gas. Listen to Washington for the cue.


    May 16 01:10 PM | 17 Likes Like |Link to Comment
  • Finding Great Value In The Energy Sector [View article]
    Chuck

    I read this installment with particular interest since my 30-year working career was spent entirely in the Energy business.

    An excellent article all-around and you have captured much of the nuance when investing in the "oil patch." This article is a fine primer for those looking to add such holdings to their portfolio.

    I have two comments / clarifications:

    First, RDS.A recently declared a quarterly dividend of $0.90 per ADR. For current investors, this will provide an annualized dividend yield of 5.7. Shell management has a stated intent to continue to raise the dividend as aligned with operating cash flow. A safe and generous yield, coupled with strong go-forward growth capex plans may be of particular interest to some S.A. readers.

    Second, SXL is now a wholly-owned subsidiary of Energy Transfer Partners (ETP). Indeed, an investor may invest in SXL directly, as noted in the article. However, an investment in Energy Transfer (likewise a MLP structure) provides the parent company significant SXL IDRs, as well as exposure to the remainder of the Energy Transfer Partners assets. Over the past few years, the company has re-imagined itself; transforming from a regional natural gas transportation company into a national, downstream hydrocarbon transportation business. The current distribution yield of 7.5 percent or so has been stagnant for about five years. However, I expect this to change, given the huge asset transition. I track ETP closely and write S.A. articles about them periodically.

    I remain quite keen and look forward to the subsequent sector valuation series.

    All the best.
    Jun 21 11:44 AM | 15 Likes Like |Link to Comment
  • Intel: Earnings Conference Call Post Mortem [View article]
    Always enjoy reading your articles, Russ. Thank you.

    Your industry background is reflected in your articles. They are rich with technical and operational details. Guys like you and Ashraf do us Regular Joes a great service.

    Yesterday, I submitted a S.A. article about Intel. It offers simple operational and financial metrics that I believe can enable the layman investor to gauge company performance.

    We are aligned insofar as gross margins are a very key measure for Intel Corp. Current state, I envision as margins go, so does the company.
    Apr 19 11:06 AM | 15 Likes Like |Link to Comment
  • State of the Union Address: Our Leaders Still Don't Get It [View article]
    Very good article and analysis.

    The President's speech left me flat. I was wondering if he really doesn't understand U.S. economics v policy, or he and his advisers believe that the average U. S. voters (the "unwashed masses") are unable to comprehend the facts around how things work, so he spoke in rhetoric; emphasizing simplistic (and poor) analogies that us common folk might relate to and understand.

    Paul Ryan wasn't much better.

    Heaven help us.
    Jan 26 09:26 AM | 15 Likes Like |Link to Comment
  • The Calm Before the Stock Market Storm [View article]
    Can someone explain how the Fed or its market agents purportedly buoy the entire U. S. stock market? What exactly do they do? Since each transaction requires a buyer and seller, who is left holding the bag when the bottom falls out since the pundits claim the "retail investor" is out of the market? Don't any of the "smart money" mutual fund or pension fund manager have any idea what's going on or are they all in on the game?

    During the Great Crash, some large investors tried to support the market as it fell, and they got crushed. Indeed, what I keep reading about here is that not only have they succeeded in propping up the market, but have driven it up by five percent this year and fifty percent last year.

    Could it be that global corporate fundamentals (earnings, cash and debt levels) are actually pretty good?

    I'm not a good conspiracist, I guess.
    Oct 3 10:37 AM | 15 Likes Like |Link to Comment
  • This GM Bull Says 'Sell General Motors Right Now' [View article]
    Thank you, mikeRetirement

    This is an excellent example as to how investors can get ditched by the media. I was unaware of this change until you mentioned it here, though I try to keep an eye on the news wires. A quick web check validated the new data point.

    http://nyti.ms/1jUJRDm

    The "stop selling" news was broadcast from the hills and rooftops. The "resume selling" wires appeared to be at a considerably lower decibel level?
    Jun 27 09:31 AM | 13 Likes Like |Link to Comment
  • 2014 Strategies And Stocks, Part 7: Apple Inc. [View article]
    Patience29

    Thank you for the kind words.

    The "dead money" crowd appears to basing the view on a little less than two years' earnings. Prior to April 2012, the stock was rocketing up and the markets were in love. Does it only take two years to go from "infinity and beyond," to "no growth dud?"

    Market "animal spirits" often vacillate from euphoria to despair. I share neither emotion about AAPL shares. When the shares trade for under $550 or so, it just looks like an undervalued stock with a decent yield.
    Feb 20 02:07 PM | 13 Likes Like |Link to Comment
  • What The Obama Capital Gains Increase Means To Investors [View article]
    Perhaps a "better way" is for the American electorate, if they so choose, to find candidates who believe that the government's primary roles are national defense, public infrastructure, relieving the truly poor / less fortunate from catastrophe, and regulation of certain institutions only to the extent to protect the People from dishonesty, fraud, deceit, and unsafe products or conditions.

    The argument today from some is that the government's role is expansion in the areas of wealth redistribution, picking business winners / losers via subsidies, and social engineering of all shapes and sizes.
    Feb 26 06:02 PM | 13 Likes Like |Link to Comment
  • Dividend Analysis: Intel Corporation [View article]
    Good article. Intel has been a hard stock to own. The PE is lower than the average utility stock, and the business media interprets most every bit of news negatively. Even upon recent analyst downgrades, the average target price remains $25. That's over a 25 percent increase from today's price. It's arguably the most hated stock on Wall Street.

    My thesis has been that the stock is transitioning from a growth stock to a value stock. The fundamentals already indicate this. However, the transition takes time. I suggest that being a "Tech" name has made it even more difficult. "Tech" stocks should be high "growth" stocks...at least that's the conventional thinking.

    Perceptions are hard to break. The yield is better than a 10-year T-note, so I'm ok waiting for a break. The stock is a pretty good candidate for covered calls, too.

    The three-year weekly chart show volume has generally tapered down. The buyers have been taking a nap on this horse.

    The dividend is secure, the balance sheet is pristine, and the business model (though sluggish) is not broken. I don't believe management gets enough credit for their inroads into the server business or potential for combining data security and hardware solutions (versus software solutions).

    The stock is not likely to go down much more from here. That's not a good reason to buy more, but it may not be the cue to bail out, either.
    Apr 12 12:50 PM | 13 Likes Like |Link to Comment
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