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Ray Merola  

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  • Never Let A Good Bear Market Go To Waste: Energy Gems Amidst The Rubble [View article]

    Average investors often find themselves buying high and selling low for precisely the reasons outlined.

    By the time "the coast is clear," it's generally too late. "Turns" may be false bounces. Unfortunately, no one rings a bell at the top or sounds a trumpet at the bottom.

    I believe as stocks trade for increasing discounts, these become better buys. Sometimes it doesn't work out. Many times it does.

    Perhaps another thought is to scale in and out of positions. I would not "load up" on energy stock shares today. Indeed, it may be more prudent to buy a quarter of a position now, then wait; buy another quarter; and so on. By scaling into (or out) of a stock, it becomes less important to hit the very top or trough.

    Good luck with all your 2014 investments.
    Dec 9, 2014. 04:01 PM | 65 Likes Like |Link to Comment
  • 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, 2013. 06:43 PM | 29 Likes Like |Link to Comment
  • Market Timing Report: 10-20% Correction Due To Extreme Sentiment And Leverage [View article]
    Having spent my career in the oil business, I can assure this board that any proposed thesis may be plausible, but the price of oil isn't often set upon linear, line-of-sight viewpoints.

    The Saudis could very well be offering the U.S. a token: lower prices for M.E. assistance. It's also possible the opposite: the Saudis want the price of oil down so the U.S. curtails its domestic drilling. Upon our current production trajectory, we outstrip Saudi Arabian oil output very soon. Possibly too soon for the Saudis.

    On the other hand, Occam's Razor might suggest demand or expected demand is slow with so many of the world's major economies (China, EU, Brazil, Russia) in a funk. Meanwhile, the Saudis have decided to defend market share versus cutting production to hold up prices. Another plausible explanation.

    Saudi Arabia (and OPEC) used to control oil prices. No more. These have enough heft remaining to influence prices, as a swing player, but the group can no longer set them. Plus the OPEC members distrust each other.

    2 other quick notes for the convo:

    A drop in oil prices adds a lot more juice to the U.S. economy than just retail consumer pump prices. That's just one outcome. The American economy runs on fossil fuels, much of it oil-based. Consumer and industrial energy needs, all manner of transportation, plastics, name it; all require oil. When the major feedstock price goes down, so do the costs for all these things.

    It is widely accepted that the Saudis need $100 a barrel oil to sustain the heavy government programs their citizens have come to expect. I see the current situation as more of a dust up than a price collapse or war.

    However, from experience, I could be entirely wrong.

    Oct 2, 2014. 08:54 PM | 28 Likes Like |Link to Comment
  • Accumulate AT&T Shares While No One Is Paying Attention [View article]

    The difference cited is between GAAP earnings and operating earnings.

    GAAP earnings are "accounting" figures that include all unusual, special and one-time gains/losses. GAAP earnings are also called "as reported" earnings. Under this format, AT&T has a 28x ttm P/E.

    Operating earnings exclude the unusual, special and one-time gains and losses. Many investors believe this provides a truer picture of how the underlying business is doing. The "noise" from the special items is removed. AT&T stock has a 13x ttm P/E using operating earnings.

    I believe operating earnings provides the clearest investment benchmarks. While I watch GAAP earnings, I utilize Operating Earnings (as does FAST graphs) when evaluating a stock's fair value.
    Feb 25, 2015. 08:38 AM | 27 Likes Like |Link to Comment
  • AT&T: A Junk Bond Fooling Investors Who Expect More [View article]
    Interesting article, but some of the thesis may be a bit thin.

    AT&T is a Dividend Aristocrat, meaning its raised the dividend for at least 25 consecutive years. In this specific case, T has improved the payout for 31 years in a row. Whenever a commentator reflects upon the AT&T dividend, this should be mentioned.

    A review of free cash flow may likewise be helpful. The payout appears safe. Furthermore, AT&T management has stated that large infrastructure projects have come in ahead of schedule. Indeed, the capex for this work will now wind down, thereby offering some capital reduction. I do not believe the current credit ratings can be dismissed so easily. An A- designation isn't an accident.

    While I agree disruptive technologies and competition are some of the risks to the T business model, one could reasonably project that AT&T, via new forays into Central and South America, has a response of its own. There are both puts and takes.

    I contend it may be argued AT&T is a bond equivalent, not a junk bond equivalent.
    Jan 5, 2015. 12:41 PM | 25 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, 2010. 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, 2013. 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, 2011. 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, 2014. 08:51 AM | 18 Likes Like |Link to Comment
  • Annaly Capital: An Impressive 20% Return In Q4 2014 [View article]
    I've invested in NLY common and preferred share for a number of years. I reinvest the common dividends. Seeking Alpha editors have published several articles I've written about Annaly Capital.

    For the average NLY investor, I offer a few thoughts.

    Follow BOOK VALUE value closely. Historically, Annaly price and book value and price should track each other: ~1.0x P/B multiple. Currently, the shares trade for far less than book value. Personally, I do not plan to sell my shares below net book.

    Watch NET INTEREST MARGIN. When the margin compresses, Annaly will find it more difficult to generate income. When it widens, Net Interest Income should improve. NIM is very low today.

    Annaly management is remunerated by maximizing book value. Therefore, it is most likely the team will seek to do so.

    The aforementioned is simplistic, but provides reasonable baseline metrics to follow.

    If an investor doesn't know how an investment makes money, its drivers, or how it works, it may not be a good investment for him/her. This is a problem for NLY investors; it can create extra volatility due to panic selling or euphoric buying. Some folks chase yield without a full understanding of the underlying investment risks and rewards.
    Feb 27, 2015. 09:13 AM | 17 Likes Like |Link to Comment
  • Never Let A Good Bear Market Go To Waste: Energy Gems Amidst The Rubble [View article]

    Indeed, small caps can provide outsized returns.

    However, in the article second bullet point I mentioned "conservative investors," and I stuck to that M.O.

    Small oils require a lot of due diligence. If over-levered, or possessing less desirable leases (even if in the best basins), the pain level for investors could get pretty high if crude prices remain low.

    Tax loss selling is a good point, too.
    Dec 9, 2014. 02:55 PM | 17 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, 2010. 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, 2010. 01:10 PM | 17 Likes Like |Link to Comment
  • Shedding Light On Why I Bought Royal Dutch Shell [View article]

    I believe you have made a good choice to invest in Shell Oil. I own shares, too, and worked for the company for over 30 years.

    The near-term layout: Shell management went on record and provided a rough estimate that for each $10 drop in the price of crude, it would cost the company ~$3.3 billion operating cash flow.

    For 2014, the company generated $45 billion OCF at an average $90 price per bbl. A year at $50 oil suggests 2015 cash flow could be about $32 billion.

    2014 capex was $33 billion. The dividend costs about $12 billion. So something has to give.

    However, there are paths forward. First, capex will get cut back. Second, Shell announced plans to sell ~$15 billion assets in 2014-15. About $10B was completed last year. Therefore, 2015 net capex could get some $5 billion skinnier on a net basis, assuming successful asset sales. Third, the balance sheet is outstanding. Shell could borrow to close the cash flow gap; at least for a year or so.

    In addition, the company announced a dividend share script program. Some 2015 dividend cash may instead be distributed in equity, not cash.

    Finally, Royal Dutch Shell has not cut the dividend since 1945. Management is well-aware of that fact. CEO Van Beurden spoke to that in the most recent earnings conference call, referenced Shell's "track record."

    Long RDS.A

    Happy Easter to all.
    Apr 3, 2015. 11:45 PM | 16 Likes Like |Link to Comment
  • General Motors: Buy This 2015 Play Now [View article]
    While I rarely comment in the negative, I believe most readers understand that a few commentators at these boards provide little to no useful information about GM and a few other specific stocks. It seems the objective is to hijack the board and repeat (over and over and over again) the same recycled opinions and data. We get it.

    For what ends? Please enlighten us.

    It appears most readers fully understand your views about GM, opinions about its management, and your personal views on the future direction of the stock. You may rest assured most of them got the message after the tenth, fifteenth or twentieth rehash.

    Please accept my apologies in advance.

    Oct 23, 2014. 09:55 PM | 16 Likes Like |Link to Comment