What We've Sold, What We Own, Where We Stand

by: Joseph L. Shaefer

With a boring and nondescript title like the one above, I'm not writing it to the SA general readership or new viewers but rather to the 11,000 or so readers who have honored me by asking to see new articles as they appear -- and specifically to those who may have taken my research to heart, purchased some of the securities we discussed, and are now wondering what to do with them.

I think most SA contributing authors do a fine job of researching and reporting on their best buy suggestions but then don't always follow up for those who have taken their recommendations and bought them. If you are among those who have agreed with my analysis and purchased some of the companies I purchased, I don't want you to be wondering what to do now. This article will update our previous suggestions with our current stance.

With that in mind, below is a condensation of what I did for clients in early and mid-May and sent to all our subscribers on 21 May. (We are traveling in Egypt, Jordan and Israel, hence the tardiness in writing!)

"Worst week in 2012!"

"Best day in 2 months!"

The headlines above come from Marketwatch.com on, respectively, Friday and Monday. This is not a fun-to-ride roller-coaster, as some such violent markets can be.

In my opinion, it is the sign of a dangerous and likely-to-decline-further market. I had hoped to see another good month or two before the summer doldrums but hopes don't ensure capital preservation, actions do. I used the bounce today to make certain client portfolios are hedged as completely as I can against a continued market slide. I think it is time to do the same for our portfolios.

Greece is hard broke. Spain is probably worse. The only question is whether it brings the rest of the EU down with it.

Without buyers in the EU and the US, emerging markets will see lowered exports. In that case, commodities will likely experience a pullback.

Bonds, even though they are a lousy investment, will be seen as a safe haven if the US housing and jobs situation does not improve. I doubt they will.

Will the Fed ride in before the election with QEIII? Probably -- but they don't want to peak too soon so I don't see that happening for at least a couple more months. The juice will be needed as the election draws closer.

Here are the trades we are making to further insulate the gains in the portfolios...

Rather than list each of these here, it is easier to say that we have sold almost all our great companies. Two rules I try to follow consistently:

  1. Never confuse a great company with a great stock.
  2. Never believe that even the best company's stock can withstand a vicious bear.

We sold all but a 1 or 2% position in virtually all of our ideas for the past year -- STO, TOT, ABB, OTC:ZFSVY, BTU, CSX, HAL, PXJ, TEVA, MCP pr A, and SLB, as well as our precious metal stocks, for instance. Quality counts in a bull market; but in a sizable decline, everything gets taken down. That includes "defensive" stocks touted by brokers as safe havens (Dividend Aristocrats, utilities, consumer staples, gold and silver miners, etc.) All but one of these were sold at a profit.

We also sold all shares of ERF, STD and TEF, all at a loss. All are fine companies but for whatever reason the market didn't agree with me. I don't try to tell the market what it "should" do, I just try to get in a little before the big trends and out the same way. I believe the trend for at least the rest of the summer, as stated consistently in my previous articles since November 2011, is a retracement to and a likely decline below the mean before a bounce sometime toward the elections.

In their stead, we bought FXF, the Swiss Franc ETF. We paid $1 more than its current price of $102. I see further European dithering resulting in a run to safer banks and safer currencies. We also bought a bucketful of HDGE, SBB and SH. And a significant quantity of mutual funds MFLDX, FMLSX, BPRRX, and GLRBX. (SA does not discuss mutual funds - I provide these merely as examples of long/short funds. There are ETFs, like HDGE, that do the same. Be careful however - many of the long/short ETFs have such low volume that it will be difficult to buy or sell in quantity!)

The bottom line is that I believe it is time to batten down the hatches and hope the storm passes by November. We are not short, but rather hedged with a downside bias. On a day the market is down 1% our typical client portfolio is now up .05% to 0.1%. The idea is not to make a killing by risking all but rather to preserve capital during tough times and buy our great companies back directly or by writing puts as sentiment becomes more negative. I'll try to write something when I believe that time is nigh, with my goal to time it as closely as I did in my article of March 3, 2009, urging readers to buy at what turned out to be the bottom.

We wish all our readers much success during these turbulent times.

Disclosure: I am short SPY. We are effectively hedged at this point. Our remaining longs are mostly high-yield stocks or preferreds bought very cheaply during the 2008-09 decline or a few companies we retain as special situations. These longs are matched against long/short funds and ETFs or inverse ETFs. Protection is paramount today!

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.

We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we "eat our own cooking," but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.