Vol. I, Iss. 3 ~ December 2007
Mike on the Markets Michael Bosso
Hedge Your Bets
Financial Adviser
A year-end Christmas newsletter should have good news, happy thoughts, and hope for the future on every page. This year, two out of three ain't bad. The market is filled with bad news, but I can give you some happy thoughts and certainly hope for the future. Let's face it, the market is overdue for a 20% correction, the economy is way overdue for a recession, we have found out that money market accounts may not be as safe as we thought, and housing values simply got overinflated and are now correcting (I like to get the bad news out of the way quickly). What may surprise you is that all of those corrections are good for the market in the long run. That’s big-picture thinking. The trick is to
keep your individual picture from shrinking while those corrections are happening. Many people still have not regained their total investments from the last correction (known as the tech bubble) and that was almost a decade ago---representing time and gains no investor can afford to lose. So what do you do to protect yourselves? How do you keep from losing your hard-earned money? Why, read on of course, and take advantage of some of the options available to investors today. This issue is all about protection if the market drops farther after the end of the year, and how I can help you avoid substantial losses and perhaps even make some profits along the way. In short, hedging
Index-Linked CD’s
exposure to the stock market, a minimum rate of return*, and a government guarantee you won’t lose any of your principal. This combination is hard to beat even, (or especially) if, the market is negative. These fantastic investment vehicles are relatively new in the United States, but have been around in Europe for a long time. Maturities range from 1 to 7 years with higher guarantees, of course, the farther out you go. Everything in the investment world has
a downside, however, and these are no exception. Returns are not paid until maturity, so if you need the money early you may or may not get your full investment back. These are investments that you truly need to sit on and ignore until they mature. The popularity of these investments is increasing so much and so quickly that the minimum purchase is steadily going up as well. Most offerings currently have a minimum investment of $10,000. Please contact me for upto-date minimums and guaranteed return rates. *many, but not all index-linked CD’s offer a minimum return
One Lincoln ~ Ste. 375 10300 Greenburg Road Portland, OR 97223 Office 503-595-1662 Toll Free 877-421-9991 Fax 503-595-1666 Cell 971-212-9464 mike@teamfbr.com
Put in a CD and Relax for the Holidays…and beyond These are perhaps my favorite longerterm, buy-and-ignore investment. As I wrote about in my last newsletter, you get:
FBR Wealth Management
Inside
1
Hedge Your Bets Index-Linked CD’s What’s a Hedge?
2
Separately Managed Accounts Ultra-Short ETF’s Defensive Stocks Stop Limits
3
Reverse Convertibles Housing, Inflation, and Other Important Stuff
4
Trading CardsTM More on the Hedge Seasons Greetings We Like to Watch…Stocks Worth Watching
Hedge
(verb – something you do) To plant or cultivate hedges. To take compensatory measures so as to counterbalance possible loss. To use the unfortunate language financial professionals must use to avoid making the hint of a suggestion of a promise, and to stay out of jail. Source: Yahoo! American Heritage Dictionary
GOOD NEWS happy thoughts HOPE FOR THE FUTURE good news HAPPY THOUGHTS hope for the future GOOD NEWS happy thoughts HOPE FOR THE
Separately Managed Accounts (SMA’s) Pretend You’re Super Rich The vast majority of the ultra-wealthy don't manage their own portfolios. Most of them hire professional money managers to do it for them. In the past, money managers such as Wellington Management, Goldman Sachs, and others would not manage money for anyone who could not invest enormous sums. Today, accounts as small as $25,000 have access to professional management services through what are called Separately Managed Accounts or SMA’s. SMA’s can only be accessed through a licensed investment professional. The client (You) pay a small annual fee (generally 1-2% of your portfolio value), and let the pros go to work for you. All trades, commissions, and expenses are built into your annual fee; there are no hidden costs.
Good News
Ultra-Short ETF’s
Happy Thoughts
Hope for the Future
Flat is Better than Down
There’s a new breed of Exchange Traded Fund (ETF) available. An ETF is a type of mutual fund that trades throughout the day on the stock market. This relative newcomer is called an Ultra-Short ETF and is an innovative way to keep your account balance as close to a flat line as possible. An Ultra-Short ETF increases in value at approximately twice the rate the market goes down.* The idea is to buy Ultra-Short ETF's in sufficient quantity to offset your portfolio holdings so as the market drops, your ETF’s go up. Keep in mind the market itself has an upward bias; in other words, it eventually goes up again with time. Buying this type of ETF is an active management strategy that should not be done without professional assistance. This particular strategy worked exceedingly well over the summer months when the market was moving several hundred points a day in either direction. If we go into a true recession and/or a true bear market, it would follow that an ultra-short ETF could be a very good way to keep yourself flat until the market begins to move back up in a healthier, more steady fashion. *depending on which fund you buy--they are available in many categories
GOOD NEWS happy thoughts HOPE FOR THE FUTURE good news HAPPY THOUGHTS hope for the future GOOD NEWS happy thoughts HOPE FOR THE
Oftentimes you’ll hear mutual fund companies describe themselves as professional money managers---and they are. But when was the last time you were able to call up the fund manager to suggest, “Hey, I think Google’s a little aggressive for my money; why don’t we unload some of that, OK Pete?” SMA’s are a fantastic option for those who don't want the hassle or stress of an active daily role in their investments. Also, as a sociallyconscious investor, you’ll appreciate the SMA’s ability to screen-out stock purchases from companies or types of companies you find objectionable. If this interests you, please contact me and we can set up an appointment to discuss your options.
STOP
A venerable loss-prevention technique. You determine up front how much you’re willing to put at risk, and your stock will automatically sell if it reaches that dollar value. I highly recommend these. They help both of us sleep at nights.
LIMITS
Defensive Stocks The Best Offense is a good Defense??? It might be backward from what we learned on the ball field, but the fact is, during a “bear market” (defined as a 20% correction in the market) defensive stocks do tend to outperform traditional growth sector stocks, and will frequently even increase in value. What are defensive stocks, you ask? Defensive stocks are typically stocks that have stable, defined earnings, and are not dramatically affected by downturns in consumer spending. That is a long and complicated way of They’re the saying: They’re the companies Americans can't live without. What I like to call the Toilet Paper Toilet Paper Producers of the world. Producers of These companies are found in the following the world. sectors: Utilities, Consumer Staples, and Drug Companies. Also, infrastructure companies that are positioned to take advantage of the inevitable government stimulus packages designed to create jobs and pull us back into a growing economy. Many of these companies have already hit record highs as people have begun to shift their assets into these tried-and-true-blue stocks. Proctor and Gamble, John Deere, Coca Cola, and Pepsi are all at or near record prices. It may or may not be too late to jump on the bandwagon of these particular stocks, but there are many others that haven't been too drastically piled-into yet. An added bonus: Once investors start looking for opportunities in these categories, they should begin to grow at a faster pace as well. A little holiday gravy! 2
Reverse Convertibles Reverse Convertible is a confusing name for a sophisticated, but incredibly profitable investment vehicle. These are another European import, much like the IndexLinked CD's mentioned earlier. A reverse convertible is a short-term investment linked to an underlying stock. These securities offer individual investors a predictable, steady stream of income due to the payment of a high coupon. At maturity, the investor will receive either 100% of their original investment amount or a predetermined number of shares of the underlying stock, in addition to the stated coupon payment. If shares of stock are delivered to the investor, their value will be less than the original investment amount and the investor will have lost some or all of his or her original investment. It is important to note that the investor's earning potential is limited to the security's stated coupon. So now that you completely understand I can move on right? Actually these “bonds” are not as complicated as they sound. For
this example let's say you buy XYZ stock at $100.00 per share paying a coupon rate of 20% with 25% downside protection for 90 days. As long as the stock XYZ doesn't lose 25% of it's value (fall below $75) during the 90-day holding period, then you receive your 20% annualized interest payments and your originally invested money back. If XYZ stock drops 25% during the 90 days, then you still receive your 20% annualized interest and you receive actual shares of XYZ based upon the original $100 stock price. As confusing as all that is, the key is to pick those bonds associated with stocks that are unlikely to lose significantly large percentages of value. These are designed to generate great income and cash flow, and as long as you are receiving professional help in selecting the appropriate bonds, you should not experience loss of principal in most cases. Stating that, always remember risk vs reward: the higher the coupon yield
(interest %), the more likely it is that the stock will fluctuate below your protection level, So it’s important not to get too greedy. A real-world example: I saw an issue on 12/04/07 with Lehman Brothers as the underlying stock. It had a coupon of 17% maturing in 60 days with downside protection of 20%. The stock would have had to drop from $59.61 all the way to $45.54 within 60 days before the buyer’s principal was not returned in full. Understand--Lehman is in the hard-hit financial sector. Still the stock would have to perform extremely poorly in a very short period of time to not have a good return in a short period of time. It is certainly possible, but the risk is partially mitigated by the yield and the allowable drop in share price. These are great investments for incomeminded investors that are willing to take a moderate risk, but unwilling to take the full risk of individual stocks.
GOOD NEWS happy thoughts HOPE FOR THE FUTURE good news HAPPY THOUGHTS hope for the future GOOD NEWS happy thoughts HOPE FOR THE
Housing, Inflation, and other important stuff.... What
does the newly proposed Hope Program housing bailout proposed by President Bush mean to the economy? The honest answer is probably not a whole lot. It is going to affect a very small percentage of homeowners—ones projected to be in trouble that are not already behind on their payments. Many professional analysts say it may not even be put into effect due to some illegalities involved in the ability of the Government to affect contract law. At a base level, housing prices need to adjust, recessions need to happen, and general market (stock markets, housing markets, and consumer markets) need to pull back from time-to-time to make the economy healthy. It clears out the mistakes and lets us start over with a clean balance sheet. Over-engineering by government agencies generally has long-term effects that cause unforeseen consequences. My favorite quote from the week was an email to Bloomberg (a financial reporting company) right after the Bush announcement. To paraphrase, “Hey President Bush, where’s my bailout package for the tech stocks I invested in back in
2000?” The Tech bubble was a terrible time for investors, but the correction (should have?) taught us a couple of important lessons. First, don't invest in companies that don't make money and have no product to sell, and second “this time is not different”. Economies, investments, and trends can be tracked for hundreds of years (data gets a little shaky the farther back you go) and ups and downs are common. Nothing goes up forever, and things don't generally go down forever. Technologies change and industries are created while other are demolished, but in the long-run, change makes our lives better, our pocket books fuller, and our future brighter.
The inflation question Every day, economists, government agencies, and Presidential candidates tell us inflation is under control. I have begun to
feel that they never go shopping, don't own a home, and never fill up their gas tanks. The following information was taken from a December 6, 2007 article in The Economist magazine: Wheat prices are at $400 per tonne compared to $200 per tonne in May (100% increase); Corn is at $150 per tonne up 50% from 2006. From the USDA website: the national average cost of whole milk for the month of November was $3.83 per gallon compared to $3.17 per gallon in November of 2006 (almost a 21% increase). Even with the housing pullback, National housing prices are still almost 53% higher than they were in 2002 (S&P Schiller price index). Should I mention oil and gas prices, or would that be overkill? I would never suggest economists, government agencies, and Presidential candidates aren't telling you the whole truth, I just want to go live in their world for awhile.
I’ve been exploring publishing some of my articles online. This one is my first and you can see it at:
http://www.gurufocus.com/news.php?id=19209 . It can even be Googled! How cool is that?
3
Trading Cards President, CEO, Sole Proprietor, and benign dictator of one of the largest privately-held manufacturing firms in the world, his company's history spans centuries. He innovated cheap, piecemeal labor and by his own efforts developed the ultimate, low-cost, overnight shipping arrangement. We don't expect his operation will suffer much from the current economic crisis; it's hard to go wrong investing in the joy of children. The downside? His enterprise has been plagued by allegations of copyright infringement, patent violation, and intellectual property theft for decades. Due to the location of his facilities, he has claimed that international trade agreements do not apply, further stating publically, “What are they gonna do? I'm Santa Claus.” As to the continuing rumors attending his actual existence, Mr. Claus has stood his ground, stating, “If I'm not real, then the US Postal Service has been party to the greatest ongoing fraud in the history of the world.”
may this season be filled with light and peace. Mike
GOOD NEWS happy thoughts HOPE FOR THE FUTURE good news HAPPY THOUGHTS hope for the future GOOD NEWS happy thoughts HOPE FOR THE
HEDGE Reducing your risks. Hedging involves deliberately taking on a new RISK that offsets an existing one, such as your exposure to an adverse change in an EXCHANGE RATE, INTEREST RATE or COMMODITY PRICE. Imagine, for example, that you are British and you are to be paid $1m in three months’ time. You are worried that the dollar may have fallen in value by then, thus reducing the number of pounds you will be able to convert the $1m into. You can hedge away that currency risk by buying $1m of pounds at the current exchange rate (in effect) in the futures market. Hedging is most often done by commodity producers and traders, financial institutions and, increasingly, by non-financial FIRMS. more of this definition and many others can be found at: http://www.economist.com. Click on “Finance A to Z” under Finance and Economics in the lefthand sidebar. The terms you see in colored Capitals are other terms defined in this excellent glossary. BTW: they’re Brits, which explains the wonky spelling, G*d love ‘em.
HEDGE FUNDS These bogey-men of the FINANCIAL MARKETS are often blamed, usually unfairly, when things go wrong. There is no simple definition of a hedge fund (few of them actually HEDGE). But they all aim to maximise their absolute returns rather than relative ones; that is, they concentrate on making as much MONEY as possible, not (like many mutual funds) simply on outperforming an index. Although they are often accused of disrupting financial markets by their SPECULATION, their willingness to bet against the herd of other investors may push security prices closer to their true fundamental values, not away.
We Like to Watch……stocks worth watching Sym
8/24 U$
12/07 U$
% Chg.
P/E
BHP
57.6
77.00
33.7
16.8
1.4
Commodit.
GRTH
Trying to buy Rio Tinto
Boulder TR
BTF
21.08
23.24
10.3
5.8
12.4
Clsd end fnd
GRTH & INC
Still a cheap way to buy Berkshire Hathaway
ChinaNepstar
NPD
16.2
16.51
1.9
142
0
Retail
GROWTH
“Walgreens of China”; IPO'd 11/9; Olympic play
Cree
CREE
24.82
23.90
-3.7
34.4
0
Tech
AGGR GRTH
Lighting up major cities and Olympic venues
Danaher
DHR
75.51
87.08
15.3
20.6
0.1
Mfg
GRTH
One of the best-run companies out there
Diana Ship.
DSX
25.5
34.65
35.9
17.3
7
Dry bulk
GRTH & INC
As the world goes, shipping goes
Duke Energy
DUK
18.38
20.56
11.9
15.8
4.3
Utility
GRTH & INC
Defensive play
Euroseas
ESEA
13.36
12.95
-3.1
7.7
8.7
Dry bulk
GRTH & INC
Said last issue I liked better at 13.36; diluted shares to buy boats
Exxon
XOM
83.15
91.50
10.0
13.2
1.6
Energy
GRTH & INC
They have what the world needs
DE
64.65
88.11
36.3
22.0
1.1
Agri Equip
GRTH & INC
Adjusted for split; getting too expensive
Smith&Wesson
SWHC
20.01
7.08
64.6
20.8
0
Mfg
GRTH
Great time to pick up a franchise name?? Just began watch
Viropharma
VPHM
10.03
8.73
-13.0
7.14
0
Healthcare
GRTH
Stage 2 trails for Hep-C and common cold treatments
Name BHP
John Deere
Div. Yld%
Indust.
Category
Mike’s Commentary
Important Disclosure Information Please note that the mention of stocks in this publication is a not recommendation to buy or sell those stocks. I personally hold, or have family and clients who hold, every stock mentioned except DSX & VPHM. Indexes are unmanaged groupings of stocks used to approximate general stock market performance. You cannot invest directly into any of these indexes. Stock prices current as of 07 December 2007 Securities offered through Pacific West Securities, Inc., Member FINRA/SIPC, Advisory Certificates of deposit offered subject to change and availability. FDIC insured up to $100,000. Services offered through Pacific West Financial Advisors, Inc., a Registered Investment Minimum deposit required. Periodic interest payments may not be reinvested in the certificate Advisor ~ Clearing services offered through Pershing, a subsidiary of the Bank of New York. of deposit. Certificates of deposit sold prior to maturity may result in an uninsured capital loss. The comments contained herein are for general educational purposes only, do not address the entire topic, and should not be considered investment advice, a solicitation, or a recommendation. All investments involve risk, including the possible loss of invested principal. Past performance is NOT a guarantee of futu re results. Be advised that security transactions involve trade costs. For more specific information on investment risks, you should consult the offering’s prospectus. Prior to implementing any strategy, taxpayers are urged to seek the advice of their tax advisors.
~ Newsletter Design by karen bosso ©2007 ~
4