Flying Pink Unicorns: 2012

Further investment ideas.

I have been thinking a lot about the markets in recent weeks, and talking a lot about them, to anyone who would listen, and more than a few people who wished they didn't have to.

Two caveats. First, nothing in this blog post is investment advice! You must do your own homework! Second, I own stock and/or option positions in every company mentioned in this post except JP Morgan, which I'm considering buying.

Here is what I've been thinking about. I have a few GREAT investment ideas which I'll outline. Cheat sheet-- BUY STOCKS. Especially buy cyclical stocks and big banks. I am especially bullish on Citigroup, GM, Ford and GE. Not because I think they will triple quickly or anything (though both Citi and GM should double or come close in the next two years if most things go right) but because I'm super confident that each of these are seriously undervalued. But more on that later.

The conditions I laid out as crucial parts of my investment thesis in my last post, hold. Europe is successfully muddling through, and will VERY likely avoid the worst outcomes which involve contagion. The manner in which they are doing it is very stupid, and harmful to Europe long term, but that's another post. Suffice to say Merkel and company won't let Greece/Portugal take down the world economy a la Lehman, and new flyingpinkunicorn fave Mario Draghi, the new head of the ECB will not let banks take down the global financial system, a la Bernanke.

Second, the US economy is improving, though recent data causes me to think the expansion has slowed a bit and may remain slow until about June when it should pick up again. Although we do not yet have the Obama Boom I wrongly predicted a few years ago, all signs are indeed more positive, and auto sales are particularly strong, a sign of consumers having long term confidence (as well as beat up old cars).

As for specific investment ideas, the two that I mentioned prominently were TBT, an ETF which shorts interest rates, and IFN, a Closed End Fund which owns shares in Indian stocks.

On January 3, when I recommended TBT, it was at 18.60. It closed Friday at 19.27. That's a 3 % return in two months and change. Not pathetic, but not great considering the market has beaten that by a mile. I NO LONGER RECOMMEND TBT. I have concluded that the fact that instrument (designed to vary by twice the inverse of a basket of long term bonds) does not do this accurately over periods longer than a single day renders it useless for a long term investment. In addition, I appear to have been premature on my call that interest rates will rise. They may not rise much until after the Fed's Operation Twist concludes in June, and maybe even a tad later. I have instead bought put options on TLT which expire in January. This ETF will, at least, accurately track long term interest rates (with a direct 1-1 relationship) over time. So a put on TLT does indeed serve as a bet on longer interest rates. I am not as excited about this call as I was in January.

IFN, an ETF which owns Indian stocks, turned out to be a brilliant short term call. IFN was $19.68 when I recommended it on January 3rd, and closed this past Friday at $23.23. That's a tidy 18% return in two and a half months!!! A Monster return, obviously. I did not advocate IFN because I thought the Indian market would soar overnight, but instead as a long term play. My strong belief that India is the next China is intact. It won't be as clean and neat an economic rise, but a rise it will be, and a stockpicker who can pick the right companies in India can make a glorious amount of money if my predictions come to pass. The folks running IFN seem to know what they are doing, so there is no reason I can think of not to buy IFN if you are thinking long term.

As for my American stock plays:

GM/Ford-- their stock is ridiculously low compared to their profits last year. Car sales are WAY up this year in the US, and both companies are going to make a metric boatload of money in the US this year. Europe will be a big drag, and China may be a potential pitfall for GM (it currently makes a lot of money in China) but roaring success in the US should drown out international woes. Both stocks have already run up nicely this year, but have a long LONG way to go. In addition, the market is only trading at 13 times last year's earnings. With interest rates this low, that is an absurd multiple. That multiple should increase to a historically normal 15 or so sometime in the next 2 years. That implies a big further rally in this already remarkable bull market, which turned 3 years old and 100% big just last week.

Citigroup (and JP Morgan, and probably Bank of America) are wildly undervalued. The market still doesn't begin to trust these mega financials and their mega balance sheets. With good reason. But the market has gotten carried away. They've already run up big this year (my Citi shares and all of my Citi options are in a lovely shade of green) but have MUCH more room to run. Sometime this week, the Fed is HIGHLY likely to say that all financials have passed its (stressful) stress tests. Citi has presumably already asked for permission to increase its dividends/institute a stock buyback. I predict this permission will be granted. Don't know when, sometime in 2012. If/when that happens, I expect an immediate pop in the stock of at least a buck, and a whole lot more bucks in the stock price after that.

GE: As soon as the Federal Reserve approves it, GE Capital should resume paying a dividend to the parent, GE, as opposed to hanging onto all of its cash. GE should then be able to increase its dividend and share buyback, as the CEO has repeatedly publicly stated he wants to. That should cause some of the share price increase I seek. Excellent quarters this year in most parts of the company should cause still more of it. Finally, I think the market overall is undervalued. Add all of that together, throw in a 3.57% yield, and I think GE is a clear buy (and hold!) for the long run, and a fine buy for the short run as well.

Two hot new investment ideas for 2012.

Happy new year blog followers! I know I don't post frequently anymore. Happily, I've been very busy working, as well as with life, so I don't have the free time I used to to put together detailed long blog posts on the issue of the day. But there are a few killer investment ideas that I just have to share. Want to make 50% or more on your money in the next 12-18 months? Read on. Needless to say, these ideas are, for the most part, very very risky. Not for the faint of heart. And nothing herein constitutes investment advice, of any kind, whatsoever. I mean it! If you are interested, you need to do your own research, and a lot of it.

I know this post is long, but I think it is well worth reading through, as it could make you a lot of money. By all means comment or email with any questions.

My investment ideas are based on my predictions that interest rates are highly likely to rise significantly in the coming year or two (and perhaps beyond) and that certain investment vehicles which buy Indian stocks on the Bombay Stock Exchange are reasonably likely to soar in the short run and VERY likely to rise in the long run. I have put my money where my mouth is on both of these ideas, and expect to do very well and hope to make a killing. If you have money which you can afford to invest in HIGHLY risky investments, you should join me..

I note that I have been consistently WRONG about my predictions about the US economy, consistently being way too optimistic. I do think we're about to break out somewhat, and grow about 3-3.5% in 2012, but it would be entirely sensible for you not to pay too too much attention to my prediction. Hey, what can I say, predicting the future is hard, especially when it hasn't happened yet. I also note that I am nowhere near expert in what I am discussing here. But the big picture I think I do understand, and I think that is enough to make a lot of money. With those caveats in mind, here are my 2 hot investment ideas for 2012.

1) Interest rates on long term US treasuries are highly likely to rise. Hoped for return 1year from today? 50-75%. 120% wouldn't surprise me much.

As many or most of you know, interest rates on long term US bonds tend to rise when investors are optimistic about the economy (for several reasons, especially including expected increases in inflation down the road) and tend to fall when investors are pessimistic (for the inverse reasons).

First, some brief background, experienced investors can skip. Long term interest have been very low for a few years now because of severe economic weakness as a result of the Great Recession, as well as a flight to quality and safety in turbulent times. When investors think the sky is falling, or might fall shortly, they often are eager to buy US Treasuries because these provide a safe haven. Accordingly, they bid up the prices of the Treasuries, and the yields move in the opposite direction of prices (google as to why if you like). The reverse happens when investors are more optimistic about the economy and less fearful about the world in general. The low yield of a US Treasury seems paltry compared to much more exciting and potentially lucrative investment ideas. At this time, investors are relatively eager to SELL US treasuries, driving the price down and the yield up. I note parenthetically that mortgage rates on houses are tied directly to the 10-year Treasury Bond-- they move in virtual lockstep with 10-year Treasury Bond rates. My predictions mean that if you are thinking of refinancing, hurry. Rates are VERY unlikely to go down significantly, and could well go up significantly. Quickly.

A year ago, in January 2011 the economy was in many ways quite similar to where it is now. Unemployment was a little higher, but there was optimism that stronger growth was right around the corner. Accordingly, the interest rate on the benchmark 10-year Treasury Bond rose from 2.54% on October 1, 2010 to 3.36% on January 3, 2011, a year ago. In contrast, the interest rate on this bond closed 2011 at 1.89%! Thus interest rates on the 10-year bond plummeted by 1.4 points last year, a very significant move. (I note that rates are already up to 1.95 in early trading today)

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2011

There is nothing especially surprising about the interest rates from October 2010 and January 2011. However, the current interest rate, 1.89%, is very surprising indeed, and makes no sense based solely on the fundamentals of the economy. Why did interest rates drop so much in 2011, from a low level of 3.36% to a VERY low level of 1.89%? In a word, Europe. As the fundamentals in Europe deteriorated, and investors became more and more fearful of events in Europe, they fled the risks there (what market commentators call a flight to quality. (In fact, investors by and large fled risks everywhere, at least for a time). On July 1, 2011, before the worst of the Europe news began to hit the front page and dominate the business section (and before the huge market volatility of last Summer), the 10-year bond was at 3.22%, very close to the 3.36% where it started the year. On August 1, it was 2.77%, and by August 15th it was 2.29%! People became convinced the sky was falling, avoided almost anything risky like the plague, and ran to the safety and security of US treasuries. This trend continued right through to the end of the year.

I expect the 10-year bond interest rate to reverse course and head back towards about the 3.36% it was at at the start of 2011. I expect this for four reasons, the first three of which are by far more important than the 4th:

A) First, as noted, I predict that the economy will improve. Not an Obama Boom, perhaps, but an improvement. That should move interest rates up some. I note that I would make this investment even if I were certain the economy would be as in 2011 (but I would, admittedly, be less enthusiastic).

B) Second, I expect Europe to successfully muddle through, avoiding the worst (for example, an Italian default, which would be absolutely calamitous for Europe and very painful for the entire world). This is the key reason for my being so excited about this investment. If I knew for certain that Europe would (i) get significantly worse; and (ii) not improve noticeably by the end of the year, I would NOT make this investment at this time.

Why am I (somewhat) optimistic about Europe? Merkel in Germany is sensible. She's walking an incredibly difficult political tightrope, as if she is seen in Germany to be spending German money to bail out profligate countries on the Med, like Greece and Italy, she will end up voted out of office, if not on the business end of a pitchfork. In any event, she knows that whatever the consequences for her, she can't let the Euro area go to hell. And she won't. In addition, I really like what I've seen out of the new head of the European Central Bank, Mario Draghi. He has cut interest rates, and significantly increased liquidity for the European banks, which badly needed it. In other words, he's acting more and more like Time's 2009 Person of the Year, Ben Bernanke. Thank heavens! Sarkozy in France is also entirely sensible, and the new Italian government has already taken significant steps, as has the previous Spanish government. The European Central Bank is really the key, and Draghi is WAY better than his mediocre predecessor, Jean Claude Trichet (search my posts for my true feelings on that fellow).

Accordingly, I think it is highly likely Europe will avoid disaster. If you disagree with this prediction, you should almost certainly not make the investment I suggest.

Why is Europe so vital to American interest rates? Europe avoiding disaster will have a clear impact on the US 10-year Treasury, because as investors become more and more convinced that the sky is NOT in fact falling, they will want to take on more risk. A 1.89% return on paper issued by a profligate and politically dysfunctional US will look more and more ridiculous. So investors will want to sell, and drive the price up. This is exactly what I expect. I don't have any clue when in 2012 this should occur. Interest rates could well

C) Reversion to the mean: Interest rates have come down so far that I expect that in the absence of even more really bad news (for example, REALLY scary news out of Europe, a double-dip recession in the US, a localized shooting war between Iran and the US that temporarily drives oil to $180/barrel) interest rates should rise a decent bit from here even if I am wrong about the US recovery. If you told me that on 12/31/12 Europe will have muddled through without real disaster, and the US economy performed like it did in 2011, with unemployment about where it is now (8.6%) and no other especially bad news, I would GUESS that the long term rate would move up to about 2.5-2.8%, making me a tidy (but not unbelievable) return on my investment.

D) The US budget picture is gloomy in the medium and long run (as well as the short run) and our politics are dysfunctional enough that we may not fix it. That should, all else being equal, put upward pressure on long term interest rates, as investors expect that the temptation for the US to "inflate its way" out of the huge debt burden will become all but irresistible.

As stated above, reason D is far less important to me. Although potentially powerful in itself, the risks of the US becoming overly debt burdened is more of a long term play, and need not play out over the next few years (not to say it couldn't).

A key reason I LOVE this investment idea is my conviction that even if I'm wrong and Europe DOES blow up, I still think I will either lose a little or make a little. I just can't see the US going the way of Japan, with 1% interest rates for an extended period. We're too dynamic an economy for that. And we're not aging anything remotely like as fast as Japan. So I see this investment as heads I tie (or lose a little) and tails I win a LOT. That's a fantastically good deal, when you can find it.

How am I going about making this wager on interest rates falling? I am using an Exchange Traded Fund ("ETF") to make this market wager.

What the heck is an ETF? http://en.wikipedia.org/wiki/Exchange-traded_fund

The ETF I chose is ticker symbol TBT. It is an ETF designed to produce daily investment returns "before fees and expenses and interest income earned on cash and financial instruments, which correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index." *Sigh* I barely know that that means, but there is a strong, strong correlation between this index and the interest rate on the 10-year bond (which I am using as a proxy). So this ETF is NOT a pure bet on the movement of interest rates on the 10-year Treasury Bond, not by a longshot!

Indeed, the biggest risk to this investment, other than Europe or something else going calamitously wrong, is the ETF itself, and its a close second. There is no guarantee (to say the least!) that it will in fact perform as it is intended to. If rates go up significantly, it is VERY likely to go up as well, but not certain, and the amount is far from certain. I feel so strongly about interest rates going higher in the next 12-18 months that I am willing to take on this additional layer of risk.

For reference (and as you always hear, past performance is no guarantee of future performance (!), on January 3, 2011, exactly a year ago, this ETF closed at $37.51. I bought this on December 21, 2011 at 18.59. So if rates on the 10-year were to move back to where they were a year ago, and this ETF performed exactly the same on the way up as it did on the way down (HIGHLY unlikely) I would do a tiny bit better than doubling my money. In a year. In the real world, if interest rates do go back to 3.36% I estimate that I could expect a return of anything between 70 and 110%. That's a crude estimate, and could prove wrong.

As a cheaper (but even riskier) alternative, you could buy out of the money call options on TBT, and REALLY clean up if I'm right. Of course, you lose a lot, perhaps even 100%, if you're wrong.

2) India. Mutual Funds and Exchange Traded Funds which invest in India got absolutely clobbered last year. The ETF I have recently purchased (IFN) collapsed by 42.81% last year!!!!! That counts the payouts that were made (equivalent to dividends on a stock). A 42% loss!!! Why? Two main reasons: (i) India had its own serious problems (huge corruption scandals, a plummeting currency, the Rupee, and an economic slowdown); and (ii) Europe. As of July 2011, (when Europe began to completely dominate business and investment news) it was down "only" 13% or so for the year. The second half of 2012, however, was a complete wipeout.

To back up a bit, I think two of the very biggest macro trends of the next few decades are HIGHLY likely to be strong economic growth in India and China. China you all know about. India has also experienced rapid GDP growth in recent years, a far cry from its chronic economic under performance from its independence in 1947 through the reforms of then Finance Minister Singh in the early 1990s. This lousy economic performance was often called the License Raj, and the low growth rate (when India was dirt poor, and thus should have been growing far more rapidly) was derided as the Hindu rate of growth. No longer. In recent years, its economy has grown around 7.5%, and a tad higher in 2010. Not quite Chinese rates of growth, but still very strong. Enough to create tens upon tens of millions of new consumers, who are buying things like tvs, cell phones, refrigerators, etc. And cars. And a lot of other things.

Although investments in funds that invest in India are very risky, and highly likely to experience wild swings, a reasonably well run fund should do VERY well in the medium and long run, as India's economy continued to grow strongly. For all of its massive problems, India is a huge growth story. Invest a piece of your portfolio in it, for the long run. You'll thank me profusely 10, 20, 30 years from now.

In the short run, as stated above, India investments got absolutely clobbered by internal problems there and by Europe. I know zilch about India's progress towards solving its internal problems. I err on the side of pessimism knowing a little about the Indian government. However, investments in India were hammered by global fear arising out of Europe. Anything and everything risky scared people. There was and is great fear of risk,as discussed above. As this fades, there is no reason in the world for funds invested in India to do VERY well.

The investment vehicle that I have chosen is a Closed End Fund called "India Fund." Ticker symbol IFN. A closed-end fund is like the mutual funds you know about (commonly called open-ended funds) with the key exceptions that they trade like shares of stock, and do not generally issue more shares after an IPO. The simple version is that the managers raise money on the open market and invest in whatever it is they are going to invest in, in this case shares listed in India. The shares thus issues trade as any stock does, with supply and demand setting the price investors pay for shares in the fund.

The managers of the fund choose what shares (or other investment vehicles) the fund is to own. These change as the managers see fit. The market value of all of the shares (and other securities) owned by the fund, is called the Net Asset Value ("NAV") of the fund. It is the amount that the fund would presumably raise if it sold all of the securities it owned and liquidate and close up shop. The price you pay on the open market is NOT the NAV. It is a share price, just like the price of a share of GE or Exxon.

Accordingly, there are two key indices you have to pay attention to, the share price of the closed-end fund, and its NAV. It is possible for a closed-end fund to trade at a significant discount (or sometimes premium) to its NAV. That is, the total market value of the shares of the fund that you can buy or sell can be significantly less than the value of the shares it owns. Now and then this creates what I and many others believe is a monster buying opportunity. Such a monster buying opportunity currently exists for IFN, my closed end India Fund.

IFN had a closing share price of $35.33 on January 3, 2011, a year ago. I bought it at the very end of December at 18.82. In addition, I bought it at a large discount to its NAV, 12.8%. According to Morningstar, its 6 month avg. discount to NAV was 7.97% and its 3 year average discount was 3.46%, so it is currently trading at a significantly larger discount to NAV than it typically does! I don't know why this is the case. If I had to guess, and its only a guess, investing in India is VERY risky. As investors sought to avoid risk, this fund, and others like it, were shunned. In addition, India was a VERY unattractive place to invest last year.

The unusually large discount to NAV represents real value for me. Even if the value of the shares in the fund (the NAV) stays the same, if the fund merely reverts to its 6 month average discount to NAV of 8% (for simplicity), it would increase in price to $19.86, a tidy 5.5% return without any increase in the value of the shares it contains. Additionally, because the share price is beaten down so badly, it currently has a very attractive dividend yield of 6.3%. (Monies returned by a closed-end fund are not exactly like dividends of shares, but they are close enough for my purposes).

So there are 4 amazingly powerful reasons to buy IFN now:

1) The share price plummeted last year. If Europe doesn't self-destruct, the price should rebound, probably sharply.

2) It has a tidy yield of 6.3%, at its current share price. http://cef.morningstar.com/distribution?t=IFN&region=USA&culture=en-us Needless to say, there is absolutely no guarantee this will continue. On the upside, it could grow and grow significantly.

3) It is trading at a 12% discount to its NAV, as against a 6 month average of 8.06% and a 3 year average of 3.48%

4) India is a slam dunk long term growth opportunity.

For all of these reasons, as of the moment I think IFN is a MONSTER buying opportunity. I wouldn't be at all surprised if my $18.82/share investment is worth $50 or $60 in several years, and a huge dividend yield thrown in at no extra charge.

Or it could all go to heck and I could lose 20-50% on my investment. Balanced against the above rosy scenario is that the problems in India which caused a good chunk of last years 42% decline are very real; are not going away anytime soon, and could easily get much, much worse before they get better. And of course Europe could go kaboom. Finally, a sharp rise in oil prices would hit India. It imports about 3 million barrels of oil/day, or over a billion a year. If oil jumps $20/barrel, a very normal increase, that's $20 billion out of India's economy. That's slightly more than 1% of India's GDP. And the effect would be worse than that, just as it is here when gas prices increase. If oil jumped $80/barrel, India's economy would go to hell in a hand basket. As would ours. As would my portfolio.

Here are investment ideas that didn't quite make the cut.

I think gold is overpriced. Look at a chart of the price of gold, its a classic bubble. I bought GLL, an ETF designed to move twice the inverse of the price of gold. I've done well thus far, up about 10.7% in 6 months. GLL is at 19.81 now. I'll probably sell some or all of it at around 22.

For a few more sedate, safer investment ideas, try GE and oil companies. I really like the idea of a good dividend. GE is currently yielding 3.8%. Assuming they slowly increase their dividend, that # goes up (slowly) even if the share price remains constant. You're wildly unlikely to quickly triple your money, and pretty unlikely to rapidly double it, but I see GE, counting dividends, beating the market for years to come.

In closing, remember Warren Buffet's famous investment credo: Be fearful when others are greedy, be greedy when others are fearful. Right now, investors are quite fearful in much of the world. So be greedy!

Monday, November 05, 2012

Obama will win tomorrow, and receive 303 electoral votes

Sunday, March 11, 2012

Tuesday, January 03, 2012

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