With the market looking just plain awful these days, and with the theory of recession becoming more and more concrete as the dour days pass, the concept of shorting equities is gaining popularity, at least from a headline point of view. Here's an article that talks about utilizing ETFs to go short. My colleague Timothy Sykes also discussed shorting in a recent piece of his own. Both of these articles bring up excellent points, and like Tim, I don't feel there is anything unpatriotic about betting against stocks, whether they are rising or falling. We're a capitalist society, and the trading spoils should go to the winners, whether the winners be long or short.
However, I urge all individual investors out there to think before they short. Don't take betting against a company or a market average lightly. The problem with shorting now is that it might be too late. The time to have purchased, say, the Proshares Ultrashort Dow 30 (AMEX: DXD) might have been a week ago. Remember that shorting is not a long-term idea, no pun intended. Going long is, so you're essentially going to become a market-timer when you invest in a short fund. There is nothing inherently wrong about trying to hedge yourself in a downward-spiraling environment, but make sure you understand that you are making a guess about the direction of stock prices. That's a tricky endeavor at best.
One thing you must avoid doing is shorting individual stocks. I think it's safer to short averages than it is to short companies. Again, if you're really sophisticated, you can do what you want, but do you have the guts to short a General Electric (NYSE: GE) or a Coca-Cola (NYSE: KO)? Or what about a Newcastle Investment (NYSE: NCT)? A Citigroup (NYSE: C)? These are all stocks that I believe may be going lower in the short-term, but they all pay dividends, which the short-seller is still responsible for. Plus, at some point, the dividend yields will signal to investors that a bottom could be in. Besides, with short-themed ETFs around, there's really no reason to literally borrow shares and sell them into the market. There's also the method of buying put options to take advantage of a downtrending equity, so you're covered by that technique, too.
Monday was an extremely trying day for my portfolio and me. Talk about depressing. Let's see, CapitalSource (NYSE: CSE) took a dive of almost 15% on hellishly high volume (it traded more than 17 million shares on Monday, and AOL Finance lists the 30-day average volume as being a little under 3 million shares) on news about a money-losing sale of assets. Now, once I saw CapitalSource moving down, I knew that Newcastle Investment (NYSE: NCT) wasn't going to be trading higher. Sure enough, there was indeed something new at Newcastle. A new 52-week low. The stock closed Monday at $7.06, down 10% and one penny above the low. And then there's MFA Mortgage (NYSE: MFA). It too was down, although only about 2%. Yeah, only. All of these stocks are at prices well below my cost basis.
I'm at that weird crossroads all investors find themselves at some point. Is it too late to sell? Let me tell you, I don't want to be one of those panic sellers who regrets dumping his stocks because as soon as he does so they start to rise. But, I don't want to be one of those holders who doesn't know when enough is enough. It's pretty rough. You don't know whether to add to positions that are faring poorly and thus risk throwing away money, or whether to avoid adding money and thus risk not getting some bargain prices. And in terms of Newcastle, my colleague Sheldon Liber is with me on this. He thinks the stock may turn out to be a value. See this article.
My other colleague, Timothy Sykes, has counseled me to instead focus on strong stocks that are working. I can't say he doesn't have a point. Indeed, my portfolio does seem rather masochistic. For now, though, I will try to avoid any emotional decisions. I am going to continue to watch the financial carnage as it further unfolds and evaluate every potential stock trade very carefully. This summer is going to be a tough one. I'll let you know what happens.
Disclosure I own CapitalSource, MFA, and Newcastle Investment; positions can change at any time.
Checking on one of my big calls of the year:Newcastle Investments (NYSE: NCT), which is down significantly so far through mid June, it is nice to see that a dividend will be paid for this past quarter of $0.25 per share. This amounts to a current yield of over 12%.
Some would say it was to good to be true as the stock price drifted downward and the dividend was cut. I maintain that this is just a waiting game until the real estate market migrates back to a more sure footing while you collect a healthy dividend.
Most advisers would remind investors not to try and catch a falling knife and I would agree, but at some point there is real value and I have taken several "stabs" at this one trying to dollar cost average while a I wait.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of NCT.
You know, I can't take much more of the financial crisis. That's because I own Newcastle Investment (NYSE: NCT) and CapitalSource (NYSE: CSE). I'm kind of hoping we get out of the mess brought on by the housing-bubble pop and the mark-to-market devaluation so that these stocks will rise again. As we continue through this recession, another problem may soon assert itself.
According to this article, consumers are starting to rely on their credit cards a little too much. This could lead to a larger quantity of delinquencies. In fact, the piece states that card delinquencies were at 4.86% in Q1, a multi-year high. Further, revolving debt increased 7.9% in March, coming in at $957 billion. Not too far away from a trillion, my friends. Let me tell you, this is the last thing we need right now. Delinquencies will become a major problem for the banks, leading to further erosion of confidence on financials by investors.
As can be expected, two ideas immediately came up during the course of the article: Visa (NYSE: V) and MasterCard (NYSE: MA). How could they not? If people are taking credit debt, then they must be using those two brand names. Since Visa and MasterCard don't really have exposure to the debt side of things, they are relatively safe from that aspect.
After five months of tracking my 2008 picks, it is rewarding to finally have a breakthrough -- topping the three major stock indices and Berkshire Hathaway (NYSE: BRK.B) too. It has been painful to have to report each month that I was being bested. However, since I have not seen anything contradicting my original rationale for my eight picks I stood my ground.
Moving into positive territory by pennies was Loews Corporation (NYSE: LTR). Among its holdings is a 51% stake in Diamond Offshore Drilling, Inc. (NYSE: DO) that has been doing well as the world remains desperate for more oil and natural gas.
Bunge Limited (NYSE: BG) was the other stock to cross the line into the black, while Valero Energy Corp. (NYSE: VLO), although improving, remains my worst performer. It is still down almost 28% after five months.
This month saw great improvement after last month's disaster. Having to conclude my findings on a specific month end day, or any day, depending on the news, sometimes distorts results. For example news on March 31 sent the market down and on April first my picks shot up an unusual amount; hopefully the trend will continue.
My riskiest stock pick Newcastle Investment Corp (NYSE: NCT) was down the most in March but recovered about 35% of the loss in April leaving Valero Energy Corp. (NYSE: VLO) the dubious honor of being my worst performer, down over 30% in the first four months of the year.
April showed improvement as many companies reported positive earnings reports or beat expectations.
Most of my picks improved. Higher food prices no doubt helped Bunge Limited (NYSE: BG) which recaptured losses moving up 23% from its recent bottom. My two winners Raytheon Co. (NYSE: RTN), the high tech defense contractor, and Reliance Steel & Aluminum (NYSE: RS) were joined by a third, Anglo American plc (ADR) (NASDAQ: AAUK) which had a 10% swing entering positive territory.
After three months it is time to face the facts: two of the three indices beat my picks handily. I have not made a good showing so far and unlike most investment idea sources, I feel obliged to air my dirty laundry for all to see.
My riskiest stock pick Newcastle Investment Corp (NYSE:NCT) is down almost 37% this year, and the energy stocks did almost as poorly even though fuel prices are near all-time highs. The downers were not offset by this months' repeat winners.
March was a seesaw battle, but in the end there was not much to show for it. However, unlike the last day of January (down 370 points in the Dow) and February's last trading day (down 315 points), March had a final day of plus 46.49, which is not very meaningful.
Most of my picks sagged a little more, while two remain in positive territory. Raytheon Co. (NYSE: RTN), the high tech defense contractor is up and Reliance Steel & Aluminum (NYSE: RS) is way up.
MFA Mortgage (NYSE: MFA) had a good trading session yesterday. A cool thing, since it's well off its recent highs. The stock closed yesterday at $7.01, having risen over 11%. What was the catalyst? Well, some bullish commentary from an analyst certainly helped out, but, for my money, the bigger news was the increase in the dividend. MFA announced a Q1 payout of $0.18 per share, which is 24% higher than the previous quarter's dividend.
This is exactly what I want to see. I'm figuring that, over time, MFA will be able to make more increases to its dividend as it benefits from further rate cuts by the Fed. Granted, MFA did choose to reduce its leverage profile, as I mentioned in a recent post. Nevertheless, this dividend increase, in my opinion, shows that this particular mREIT is a cut above many and worth holding for now. It's going to be a volatile ride, and I expect some profit-taking based on yesterday's action, especially considering the fact that the volume of shares traded wasn't overly high.
Two of my other mREIT investments, Newcastle Investment (NYSE: NCT) and CapitalSource (NYSE: CSE), also fared well in yesterday's session. Another mortgage entity I'm keeping my eye on, Annaly Mortgage (NYSE: NLY), had a good day as well. Let's hope the financials are finally stabling -- granted, many financials, such as MFA, are way off their 52-week highs, but I have to say, I liked the way the second quarter started, and I certainly enjoyed MFA's dividend change.
Disclosure: I own shares of MFA, MFA preferred, CapitalSource, and Newcastle Investment; positions can change at any time.
Friday morning, lost in the midst of another bad day in the market, Newcastle Investment (NYSE: NCT) reported that it would be cutting its dividend to increase cash for additional liquidity and possible share buybacks. As the stock price has gone down, the trailing dividend yield continued to rise. When I bought at $12.50, the yield was about 22%. The trailing yield as of Friday's close was 32.50% at a stock price of $8.60. Looking forward the current payout will be $0.25 per share, decreasing the yield to about 11% going forward.
The lower yield is in line with the level of distributions made before the financial crisis, but many investors since were looking to enjoy the higher yields given their now higher level of market risk. The stock lost $1.64, almost, 16% on this news and the overall negativity, caused in part by one of the Carlyle Groups investment vehicles Carlyle Capital collapsing and Bear Stearns (NYSE: BSC) news on Friday that it was remaining open but only as a ghost of its former self with the help of the Federal Reserve and JP Morgan Chase (NYSE: JPM). Of course, we all know that by Sunday afternoon it was announced that JPMorgan will be acquiring Bear Stearns for $2 share.
Oh man, the news coming from the Fed seems to get worse and worse. On a day when financials like Citigroup (NYSE: C) continue to weaken -- Merrill Lynch (NYSE: MER) reduced Citi's outlook -- Fed head Ben Bernanke sends the market indication that we are not yet near the end of the mortgage debacle, and he is looking for a "vigorous response" to address it.
According to an AP article, Bernanke, in an address to a banking group, stated that the mortgage crisis was not done, and that more relief would be necessary for homeowners who simply are unable to balance their books. This isn't what anyone on Wall Street wanted to hear, and certainly not what an individual investor like myself was looking for, either; I have ample financial exposure in the form of MFA Mortgage (NYSE: MFA) and Newcastle Investment Corp. (NYSE: NCT).
Further, Bernanke made a suggestion that bankers would obviously find tough to implement -- he said that a reduction in loan principal might be an appropriate way to relieve a struggling owner of real estate. Hmmm, that might not go over too well, especially with the crowd that isn't happy with government intervention -- now Bernanke is calling for lenders to be more lenient? But, what should one expect? This is the Fed, after all, and it's the institution's job to promote some economic homeostasis in times of need. Bernanke believes more foreclosures are coming, and he wants to get ideas out there that will save as much home equity as possible. He brings up a good point, implying that lenders will benefit from loan-principal reductions simply because the rate of foreclosures would, in theory, decline as a result of such a tactic.
Two months into the year and investors' true 'metal' was tested, and mine more than most. February showed signs of improvement over January, but the last week ended hopes of any rally. The last day of January saw a 370 point drop in the Dow and February's last trading day closed with similar results, down 315 points.
The soft stock market did display many points worth noting. The Dow Jones Industrial Average was about break even for the month, indicating investors were showing some signs of support for large cap stocks, prompted in part by news of increased profits at Wal-Mart (NYSE: WMT) and share buy-backs at IBM Corp (NYSE: IBM).
Some of my picks also sagged a little more, although not as much, while two turned into positive territory. In January, only Raytheon Co. (NYSE: RTN), the high tech, defense contractor, was up. In February, the weak dollar and inflation concerns boosted Anglo American plc (ADR) and Reliance Steel & Aluminum (NYSE: RS) -- two commodity plays.
We now own Newcastle Investment Corp. (NYSE: NCT), a CMBS lender and REIT paying about a 26% yield in several portfolios. It does not own real estate, instead it holds loans on nonresidential properties.
The stock has lost two thirds of its value from its 52-week high and closed at $11.08 yesterday down further from my initial buy-in. The stock is down because of investors fears about the real estate values supporting the loans and the resemblance to residential mortgage brokers and lenders that have collapsed or suffered great losses. Neither of these issues are of concern to me. I am active in the commercial real estate markets and we have not seen appreciable reductions in the value of existing commercial and industrial property.
January was a wild ride and February holds the promise of more of the same after yesterday's 370 point drop in the Dow. All the major indices were down in January and so were seven of my eight picks. Only Raytheon Co. (NYSE: RTN), the high tech defense contractor, was up. My two high flyers from last year, Huaneng Power International, Inc. (ADR) (NYSE: HNP) and Valero Energy Corp. (NYSE: VLO), were the biggest losers.
Among the indices, the DJIA lost the least and the NASDAQ lost the most. The average return for my eight picks was -7.82%. This underperformed the average of the indices that was -7.58% -- but my new stalking horse Berkshire Hathaway (NYSE: BRK.B) bested both, so Buffett is still the man.
Now including dividends for my picks which average 3.91% divided by 12 for the one month allows for an additional .326%, reducing the loss to -7.494%. Using 1.8% for the average dividend of the indices divided by 12 adds 0.15%, reducing the loss to -7.43%. The dividends tighted things up. BRK.B does not pay a dividend.
The following are my eight picks with the starting share price as of December 28, 2007:
Ever want to just slap yourself silly for not buying what you know you should have bought in the first place? I'm going through that right now with MFA Mortgage (NYSE: MFA).
MFA has been able to avoid the whole subprime mortgage chaos and is riding the wonderful wave of the Bernanke rescue effort. It operates as a real estate investment trust, and it stands to benefit from further rate cuts. Oh man, I was thinking of buying this one last summer, but it seems to have put me in the position of should-I-chase-this-or-not. Check out the chart. Thank goodness I at least own the preferred MFA shares (NYSE: MFA-A). I bought those last summer below par value, getting in around $22. The shares are now trading well over $24, and they pay a nice coupon at par -- over 8%. I happen to own another mortgage entity, Newcastle Investment (NYSE: NCT), which has been discussed previously by Sheldon Liber.
I'm going to be watching the price action on MFA carefully the next few days, perhaps looking to get in. Its dividends have been rising, and on a down day like today, its stock is getting a nice bid (as of this writing, it is up 3% or so).
The price-to-cash flow ratio has been repeatedly promoted in various publications as one of the more important metrics to consider when evaluating a stock to buy. Apparently over long periods of time it is more telling than the often quoted price-to-earnings ratio. I have read that cash flow is a key metric that "my pal Warren" looks at for Berkshire Hathaway (NYSE: BRK.B) investments.
Here are the figures for the Chasing Value: Final list -- 8 stocks for 2008 in order from highest to lowest P/CF. The 12/28/08 starting stock price, yesterday's closing price and the current P/CF for the most recent fiscal year (MRFY) are listed. Only two stocks are up, while six are down.
Bunge Limited (NYSE: BG) BG was $119.03, up to $133.00, P/CF 15.99
Raytheon Co. (NYSE: RTN) RTN was $61.51, up to $61.58, P/CF 13.64
Checking on one of my big calls of the year:
After five months of tracking my 2008 picks, it is rewarding to finally have a breakthrough -- topping the three major stock indices and 
This month saw great improvement after last month's disaster. Having to conclude my findings on a specific month end day, or any day, depending on the news, sometimes distorts results. For example news on March 31 sent the market down and on April first my picks shot up an unusual amount; hopefully the trend will continue.
After three months it is time to face the facts: two of the three indices beat my picks handily. I have not made a good showing so far and unlike most investment idea sources, I feel obliged to air my dirty laundry for all to see.
MFA Mortgage
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