Portfolio Performance: -18.1% YTD thru Nov 2008

Click here to view the spreadsheet containing all disclosures for my complete equity portfolio, including initial entry points, YTD returns, total returns, etc.

THE ENLIGHTENED-AMERICAN PORTFOLIO SPREADSHEET

  • Enlightened-American Portfolio: -18.1% YTD (including dividends)
  • DJIA: -33.4%
  • Nasdaq: -42.1%
  • S&P 500: -39.0%
  • DJ WIlshire 5000: -39.6%
  • Russell 2000 (smallcap): -38.2%

The portfolio sagged ever lower, finishing November down 18% for the year.  In his early years, Warren Buffett constantly reminded his hedge fund investors that the hallmark of investing success was outperformance in bear markets as opposed to outpacing bull markets. While that may be some small comfort, I suspect there’s some elements of false modesty and lowered expectations in Buffett’s sentiment as he managed positive returns in good and bad years alike in the Partnership days.

Though markets continued their descent, I slowed my activity somewhat in November, partly due to re-evaluating investment premises going forward and partly due to running low on cash (now at 20%).  I made the following moves in the portfolio:

  • I traded out of the Chesapeake Energy common (CHK) and into the preferred D shares (CHK-PD).  Doing so allowed me to book the tax loss while retaining my exposure to Chesapeake and increasing the yield on the investment.  You can find specific details on CHK’s various convertible securities here but these preferreds are mandatory convertible after Sep 2010 when CHK sustains a share price over $44 and are yielding over 7% currently.  CHK paid over $200M cash dividends in 2007 and recently registered with the SEC to potentially sell nearly $2B in new equity so it wouldn’t be a shock to see them cut the dividend on the common.  Shifting to the preferreds will ensure I get paid to wait for CHK’s asset value to be recognized by the market.
  • While not explicitly reflected in the spreadsheet, I added to my position in Brookfield Asset Management (BAM) at $15.  While investors are rightfully concerned about BAM’s large exposure to the commercial real estate market, I think BAM is offering an adequate margin of safety. Even after haircutting future cash flow by half, investors aren’t overpaying for the shares.  They also have over $3B in liquidity to take advantage of the opportunities that will surely present themselves in the coming months.
  • I sold SK Telecom (SKM), which has actually held up well in local currency terms.  Unfortunately, the SK won has dropped 40% or so against the US$.  As the financial crisis leaves no country untouched, I became concerned with the macro picture in South Korea and couldn’t really get a handle on the risks of South Korea experiencing another currency meltdown.
  • I divested American Capital (ACAS).  Readers can find detailed discussion here.
  • I continue to play around with National Oilwell Varco (NOV), writing Feb 09 $15 puts for over 20%+ premiums, for an effective price below $12 if assigned.  Frankly, barring any undisclosed bad information, it seems ridiculous that someone can be paid over 20% to buy NOV under $12 but that’s the market we’re dealing with now.

I don’t do much with technical analysis or charts.  It’s not that I don’t think they’re useful; rather, I’m not sure if I can use them to predict the future and make money.  That said, I found Louise Yamada’s take on the current market chart very interesting (and disturbing).  She is calling a massive double top on the S&P 500 stretching 8 years from 2000 and sees the S&P 500 headed to 600.

Charts, in and of themselves, may be interesting but when fundamentals tell the same story, I start to pay attention.  Reading on some of the details of the new TALF program, my rough understanding is that the Fed & Treasury intend to make low-cost financing available to investors so they can buy consumer-backed loans and securities.  Correct me if I’m wrong but I thought investors leveraging up to buy securities was part of the problem in the first place.  How do you solve the problem of overleverage?  Why, with more leverage, of course!

The foundation of the American economy, the consumer, is simply too overleveraged while at the same time, we have too much capacity in all the wrong areas.  From a common sense standpoint, people don’t need to borrow more and we don’t need more Blockbusters, Starbucks, mortgage brokerages, strip malls or capital-destroying Wall Street banks.  We do need to shift into an advanced tech production economy — cue all the common discourse on green technology, advanced communications, defense, etc. The fundamental economic imbalances are going to take some time to unwind and it only makes sense for the markets reflect this painful adjustment as job losses mount and corporate profits slide.  It’s possible the market has already discounted this adjustment but my feeling is that market participants are underestimating the pain ahead.

I recommend two additional links for readers.

There seems to be huge dissonance in the markets.  While the Dow rallied 1,000 points last week, the 10-year Treasury yield fell below 3%.  Normally, yields rise when stocks rally as money leaves the bond market.  That the money moved into long-term Treasurys instead of the short-end, well, I don’t know what that portends but it doesn’t seem good.  Is the bond market really calling deflation or was it some sort of technical move during a holiday shortened week?  In any case, when the bond and equity markets disagree, it’s usually the bond guys who get it right.  Nevertheless, I find thoughts of shorting long-term Treasury popping up more often these days.

Right now, corporate bonds spot such attractive yields across the spectrum that I am looking at moving up the capital structure.  With high-yielders at 20% or higher even for short-term bonds, it may make sense to buy bonds and not wait for equities to bounce back.  The cases for inflation or deflation seem to get tighter as this crisis drags on. While I still lean toward the Fed accomplishing its goal thus leading to inflation, deflation looms as a very possible outcome.  Gold historically performs well with inflation.  It also did well during the Great Depression but its trade was restricted by FDR so that is an imperfect reference point.

Going forward, I am taking a very cautious stance. Last month, I stated that gold miners appeared to be among the most opportunistic sectors and regular readers know that I am bullish on energy long-term. It may be instructive that those two sectors held well above their October lows even as the broader market fell through to new lows in November.  If the current rally has legs, I will continue implementing my previous equity strategy while researching corporate and US government bonds.

7 Responses to “Portfolio Performance: -18.1% YTD thru Nov 2008”

  1. Dax Says:

    I’m a very big fan of Louise Yamada, but even she isn’t right all the time. She was very bearish in 2004, saying (again) that the S&P was in a secular bear market that began in 2000.

    As for Gold, George Soros made money this year when he shorted Oil and went long Gold. His reasoning was that there is typically a 10:1 relationship between Gold and Oil (Gold at $500 = Oil at $50), and Oil at $147 was too expensive relative to Gold.

    Now Gold seems too expensive relative to Oil.

  2. LacPham Says:

    Hi,
    How do you find information on preferred stocks on the Web?

  3. Davy Bui Says:

    Lac,

    There’s not much information on preferreds. You can look up stock information just like any other ticker if the preferred is publicly listed. CHK provided a little cheat sheet summarizing all the features of their convertibles. I basically looked up the initial SEC filing for the preferreds I bought.

  4. Dax Says:

    There’s an ETF that invests in Preferred stocks. Ticker is PFF.

  5. Davy Bui Says:

    Dax, thanks for the heads-up on PFF.

    Did a quick check on it and their top holding is Freeport Preferreds but the next largest holding is Ford. The next 8 largest holdings are all financials.

    http://www.etfconnect.com/select/fundpages/etf_funds.asp?MFID=176361

    Caveat emptor.

    Do you think Yamada is wrong on her secular bear market call dating back to 2000? I’m not a chartist but from a fundamental standpoint, even during the rally from 2003 – 2007, the US$ fell in conjunction with the rally, so were US investors really any better off?

  6. Dax Says:

    No I agree with Louise on the secular bear market from 2000. I think it’s less clear where we go from here. You can look at the chart as a double top (2000 + 2007) or as a double bottom (2002 + 2008), which would give very different conclusions.

    Also, a secular market can have a counter trend rally lasting years. That’s what Louise missed in 2004. I think we could have a big bear market rally from here, but dunno if it would be a new bull market.

  7. The Enlightened American » Portfolio Up +2.5% YTD 2009 and the View Ahead Says:

    [...] of gold and gold miners accounted for the higher returns (anticipated in the October and November commentaries).  Of course, these returns can quickly become a mirage, especially in the crazy, volatile world [...]

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