Freedom 45

Some stuff I read online 4/16/08

2008-04-16T12:03:00.001-07:00

The market is trading up big today on beats by JP Morgan and Coke. Jamie Dimon of JPM is claiming the worst is over. I think the next day or two will tell when we start to see some more financials reporting. Citi reports on Friday before the market opens and as a holder of C, I am anxious to hear what Vikram Pandit has to say.

Here is today’s list of interesting articles I have read online.

The Wall Street Journal has a list of the 10 richest hedge fund managers and how they got that way. An interesting read.

How The 10 Richest Hedge Fund Managers Got That Way

Under the heading of “context is critical”, Fortune is reporting that Jack Welch took a shot at Jeff Immelt. I heard the discussion on CNBC this morning and while Jack did use the words Fortune is quoting, it was definitely not as bad as suggested.

Here is the Fortune piece: Welch takes shot at Immelt over GE miss

Here is CNBC’s page on the comments: Jack Welch: GE CEO Immelt Has 'Credibility Issue'. Jack also makes some interesting comments on GE that make it sound like a nice buy.

Thanks for reading…

Disclosure: Long Citi (C)

Some stuff I read online 4/15/08

2008-04-15T10:47:00.001-07:00

It has been a while since I posted. As I mentioned 3 months ago, my day job keeps me pretty busy once a quarter (last week was a 70 hour week) so reading and writing are luxuries during quarter end.

We are deep in earnings season again and so far quite the mixed bag. While no one has blown the numbers away yet, there have been few big disappointments. The biggest was probably GE who surprised the market with a sizeable drop in earnings last week. The market then moved into worst case scenario mode and traded slightly down in anticipation of future misses. Johnson and Johnson posted some good numbers today so maybe it will be a catalyst to the upside. The big banks start reporting this week and hopefully they can put some nice spin on the remainder of the year. They have recently begun lightening the balance sheet of some of their less liquid notes so it will be important to see if there are any write-ups coming down the pipe.

Here is today’s list of interesting articles I have read online.

In the worlds worst kept secret, Delta and Northwest have agreed to merge, creating the #1 airline in the world. While there are still a number of hurdles to work out, the CEO’s are fairly confident this deal will receive approval citing recent decisions in Europe to help clear the foreign hurdle. I have always thought there was a better way to run an airline and was disappointed that Gerry Schwartz of Onex did not get the chance to take a swing at it a few years ago. I suspect he may have had the model.

Delta, Northwest agree to merger; now the hard part

Jerry Zucker made a lot of noise in Canada when he took over Hudson’s Bay, the first company in Canada. Jerry died this past weekend and there is a lot of concern and speculation over the future of the company, especially in the current retail landscape.

HBC sale would face radically changed landscape

Chad Brand over at Peridot Capital has an interesting piece on the underlying performance of FI’s. He points to Wachovia who reported earlier this week and suggests that 90% of the business is still profitable.

Despite Writedowns and Loan Losses, Core Banking Businesses Remain Very Profitable

I have mentioned in the past my small addiction to Starbucks (one of the key reasons I am not yet retired…and that is only partially in jest). The Portfolio Strategist has some positive comments on SBUX suggesting that it may be time to dip your toe in the triple-venti-non-fat-no-whip-mocha-latte. And maybe you can try one of their $2 donuts while you are there.

Is Starbucks Getting a Caffeine Boost?

Thanks for reading…

Should You Take Out A Payday Loan?

2008-04-14T13:32:00.000-07:00

Payday loans are becoming more expedient for people who have lost other forms of easy credit. That, however, doesn’t make them the best place to get an easy loan. There are reasons to avoid getting a payday loan , particularly if you think you can’t pay it back in time. Interest rates can be very high for such a short-term loan and they should never be used for non-essential purchases. You might even be able to get a cash advance from your employer. It might be a bit more embarrassing, but at least it won’t cost you as much and it will be taken directly out of your paycheck. There’s no danger of not repaying the loan when it’s from your employer.

The penalties for taking out a payday loan and not paying it back in time can significantly increase what you owe down the line. Also, just because you don’t have to have spotless credit to obtain a payday loan does not mean that defaulting on one won’t show up on your credit report. You should check out other sources of credit if you have great credit rating, although revolving credit like credit cards can be a long-term debt trap.

Having said this, there are occasions when using a payday loan makes sense. If you work in a financial industry or one that might not like to know your credit is in the dumps and you’re short on money, then you shouldn’t check to see if you could get a cash advance through your employer. Instead, opting for confidentiality in these cases can help you keep your job. If the emergency you are experiencing affects your health or your ability to keep working, it’s probably important to make sure the need is met immediately. In that case, a payday loan can be a godsend, particularly if your credit is lousy and you are trying to avoid late fees and penalties from other creditors.

Disclosure: This is a paid posting and does not necessarily reflect Freedom 45’s opinion

Some stuff I read online 4/3/08

2008-04-03T11:24:00.000-07:00

The market is trading to the upside today after a slight decline yesterday. I suspect this kind of action is valuable to the eventual upside move the market seems to want to make. Financials have been trading up nicely again which makes me quite happy. The talking heads on CNBC have been replaced with ongoing testimony on the Bear takeout. Not nearly as much fun.

Here is today’s list of interesting articles I have read online.

There have been reports recently that Apple stores are running low on iPhones leading to many analysts to predict that Apple will release its long awaited 3G phone imminently. Here is thestreet.com take on the shortage.

Apple Facing the Great iPhone Shortage

There is a piece on Seeking Alpha about Clorox. I had looked at Clorox as an investment about a year ago and never pulled the trigger. This piece makes we think it is worth a look in the dividend portfolio

Clorox: A Reasonably Valued, Dividend Growth Stock?

IBM has run afoul of the government and currently has been suspended from bidding on new deals with all US agencies.

IBM Takes a Hit - Suspended From New Federal Work

Only eBay wrote a piece outlining a fairly positive outlook for eBay Skype and PayPal divisions.

eBay Watch: Q1 Predictions for PayPal and Skype

Lastly, a piece on how Dell is using a social network to influence business decisions.

Dell's IdeaStorm: Social Network Driving Business Innovation

Thanks for reading…

Disclosure: Long Apple (AAPL)

Some stuff I read online 4/1/08

2008-04-01T09:42:00.000-07:00

The market is rallying nicely this morning on news that UBS is writing off $19B and Lehman is raising $4B (Note that Lehman is raising money not because they say they need it but because there are persistent bankruptcy rumors on LEH and they want to put them to rest). The Lehman offer is actually oversubscribed and is trading at a premium. When the market goes up…WAY UP…on bad news, that is a good sign for the bulls. Let’s hope that things do not get overheated too quickly and have as retrenchment as quickly as the run up. Volatility has been the name of the game of late so time will tell if this holds.

National City (NCC) has hired Goldman Sachs to help it pursue strategic options for the business. Widely speculated, this confirms that NCC is looking for a buyer for the business. The talking heads are saying this may be a big turning point for the market depending on what kind of a premium NCC might fetch in the market. A decent premium may just spur a big (or bigger) rally in financials.

Here is today’s list of interesting articles I have read online.

Reuters is reporting that Google is going to allow offline editing of Google Docs files. The technology, made possible by Google Gears, will allow users to update files when not connected to the net and will sync once they reconnect. I have often thought this was a fabulous idea and were this to come bundled with something like what the Palm Foleo was to be or what the eee PC is, I think you have a “killer ap”.

Google starts letting users edit documents offline

Rob Carrick over at The Globe and Mail has a great piece on the investment value of Canadian Financial institutions and uses input from StockPointer to EVA rank the FI’s.

Thinking of buying the banks?

Citigroup re-organized yesterday and sparked further speculation that the company may be split up. The most likely candidate for spin-off appears to be the credit card business which was re-organized under a global banner and split from the rest of the business.

Citigroup restructures, breaks out cards as new unit

Thanks for reading…

Disclosure: Long Citi (C) and National City (NCC)

Some stuff I read online 3/27/08

2008-03-27T12:04:00.001-07:00

After a brief run-up at the open, the markets are trading to the downside, largely lead by financials. Nothing catastrophic. All runs up will pull back and base at some point. Lets hope that this is basing and not resistance.

Here is today’s list of interesting articles I have read online.

Mark McQueen has an interesting note on the BCE takeover in light of the Clear Channel ruling yesterday compelling the banks to fund the deal. One of the highlights of the article is the fact that, even though these loans will likely be performing, they will need to be written down from the outset due to current market conditions. I have heard and made this argument several times with respect to the huge write downs being taken by the banks right now. I look for significant write ups in the future.

Clear Channel ruling will boost BCE shares

Chand Brand at Peridot Capitalist has a piece on the drop in values of CA homes. Looks like year over year there was a 26% drop in the average home price in CA. He also highlights recent ads by the National Association of Realtors claiming that housing is s great investment since it doubles every 10 years. That suggests a growth rate in excess of 7% annually for residential real estate. Maybe in a bubble but definitely not the norm. As with the sub-prime lenders picketing Bear Stearns, a little “talking your own book” going on here.

Yikes, California Home Values Drop 26% in February

The dividend guy has a piece on asset allocations suggesting starting with pension fund allocations as a base for allocation decisions. As one of the commenter pointed out, pension funds would tend to have a much longer time horizon than you or I, one can still use the concept in their own portfolio allocations. In a future post, I will write about duration that you can use to help match the fixed income portion of your portfolio to your investment horizon. I will also do some research and try to come up with a list of some of the better asset allocation models on the web.

Pension Fund Asset Allocations You Can Use

Thanks for reading…

Some stuff I read online 3/26/08

2008-03-26T10:29:00.000-07:00

The financials are getting spanked again today. Meridith Whitney is out with another nasty report on the sector highlighting her fears around Citi (I get the feeling she does not like them very much). Overall, the market is getting beat up a bit but only being down 130 on the financial weakness is not bad. I took advantage of the pullback to add Blackstone to my portfolio writing June 22.50 calls versus long stock. With management committed to a minimum 1.20 worth of dividends for the next two years, there is about 20% of downside protection to a stock that trades at half its 52 week high. I fully expect this to be a very profitable investment both through ongoing dividends and stock appreciation.

I was listening to CNBC this morning and a guest suggested a way to get the price of oil and other high flying commodities to come back to earth and it seems like both a pretty easy and possibly very effective one. Increase margin requirements for commodity futures. This would force hedge funds and other speculators to reign in their position sizes that many have blamed for the run up. Interesting.

Here is today’s list of interesting articles I have read online.

I suspect that there will be a lot written for many weeks and months to come about the Bear Stearns acquisition. Here is a great piece trying to get in the head of Jamie Dimon from JP Morgan.

Dimon's dog

With all the talk of US banks recapitalizing, Mark McQueen over at Wellington Financial has an interesting piece on the stealth recapitalization of some of the Canadian banks.

Canadian banks quietly rebuilding capital

Motorola is splitting itself into two. Carl Icahn has been lobbying for change at the tech giant for a while now and it seems that he may have won at least a small victory. I am curious as to the move since recently MOT said they were looking to sell off the handset business. Were there no buyers? Stock has moved off its opening high of 10.30 to trade 9.85 up a mere dime. Looks like the market does not think much of the move.

Motorola to split into two companies

And lastly, a piece on a Dividend Aristocrat, 3M. A great piece suggesting that it is on sale right now and that the dividend is primed for safe long term growth as a result of a lowered payout ratio over recent years.

3M Company: Dividend Aristocrat Available on the Cheap

Thanks for reading…

Disclosure: Long Citi (C) and Blackstone (BX)

Some stuff I read online 3/25/08

2008-03-25T09:45:00.000-07:00

I took a couple of days off so just getting back to some writing. Some notable non financial news: Tiger Woods win streak is stopped. That is right. Tiger played this weekend and did not win. First time in 7 tries. Next stop for Woods is the Masters which goes off April 7-13 and woods looks in fine form (as an aside…Tiger was on Squawk Box this morning and confessed to being an early investor in and current shareholder of Google). Kimi Raikkonen took round 2 of the 2008 F1 season and now trails Lewis Hamilton by three points. Of note is the success of relative newcomers Kovalainen and Kubica. Fourth and fifth overall, these two are some rising stars in the series.

One of my options posts (part 2) was highlighted in the most recent Carnival of Personal Finance hosted by Million Dollar Journey. The link to the carnival is here. Post 3 took a vacation with me last week so look for it soon.

Here is today’s list of interesting articles I have read online.

JP Morgan raised its bid to $10 for Bear Stearns yesterday. Part of the reason was a clause in the original contract that put JPM on the hook for trades made by Bear even if the deal did not go through. Bear trades at $11 as I write this so still some speculation that there may be another raise. A brief article below on the “line” that may have forced the raise.

Lawyers in spotlight over loophole

The merger of XM and Sirius moved a step closer to fruition yesterday when the justice department approved the merger. While the FCC still has to approve the deal, it is definitely more likely now than it was last week. That raises the question of the Canadian entities who at this point are separate entities from the US firms and operate under Canadian regulations. While I personally question whether the CRTC would approve such a merger easily, as the Globe and Mail article below highlights, it may be tough for them to continue to operate separately once the merger is concluded in the US.

U.S. ruling sets clock ticking on radio deal

I have mentioned before that I like the long term outlook for Blackstone and at $15 and change, a great buy (will likely enter this week). Here is an interesting piece supporting a buy in Blackstone.

Calling a Turn in Blackstone Group

And lastly, a piece on a Dividend Aristocrat, 3M. A great piece suggesting that it is on sale right now and that the dividend is primed for safe long term growth as a result of a lowered payout ratio over recent years.

3M Company: Dividend Aristocrat Available on the Cheap

Thanks for reading…

Some stuff I read online 3/19/08

2008-03-19T13:39:00.000-07:00

Here is today’s list of interesting articles I have read online.

So yesterday we did not get the historic 100 bps move many were predicting but the market did not seem to mind. After an initial pullback, the DOW popped quite nicely to end up 420 for the day. The open today was pretty flat but traded down in the morning and ended up giving back half of yesterdays gains by days end. Still a lot of fear in the market.

Today is Visa (V) day. I have outlined previously that I think the Visa IPO is one of the reasons to own NCC (and there are not a lot of others right now!!!). thestreet.com has done a great job outlining the pros and cons of the Visa IPO. I personally think that there are a lot of reasons to own Visa and that the stock will definitely be a performer over the next few years. I used to work in the industry and as far as I am concerned, there is somewhat of a license to print money here. Visa opened at $59 (up $15) and traded as high as $69 in early trading before pulling back to the $59 range. Not a bad start.

The Pros…
Five Reasons to Embrace Visa IPO

The Cons…
Visa IPO Brings Value, For Now

Office of Federal Housing Enterprise Oversight has given Fannie and Freddie clearance to lower their capital requirements and to raise additional funds allowing them to purchase 200B worth of mortgages. This should help the overall mortgage market by providing a buyer for a lot of issues that to date have been illiquid at any price.

Fannie, Freddie cleared to pump $200 billion into market

Thanks for reading…

Some stuff I read online 3/18/08

2008-03-18T09:51:00.000-07:00

Here is today’s list of interesting articles I have read online. Today marks a potentially historic day in the financial markets with the Federal Reserve expected to lower interest rates by a whopping 100 bps. There are still a lot of jitters in the market but a lot of people are pointing to yesterday’s action as a possible bottom in the market. We had every reason to be down 500 points yesterday but rallied instead to close slightly to the positive. When the market goes up on bad news, it is hard to argue the market is still in bear mode. Do I believe we have bottomed? No idea. I do believe that there are a lot of bargains out there and now is a good time to nibble a little more.

Financial week has an interesting piece highlighting how hedge funds, who through the use of massive amounts of leverage may have helped lead us into the current credit cycle may actually be the saviors of the market by stepping up with some much needed capital to shore up stocks and companies.

It could be the hedgies that ride to the rescue

Reuters has a great piece on Joe Lewis (No…not the candy cake) and how he lost over $1B betting that Bear Stearns was undervalued at $100 per share over the past 12 months. He is obviously not happy with the $2 “take under” (some have called it a “steal” announced on Sunday and is likely one of the reasons that Bear is actually trading at $7.30 a share as I write this.

Lewis takes $1 billion hit from Bear Stearns

Following on the Bear trade, Felix Salmon does a nice job outlining why Bear might be worth more than $2.

Why Is Bear Stearns Trading at $5?

Thanks for reading…

Some stuff I read online 3/17/08

2008-03-17T10:58:00.000-07:00

Here is today’s list of interesting articles I have read online. I will add that there is a crush of stuff written today and I have not even scratched the surface on what is out there. I actually opened up the e-mail from Seeking Alpha and was a bit overwhelmed.

I read an article late last week that for the life of me I cannot find again but will summarize here. A savvy investor bought 17,000 March $25.00 put options on Bear Stearns on Wednesday for about 0.25 (17,000 X 100 X 0.25 = $425,000). So for a little less than half a million, this investor had positive exposure to BSC as it fell. This trade was entered when Bear was trading for around $60. These options traded as high as $7.10 on Friday as Bear dropped to about $30 (making the position worth about $12MM). Not bad for 48 hours work. If this investor held through the weekend (which I suspect they might have) they would have had the chance to sell those puts for around $21 or a position value of $35,700,000 or an 8,300% return in 5 days.

Mark McQueen runs Wellington Financial in Toronto, Canada. Wellington is a boutique investment firm in the venture space that specializes in debt financing. Mark runs a near daily blog and has a great analysis (including a bit of humour) of the Bear take under.

JP Morgan inks the deal of the year

Matt Cooper from Conde Naste has an interesting piece on privatizing Fannie and Freddie.

Memo to the Next President

Thanks for reading…

A Primer on Options – Part 2

2008-03-14T12:58:00.000-07:00

Before I start this post, a reminder to all that the first round of the 2008 Formula One season goes off this weekend. It will take place in the wee hours of the morning for those of us in north America so you might want to record it! I hope some of you get to enjoy it.

This week I am going to expand on the options example I started last week. I will start by focusing on the profitability of the two options I started with last week and then will discuss a bit about what are referred to as “The Greeks”.

Let’s start with a look at a long call. Last week I looked at the Mar $30 for YHOO trading at 0.34 per share ($34 per contract as each contract controls 100 shares). The option buyer will pay $34 for the right to buy 100 shares of YHOO for $30.00 on or before the third Friday of March. Assuming for the moment that they intend to hold until expiration, the option buyer will make money as long as the stock closes above $30 plus the cost of the option ($30.34). Below $30, the option would be worthless at expiration (the holder could buy the stock in the market for less than $30 so would never exercise). So what does that mean? At any price below $30, the option expires and the buyer loses 0.34 per share. Above $30, the option holder has incentive to exercise. For illustration, let’s assume that the stock closes at $35 on the third Friday. The option holder can exercise the option and buy the stock for $30 and immediately sell it for $35 making a $5 profit. Subtract from that the 0.34 that the option cost and the net profit (excluding commissions) is $4.66. A profit chart for the Mar $30 option is shown below. You can see that, the maximum loss is the cost of the option but the profit is unlimited. To the right of the strike price, the profit diagram looks pretty much like stock (although 0.34 lower).

Put contracts operate in reverse. Profit is achieved when the stock goes down. The $30 put that we looked at last week cost $1.85 so breakeven for the trade happens at $30 - $1.85 = $28.15. At any point below $28.15 the put buyer makes money. Above $30, the option expires worthless and the put buyer loses $1.85 per share. Assuming that the stock at expiration trades for a price of $25, the put buyer can buy the stock in the market for $25 and immediately sell it for $30, making a $5 profit. Subtract from that the $1.85 they paid for the option and the net profit is $3.15. The chart below highlights the profit profile of a long put.

These two brief examples show the profitability of options but also the leverage capabilities inherent in the tools. For a 25% move in the stock up (from $28-$35), the call buyer makes 1,370% ($4.66/0.34). But of course, buyers beware. Speculating in options can be very profitable but can also be very costly. If you are right, you win big but if you are wrong you lose 100%. The vast majority of options (something like 80%) expire worthless so you will be wrong a lot more than you are right when speculating (next week I will talk about how you can use options not as tools for speculation but for income and risk management)

The examples above focus on expiration date moves. But what about before expiration? If you buy YHOO Mar $30 calls for 0.34 and the stock moves up a dollar, what happens? This is where the “Greeks” come in. The Greeks refer to the Greek letters given to various derivatives (the calculus version of derivative not the stock market version). The Greeks are:

Delta – measures the rate of change of the option price for a given change in the underlying stock

Theta – measures the rate of change of the option value over time (remember that an option contract has two types of value – time and intrinsic value)

Gamma – measures the rate of change of delta, the second derivative of price sensitivity

Vega – measures the rate of change of the option value relative to the volatility of the stock

Rho – measures the rate of change of the options relative to the interest rate

Assuming a delta of 0.50, a $1 move in the stock would represent a 0.50 move in the option. As a general rule of thumb, an at the money option has a delta of 0.50.

I will cover the Greeks in more detail next week (although I know now that I will not do them justice) and how they can be used in hedging. I will also cover some basic option only strategies.

And before closing, a little bit of OPC (Other Peoples Content). A co-worker sent me this the other day. I hope you get a chuckle out of it.

Thanks for reading…

Some stuff I read online 3/13/08

2008-03-13T10:24:00.000-07:00

Here is today’s list of interesting articles I have read online.

I own SHLD and am therefore extremely interested in what Eddie Lampert is up to. From my perspective, the reason for investing was never retail but real estate, brands, cash flow and what Eddie could do with those. Here is a great piece on the brands.

Unseen Value in Sears' Brands

Apparently, a couple of bankers and a couple of academics thought it a good idea to limit a banks ability to pay dividends during the crisis. Not good news for shareholders. Fortunately, it does not seem to be gaining much traction.

Calls for government to limit bank dividends

Thanks for reading…

Some stuff I read online 3/12/08

2008-03-12T10:58:00.000-07:00

I read a lot of stuff online. Some of it business related. Some of it investment related. Some of it just for fun. I am going to start a regular post where I will highlight some of the more interesting pieces I have read. For anyone interested in good quality commentary on the market should slide on over to Seeking Alpha. A lot of top drawer financial minds write and post things to Seeking Alpha (SA) and you can tell SA what type of info you want to receive and get a daily e-mail of everything posted on your topics. I find it a very useful resource.

Here is today’s list:

Felix Salmon writes for Conde Naste Portfolio (and sends his articles to SA) and has an interesting piece on credit default swaps on US Treasuries. Apparently someone out there thinks it is worth 16bps to insure against a default of the US!
US Default Risk Soaring

CNBC has a photo array of some “Spitzer t-shirts”. Kind of funny.

Spitzer Capitalism: The Tee Shirt Collection

Keeping on the Spitzer theme, here is piece on how he got caught.

How Client 9 Got Caught

Thanks for reading…

The Ultimate Dividend Rules

2008-03-11T08:45:00.000-07:00

That is the heading on the second last page of Josh Peters’ book “The Ultimate Dividend Playbook”. Josh is the editor of the Morningstar Dividend Investor, a dividend investment advisory newsletter and pulls together an excellent framework for analyzing stocks from a dividend perspective. His focus is on identifying those stocks that have a history of strong dividend growth coupled with solid earnings growth and the ability to pay and grow dividends in both good times and bad. In my mind, an excellent read and a must for any dividend investor.

Josh introduces the concept of a “dividend drill”. The dividend drill involves answering the following questions with respect to a company’s dividend:

1) Is it safe?
2) Will it grow?
3) What is the return?

To answer these questions, Josh highlights his investment decision making framework. First he discusses things to look for to determine whether the dividend is safe. Some key factors for him are historical growth rates, payout ratios, earnings stability and the what he calls willingness to pay which is an assessment of how committed to the dividend and its growth through good times and bad.

Under the heading of will it grow, Josh introduces the Dividend Drill Return Model (DDRM) which decomposes the current EPS to help understand how much of the current EPS is being used for dividends versus growth and what is left over (the Funding Gap). This analysis allows the user to estimate the overall expected return from a stock and where the growth comes from (capital gains versus dividend income) and what the affordable dividend growth rate is. The analysis is quite simple and elegant and presents a very nice summary of what you can reasonably expect for a dividend growth rate. What I like about the model is that, while it is quite simple, some of the inputs, like core growth rate, require you to do some homework. So while the model is simple to implement, it also forces you to go beyond the numbers and really understand the company.

He then implements a hurdle rate process that helps to rank stocks based on components of return. His premise is that for a given return (yield + growth), those stocks with high yields (and low growth) or low yields (and high growth) should carry a higher hurdle rate than stocks with a more moderate yield and growth profile. Basically what he is saying is, stocks that operate at the extremes of the yield or growth metrics are riskier than others and would require a higher potential capital gain component (what he calls margin of safety) to justify the risk. He compares this to Graham’s position of buying a stock for less than it is worth. Put another way, just because a stock is a good investment, does not mean it is a good buy at its current price. For the high yield or high growth stocks, best to let them come in a bit before buying. As part of this process, he reminds readers of the Gordon Growth Model and uses it as a tool to help pick that entry point.

Put together, Josh presents a fantastic approach to evaluating a company from a dividend perspective.

He also offers some insight into managing a dividend portfolio including what he considers appropriate diversification and thoughts on measuring success and in the appendices to the book, presents some specific thoughts on evaluating banks, utilities, REITS and energy partnerships.

You can get Josh’s book here:

The Ultimate Dividend Playbook: Income, Insight and Independence for Today's Investor

You can get info on Morningstar’s Dividend Investor here:

Morningstar Dividend Investor

Thanks for reading…

A Primer on Options

2008-03-07T11:32:00.000-08:00

This will be the first post in an educational series. I will be writing one piece a week on some topic of investing, partly to help people understand a little more about the process but partly for my own benefit. You see, part of the reason I started this blog was to keep myself honest. If I have to bear all to the world, I better be able to justify why I am making an investment. Same goes to the strategies and tools. If I am going to use a strategy or a tool, I should be able to explain it or I should not be using it. If you have any topics you would like to read about, drop me a comment and I will try to get a piece up. Options are one of those tools that are misunderstood and often misused and almost always underused. It will take a few pieces to cover options so consider this post one of three (although I reserve the right to invoke the Douglas Adams approach to numbering trilogies).

Options are derivatives. A derivative “derives” its value from another security. An option gives the holder the right, but not the obligation, to buy (for a call) or to sell (for a put) at a specified price (the strike) on or before a specified date (the expiration). Options are readily available on many different securities from stocks to indices to exchange traded funds and even futures contracts (I will talk primarily about stock options). The premium is what you pay to buy an option and in the case of being long, represents the maximum loss on your investment.

There are two types of options, European and American. The primary difference is when they can be exercised. European options can only be exercised at expiration. American options can be exercised at any time up to expiration (although there is only one time you would exercise rather than sell).

Options often get a bad rap in the marketplace as complex instruments only for use by mathematicians and Wall Street wizards due to their risk. Options can be risky, especially when used as a tool for speculation. But options can also be used to enhance income (covered calls), reduced risk (married puts), lower entry costs (cash secured puts) or as a pure income play (call and put spreads). There are literally hundreds of possible option combinations each of which has its own use and risk reward payoff. Over the next couple of weeks, I will cover some of the more common strategies.

Option quotes are a little more complex than stock quotes due to the fact that for each stock, there can be hundreds of option quotes. The table below comes from Yahoo Finance and looks at a quote for…Yahoo options.

Looking down the middle column, we can see the list of strike prices that are listed for YHOO for Mar ‘08 expiration. I will focus on the 30 strike for illustrative purposes. First thing to note is the current price of YHOO is $28.41. This means that the 30 calls are out of the money meaning they have no value other than time value. Options have value in two was. Intrinsic value is the value of the option net of time value and represents the amount the option is in the money. In this case, the YHOO 27.50 is 0.91 in the money. Time value represents the value of the right to purchase or sell before expiration. Reading from left to right, YHQCF is the option symbol for the Mar 30 strike for YHOO. It last traded at 0.34 down on the day 0.12. Bid/Ask are the same as for stocks. The next two columns are somewhat unique to options. The “Volume” column represents the number of options traded but may represent new or opening trades or closing trades where someone is exiting a position. The net of the two trades will be reflected in the next day’s Open Interest which represents the total of all trades that are still held in investor accounts. The right side of the chart is read the same way, just for put options.

Next time, I will continue the analysis of the Mar 30’s including how the positions make money and a brief discussion of “the Greeks”.

Thanks for reading...

A Little Game of Government Give and Take

2008-02-27T19:29:00.000-08:00

Two years ago, the Conservative Party of Canada toppled the minority Liberal government and won the federal election, regaining power after 13 years of Liberal rule, albeit in a minority capacity. Since then, the Conservatives have implemented a number of tax initiatives, some good, some bad. Here is a scorecard.

One of the first things the Conservatives did after taking power was to repeal two Liberal tax initiatives. One lowered the rate of tax for the lowest tax bracket and the other raised the basic personal exemption allowing people to earn more money tax free.

Taxpayers: 0 Government: 2

Fast forward to Halloween 2006 and after campaigning on a promise to not tax the popular income trust structure in Canada, the government announced that they were indeed doing just that. Income trusts lost their lucrative tax structure (allowing the entity to pay tax only on those earnings NOT paid to unit holders). New trusts lost it right away and existing trusts lost it after 2010. Trusts were to be taxed as a corporation would (Billions of dollars were lost in existing trust market values in the process). To offset some of the tax hit, the government played with the taxation of dividends. The government has long used a process of grossing up the actual dividend and offering a tax credit to try and eliminate some of the double taxation inherent in dividends. Concurrent with the trust taxation policy change, the government offered a richer combination of gross up/credit to move the law closer to no double taxation.

Taxpayers: 1 Government: 3

Fast forward to fall 07 and the Conservatives release their fall update (a sort of “mini budget”). This update included among other things, a decrease in the lowest personal tax rate and an increase in the basic personal exemption, effectively reversing their earlier reversal. While a number of people in the media and the Liberal party itself confirmed to me that this was merely a reinstatement of the Liberal policies, no one reported on it, INCLUDING the Liberals. (I find this interesting because no Politian I know will fail to take credit for a policy that is good and here the Liberals are not willing to take credit for a policy that is both good AND their own). The government also announced some changes to the corporate tax structure that, as a small business owner, I appreciate but as I will note below, had some hidden consequences.

Taxpayers: 3 Government: 3

Yesterday, the federal Conservatives released their third budget since taking office and in it they included a new Tax Free Savings Account (TFSA) proposal for all Canadians over 18. This account, to be implemented in 2009, allows Canadians to place up to $5,000 per year into the account where all earnings are tax free. This is apparently the governments solution to their election promise to allow Canadians to “plow gains back into investments” and defer the tax on those gains, a late campaign promise that pretty much everyone thought was both unwieldy to manage and too costly to implement. (As an aside, I am quite intrigued by the opportunities to use this new account as part of my dividend income portfolio…more to come on that as the rules get worked out). The hidden consequence noted above was made clear in yesterday’s budget and highlighted in an E&Y analysis. As a result of lowering the corporate income tax rate, the government was making adjustments to the gross up/credit structure for dividends. As a result, once all the corporate tax changes have been implemented, the new top marginal dividend tax rate will be a mere 30 bps (0.30%) lower than the old rate.

Taxpayers: 4 Government: 4

While the score is tied, I suspect that, at least in the short term and factoring in the market value loss of income trusts, the government side of the equation carries much more weight. In the medium term (5-7 years) when Canadians can start to feel the positive effects of the TFSA, the left side of the equation may start to close the gap but only time will tell.

Thanks for reading…

Disclosure: Stopped supporting the Conservatives when they stopped being Progressive

Tiger spanks Cink and some random thoughts on the market…

2008-02-26T12:16:00.000-08:00

In what was his second most lopsided victory in Match Play, Tiger Woods defeated Stewart Cink 8 and 7 in the final round of the Accenture Match Play to win for the third time in a row. His most lopsided win came against Canadian Stephen Ames when Ames made a comment prior to the match that he thought Tiger could be beaten. Tiger won that match 9 and 8 (for those not familiar with match play scoring, 9 and 8 mean that Tiger was up by 9 holes with 8 to play). The main difference between the two scores…the final round in the match play is 36 holes so Tiger took 29 holes to beat Cink 8 and 7…it only took him 10 to beat Ames. Note to PGA Tour players…do not challenge Tiger in public.

On the markets, things are looking positive after a weak open driven by a big IBM announcement that they are buying back $15 billion worth of stock. Stock buybacks are often taken as a signal that a company feels its stock is undervalued and hence a buying signal for the market. Concerns over stagflation continue to keep this market somewhat range bound but lately there has been more positive moves on negative news suggesting that a lot of the bad news may be baked into the numbers. This is a good thing and is needed to put in a bottom and start another move up.

I am reading a book by Morningstar analyst Josh Peters that has a lot of really good tools/ideas for dividend investors. I will definitely be working some of these concepts into my models and will be reviewing the book in this forum, probably next week.

Thanks for reading…

Caveat Emptor...even if it is free!

2008-02-22T20:17:00.000-08:00

A blog site I read pointed me to an article on another blog site that I have browsed on occasion outlining some of the tax benefits to incorporating a business and some tax strategies that could be implemented once you did. I own my own business so I was intrigued and went over to take a look. Some of the strategies employed in the piece were accurate and very valid tax strategies. Some were less so and only apply in special situations and some require the advice and input of tax and legal professionals to ensure that it is done correctly. Some, were just not true...at least not in the context described. I am not a tax expert by any stretch of the imagination (although I have often said I know just enough to be dangerous) but reading this article reminded me of how careful one must be when it comes to taking what seems like very credible information from a source that we may trust without first thinking it through rationally, hence the title of this post...Let the buyer beware. The old adage "if something seems to good to be true, it probably is" applies here. It is always good to plan for your personal and corporate tax situation in much the same way that it is prudent to invest with a plan, buy a car with a plan or even make dinner with a plan...just make sure the plan is grounded.

Tiger is still playing after the third round but Phil was eliminated. No 1 v 2 on Sunday.

Thanks for reading...and be careful out there

Match Play Underway

2008-02-20T08:44:00.000-08:00

The opening round of the Accenture Match Play championship starts today. Unlike normal stroke play, golfers go head to head, hole by hole until someone wins. Each hole is win, lose or draw and he with the most wins at the end…WINS. The interesting thing about this type of event is, if you can get hot, you can have a shot. The flipside is, if you have a couple of bad holes in a row, you can quickly fall out of contention. 32 players, 6 rounds and a whole lot of golf. Both Tiger Woods and Phil Mickelson come into the tournament with wins in their last events so there is definitely the possibility that the world number one and two will go head to head on Sunday. I do not usually watch a lot of the match play tournaments (having four golfers on the course the final day does not make for exciting television) but will definitely be checking in from time to time.

In addition to golf, I am a big fan of Formula One racing (and open wheel racing more generally provided it is not on an oval). Melbourne is the first race of the year and goes off on March 16. Kimi Raikkonen won the first round last year and will be looking to build on his championship winning season in ’07 with a first round victory. Lewis Hamilton, who in his rookie year lost the championship in the last race, will be looking to prove that last season was not a fluke.

The 2008 schedule can be found here: http://en.f1-live.com/f1/en/calendar/index2008.shtml

Thanks for reading…

FedEx has the best commercials

2008-02-15T07:18:00.000-08:00

I have always thought FedEx has great commercials and the last few they have done with the PGA for the FedEx cup have been great. Here is one of them.

Enjoy!

Sports Illustrated Swimsuit Indicator?

2008-02-13T08:25:00.000-08:00

I am often intrigued by things that seemingly intelligent, well educated people who we trust with trillions of dollars seem to follow in an almost superstitious way as forecasting tools for the market. The latest I have heard about is the SI Swimsuit indicator. It seems, in years that an American lady lands on the cover the S&P is up an average of 13.9% but in years that an non-American lands on the cover, the S&P ekes out a mere 7.2% return. Further to that, in American years, 13 out of 15 years have been up years where as in non-American years, only 11 of 15 years have positive gains.

The folks over at Bespoke Investment Group have published returns annually beside the nationality of the cover lady. Interesting trivia...

http://seekingalpha.com/article/64276-sports-illustrated-swimsuit-indicator-decidedly-bullish?source=d_email

Thanks for reading...

Disclosure: No position in the SI Swimsuit Edition

Taking aim at Blackstone

2008-02-11T08:58:00.000-08:00

Blackstone is a company that came to market last year with a lot of chatter around it. Run by Stephen Schwarzman, Blackstone is one of the giants of the private equity world. Blackstone sold common units in the management group of the firm to the market for $31 per share and after a short trade up, it turned south and headed straight for $17. There was a lot of chatter on the street about whether the Blackstone IPO marked a market top (If the smartest guys in the room are selling, should we be buying? went the argument). Well, turned out to be about right and the market has not been healthy since then. After initially keeping and eye on Blackstone I lost track of it and have not really taken a look in a while. I read a great piece on the weekend that changed that and I will be taking a closer look at Blackstone in the weeks to come. I have posted the link to the Seeking Alpha article below so you can go direct to the source but the basic argument is as follows:

-->Blackstone has a fantastic track record of generating positive returns
-->They earn 2% on assets under management and 20% of the returns on the portfolio in addition to other fees they earn in an increasingly diversified business
-->They are committed to paying the majority of the net earnings to unit holders
-->If they were to continue to grow at the current pace, Blackstone would generate upwards of 15B in revenues in 5 years giving rise to a share price north of $150
-->Current dividend yield is approx 6.8%

While I am not ready dip into the Blackstone waters just yet, the logic is fairly sound and does justify a closer look.

http://seekingalpha.com/article/63853-unique-opportunity-in-blackstone-group?source=d_email

As an aside, seekingalpha.com is a fabulous site for gathering investment ideas and doing research. I will be posting a list of some of my favorite sites soon but in the meantime, check out Seeking Alpha.

Thanks for reading…

The Case for Keycorp

2008-02-08T07:45:00.001-08:00

KeyCorp is the holding company for KeyBank, a full service provider of banking services to individuals and corporations. Its current price of $25 is up 25% from its 52 week lows but still 40% off its 52 week high. Its dividend of $1.50 per year provides an approximate 6% yield on its current price and has a history of regularly increasing the dividend. (One of the objectives of my dividend portfolio is to identify good firms with increasing dividends that overtime will yield substantial dividend yields based on my initial base). KeyCorp trades at just shy of 11X forward earnings which is a below the industry average of 12.15X. Earnings estimates have been substantially cut in the last few months (as for most FI’s) so the risk is more to the upside on earnings (my thesis is that, overall, the financial services market has priced in more downside than there ultimately will be and the banks will start surprising to the upside before the end of the year). Overall, I think KeyCorp has potential for long term steady growth in both earnings and dividends making it an ideal candidate for the earnings portfolio.

Overall, the portfolio is over-weighted to the financial services sector right now, primarily because of the incredible buying opportunities caused by the sub-prime situation in the sector. I expect that the next purchase will be outside of financial services and I am currently looking at AT&T as a potential buy as well as Disney.

Thanks for reading…

Disclosure: Long KeyCorp (KEY)

Super Tuesday, Win # 2 and a National City Note

2008-02-05T08:02:00.000-08:00

A bit of a catch up blog and a promise to write about KeyCorp soon…

Today is Super Tuesday in the US. A total of 24 states are holding primaries today and there is still not a clear front runner in either party. John McCain has the best chance of being the Republican nominee primarily as a result of the large number of winner take all primaries the republicans are holding but Mitt Romney is still in the hunt and may survive today to fight another day. With Hilary having a mere 6 point lead over Barack and a lot of proportional primaries, the democrats look to be fighting over the nomination for some time to come. I have heard a lot of debate recently over whether it is better to have a woman nominee or an African American nominee and every time I hear the argument, I am reminded of Denzel Washington’s response to a reporter after he won the best actor Oscar. The question was basically (and this is not an actual quote) “when do you think the press will write about an actor winning the Oscar and not a black actor”. Denzel’s response was simple and elegant “I guess you can make that call” (again, not a direct quote). The point is this. Man, woman, black, white should not be the issue. Best person for the job should be the criteria. Hard stop.

Tiger Woods continues his perfect season with a win in Dubai. While not the trouncing of the field he delivered last week, as my father used to always say, they only ask who, not by how many. Many have said that Tiger is not good for golf. His domination makes the game less interesting than it could be if he were not in the field. While the performance at the Buick is definitely an example of why people make the argument, I for one think the game is better for him being there. He has over his career brought a lot of highlights to sports shows (who can forget the hanging swoosh at the Master’s). He has brought an emphasis on physical fitness to the sport and through his success has donated millions of dollars to charity. He is a big supporter of kid’s golf and the benefits to children being involved in a game where good sportsmanship is key. I personally think that his dominance has made the rest of the field raise their game to a level they may not have reached (who in the field does not want to go in the books as the guy who beat Tiger head to head?). And lastly, anyone who has seen Tiger playing on a Sunday when he is down a stroke knows it is a thing of beauty.

Finally, a note about National City (NCC), a stock I have been long for a little while now that I have not had a chance to write about. National City is a regional bank in the US who is in the odd situation of owning a substantial piece of Visa International. After the expected IPO, NCC will own between 4.5% and 5% of Visa. I bought NCC at $22 for the Visa exposure and for its rich dividend. While the dividend is not nearly as rich as it was when I bought (still a 4% yield on my purchase price), I believe the company is incredibly undervalued. A quick breakdown of why I think it is undervalued:

->Mastercard is worth about $24B dollars.
->Visa is larger than Mastercard and at an assumed 1.8X would carry a market cap of $42B
->NCC’s piece of that would be about $2B
->NCC has a current market cap of $10.5B meaning its core business garners an $8.5B valuation
->Current 2008 average estimate for NCC is to earn about $1.59 per share meaning NCC trades at about 6.8X forward earnings.
->If we look at the industry average of about 12X, NCC’s core business is worth about $19 per share plus the Visa piece give NCC a target of about $22 per share or at least $5 above where it is.
->Running the same math across the trailing twelve months (about $1.90 - which includes one quarter of write downs) and the price comes up to $26. Going back a year to a non sub-prime result and EPS pops to $3.70.

I think it is pretty clear that NCC does not have to recover a lot to see a nice little run up in its stock and the realization of the Visa IPO expected later this year will help. NCC has a long history of positive dividend payments will help cushion some of the short term downside risk.

Look for a KeyCorp note soon.

Thanks for reading…

Disclosure: Net long National City (NCC) and KeyCorp (KEY)