The Low Price/High Yield Portfolio

Today, I want to talk about my little low price/high yield portfolio that I started last summer. It came about because I had some money invested last spring in some short term private corporate bonds that were yielding 7% and matured in three months. Not a bad deal - until I got a notice last summer that the next series were only going to yield 5%. I said to myself, surely I can do better than that with some nice dividend paying stocks. The idea was to find some stocks that would give me at least the 7% yield I had been getting on my bonds and also potentially provide some capital appreciation. That would be icing on the cake.

So I did a stock screen for stocks that yielded 7% or better, had at least 300,000 average volume, were priced under $6, and were technically oversold. The volume is important because it helps narrow spreads and assures you of some liquidity. Why low price? Simple - choosing low price stocks allows me to buy more than one round lot of each and that gives me more flexibility in how to play the trade. I can buy or sell fractional positions that way as the price changes. My little trading account is too small to do that with a $50 or $80 stock.

So here's what I came up with, back in July (the prices and dividends are as of today):

Symbol Price Dividend Name

AOD 5.83 11.32% Alpine Total Dynamic Dividend Fund
CIM 4.02 17.91% Chimera Investment Corporation
RSO 6.54 15.29% Resource Capital Corp.
NRF 4.12 9.71% NorthStar Realty Finance Corp.
SPIL 5.13 15.80% Siliconware Precision Industries Co. Ltd.

A financial, a property management, two REIT's and a tech. That's fairly diversified and avoids putting all my eggs in one basket. And it yields an average of 14.01%. That's not quite the 35% return I'm getting on my swing trading, but it handily beats the 7% I was getting with those bonds. Plus, since buying these last summer, I now have just over 6% of my original investment in capital gains, which increases my yield even more, and provides some cushion against market downturns. Even if all these stocks do is break even, I'm still making money.

Since last summer, I've added three more names to the LP/HY portfolio: DHY, JRO, and ANH.

Here they are:

ANH 6.91 13.31% Anworth Mortgage Asset Corporation
DHY 2.95 10.78% Credit Suisse High Yield Bond Fund
JRO 11.83 6.59% Nuveen Floating Rate Income Opportunity Fund

Another REIT and two bond funds. And technically, JRO, trading at 11.83 isn't all that "low price", but it rates as an honorary member of the portfolio because it pays its 6.59% dividend monthly rather than quarterly. And as we all know, it's always better to get paid sooner than later.

Of course, with dividends averaging well north of 10%, you might wonder if this portfolio is risk-free. Of course not. With this kind of return, there's always a risk involved. The risk comes in two flavors: one, the company could decide to issue new stock, thus diluting existing shareholders. CIM recently in fact did just that dropping from 4.04 to 3.86 in one day. Interestingly, however, two days later it was trading right back at the level it had been before the announcement.

The other big risk is that a company will cut its dividend. That hasn't happened yet here, but I think I now have enough diversity and profit to guard against that. Unfortunately, both of these risks tend to pop up suddenly and without warning. On the other hand, risk and profit go hand in hand. Going for higher yields always implies taking higher risk. That's why I'm not 100% invested in CIM, the highest yielder of the group.

And if my trading generates a better yield than this, why bother with this particular strategy? Because this portfolio doesn't care if I had a good week or bad - the return is always there (obviously modulo the caveats above). I'm not saying to buy any of these, but they're all at least worth a look. Just some food for thought.

Downtrend Broken

When I posted my 1 AM update last night, I was expecting an up day today. I was rewarded beyond my expectations, to the tune of +1.76%. That certainly helped take the sting out of the miserable day I had on Tuesday. Today's 173 point gain was so big it took us clear to the top edge of the descending RTC channel in one day. According my RTC method, this is only a bullish setup, not a trigger, but because the indicators are all looking so bullish, I am now turning the short term swing trend arrow from red to green. I believe that the downtrend established on 11/08 is now over. I put my long hat on late last night; it remains on for tomorrow.

Trades

Today I found a new name to add to my low price/high yield basket: ANH, Anworth Mortgage Asset Corporation, yet another REIT. It is currently yielding an impressive 13.35%. I bought it at 6.88 today and it closed at 6.89. Overall, the basket is performing nicely.

I am tickled over having been able to get some JRO the other day. It added another 7 cents today and looks to have still plenty of room to run. It's now yielding 6.61%, but keep in mind that it pays that monthly, not quarterly. I bought some for my IRA too.

The GM IPO

Well it seems like everyone else in the known universe has something to say about the GM IPO, so I might as well too.

I tried to get in on this IPO when the talk was of pricing it in the low 20's. However, neither of my two brokers would give me any shares, being as how I am simply a mere mortal and not a billion dollar hedge fund or my own country.

Then it got really popular. Then greed raised its ugly head. The price went up. They issued more shares. And here's the net result, in a day's worth of five minute bars:It finally priced at 33, but for us peons, it opened to the public at 35. Then, after a little bouncing around, it was all downhill after 10:45 AM. It finally closed at 34.19. If you had bought at the open, you'd be underwater now. If you had gotten in at 33, you'd have an underwhelming 1.19 profit.

Which is not to say I don't think the New GM will eventually go higher. But I think it revisits the zone where it was originally supposed to IPO before that happens.

Now where have I seen this movie before? Oh yeah, IBKR, Interactive Brokers, another IPO that generated a ton of hoopla before it opened on 5/4/07. By some strange coincidence, the prices were pretty close to GM's today.

There was a lot of interest. IB raised the price. They diluted the offering. By the time it hit the floor, it was at 33.00. It hit a high of 34.25 that day before closing at 31.30. Sound familiar? So then what happened? Let's look at the first couple of months on its daily chart, back in 2007:A month after opening, it was trading at 26. It briefly flirted with 35 in early 2008. Today it's at 17.80. (Disclosure: IBKR is my trading broker).

Would I buy GM tomorrow? Heck no. I like the company, I drive only GM cars, but I'm not rewarding this sort of greed. Sorry guys. I'll come back and visit when you're down in the low 20's.

A turning point

Yesterday, I was thinking we might see a bounce today. It turned out to be more like a thud than a bounce, with the Dow down 16, the Nasdaq up just 6, and the S&P essentially flat. However, and you can call me an optimist, but I think the important take away here is that the bears were unable to drive the market any lower today after yesterday's big bum's rush to the downside.

Add to this the fact that the indicators are all looking oversold now (and the stochastic is about to make a bullish crossover) and I think it might be time to call the recent downtrend over. Note also that tomorrow is GM IPO day. I'm willing to bet that that by itself will have a positive effect on the market as a whole. And the futures are all up about a third of a percent at the time of this writing (7:50 PM EST).

However, according to my RTC method, we don't even have a bullish setup yet, much less a trigger. We remain way below the lower RTC line in the descending channel (though that in itself can be bullish, going by a "reversion to the mean" theory). So we're now at one of those critical junctures: the bear raid may be over, but it's not quite time to hit the "all clear" siren.

Accordingly, tomorrow I will be reaching for my long hat, though not quite putting it on just yet. And the red downtrend arrow remains in place, if only because I'm from Missouri (well, I'm not really, but I still want the market to show me) so I'll wait another day or maybe two for a bullish confirmation before calling the downtrend over. So tomorrow is looking like a good day for the adventurous to go long. Everyone else, just wait a bit.

1 AM Update

Right now, all three futures are up strongly, and have been trending up since 5 PM. ES is now up 0.83%. NQ and YM are also up about 0.75%. The daily ES chart has formed a classic bullish stochastic crossover. Based on this, I am going to have to put on my long hat for tomorrow after all, despite the lack of RTC confirmation. We'll see if I'm right or not.

Trades

Today's big trade is one I didn't make. Way back last spring, I thought it was a good idea to stock up on DRYS, the dry shipping company. Well, shortly after getting in my DRYS sank like a Liberty ship in a U-boat attack. Today, however, after the close DRYS reported better than expected 3rd quarter earnings and it took off like a V2 rocket in the after hours trade. Thus proving that sometimes you can turn a trade into an investment after all, and more importantly that it's better to be lucky than good. I ended the day up nearly 1%, mostly on the strength of that one stock.

Aside from that, my JRO was up 21 cents, and my silly OMEX spec trade was down a mickel. C'mon guys - I want some pirate gold!

Ever lower, but maybe a bounce?

Today's action could only be described as just plain ugly. The Dow dropped clear down to the lower Bollinger band at 10,977 before rebounding a bit to close at 11,023.50.

But there is a silver lining to this carnage. After a long wait, it looks like Wall St. is getting ready to hold a sale. A lot of stocks on my watch list that until recently looked overbought are now starting to look oversold.

So where does this leave us? We are still way in downtrend territory according to the RTC, so I must leave the red arrow in place for the short-term trend. However, you can see how oversold all the indicators look after today's action, so at least a one day bounce tomorrow would not surprise me at all. For now at least (8:30 PM), the ES is up 300 and the NQ and YM are also in the green. But because of the magnitude of today's losses, I think a short term trend change now becomes anywhere from four to six days away.

Trades

I dipped my toe in the water today and picked up two interesting stocks. First I bought some JRO, the Nuveen Floating Rate Income Opportunity Fund. I've had my eye on this one for a while, but couldn't find a good entry point. I think today provided one. It is currently yielding an attractive 6.72%, but what makes this really interesting is that they pay out monthly rather than the usual quarterly. I like that.

My other buy today was OMEX, Odyssey Marine Exploration. You may have seen their show, "Treasure Quest" on cable. OMEX at 1.92 is looking oversold. I'm not expecting to get rich on this one - it's more of a vicarious play. I can't be on the Odyssey Explorer hunting for sunken pirate treasure (arrrgh!) but I can buy a few of their shares. OMEX has limited downside at this level and if they should happen to hit some major shipwreck brimming with gold dubloons, it could take a nice pop. It's just a fun trade. We'll see how she sails.

And just to show I don't always talk about my winners, my entry into TIE last week was poorly timed. I've got some unrealized losses on this one, but I'm going to hang on anyway.

The War on Terrorism is Over: We Lost

This blog is usually for stock market commentary and forecasts, but this is an issue too important to ignore, particularly with the upcoming holiday travel season just getting underway. I hate to break it to you but the War on Terrorism is over, and we lost. Yes, it's true. A few dozen suicidal lunatics armed with nothing more than box cutters, exploding shoes, and flaming underpants have managed to make a mockery of the United States Constitution and turn our country into a police state that would have made Adolf Hitler proud. I'll bet the Gestapo would have loved to have machines that could see you naked under your clothes. For that matter, our own TSA is getting to resemble the Gestapo more and more on a daily basis.

If you have any plans to fly commercially now, get ready to check your Fourth Amendment rights (you know, that's the one prohibiting unreasonable searches) at the door when you check your bags. You can now expect to be placed in a machine that bombards you with x-rays that can see right through your clothing and produce a nude picture of you for the titillation of some TSA voyeur in his own personal peep show room off to the side.

And forget all the TSA nonsense about how the images are "blurred" or just "outline sketches". They have five different modes or varying detail, along with a software "magnifying glass" the operator can move about to examine ahem, "areas of interest". I'll bet. And if you refuse to be subjected to the humiliation and indignities of this creepy system, you then have the "option" of getting the hands-on "groin check" from another TSA goon in a process that would get them thrown in jail if they tried it on a stranger in the street. And if you refuse that "option", you apparently will now be subject to arrest, evidently for having the temerity to assert your rights as a citizen.

It would be one thing if this outrageous new invasion of privacy actually did anything for airline security, but it doesn't. The TSA is always one step behind, fighting the last threat that will never happen again. The box cutter hijackings stopped as soon as the passengers realized that they had to stand up to them instead of cooperating. One idiot tried to blow up his shoe, just one - so now everyone has to take their shoes off. It never happened again. Then we got some never fully explained threat of "liquid bombs", so now you can't take a tube of toothpaste with you anymore. Then some moron set his underwear on fire, bringing us to the sorry state we find ourselves in now with virtual strip searches and groin checks.

What's next? Well, it should be pretty clear. The final frontier for these Moslem psychotics is to use the same techniques drug smugglers have used for years. And it should be clear where that will lead, since the current machines don't "see beneath the surface of the skin". Are you up for a colonoscopy before every flight? Does that sound absurd? Would anyone have believed the current state of things 20 years ago?

Not to mention the complete idiocy of subjecting the pilots to these sorts of things. Hello - once the pilot is locked inside the cockpit behind those new Fort Knox bank vault doors all the airlines installed to keep bad guys out, the plane is going anywhere they feel like, no matter what they did or did not bring on board. The stubborn failure of the TSA to even acknowledge the stupidity of this just makes them look like idiots.

Bottom line: enough is enough! We, the traveling public, must draw a line somewhere while we still have any freedom left at all in this great country. I urge everyone who reads this to call and write to their congressional representatives and demand that they put a stop to this outrage. Here's a sample suggestion:

I am writing to you for help with the outrageous new methods being forced on air travelers by the TSA, specifically the digital strip search machines and their equally creepy alternative, the so-called "groin check".

It would be one thing if these outrageous invasions of privacy actually did anything to improve safety, but they don't. Make no mistake, the "safety argument" is a non-starter. What this is about is a government bureaucracy gone wild and doing something simply because it believes it can steamroller the American public. This is a ploy on the part of the TSA to justify their existence and promote the illusion of security.

I won't even go into the obvious and egregious violations of the Fourth Amendment involved here. This new Gestapo-like behavior by the TSA must stop. Enough is enough! I realize you don't have a personal stake in the matter since you get the VIP treatment end-to-end, but please have some pity for the ordinary citizens who are now being subjected to a degrading and humiliating experience that violates the basic liberties we hold dear as Americans, not to mention common decency.

I appeal to you to do something to rein in the TSA and put an end to the strip-searching and groin checking. This has gone WAY too far. Thank you.

And if you're still not convinced, check out these web sites:

flyersrights.com and
fedupflyers.org

Some of the stories there are as scary as they are appalling.

Go to the US Travel Association and fill out their survey to tell them what you think of this.

And if you want to see for yourself the TSA's own policy manual, you can find it here.

Oh and, by the way, if you're wondering whether all these rules apply to TSA employees, well they don't. They have exempted themselves from the groin check (it's all in the manual). And at the big unveil of the scanners, Janet Napolitano, head of the TSA, declined to go through for the demo, assigning the task to one of her flunkies. Members of Congress, to the surprise of absolutely no one, are also exempt.

A failed rally attempt

Today we saw an attempt at a rally following last Friday's negative action. Things were looking good until around 2 PM when all the day's gains evaporated leaving us with a gravestone doji. However, note that while a GS doji in an uptrend is a bearish pattern, a GS in a downtrend is bullish. Note also that the indicators are starting to look oversold. The RSI in particular has declined to its lowest level since last August just before the big uptrend began. But volume today was lighter than yesterday. Go figure.

In addition, we remain firmly in the descending RTC established on 11/5. On that basis alone, I have to leave the red trend arrow in place. So where does this leave us? The bullish gravestone doji is a pretty rare pattern. I went back through 10 years of daily Dow charts without finding another one like today's. The next support level int he Dow is at 11,150 and the lower Bollinger band isn't til 10,971. Today is one of those indecisive days where I can't figure out which hat to put on tomorrow. Either the bearish RTC trend continues, or we see an uptick motivated by the GS doji. There's really no way to tell so I will continue to stand aside.

Trades

Today I bought another 100 shares of DHY. I figure for a total investment of $293, how wrong can I be? Other than that, I will wait until I see evidence of a turnaround before committing more money to this market.

Weekly review

The past week was interesting because it featured a trend reversal. Let's take a look at it on the daily Dow chart:I have added the new RTC downtrend to this chart starting from the 5th. Notice how we continued lower once the Dow fell below the lower line of the ascending RTC. That was the bearish confirmation that the uptrend going back to August 31st was over. We can see that we're actually below the new descending RTC.

However, we also see that all of the indicators I follow (stochastic, RSI, momentum, and money flow) have decisively come off their overbought levels. On the other hand, none has yet reached oversold levels yet. So to gain some perspective, let's look at the weekly chart:

Technically, this picture looks at least as bad as the daily chart. The indicators are off their overbought levels but not nearly as much as on the daily chart. Also, last week's long red candle looks very nearly like a dark cloud cover and that's never a good sign. Look also back to the end of the April rally and see how it ended. The similarity to the past two weeks is a bit disconcerting. I'm not exactly expecting a huge drop this coming week like the one that followed the April run-up, but I don't think we're in for any big recovery either.

On the downside, it looks like the next stop is the 200 day MA at 10,957. That level should provide some support if we head lower tomorrow. And speaking of tomorrow, I note that as of this writing (7:45 PM) all three of the major futures (ES, NQ< and YM) are up by non-trivial amounts. In fact, the ES is now showing as oversold on the indicators. And it's not really unusual to see at least some sort of bounce after a bad week before continuing lower. And that's pretty much what I expect right now. So I'm taking my short hat off for tomorrow but keeping it handy for later this week. But I'm also leaving the red arrow in place for the daily trend, just because the daily RTC is so dismal.

So the general take-away is that Wall St. is getting close to putting on a sale, but I'm not quite ready to go shopping just yet. Soon though. We'll see how the week plays out. If the PIGS can manage to stay out of trouble for a few days and if our esteemed president can keep his foot out of his mouth and refrain from torpedoing the economy for a change, we may see some more upside before the end of the month.

Performance

Last week was not good for me. I lost 1.7% compared to a 4.3% gain the week before. The only consolation is that the Dow lost more. Even so, I'm still up 24.57% year-to-date and on track for a 34.92% annual rate of return. My win/lose ratio by day is 1.56. My low cost/high yield basket of stocks was off last week but all are still in the black. Since I'm only owning them for the dividend, I'm not overly concerned with that at this point. Capital appreciation on these stocks is just the icing on the cake.