Third Stress Test

I had a spectacular week, thanks to the Federal Reserve's "Comprehensive Capital Analysis and Review" or third stress test of the largest banks (and bank holding companies). The summary report can be found here.

These tests were the most rigorous so far. The Fed's assumptions were that unemployment jumped to 13%, real estate prices fell by 21%, and equity prices fell by half. After this "worst" case scenario, only 4 of the 19 banks were found to have insufficient capital. Among the 19 banks, they have current aggregate tier one capital coverage of 10.1%, and under the stress test, that number would fall (in aggregate) to 6.3%, above the 5% minimum.

The losers were MetLife, Citibank, Ally (formerly GMAC), & SunTrust. More importantly, there was a spectacular winner and I'm not talking about what would happen in another downturn. Bank of America's stock price took off like a rocket this week, ever since JPM got the scoop on the Fed's announcement Tuesday:


The WSJ included the following graphic in a Wedensday article about the results of the test. This shows the strength of the banks' balance sheets in the Fed's 2012 stress test, as well as what they were in 2009's test:

As you can see from the report, all banks have significantly improved their positions over 2009. However, I think that as it's been mostly bad news out of BAC, people were more pessimistic than they should have been. CEO Brian Moynihan has brought BAC back from the brink by shedding non-core assets and repairing the balance sheet. A giant pile of money from the taxpayer never hurts, but I think this test makes clear that you also need good leadership at the top. I'm hesitant to put more money into BAC stock, even though it looks poised for more gains.

That's stupid

So, I filed my taxes for 2011 and I received a pretty sizable tax break for my AgFeed losses. That's pretty crazy. Why does the federal government subsidize my gambling?

Margin & Options

There's enough risk in my portfolio that I've a had a great 2012 so far. My 2011 was horrendous, posting losses of 27%+. I'm up 24%+ so far this year, but well under my peak of January 2011. I bought more BAC at $6 a share, which was pretty spectacular. It's trading over $8 now, so I've realized some gains there. I'm still averaged at about $10.50, so I'm down 22% overall. The only winner I had in 2011 was my Pimco bond fund, (NYSE: PHK) which I sold in January, taking a 20%+ gain over about a year.

I'm taking Derivatives right now with Alan Marcus, author of 'Investments.' His textbook is used by something like 75% of all MBA programs in the world. I can't remember the exact statistic, but BC used that as a selling point when I applied. Most of the class (including me) did poorly on the midterm. It was a pretty hard test, but it was the first time in my program that I haven't aced something. I think part of the problem is that I have no experience trading derivatives. It's all very abstract to me. In any other class when we learn something new, I can come home and actually try to replicate it with my own stocks. In order to take a bit more from the class, I just added a margin account and options trading to my brokerage account. I'm not about to add leverage to my portfolio or sell puts or something, but I may try to hedge out my market risk in an effort to learn how it's done. That may or may not be a good idea with my portfolio, but the Dow is at 13,000 and it seems like a good hedge at this time.

I'm also headed to the Berkshire Hathaway shareholder meeting in May. BC has three seats at the meeting, so they give them to interested students. I applied aggressively (in the same way that I got into the MIT Sloan class) and booked my flights last week. I'll try to take lots of photos and post them here. I'm sure the coverage of that meeting is pretty comprehensive anyway, but maybe I'll be able to add something.

2011: Let's All Try to Forget It

I had a horrendous 2011. The Dow was up 5.5% for the year, but I was down a staggering 27.5%. Without AgFeed, I still would have been down 14.9%. I sold my AgFeed position at the end of August for $1.012 a share. It stopped trading in December at $0.39. There's now a class-action lawsuit against AgFeed, but unless they're insured against the losses, I doubt I'll see anything. Well, it sucks, but better men than me have been burned by sketchy Chinese equities. See: John Paulson.

I've plotted my returns since 09/30/2008 against the Dow 30, above. I was outperforming the market from March of 2009 to March of 2011, but I've since eaten it. There's a lot of risk in my portfolio, so I can wait on a rebound, but I may have a really weak porfolio. I'm not getting rid of my casinos and my only winner has been the Pimco-managed bond fund (NYSE:PHK). I bought additional shares of Bank of America at $6, which will probably bite me in the end. The graph below plots my excess returns (the difference between my performance and the Dow's). If the graph is positive, I'm beating the Dow and if it's less, I'm underperforming. Proof I suck. I'm learning a lot in my Master's program, so when I'm less busy at work, I hope to revisit my portfolio and fix its weaknesses. Until then, I'm just praying for a rebound.

WHOOSH!!!!!!!!!!!!!!!

Stupid Investors: So, how was your Q2, guys?

AgFeed, Industries: Not good.

Has AgFeed Turned?

Since June 10, 2009, AgFeed has been losing value. It's been more or less a straight shot to $1.00 from $7.96 a share. That's an 87.4% loss for anyone keeping score. So, imagine my surprise when this past Friday, it closed 82% above its May bottom.

My AgFeed position, when fully purchased, was 26.6% of my portfolio. The losses have been huge, and single-handedly responsible for my weaker 2010 and 2011 performances. Since January 1st, the Dow has risen 9.5%, yet my YTD returns are -4.3%. If AgFeed was only worth what it was on January 1st, I'd be up 3% YTD. So AgFeed's performance has lowered my whole portfolio's returns by 7.3%. However, I haven't sold it because I don't buy the valuation. At its bottom, its equity was worth $52 million. Bananas. So it looks like it could finally be turning, but I'm too scared to do what I want to do: sell everything I own and load up on AgFeed. This week, while I'm not actually working or in class, I'll be watching the market.

LVS purchase

I bought shares of Las Vegas Sands at $41.79 with all of my remaining cash. That puts quite a large part of my portfolio in Vegas (and Macau).

I've chatted up my Corporate Finance and Investments professors and found that they're both holding cash. Almost entirely. They're very pessimistic about the future. And both wrong. Hopefully.

End of 2010

Going into the end of the year, I'm holding:

21.68% of my portfolio in shares of PHK at a cost basis of $11.94 a share; 17.89% FEED at $3.99; 28.98% MGM at $10.16; 13.60% BAC at $14.80; and 17.85% in cash.

As of 12/30, I'm down 10.26% on BAC and down 32.55% on FEED. I'm up 5.11% on PHK, although I bought it for the 12% dividend, and I'm up 45.89% on MGM.

Happy New Year!

PHK

Bought 167 shares of PHK at $11.94. It's up 5%+ in a few days, but I'm holding it for the dividends. At $11.94 a share, it's paying 12%+ a share in dividends, annually. And I love that it pays out monthly. PHK is an ETF, the first one I've purchased in my discretionary account, but unless this thing goes to $14 a share in the short-term, I'm a long-term holder.

VMW Sold

I sold my shares of VMWare today at a 90% gain. It'll be a long-term capital gain on my taxes, just barely. I'm holding 40% cash as the market is at a 2 year high and I'm not sure where we're headed in the short-term. There's enough return and risk in my AgFeed, MGM Resorts, and Bank of America.

Verizon Sold

I had originally bought my shares of Verizon for the 7% dividend. I checked the other day (October 5th, the day before ex-dividend date) and I was up more than 20%, so I sold my entire position. I figured it was like getting three years of dividend payments early, so I got out. I'll wait to see if it falls a bit post-dividend (maybe not now that the iPhone is officially coming to Verizon's network).

Financial Accounting & Grad School

I'm applying to MSF programs right now and I'm getting pretty excited about the prospect of going back to school. I've chosen two part-time programs and one full-time program, although my preference is to keep working. I took a look at some of the prerequisite courses for the Carroll School of Management's MSF program and I need to have taken Financial Accounting before I can start. I requested a FA textbook (Weygandt, Kieso & Kimmel, 2nd ed.) from the Minuteman Library Network yesterday. I'll just read through it on my own and then test out of the requirement. I'm actually pretty jazzed about learning financial accounting since I've been trying to read through financial statements for 2 years now without any idea of what I'm doing. I've been piecing it together as I go, but it'll be nice to have some direction.

I'm up 8% YTD 2010. I hit a high for the year at the end of April, when I was up 30%+. Actually, in just the first few days of 2010, I was already up more than 8%. I didn't try to guess at the highs, but I've been putting more money in at the lows. I doubled the amount of money that I've contributed to my portfolio, so being up 8% now, versus 8% at the beginning of 2010, is a much larger number.

More invested -- Aug 27, 2010

I used my remaining cash to buy additional shares of Bank of America at $12.56. It's now 16.17% of my holdings, up from 3.3%.

Shunning equity?

From Friday's Wall Street Journal:

By KEVIN KINGSBURY And JOHN KELL

Money returned to long-term U.S. mutual funds last month after investors pulled holdings out in May in the wake of the stock market's "flash crash," the Investment Company Institute said in data released Thursday.

In stock funds, more money continued to be pulled than was added, continuing a trend in which investors haven't consistently added to stock funds even since the market bottomed in March 2009. Outflows, or selling, dropped to $5.41 billion in June from $24.76 billion a month earlier as money leaving domestic funds last month more than offset net inflows to those that primarily invest overseas.

Instead, the bulk of cash going to mutual funds since then has been bond funds. In June, they received a net $20.74 billion, said the industry group, up from $14.54 billion in May. They rose 58% for taxable funds to $18.79 billion but dropped 27% for municipal-bond funds.

Money continues to flow from money-market funds as interest rates for such instruments remain near zero. Outflows rose to $24.15 billion from $22.16 billion, putting the first half's total at $509.27 billion, said the ICI. That compares with outflows of $189.37 billion in the first half of 2009.

Meanwhile, for the latest week, assets in money-market funds jumped $3.57 billion as inflows into institutional funds more than offset a decrease in retail funds, according to the ICI.

For the week ended Wednesday, total fund assets grew to $2.802 trillion, according to the ICI. Earlier this year, the total funds tracked by the ICI dropped below $3 trillion for the first time since October 2007.

Retail funds decreased $2.37 billion, to $980.36 billion in the latest week. Taxable government funds saw $990 million of inflows, putting assets at $173.58 billion, while nongovernment funds had $1.86 billion of outflows, lowering the money in them to $597.07 billion. Tax-exempt funds declined $1.5 billion to $209.71 billion.

Assets in the institutional class were up $5.94 billion to $1.821 trillion. Taxable government funds had $10 million of outflows, putting asset levels at $662.88 billion. Nongovernment funds had inflows of $7.56 billion, moving their assets up to $1.025 trillion. Tax-exempt funds had outflows of $1.62 billion, falling to $133.27 billion.

The original article

Performance YTD 2010

This is a chart of everything I've held in 2010. Everything I have in my portfolio I was holding on January 1st, except for Verizon. I didn't buy that until March. I've also put additional funds into some of these stocks (AgFeed and Verizon) during the year.

I only have one winner: VMWare. I still don't REALLY understand what they do. I don't need to, apparently. I'm completely emotionally invested in AgFeed. I'll hold it forever if I need to. That breaks two of Jim Cramer's rules. I shouldn't be emotionally invested in any of these stocks and I'm not supposed to throw good money after bad. Take a look at its performance: it's awful! It's lost almost half of its value since January 1st, and I ADDED money to it! What a moron! But I keep going back to the 10Ks and 10Qs and I get excited every time. This stock is going to go stratospheric. I can feel it. All signs point to no, however.

Portfolio Change

Added some money to my brokerage account. Spent half of it on additional shares of Verizon and I'm keeping the rest in cash.

Verizon ---------------- 24.31%
MGM Resorts -------- 24.07%
AgFeed Industries --- 22.19%
VMWare -------------- 14.48%
Cash -------------------- 11.66%
Bank of America ------- 3.29%

Excess Returns Again

Excess Returns are under or over-performance against a selected benchmark. For example, if after a year, the Dow Jones (I always use the Dow, but the S&P 500 is probably the better benchmark) is up 10% and I'm up 5%, my Excess Returns are -5%. Below, I've included a graph of my historical excess returns. The blue area is the daily rate, and the red bar represents my average for the whole period (Oct 1, 2008 to June 25, 2010)

My current excess rate is 19.84%, and I'm trying to figure out how much is too much. In the long run, I should only have returns at or near the Dow Jones. If I'm making more than the Dow, than it's only temporary and a correction might be coming. You can see in this chart that I peaked in at least two moments, at around 40% in June of 2009 and at 35% in April of 2010. I held the gains in both cases for less than two weeks. So the question I'm trying to answer this weekend is, how high is too high? If I get to 40% again, should I halve my positions or buy put options? Can I get higher than 40%? Is 30% a better limit? I don't want to bail out of stocks early (see Ford, Tata Motors, US Steel, Dr. Pepper, Leading Brands, Entravision Communications, etc;), but learning how to limit my losses seems like the long-term winning move.

If anyone know anything about this, please post a response and let me know. Thanks!

Thinking about AgFeed

Found an interesting paper on the Chinese cycle of pork prices. According to this paper, the cycle lasts 42.33 months (on average). Pork prices peaked in the summer of 2008, which puts us at the bottom of that cycle right now. I hope to realize substantial gains between now and 2012. AgFeed, even with pork prices as low as they are, has almost no debt and is still making a profit. Why is FEED so cheap? Am I way ahead of the curve or missing something?

The link to the paper won't work. See: www.prairieswine.com/database/pdf/39650.pdf.

Jim Cramer is Alright with Me

Jon Stewart may think Jim Cramer is an asshole, but he's alright with me. When I decided to open a brokerage account two years ago, it was his show that I watched everyday and it was he who got me excited about investing. I've read Real Money and Stay Mad for Life and I liked both of them.

I took a look at my excess returns for 2010 and there's some advice that he dispensed in Real Money: Sane Investing in an Insane World to which I should have paid closer attention.

Now, I'm paraphrasing, but Jim said amateurs worry about not making enough money, and professionals worry about making too much money. At first, that statement pissed me off. It seemed like the sort of formulaic advice that's hip right now: take something that everyone thinks is true and just say the opposite. Are you drowning in the sea? Don't try to swim, try to sink! Then, when you get into the details of the advice, you realize they're actually recommending swimming, not sinking. A lot of articles on the internet are set up like this, just to catch your attention. It's bullshit. However, in the context of excess returns, that's actually awesome advice. In May of this year, I had returns 25% greater those of the Dow Jones. That was an aberration. I'm not good enough at investing to sustain returns that high. Had I really understood the advice, I would have either sold out of a few of my positions and held cash, or gone long puts to protect myself against the inevitable correction. Too late on a smart play, AGAIN. Oh well, I have to learn these lessons to get better, right?

Excess Returns and crazy AgFeed volume

Relative to the Dow Jones, I'm still doing pretty well for the year. Had you invested $100 with me on January 1st, it would be worth $10.00 more than if you had put it in the Dow Jones.

I've also updated the look of the blog. Blogger now has some fancy pants new designs, so expect changes. I ditched the clunky Fidelity widget for Yahoo! Finance's and I'm going to change the program powering my comments.

Yesterday, 313,426 shares of AgFeed were traded. Google Finance lists the average daily volume at 642,000. Today, 4.82 million were traded. I have no idea what caused that. Other US-traded Chinese agri-stocks had similar jumps in volume, but not other Chinese ADRs. An appreciating yuan only helps these agricultural firms, but I don't get the jump. It seems excessive.