Conservative Plays

I've been dismayed lately, as many of us have been, by the low interest rates we're getting on our CDs and savings accounts in the U.S. If we are retired or approaching retirement, we may be especially upset by these low rates.
Fortunately, we have options. Even in today's low interest rate environment, many stocks and funds offer attractive dividend yields. Especially the emerging market high yield funds, comprising of both bonds and stocks, seems to be a better bet than staying within U.S. confines.

I would never advocate putting all of your eggs in any one of them, but rather to spread around a good chunk of your savings in these assets if you need current yield. As discovered by my pal Phil DeMuth, and often utilized in his rapidly growing client base at Conservative Wealth Management, here are a few options for high current yield with safety.

The iShares Lehman Aggregate Bond (AGG) exchange traded fund (ETF) largely owns bonds of investment grade and steers well clear of the subprime mess. Experts are expecting more defaults on bonds through next year, but the default rate lately has hovered at or close to zero so even a jump will not significantly affect a large mix of bonds. AGG's trailing twelve month yield (TTMY) is 4.8%. (Note: The trailing twelve month yield, used throughout this column, is not the same as the current yield. As the price fluctuates, the yield changes even if the dividend stays constant or rises. Check with Yahoo! Finance for the latest yield figures.)

The Cohen & Steers Dividend Majors (DVM) ETF is comprised of many high yielding real estate investment trusts (REITs). As any reader of this space knows, I love REITs for their yields. Yes, I know they took a huge drop last year. But that only increased their yield. They are recovering now and so the yield is falling. But the trailing twelve month yield is 6.5% and that looks good enough to eat.

BlackRock Global Energy and Resources (BGR) holds high yielding energy stocks from all over the globe. I happen to think oil prices are in a bubble (I could well be wrong). But even if they are, with a yield like 8.7%, BGR could lower its dividend and still be doing fine.

Templeton Emerging Markets Income (TEI) contains bonds of emerging markets. These bonds are often issued by nations that are in better economic shape than the US is right now by virtue of running budget surpluses and trade surpluses. With a yield of 9.1% it's good enough for me and own it I do.

Black Rock Dividend Achievers (BDV) is comprised of high dividend stocks. It has an amazing yield of 6.9% and while its price will fluctuate like mad as markets move, its yield is positively mouth watering.

Great Northern Iron Ore (GNI) mines, well, iron ore, in Northern Minnesota. Its 6.9% dividend rate tells us that world demand for iron ore remains robust.

BP Prudhoe Bay Royalty Trust (BPT) pays you a royalty on the oil taken from a series of oil fields near Prudhoe Bay. Its yield for the past 12 months was a stunning 10.4%. As the price of oil rises, it could do even better but might not as a ratio of price.

Bank of America (BAC), the nation's second largest bank, has been stung by sub-prime and other poor investments. It's possible that it will cut its lofty 7.1% dividend, so if you are really, really cautious, you might wish to stay away. Even if it were cut by 20%, however, it would still yield north of 5%, which isn't bad at all.

Consolidated Edison (ED), which New Yorkers know as Con Ed, is an immense electric utility. It's paying a fabulous 5.6% yield. It is regulated, although not as much as it once was, so the yield is fairly safe.

General Maritime Transport (GMR), a firm that transports oil, that most precious of commodities, across the seas, pays a 6.9% yield. Looks good to me.

Now, the REITs mentioned here will not, repeat NOT, qualify for the super low Bush dividend taxation rate. Neither will the oil royalty trusts. And neither will the bond fund at the top (AGG) or in the middle (TEI). But the yield on all these remains excellent.

The strategy here is to not buy just one of these investments. As always, diversify. I would also highly recommend that you talk to your own financial advisor, and you should have a financial advisor. He or she may have his or her own ideas. But this is a start towards a Stein/DeMuth High income portfolio you might like.

Size Matters

These days, it seems like everyone is just throwing out ETF's like cinnamon sprinkles. Throw some out there, and see which one sticks. Well, although ETFs are great tools (I've emphasized thsi point in previous articles) to invest in a sector without the risks of company specific problems, don't just choose one based by names.

As of May 1, there were 107 industry-specific ETFs providing exposure to more than 30 different industries, according to a Morgan Stanley report released this week. By design, industry-specific ETFs allow investors to own a basket of stocks in a given slice of the economy.

Initially, two ETFs may appear to be similar by name, but the formulas behind their underlying indexes can result in very different portfolios. Most ETFs are weighted by market capitalization, which means larger companies receive greater representation in the index. But in an equally weighted fund, all stocks carry the same weight, regardless of a company's size, earnings, or revenues (so you'll find more small companies in equally weighted ETFs).

Here's an example of how this plays out. Two retail ETFs: the equally weighted SPDR S&P Retail ETF (symbol XRT), which includes 53 companies, and the Retail HOLDRs Trust (symbol RTH), which has no underlying index and holds just 18 stocks.

Because the S&P fund includes more small companies, it's heavily exposed to apparel--a more cyclical slice of the industry. Companies with market capitalizations of under $5 billion make up 60 percent of the fund, versus just 7 percent in the HOLDRs fund. In that ETF, retail giants Wal-Mart, Home Depot, Target, and Walgreens account for half of the portfolio.

That being the case, do check under the hood with these ETFs. When in doubt, go with the larger names. The bigger companies tend to do better in recoveries, becaue of their size and economy of scale. Plus, at the very least, you've probably heard of Coca Cola or Boeing.

Here's some top picks.

iShares DJ US Oil Equipment & Services (IEZ) holds 55 companies in the Dow Jones Wilshire 2500 Index that are suppliers of equipment or services to oil-field and offshore platform companies.

Market Vectors Global Alternative Energy (GEX): tracks the Ardor Global Index, which includes 30 global companies involved in alternative power production and supporting technologies. The fund will always have 30 percent of assets in non-U.S. companies located in at least three different countries.

PowerShares Water Resources (PHO): tracks the Palisades Water Index, which includes U.S.-listed companies involved in water supply and treatment, and in technologies or services associated with the water industry. At least 80 percent of the index's components must derive at least 50 percent of revenues from water-related activities.

Financial rebound

After free-falling for more than 6 months, has the financial sector stocks finally bottomed? Well, YES.

The financial sector crises, consisting of subprime mess and other credit problems, has driven down the sector more than 30% since last December. Now with all the surprises out of teh way, it looks like the sector is looking to rebound in the second half of the year.

There will be more bad news, yes, but not surprises. As the impact from Fed rate cuts start reflecting, and companies take measures to remedy the losses, this sector is headed for a rebound.

The world's largest financial group, Citigroup, is considering selling its Japanese consumer finance company CFJ KK or cutting the unit's business significantly as part of its plans to shed assets, Japanese daily Nikkei reported on Sunday. This is another bold move to cut the losses, and rebuilding for the future.

The biggest U.S. bank is aiming to unload $400 billion of assets within three years after being hit hard by flagging mortgage and credit markets.

Market in W-shaped rebound

Many gurus in recent weeks have come out with predictions that the market has bottomed, and is ready to rebound. Although anything is possible, the likelihood of a rebound is somewhat unlikely in my opinion. For one thing, the stock market started its decline, if not a crisis in the last days of 2007 and continued well into March of this year. The market dropped more than 20% from its peak of Dow at 14000. Now, as bad as that sounds, a market that has troubles in wide-reaching credit system, real estate bubble, worthless dollar, and inflation in almost everything in a daily need, is one that would certainly drop more than it has so far.

Looking back at the Nazdaq bubble in 2000, many "gurus" also said the market has bottomed is ready for a rebound every time there is a technical rebound. Note that the Nazdaq did not drop from 5000 to 1200 overnight, but it did so with several 1-2 month rallies in between, but only to drop even further when the steam runs out. Traders and fund managers on Wall street hates to see their portfolios drop double digits, and tends to sell at managebal losses and re-balance their portfoilios. Everytime they do that, there is a rally in specific sectors (usually the ones that has dropped the most, getting funding from trades who sold their losses in other sectors that dropped less) and thus bidding up the market. Therefore, the "rebound" we're getting in this couple weeks, really is a technical rebound and one that is NOT sustainable. Especially when many traders go on vacation in the summer, when the market tends to drop in allmost every summer, we will see this rebound dissipate. That would prove a real buying opportunity for the bulls. I would predict 4Q 2008.

Furthermore, the Fed has pretty much ran out of ammo by cutting the interest rate to 2%. Cutting anymore, would cuase a widespread infaltion that is beyond remedies.

The Fed cut rates to 2 percent this week from 5.25 percent in September. With the value of the dollar falling against foreign currencies, and rising commodity costs pressuring consumers at the gas pump and the grocery store, the central bank wants to steer clear of actions that will push prices up even more.

By lending directly to banks, the Fed can provide capital that banks need to lend to consumers and businesses without fueling higher prices in industries that don't.

By relieving the seizure plaguing financial markets, the Fed hopes it can free up the cash many banks are hoarding. This would presumably encourage banks to lend their money out through mortgages or business or car loans.

Recent months have seen surging food and energy costs. Wall Street is concerned that the threat of inflation and the persistent struggles of the housing market would force consumers, who account for about 70 percent of U.S. economic activity, to spend less.

The Fed said Friday it would boost the amount of emergency reserves it supplies to U.S. banks to $150 billion in May, from the $100 billion it supplied in April. The Fed took this action and several other moves to boost credit in coordination with the European Central Bank and the Swiss National Bank.
But even after the Labor Department said the U.S. economy shed 20,000 jobs last month -- fewer than expected -- stocks had a lukewarm response. That suggests that, like the Fed, investors aren't sure the credit crisis has been contained.

So be cautious in this market right now, and don't rush into buying stocks. Especially ones that has seen a rebound in recent weeks, as this market is certain to do a W-shaped rebound, before it really takes off into another bull run.

When insiders buy, u buy!

Whenever a buyback is announced, it is always a good idea to check out the company, its fundamentals and its prospects. Let's take a look at one company that has recently announced a buyback: Friedman Billings Ramsey Group (FBR).

Friedman Billings Ramsey's board has raised its buyback authorization for Class A shares to 100 million, from the earlier approval of 50 million. FBR has already bought back 23.6 million shares under the earlier authorization.
The company has suspended dividend payments for the current quarter. The last quarterly payment of 5 cents a share was made on Oct. 31 for the quarter ended Sept. 30, 2007.

The company's net loss expanded to $214.7 million, or $1.28 per share, in the third quarter, with heavy writedowns and losses related to its on-balance-sheet securitized loan portfolio. FBR expects its losses to narrow in the fourth quarter to $38 million. The company has completed the sale of its on-balance-sheet securitized loan portfolio and is currently negotiating the sale of the remaining $48 million of the mortgage loans.

FBR has certainly felt the pressure of the housing and financial-market turmoil, but some may feel this one is drastically undervalued because it is currently trading below book value per share.

Stock price of FBR has shot up in the past couple weeks, despite the subprime crisis.

Go Green!

If you have not noticed the increase in prices at gas pumps, grocery stores, and just about everywhere else, it's time to come out of the cave.

A large part of the inflation we are witnessing nowadays is due to the surge in oil prices. Putting aside the reasons behind this surge of oil from $30 a barrel few years ago, to the new $100 mark, it would be nice to make some money in the dire situation.

Turning this opportunity to make some profit, isntead of just paying like a dummy, you can either do energy plays with oil and natural gas. Or, you can consider the following: green energy. By doing so, you'd be investing in the future to come.

Here are six ETFs, and I've included their investment focus, international exposure, market cap, and expenses -- in each fund's holdings:

1. PowerShares WilderHill Clean Energy Portfolio (PBW)

Listed in March 2005, PBW was the first alternative energy ETF and tracks the WilderHill Clean Energy Index. The fund holds 40 U.S.-listed companies that produce green or renewable energy and related technologies. It's focused on small-caps (69 percent weighting) and is dominated by information technology companies (41 percent of holdings). The ETF charges a 0.60 percent annual fee that will weigh on gains. The relatively volatile PBW has returned a 22.5 percent gain since its inception, but dropped just over 6 percent in the past year. See PBW's full holdings.

2. PowerShares WilderHill Progressive Energy Portfolio (PUW)

This ETF differs from PBW by focusing on companies providing "transitional energy bridge technologies" -- that is, technologies that improve the use of existing fossil fuels, rather than entire new approaches. PUW also has heavy small-cap exposure (49 percent), but offers relatively diversified sector exposure: the largest single sector, industrials, constitutes just 28 percent of the fund. Since its inception in October 2006, PUW has returned a strong 18.7 percent; it also charges a steep 0.60 percent yearly fee.

3. PowerShares Cleantech Portfolio (PZD)

This ETF tracks the Cleantech Index, which aims to capture the potential for companies that "produce any knowledge-based product or service that improves operation, performance, productivity, or efficiency, while reducing costs, inputs, energy consumption, waste, or pollution." PZD is heavily weighted toward industrials (59 percent), with 63 percent of its holdings in small-caps; like the other PowerShares ETFs, it has a 0.6 percent expense ratio. See PZD's full holdings.

4. Claymore/LGA Green ETF (GRN)

GRN launched in December 2006, and follows the Light Green Eco*Index, which is comprised of about 200 stocks that are in some way active in alternative energy. Yet a quick look at GRN's holdings reveals the world of difference between this and the PowerShares ETFs. Top holdings of GRN read more like the S&P 500: Mobil, Citigroup, and General Electric -- mega-cap corporations that allocate a certain (no doubt, growing) portion of their investment or R&D in green technologies, but are hardly "pure plays" on the alternative energy theme. GRN has a 0.6 percent yearly fee.

5. Van Eck Global Alternative Energy ETF (GEX)

Launched on May 9, 2007, GEX tracks the Ardour Global Index (Extra Liquid), which is composed of stocks in 30 publicly traded companies that obtain at least half of their revenue from alternative energy activity. GEX is unique among its peers in two key ways: emphasizing large-cap exposure (31 percent of the fund's holdings; small-caps are only 26.9 percent), and international reach (European companies constitute 47.1 percent of the fund, China/Japan 11.1 percent, and U.S. 41.8 percent). GEX charges 0.65 percent annually.

6. First Trust NASDAQ Clean Edge ETF (QCLN)

Launched in February 2007, QCLN follows the NASDAQ Clean Edge U.S. Liquid Series Index, which captures five subsectors of the alternative energy industry: renewable power generation, renewable fuels, energy storage and conversion, energy intelligence, and advanced energy-related materials. The 44 stocks in this basket are almost entirely small-caps. QCLN charges a 0.68 percent annual fee.

Market turmoil

This blog ain't for the young and adventurous. Your blog is coming soon.

Wow. What a time. Housing is correcting rapidly, but from a super-high level. The stock market is correcting rapidly, too, but also from a very high level. The dollar is collapsing. As I write this, oil is hovering near $100 a barrel. What to do?

First of all, panic.


Just kidding -- don't panic.

The stock market fluctuates. It's had five good years in a row, with some of them very, very good. Even with recent corrections, at the of end of 2007 it was higher than it was at the beginning of 2007, and dramatically higher on the Dow than it was at its peak in 2000 -- and that doesn't include dividends.

Given the intense feed of negativity into the market from the media and short-sellers, it's not the least bit surprising that the markets would fall. Given the losses from subprime and its related indices at banks, and their reluctance to loan after many years of loaning too much, it's not going to be a total shock if we go into a recession. And if we do, the markets will fall more -- maybe a lot more.

This isn't a development to strike terror into your hearts -- if you're a long-term investor, it signals a time to buy. The history of stock market investing is unequivocal on this point: When the market is low, when the economy is in a recession, it is -- in the long run -- by far the best time to buy.

So continue to buy the diversified domestic funds, especially the FSTVX, and its equivalent total market fund at Vanguard. Continue to buy the emerging markets (which had a super year in 2007) in the form of the EEM or the ADRE. Let me make this totally clear: The emerging markets won't just go up in a smooth line -- they'll fluctuate. They'll fluctuate a lot sometimes, and sometimes in a jaw-droppingly downward direction. Keep buying in a patient, thoughtful way, possibly setting it on autopilot.

Keep buying the developed markets in the EFA, also in a disciplined, ongoing way. Europe has its problems for certain, and so does Japan. But they benefit from the falling dollar and are extremely big economies, and tend to fluctuate a lot less than the EEM as well. But they will fluctuate. Stay in them patiently and you'll be rewarded.

Now, about housing: I fully respect the people who say that housing is going to fall even further than it already has. In my beloved Southern California, housing is falling far and fast, so I see it all around me. But buying a home isn't like buying a stock or a barrel of oil. A home is a unique item -- it's about the heart as much as the head. It's about falling in love with the place in which you live.

In my experience as a homebuyer, there are so few homes that one really falls in love with that if you find one you do love, you should snap it up (if you need it and can afford it). I urge this even though housing is likely to fall even further.

There's some economic rationale to this course of action as well. The history of home prices tells us that when housing reaches a peak, it falls (of course), but then when the next wave comes along, that wave lifts housing higher than it was at the last peak -- often far higher. In the meantime, you get to live in the home rent-free -- with the "imputed rent," which is sort of a dividend composed of the rent you would have had to pay if you'd lived in the home as a renter. (If you owned a bond with that same yield as your imputed rent, you would have to pay tax on it.)

For house flippers, these are really hard times, and I can only say that if they're highly leveraged, get out of the leverage as fast as you can. If that means selling at a loss, it's preferable to an even bigger loss.

Housing cycles, by the way, are usually very long ones. This time may be different, but usually they last five or more years, so don't expect a turnaround soon. (I could be wrong, and in this case I hope I am.)

Again, don't panic. We've been through many recessions since World War II, and we always get through them and go on to a brighter future. And we always look back and say we wish we had bought more stocks and more real estate when times were hard.

As for oil, there's no harm at all in buying a chunk of the XLE, the index fund for energy securities. It's had a phenomenal move in the last few years, and usually that spells correction. But over very long periods, you'll do fine.

Short term investors, look for my blog in the coming weeks. I will have one on profiting in a bear market, and volatile markets.