Dave Landry's Market in a Minute - Monday, 12/2/13

Random Thoughts


You hate to read too much into a holiday shortened session but you certainly can't ignore the action. So with that said....

Friday was a little mixed.

The Quack plowed ahead to close at multi-year highs, gaining over 1/3%.

The Ps tried to rally but came back in to close slightly in the minus column.

The Rusty put in a similar performance but managed to finish in the black, albeit barely. Nevertheless, this is enough to keep it at all-time highs. Better-than-a-poke-in-the-eye is what I say.

With the broad based Rusty hovering around new highs, it is no big shocker that internally things are still looking pretty good.

Drugs, led by Biotech, managed to bang out all-time highs.

The Semis, which have been trading mostly sideways as of late, ended slightly higher. This action has them probing the top of their trading range.

Defense, Regional Banks, Conglomerates, Computer Hardware, and Health Services to name a few remain in uptrends and at or near new highs.

The Chart of the Day is MDC Partners (MDCA). I found the stock by sorting today's New High List for frequency then used the flipchart feature to review the charts. The stock was also the Chart of the Day back on 7/31. Since the Trend Spotter signaled a buy on 9/11 the stock is up 42.90%.

It is a marketing communications firm providing marketing communication and consulting services throughout the United States, Canada, and the United Kingdom. Its services includes advertising and media, interactive marketing, direct marketing, public relations, corporate communications, market research, corporate identity and branding, and sales promotion. The Company also provides mobile marketing, and database and customer relationship management services.

Not too long ago, I hit a big milestone.

I officially received my 50,000th dollar in dividend income from my Daily Paycheck portfolio.

I'm not trying to brag. Instead, I want to show you how I did it, and how you could possibly too.

A little less than four years ago, StreetAuthority co-founder Paul Tracy challenged me to build a portfolio of dividend stocks that would pay out more than 30 dividend checks a month -- one for every day of the year. He even gave me $200,000 and a dedicated brokerage account to get started.

I collected the very first dividend from my real-money portfolio on December 24, 2009 -- just a few weeks after launching The Daily Paycheck advisory. It was issued by Invesco Value Municipal Income Fund (NYSE: IIM).

My first dividend was for $18.13, or 7 1/4 cents per share for my initial holding of 250 shares.

It doesn't sound like the most promising start. After all, $18.13 won't get you very far toward retirement -- that is unless you reinvest dividends and have a bit of time. As of today, I've received 46 dividends from IIM for a total of $953.02. My latest dividend was for $23.37 -- 28.9% more than my very first dividend. IIM did raise its monthly dividend to 7 1/2 cents per share back in August 2011. But most of the dividend growth is by way of dividend reinvestment.

You see, I reinvested my very first dividend back into IIM. The following month, I had incrementally more shares generating incrementally more income.

361 Capital portfolio manager, Blaine Rollins, CFA, previously manager of the Janus Fund, writes a weekly update looking back on major moves, macro-trends and economic data points. The 361 Capital Weekly Research Briefing summarizes the latest market news along with some interesting facts and a touch of humor. 361 Capital is a provider of alternative investment mutual funds, separate accounts, and limited partnerships to institutions, financial intermediaries, and high-net-worth investors.

361 Capital Weekly Research Briefing
December 2, 2013
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA





It was another unhappy week for the bears as the slow markets again posted new record highs?
For the most part, equity markets in the U.S. and Europe continued to glide higher as the U.S. celebrated the Thanksgiving holiday which also kicks off the peak shopping season. Early indications are that Thursday and Black Friday retail sales got off to a good start ? online sales on Thanksgiving Day were up 20% overall, and Walmart announced it had processed over 10M transactions at its stores on Thursday night. Despite some concerns being raised about equity markets starting to get ?bubbly,? stocks continued to march higher, with the Nasdaq breaking above 4,000 this week for the first time since the internet bubble popped. For the week, the DJIA gained 0.1%, the S&P500 rose 0.1%, and the Nasdaq added 1.7%. November saw the S&P rise 2.8% and the Nasdaq up 3.6%.
(TradeTheNews)

Market tops and bottoms are always a popular topic of conversation. There are a number of theories about how to forecast key turning points in advance, but, in reality, those theories rarely work.

While it does seem like an exercise in futility to forecast the day and price of tops and bottoms, there is valuable information to learn from studying the general nature of market turning points. This knowledge will help us understand what to look for and how to react to the market as it develops rather than provide a false sense of comfort about what we should see.

In the stock market, we tend to see tops build slowly and bottoms appear unexpectedly. This can be seen in the chart below, which shows the 2007 market top on the left and the March 2009 bottom on the right.

It's no secret that there's a horizontal oil boom happening in the United States today. What is less appreciated is how unique this boom is to the United States.

There are lots of places in the world that have oil in the ground that horizontal drilling and multi-stage fracturing could exploit. But more is required than just having the oil. The U.S. is unique in that it provides the perfect combination of the ingredients necessary to allow for the horizontal revolution to take off.

Let's tick the boxes on these ingredients. First, the U.S. has the oil in the ground trapped in large quantities in tight/shale oil rocks that horizontal wells and multi-stage fracturing can exploit.

Second, the U.S. already has in place a network of thousands of miles of pipelines that were originally used to develop conventional oil plays.

Third, the U.S. has the thousands of drilling rigs required that are needed to drill these unconventional fields that have low rate wells and require constant drilling.

Fourth, the U.S. has the thousands of skilled energy workers required to accomplish the massive amount of drilling, fracturing and completion work that is required.

Fifth and perhaps most importantly, the United States has a system of land ownership that financially incentivizes landowners to have their land developed.

All of those ingredients coming together have allowed the United States to move quickly and exploit the opportunity created by horizontal drilling and multi-stage fracturing.

Other parts of the world may have the actual oil in the ground, but the lack of the other four ingredients means that reaching that oil is many years away. The pipelines, drilling rigs and staffing will require billions of dollars of investment and years. The complications of not having a system of land ownership similar to the United States may present a permanent problem.

All that being said, there is one other country that also has all of the necessary ingredients. And that is America's neighbor to the north.

If you are interested in investing in tight/shale oil producers, you might want to take a look at some of the Canadian producers. The reason for that is that the Canadian producers offer the same opportunities as their U.S. counterparts, but many of them sell for half the valuation in the market today. One of the best examples of this is Bellatrix Exploration (NYSE: BXE).

Bellatrix offers exposure to three horizontal oil and gas plays. The gas plays are of the "liquids-rich" variety, which means that the economics of the plays are excellent, even in the current world of depressed natural gas prices.

In light of the holidays why don?t you check out: David and Goliath: Underdogs, Misfits, and the Art of Battling Giants by Malcolm Gladwell.

Quote of the day

Matt Levine, ?No matter how long the anomalies have persisted, if they?re just brute statistical facts they could always go away tomorrow. Your anomalies have no soul.? (Bloomberg)

Chart of the day

Had some fun playing with the Bloomberg Billionaire tool this morning, located here.

Some of the data I was able to pull about YTD dollar and percentage gains in billionaire net worth tells an interesting story about what?s worked this year (tech and activism) and what has not (emerging markets and commodities). It?s amazing how this mirrors what?s worked and not worked in a typical investor?s portfolio.

Some tidbits:

Tech has been great in 2013, especially old tech like Microsoft:
Bill Gates, retired, is the biggest winner of 2013 in dollar terms. His net worth is up 23% YTD to $77.7billion, reclaiming the top spot.
? Downtown Josh Brown (@ReformedBroker) December 3, 2013

Emerging markets like Latin America, not so much:
Carlos Slim, the world?s #2 billionaire, actually managed to lose money this year, net worth down $3.7 billion YTD (too much EM exposure).
? Downtown Josh Brown (@ReformedBroker) December 3, 2013

And don?t even get me started on metals and other commodities:
The biggest billionaire loser is Chilean copper heiress Iris Fontbona, who lost $6 billion or 20% of her fortune in 2013. Commodities.
? Downtown Josh Brown (@ReformedBroker) December 3, 2013

And the year?s big Wall Street winner was Carl Icahn ? everything this guy touched turned to gold:
Carl Icahn surpassed George Soros this year in net worth. $23.7 billion vs $22.9 billion. Carl made 8 billion dollars this year, OMG.
? Downtown Josh Brown (@ReformedBroker) December 3, 2013

Have some fun with the data on your own, click below:
Bloomberg Billionaires Ranking

Just as every fisherman has stories about the big one that got away, every investor has "woulda, coulda, shoulda" tales of investments that would have been wildly profited wildly if they had only purchased.

I myself have one such tale from the past year. It gnaws at my insides to think about the massive profits that I missed out on, even though I felt a strong conviction to buy. The good news is that it's not too late to jump on board.

This stock was trading near $65 in 2007 before the financial crisis knocked it down below $5. The price wallowed in the nowhere zone under $5 for several years before slipping into penny-stock territory below $1. Although this company was (and is) majority owned and controlled by the U.S. government, most investors had written it off as not viable. At one point, the stock price fell to less than a dime a share. The price collapse caused the company to be delisted from the New York Stock Exchange, relegating its shares to the over-the-counter market.

I considered buying shares in the $0.15 area, thinking that there was no place for this once-mighty quasi-government agency to go but up. All the bad news was already reflected in the price, the housing market had improved, and there was no longer chatter about the government shutting down the company. I noticed the volume picking up and the price rising -- but fear and doubt kept me from buying.

Between late March and late May, this stock rocketed from a low of $0.09 to nearly $5.50. I watched the entire 6,000% moonshot in amazement. Every $100 investment near the lows would have skyrocketed to more than $6,000 in around 60 days, an incredible return by anyone's standards. The price has since dropped back to about $2.70, but it could easily double or even triple from here.

If you haven't guessed, I am talking about the Federal National Mortgage Association, commonly known as Fannie Mae (OTC: FNMA). A $15 billion-plus company by market cap, Fannie Mae provides liquidity and stability services in the secondary U.S. mortgage market. In other words, it guarantees and securitizes mortgage loans originated by lenders in the primary mortgage market.

Fannie Mae's financial condition has improved dramatically since the housing crisis. Over the past five years, Fannie Mae has facilitated $3.9 trillion in mortgage credit, supported 3.4 million home loans, 12 million mortgage refinances, and 2 million units of rental properties. By the end of this year, it will have paid back $114 billion to taxpayers.

After posting this type of performance and rebound, why are there lingering concerns about Fannie Mae? The U.S. government still owns nearly 80% of both Fannie Mae and its sibling firm, Freddie Mac, and most of Washington's Republicans and Democrats want the firms dismantled (and their shareholders wiped out) as part of a broader overhaul of the housing finance industry.

But at least two large hedge funds disagree with Washington's assessment and are fighting to keep Fannie Mae a viable, ongoing concern: Fairholme Capital Management (Nasdaq: FAIRX), led by Bruce Berkowitz, and Bill Ackman's Pershing Square Capital Management.

Currently Fannie's largest stockholder outside the U.S. government, Berkowitz wants to restructure Fannie and Freddie through negotiations with their stakeholders, with the goal of freeing them from government control. Ackman's firm owns a nearly 10% stake in Fannie Mae's common stock and has earned a return of 44%.

Put simply, Berkowitz wants to design a new mortgage insurer by jettisoning the old mortgages, including those in foreclosure. This book of old business would be transferred to common shareholders such as Ackman, who doesn't seem concerned by this possibility. He has said the mortgage insurers should keep the foreclosed assets, rehabilitate the homes and rent them out -- basically, become a large residential REIT.

Judging by Ackman's statement, I expect that should Berkowitz's plan be instituted, Ackman will lead the charge in turning what's left of the common shareholders' holdings into a gigantic REIT. This would be a win-win for everyone involved. Ackman has gone as far as saying that it would instantly stabilize the housing market.

Risks to Consider: The hedge funds fighting for Fannie Mae's survival are no match for the powers of the U.S. government. Although I firmly think that a proposal similar to Berkowitz's will prevail, there remains a high risk of Fannie and Freddie being dismantled, leaving the common shareholders with nothing. Always diversify and use stop-loss orders when investing.

Action to Take --> I am convinced that Fannie Mae will reach $8 within the next 12 months. Dismantling Fannie and Freddie would be too much of a headache for Washington, not to mention the shareholder blowback should such an idea become reality. Politicians usually take the path of least resistance, and that path is to maintain Fannie Mae by following a Berkowitz-type proposal. Buying the stock between $3 and $2.25 with a 12-month target of $8 and an initial stop-loss just below $1.75 makes solid investment sense.

- David Goodboy

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