Got Cash?

Many investors keep cash as part of their portfolio. In times of falling prices, it is good to have some cash on hand in order to buy stocks while they are on sale. One question I had was what to do with cash. While I am overall very pleased with my online broker, they like most other brokerages pay only a pittance of interest for cash in your account. Most regular savings account interest rates are low. If I invest in a CD, the cash may be tied up for at least 90 days. I save monthly, but invest in the market quarterly in order to save on commissions. I wanted to find a place to park cash where I could 1) get a decent rate of return and 2) be able to get to the cash fairly quickly.

I discovered TreasuryDirect.Gov (click here). As the name suggests, at TreasuryDirect you buy treasuries directly from the government. The account is fairly simple to set up with some paper work that must be signed by your bank. Once the account is set up you are able to buy T-Bills, T-Notes, Savings Bonds, etc. directly from the government. In using TreasuryDirect, you pay no commission so all the interest earned is yours to keep. I personally buy 4 Week T-Bills so that my cash is tied up for only 28 days. The yield this week was 4.75% on a 4 week T-Bill. Not bad for these uncertain times.

Is This the Time to Buy The Big Banks

Back on August 10th this blog asked the question, "Have the Big Banks Bottomed?" (Click here for the blog entry) Tonight I wonder is it time to buy the big banks today. The four largest American banks revealed today that they had borrowed $500M each from the Fed Discount Window (Click here for story). This was more of a sign that the system works as opposed to true needs. Bank of America revealed a $2B investment in CountryWide Financial today (Click here for story). It seems that BoA really paid 80 cents on the dollar for CountryWide. The big banks have weathered the storm and may be ready to seek bargains in those sound businesses that have been hit along with those businesses that may fail. These are times that Warren Buffett looks forward to.

I am an amateur investor. All investors should do their own due diligence before committing funds to any equity. This may be the time to get in on the big banks. I am long on Citigroup ($48.43) and JP Morgan Chase ($46.00)at the time of this writing.

Let's Be Fair to Cramer

While my style as a long term investor is very different from that of Jim Cramer, he deserves his due for how he educates the individual investor through his show Mad Money on CNBC and his website TheStreet.com.

Cramer is very passionate about what he does. Witness the "Cramer Meltdown" (click here) on CNBC's Street Signs with Erin Burnette. What you see is a man who cares about the markets and people. Notice his comments that we are spending billions to build homes in Iraq while 100's of thousands of Americans face foreclosure on their homes due to the policies of the past.

Jim Cramer made the cover of the August 20 edition of Barron's. The article questions Cramer's stock picking abilities (click here for the article). I have watched Mad Money on average at least a couple of times a week since the show debuted back in March 2005. To be fair to Cramer, he begins every show with the usual written legal jargon about how investors should use caution in making investments based on recommendations from the show. Cramer goes beyond the legal jargon though and verbally warns watchers not to buy his recommendations in the After Hours market while watching the show. Cramer tells viewers and callers that they need to do their own homework before investing. He waits until his Friday show to make his most speculative recommendations in order that investors have the weekend to do their homework and not rush out and buy the stock. Jim Cramer is also honest about his mistakes. I remember distinctly his reaction and remorse the day after he recommended Dick's Sporting Goods, only to later see the stock plunge.

I have to say that only one time have I ever purchased a stock because Cramer recommended it. I quickly sold the stock for a small profit. I enjoy the excitement of the market. I love to learn about different companies and their prospects. In my area, I really have no one to talk to who shares my passion for stocks. Watching Cramer fills that void for me. I watch Mad Money not for stock picks, but for education, for ideas and for entertainment. Let's face it, Cramer is very entertaining. I believe the entertainment factor is by design. Cramer entertains so he can inform and educate.

I wonder if the Barron's article was the first step in the coming marriage of Dow Jones and Rupert Murdoch to deliver a blow to CNBC as Murdoch's FoxNews plans to introduce its own business network on cable later this year.

As a long term investor I would hope to be more like Warren Buffett than Jim Cramer. That is not to sell Cramer short. I have learned much from him and have spent many hours enjoying Mad Money. Investors should do their own due diligence whether copying Warren Buffett or following recommendations from Jim Cramer, CNBC, the talking heads on FoxNews Saturday Morning Business Block or any other source. The Intelligent Long Term Investor will do just that.

Financials Up Yesterday

After being down over 300 points at one time yesterday, the Dow Industrials bounced back to finish down just over 15 points. The financials led the way today as traders feel that the Fed will lower interest rates soon. Some speculate that it has already secretly done so. While the reader may think that it was prescient that yesterday's entry referred to Citigroup and JP Morgan as long term buys, it was merely coincidence that those stocks finished up strongly today. Although I do believe that both are solid long term investments, no one can make better than an educated guess as to the short term direction of the market. Another financial related stock in the portfolio, AIG finished up today as well.

Light at the End of the Tunnel?

Citigroup (C) $45.61 (.05) P/E 10.72 Yield 4.62% Dividend Pay Date 8/24/07

JP Morgan Chase (JPM) $43.00 (.30) P/E 9.65 Yield 3.47% Dividend Pay Date 7/31/07

There may be light at the end of the tunnel at two of the big banks. At the end of the 2nd quarter, Eddie Lampert's hedge fund, ESL Investments, raised its stake in Citigroup to 24.8 million shares from the 15.2 million held as of March 31, according to a Securities and Exchange Commission filing released on August 14. Exactly when the purchases were made is not known. C has declined substantially so far in the 3^rd Quarter as the subprime mortgage fiasco unfolds before investors. Although Sanford Bernstein has been estimated that Citigroup may lose $3Billion in the 3^rd Quarter as a result of the subprime mess, Citigroup is poised to come through the recent market turmoil in better shape that many banks. Lampert is widely known for the quality of his investments. Analysts from Sanford Bernstein and Sandler O’Neill rate the stock as Outperform with price targets of $65 & $62 respectively. Citigroup has a current yield of 4.62%, equivalent to a bond.

While JP Morgan Chase is struggling in the current market to complete many of its current deals, the bank is also poised to do well in the long term. JP Morgan has positioned itself to take advantage of the current weak environment due to the bank’s strong capital and liquidity positions. JP Morgan , like Citigroup, pays out a decent dividend to reward investors for their patience. Currently JPM has a dividend yield of 3.47%.

Has the market bottomed out? It is too soon to tell. It may be best to wait before committing funds to either of these stocks. Yet in the long term, Citigroup and JP Morgan should provide investors with a good investment. As always the reader is reminded that I am an amateur investor. Each investor should do his own due diligence before committing funds to any equity. There is potential for substantial loss of capital by investing in equities. I am long in both Citigroup and JP Morgan Chase at the time of this writing.

Buffett's Latest Moves

According to Bloomberg, Warren Buffett has purchased shares of Dow Jones and Bank of America (click for full story) Additionally Berkshire Hathaway added to positions in several stocks including Wells Fargo, UnitedHealth, WellPoint, Johnson & Johnson, and ADR's of Sanofi-Aventis SA.

AIG Has Been An Aggressive Buyer of AIG Stock

To continue on yesterday’s entry regarding American International Group. With all of the concern about AIG’s exposure to the subprime mortgage mess, most reports overlook that AIG has been aggressively buying back stock. During the second quarter of 2007, AIG repurchased 22,021,462 shares of its common stock. An additional 24,501,510 shares were purchased through August 6, 2007, for a total of 48,993,471 shares purchased year to date. On the first trading day of the 3^rd Quarter, July 2, the stock closed at just over $70 per share. The stock hit a 52 week low on August 1 of $60 on very heavy volume. While to say that the company bought stock back at the 52 week low is total speculation, the more than 24 million shares repurchased between July 2 and August 6, were bought at the low end of the 52 week range. With over 2.6billion shares outstanding, AIG purchased just under 1% of its outstanding shares in no more than a five week period. This purchase suggests that the company saw a bargain in its own stock and wisely repurchased when the stock was down.

In the WSJ “Heard on the Street” Column of August 13, (click for full article $) it was speculated that some analysts feel that AIG is more exposed to the subprime mess than the company admits. As mentioned in yesterday’s entry, AIG feels that its exposure to subprime will have a minimal impact on the bottom line.

AIG is one of the largest insurance companies in the world. While not founding the company, Maurice “Hank” Greenberg, built the company with such diversification that the impact of losses in subprime may indeed be minimal.

AIG is likely positioned to weather the current storm in the equity market well. As mentioned yesterday, the company has a very low historical P/E at this time. The stock may well double over the next few years. Again, I am an amateur investor who is long AIG at the time of this writing. I have no knowledge of the company other than information that is available publicly to all. Each investor should do their own due diligence before committing funds to any equity.

American International Group

American International Group (AIG) released 2^nd Quarter earnings on August 8. AIG reported that its net income for the second quarter of 2007 was $4.28 billion or $1.64 per diluted share, compared to $3.19 billion or $1.21 per diluted share in the second quarter of 2006. Earnings increased 36.6% per diluted share over the same period last year.

AIG downplayed concerns about its exposure to the troubled U.S. housing market, noting that its investment in mortgage-backed securities and its lending business are meeting or exceeding performance targets.

Chief Executive Martin Sullivan reported that AIG is very comfortable with the size and quality of its investment portfolios and its operations. Sullivan further urged investors to consider the company a very safe haven in stormy times, and that AIG stands to take advantage of near panic in markets.

"In every period of uncertainty, there is also opportunity," he said. "Given the high quality of our investments and our superior financial strength, AIG is poised to take advantage of these opportunities as they arise."

AIG has no need to sell any of its securities to meet its cash needs, and is able to hold them to maturity, and realize full performance. AIG has about $28.7 billion invested in securities backed by loans made to subprime borrowers, which is about 3.4% of the more than $838 billion in cash and investable assets on hand at AIG.

AIG is currently down 9.8% YTD. AIG recently upped its dividend to .20 per share per quarter. The company plans on increasing the dividend around 20% per year under normal circumstances. AIG has a current dividend yield of just over 1%. The company has a P/E ratio of 9.65 based on 2007 projected earnings of $6.70 per share. AIG recently closed up .37 at $64.67.

While there will likely continue to be a great deal of volatility in the market over the next few months, AIG has a great deal of upward potential in the stock. The current PE ratio is less than half of the average PE ratio over the past 10 years. The stock could double over the next few years.

AIG at this time appears to be a solid investment for the long term investor. Of course I am an amateur investor. I am long AIG at the time of this entry. All investors should do their own due diligence before committing capital to any investment.

Have the Big Banks Bottomed?

Today was another wild ride in the markets. At one point the Dow Industrials were down over 200 points. After an infusion of cash by the Federal Reserve into the system, the markets rebounded to the Dow down just over 31. The Dow has lost almost 1000 points since it peaked at just over 14000 just a few weeks ago. The financials which were hammered on Thursday bounced back a little today. In fact there are some analysts who think that the big banks are now a buy. I am heavily weighed in the financials in my current portfolio. I know many think it is unwise to be anywhere the financials right now. As a long term investor, I am prepared to ride out the storm created by the subprime mortgage crisis. I am of the opinion that Citigroup, JP Morgan Chase, and American International Group are such large diverse companies that fallout from the problems created by the subprime mortgage meltdown will be limited. Just this week AIG’s release of 2^nd Quarter earnings appear to support this thesis. This may be the time to buy into the financials. As always remember I am an amateur investor. You should do your own due diligence to be sure if any particular equity is right for your portfolio.

Slammed Again

Like most investors, my portfolio was slammed again today by concerns over liquidity. While no one knows for sure what direction the market may take tomorrow, it may well be that we are in for a correction. In fact, my portfolio is in a correction now falling by more than 10% in the past month.

One bright spot today, GM (currently in the portfolio) was the only stock in the Dow Industrials that was up today. Go figure. The down day spoiled a good earnings release late yesterday of AIG.

AIG Reports

American International Group released 2nd Quarter earnings after the market close today. AIG beat the street estimates for both the top and bottom line. The stock has risen the past three days in anticipation of strong earnings. AIG will present a conference all on Thursday morning to discuss the quarter. There has been a good deal of concern that AIG may face losses due to exposure to subprime mortgages. We will present a detailed report on AIG this weekend.

Steady As She Goes

That the Fed decided to hold interest rates steady at 5.25% should come as no surprise to the long term investor. Fed Chairman Ben Bernake has been consistent in that his concern is inflation. The market dropped after the announcement probably as a result of weaker hands being shaken out by the news. The market then bounced back probably as a result of bargain hunters swooping. The Dow finished up about 38 points for the day.

Apparently some felt the Fed would at least indicate that a rate cut was a possibility due to problems in the credit market. This investor asks why should tax payers bail out hedge funds. People who invest in hedge funds should be market savy to begin with. Investors should know the risks that they are taken with a specific stock, bond or other equity instrument. While anyone hates to lose money, these sophisticated investors should know what risks they are taking by investing in these instruments.

If I as an amateur investor make a mistake and lose money, I take it as a lesson learned and go on. That is why they call it risk.

I did note that the financials in my portfolio all finished strong today, particularly after the sell off after the Fed announcement. The action of the past two days may have restored some confidence in investors.

AIG reports after the close of the market tomorrow. The stock has been up strong the past two days..The market is pricing in positive news in AIG. AIG had a recent sell off after investors became spooked that the company had a strong position in the subprime mortgage industry.

Disclaimer: I am long AIG. Before making an investment do your own due diligence.

The Wild Ride Continues

The volatility in the markets continued today with the Dow making up all it lost in last Friday's sell off. It was the best day for my portfolio in over a month and the best Monday I have ever had.

Several stocks in the portfolio closed at their high for the day on heavy volume. Of particular interest me are Pfizer and AIG. Pfizer was up .60 today to $24.11. I suspect with the high dividend yield of Pfizer will not drop much further unless there is some major negative news. According to Marketwatch is on track to triple its Phase III portfolio by 2009. Pfizer expects to introduce 4 news medicines a year to the market beginning in 2011 (see article at Marketwatch). The patient long term investor may be getting a bargain at this time with Pfizer.

AIG was up $2.92 today. I suspect that traders are buying before earnings which will be released after the close on Wednesday, August 8. I still contend that AIG is cheap and at some point will have a major positive move.

Disclosure: I am long in both PFE and AIG. I am an amateur investor. Always due your own due diligence before investing.

General Motors

Excluding charges, GM said its operating profit was $1.4 billion, or $2.48 a share, up from $1.1 billion, $2.03 a share. Analysts polled by Thomson First Call had expected an operating profit of $1.13 a share. GM reported automotive revenue at $45.9 billion during the 2nd Quarter, up from $44.9 billion a year ago.

General Motors is the most speculative stock in my current portfolio. While General Motors beat the estimates of the street for the 2nd Quarter, this is a turnaround situation that has "iffy" chances of success. There are many factors that must go right in order for the company to be successful in its turnaround. Some of these factors are out of the control of management of GM.

First and foremost GM must have successful negotiations with the United Auto Workers (UAW) this summer and fall. If the negotiations fail, GM as we currently recognize it may no longer exist in just a few years. Even if negotiations are successful, the WSJ reports that the company will be worth nowhere close to its current $18B market capitalization.

It may well be that if a successful agreement is not reached with the UAW, General Motors could close many if not most of its plants in the United States and Canada and begin to import vehicles from facilities overseas. The Chevy Aveo, manufactured in South Korea, is just one example of this going on already. GM could expand its facilities in Asia and Mexico to import vehicles into the United States. Even with a successful UAW agreement, GM may take this path to reduce costs.

Other factors such as rising oil prices, rising interest rates, the housing debacle, the unstable geopolitical situation, the risk of another major terrorist attack on the United States are obstacles that GM is facing as it implements its turnaround.

It appears that GM management, let by Chairman CEO Richard Wagoner, understands that the status quo must change in order for GM to remain solvent. GM has cut costs by closing plants, buying out workers, and reaching a successful agreement with the UAW at Delphi. GM has raised cash by selling off assets such as 51% of GMAC last year and is currently in the process of selling off Allison Transmissions (a very profitable high margin subsidiary).

Many make sound arguments that cost cuts and the selling of assets are just Band-Aids that will not cure what ails GM. General Motors must look boldly into the future in order to be remain solvent. Fortunately for the long term investor, GM is doing just that. In the 2nd Quarter, more that 50% of revenues came from outside of North America. GM has a great presence in China. Buick is the number one nameplate among imports in China. Buick is considered a car of the elite in China, much as Cadillac is considered in the United States. While numbers are small, GM has had success in India. General Motors is expanding its presence in Malaysia and Indonesia, possibly even manufacturing there in the future.

According to the Wall Street Journal, GM's North American operations had an adjusted profit of $78 million for the 2nd Quarter turning around an adjusted loss of $94 million a year before. Net sales fell to $29.57 billion from $30.85 billion. GM Europe posted adjusted net income of $236 million, up from $143 million a year earlier. Net sales rose to $9.56 billion from $8.74 billion. Net income on an adjusted basis at GM Asia Pacific rose to $237 million from $164 million. Sales climbed to $5.45 billion from $3.78 billion. GM Latin America had adjusted earnings of $213 million, compared with $155 million a year ago. Sales rose to $5.45 billion from $3.78 billion.

Because foreign profit margins are so thin, GM must look to North America for long term profitability according to Standard & Poors. GM is currently making large capital expenditures in technology. The leadership at General Motors realizes that it can not afford to wait to see what others such as Toyota are doing. GM must take the lead with new technology. According to Bloomberg, the Chevrolet Volt concept plug-in car has twice the range of that of Toyota's plug-in car (See full article at Bloomberg). The Chevy Volt battery can be charged on a household outlet. The car uses an engine to generate electricity when the battery runs down. This engine may be powered by gasoline, diesel, or by groundbreaking technology hydrogen fuel cells. The engine only recharges the batter and does not power the drive train. One tank of gas could carry the Volt as far as 640 miles.

General Motors is taking a big risk here. It is comforting for the long term investor to know that CEO Rick Wagoner has the largest sharecount among insiders at 400,000 shares. Wagoner appears to be committed to returning General Motors to long term sustainable profitability.

All that being said, Warren Buffett has stated in past that he would not invest in the auto industry. Companies such as General Motor require tremendous amounts of capital, huge amounts of long term debt and typically very slim net profit margins. The automobile industry is very cyclical, continually going from periods of boom to bust.

Many investors are betting that GM will not be successful. Currently the stock has a short interest of 11.92% of shares outstanding (over 57 million shares short).

Although the stock has risen substantially over the past 12 months (almost 30%), make no mistake, General Motors is a very risky investment for a short term and a long term investor. Earnings are all over the board, sometimes very positive as the past quarter and at other times huge negative surprises.

At this time the risk is worth it to me personally. I opened my original position in GM in January 2007. I have added to my position twice since them. Even with the large market plunges of the past several weeks, I am still up almost 4% in General Motors.

As an amateur investor I can not make a recommendation for you to invest in General Motors. I can recommend that you do your own research on the company and make your own decision on whether you can tolerate the high risk of owning this stock. If GM is successful in its quest for cutting edge battery power and fuel cell technology, the GM of the future could be very different and much more profitable than the GM of the present.

Overreaction?

Today was another horrible day in the market. The sell off was particularly steep as the closing bell neared. This was a sign that traders were reluctant to keep positions open over the weekend. Perhaps traders fear that more bad news will be forthcoming over the weekend.

The news of the downgrade at Bear Stearns by Standard & Poors appeared to have a negative impact on the market along with the weaker than expected employment numbers. The news of the Bear Stearns downgrade should really come as no surprise after the investment bank has closed two hedge funds and another is not allowing redemptions.

The market is down substantially over the past two weeks. Whether this is the much anticipated greater than 10% market correction or the beginning of a bear market remains to be seen.

One thing that the long term investor should bear in mind is that the market often overreacts both to negative news and positive news. This overreaction often presents the long term investor with buying opportunities when the market is down and a good point to take profits of the market has overreacted to good news should one be ready to sell.

Today's huge sell off as the market neared closing may present a buying opportunity as soon as next week.

Dividends

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in"
John D. Rockefeller, founder of the Standard Oil Company
(Exxon Mobil, Chevron, Marathon, Amoco are successor companies of Standard Oil)

In The Future for Investors, Jeremy Siegel makes a point that stocks that pay dividends should be an integral part of an investors portfolio. I will not make a long term investment that does not pay a dividend. Current dividend yields in my portfolio range from 4.86% at Pfizer to 1.25% at AIG.

I am attracted to stocks that pay dividends for several reasons:

1) They produce income which I then reinvest.

2) The dividend yield helps put a floor on the stock during a down market. For example Pfizer's current yield of 4.88% is attractive to investors. With a yield of almost 5% chances are the stock price will not go down much further baring some bad news impacting Pfizer directly or bad news impacting the broad market overall. If you bought 100 shares of Pfizer today at $23.75, you would have invested a total of $2375. The current dividend amounts to $1.16 per share annually for a yield of 4.88%. Suppose further that the price of Pfizer begins a slow steady climb to $50 per share. Those who enter at that point receive a dividend yield of 2.32%. Although your stock is now worth $5000, you still have only $2375 invested and the yield of your actual investment remains at 4.88% as long as Pfizer continues to pay the same dividend.

3) Many companies have increased their dividend payout recently. In my portfolio Alcoa, Caterpillar, Exxon Mobil, American International Group, Pfizer, JP Morgan Chase, and Citigroup have all increased their dividend payout in the past year.

4)Dividends truly allow me to share in the profitability of a company. I prefer a company to pay a dividend rather than repurchase stock. When a company buys back its shares, an investor only profits when he sales his shares. As a long term investor what if I am not ready to sell my shares. For example company XYZ is going for $50 a share. If the company buys back 10% of its shares, theoretically the shares should go up 10% in price to $55 a share. The only way that an investor can reap that 10% is to sell his shares. If the company increases its dividend rather than repurchasing shares, the current shareholders will be rewarded for remaining as investors in the company. Some companies such as Exxon Mobil buy back shares as well as increase their dividend. Such as strategy allows an investor to share in the current profitability of a company in addition to allowing for the possibility of a nice capital gain when the investor does decide to sell the stock.

5) While they are taxed, dividends are currently taxed at 15% (historically the tax rate on dividends has been much higher).

6) Dividends reward the patience of the long term investor.

Closing the Book on July

July 2007 was the worst month I have had since July 2006. Interestingly the market began its upward movement at the end of last July. Perhaps the cycle will repeat.

As of July 31, I am up 4.3% YTD. The S&P 500 is up 3.35% YTD. The Dow is up 6.00% YTD. Honeywell leads the 30 stocks in the Dow Jones Industrial Average with a year-to-date gain of 31.4%, according to data from Dow Jones. Alcoa is second with a gain of 27.5%, followed by Caterpillar with a rise of 25.6%. Citigroup lags with a year-to-date decline of 15%. See full story at Marketwatch.

While General Motors reported a profit for the 2nd quarter, July sales show that the auto giant still faces a tough battle to remain profitable in its core North American region. Sales were down 22% in July. I am still hanging in long with GM. It is the most speculative stock in the portfolio. Look for a full report on GM pros and cons in this weekends blog.

Some analysts feel that investors have overreacted to AIG's exposure to the subprime market. Shares of AIG fell over 8% in July. AIG will report earnings after the market close on Wednesday, August 8. My source indicates earnings of $1.70 per share. Average analysts surveyed estimate $1.61 per share. For the long term investor, this may be a good time to open or add to a position in AIG.

As a disclaimer: I am an amateur investor. I do have long positions in GM and AIG. One should carefully research or seek the advice of an investment professional before investing.

Proved My Own Point This Morning

In an earlier post I mentioned that it is difficult for anyone to accurately predict the short term direction of the market. In my posting this AM, I "predicted an immediate and steep decline at the open". I also predicted that the market could bounce back barring further bad news.

Well the market opened higher before going into a steep decline this morning. At least I got the part that the market could bounce back correctly, though who knows if we will experience another late afternoon sell off today.

Be Ready For a Wild Ride Today

The Dow Industrial Futures are down 133 points at 7AM in the East this morning. Fair Value of the Dow is down just over 11 points. The Fair Value of the S&P 500 is actually up just a bit this AM. There will likely be an immediate and steep drop at the open this morning. Markets in Asia and Europe have had steep declines today. Depending on what news we may get regarding mortgages, mortgage companies and hedge funds, the Dow may bounce back toward the end of the day. However if more bad news comes out during the day, this could be a very bad day for markets indeed. Margin players could get squeezed causing even more of a drop. I plan on staying long looking at the long term picture.