May 2008 Portfolio Results

Following are year-to-date returns through May 31:
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NoTouch Portfolio: +3.8%.
OOP Portfolio: +2.8%.
Dividend Portfolio: +13.4%. Three stocks in this portfolio have had spectacular runs in the first five months of this year: HGT up 49%; PWE 26% and NRP 21%. Their ytd returns are really even better, as this portfolio is only reflecting changes in share values. All dividends are being collected into a general cash pool to make the record keeping easier, and not allocated to the specific stock that produced the dividend. HGT and PWE pay monthly royalties and NRP pays a quarterly dividend.
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All the model portfolios compare favorably to the overall market averages:
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Dow: -4.7%.
S&P 500: -4.6%.
Nasdaq Composite: -4.9%.
Wilshire 5000: -3.8%.
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The markets continue to be in rally mode. In my system, the Nasdaq March lows now have become long term lows, and the April lows have become intermediate term lows. At 2522, the Nasdaq is above its moving averages, and the 20, 50, and 200 day ema's are in proper bullish trend alignment. However, so as not to go totally in the tank with the bulls, Friday's close makes an interesting candlestick pattern and indicates some indecision. The close this week also could not exceed last week's high, so early trading next week will determine whether there is a short term continuation pattern or a potential reversal. The bulls need to clear the 5/19 high, or there is real potential for a selloff.
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The S&P 500 is not as bullish as the Nasdaq. The index kissed its 200 day ema from the bottom side both Thursday and Friday, but could not penetrate it. Both the 20 and 50 day ema's are below the 200 day ema. It is possible the S&P held and marked a short term low this week, but the index needs to clear the distinctly negative short term pattern it printed on 5/19.
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I had a good month in my real life accounts due to my continuing overweighting in energy and commodity stocks. The first half of the month was spectacular; it almost had me dreaming of lazy days on tropical islands, but then reality returned. It still was a nice month. I did lighten up more on some trading positions. I should have dumped RIO this week, too, but did not. It triggered a sell on the system I use, but I was away from the markets for a few days and by the time I returned it's Tues/Wed/Thurs results had carved a new short term low. If that low doesn't hold, I'll exit to protect my gains on this one. I've been in the stock long enough and it has advanced enough that I had intended to use a new 10 day low as my exit signal, and that happened Tuesday. I do not like to leave stop orders with the broker. I prefer to monitor them myself. I have enough of a gain in RIO to ride out some hits, but I still do not like to violate the discipline of my system.
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I did not like the action in my all-time favorite stock, XTO, recently either. It has painted two distinct distribution weeks in the past six weeks, made a double top on the weekly chart, and if next week's price action is negative, will have marked a definite short term top. XTO is my longest held position. I know you are not supposed to fall in love with a stock, but this company has been great to shareholders over the years. Not only has it done well itself, but XTO has also spun off shares of royalty trusts CRT and HGT to shareholders over the years, and when they announced their latest 5:4 split, they effectively increased the dividend 25% at the same time, by not reducing the dividend amount when they increased the shares.
...XTO CEO Mr. Simpson gets paid like a rock star. I cringe every time one of those articles about overpaid executives comes out because I know he will be on it, and it sometimes has a short term effect on the stock. But at the same time, I think he is the best CEO in the oil/gas business, and I expect to be an XTO shareholder as long as he continues at the helm. I sometimes sell out of trading positions in XTO, but the core holding is about as untouchable as it gets for me.
...And I've become much more appreciative of the effects of royalty and dividend payments over the years. I never was interested in them before. I only used to be concerned about price movement. But CRT changed that for me. When XTO spun off CRT to shareholders, in retrospect that was a watershed moment for me, although I did not know it at the time. I logged onto my online account one day and saw shares of CRT there. At first I thought it was a mistake. At that time, I wasn't keeping up with my reading on my positions, another bad habit.
...I figured there wasn't enough of the CRT there to bother selling it, so I just left it there. After several months, I finally started noticing those monthly royalty payments. I bought more, and subsequently added royalty trusts HGT (another XTO spinoff), SJT and PWE to the portfolio. I also use the financial ETF PGF for the monthly dividend. I have tried from time to time to make ACAS a part of the mix, but have always been forced to sell out due to their price action. In fact, I have gone as far as to remove them from my watchlist. Once I have proved myself wrong too many times on the same stock, it is time to realize that I just don't have a feel for trading that one and move on.
...Years ago, I knew a trader (via bulletin boards) who used to make all his monthly living expenses out of dividend and royalty payments. I have always thought that would be a good way to go, but of course, requires a lot of capital, and probably a more austere lifestyle than my better half would tolerate. He had been the beneficiary of a large lump sum settlement and used those proceeds to get himself set up with the dividend/royalty paying stocks to pay his monthly bills. Then he would trade the rest of the money. I never met him personally, but he was very helpful to anyone who asked. He was always more than gracious to me, and gave expansive, detailed answers to all of my questions. I was pleased to see him featured in an article in Investors Business Daily some years after that. Although my present day style does not begin to resemble the methods I used in those days, the education I received from several people on those early Prodigy boards was invaluable. Several of the regular contributors on that board went on to become full-time traders, a couple of them fairly well known. I have never run across a similar group since.
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OUTLOOK
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It would not be surprising to see continuing selloffs in the commodity and energy stocks. While the longer term trends are firmly in place and are not going to change, imo, unless the world economies go totally into the dumper, there is considerable pressure being applied for price relief right now.
...From all appearances, there is already warfare going on between the countries that control resources and the countries that use those resources. It appears that President Bush went hat in hand to visit our supposed allies a few weeks ago to try and get them to help out with the oil situation, but they basically told him to forget it. That in itself is a major story, because if true, it would indicate that there is a genuine belief in that region that there is a power shift going on and that they do not have to worry as much about keeping the U.S. happy.
...A few days after his return, Mr. Bush lashed out against the oil producing nations in that region. In warning them that their resources were not going to last indefinitely, he may have also inadvertently confirmed the peak oil theory.
...Then a few days ago, European leaders were speaking out against high oil prices and publicly suggesting that there needed to be concerted efforts to bring the prices down. And, lo and behold, there was a commodity and energy selloff shortly afterward.
...It appears that oil and energy will still be key factors in the end-time scenarios that are shaping up. The major countries that are net importers of energy also happen to have more political and military clout, with a couple of notable exceptions, of course, than the countries that export energy. There are many folks, among them former Fed Chairman Mr. Greenspan, who state that the U.S. is in Iraq primarily because of oil.
...When the major powers that be are forced to step up because of the potential for civil unrest in their countries, that is something to keep an eye on. They can exert powerful pressure on nations, not to mention the markets that we trade. I have been lightening up on my resource stocks for over a month now. I am also keeping a close eye on DUG, which I use at times to hedge against my permanent portfolio energy long positions.
...This past month I also added the first tech stock that I have owned for quite some time. GLW is an industry leader in its field, with a 23% OR and 31% ROE. The weekly chart has formed a decent cup and handle formation, so I bought the breakout. I was looking for further diversification away from energy and up to that point did not have direct exposure to tech. The breakout is a favorite Canslim pattern. It would have been good to be in this stock long before now in 20/20 hindsight, but I was sitting fat, dumb and happy in my other positions up until I started getting edgy about the resource sector several weeks ago.
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Shocked! How the Oil Crisis Has Hit the World, The Independent, UK.
Irate Europeans Protest the Soaring Price of Gasoline, New York Times.

April Portfolio Results

The model portfolios all rebounded in April. All three finished the month in positive territory for the year, still handily outdistancing the major market averages.
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Following are the year-to-date returns through April 30:
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NoTouch Portfolio: +1.7%.
OOP Portfolio: +1.3%.
Dividend Portfolio: +1.3%.
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Those numbers compare favorably to the market indices:
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Dow: -3.4%.
S&P 500: -5.6%.
Nasdaq Composite: -9.0%.
Wilshire Composite: -5.6%.
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Dividend Portfolio change: As announced beforehand (see the 4/7 blog entry), MIC was sold at the 4/7 closing price. The proceeds from the sale were used to buy PBT at the 4/8 opening price. When the Dividend Portfolio was set up, I did not intend to make changes to it. I wanted to set it and forget it the same as the NoTouch and OOP Portfolios. But when the MIC position got to a 24% loss, I decided to move on. In real life trading, I would never let a position go against me by that much - at least not intentionally. (I did have one drop 50% overnight one time years ago. What a feeling that was when I turned on the computer to start the next day's trading and saw that.)
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Commodities have been getting tossed about in choppy seas for the past several weeks. That hurt my real-life numbers this past month, but overall still doing well, better than the model portfolios and, of course, much better than the negative returns in the stock market.
...My contention has been that as long as the powers that be are able to hold things together, then commodities should do well, too. On one of CNBC's morning shows this past week, the anchor was absolutely trashing Jim Rogers, a legendary investor who is heavily into commodities and pretty much negative on the the U.S. markets in general. This anchor was vehement, even opining that Mr. Rogers likely made all his money when he was with Mr. Soros all those many years ago and hasn't made anything since.
...It seems sometimes there is an endless supply of cheerleaders on the financial channels touting techs and financials. That has been going on for months, no matter how badly they perform. The cheerleaders are so quick to point out bubbles in commodities - mostly because they hate them, I think. Money that goes into commodities is money that could have gone into something they might make a market in, perhaps. At least that's the way it seems. Mr. Kudlow was ranting recently about gold on his program recently, too. He wants the central bankers of the world to unite and crush the gold prices. Gold is still viewed as a safe haven refuge by many people, and holding it is seen in some circles as a repudiation of the current fiat financial system.
...I don't see gold in that light so much any more. The world is never going back on a gold standard. That ship has sailed. Instead, we are moving inexorably toward an electronic commerce system, where all buying and selling will be done within a central system that requires biometric identification from all participants. More than anything, I do think that gold does still serve somewhat as inflation protection. As our leaders continue to debase our currency, then tangible assets tend to reflect a higher price. In that light, I still favor commodities in general over gold due to their practical uses in the world economy.
...The Asian economies, China in particular, are on the rise. China is bent on becoming the world's superpower. As they rise, they exhibit a voracious appetite for natural resources that tends to increase demand on somewhat inelastic resources. When you hear about a company or nation making a major oil discovery that could end up solving all our woes, if you believe the oracles, that oil won't be on the market tomorrow, next week, next month or next year.
...If the markets and world economies do go totally into the dumper, as in a depression, that will be deflationary for the metals and natural resource stocks. They will get trashed right along with everything else - and there have been a couple of times in the past two months where I thought that might be starting. But the deepest pockets and most powerful people in the world are working together to hold things together. As long as they are able to do so, then I still expect natural resource stocks to outperform the markets in general, subject to some violent corrections in the process, though.
...With all the publicity about Exxon's $11 billion profit and the politicians pandering for votes as a result with plans that will not work, there was little notice about the fact that XOM's worldwide oil production fell 10%. Even excluding the situation in Venezuela, their production was down 3%. And there are more than a few people that think that some of our supposed friends in the Middle East haven't increased production much because they can't, not because they won't.
...If I were still a chartist, I would have to note that the S&P and Nasdaq are both sitting at critical points. Both cleared their 200 day ema's last week, but painted negative patterns in Friday's trading action. The S&P painted the second leg of an evening star candlestick pattern. Down action Monday and Tuesday would be discouraging to bulls. The Nasdaq had a lower close than open Friday. Both indices are showing negative divergences in their MACD patterns, and their stochastics are overbought. However, the weekly charts still look solid.
...Having said all that, I don't pay much attention to charts. I use them these days as secondary indicators. Charts are too easy to paint in order to set traps for small fry. And negative divergences can stay negative without a corresponding price drop longer than you can believe sometimes, especially if you are in a short position.
...One indicator that I have been using as a tool in deciding whether to ride out corrections in the resource stocks or to lighten up, is to check and see how the financial and housing stocks are doing. When I see housing stocks being jammed upward, I am of the opinion that the rally won't have legs and equilibrium will soon be restored. The housing crisis is nowhere near over, and it is going to be quite a while before the home builders are again prospering. So when I see them being bought and profitable resource companies being trashed, that doesn't compute. To me, that is either hedge funds or their ilk trying to cover short positions in financials and homebuilders and having to sell off some of their good holdings to raise the cash to do so. Or it could just be blatant market manipulation for no other good reason. If you don't think that happens, look at some intraday charts for your favorite stocks and watch them go up and down all day long. Many times you will see relentless buying for a couple of hours, then the action turns on a dime, and the corresponding selling pressure is just as unrelenting.
...I am also starting to hear grumblings from co-workers about poor 401k performances. That could be significant going forward. 401k money that is deducted automatically from workers' paychecks provides a significant support to the markets. If people get scared enough to stop making their contributions, or have to start cashing in their funds in order to make ends meet, that will add to the problems going forward. There are already reports about folks having to part with prized possessions online and at flea markets to make ends meet.
...As always, nothing I write is to be construed as advice. We are sailing into some times that will prove to be unique in the history of man as the return of Jesus Christ draws nearer. There are major decisions to be made. We each own our decisions. May the Lord give us wisdom and strength for what lies ahead.

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