Thoughts for 2008

Some time has passed since I last wrote. Things got a little hectic towards the end of the year but I want to start a new in 2008 and try to at least provide a weekly update of what the market did and what moves I made in my portfolio. Writing things out helps me to recap and refocus. I hope it helps you as well. Feel free to write back with your comments.

I was also thinking of starting an investment club that we could all partake in. We can discuss strategies and re-adjust monthly. We can all pitch in ~$500 each to start and then $25 a month to help accumulate funds. I would like to get at least 5 people interested so we have some capital to play with. Once a month, everyone will send an email with their thoughts and one suggested idea (buy this stock and sell that or go 50% into cash). We will vote on the best idea and execute it that month. At the end of the year, we can all get together, have a drink and give out stuff for the best trade, the worst trade, etc. Let me know if you are interested and I will look into it further. I have attached a few links to check out:

http://www.fool.com/InvestmentClub/InvestmentClub01.htm

http://www.investmentclubhelp.com/

http://biz.yahoo.com/edu/ed_clubs.html


My personal thoughts going into 2008 are more pessimistic than optimistic but that doesn't mean there isn't money to be made. I think both the US and World economies slow with the US slowing at a faster pace due pressure on the US consumer. There is just too much bad news and not enough good news. We have housing that is a mess. Inventories continue to rise, home prices continue to fall and liquidity non-existent (Liquidity is needed by banks to lend out money to the consumer. Banks are constrained right now and therefore are hesitant to lend money. This is why after 100bps in Fed cuts, mortgage rates have not changed). Jobless claims are rising almost to levels where the last recession took place. The weak US consumer coupled with rising inflation leads to stagflation which is the worst case scenario. People don't have as much money yet prices keep rising!

So with all that said, I am positioning my portfolio into recession proof stocks and high dividend payers. I am also somewhat bullish on well capitalized (lots of cash on hand) small caps. I think the Fed is going to have to cut at least another 50bps if not 100bps so this bodes well for smaller companies. They will be able to borrow at lower rates to finance their growth. If not, they still have plenty of cash. As long as they are not laden with debt and have good, experienced management, I would venture into some small cap. I also like US based companies that have over 50% of their revenue coming from overseas. The dollar should continue to be weak against other currencies and this is a positive for these companies as they make money in the foreign currency and then translate it back into dollars. I am a big fan of staying in at least 30% cash right now. This will give me the opportunity to pick up stock that I believe is “on sale.”

Depending on the type of stock and tax implications, I put my positions into 1 of 3 accounts. I have a trading account, Traditional IRA (former 401(k)) and a Roth IRA. I put most of my speculative positions and options trades (other than covered calls) into the trading account. This is so I can write off any losses. I am the most aggressive in this account. I put all of my big dividend payers into my Roth since this grows tax free. My traditional IRA has the biggest chunk of change in it so I use this for things I really believe in and want to take bigger positions in. I usually put positions I wouldn’t mind holding for the long term in this account. I also write a lot of covered calls in this account.

I get all of my info and research from the following sources:

Bloomberg
Etrade
Scottrade
Yahoo! Finance
Thestreet.com
Realmoney.com – Subscription
Actionalertsplus.com – Subscription
Stocks under $10 – Subscription

Currently owned stocks

Most of these stocks come from recommendations from the above sources. I invest by a top down method. I take a view of the overall economy (US and World) and then I breakdown those sectors which I think will outperform and then select those stocks which I believe are undervalued or best of breed. I purchase and sell stocks in layers. I rarely sell or buy all at once. My investing philosophy is modeled after Jim Cramer’s.

Roth IRA
NLY – Is a REIT (Real Estate Investment Trust) that is well capitalized and is able to pick up MBS (mortgage backed securities) at huge discounts in this volatile market. Since they are a REIT they have to pay out most of the earnings thus giving this stock a current 7% dividend

MCD – McDonald’s is a defensive stock that pays a 2.5% dividend and has a big chunk of its income coming from overseas. They are also taking market share from Starbucks with their premium coffee.

VZ – Verizon has a 3.5% dividend and has a great growth story with their new FIOS service. I have FIOS recommend it highly. The quality is that much better both internet and TV. This is one of my favorite stocks.

OHI – Is a Healthcare REIT. Pays a 7% dividend. I have owned this stock for years. It consistently moves between $13 and $17. I always own shares but I trade it the range as well. One day this company will be bought out.

Traditional IRA
CVS – Defensive stock tied to healthcare. Consolidation has taken place in this industry with Walgreens buying Happy Harry’s. I could see CVS buying Rite Aid to compete. CVS is well run and more a defensive holding than anything. I will probably look to sell in the upper 40’s

SGP – Pharma company that is best of breed. Has been beaten up lately but should trade back into the 30’s early in 2008.

CLNE – Small cap natural gas play. Very volatile and I would normally hold it in my trading account but I wanted to take a big position. It has great management and has just been initiated as a Strong Buy by Broadpoint. I think you will see many more analysts start to cover this stock.

RTN – Defense contractor – Defense spending will continue in any economic environment and regardless of who wins in November.

WB – Wachovia bank - My worst pick in 2007. The only saving grace so far is its 6.75% dividend. Hopefully they don’t cut it. I don’t think they will. The CEO came out and was bullish on the stock but who knows. I continue to write covered calls to try to recoup some of my loss as I wait for it to trade back up.

TASR – Small cap with great growth potential. Orders keep coming in from all over the world and there is no real proof that stun guns harm people. They have had over 50 cases that have been thrown out. Best thing about this stock is the residual income it gets from the sale of its stun gun cartridges. Think razors blades. That is why this stock will continue to grow. The cartridges are not reusable so you have to buy more!

Trading Account
EMC – Tech company that owns over 60% of the hottest IPO VMWare. The stock doesn’t fully value this let alone its core business. Stock should trade back into the 20’s.

SIRI – The merger will go through, it’s just a matter a time.

EGT – Small cap slot machine company. Sells machines in Asia. Asia loves to gamble and with more disposable income being created there = more gambling!

CLNE - Up 9% today!

Corporate Capital Management

Management has 2 basic choices on how they fund themselves:
1) Issue Debt
2) Issue Stock

If you were a manager when would you issue debt vs. stock and vice versa?

Generally it is a some combination of both but there are reasons for each.

Debt gives you better tax benefits and when interest rates are low, you might want to issue debt so you pay out less interest. Debt also depends on the credit worthiness of the company (ie AAA vs AA vs A vs BBB....etc). There are a lot of variable that go into issuing debt.

Stock on the other hand is a one and done deal. If you are public company then you already know what you are going to get. If your stock is trading at $50 a share then you are going to get roughly $50 x # of shares you are going to issue. Most likely you will get less than $50 a share since you will be adding to the total shares outstanding and diluting the stocks value but the current price is a good proxy.

So back to the question or more specifically, when would you issue stock?

The answer is when you think it is as high as it's going to get! That way you get the most bang for your buck.

The lesson here is when you hear of a good company getting ready to issue more stock - be very weary - it has a higher probability of going DOWN!

Check out WYNN stock:

CLNE since August 27th

Up 25% - Guess Cramer missed this one.

CLNE from a different standpoint

Cramer on CLNE from Aug 27th

http://www.stockpickr.com/popupLinks.php?all=allvideo&url=http://www.thestreet.com/video/cramermarketupdates/10376279.html

Just a reminder that it is purely a spec play!

2 Quick Lessons

1) If you have a strong conviction about a stock - go with it. I wrote last that I would be back in on CLNE regardless of price on Monday. I didn't do it and now I have watched it go from $15.25 to $16.50. A 6% gain in 2 days. It was even up today on a down day!

2) A lesson about commissions - Buy in 50 share lots or more. Preferably 100 share lots. Think of it this way. If you buy 20 shares of a $20 stock and commissions are $10 each way (buy and sell) that stock has to go up $1 dollar or 5% just to break even. If you bought 100 shares now the stock only has to go up $0.20 or 1% to break even. Got it? Good.

Weekend News

So after doing some Saturday morning reading, I found out that COP has announced that they are going to shop a natural gas field in China to help meet a rising demand. I see this being both bad and good for CLNE. Bad because of competition and COP is a really big company that can eat CLNE's lunch. However, COP being a much bigger company may help facilitate the movement of outside companies moving in. That should help CLNE. If they can just get started in China, that should boost up the shares. Then you always have CLNE being a takeover candidate. They are already established here and in Peru. COP is in the game but what if Exxon wants to get in? An easy way is to just buy up a small company who already knows what they are doing and build off that. Can you say 20% premium?! I just see so many upside reasons to own this stock and my favorite still being it's management in Boone Pickens. I know I said that I was going to wait until 14.50 to pick up more shares but I think I am going to start layering in on Monday. I would never forgive myself if I have been talking all this talk and missed the big run up.

Other notes:
Amazon.com just launched a downloadable music site that it plans to compete with Apple's iTunes. The difference between the two is encryption. Apple encrypts its files so that you can only use it on an iPod and you can only have it on 5 iPods. Amazon has no such thing. You can download it and put it on anything. This could be huge for Amazon. I am genuinely contemplating them as an investment.

Next week (Friday) is a very important economic number. Non-farm payfolls. Last month it was negative showing just loss not growth. Although it is expected not to look good (it lags one month), it should give some insight as to how bad this credit crunch has been.

Let's try to get this blog going again.

The 100pt gain yesterday was mainly due to GM coming to an agreement with the UAW and speculation that Bear Stearns is going to have someone come in and take a big stake in the company. The market is poised to open up again today, but I think we end down big. Reasons revolving around housing issues again. New home sales are expected to be be down 5.2% but there is a lot more downside risk and KB Homes, who reported this morning only confirms that. See below:

*KB SEES RISING FORECLOSURE RATES CAUSING MORE HOME PRICE CUTS
*KB HOME SEES HOUSING INDUSTRY CONDITIONS WORSENING INTO '08
*KB HOME SEES HOUSING INDUSTRY CONDITIONS CONTINUING TO WORSEN
*KB HOME BELIEVES IT WILL BE 'SOME TIME' BEFORE RECOVERY BEGINS
*KB HOME 3Q HOUSING GROSS MARGIN FALLING TO A NEGATIVE 28.0%
*KB HOME 3Q CANCELLATION RATE 50% VS 34%
*KB HOME SEES NO SIGN THAT HOUSING MKT IS STABILIZING

The treasury market is already up a good amount which signals that investors are picking up safer investments. I have been raising my cash positions going into all of this strength. I am actually hoping we have a nice pull back so that I can start layering into CLNE again.

And.....I'm Out!

I sold out of everything I had with a gain this am in the pre-market. It wasn't much but I am not going down 100% in this slaughter. I will use the proceeds to strategically buy down my other positions. I still love CLNE and will buy when they go lower today.

New Strategy

Hopefully everyone sold some of their CLNE yesterday. I sold about 150 shares which leaves me with 300 more to go. Anytime your stock is up over 15% I think you should trim the position. You can always buy more if it goes down and you still like it.

I have a new strategy that I want to put out there. With this roller coaster ride of a stock market, we have tremendous volatility which has translated into big swings in the market each day. So with that said, on big up days I am going to buy puts on financial institutions - my favorite is WB (Wachovia). I did this yesterday and clipped a 60% REALIZED gain this morning.

Why do I like (or dislike, remember we are buying puts which bets the stock is going down) WB?

1) I had a horrible banking experience with them recently. I won't get into it but their customer service is sub par to be polite. Also, all of the customer that were waiting with me were closing their accounts.

2) Back in 2005 or 2006, they bought Golden West. Golden West originated a ton of option ARM and hybrid ARM mortgages that are all sitting on their balance sheet (now WB's balance sheet). All of these mortgages will be marked down at some point and/or are the first type of mortgages, I believe, to start taking major losses. The borrowers of these mortgages are going to be shocked to say the least when these reset and they are not going to be able to pay.

Financials are out of favor right now and I think WB is going to have some major problems. You have both a short term way (general sector bearishness) and mid/long term (Golden West acquisition) for them to go down.

On fire! Above $17 right now @ 9:37am

What's going on?

So what is going on with the market. One only needs to look at the VIX index see. The VIX index is:

The Chicago Board Options Exchange SPX Volatility Index that reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used.

In simple terms, it shows the volatility of the S&P 500. For example, if the S&P 500 opens the day at 1455 and stays between 1450 and 1460 all day, volatility is low. If it moves between 1400 and 1500 then volatility is high. Easy enough.

With that said, between Apr and July 15th the index averaged 14.05. From July 15th to EOM, it averaged 19.44 ending at 23.52 today. Volatility is increasing.

The reason vol (volatility) is increasing is simple. Housing. It all revolves around housing right now. The market wants to go up but every other day something negative about the housing market comes out. You would think that the worse case scenarios would already be baked in.

Why does housing have such an effect? To put it simply, the economy is run by consumer spending and if that spending dries up, then the economy and the stock market go down. So if consumers have to allocate their disposable income elsewhere, like higher mortgage payments than businesses don't sell as much and they miss earnings causing stocks to go down.

More later...

CLNE & TASR

CLNE ended up $1.55 or 9.74% on the day. It popped right around 10am when a Reuters article detailed Boone Pickens trip to China. I think this stock is going to keep running. I will buy more on any pullback.

TASR has been in the headlines lately and is on fire, up more than 123% YTD. The stock met some weakness today when a analyst downgraded it but still reaffirmed long term bullishness on the stock. I think it has the potential to go up another 50-60% by the end of the year and started to build a position. I will look to trade this stock. It is hard to put a target price on this stock since it doesn't really have any competitors to compare it too. I am looking at it as a momentum play. It's current PE is 110 which is certainly not sustainable. EPS is $0.15 ttm. Analysts have this years EPS being $0.22 so that is a $24.29 price target with the same multiple. If we see a surprise on 10/25 the stock certainly hits the $24 mark. I will error on the side of caution and use $20 as my target and re-evaluate if we get there.

Up 11%!

CLNE is up over $1.70 today (11:00am). That is about an 11% gain. Not bad for my first pick. I am going to wait to see what happens over the week but I would be in the market to pick more shares up on any pullback.

CLNE

Clean Energy Fuels

IPO was in May earlier this year. One of the biggest shareholders is Boone Pickens. Billionaire oil tycoon who has been an advocate of clean energy for sometime. He is currently in China building relationships.

Think about it:

China is an emerging market that is on fire with double digit growth. They have tons of money in reserve. More importantly, they have ~1.3 billion people (US has 300MM). With the world population at about ~6.6 billion, China has ~20% of the worlds population. That is a lot of people that need to travel. They already have a smog problem bigger than California's and they have already adopted clean fuel in over 2000 of their mass transport buses. If CLNE can book some business there, I think this stocks climbs and climbs fast.

In addition to working on China, CLNE operates in the US and soon in Peru.

Disclaimer: This is a risky small cap play. Don't put all of your retirement in it.

Long term or Short term?

The answer, I think, is both. The market is dynamic and you should be too. There are long term plays that you hold for the long term but sometimes you need to do some short term pruning. Think of a long term hold as a plant. Every now and then you need to cut some of the wilting leaves off so the plant will thrive. Case in point:

I own CAT. I like CAT for the long term, especially with global growth on fire and emerging markets having the need for heavy machinery. It has had a nice run lately and going into earnings (yesterday) I was thinking maybe I should sell some and lock in some very nice profits. I decided against it and they reported below expectations and now the stock is down over 4% this morning.

If I would have done the prudent thing and sold some shares locking in my profit, I would have cash in my pocket and the opportunity to pick up some lower priced shares today. Lesson learned.

Whenever volatility is going to pick up (ie. earnings time) prune the plant and take some profits!