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!