Post Time Approaches

The next race is about to begin.

Another week of positive economic news just passed, and for me, that means it’s time to start buying good stocks.

While an improving economy doesn’t mean the market will go up, it does mean it has one less reason to go down. As improvements in the economy continue, a double dip recession becomes less likely and a major economic decline becomes even less so. This is good for the market as it removes most of the possibility for a sharp sell off.

What we are facing is the probability of a slow growth economy or a “W” shaped recovery over the next couple of years, but a lower case “W” rather than an upper case.

We are likely moving into a new market phase where stock selection will determine performance. With the market already having made a sharp recovery and the removal of any strong negative catalysts, it looks like the market will move up or down with more moderation.

These more moderate movements will lack the powerful gravity to pull all stocks with them as we have seen for the last two years. In this environment of selectivity we should return to old fashioned researching of individual stocks based on fundamentals.

This puts industry analysis and special situation investing at the forefront once again. Whether the market goes to 1250 next year as many observers feel or corrects 10% as others predict, if you select the right stocks you will make money.

I have been steadily increasing my net long position which now stands at 70% of NAV. I plan to increase it to 100% over the next couple of weeks if things continue to improve.

My favorite areas for 2010 include fee based MLPs and mreits. Another area I am adding to is ‘buy write” growth stocks.

MLPs will get an added benefit from automatic changes in the tax law scheduled for January 2011. Mreits, both agency and non agency look good because non overheating slow growing economy is ideal for them.

The “buy write” is a way for the conservative income oriented investor to hedge their position in growth stocks and in effect convert them to income producers by harvesting the option premiums.

The way it works is to buy a stock you like and simultaneously sell a call on it.

There will be lots of ways to make money in 2010, but relying on the market as a whole is probably not one of the good ones.

Barry Zee

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4 Responses to Post Time Approaches

  1. W.Kinsolving says:

    No comments yet? What an opportunity! I suppose I must ask the obvious: Which MLPs? Which mReits? And which “buy write” stocks do you suggest? I ask, not to escape DD, but rather to iris in on those stocks worthy of attention. Many thanks.

  2. barryzee says:

    For MLPs I like EPB the best due to its high expected growth rate. I like EXLP as a play on shale gas though it is a little speculative. It is not a pipeline , but a gas compression provider. The XOM XTO deal makes EXLP a lot more obvious a play. There are many others I like including MMP and EPD for more conservative investors. It is hard to go wrong with any fee based pipeline right now.

    For mreits I like CMO because its large proportion of current reset mbs positions it well for any coming rate hike. ANH is similarly prepared for both rate hikes and the Fed leaving the mbs market next quarter.

    For “buy write” you can use many growth stocks and the ones i have used are more dependent on the economic cycle.

    My favorite right now is CIM with an otm Mar call at $5 where I have overwritten the calls to 3x the underlying stock. A bit susceptible to a black swan melt up so don’t go too overweight.

    Others include ALGT with APR 45 calls and BECN with Jan call that soon needs to be replaced.

    Many other good quality stocks should work as long as they have decent implied volatility.

    Barry Zee

  3. W.Kinsolving says:

    Many thanks. You’re most generous.

  4. Tom D says:

    Thanks for the good ideas. I need to look at the MLP tax changes coming. Hopefully they will be eliglble for tax-free retirement plans without using an expensive intermediary like TYG.

    For smaller players (me) in the energy buy/write sphere, one I like is ING’s Risk Managed Natural Resources Fund IRR. They did/do have XTO in their portfolio which has given it a boost. IRR is trading a bit above N.A.V. just now and is paying over 8%. They held up much better than most closed-ends last year partly due to a put strategy.

    I have some of the CMO and NLY preferreds for a more conservative approach there (8-9% instead of 14-15%), but I do have some ANH common based partly on Howard’s analysis a while back.

    TD

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