SINLetter - January 2009

Welcome to edition 41 of Suria Investment Newsletter (SINLetter), a free monthly investment newsletter. The objective of this newsletter is to provide you with unbiased initial research and basic facts about individual stocks and other financial instruments so that you can research them further before deciding to add them to your portfolio or not. If you are reading this and are not a subscriber, you can subscribe by going to www.sinletter.com/subscribe.aspx and you will start receiving this newsletter from next month. I have provided relevant links throughout this newsletter, but if you have any questions or comments, feel free to write to me.


December Blog Entries:

If you do not subscribe to blog entries by email or in case you missed them, here are the blog entries for November.

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2009 Outlook

After a dismal 2008 that saw the Nasdaq lose 40% of its value and the S&P 500 drop over 38%, the key question on most investors minds is "What can we expect in 2009?". While some economists were expecting a turnaround in the second half of 2009, a majority of economists at the American Economics Association convention held in San Francisco last weekend do not expect the economy to show signs of improvement until early 2010. Market gurus like Warren Buffett share a similar opinion as he expects things to get much darker before they get better and feels that you are best served keeping a long-term recovery in mind. The data appears to support this view as you can see from the following set of economic indicators,

  • New orders for manufactured durable goods dropped $1.8 billion or 1% to $186.9 billion in November, representing the fourth consecutive monthly drop.

  • Shipments of manufactured durable goods decreased $5.3 billion or 2.6% in November to $195.9 billion, representing the fourth consecutive monthly drop.

  • GDP dropped 0.5% in the third quarter of 2008 and is widely expected to drop ?% when fourth quarter numbers are reported.

  • Inventory of new homes in November was at 11.5 months, dropping 2.9% from October 2008 and a whopping 35.3% year-over-year. Anything over a 9-month supply is considered problematic. November sales represented the fourth consecutive month of drops.


  • Confidence amongst U.S. homebuilders, which in November hit the lowest level it has ever been since the index of builder confidence was created in 1985, continued to stay at this level of 9 in December.

  • Nonfarm payrolls dropped sharply by 533,000 in November, pushing up the unemployment rate to 6.7%. The unemployment rate is expected to jump to 7% when December numbers are reported. According to Kenneth Rogoff, a former chief economist of the IMF, unemployment could reach as high as 12% by 2010 and could stay at those elevated levels until 2011.

With the exception of commodity prices coming down, there are dark clouds as far as the eye can see. Since the market is forward looking, it will most likely bottom well before the recession ends and I think there is a good chance we might see modest gains in 2009. The nascent recovery in the market we have seen since November could be a bear market rally and we could easily retest the November lows. To offset potential declines, I am going to start hedging the portfolio with put options and/or short positions once again in 2009.

The sectors I like best for 2009 are healthcare (services and generic drugs), entertainment and consumer staples. We currently have exposure to all three areas through Teva Pharmaceuticals (TEVA), Icon Plc (ICLR), Activision Blizzard (ATVI), Lionsgate Entertainment (LGF), Blockbuster (BBI), Procter & Gamble (PG) and Unilever (UL). As I mentioned to Steven Halpern of TheStockAdvisors.com, my top pick for 2009 is Activision Blizzard. You can find the picks of the other 74 participants of his "Top Stock Picks '09" survey on AOL's BloggingStocks here.


Portfolio Performance:

After starting 2008 on a strong note, the SINLetter model portfolio suffered in the latter half to deliver full year returns that were in line with the 38.5% loss of the S&P 500, better than the 40.5% loss of the Nasdaq and behind the 33.8% loss of the Dow. The two key mistakes I made in the second half of 2008 were to stop hedging in September after we were officially in a bear market as defined by a 20% loss and not taking profits on the ICICI strangle. The put and call options of the strangle showed profits of greater than 70% at different points but I failed to act swiftly to take those gains and instead ended up with a loss for the strangle with less than two weeks to expiry. The only consolation I have is that I think the model portfolio is very well positioned going into 2009 and am happy to see it post a gain of 6.89% in the first two trading sessions of 2009.

Performance Metric Dow S&P 500 Nasdaq SINLetter
December 2008 -0.6% 0.78% 2.7% -1.47%
Fourth Quarter 2008 -19.12% -22.45% -24.61% -27.24%
2008 Annual Returns -33.84% -38.49% -40.54% -38.73%
Since Inception (Aug 2005) -17.38% -26.88% -28.17% 33.05%


 

Gold continued its upward streak with a gain of $64.50 or 7.9% to close the month of December at $880.80 per troy ounce.

Portfolio Readjustment:

I am making no changes to the model portfolio at this time. As discussed below, I am adding the Bank of America (BAC) and Pfizer (PFE) to our watch list.


2009 Dogs of the Dow

With the model portfolio almost fully invested at this point, I do not want to make any changes to it just yet and figured this would be a good time to revisit The Dogs of the Dow strategy. According to the Dogs of the Dow theory if you were to pick 10 stocks with the highest dividend yields from the Dow Jones Industrial Average (DJI) at the beginning of the year and hold them until the end of the year, your average returns over a period of time should be higher than the returns of the entire Dow Jones Industrial Average (DJI).

We have been tracking the returns of the Dogs of the Dow on SINLetter in real time (ok, with a 30 minute delay like the model portfolio) since 2006. The theory generated a lot of interest in early 2007 after it posted market beating returns of 24.80% for 2006. In the January 2007 edition of SINLetter I wrote,

I considered using the Dogs of the Dow theory once again to pick this month's featured stocks but after a gain of 58.19% in General Motors (GM), a gain of 45.98% in AT&T (T) and a gain of 37.06% in Merck (MRK), most of the stocks on this list can hardly be called "dogs". Given the high level of interest in the Dogs of the Dow theory, there is a possibility that some of these stocks may register additional gains in the first quarter of 2007 but I plan to abstain from the dogs this year with the single exception of Pfizer, which I already hold in my personal portfolio.

Just like any mutual fund or advisor that has a hot streak and attracts equally hot money, the theory failed to live up to expectations in 2007 and 2008. The 2007 dogs posted a loss of 1.38% when compared to a gain of 6.43% for the entire Dow Jones Industrial Average. The 2008 Dogs of the Dow posted a loss of 42.98%, underperforming the Dow by more than 9% thanks to an 87% drop in General Motors (GM) and a 77% decline in Citigroup (C).

After taking a hard hit in 2008, the 2009 Dogs of the Dow appear to hold true to the underlying value investing spirit of the theory and are worth looking into this year. Most financial websites are reporting Citigroup's dividend yield as over 9% based on a 16 cents quarterly payout in 2008. However Citigroup has decided to cut its dividend to just 1 cent per quarter going forward and hence the company did not make the 2009 Dogs list. While Altria is no longer on the list, Kraft Foods (KFT), which was spun off from Altria in 2008, made the cut.

2009 Dogs of the Dow

Company Name Symbol Price* Dividend Yield*
Bank of America BAC $14.08 9.09%
General Electric GE $16.20 7.65%
Pfizer PFE $17.71 7.23%
DuPont DD $25.30 6.48%
Alcoa AA $11.26 6.04%
AT&T T $28.50 5.75%
Verizon VZ $33.90 5.31%
Merck MRK $30.40 5.00%
JP Morgan Chase JPM $31.15 4.88%
Kraft Foods KFT $26.85 4.32%

* Price and yield as of market close on Dec 31st, 2008

A year ago, it would have been hard to imagine GE sporting a single digit P/E or Bank of America trading in the low teens. While this list has many attractive stocks, Bank of America and Pfizer appear to be the most appealing on the list to me. With the acquisition of Countrywide and Merrill Lynch, Bank of America has become the largest bank in the country in terms of deposits and is likely to benefit from the refinancing wave that the lowest mortgage rate in decades has triggered. Bank of America is however a risky play as the integration of Countrywide has proven harder than expected and the company is already experiencing cultural issues even as it completes the acquisition of Merrill Lynch. Pfizer on the other hand is sitting on $35.29 billion in cash and investments and can more than fill any holes in its drug pipeline through small or large acquisitions. Pfizer has been a long-term holding in my personal portfolio and I plan on adding both Pfizer and Bank of America to the SINLetter watchlist for now.

Due to time constraints, I am keeping this newsletter shorter than usual but plan to feature a couple of stocks in a follow up blog entry soon.


Every month we add featured stocks into a model portfolio started with a cash position of $100,000 on August 2, 2005. To keep calculations simple, trading costs and regular dividends are not included.

Model Portfolio - December 31, 2008

Long Stocks

Stock Symbol Number of Shares* Cost Current Value Diff ($) Diff (%) Date Added
Precision Castparts PCP 200@$51.13 $10,226 $11,896 $1,670 16.33% 12/5/2008
Sterlite Industries SLT 2000@$4.71 $9,430 $11,040 $1,620 17.2% 11/6/2008
Intel INTC 500@$15.60 $7,800 $7,330 $-470 -6.03% 8/29/2008
Activision ATVI 1,200@$12.635 $15,162 $10,368 $-4,794 -31.62% 8/29/2008
Towerstream TWER 13,000@$1.1361 $14,769 $8,970 $-5,799 -39.27% 6/30/2008
Textron TXT 150@62.55/share $9,382.5 $2,080 $-7,302 -77.83% 5/31/2008
Companhia Siderurgica Nacional SID 200@43.15/share $8,630 $2,562 -$6,068 -70.31% 4/30/2008
Lionsgate Entertainment LGF 1,000@9.41/share $9,410 $5,500 $-3,910 -41.55% 2/29/2008
Tata Motors TTM 500@17.52/share $8,760 $2,225 $-6,535 -74.6% 2/29/2008
Barclays PLC BCS 400@32.435/share $12,974 $3,920 $-9,054 -69.79% 11/20/2007
Powershares Water Resources PHO 400@22.10/share $8,840 $5,756 $-3,084 -34.89% 10/31/2007
Blockbuster BBI 3,000@3.925/share $11,775 $3,780 $-7,995 -67.9% 7/9/2007
Unilever Plc UL 200@32.53/share $6,506 $4,604 $-1,902 -29.23% 5/11/2007
EMC Corp EMC 600@13.85/share $8,310 $6,282 $-2,028 -24.4% 3/31/2007
ICON Plc ICLR 300@18.65/share $5,595 $5,907 $312 5.58% 1/31/2007
Diamond Offshore Drilling DO 80@76.65/share $6,132 $4,715 $-1,417 -23.11% 1/3/2007
Alvarion ALVR 1000@6.87/share $6,870 $3,630 $-3,240 -47.16% 1/3/2007
WisdomTree Investments WSDT.PK 1000@7.40/share $7,400 $700 $-6,700 -90.54% 11/30/2006
Teva Pharmaceutical TEVA 300@35.05/share $10,515 $12,771 $2,256 21.46% 9/1/2006
Suntech Power STP 250@25.93/share $6,483 $2,925 $-3,558 -54.88% 7/31/2006
Procter & Gamble PG 180@55.60/share $10,008 $11,128 $1,120 11.19% 6/30/2006


Options

Option Number of Units Cost Current Value Diff ($) Diff (%) Date Added
IBNAZ.X 5@2.6/contract $1,300 $425 $-875 -67.31% 10/9/2008
IBNMV.X 5@2.05/contract $1,025 $55 $-970 -94.63% 10/9/2008
Cash     $4,482      
Total     $133,051 $33,051 33.05%  

 

* Price and number of shares adjusted for Activision Blizzard (ATVI) and ICON plc (ICLR) to reflect splits on September 8, 2008 and August 13, 2008 respectively.

Voluntary Disclosure: From the stocks that are currently in the model portfolio, I own shares of Sterlite Industries (SLT), Intel (INTC), Activision Blizzard (ATVI), Towerstream (TWER), Lionsgate Entertainment (LGF), Tata Motors (TTM), PowerShares Water Resources (PHO), Barclays (BCS), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR), WisdomTree (WSDT.PK), Unilever (UL), BlockBuster (BBI) and Marcus (MCS). I also own $20 Jan 2009 IBN calls (IBNAZ.X)

 


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