SINLetter - January
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
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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.
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,
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
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
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.
|Fourth Quarter 2008
|2008 Annual Returns
|Since Inception (Aug 2005)
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.
I am making no changes to the model portfolio at this
time. As discussed below, I am adding the Bank of America
and Pfizer (PFE)
to our watch
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
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.
Dogs of the Dow posted a loss of 42.98%, underperforming
the Dow by more than 9% thanks to an 87% drop in General
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
|Bank of America
|JP Morgan Chase
* Price and yield as of market close on Dec 31st,
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
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
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
Model Portfolio - December 31, 2008
||Number of Shares*
||Number of Units
* Price and number of
shares adjusted for Activision Blizzard (ATVI)
and ICON plc (ICLR)
to reflect splits on September 8, 2008 and August 13,
From the stocks that are currently in the model portfolio,
I own shares of Sterlite Industries (SLT), Intel (INTC),
Activision Blizzard (ATVI),
Lionsgate Entertainment (LGF),
Tata Motors (TTM),
PowerShares Water Resources (PHO),
Suntech Power (STP),
and Marcus (MCS).
I also own $20 Jan 2009 IBN calls (IBNAZ.X)
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