Carnival of Road to Financial Independence #44

Welcome to the June 27, 2012 edition of carnival of financial independence.

Frugal Living

Jeremy Biberdorf presents Putting Your Health Before Your Finances posted at Modest Money, saying, "One area that I was particularly naive was how I viewed health. I thought that while I was young with no obvious problems that I just didn’t need to worry about it. As a result I was irresponsible and abused my body. This may not seem like a financial mistake, but I’m really learning it all comes full circle."
 Mac Hildebrand presents David Weliver from MoneyUnder30 Talks Spending Habits and Goals posted at Credit Card Chaser, saying, "Credit can be a powerful ally or a costly enemy based on how you use it. Build credit using credit cards and make smart decisions when you know your own spending and prioritize goals."

Zhu presents Couponing, a North American "Sport" | Correr Es Mi Destino posted at Correr Es Mi Destino, saying, "At home, we always joke that if a prod­uct is expen­sive, I’m nat­u­rally attracted to it; and that if prod­uct is cheap, Feng is the one who can’t resist buy­ing it. This is espe­cially true when it comes to food: Feng likes good deals while I always sub­con­sciously think that if food is inex­pen­sive, there must be a catch. I guess it’s my French upbring­ing: in the old world, we think of food as a delicacy—the less, the more expen­sive, and the more expen­sive, the better."  

Jessica Bosari presents 7 Budgeting Mistakes You're Probably Making Right Now | savingtools.com posted at SavingTools.com, saying, "Some budgeting mistakes are particularly frustrating because they seem like they should be saving you money when they are really costing you more than you would have spent in the first place."
Lara Whitmore presents The Truth About Money posted at Live Creatively.

Victoria presents First Time Home Buyer: Buying a Home vs The Budget posted at Lend Not Borrow, saying, "Lend Not Borrow takes a look at what it takes to REALLY afford a home. This article focuses on the first time homebuyer and gives tips on things you should consider when buying your home."

Passive Income

Jon Rhodes presents Napoleon Hill - The Secrets of How To Think Rich posted at HypnoBusters, saying, "This article shows you many of the mind states required to make lots of cash."
Adrienne Smith presents What Kind Of Legacy Will You Leave posted at AdrienneSmith.net, saying, "Have you ever thought about what kind of legacy you will leave? Have you made preparations so that your family will be proud?"

Duke Mascaro presents How To Start A Business...The One Thing You Absolutely Must Have - Entrepreneur Stories posted at Entrepreneur Stories, saying, "Make passive income by starting your own business"

Reducing Expenses

Jailan Marie presents Find Savings By Reviewing Your Financial Plans posted at Innovative Solutions For Positive Change, saying, "What can you do to cut, reduce, eliminate or postpone payments? There are things you can do that will save you money today."

Stock Investments

Dr. Dean presents Are You An Investing Scaredy Cat? posted at Dr. Dean's TheMillionaireNurse.com Blog, saying, "Risks and rewards in investing...Do you understand them? What makes people sell when they should buy?"

Habeeb presents Yacktman Mutual Fund (YACKX) posted at Dividend Paying Mutual Funds, saying, "The Yacktman fund has $7.4 billion in assets under management and is a Gold 5 star rated fund by Morning Star. 86% of the fund’s assets are invested in large cap blue chip American companies and 12% is held in cash to take advantage of market buying opportunities. If you had invested $10,000 in this fund in 06/24/2002, your portfolio would be worth $26,921 as of 06/24/2012."

Others

Scott Vong presents The Best Way to Build Wealth - Spiritually | scottvong.com posted at The Raw Food Pitstop. Michael Bonner presents Affilorama affiliate program review posted at Money Maker Fundamentals.

John presents What to Do if You Lose Your Wallet posted at Wallet Blog, saying, "Until it's gone, most of us don't even realize how much of our life we carry in our own wallet. If it goes missing, you should know what to do. If you haven't lost it, you should still know what to do."


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Canadian Real Estate Market

To ask whether residential real estate is a good investment to the first degree of complexity is the same as asking whether real estate prices are expected to go up or down. No one wants devaluating investments, naturally. However, the first thing to understand about real estate prices is that they’re sticky, which is why there are housing bubbles in the first place. For example, residential property sales are up again in Toronto this year, and until recently they were up in Vancouver. Ask the question of whether properties (at least in the short run) in these cities were set to go up in coming years, and you’d come up with pretty solid affirmative; but does it make a good investment? Maybe yes, maybe no, but you’d have to consider some other things.

That is, when you hear the token economist in the media referring to the housing markets as “red hot” you’d rightly say he was speaking pejoratively, that the properties are likely overvalued and that housing affordability in Canada has been fueled at least in part by record low interest rates, among other things. Vancouver, it turns out, is the most expensive city in Canada to own a house in, with shocking carrying costs. Eventually, it will cease to be the most profitable city to sell a house in. In fact, home prices have already dipped sharply (figured range from 10-15%) in the past year as residential property sales slowed to a crawl. This sort of thing on its own is a good thing in the long run; cooling markets are better than a nuclear winter, slowing sales are better than foreclosures. And the CMHC tightening its lending policies is a good sign too.

Ah, but nothing is certain in life. Where major banks decline mortgages that the CMHC won’t insure, subprime lenders will. For these and other reasons, prices continue to rise in Toronto. Sooner or later they’ll stop going up, and whether they’ll go down a lot or a little is anyone’s guess.

The good news is that there are still robust urban real estate markets in Canada, where property values are rising in a measured way. Ottawa is one such place, so is Montreal. Montreal condos are continually seen as a good buy if you’re in the market for such a thing.

Stock Portfolio & Watch List Updates for June 2012

Following are the activity from the previous month:

1. Closed the following longs: Sold our AT&T (T) position at $33.26 for a 25.97% return and impact to the portfolio of 0.43%.
2. Increased/Added the following longs: Added National Presto Industries (NPK), CPFL Energia (CPL), and Citigroup (C)  with ~2% of the portfolio each at $68.75, $24.18, and $25.25 respectively on 06/05/2012. Added 20% more to our holding in iRobot Corporation (IRBT) and 50% more to our holdings in Nokia (NOK) on 06/01/2012 at $20.01 and $2.675 respectively.
3. Long Calls: Added Jan 2014 12 Calls on Corning Incorporated (GLW) at $2.7 with roughly 0.4% of the portfolio. The exposure is ~2% of portfolio value.
4. Long Puts: None.
5. Shorts: None.
6. Short Calls: None.
7. Short Puts: Wrote Procter & Gamble (PG Jan 2012 57.5) puts at $2.34 on 06/22/2012 with a cash-coverage requirement of ~2% of portfolio. 
8. Synthetic Longs: Added CVI Energy (CVI Dec 2012 25) and JC Penney (JCP Jan 2014 25) synthetic longs on 6/6/2012 for a cash outlay of a few dollars. The exposure is ~2% of portfolio value each. 
9. Synthetic Shorts: None. 

The cash position in our portfolio is at about 30%.

Long/Short Portfolio Update:

The overall portfolio is 3.54% down compared to our cost-basis.

2012 Transactions Summary:

Excluding dividends, we have a realized gain of 9.23% in the portfolio YTD.

Option Position Updates:

Short Puts: ABB Ltd (ABB Dec 2012 15 @ 0.65), Quality Systems (QSII Dec 2012 30 @ 2.15), and Procter & Gamble (PG Jan 2013 @ 2.34). The short puts together have a cash coverage requirement of about 22.7% of our cash position.

Short Calls: Nucor (NUE July 2012 43 at $2.90), Itron (ITRI Aug 2012 40 at $4.20), Microsoft (MSFT Aug 2012 31 at 31), Quality Systems (QSII Sep 2012 45 at $2.70), Intel (INTC Oct 2012 27 at 1.67), Alcoa (AA Jan 2013 12.5 at $0.64), Market Vectors Gold Miners ETF (GDX Jan 2013 59 at $6), Dryships (DRYS Jan 2013 2.5 at $0.65), and Clearwire (CLWR Jan 2013 1.5 at 0.35). The short call exposure is ~17.85% of the portfolio.

Watch List: Automatic Data Processing (ADP), Air Products & Chemicals (APD), Bemis Company (BMS), Canon (CAJ), Dell Inc (DELL), Diageo (DEO), Emerson Electric (EMR), Forest Laboratories (FRX), Jefferies Group (JEF), McGraw Hill (MHP), 3M Company (MMM), NovaGold (NG), Nestle (NSRGY), PepsiCo (PEP), Raven Industries Inc (RAVN), State Auto Financial (STFC), Teva Pharmaceuticals (TEVA), and Whirlpool (WHR).

Short Selling vs Long Puts – Strategies for Value Investors

Long puts are bought on the expectation that the stock has catalysts in place to go down in the short-term allowing the investor a chance to profit from that directional outcome. The maximum upside occurs if the stock price drops to zero before expiry. The maximum loss on the other hand is limited to what is committed upfront – the option expires worthless should the stock price stay above the strike price before the expiry date.

Short selling on the other hand involves borrowing the shares and selling upfront. The expectation, similar to a long put, is to make a profit from the downward directional move of the concerned stock. The difference is that it is not time limited i.e., the position will stay intact until closed. The short sale proceeds are credited to one’s account – paying the dividends is one’s responsibility. The key downside is the unlimited potential loss - there is no theoretical limit to how high a stock can go and hence there is no limit to ‘how much’ one can lose, should the stock price march higher.

Long put positions can prove beneficial to value investors in the following situations:

a)      Say you own a stock XYZ at $30 per share. The price has since moved up to $50 and you still consider it a good value. However, the macro situation has changed and your analysis indicates the possibility for a sharp temporary pullback. In this scenario, buying protective long puts is a good strategy to earn additional income, should the stock drop.

b)      End of year tax considerations can lead to a situation where a stock might not be sold even though all analysis point to selling as the right strategy. Here also, buying long puts as part of a collar construction can ensure that profits are locked in.

c)      In situations when your fundamental analysis strongly indicates that a particular stock is way overvalued, committing a small amount of capital using long put positions is a good strategy to benefit from a probable pullback.

Short selling can be beneficial to value investors in the following situations:

a)      Some value investors attempt to construct a portfolio aimed at generating absolute returns – independent of the market direction, the portfolio will generate positive returns year after year. A long-short approach is one way to arrive at such a portfolio – hold both long and short positions although on the average one or the other sets of positions will be more, depending on the macro assessment. The aim is to profit from all directional moves the research indicates, rather than attempting to benefit only on the long-side.

b)      If the fundamental analysis of a particular stock has shown with a high degree of confidence that impending bad news (financials are questioned - fraud, SEC inquiries, pending lawsuits, etc.) will cause the company’s stock price to plummet, short selling such stocks is a good strategy to profit from the expected outcome.  In such scenarios, you cannot predict the timing and so long puts are not a good option.

Tracking George Soros's Soros Fund Management Portfolio: Q1 2012 Update

Below is a spreadsheet that highlights George Soros's moves this quarter. Please check-out our SeekingAlpha column for an analysis of the moves:

Tracking David Einhorn's Greenlight Capital Portfolio: Q1 2012 Update

Below is a spreadsheet that highlights David Einhorn's moves this quarter. Please check-out our SeekingAlpha column for an analysis of the moves:

Tracking John Paulson's Paulson & Company Holdings - Q1 2012 Update

The spreadsheet (47C8ZTC86B8V) below show Paulson's US long stock holdings as of Q1 2012:

Paulson's portfolio increased by over $1B this quarter to $13.87B. The number of stocks in the portfolio remained almost steady at 42 although there were some stake disposals and new additions. The huge gold related stock position was kept steady although there were some minor re-allocations between them. The one other huge position is Delphi Automotive (DLPH) which was reduced by 10% this quarter. The position still accounts for over 10% of the total portfolio value. Trades that show a clear bullish bias include his gold holdings, DLPH, Anadarko Petroleum (APC), Hartford Financial Services Group (HIG), MGM Resorts International (MGM), and Caesar's Entertainment Group (CZR). Trades that show a clear bearish bias include American Capital Limited (ACAS), Pharmasset (VRUS),Rock-Tenn Company (RKT), Suntrust Banks Inc (STI), Transocean (RIG), and XL Group PLC (XL).

Tracking Prem Watsa's Fairfax Financial Holdings - Q1 2012 Update

The spreadsheet below show Watsa's US stock holdings as of Q1 2012:

 The portfolio remained largely unchanged although the total portfolio value increased by around 21% due to a combination of performance and a significant stake increase in Research in Motion (RIMM). The only new holding is Novadaq Tech Inc (NVDQ), a very small ~0.6% position. Dell Inc (DELL), Level 3 Commn Inc (LVLT), and Atibitibowater (ABH) were changed only marginally and so do not indicate a clear bias. LVLT had a stunning performance vaulting by over 50% during the quarter. Wells Fargo (WFC) was decreased by one-third indicating a bearish bias.



 

Tracking Iam Cumming's portfolio - Q1 2012 Update

This article is the first of a series that provides ongoing analysis of the changes made to Ian Cumming’s Leucadia National's (LUK) US stock portfolio on a quarterly basis. Ian Cumming is the chairman of Leucadia National (LUK) since 1978 and he along with Joseph Steinberg built the company into a $5B market-cap entity with interests in a diverse set of establishments that include real-estate, wineries, mines, etc.Their focus is on turning around financially distressed companies and selling it eventually for huge returns. As such, their US long portfolio has just four names.

The spreadsheet below show Cumming's US stock holdings as of Q1 2012:

 The investments in Jefferies Corp (JEF) and Mueller Industries Inc (MLI) represent very large 68% and 30% of Leucadia's ~$1.2B portfolio. As such, the positions indicate a clear bullish bias. Jefferies (JEF) currently trades well below the price range Cumming could have bought itat - it was purchased in 2009 and his average cost basis was $22.61 with the stock currently trading around $13. MLI was purchased last quarter (Q4 2011) when the share price varied between $35.50 and $46 and the stock currently trades at around $41.

Tracking Carl Icahn's holdings - Q1 2012 Update

This article is the first of a series that provides ongoing analysis of the changes made to Carl Icahn’s US stock portfolio on a quarterly basis. Carl Icahn consistently figures prominently in the list of the greatest investors of all times. He is known for his ability to spot public companies that will benefit from changes at the top and relentlessly going after them in his role as an activist investor. His style of operation is pretty intimidating and usually starts out by taking a minority stake but that can quickly escalate to a proxy battle, if management fails to go with his demands.

The spreadsheet below highlights changes to Ichan's US stock holdings in Q1 2012:

 The US long portfolio shrunk by ~16% this quarter from over $11.65B to ~$9.77B mainly because of a couple of liquidations as a result of deals that paid-off handsomely: Carl Icahn made over 55% in a period of less than six months on his $1.2B investment in El Paso when Kinder Morgan offered $26.87 per share in February 2012. Previously, Motorola Solutions (MSI) bought 23.7M shares of its own stock that Carl Icahn held for $49.15 netting a large profit for Ichan - Motorola stake was established in 2009 - he was instrumental in splitting up Motorola into two - Motorola Mobility Holdings (MMI) and Motorola Solutions (MSI).

Bullish: Ichan increased his stake in CVR Energy Inc (CVI) by over 230% this quarter. Since then he acquired an 80% stake through a $30 per share tender offer in May 2012. He has plans to sell the company at $36 per share and has hired Jefferies & Co (JEF) to assist in the process. Icahn kept his large stakes in Federal Mogul and Forest Labs (FRX) steady indicating a bullish bias. The WebMD (WBMD) stake was also modestly increased indicating a mild bullish bias. 

Bearish:  Icahn's portfolio shows modest reductions in his Commercial Metals (CMC) and Motorola Mobility Holdings (MMI). The ~10% stake reductions indicate a mild bearish bias.