Bank Stock

Now you are adding stocks in sectors that will add volatility to your portfolio.

Next industry I would look at is the Financial sector.  If you can’t beat them join them.  Buying a bank stock without a dividend is like riding a bicycle without a seat.  Painful at times.  Banks and Governments are joined at the hip; the big banks that were going to fail have failed already.  The Government is not going to let another one fail, due to the Volker rule.

Even though I think the managers of banks are not honest with their shareholders, I think you should buy a bank stock.  You could look at regional or local banks.  I like U.S. Bancorp (USB), it has a nice dividend yield of 2.5% as of the time I am writing this.  But you may have a bank you like better. 

The money center banks are interesting although no or little dividend yield in some cases.  I do believe the bankers will try to raise their dividends as a method to prop up their stock prices so they can give themselves options and big bonuses.  There is Bank of America (BAC), Goldman Sacks (GS), Morgan Stanley (MS), Citigroup, Inc. (C) the people who caused two depressions one in 1929 and one in 2007, Wells Fargo & Co (WFC).  I like BAC just because Karen Finerman on Fast Money bought it. 

The political cartoon below is what happened to collapse our banking system.  Bankers sat by our congressmen and rewrote the banking laws.  Remember Canada’s banks are still regulated.  Their banks did not collapse. 

If you would like to buy a bank but feel uncomfortable buying one of the US money center banks.  Buy a Canadian bank.  Canadian banks have a tail wind considering Canada is in a good long term position because it owns a lot of commodities.  It also believes in regulating banks, taxing the wealthy, and supporting the middle class.

Middle Class Under Attack

The Price of Inequality.

“Freedom is not merely the opportunity to do as one pleases, neither is it the opportunity to choose between set alternatives.  Freedom is, first of all, the chance to formulate the available choices, to argue between over them – and then, the opportunity to choose.”

- C. Wright Mills

Review Lesson number one posted on May 27^th.  You need to invest in stock to get ahead.  http://finance.yahoo.com/blogs/daily-ticker/american-dream-myth-joseph-stiglitz-price-inequality-124338674.html;_ylc=X3oDMTNuNGVvYm0yBF9TAzExODMzMDgwNzMEYWN0A21haWxfY2IEY3QDYQRpbnRsA3VzBGxhbmcDZW4tVVMEcGtnAzBhYTgxYzVmLTFjNmMtM2UyMy05ZDM0LTc0MDFkYTM0Y2M5MgRzZWMDbWl0X3NoYXJlBHNsawNtYWlsBHRlc3QD;_ylv=3

Joseph Stiglitz wrote a new book, “The Price of Inequality”.  http://www.amazon.com/The-Price-Inequality-Endangers-ebook/dp/B007MKCQ30

You could read Dick Chaney’s “In My Time: A Personal and Political Memoir” or just look on the front page of 6/12/12, in The Arizona Republic or the Washington Post the article is “Families lost 39% of Worth in Slide”.  Tricky Dick Chaney doesn’t like the middle class read his book.  You could watch the 60 Minutes from the same date 6/12/12 or you could listen to Jim Cramer’s rant on how the market is rigged, as seen by the Facebook IPO again today.  My recommendation is review what is happening to the middle class.  The GOP is using the economic policies of our 34^th, 35^th and 36^th presidents with the same results.  Just like smoking causing cancer, like global warming the downward slope of the American Middle Class is true.  Like global warming we are unsure on how bad this will end up, but we can avoid the worst problems if we are realistic and plan appropriately.  Just one day’s news and TV viewing; funny thing is I don’t read much news in newspapers or watch much TV except for CNBC and Bloomberg.  So don’t smoke, or move to Florida, and start the only investment game in town the middle class can use to become rich themselves.  I agree with Jim Cramer on this point, the only way for you to move up is with high quality stocks.  (Sorry Jim I don’t know if I quoted you or not.)

2 recommendations. 

First I want you to spend less than you make.  Take the difference and invest it in high quality dividend stocks (at least at first).  Watch your stocks and make sure the company business doesn’t take a turn for the worst.  Here is your goal.  I want you to get one month’s take home pay in dividends every year.  After one month then you need to get one quarters take home pay in dividends.  Even if it is one share at a time on Orange for a $4 commission. 

Second I recommend that you do not vote for the GOP, until either they change their policies or you move up the wealth ladder to the upper 10% of American’s with a net worth in the top brackets.  There would not be a problem with the deficit in the Federal budget today, if we did not have the giveaway program of welfare to the ultra-rich installed by the Bush tax cuts.  Start voting for the party who supports the middle class, after all that is where you are at now.  If enough people start voting different they will change their policies to support the middle class the real backbone of the country.

Closing your eyes to trends doesn’t make them go away just gets you caught in the trap.  Cigarettes were known as coffin nails in 1900.  Scientists bought (bribed) and paid for by the tobacco industry couldn’t change that.  I have friends that smoke and am addicted to second hand smoke.  Scientists bought and paid for by the coal industry don’t change the fact that there is a global warming.  And, economists bought and paid for don’t change the graph of the middle class it turned down during the Bush years and now the middle class has been set back 20 years.  Only half the middle class families stayed on the same economic rung during the Bush years according to the study.  Medium income has fallen 8%.  You need to know the trends to profit by them I know I am addicted to nicotine in cigarette smoke.  Unless something changes the treads continue.  Florida will have more problems as the ice caps melt.  In oil hydraulic fracturing or hydrofracking reversed a tread identified by a Chevron scientist in the 60’s that American would run out of oil and become an importer.  Trends change but until they do, you need to understand how the trend will affect your life. http://www.youtube.com/watch?v=VnVJAkhGyjQ

You have to be an investor in stocks to change your trend!  Become an anti-consumer and a pro-saver.  Be aware that the system is rigged against you.  See the cartoon below.  You can ride on the über-rich’s coattails.  Pick out a basket of good stocks, watch them just to make sure that the underlying company doesn’t become something like a Kodak, and reinvest your dividends.  This is a balance sheet recession / depression, so dividends are above the yield on bonds. 

Third Stock Industrial Sector

Now your portfolio will start going up and down be prepared not to panic.

You have a food stock and utility.  Your stocks don’t do much as far as going up or down fast or far.  If they go down then no big deal if there is no bad news about the company, that means your dividend reinvest just buys more stock the more stock the more dividend right?  If you stock goes up great then you win either way.

For your third stock I like the Industrial sector.  This sector will rise and fall in price with the business cycle.  So be aware that the stock you pick may drop depending on when in the business cycle you buy it.  What you have to do is make sure that you don’t have a Washington Mutual or Kodak.  As long as the company isn’t busted and it is the business cycle your dividends buy more stock.

I like Eaton Corp. (ETN) but you could still pick many other industrials.  Emerson Electric Company (EMR), Caterpillar Inc. (CAT) and many more too many to list.  Pick on everyone likes or at least doesn’t say anything bad about and let your dividends start working.  Watch the company to make sure it doesn’t turn into a dog.

The Sectors

Analyzing where to go next.

In your stock portfolio you should have at least 5 different stocks in 5 different sectors.  In Consumer Staples you have purchased a food stock, and in Utilities we have an electrical utility.  So next we need to select three of the following sectors; Telecommunication Services, Materials, Technology, Industrials, Health Care, Financials, Energy and Consumer Discretionary.  If you get one stock in every sector your risk goes down even more.  You have the most risk in your portfolio owning one stock, as you purchase more stocks in different sectors the graph line goes from the upper left to the lower right until it flattens out into a horizontal line running parallel to and just above zero risk like.  You will in effect become your own mutual fund.

Mark Twain said "A gold mine is a hole in the ground with a liar on top."  So I am going to change that around a bit.  A Technology Company is a company with a liar at the top.  Tech companies measure eyeballs, clicks, clouds, users and sales growth.  Tech companies do not like measuring profitability and if profitable make pennies a share.  Tech hate dividends and love buybacks, they love to reinvest the profits.  Yet buybacks are at the very best stock purchased at the top of the market to support the stock price for management so they can get their bonus.  The technology itself is mostly hard for you to understand, yet you must understand the technology inside and out to know if your company is still in a leadership position.  Stay away.  If you must buy one buy one that has a dividend with a health yield.

The remaining sectors of Telecommunication Services, Materials, Industrials, Health Care, Energy and Consumer Discretionary as the sectors for our next recommendation.  I am going to add or create two new sectors.  Commodities and Agriculture.  In the Commodities sector I am adding are the owners of the commodity; Alcoa Inc. (AA) aluminum, Cliffs Natural Resources Inc. (CLF), etc.  In the Agriculture you have Deere & Co (DE), Potash Corporation of Saskatchewan Inc. (POT), etc.  Please make a note that it is everything commodity and everything agriculture the everything raw materials.  Safeway is not an agriculture sector it is every stock that controls, mines or grows that commodity, and oil and natural gas are not in the commodity.  For my purposes Energy consists only of oil and natural gas, coal and uranium miners are in the commodity sector. 

When you first purchase your new stock for the first time you should sell an upside covered call to lower your cost and make a little additional return on your initial investment.  After it expires you will need to analyze if you want to sell another or just hold the stock.

Two New / Different Sectors

The Third Stock should be from the Industrials Sector.

This group is not a study eddie group like the Food stock or Utility stock.  When the economy is bad your stock will be down in the toilet, and when the economy is up it will be floating in the clouds.  Do not be alarmed, when the stock goes down you buy more stocks with your dividend reinvestment automatic setting. 

In your stock portfolio you should have at least 5 different stocks in 5 different sectors.  In Consumer Staples you have purchased a food stock, and in Utilities we have an electrical utility.  So next we need to select three of the following sectors; Telecommunication Services, Materials, Technology, Industrials, Health Care, Financials, Energy and Consumer Discretionary.  If you get one stock in every sector your risk goes down even more.  You have the most risk in your portfolio owning one stock, as you purchase more stocks in different sectors the graph line goes from the upper left to the lower right until it flattens out into a horizontal line running parallel to and just above zero risk like.  You will in effect become your own mutual fund.

Mark Twain said "A gold mine is a hole in the ground with a liar on top."  So I am going to change that around a bit.  A Technology Company is a company with a liar at the top.  Tech companies measure eyeballs, clicks, clouds, users and sales growth.  Tech companies do not like measuring profitability and if profitable make pennies a share.  Tech hate dividends and love buybacks, they love to reinvest the profits.  Yet buybacks are at the very best stock purchased at the top of the market to support the stock price for management so they can get their bonus.  The technology itself is mostly hard for you to understand, yet you must understand the technology inside and out to know if your company is still in a leadership position.  Stay away.  If you must buy one buy one that has a dividend with a health yield.

The remaining sectors of Telecommunication Services, Materials, Industrials, Health Care, Energy and Consumer Discretionary as the sectors for our next recommendation.  I am going to add or create two new sectors.  Commodities and Agriculture.  In the Commodities sector I am adding are the owners of the commodity; Alcoa Inc. (AA) aluminum, Cliffs Natural Resources Inc. (CLF), etc.  In the Agriculture you have Deere & Co (DE), Potash Corporation of Saskatchewan Inc. (POT), etc.  Please make a note that it is everything commodity and everything agriculture the everything raw materials.  Safeway is not an agriculture sector it is every stock that controls, mines or grows that commodity, and oil and natural gas are not in the commodity.  For my purposes Energy consists only of oil and natural gas, coal and uranium miners are in the commodity sector. 

When you first purchase your new stock for the first time you should sell an upside covered call to lower your cost and make a little additional return on your initial investment.  After it expires you will need to analyze if you want to sell another or just hold the stock.

2nd Stock

Buying Your Second Stock?

Last post we explored choice 2.  Let’s look at choice 1.  You buy your second boring stock.  You like the food stock you purchased as your first.  But don’t get tempted to buy a second stock in the food group.  We should diversify.  I would suggest a utility.  There are many utilities, you can pick your own or go with my suggestion.

Consolidated Edison Inc. (ED) is my first pick in the utilities.  I purchased it in March of 2008 for $40.50 a share.  It gave a 5% dividend return of .40 a share.  It has raised its dividend every year.  ED is now in a range of $57 to $60.50.  The dividend has gone up to .605 a share dividend.

You may say past performance is no guarantee of future performance and you are correct.  The history of Con Ed that I look at is a bit farther in the past.  During WWII New York City lobbied and gained the right to ignore the blackout rules and keep the lights on.  American ships were lost and sailors lost their lives as submarines sat outside the harbor using the city lights as a back drop to outline the ships, yet tourism in New York City took precedence over lost tonnage of shipping and American lives.  The tri-state area and California have an economy that is an engine of its own, not relying on the national economy.  The Orange County deregulation nuts got their way in California and there were rolling blackouts and Enron stole money from every person who lived in California.  New York regulators are not cut from the same cloth, and did not go nutty in the name of deregulation.  So my recommendation is based on historical outlook but a different history.

You should again sell a covered call at the same time as you purchase the stock.  Again dividend reinvestment is the way to go.  Get your broker to help you if you don’t know how to code it into the on line screen.  You now have 2 boring stocks.  The goal gets stocks you don’t have to worry about or time consuming to monitor.

You can pick your own utility if you like you don’t need to pick mine, or you can get the utility ETF in this case it has a dividend but I don’t think it has the same upside potential as ED.  You can get a natural gas utility if you would prefer. 

Next post I will recommend a third boring stock.  Unfortunately your third and fourth stocks will take a bit more to monitor.  Both will be in different industries so you will stay diversified.

Current Conditions 6/4/12

The Market Behaved Badly.

The stock market behaved badly Friday (6/1/12) and Monday (6/4/12).  Just be aware I do not believe you should invest short term money right now.  If we can’t get good news out of Europe.  And, job creation  has been poor and will be poor if the GOP has anything to say about it until after the next election in November.  The GOP can’t get their boy elected if jobs are created and the economy improves.  It is my belief that a bad Friday followed by a bad Monday equals a bad few weeks or months in the market.

 

As long as the Government sector of the economy is lying off teachers, fireman and policeman the Private sector has to create enough jobs to cover the lost jobs before it creates one new job lowering unemployment.

 

Remember this formula G + B + C = GNP.  Fifth grade math is all you need for the stock market.  G is now a negative number in this formula and will be until November due to GOP tea party games.  Remember 50% of your stocks performance is the market.  Reread Lesson number Ten in my first post.  Review Lesson Number Thirteen also.

 

G = Government

B = Business

C = Consumer

Favorite Option Strategy

You Have Your First Stock What Is Next?

Let’s suppose you saved up $10,000 and purchased 100 shares of that boring food stock.  You sold a covered call for two months out.  You now have some money left over, and you have at stock with a dividend for 3% and with the covered call you got an additional return of 3% after it expired.  You have 2 options.  You still have enough to buy another stock choice 1.  Or do my favorite option strategy choice 2. 

Of your original $10,000 you have anywhere from $6,000 to $4,500 left over.  You decide to see how the covered call works and save a little bit from your paycheck to prepare to make your second purchase. 

So in choice 2 you decide you liked it when the call expired as worthless.  You got cash for holding the stock.  I have heard 90% of all calls and puts do expire as worthless.  I have heard that of the 90% that do not get exercised, some expire as worthless and some are purchased back.  Either way you always make money selling calls and puts.  This is a conservative strategy designed to lower your market risk as long as you would like to own the stock anyway. 

You also like the stock you purchased.  If it goes up say 10% you would sell it and buy more on a pull back.  If it goes down you’d like to buy another 100 shares.  You sell two options and put and a call on the same stock.  The put is at a lower strike price to where it is trading and the call is at a higher strike price to its current price.  In choice 2 you have now taken in some money and you will automatically buy the stock if it drops and sell the stock if it goes up.  You collect the dividend as you wait to see what happens.  So in this choice you make money if the stock goes up, down or nowhere at all.  If for some reason it goes down you can sell 2 covered calls.

The result you have a safe boring stock.  You are collecting the dividend.  You are collecting premium selling options against your position.  And, you only have to watch the market and economy as a whole and 1 stock.  Next post I will explore choice 2 and recommend a second safe boring stock with a nice dividend.  After you have a diversified portfolio of boring safe dividend stocks we can talk about growth stocks.