In the eight-plus years that I've been producing The Contrarian's View, I can't recall ever devoting this "essay" section to the portfolios. But for this issue I do so, because the portfolios are undergoing a major transformation from what they looked like in July, or somnambulantly for months (or even years) before that.
By early September it became obvious to me that, with interest rates and stock prices headed in opposite directions, the stock market presented the greatest danger.... and opportunity.... since the spring and summer of 1987, and if I didn't get off my butt and do something, I would find my portfolios crashing and burning with the best of the money managers. (The Stock Market Outlook in this issue provides my reasoning in detail.) So I undertook to raise as much cash as I could in my real-life holdings without taking a beating on taxes, to shrink my margin debt as close to zero as possible, and, where appropriate, to go short, buy puts, or calls on gold stocks.
The first major change came inadvertantly, while I was on vacation. The uncovered Union Carbide calls (shown in the "Present and Future Income" portfolio), which you may remember were originally covered calls written against convertible bonds, were exercised by their owner. Since I was away and unreachable, my broker obligingly sold short 200 shares of Union Carbide, at 32-1/2, to deliver against the exercise. Now the shares of Union Carbide have had quite a run-up, due in no small part to a competitors' polyethylene plant blowing up; but polyethylene supplies will eventually return to normal and Union Carbide stock would return to earth even in the absence of a bear market; so being short at 32-1/2 is not such a bad thing. In the portfolios, I have treated this as covering the naked calls for $3000 in "Present and Future Income", and shorting 200 shares of Union Carbide common for $6500, less commission, in "Hedger's Delight".
Also in "Hedger's Delight", I exercised the Hasbro warrants for cash, leaving me short 75 shares of common; and Safeguard Scientifics spun off 14 rights to buy Coherent Communications stock at $5, which my broker obligingly exercised, leaving me short 14 Coherent shares. And finally, I bought a LEAP call on Homestake Mining, adding to my highly-leveraged gold-share positions. "Hedger's Delight" is now as bearish as itsÍs been since mid-1987; and long-term subscribers will recall that I made a bundle of money in this portfolio in the 1987 Crash. (The portfolio also contains Citicorp options, which I will discuss later.)
ThereÍs not much "present income" to be found in the "Present and Future Income" portfolio; itÍs now mostly cash, as I have taken many profits. My toughest decision was what to do about Citizens Utilities. This is one of the great.... and still mostly undiscovered.... growth companies (and stocks) of the postwar period; the company's earnings growth rate (%) is consistently in the high teens. I have bought and sold this stock before; and each time I have regretted selling it. On the other hand, it suffers with everything else in a bear market. So I compromised, and sold enough to recoup most of my original investment (I owned more shares than shown), letting my profits ride. I sold the stock ex-stock-dividend; I will add the September 30 dividend to the 117 shares left in the portfolio.
In "Crapshooter's Folly" I decided to do some weeding in the energy issues, particularly those with low or no dividends, as they are likely to suffer more in the bear, or odd-lots. Both Apache and Energy Service are good companies, but I felt that I would get more bang with greater leverage in the more junior issues if energy stocks should take off, and I needed to reduce margin debt, so the larger-value holdings had to go.
I also decided to sell the Citicorp shares against which I had written a call some time ago, leaving me with a naked call which, like the Union Carbide call, will probably be exercised. I have transferred both the call and put of Citicorp to "Hedger's Delight" at current market prices.
(Even the "Discards" portfolio had activity this month, as a number of stocks were reverse-split or became worthless.)
All of this positioning.... and there may be more, the "computer warmline" will carry the details.... is in expectation of a substantial decline in stock prices, and in anticipation of the bear market returning in one fashion or another. I hope I am sufficiently hedged; who knows, I may even make some money!
In the Debt Overhang booklet mailed with the January 1993 issue (new subscribers receive this reprinted on two sheets), I presented the following table of the probable inexorable growth of the federal debt:
Federal Deficit Annual Federal Deficit As
Debt As %/Debt Deficit Income % of Income
------- ------- -------- ------ -----------
FY1992 $4,135 7.0% $290 $1,075 27%
1993 4,425 7.5% 332 1,107 30%
1994 4,757 8.0% 381 1,140 33%
1995 5,138 8.5% 437 1,174 37%
1996 5,575 9.0% 502 1,209 42%
1997 6,077 9.0% 547 1,246 44%
1998 6,624 9.0% 596 1,283 46%
1999 7,220 9.0% 650 1,322 49%
2000 7,870 9.0% 708 1,361 52%
It would appear the end-of-FY1994 debt will be about $60 billion
less than what I projected in the table.
But now interest rates are climbing again, and this will cause the
deficit to increase again beginning next
year. Even so, the actual deficit for FY1994 will be about 6.3% of
the accumulated debt, so the government
does appear to have bought itself some time.... adding another
year or two.... before it goes bankrupt (in
fact, if not officially). Will rising rates accelerate the demise
again, or have the feds decided to delay
bankruptcy, in my honor, to the year I reach "official" retirement
age, 2005? Thanks a bunch, fellas.
We'll see about that.... anyway, if they permit me to track their results for publication, I'll present them here as the Professors' Investment Club portfolio. They are likely to rely on dividend reinvestment plans, since the amounts of money will be small; I will use your suggestions, if I also like them, or select my own favorites. Like the other portfolios appearing in The Contrarian's View this will use real money; but since I'm not in control, I will make no investment claims for it.
Since the divergence between interest rates and stock prices is not as great as in 1987, a 1987-style full-scale crash is unlikely; but we could see.... and I give this about 1-in-3 odds.... a downward "crack" in stock prices, stretching over several days because of the so-called "circuit breakers", until equilibrium is again reached in the high 2000s for the DJIA. (That's about a 1000-point decline from current levels.)
There are, I think, two ways this "crack" could occur. The first is for the "circuit breakers" to cut in during a general panic.... a "run on the market" by unsophisticated mutual-fund owners (and maybe even by supposedly-sophisticated money managers).... and essentially shut the market down for two or three days until a balance between buyers and sellers is again reached. The more likely kind of "crack" would be for the "circuit breakers" to actually work, and for stocks to erratically decline 75 to 250 points per day over a week or ten days, again until balance is restored below DJIA 3000. That leaves about 2-in-3 odds that the bear will return in an "ordinary" way, grinding prices tediously but inexorably lower; and virtually zero odds that stocks will make new highs. In any case, October and November are the danger months, with mid- to late-October likely to see the greatest declines, or the "crack" if it should occur.
This is one of those few times when one can go heavily short with a high degree of confidence. As I have already described, in my own portfolio I am endeavoring to eliminate margin debt and favor the short side, in most cases by lifting one leg of a hedge, in others by shorting against positions held long. I would also suggest you consider the purchase of long-term index puts at current levels.... or maybe even short-term, if you go out at least six months.
A. "Hedger's Delight" -real portfolio, includes commissions:
SUMMARY - "Hedger's Delight":
Original cost: $10,455.77
Present value: $ 8,043.62
Increase: $-2,412.15 [-23.07%]
Yield: $ -81.00 [-0.77%]
The performance of this portfolio from January 1987 to the present
(adjusted for the dilutive effect of added cash) is -21.05%,
for a compound annual rate of return of -3.00%.
COMMENT on "Hedger's Delight": In addition to the changes already discussed in the "essay", Safeguard Scientifics has split its stock 2-for-1; and the cash balance also reflects a dividend received (in January!....IÍm catching up on the bookkeeping) from Pegasus Gold, and dividends paid out on the Hasbro and Union Carbide short positions.
B. "Present and Future Income" - real portfolio, includes commissions:
SUMMARY - "Present and Future Income":
Original cost: $ 9,548.98
Present value: $12,431.22
Increase: $ 2,882.24 [30.18%]
Yield: $ 144.19 [1.51%]
The performance of this portfolio from January 1987 to the present
(adjusted for the dilutive effect of added cash) is
+45.68%, for a compound annual rate of return of 5.00%.
COMMENT on "Present and Future Income": The cash balance reflects (in addition to buy and sell transactions) dividends received from Continental Mortgage and Equity Trust, Duke Realty, and Southwestern Property Trust, and proceeds from the sale of Citizens Utilities stock dividends fractional shares.
C. "Crapshooter's Folly" - real portfolio, includes commissions:
SUMMARY - "Crapshooter's Folly": Original cost: $10,817.13 Present value: $16,751.31 Increase: $ 5,934.18 [54.86%] Yield: $ 20.00 [0.18%] The performance of this portfolio from January 1987 to the present (adjusted for the dilutive effect of added cash) is +70.63%, for a compound annual rate of return of 7.17%.
COMMENT on "Crapshooter's Folly": In addition to the numerous transactions already mentioned, dividends received from Apache, Citicorp and North Canadian Oils have also affected the cash balance shown. Also, the expiration of the Unit Corp. warrants has been extended by two years.
D. "Discards" - stocks even I have given up on for one reason or another (bankrupt company, too much paperwork, held too long with no profit, corrupt management, or change in personal objectives). This model portfolio includes commissions when I have actually sold my holdings, but does not include commissions when I still own the stock that was transferred to here from one of the other portfolios. (In the latter situation, I would probably have to PAY the broker to take the stuff off my hands.) I make no claims for the performance of this portfolio; I'm as curious as you are to see how it turns out.
SUMMARY - "Discards": Original cost: $ 1,266.28 Present value: $ 332.80 Increase: $ -933.48 [-73.72%] COMMENT on "Discards": This portfolio hasnÍt seen this much activity in years. The Connecticut Bancorp warrants expired worthless; the Hotel Investors Trust warrants were sold by good-til-cancelled order filled; Integrated Resources has emerged from bankruptcy, and the common and preferred stockholders were wiped out; Lancer Industries also emerged from bankruptcy and underwent a reverse stock split, with cash issued for the newly-fractional shares; and for good measure, I "sold" (I did not own them) the Mesa shares, as I wind down this portfolio.
E. Commerce/INVEST/Bull&Bear IRAs - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $18,088.74
Increase: $ 9,762.55 [117.25%]
Current yield: $ 929.73 [5.27%]
The performance of this portfolio (including its predecessors)
from January 1, 1987 to the present is +64.94%, for a
compound annual rate of return of 6.70%.
COMMENT on IRAs: There is no change from the last issue (except for the money-market balance).
F. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought ======= ============= ============= 27Jan92 stock @ 57.82 MM @ 13.34 10Mar92 MM @ 13.40 stock @ 56.95 13Mar92 stock @ 56.65 MM @ 13.41 29Apr92 MM @ 13.48 bond @ 31.19 19Jun92 bond @ 32.14 MM @ 13.55 29Jun92 MM @ 13.57 stock @ 56.74 24Jul92 stock @ 56.76 stock @ 58.61 23Dec92 stock @ 61.48 MM @ 13.78Values on 22Sep94: stock, 70.85; MM, 14.62
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%;
1992: 10.20%; 1993: 3.08%
Gain, January 1 through June 30, 1994: 1.72%
Total gain since January 1, 1988 (6.5 years): 117.91%
Compound annual rate of return: 12.73%
(My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash
contributions.
Buying CREF stock on January 1, 1988 and holding it gained
118.06%, for a compound annual rate of return of 12.75%.
G. Current unfilled portfolio good-til-cancelled orders:
GTC sell - 500 Breakwater Resources @ 1/4, 100 Medical Resource @ 2-1/2, 2 Bank of New York April 1995 calls $30 @ 3. I am contemplating selling my CIGNA bonds and People's Bank shares at current market prices.
GTC BUY - 100 Amax Gold @ 5-1/2, 100 Horsham @ 9-1/8, 200 Manville 1996 warrants ($9.40 to 5Jun96) @ 1/2, 1 Placer Dome January 1996 LEAP call $30 @ 2.
COMMENT on "Timer's Trend": Even though the popular averages, such as the Dow, approached their early-1994 highs in September, ñTimerÍs Trendî never gave a very big green light to the rally. After much whipsawing in August, it gave a buy signal on August 24; from then until September 20, when the sell signal came, the more sensitive 10% exponential kept whipsawing, indicating the extreme thinness of the rally..... that is, participation by relatively few stocks.... and warning of the danger ahead.
============================== TIMER'S TREND =================================
Tue 31 May 94 . #| . | 3758.37 + . *
Wed 1 Jun 94 . |# . | 3760.83 + . *
Thu 2 Jun 94 . |# . | 3758.99 + . *
Fri 3 Jun 94 . |# . | 3772.22 + . *
Mon 6 Jun 94 . |# . }| 3768.52 + . *
Tue 7 Jun 94 . #| . | 3755.91 + . *
Wed 8 Jun 94 . #| . [| 3749.45 + . *
Thu 9 Jun 94 .# | . | 3753.14 |-. *
Fri 10 Jun 94 . |# . ]| 3773.45 |-. *
Mon 13 Jun 94 . |# . | 3783.12 |-. *
Tue 14 Jun 93 . | # | 3814.83 +~.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 15 Jun 94 . # . | 3790.41 + . *
Thu 16 Jun 94 . |# . | 3811.34 |+. *
Fri 17 Jun 94 .# | . [| 3776.78 + . *
Mon 20 Jun 94 # . I . {| 3741.90 |-. *
Tue 21 Jun 94 # . I . | 3707.97 |~*-~~~~~~~~~~~~~~~~~~~~~~~~~
Wed 22 Jun 94 . #I . | 3724.77 | .- *
Thu 23 Jun 94 # . I . | 3699.09 | . - *
Fri 24 Jun 94 # . I . | 3636.94 @|~.~~~-~~~~~~~~~~~~~~~~~~~~~~
Mon 27 Jun 94 # I . | 3685.50 | . - *
Tue 28 Jun 94 # . I . | 3669.64 | . - *
Wed 29 Jun 94 # I . | 3667.05 | . - *
Thu 30 Jun 94 # . I . | 3624.96 | . -*
Fri 1 Jul 94 .# I . | 3646.65 | . - *
Tue 5 Jul 94 .# I . | 3652.48 | . - *
Wed 6 Jul 94 .# I . | 3674.50 | .- *
Thu 7 Jul 94 . & . | 3688.42 | .- *
Fri 8 Jul 94 . #I . | 3709.14 | - *
Mon 11 Jul 94 # I . | 3702.99 | - *
Tue 12 Jul 94 .# I . | 3702.66 | - *
Wed 13 Jul 94 . & . | 3704.28 | - *
Thu 14 Jul 94 . | # | 3739.25 |-. *
Fri 15 Jul 94 . |# . | 3753.81 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 18 Jul 94 . | #. | 3755.43 + . *
Tue 19 Jul 94 . # . | 3748.31 |+. *
Wed 20 Jul 94 # I . | 3727.27 + . *
Thu 21 Jul 94 . #I . | 3732.45 |-. *
Fri 22 Jul 94 . #I . | 3735.04 |-. *
Mon 25 Jul 94 . & . | 3741.84 |-. *
Tue 26 Jul 94 .# I . | 3735.68 | - *
Wed 27 Jul 94 # I . | 3720.47 | - *
Thu 28 Jul 94 . #I . | 3730.83 | - *
Fri 29 Jul 94 . | # | 3764.50 |-. *
Mon 1 Aug 94 . | .# }| 3798.17 +~.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 2 Aug 94 . | # | 3796.22 |+. *
Wed 3 Aug 94 . | # | 3792.66 | + *
Thu 4 Aug 94 . # . | 3765.79 | + *
Fri 5 Aug 94 .# | . [| 3747.02 |+. *
Mon 8 Aug 94 . # . ]| 3753.81 + . *
Tue 9 Aug 94 . #| . [| 3755.76 + . *
Wed 10 Aug 94 . |# . ]| 3766.76 |-. *
Thu 11 Aug 94 # I . {| 3750.90 |-. *
Fri 12 Aug 94 . |# . | 3768.71 |-. *
Mon 15 Aug 94 . # . | 3760.29 |-. *
Tue 16 Aug 94 . | # }| 3784.57 + . *
Wed 17 Aug 94 . | # | 3776.48 + . *
Thu 18 Aug 94 . # . | 3755.43 |+. *
Fri 19 Aug 94 . |# . | 3755.11 |+. *
Mon 22 Aug 94 . # . [| 3751.22 |+. *
Tue 23 Aug 94 . | # ]| 3775.83 |+. *
Wed 24 Aug 94 . | # | 3846.73 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 25 Aug 94 . | #. | 3829.89 |+. *
Fri 26 Aug 94 . | . # | 3881.05 | + *
Mon 29 Aug 94 . | .# | 3898.85 | .+ *
Mon 29 Aug 94 . | .# | 3898.85 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 30 Aug 94 . | . # | 3917.30 | .+ *
Wed 31 Aug 94 . | .# | 3913.42 | . + *
Thu 1 Sep 94 . #| . | 3901.44 | .+ *
Fri 2 Sep 94 . |# . | 3885.58 | + *
Tue 6 Sep 94 . |# . | 3898.70 | + *
Wed 7 Sep 94 . |# . | 3886.25 |+. *
Thu 8 Sep 94 . | .# | 3908.46 |+. *
Fri 9 Sep 94 #. I . | 3874.81 + . *
Mon 12 Sep 94 # I . | 3860.34 |-. *
Tue 13 Sep 94 . #I . | 3879.86 |-. *
Wed 14 Sep 94 .# I . | 3895.33 | - *
Thu 15 Sep 94 . | .# | 3953.88 |~-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 16 Sep 94 # I . | 3933.35 |-. *
Mon 19 Sep 94 . & . | 3936.72 |-. *
Tue 20 Sep 94 # . I . {| 3869.09 | - *
Wed 21 Sep 94 # . I . | 3851.60 |~*-~~~~~~~~~~~~~~~~~~~~~~~~~
Thu 22 Sep 94 #. I . | 3837.13 |~.~-*~~~~~~~~~~~~~~~~~~~~~~~
================================================================================
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (})
signalNEXT ISSUE - will appear about October 21. /Nick Chase