Master Achievement

The start of 2010 began with an upside move to the markets but this was unsustainable.  While many political issues spooked the market with talk of increasing taxes on banks and excuses throughout the State of the Union address.  The economy seemed to be a scrapegoat for portfolio managers to sell out their positions.  The financial markets are not cheap for this economy following the significant upside move from March to December 2009.

Updating the asset ETFs in the portfolio, they still have positive returns averaged over the 3, 6 and 12 nonths periods.  However, the downturn during the final two weeks of january moved the top five ETFs below their 100-day moving averages.  this is a warning sign that volitility may be returning to the market.  Following the rules, you should move to 100% Cash or Money Market accounts throughout February.  We will update the FOF Portfolio in March after the markets have time to get through their correction.

February 2010 Update - Master Achievement

Rules for FOF Portfolio

1. Rank the 12 asset classes by taking an average of each Funds 3-month, 6-month and 12- month performance.  The sort with the highest average at the top of the list (see table).
2. Evaluate the top 5 Funds on the ranked list to ensure each Fund is trading about its 100-day simple moving average.
3. Invest 20% of your portfolio in each Fund ranked 1 to 5 and above its 100-day trading price based on last closing price.
4. in the event that a Fund is trading below its 100-day price, do not invest in that Fund.  there may be a period when you are not 100% invested due to market volitility.  This is part of the strategy of keeping your money out of a dangerour market to prevent loses (I.E. 4th quarter 2008).

Click here to see original Fund of Funds Portfolio.

U.S. investor Warren Buffett holds just over 3 percent of leading reinsurer Munich Re AG, the German company said Tuesday.  An ad hoc statement from the company said that Buffett has informed it he now has 3.045 percent of the voting rights in Munich Re. The statement attributed the holding to Buffett rather than to Omaha-based Berkshire Hathaway.

Companies are obliged to issue such statements when holdings exceed 3 percent. Munich Re declined to say whether Buffett had owned any shares before bringing his stake above 3 percent.  Munich Re is one of the world’s biggest reinsurance companies, selling backup coverage to other insurers, spreading risk in the event of huge losses.

Natural catastrophe losses were far lower in 2009 than in 2008 due to the absence on the whole of major catastrophes and a very benign North Atlantic hurricane season.  However, the total number of destructive natural hazard events was above the long-term average, 850 being recorded in all.  Consequently, despite the lack of really disastrous events, there were substantial economic losses of US$ 50bn and insured losses amounted to US$ 22bn compared with economic losses of US$ 200bn and insured losses of US$ 50bn in the previous year.

Billionaire investor Buffett has been a shareholder in Munich Re since at least 2008.  Munich Re Chief Executive Officer Nikolaus von Bomhard told shareholders at the annual meeting in Munich that year that he expected Buffett to remain a shareholder in the company.  At the time, Buffett’s stake was below the 3 percent threshold, the lowest that requires disclosure.

Buffett’s Berkshire held 3 percent of Swiss Re as of March 2009, data compiled by Bloomberg show.  The Zurich-based reinsurer is increasing surplus capital as it bids to regain its AA credit rating and repay 3 billion francs ($2.87 billion), which Buffett injected into the company last February.

ETFs in Fund of Funds Portfolio

1. Rank the 12 asset classes by taking an average of each Funds 3-month, 6-month and 12- month performance.  The sort with the highest average at the top of the list (see table).
2. Evaluate the top 5 Funds on the ranked list to ensure each Fund is trading about its 100-day simple moving average.
3. Invest 20% of your portfolio in each Fund ranked 1 to 5 and above its 100-day trading price based on last closing price.
4. in the event that a Fund is trading below its 100-day price, do not invest in that Fund.  there may be a period when you are not 100% invested due to market volitility.  This is part of the strategy of keeping your money out of a dangerour market to prevent loses (I.E. 4th quarter 2008).
5. At the begining of each month, update the ranking of each fund by calculating the new return average and then sort with highest average return at top.
6. If any invested funds fall from the top 5 ranking, then sell this fund and replace it with the new fund in the top five ranking.  The strategy is to be invested in the top 5 asset classes that trade above their 100-day moving average.
7. If any Funds you are invested in fall below their 100-day average, then you will exit that Fund.  You do not need to monitor the 100-day on a daily basis.  Check this measure at the beginning of each month as this will get you out of a declining fund without any whipsaw movements.
8. Continue to monitor your portfolio at the beginning of each month to update ranking and best Funds to be invested in.
9. At year end, you can rebalance your investment amounts to return to 20% in each Fund.  Make this an easy time such as the beginning of January.  If you have a Fund that increases in value through the year, let the profits run unless; (1) the price drops below the 100-day average; (2) the Fund drops out of the top 5 ranking; or (3) you rebalance at the beginning of the year taking the Funds balance back to 20%.

Two weeks ago, Exxon announced it would purchase XTO Energy for $41 billion.  XTO Energy is a giant natural gas company. It’s the second-largest producer of natural gas in America, and Exxon’s biggest acquisition since it bought Mobil 10 years ago.  Natural gas is cheap, abundant, and produces 60% less emissions than coal.  As electricity demand grows, Exxon thinks natural gas will be the fastest-growing fossil fuel in America.  In other words, Exxon bought XTO because it plans to supply the power industry with natural gas.

There are a number of ways to play this trend.  You could invest in natural gas to play the price of the commodity with UNG.  I do not like this as there is a large supply of natural gas in the U.S.  secondly, you could play the utilities that use natural gas to generate electricty,  This is a good option that appears to be safe over the next 10 years.  A third option is to invest in the midstream natural gas players.  These are the companies that process, store and transport natural gas.  These companies are generally listed as master limited partnerships ot MLPs. 

My favorite way to play this trend is with an ETF:  Fiduciary/Claymore MLP Opportunity Fund (FMO).  This is not a pure-play on natural gas but you get exposure to all pipelines that are a tgoll-road investment.  FMO had a return of 60% in 2009.  It pays a quarterly dividend with a yield of 7.5%.  FMO trades at $18 per share which is a 12% premium to its NAV.  This is an attractive, total return investment for long-term investors.  FMO is 42% invested in midstream gas and 40% invested in midstream oil.  These pipelines will continue to generate cash as long as there is demand for energy.

The preferred tax treatment of MLPs is an added benefit to recieving cash disvidends as these are frequently classified as return of capital which lowers your taxable cost basis.

TOP 10 HOLINGS
as of 11/30/09

The income component is generated by the sell of covered calls against the Fund’s holdings.  GGN pay a monthly dividend of $0.14 for an annual dividend of $1.68.  Trading at $16.00 per share, the annual dividend yield is 10.5%.  As of December 29, 2009 the fund has a one-year return of 78.2% but only sells at a 3% premium to its NAV.  Over the Fund’s four year history, the range fluctuated from a 56% premium in January 2009 to a  10% discount in April 2008.  GGN has a market cap of $350 million with an expense ratio of 1.28%.  The Fund has a preferred stock (GGNpA) that trades at $25.50 with a yield of 6.5% paid quarterly.

In contrast, Bloomberg quoted Nouriel Roubini as saying the idea of gold going to $2,000 per ounce was “utter nonsense”. Maybe $1,100 or so, says Roubini, but that’s about it.

Regardless of which expert may be correct, I want to receive the 10.5% dividend yield from GGN to protect my downside and still have room for some upside movement.  

The increased demand from China, along with the beginning of supply chain restocking by the United States and other western economies, led to the increase in demand that drove metals prices up during 2009.  As restocking continues and Chinese demand is prolonged, a floor should be maintained on industrial commodity prices.  As gold continues to reach new highs, the related equities offer upside in the price of the metal.  If gold stays above $1,000 per ounce, the mining companies should begin to realize meaningful cash flow, which will accrue to the benefit of shareholders, and gold equities could enjoy a further upward move.