Money and Investing Thoughts

Why Does GM Stock Still Have Value? – WSJ.com.

Despite the link name, the article linked above is titled “How Traders Killed Value Investing”. The piece is an interesting read on how the big money traders manipulate the prices of securities. A quote:

For the long-term investor, whether you’re investing for retirement or simply betting on a company’s potential success, the payoff is suddenly in play — every stock is a potential target of forces outside of the traditional movers.

Over the last year I have watched a stock market that one day was betting on $200 oil fertilizing the world at $1,000 per ton to, only a few months later, driving the stock prices of good companies down to levels I have not seen in 30 years of stock market interest. My frustration reached such a level that I stopped writing regular posts for this blog. Of course, I stopped just about the same time the market hit its most recent bottom and has rebounded 40% since.

I continue to read articles concerning the current speculative nature of the market. I want to put out information that will help investors make money, this is not a trading site for those trying to make a quick buck. In the continuing evolution of this site, I have decided to focus primarily on dividend paying stocks. It is much harder for the market pushers to manipulate a distribution away from an investor. I also want to pursue ways to give some downside protection to a stock portfolio and look at covered call selling to enhance income.

The website I picked to show model portfolios has not worked out well so I am working an a new portfolio tracking system to help track what I am writing about. I will also be using some of the information from my other site: The Shipping Stocks Blog, to find good, income paying investments.

I plan to get the new portfolio up and running by 1 July. Until then check back in for what I hope will be some interesting and useful investing with a focus on income stocks.

Each week I recap the results of the WilderHill New Energy Global Innovation Index, symbol NEX, and published by New Energy Finance Ltd. The index consists of approximately 90 stocks from 22 countries. The NEX is the tracking index for the PowerShares Global Clean Energy Portfolio ETF (PBD: 9.73 +0.259 +2.73%). For reference, the NEX has a 52 week high of 461.56.

I had not received updates from New Energy Finance for a couple of weeks over the holidays. For the record the NEX finished the year at 177.99 down 61% for the year of 2008. The NEX is rebalanced each quarter and stocks are added and dropped. You can see what changed here.

For the week ending on Monday, Jan. 5 the NEX gained 7.7% to 191.72. The NASDAQ and S&P 500 gained 3.2% and 2.7% for the same period. The ‘energy conversion’ sector was the top sector, gaining 12.9%. Solar energy was close behind, up 12.6% for the week. The bottom sector was power storage which was up a measly 0.3%.

Here are the top winners and losers from the NEX for the week:

NEX top gainers since 31 Dec 2008
GT Solar International SOLR + 38.4%
Capstone Turbine CPST + 29.8%
Ballard Power Systems BLD + 24.6%
Gushan Environmental GU + 24.5%
SunPower SPWRA + 22.0%

NEX top losers since 31 Dec 2008
EnviTec Biogas ETG - 6.4%
Echelon ELON - 5.8%
GS Yuasa 6674 – 3.9%
Energy Developments ENE – 3.0%
Babcock & Brown Wind BBW - 2.8%

Huge Distributions At ProShares – Features.

Shareholders in the various ProShares inverse and double-inverse funds received a pre-Christmas gift of the unpleasant kind. The article linked above from Index Universe lists the cash distributions made by 35 of ProShares ETFs ranging from 4.1% to 44.3% of the previous day’s NAV (December 22). The distributions will be paid in cash and are fully taxable as (mostly) short term capital gains. It appears no warning was given of the timing or amount of distributions, so many shareholders will be hit with a pretty healthy tax bill on gains they may not have earned.

Two weeks ago Rydex funds announced distributions of up to 86% on their inverse funds. I wrote about it here. The Index Universe article from that event that I used as a source opined that the ProShares inverse funds would not have distributions as large as the Rydex funds. Well, they were not as large but I doubt that is much consolation to the holders of the 20 ETFs that had distributions of 20% or greater.

Recently there has been discussion on whether heavy trading the double and double-inverse ETFs are a cause to the recent extreme volatility in the markets. My article on the discussion is here. I think the underlying lesson in this is that the leveraged ETFs should be used for short term trading only and there are pitfalls for the unaware investors in these products.

Are ETFs Driving Late-Day Turns? – WSJ.com.

The article from the WSJ.com linked above (subscription required) puts for the hypothesis that the 2X leveraged and inverse leveraged ETFs are pushing the market, especially in the final hour of trading.

The recent market action has traders waiting for the last hour, determining the market direction, and piling in. The leveraged ETFs are a popular vehicle to ride the direction of the final hour of the day. These ETFs have become some of the most active issues in the market.

Outside of the possibility that active trading in these funds is pushing market volatility to higher levels, I am wondering if their is a possibility of them blowing up at some point. Can they become the equivalent of program trading in 1987 or mortgage backed security trading in 2007. A few days ago I wrote an article on one of these leveraged ETFs that hit shareholders with an 86% short term capital gains distribution. That seems to be a small clue that all may not be well in double gains and losses land.

I really do not have a clue if these ETFs can blow up. The gut feeling is there that as their trading volumes grow there is a flaw in the structure that will bring it all down at some critical level. If anyone has any thoughts on this I am curious to hear them.

I get the RSS feed from IndexUniverse.com and a weird thing happened to an article I was interested in today. The article was about the fact that the the Rydex Inverse 2X S&P Select Sector Energy ETF (REC: 0.00 N/A N/A) went ex-distribution with an 86% distribution. The link stopped working as I went from page 1 to page 2 of the article. I used the search function on the Index Universe website for “REC” and only found an article referencing planned distributions on 12/19. It appears the article I was reading has been taken down. I took another look at the site and the article is back up. You can read it here.

Too bad. I have completed a little research on REC and it looks like shareholders of record yesterday got hosed. Rydex declared a short term capital gain distribution of $86.48 per share. REC shares closed on Wednesday $88.23 below the ending price on Tuesday. Pity the uninformed shareholders.

REC started trading on June 10, 2008 at an NAV of $75. In the last 6 months the shares have traded between (before going ex) $70 and $258. Yesterday’s price ($12.05) plus the distribution equals $98.53, so there are exactly zero shareholders out their who will receive the distribution and actually made 86% on their investment. I would really like to find the guy who bought at $200+ and still holds the shares, has lost 1/2 his investment and has to pay full income tax on 86% of what’s left.

ETF’s are supposed to be tax friendly investments, but it is obvious there are some issues with these double down/up types. Before the Index Universe article disappeared, there was a chart listing a couple of other Rydex ETF’s that distributed 50%+ gains. Traders in these things need to keep a careful eye on distribution dates.