RD's Picks

The SLO highlight for me this week is the portfolio NAV breaking above ten bucks and passing all the slackers who've been sitting in all cash since the start. The heavy lifting was done by my biggest holding, Global SantaFe (GSF), bouncing back from much of its sell-off.

Portfolio changes this week were selling off my last few shares of American Railcar Industries (ARII) and managing to trade myself out of Mattson Technologies (MTSN). Will keep on eye on MTSN and buy back in if the price comes down again.

Other than those sells, just traded around some of my positions. Volatility was quite a bit lower this week, so not as many lowball buy/highball sells triggered. Thursday was calm enough that none of my trading orders tripped. I had part of Friday off, so played daytrader for awhile, added a little to the market gains but hardly worth the effort.

No big moves planned going forward. Still looking for GSF to continue recovering and will lighten up some more as it (hopefully) goes up. This stock typically has pretty big intraday swings, so I'm going to try trading to lighten the position; sell 200, buy back 100 lower, rinse, lather, repeat. Cash raised from scaling back will either be distributed among the other holdings or used to add a new position, maybe a global industrial play or a railroad.

Question of the Week
Identify which of our portfolio stocks we think will benefit most if the Fed cuts the funds rate and explain why. I'm going to use this as a portfolio review. Stocks are ordered from least benefit to most benefit from a cut as I see it. Caution - on rare occasions (like daily), I've been known to be wrong.

Prospect Capital (PSEC) - Too tough to call. PSEC is a business development fund focused on energy companies. As a financial company first instinct is to say PSEC would be a big beneficiary of a rate cut. However, they operate with very little leverage and an easy money environment would increase competition from private equity, hedge funds, and the like for attractive business opportunities. On the flip side, a lower short term interest rate will make that nearly 10% divvy look even more attractive.

Rocky Mountain Chocolate Factory (RMCF) and Rubio's (RUBO) - Basically no impact from a rate cut. Both of these companies have cash on the books, no debt, and are financing their growth out of cash flow. Neither business, selling chocolate and Mexican restaurants, is very sensitive to economic conditions. RMCF may get a little boost as the dividend gets more attractive. RUBO doesn't pay a dividend.

Cisco (CSCO) - Small positive impact from a rate cut. With $16 billion of net cash, CSCO has no need to access credit markets. However, an easier money policy should stimulate growth and increase demand for their products.

Anheuser Busch (BUD) - Small positive impact from a rate cut. I would have put this in the 'no impact' category except BUD has quite a bit of debt and pays a dividend. A lower rate environment should save them a few bucks in interest expenses and the dividend gets more attractive with lower cash rates.

Novartis (NVS) and Unilever plc (UL) - Small positive impact from a rate cut. The businesses aren't economically sensitive, but these are foreign companies so a weak dollar should result in higher share prices and lower rates will make the dividends more attractive.

AT&T (T) and RPM International (RPM) - Average impact from rate cut. Quite a bit of debt on their books = lower interest expenses if rates come down. Much of their businesses are economically sensitive, so stimulating growth should be good for T and RPM. Lower rates also make the dividends more attractive.

Global SantaFe (GSF) - Above average impact from rate cut. I believe part of the reason for GSF's sell-off the first few weeks of the contest was concern over the debt associated with the Transocean (RIG) merger. In an easier credit environment, those concerns are reduced and lower interest expenses are a big positive when financing $15 billion. Higher oil prices from a weaker dollar will also boost the share price. BTW, GSF continues to be the slightly cheaper way to buy the GSF - RIG merger.

Northgate Minerals (NXG) - Above average impact from rate cut. Gold. Lower rates = weaker dollar; more worries about inflation.

Bank of America (BAC) and Wells Fargo (WFC) - Above average impact from rate cut. Banks would normally get the biggest bang from a rate cut. However, in this case, I believe much of the expectations for a rate cut got baked into the share prices when the discount rate was cut last Friday. If that's the case, the financials will sell-off if the Fed doesn't cut rates at the next meeting. If the banks run up before the Fed meeting in Sep, I plan on lightening up and picking them back up after the market sells the news because I don't think the Fed will cut the funds rate. Dividends get more attractive if rates drop.

Chevron (CVX) - Most impact from a rate cut. Fed funds rate cut = weaker dollar; Weaker dollar = higher oil prices. Economic stimulus = increased oil demand; increased demand = even higher oil prices. Combine that with Chevron's dividend getting more attractive if cash rates drop and lots of international exposure and I think Chevron wins big with a rate cut.

Disclosure: I own shares of CVX, WFC, GSF, T, CSCO, and PSEC.

Rant: The Question of the Week box includes the following statement, "Want to get an interesting discussion going?" As much as many of us would like to get an interesting discussion going, the hoops you have to jump through to allow and make comments on the blog entries make it almost impossible. Combine that with links to only the four or five most recent blogs and a good discussion just isn't likely to happen. /rant off

Thanks for reading and have a great week. Comments cheerfully accepted assuming you can figure out how to post them and I can figure out how to accept them.

Comments: View Comments |  Saturday August 25, 2007