WASHINGTON, February 26, 2013 – Several sources have reported that DC-based private equity firm Carlyle Group LP (symbol: CG) is preparing to sell Arinc Inc.—an Annapolis MD-based aerospace and defense company—something the company was unable to accomplish two years ago.
A well-respected, multi-faceted firm founded in 1929, Arinc has been a mainstay in the DC-Baltimore metro area for years. Its potential sale should generate more interest than it did previously, perhaps tempting bids in excess of $1.2 to $1.5B according to an early report from Reuters. Carlyle has reportedly enlisted the services of J. P. Morgan (JPM) and Evercore Partners (EVR) to serve as advisors with regard to the potential sale.
That was interesting news on a very bad day for the market. After opening up in the morning in continuation of Friday’s relief rally, the market appeared to get blindsided by the results of the Italian elections. Silvio Berlusconi appeared to be the outright winner in early voting. But surprise: later in the day, Italian voters reverted to form and gave no Italian party or coalition a clear majority which, ultimately, is par for the course in Rome, once the seat of the most powerful and efficient empire the world has ever known. Things change.
In any event, the repetitiousness of current history aside, the prospect of more economic turmoil in Italy—which is universally acknowledged to be close to the brink anyway—brought a drop of 216 Dow points, a severe case of the jitters, and a fantastically high VIX (volatility) reading to the markets yesterday afternoon. That resulted in a waterfall decline that pretty much took all investing boats with it, save, interestingly, for gold.
The glittering yellow metal enjoyed a nice up day after months of grinding declines without much respite. Apparently, at least some investors woke up to the fact that Europe might need to come up with a “final solution” to its fiscal problems yet again.
Then, of course, some investors still fear the March 1 sequester, which—unless Congress for once has kept a secret—will almost certainly kick in on Saturday. Most investors, however, if they’ve done any research at all, will know that this once-dreaded event essentially means nothing at all, as spending is actually continuing to increase anyway. Move along, folks, nothing to look at here.
Speaking of sales, mergers, and acquisitions BTW, beleaguered bookselling conglomerate Barnes & Noble (BKS) went countertrend yesterday, gaining 11.5% ($1.55 per share) to $15.06 after it was reported that the company’s chairman, Leonard Riggio, announced that he wanted to gain control (i.e., buy a majority interest in) of the retail side of the struggling company’s business. We assume he has a leveraged buyout (LBO) in mind. But why anyone would want to do an LBO involving a business that, if not dying remains in utter chaos, is a mystery to us. That said, we’re sure current shareholders would jump at the chance to get out of this perennial dog at any price that’s better than the one they were able to get last Friday.
How to play today’s action:
In spite of steadily selling off our winners (and occasional small losers) over the last two or three weeks to lighten up for an inevitable market correction, our program was rudely interrupted by yesterday’s afternoon swan dive on Wall Street which took everyone, including us, by surprise. Part of the reason for the severe late-afternoon drop, we suspect, was that batches of stops were hit as action worsened, thus steepening the slide via autopilot.
A stop order, for the uninitiated—which has a couple of additional permutations—is at its simplest a standing order a customer places with his or her broker to automatically sell a stock at a predetermined upside or, more frequently, downside price. Such orders are typically entered “GTC” or “Good Till Canceled” which means they stay on the books until whenever. (Additional rules apply, but that’s another article.)
At any rate, yesterday’s decline was so swift and so sudden that it swept an awful lot of these GTC stop orders along with it, creating an outsized cascading effect, which is what we saw by the close.
The Maven, for a variety of reasons, only uses “mental stops”—i.e., stop orders he keeps in his head or on a sheet of paper, not with his broker. That’s because investing pros have their way of seeing where these stops are located, and can manipulate the market in such a way as to trigger clusters of stops—most effective when the pro is already in a short position and looking to accelerate a decline to increase his profits on the downside. By not publicly exposing his mental stops, the Maven keeps them hidden from these predators. The price, however, is eternal vigilance, as we saw yesterday.
As a result, we were surprised we had to “stop” ourselves out of a couple of positions we hadn’t intended to sell, such as partial positions in mega-regional bank BB&T (BBT) and the Swedish stock ETF (EWD). We also, reluctantly, sold our position in MLP Alon USA Partners (ALDW) for roughly a 30% gain—the second heavy-gaining round trip we’ve taken in this nearly brand new stock. It’s an unusually constructed MLP with an untested thesis, but it’s done well for us so far and we hope to get back in soon at a reasonable price.
However, as our “stop” orders are indeed in our head, we can also change our minds, unlike GTC orders which tend to fire off when you’re at the local grade school watching junior get his ten seconds of fame during the third-grade talent show. Suspecting something a little strange was going on yesterday afternoon, we held other positions we might have stopped out under normal circumstances. We have been rewarded, at least partially, this morning, as the market is now up 93 Dow points at 9:50 a.m. EST, buoyed, say the pundits, by nicely increasing home sale prices.
Unfortunately, we have yet to make up all the ground we lost during yesterday’s neutron bomb selling—selling that left stocks and markets standing while vaporizing individual portfolios.
In spite of yesterday’s and today’s current bipolar market action, we think we’re in the middle of a genuine and much-needed market correction. Up to last week, it’s been an uncommonly delightful 2013 so far, and the Maven has made as much money in this period as he’s ever made in a two-month period since late 2007. So the Maven is not in a mood to leave these winnings on the table for the predators to snap up. They got us yesterday, but we’ll be using today’s current rally (which may or may not last) as an excuse to dump more of our profitable positions as well as squeak out—with small losses—of those positions whose investment theses have been changing.
This correction—and we’re confident enough to label it as such—probably has a way to go, as we are oversold but not yet extremely sold according to charts and oscillators that we use. Furthermore, our longtime chart advisory service has all market merchandise, with the exception of the dollar and the 30-year Treasury, on current short term sell signals, which means that temporarily at least, nothing save these two items is even marginally reliable at the moment.
So we’ll continue to raise cash until these signals start switching. One or two more days like yesterday would be good enough to do just that. Or, two or three weeks of Chinese Water Torture markets, which would accomplish the same thing but with far greater suffering.
Meanwhile, again, we’ll try to hold on to as many of our REITs, MLPs, and utilities as we can, realizing that even these can get hit in a severe downturn. However, their outsized dividends can alleviate the suffering and provide us with some income until things start coming back. Preferred stocks in REITs and via the occasional ETF (like PFF) are also pretty stable. Such stocks (except for PFF et. al.) are issued at a fixed price—very often $25 per share—and can eventually be called (bought back) at that price. So if you can find them at less than $25 per share, they can be a good deal. You can collect the swell dividend (senior to common dividends, BTW) as long as you like, and, if the stock eventually gets called, you can also take a small capital gain if you bought it cheaper than par value (again, usually but not always $25 per share).
Right now, even in this market, we’ve been nibbling into the preferred B shares of NorthStar Realty Finance (NRF/PRB)*, whose underlying stock is stabilizing and whose preferred B shares are slightly under par. With an approximately 8.33% current dividend yield, what’s not to like.
Otherwise, exceptions noted, keep paring positions while external pressures remain on the market. Eventually, there will be markdown sales where you can get back in, so go hide temporary cash in money market funds and/or 3-month CDs, or possibly in a low management fee T-Bill ETF like Schwab’s SCHO which is commission free for account holders at that firm, like the Maven.
This isn’t an ad, however. We don’t get a cut when we mention Schwab products, and other discount houses like Fidelity have been offering similar products, so at least be aware of them. Yes, the yields are pathetic. But even pathetic is better than straight cash, because for the Maven, at least, every penny counts.
*NOTE: If you trade for your own account, you’ll find that each brokerage house and level of service may employ a maddening variety of symbols for a given preferred stock. If the symbol we listed doesn’t work and if you can’t figure out the alternative for your account, call your broker and ask for the symbol. Free/shareware site QuantumOnline also offers plenty of preferred stock info and additional preferred symbols that can put you on the trail.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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