Year End Moves

I haven't had much time to post lately, so my apologies for that. I can't believe it's been over a month since my last post.

Now that the Fed has gone down swinging with rate cuts to essentially 0%, I don't expect the cash returns from savings accounts to be particularly attractive for the near future. Indeed, it was just last week that the Treasury sold 4-week bills at the mouth-watering discount rate of 0%. Clearly, if anything could be considered overvalued in this market, cash and its perceived safety would have to be a forerunner.

With the markets responding favorably to yesterday's cut, I took the opportunity to close out some positions. The problem now, as Obama noted, is that the Fed has run out of its traditional ammunition to fight recession. It's nice that they've come out saying they'll do all they can to help the economy, but it's not as though they were holding back before. Some sort of drastic fiscal response is now a near certainty. The threat of deflation is the key fear now, but these moves will likely have inflationary repercussions at some point.

Consequently, I've been adding more cash to my portfolio. As mentioned before, selling puts now seems like a much more lucrative way to put my cash to work, as well as a more disciplined way to enter stock investments.

Preferred Shares

I've also been researching preferred shares and convertible bonds as potentially safer investments that still capture most of the upside value of common stock. Companies are now readily cutting dividends on common shares to preserve capital, but are still making their payments on preferred shares and bonds.

I'm pretty new to these investments, so I'm still learning how to best dig up information about them. The data in Yahoo Finance isn't that great for looking up preferred shares, so I've found that the company website and SEC filings have been the best resource. I'm leaning toward the preferred shares of natural resources companies like Freeport McMoran and Chesapeake Energy, which have large holdings in necessary commodities. For example, I recently made an investment in Chesapeake Energy Series D preferred shares. Here is an excellent writeup on the investment case. I took a look at the features of Chesapeake's various stock classes, and also found the D shares to be the most attractive based on its offering size, its conversion characteristics, and its 10%+ yield.

Oil

Prices have come down so fast that it's almost a pleasure to go to the gas station. If you're a driver, it would be terrific to lock up <$2 prices for gas for the next few years. A number of other bloggers have written about how to construct a rough hedge on gas prices by buying ETFs that track oil, such as USO or OIL. If oil prices increase over the next few years, the pain at the pump will be offset by the increase in the value of the ETF. If oil prices decline, the ETF will fall in value but so will gas prices.

I chose to invest in USO as there is also the possibility of writing options on that ETF. As prices continue to fall, I think there may be an opportunity to write a call spread on USO.

Tax Losses

The majority of my passively managed portfolio is in Vanguard index funds. As the year wind downs, I think most index fund investors have suffered some epic losses. I've been looking to take advantage of selling some investments for the tax writeoff.

Normally, I would be hesitant to sell any index funds, as I would much prefer to buy and hold. In this environment, however, I think it does make sense to sell index funds as long as you switch to a similar investment. By doing this, you can exploit the tax savings while maintaining your original investment exposure.

For example, let's say you originally invested $10,000 in a Vanguard S&P 500 fund. For simplicity, assume that the Vanguard investment is now worth $7,000. You could liquidate the investment, claim $3,000 in losses, and invest the other $7,000 in a similar investment, such as the S&P 500 ETF SPY. When the $7,000 appreciates someday back to $10,000, you could sell it and claim $3,000 in (long-term) capital gains, which has a lower tax rate than ordinary income. There's a good explanation here.

Now you can't do this for the same investment, as that would violate the SEC's wash sale rule. The example given above is toeing the line in my opinion, but I don't think it's actually disallowed. However, since almost everything in this market has dropped 40%+ this year, it's not as difficult to find a replacement.

I plan to sell a chunk of my Vanguard Total Stock Market Index fund and switching to Berkshire Hathaway (BRKB). I unfortunately was out of the country and not following the markets when Berkshire was trading below $3,000 in late November. Here is a comparison of how the two have traded. I feel more comfortable with the Berkshire collection of assets rather than the overall market. Whitney Tilson had a solid article discussing this a month ago.

Recent Moves

Although I haven't been writing much, I've still been fairly active on the trading front (at least for me). Here's a list of my recent trades:

• US Oil Fund (USO) - 12/16/08 - BOUGHT 100 shares at $36.25
  
• Autodesk (ADSK) - 12/16/08 - BOUGHT 1 $20 December '08 put at $1.30 (closed position)
  
• BP (BP) - 12/05/08 - BOUGHT 100 shares at $41.72
  
• Chesapeake Energy (CHK-D) - 12/05/08 - BOUGHT 100 preferred shares at $43.50
  
• Freeport McMoran (FCX) - 12/03/08 - SOLD 4 $12.50 May '09 put at $2.89
  
• GE (GE) - 11/13/08 - SOLD 2 $10 March '09 put at $1.45
  
• Nokia (NOK) - 11/11/08 - BOUGHT 100 shares at $13.76
  

Disclosure: The author is long ADSK, BP, CHK, FCX, GE, NOK and USO. Current TogaPF portfolio holdings here.