Performance Review - Net Payout Yield

The Net Payout Yield portfolio continues to excel. The portfolio is beating the S&P500 by nearly an 8% annualized gain with a sub 1 beta and less then 15% annualized turnover. So a superior gain with less risk and limited turnover.

A couple of the better performers have been the most recent additions of CSX and Agrium (AGU). Both stocks have gained more then 30% this year since being added. The portfolio is close to fully invested with only $25K in cash left. Stone Fox Capital continues to expect a year end rally to at least 1,150 or 1,200 on the S&Ps. At that point we'll likely increase the cash position.

The below returns are from marketocracy.com and contain assumed fees 1% higher then what Stone Fox charges for this type of portfolio. So the annualized returns of 6.93% would be 7.93%. Please contact us at stonefox27@ymail.com with any questions.

RETURNS Last Week 2.69% Last Month 2.48% Last 3 Months 12.12% Last 6 Months 32.38% Last 12 Months 33.81% Last 2 Years N/A Last 3 Years N/A Last 5 Years N/A Since Inception -1.49% (Annualized) -1.16%

S&P500 RETURNS Last Week 2.33% Last Month 0.30% Last 3 Months 9.47% Last 6 Months 25.18% Last 12 Months 23.09% Last 2 Years N/A Last 3 Years N/A Last 5 Years N/A Since Inception -10.30% (Annualized) -8.09%

RETURNS VS S&P500 Last Week 0.37% Last Month 2.18% Last 3 Months 2.65% Last 6 Months 7.20% Last 12 Months 10.71% Last 2 Years N/A Last 3 Years N/A Last 5 Years N/A Since Inception 8.81% (Annualized) 6.93%

Kona Grill CEO Buys Shares

Not a huge surprise to see a new CEO buy into his new company. Especially a company seen as very undervalued if a turnaround takes place. It's only 22.5K shares at a little over $65K. Whats really intriguing though is to see 75K shares traded on a Friday which happens to be the highest volume since mid June.

We'll see in a few days whether is was one of the Private Equity groups adding shares now that they have a more friendly CEO and BOD. The really odd part is that the trades went off without pushing the stock up. Insiders were basically the only ones on the bid the last week or so and yet it didn't drive the price up. Hmm...

Keep an eye on this next week.

Synovus Insider Buys

Interesting note from Investopeida on the insider buys at SNV. Whats even more interesting is that the stock has been crushed. Insiders evidently saw the Q3 write offs as a peak while outsiders saw fear of more of the same in the future. We're still sticking with the insider for now. After all the yield curve is on their side.

Synchronized Buying
Synovus Financial Corp. (NYSE:SNV) saw some very active buying in the last week by the company's CFO and one director, and steady buying from seven separate corporate insiders since September 22. The total number of shares purchased over that period was 162,500 with an average cost of roughly $3.00, for a total of approximately $488,000.

Investors Countinue to Pour Money into Bonds

According to this report from Morningstar, investors continue to pour money into fixed income funds and out of equities. Amazingly though more money has come into the market this year then was pulled out in 2008, but just about all of the gains went directly into bonds. Anybody think the retail investor is right this time?

With the economy starting to recover and interest rates at record lows, it seems like an odd time to be invested in bonds. Do people realize that bond funds lose money as interest rates rise? Bonds are the worst investment in rising rate environments. Wanna bet that the media convinced everybody that the market had come too far, too fast going into September/October. That bonds offer safety in a volatile environment. That bonds did better during the crash. Poor sheep listened again.

Also, most people don't understand the difference between a bond and a bond fund. A bond in theory doesn't lose value as long as your willing to hold till maturity. You collect the payments and don't really care about the trading value. Unless of course you've got a bond from some company about to stop paying. That's a completely different discussion though. A bond fund on the other hand is all about trading value. Its value is updated daily based on what you could sell the bonds for at the closing each day. Basically mark to market versus hold to maturity. Mark to market can be brutal as we saw last year.

Back to the details of the report:

• Most of the money flowing into fixed income funds came from the record $3.6T in money market accounts in January. That total is now down to a still very high $3.2T.
• Bond funds had an inflow of nearly $42B in October and $296B YTD.
• Equity funds had a $3B outflow in October and only $12B inflows YTD.
• Domestic equity funds were decidedly negative with net outflows YTD of over $4B.
• International equity funds fared much better with inflows of $16B YTD.

This leaves one to wonder what happens when money flows into equities and domestic funds in particular. Even though stock markets are up huge off the lows, nobody has been convinced to join from the sidelines. As we wrote about the Yield Curve in our previous article, this might sum up why equities tend to do well in the initial phases of interest rate hikes by the fed. All this money in fixed income is likely to come flooding out as bonds begin losing value. The money must find a home with the options of either next to nothing in money market accounts or the 'promise' of big returns in equity funds (nobody tell them that they are late to the party yet again).


p.s. Just don't tell these party crashers until I have my clients money out of the market.


Disclosure: Fully invested in domestic and international stocks

The Ultimate Leading Indicator: Yield Curve

As we've been fond of pointing out this year, the leading indicators tell us where the market is going. A lot of investors have fought the trend by concentrating on lagging jobs reports or focusing on future write downs at banks. Those are all concerns, but the leading indicators have told us for months that the future is bright.

One of the best leading indicators around is the Yield Curve. Unlike most indicators whether leading or lagging this one can be followed on a daily basis and doesn't rely on random sampling or questionable government reports. The old addage of don't fight the fed is alive and well. As the chart below shows, when the Yield Curve is above 3% or the difference between the 10 yr and 90 day Treasury bills yields that is the time to buy stocks. Conversely, when the yield flattens out and becomes flat is the time to sell stocks. The negative yields in both 2000 and 2007 were huge warning signs of impending problems.

One interesting note going back to the addage of not fighting the fed. It's usually been portrayed that you shouldn't fight the Fed from day 1 of a change in rate policy. Instead its usually not until the Feds policies change the economic situation up to a year later that you should be concerned.

As we know all to well from 2007/2008 is that even while the Fed cut interest rates sending the yield curve soaring up, the market kept plummeting. Similar to what happened in 2000. The reverse happened in 2004 when the Fed started tightening or increasing rates, but the market kept going up for a couple of years. Ultimately the yield curve became negative and most domestic related stocks hit their peaks in 2006. It was only because of commodity stocks and emerging market growth that major markets peaked in 2007.

Back to today, the yield curve is hanging strong over 3.4% providing huge incentives for the economy to expand. For everybody expecting the impending correction, this indicator suggests it isn't going to happen. In fact, it won't be until nearly a year after the Fed starts raising rates that the economy will suffer and hence stocks should be sold. So many people seem to fear the first rate increase, but instead that's a sign to remain bullish. The Fed Funds Rate going from 0.25% to 0.50% isn't going to derail this economy. Mainly because the following economic reports will be strong making people confident that the higher rates aren't having an impact. Then wham, after the 10th raise in 12 months, the economy will finally stall.

If anything, this leads us to the ultimate issue with the Fed playing yo-yo with interest rates. It takes 12 months for rate changes to impact the economy and yet the Fed decides to make drastic changes within 6-9 month periods. Almost like a kid that embarks on a 12 hour drive and wants to know if we're there yet after 2 hours.

This behavior in Fed policy and the havoc is has on the economy is one reason the 'buy and hold' strategy hasn't worked very well this decade. So many experts claim that the strategy is dead, but we maintain that depends on the Fed and what the Yield Curve tells us. Forget the forecasting, just let the indicators tell you what to do next. For now, they say stay long risky assets.






Note: Our first mention of the hugely positive Yield Curve was on Nov 17th. Basically when most stocks hit bottom. The market made a lower low in March, but the average stock didn't.

Stat of the Day: Weekly Jobless Claims at Low of the Year

As Stone Fox Capital posted earlier this week in our new focus Future Stat of the Week [Future Stat of the Week: Weekly Jobless Claims], it's important to pay attention to where economic stats are headed and not so much where they've been.

Today, the government reported that jobless claims declined to 502k for last week which is the lowest level since early January. Anybody sweating last Fridays Jobs report clearly is missing the trend. The 4 week average continued its decline hitting sub 520K. The jobless claims is clearly on a path to sub 500K and then probably closer to 400K in the next couple of months. Knowing that would you short the stock market?

• The Labor Department said Thursday that first-time claims for jobless benefits dropped to a seasonally adjusted 502,000 from an upwardly revised 514,000 the previous week. That's the fewest claims since the week ending Jan. 3, and below economists' estimates.
• The four-week average, which smooths fluctuations, dropped to 519,750, the lowest in almost a year. It has fallen by more than 20 percent since its peak in the spring.

Kona Grill Finally Hires a New CEO

Kona Grill (KONA) has long been a favorite concept of Stone Fox Capital with its blend of sushi with western foods, but it clearly lost its way over the last couple of years due to questionable management. Last Monday, KONA announced a new CEO plus a new BOD member. Positive signs that they've finally got quality management on board to turn the concept around. KONA was always criticized for being run by a hedge fund manager instead of an industry expert. Now we'll see.

Mr. Buehler was the Chief Executive Officer of LS Management, Inc., the owner and operator of the Lone Star Steakhouse & Saloon/Texas Land and Cattle Steak House restaurant concepts, as well as Lone Star Business Solutions, an external accounting, IT and HR provider, where he served from July 2007 to May 2009. Lone Star Steakhouse & Saloon consists of 141 company restaurants, 5 domestic franchise restaurants, and 10 international franchise restaurants, while Texas Land and Cattle Steak House consists of 28 company restaurants.

KONA just reported Q3 results that included a devastating 9.9% drop in comps. The market has turned to where most competitors are reporting more manageable 2-3% drops, but KONA is still reporting numbers matching the highs of the recession. This trend clearly must turn and quickly for KONA to be a good investment.

Just getting a new CEO with the same old board that approved numerous questionable deals involving the old CEO wouldn't have been enough to get us re-interested in this concept. The good news is that KONA also brought along a new member to the BOD replacing a long time member. Mr. Bakay is from BBS Capital Management that recently bought an 11% stake in KONA providing ample support for a much needed shakeup.

Considering both of these industry experts are willing to invest their careers, money, and time into KONA at this low point suggests that the concept indeed has a chance at turning around.

Kona Grill's Potential
KONA operates 23 restaurants in the casual dining segment with over $80M in revenue. This revenue level is after a couple of devastating years of drops in comps so the revenue number could easily expand much higher without growing stores. Up until the recent quarter, KONA still had decent restaurant operating margins of over 17% and prior to this last 12 months they were usually in the 20%+ range.

Long term, the concept can easily be expanded to 100 stores based on comparable concepts like Cheesecake Factory (CAKE) and even the 150 store concept that the new CEO oversaw at Lone Star Steakhouse.

With a market cap of under $30M, KONA offers an appealing valuation prospect if the new CEO and BOD can turn the company around. Right now its a gamble considering they have very little cash or financing available. At just $3M they have very little flexibility in this liquidity crunched environment. They also have limited debt providing for the opportunity to lever up the balance sheet without diluting existing shareholders as the lending market returns. Not having debt is a big benefit at this point in their development as most concepts are usually highly levered by this point in the growth cycle.

Private Equity is also lurking with the recent purchases by BBS Capital and the ever present Mills Road that has made 2 offers in the past that the previous management team turned down.

What's amazing is how under followed they've always been considering the IPO and the potential. With the 2 stores in development, a good CEO could easily up this company to over $100M in annual revenues yet the stock constantly trades under 10,000 shares daily. Even this big news was followed by slim trading making it very difficult for big investors to move in and out of the stock. So any new capital via shares or debt would likely expand the following and help liquidity.

Until the market pricing improves though, the Interim CEO and BOD definitely took the correct path to slow down expansion. Expansion for expansions sake isn't wise. It needs to be done profitably and KONA has lacked profits since becoming public. KONA finally has SG&A under control at a low 7.5% of revenue and with margins getting back to 17%+, they could easily hit 10% cash flows or EBITDA. That would be huge since they lack liquidity. Posting profits would also turn a new page on this investment and eliminate any downside risk from here.

Can the new CEO and modified BOD return KONA to the fast growth realm? Purchases in the low $3s look very appealing, but we wouldn't recommend chasing until we see more details from the new management.

Disclosure: Adding shares in the low $3 range.