Sold 50 DSPG at 7.04/Bought 50 RNST at 14.14/Decline in Consumer Credit/AON OSM PSEC GLW ACET/Bill Gross:The New Normal/Home Prices Next Decade

I was encouraged-a little- by the jobs report yesterday. While the market's first reaction was to fall based on the 20 thousand decline in the payroll number, and probably more unwinding of the carry trade positions by the hedge fund wizards, I thought the late market activity finally got the analysis right, focusing on the household survey which showed a massive jump in jobs.

Brian Westbury's take on the report appears more balanced and reasonable than what I would expect from a David Rosenberg. This is a link to Westbury's analysis of the job report: .ftportfolios.com/Commentary This is a link to the WSJ summary of how other economist view the jobs report. (in June 2009, Rosenberg was predicting a fractionally positive 2009 3rd quarter GDP number followed by a relapse in the 4th quarter, Barrons's & David Rosenberg For a bird like Rosenberg, the data has to be bad when it does not support his bearish thesis. If the data supports his thesis, then the data is good.)

I did get a little sea sick with all of that up and down motion, but the late rally wiped out a five figure loss in my portfolio by the end of the day. The ^VIX closed the day up .03 to 26.11 but it was a wild ride during most of the day, moving in a range of 25.37 to 29.22. The burst out of its movement below 20 on January 21st was the harbinger of the trouble to come. ^VIX: Historical Prices for VOLATILITY S&P 500 It all started with China reigning in growth by tightening credit availability. The problems in Europe only added fuel to the fire.

I use the kind of action late last week to see how my securities are correlated in a downdraft impacting a broad range of asset classes. On Thursday, I actually counted my red and green arrows. I want to have some negatively correlated asset classes. While the red arrows outnumbered the green ones by 6 to 1 on Thursday, I did have close to 60 green ones. I thought that was good considering the extent of carnage last Thursday.

The impact of unwinding the carry trade is discussed by Forsyth in his Friday's column in Barrons. I discussed it last Thursday after the market's rout, referring to the the $50 decline in gold that day as a casualty of that unwinding process, in the comment section to this Post: ISM SERVICES (response to Luther's comment).

1. Bill Gross & The New Normal for Developed Nations: In this February newsletter, Bill Gross does not offer much hope for growth in those nations who are likely in a few years to have their public debt exceed 90% of GDP. PIMCO He includes those nations in a ring of fire as being the most vulnerable to a slowdown caused by such high and unsustainable levels of debt. In addition to the problem children of Europe, the usual suspects, he includes the U.S., Japan and the U.K. within that category. Historically, nations which reach this level of debt find it difficult to grow.

Gross references the book, which I have just read, by Carmen Reinhart and Kenneth Rogoff, "This Time is Different", that draws a number of conclusions, based on historical evidence, of what happens after a recession caused by a severe financial crisis. Past events suggest that debt will double in about three years, unemployment will increase on average by 7% and remain elevated for five years, growth will be clipped once public debt exceeds 90% of GDP, and the delevering process will take 6 or 7 years. In 50% of the historical cases, there is a prolonged period where the nation has to tighten its belt which causes a significant drag on its growth. In the other 50%, governments' default on their debt or suffer substantial inflation which devalues the value of their debt obligations. In other words, it goes from being bad as the best case scenario to worse than bad for an average family or investor.

He recommends directing risk/growth oriented assets towards "Asian developing countries", (e.g. India and China), which would exclude Japan and any other country that resembles the "old established G-7" nations. Europe, Japan and the U.S. will no longer be the drivers of growth as they delever. The same focus on those Asian developing countries would be true for bond investments too. Of the developed nations bond markets, he apparently likes Canada, since that is the only one discussed favorably by him in what is generally known as the developed markets. (Canada is in a circle with yellow dots which I assume means caution, however). U.K. government bonds are clearly in his avoid/danger camp. Australia has little company in the ring with green dots.

The Reinhart book is also discussed in several articles which I previously referenced from the NYT and Forbes.com (the article in Forbes is titled the "Global Debt Bomb").

I also discussed a Newsweek article written by the authors in this post: Item # 4 The Long Tail Contract

2. Aceto (ACET)(owned LT category): Aceto reported results for its second quarter (Q/E 12/09). Sales decreased 4.5% to 70.9 million. On a GAAP basis the company lost 10 cents. Excluding some items, ACET would have earned 3 cents per share, hardly inspiring. The one analyst who follows the company had estimated a five cent profit for the quarter. ACET: Analyst Estimates for Aceto Corporation Cash levels decreased to 46.971 million as of 12/31/09 from 57.761 million as of 6/30/09. The company explained that cash was used, "in large part", to enter the Glyphosate market for the 2010 crop growing season. So a large part of the decline in cash was used to buy Glyphosate. ACET is a hold. Price to sales and price to book are both less than 1.

ACET: Key Statistics for Aceto Corporation I do not intend to buy more shares based after reviewing this lackluster report.

3. Corning (own 2010 Speculative Category): Corning disappointed investors Friday with its revised outlook for 2010. GLW sees TV LCD growth of 21% in 2010, down from 35% in 2009. Fiber optic demand is expected to be down 5% after increasing 17% in 2009. GLW expects a slowdown in U.S. LCD TV growth as the market nears saturation. Corning stock had a wild ride on Friday, falling to as low as $16.96 before closing down 20 cents to $18.05.

4. Prospect Capital (PSEC) (owned): The management at Prospect raised its hostile offer for Allied Capital. exv99w1 The Board of Allied Capital rejected this "sweetened" offer and recommended to its shareholders that they approve the merger with another BDC called Ares. EX-99.1 The management of Prospect announced its proposal to acquire Allied on January 20th. The stock of PSEC closed at $13.2 that day. Since that time, the shares have fallen by almost $3. I suspect that another sweetened offer will take the shares below $10. The shareholders of PSEC are voting on management's decision to buy Allied Capital by running to the exits.

5. OSM (owned): OSM is a senior bond from Sallie Mae (SLM Corp) that matures in 2017 and pays interest monthly pursuant to a formula tied to CPI. The formula is discussed in several posts and the following links are just two of them: Item # 3 CPI & CPI Floaters & Item # 1 / CPI and CPI Floaters OSM and PFK

There was an interesting article in yesterday's NYT pointing out that Obama's efforts to take over the entire student lending process and to end government subsidies to private lenders for student loans was running into roadblocks in Congress, and the passage of the President's legislation was in doubt. The credit risk connected with Sallie is the main reason OSM has been selling at such large discounts to par value in my opinion. I own just 150 shares of OSM which have rallied several dollars over the past few weeks.

6. AON (own TPs in TC form only-KVW and KTN): Aon had a good report for me as an owner of a junior bond (a Trust Preferred) that is the underlying security in the Trust Certificates KVW and KTN. AON best the consensus forecast by 15 cents, earning 96 cents per share excluding items. Revenues rose 8.8% year over year.

7. Future of Home Values and Ownership: In a report published by the Urban Land Institute, John McIlwain predicts that home price appreciation over the next decade will be the 1% to 2% range annually.The Future of Housing Demand US News and World Report U.S. Housing Market (report: .uli.org/Housing in America.) Actually, I think that is too pessimistic. The huge decline in home prices in 2007-2008 basically reset prices to what I would call an equilibrium point, where about 50% of the average families could afford the median priced home. From that level, I would expect 1 to 1 1/2% annualized increases above the inflation rate. I am anticipating an average CPI of 2.5% over the next ten years which is close to the breakeven point on the ten year TIP now. This would result in a more normal annualized gain of 3.5% to 4%. I would not agree with the statement that housing prices will likely fall another 10% in 2010, and will instead continue to rise off their cyclical lows reached last year in many localities. The ten percent fall for 2010 apparently comes from Moody's Economy.com (see page 3 of the report). I would agree that the number of underwater homes is the "sleeping giant" of the housing crisis. This creates the temptation to turn in the keys, walk away, even when the borrower can pay the loan. That would not be wise in a state like Tennessee if the borrower has assets. The mortgage in Tennessee just secures a note. If the lender sold the home after foreclosure for less than the amount due under the note, the lender could sue the borrower for the deficiency.

8. Consumer Credit Declined for the 11th Consecutive Month In December: Total consumer debt fell less than expected in December, to a seasonally adjust decline of .8%. For 2009, consumer debt, excluding mortgage debt, declined to 2.456 trillion from 2.559 trillion in 2008: FRB: G.19 Release--Consumer Credit--February 5, 2010 This is only the second annual decline since 1941, with the last decline being a 1.3% decrease in 1991. The drop in 2009 was 4%. Revolving credit fell 9.5% in 2009 compared to 2008.

9. Sold 50 DSPG at $7.04 and Bought 50 RNST at $14.14 (See Disclaimer): I mentioned in my Gateway Post for the 2010 Speculative Strategy that the proceeds from the sales of LTs and other speculative stocks would have to be reinvested in 2010 in income producing securities. So, after selling 50 NADX last Thursday, I need a few more hundred to buy the 50 shares of RNST on Friday, and that is why I sold my 50 of DSPG at $7.04 bought on 12/31/2009 at 5.62. And the second reason for selling DSPG is now I do not have to come up with a target price for it. So that is the laziness factor, common with the OG who really does not want to think all that much.

Renasant Corp (RNST) is a bank that I will place in Category 2 of my Regional Bank Stocks' stratagem. The annual dividend is currently 68 cents so that puts my yield at around 4.8%. The last earnings report (Q/E 12/09) looked solid to me, with Renasant earning 19 cents per share compared to 1 cent in the year ago period.

The bank operates in Mississippi, Alabama and Tennessee. Renasant Bank - Locations

Book value was $19.45 per share with tangible book at 10.38. Net interest margin was 3.22%. The tangible capital ratio was 6.35%. Tier 1 risk based capital ratio was 11.16%. Total risk based capital ratio was 12.41%. Nonperforming loans as a percentage of total loans stood at 2.13%. All numbers are as of 12/31/2009. Press Release

The bank declined to participate in TARP: “During the fourth quarter of 2008, we announced our decision not to participate in the Treasury Department’s Capital Purchase Program which is part of the federal government’s Troubled Assets Relief Program,” commented McGraw. “Our strong capital ratios, which continued to increase during the fourth quarter of 2008, along with future earnings should allow us to meet projected balance sheet growth, maintain our current dividend and deal with the effects of the downturn in the economy.” Press Release

The current analyst estimate calls for 94 cents in 2010 and $1.27 in 2011: RNST: Analyst Estimates for Renasant

10. Portugal: The ruling Socialist Party, which heads a minority government in Portugal, had its austerity budget defeated by the other parties, who passed a budget that would add to Portugal's deficit woes. WSJ Union workers walked in masse to the finance ministry to protest the proposed wage freeze Reuters The deficit in Portugal in 2009 was 9.3% of GDP, and the EC requires no more than 3%. (the Socialists are the responsible adults in Portugal too, as in Greece?)