Thursday, June 10, 2010

BP/Sold 100 of the ETF VEU at 38.6/Bought 100 OSM at 15.75-Regular IRA/Bought 100 AXAHY at 14.69

While the decline in the market averages was modest yesterday, I was concerned about the failure to maintain even a modest up move. I will turn even more bearish on a short term basis when and if the S & P 500 breaches the intraday lows of 1040-1045 hit on multiple occasions in 2010 {at 1044.50 on 2/5/2010: ^GSPC; at 1040.78 on 5/25/2010, at 1042.17 on 6/82010: ^GSPC) This will break the series of higher highs and lower lows in place since March 2009, and would indicate to me at least a good possibility of a significant and sharp breakdown in the market with a waterfall loss of 5 to 10% fairly quick.

Louise Yamada made this point in a recent interview on CNBC, summarized briefly in this earlier post: Item # 4 Yamada Interview Over the intermediate or long term, it is impossible for me to prefer bonds over stocks at current prices. The main questions are how much longer will the current long term bear market last and where is it likely to bottom. Some say that there are another 5 or seven years left, and the market has not hit bottom. An adherent to this view would remain in their cash and bond allocation, and use rallies to lighten up on stocks.

The other view is that we are close to the bottom now, maybe another five to 10 percent is possible on the downside, and the duration of the secular long term bear market is more likely to be 2 or 3 more years rather than 6 or 7. A believer in that scenario would be looking for opportunities to buy stocks on weakness now, realizing that bonds could easily fail as an asset class in the coming years as governments deal with their debt problems with inflation.

1. A Depressing Column From Forsyth in Barrons: Possibly, Randall Forsyth rounded up every bearish forecast for the stock market in his "Up and Down Wall Street" column, other than David Rosenberg, Gary Shilling and his co-employee Alan Abelson. I would agree with the observations that we are currently in a long term secular bear market. I am somewhat more optimistic that most of the recent slide is over and am staying with my prediction that the S & P 500 is currently in a sideways range bound movement between 950 to 1250 for the next two or three years. And, I have been saying since September 2009 that the rally off the March 2009 lows was probably a short duration cyclical bull rally within the confines of a long term secular bear market, similar to the cyclical bull move off the catastrophic long term bear market low in October 1974. More on 1982 or 1974 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (and see Item # 2 from post dated 4/1/2010: Problems Brewing for Stocks & Item # 4 from post dated 3/29/2010 Efficient Market Hypothesis as Hokum /Historical Perspective on S & P Gain Since March 2009)

Two of the more bearish analysts mentioned in Forsyth's column are Mark Steele, BMO Capital Market's head of quantitative research and technical analysis, and Richard Russell who writes the Dow Theory's Letter. Both are recommending that investors dump stocks.

One characteristic of a fast and significant move to the downside is that every bear in the world comes out of the woodwork.

Michael Santoli discusses in this Video the factors that may lead to a breakdown below the February 2010 lows in the S & P 500, which was around 1040.

2. Sold 100 VEU at $38.6 (see Disclaimer): LB has a few billion reasons for selling this ETF yesterday. Rather than boring a reader with a discussion of all of them, I will mention just three. I purchased these shares at $29.8 in early April 2009: BOUGHT VEU AND GJT This was close to a $1000 long term capital gain. I have decided to harvest a few of these long term capital gains (LTGS) in 2010 since I know the maximum tax rate will be 15% on LTCGS. I suspect that this rate will rise, but Congress is not exactly making much progress in deciding yet what will happen after the end of this year. Dividend Tax Rate in 2011? Another reason is the LB wants to buy a limited number of foreign stocks, without having to dip into the cash allocation, and to target specific sums based on a number of considerations, including valuation, decline in the local currency against the USD, decline in the stock in local currency, etc. And, lastly, on of LB's favorite sayings is "you never go broke taking a profit".

3. Bought 100 AXA Financial ADR at $14.69 (AXAHY)(see Disclaimer):

Snapshot of Trade:

AXA is a large insurance company based in France. Its host market is the Paris stock exchange, where the ordinary shares trade in Euros. CS.PA: Summary for AXA The shares closed yesterday morning at €12.31. AXA ADRs use to trade on the NYSE but the company volutarily delisted them. The AXA ADR now trades on the pink sheet exchange under the symbol AXAHY. One ADR equals one ordinary share. When I placed the order yesterday morning, the ADR had fallen in price, the Euro had risen in value against the USD by around 3/4%, and the ordinary shares trading in Europe were up about 1.9%. This created a small advantage to buy the AXA ADR at a more favorable price than the one then prevailing on the Paris exchange. Some would call this arbitrage, but I am not playing with enough money to arbitrage anything. I was considering buying AXA, and I saw a brief opportunity to buy it at a slightly better price.

I have been using 11/25/2009 as the date to compare ordinary shares priced in Euros with U.S. exchange traded ADRs for European companies. This was the day the EURO peaked against the USD. AXA was then trading at €16.91. AXA Share Price Chart | CS.PA And that represented a decline from a €19.69 share price on 10/15/2009. Measured just from the €16.91 price from 11/25, the ordinary shares had declined 27.2% in local currency terms to the close yesterday of €12.31. For a security that I have some interest in buying based on the long term fundamentals, this decline interests me.

The decline in the ADR has been more severe during this same time period falling from USD 25.92 on 11/25 to $14.69, my entry point from yesterday. AXA SA ADR Share Price Chart | AXAHY.PK This is a 43.33% decline. The additional decline is due to the fall in the Euro. Of course, I still face the risk of further declines in the currency. {for anyone interested, I can loosely track these pricing issues by setting up a Yahoo Finance portfolio. I use the currency ETFs as surrogates for the exchange rate (FXF, FXE, FXC, FXA), the primary symbol for the exchange where the foreign firms shares are traded, and then the U.S. ADR price. I sometimes have to check the pink sheet price directly rather than using the YF quotes}

The price of AXA has already been crushed particularly in USD terms. If it continues to fall, I do not have a problem holding it.

I have been following AXA for a long time. This does not make me an expert of course, but it does cut down the time needed to do research before rearching a comfort level sufficient to make a small purchase. Morningstar has one of the few analyst reports available to me, and this service rates it four stars with a fair value at $33 currently. Dividends are paid annually, generally based on a 40 to 50% payout Individual Shareholders/Dividends. The dividend for 2010 has already been paid but sometimes there is a special dividend later in the year. P/B is around .6 and P/S is approximately .2. The PDF version of its annual report, which is over 500 pages, is linked at this page at the AXA web site: Annual Reports. Unless otherwise noted, all amounts are expressed in Euros in this report. AXA is shown to have have had an E.P.S. of 1.51 in 2009 on 90 billion in revenues. Shareholders equity per share was shown at 20.4 per share as of the end of 2009.

S & P also has an analyst report dated 5/19/2010. Its rating is 3 stars with a 20 USD target on the ADR shares.
S & P estimates USD earnings of $2.13 in 2010 rising to $2.36 in 2011. If that occurs, the stock is cheap based on a P/E multiple of just 6.22 on the 2011 estimate at a $14.69 price.

4. Bought 100 OSM at $15.75 (see Disclaimer): I own 200 shares of OSM in a taxable account, where I am attempting to take a long term view of this senior bond issued by SLM. When I buy it the regular IRA, I am engaged in what hopefully will be a profitable short term trade. I will take less risk in the retirement accounts, and I view this bond as too risky for the retirement accounts except as a short term trade. If the security tanks on me, I will include it in the next Roth conversion, which would be a way for me to receive a benefit from a significant fall in price.

I have discussed this security many times since the later part of 2008. It is a senior bond issued by Sallie Mae (SLM) that matures in March 2017 at $25. Interest is paid monthly based on a complex calculation tied to a 2% spread to CPI. My most recent discussion of how SLM calculates the monthly interest payment can be found in Item # 9 Bought 50 OSM at 15.74, the post dated 5/25/2010 which also contains links to some of the earlier discussions. I view the main risk of this security to be the credit risk of SLM. If SLM survives to pay off the note, then OSM would without question be a good investment at the $15.75 price.

OSM is ex interest today. The prospectus can be found at

This type of buy is analogous to trying to get on first base by leaning into a pitch, hoping that it grazes your jersey. A $50 to $100 profit on the shares and one or more monthly interest payments are the very modest objectives for this 100 share purchase.

In addition to OSM, several other bonds which are owned go ex interest today including BACPRW, GYC, CPP, PJR, and UZV.

5. BP and Whitney Tilson: I was listening to CNBC when money manager Whitney Tilson mentioned that BP was his newest long position-at 4%. CNBC The day after that interview BP sunk another 14% or so to less than $30, their lowest level since 1997, and about 1/2 of the share price on the day of the rig explosion. MarketWatch The shares took a big dive mid-day yesterday after this article in Fortune Magazine appeared, quoting Matt Simmons, that BP has a month before it declares bankruptcy. BP claims that it has enough cash to pay for the clean up.

I started hearing money managers claim BP represented good value when it crossed below $50. It is generally not advisable to try and catch a falling knife. It is conceivable that this spill could force BP into bankruptcy, but that seems to be remote based on what I know now.

I mentioned in an earlier post that I would not buy BP under any circumstances. That was the OG talking. LB is sort of an intellectual moralist, and has been known to rationalize buys of renegade type companies on one of several grounds. The most common would be that someone has to vote against the Board of Directors at the next annual meeting, and LB will volunteer HK sometimes to cast that negative vote. Besides, admittedly, refusing to buy gas at a BP station is not a boycott likely to work and ultimately may punish a small businessman who owns the station who has nothing to do with BP's renegade corporate culture, willing to sacrifice safety and virtually anything to achieve that extra dollar of profit.

ProPublica has a good article exposing how BP's culture of malfeasance leads to "accidents". Oil has been found 20 miles into the southern Louisiana marshes. In Louisiana marshes, a crude awakening

I feel sorry for the individual investors who own BP, particularly the retired individuals who bought it for its perceived safety and the dividend. As for BP, what goes around, comes around.

I do not have a position in BP.

6. Risk Dispersion in Reinsurance Companies Preferred Stocks and TPs: You just never know when a series of calamaties will hit a reinsurance company. An oil rig explodes, an earthquake erupts in Chile or San Francisco, a Katrina type hurricane hits Miami, or so on. I do not invest in the common stocks of reinsurance companies.

I mentioned yesterday that I sold 50 shares of a preferred stock, RNRPRB, issued by RenaissanceRe, reducing my exposure to 50 shares of RNRPRD: Sold 50 RNRPRD at 22.05 & Bought 50 REPRB AT 20.78 In the place of RNRPRB I added 50 shares of a TP from EverestRe.

I also own two other equity preferred stocks issued by reinsurance companies. I bought 50 shares of AHLPRA, an issue from Aspen, at $19.75 and 50 shares of a fixed coupon equity preferred stock issued by OdysseyRe, ORHPRA at $25. In the case of ORHPRA, I bought that fixed coupon equity preferred stock after selling its floater, ORHPRB at 24. Just as an example of how a catastrophe can impact earnings, Aspen took a hit of 100.3 million from the earthquake in Chile. While that does not concern me in isolation, a series of hits could conceivably cause the reinsurance company to eliminate its common share dividend and even its non-cumulative equity preferred dividend in order to rebuild its capital. This may not happen but the possibility of something adverse happening along those lines keeps my exposure to their preferred stocks at very modest levels.

If I go to a 100 shares on one of them, I would tend to favor the Everest TP over the non-cumulative equity preferred stocks for several reasons. It is higher in the capital structure. It has a maturity date. The payments are cumulative and can not be deferred for more than 5 years. Interest is earned on the deferred amount at the coupon rate. So, those are advantages to the TP compared to the non-cumulative Odyssey and Aspen equity preferred stocks.