Wednesday, June 30, 2010

Sold 50 Wain at $18.7-Being Acquired/Bought 200 WIW at 12.29/Bought 50 CCNE at 11.06/Case Shiller/Hussman Stark Warning to Investors/



Fidelity started a new service which allows their customers to measure the performance in their accounts. I made a snapshot of the graph for my main taxable account since 2009. If I am fearful of anything now, it is losing what I have gained over the period of time shown in this graph, which put me significantly ahead of the balances from October 2007 adjusted for the maximum contributions made into the IRAs from this account. The graph understates performance in 2009-2010 since I withdrew $6,000 from the account shown in this graph to fund the IRAs in early 2009 and again in 2010. I have not contributed any funds to the taxable accounts since 1984 and have been funding the IRAs out of the main taxable account. I am up slightly in 2010 in this account and more in the IRAs bringing the year's appreciation to around 2.6%. I am not satisfied with the result so far this year.

I am conflicted however. While concerned about potential losses, I see a large number of opportunities being presented daily in common stocks. And, the alternative "safe" investments such as U.S. treasuries, already extremely unattractive from a yield standpoint, are becoming even less desirable as fearful investors flock to them and away from risk assets. One way that I have historically resolved that conflict is to buy stocks in very small increments with cash flow coming into the accounts. My money management revolves around increasing cash flow and investing that cash flow mostly in a manner to generate a compounding effect over time. I do not have any psychological or financial issues about investing cash flow even in the most fearful of times, as I continued to do in the October 2008 to March 2009 Near Depression period. However, that approach is limited to the taxable accounts. Cash flow into the retirement accounts will not be invested in stocks anytime soon. In fact, I have just about eliminated my exposure to to stocks in those accounts.

The ^VIX rose 5.13 or 17.69% yesterday to close at 34.13. We have been in what I call an Unstable Vix Pattern since August 2007. Vix Asset Allocation Model VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern I view this pattern to be a dangerous one for most individual investors, all buy and hold investors facing situational risks, and one that has to be traded to advance one's capital position.

The 10 year treasury yield fell to 2.94% yesterday. Bloomberg The five year note is yielding 1.77%. The two year note closed at .6%. The 3 month T Bill is at .16, free money for the treasury for all practical purposes. Randall Forsyth in his Barrons.com column opined that these yields indicate a market "discounting deflationary, depression conditions". I would tend to agree that the treasury bond market yields are certainly more consistent with a far more dramatic slowdown in growth than mainstream economists currently predict.

1. Sold 50 WAIN at $18.7 (see Disclaimer): I thought that the rise in Wainright Bank (WAIN) shares yesterday had to be a misprint when I first opened the stock portfolio containing my regional bank stocks. The stock was up almost 100% as the market was tanking. I then noticed that Eastern Bank was acquiring WAIN for $19 in cash: MarketWatch The shares closed on Monday at $9.62. I bought those 50 shares at 8.72 about a month ago. I did not see any reason to keep the shares so I sold them yesterday at $18.7. This one falls under that category about the blind squirrel. Still over the life of the regional bank basket strategy, which will be 5 to 10 years from its inception in March 2009, I do anticipate that a number of these small banks will be acquired, hopefully at premiums.

2. Bought 50 CNB Financial (CCNE) on Monday at $11.06 (Regional Bank Stocks Basket Strategy)(See Disclaimer): CNB is another micro cap bank with 22 banking locations in Pennsylvania: CNB Bank - Locations & Hours At a $11.06, the dividend yield is about 6.1%: CCNE: Summary for CNB Financial Corporation. The one analyst that follows the company estimates that CNB will earn 98 cents in 2010 and $1.16 in 2011. CCNE: Analyst Estimates

CNB Financial was one of the 10 banks mentioned in this article from TheStreet as having a solid dividend. I would point out that the author has the bank's location in error.

CNB recently completed a stock offering at $10.25 per share raising net proceeds of 32.1 million: Press Release This stock offering represented a substantial increase in this small banks market capitalization. The prospectus for the offering can be found at the SEC's web site. CNB did not participate in the TARP program: SEC Filde Press Release

The bank earned 25 cents in the last quarter, down from $.26 in the year ago quarter (page 4 Form 10-Q) As of 3/31/2010, non-performing loans as a percentage of total loans was 1.21% and the net interest margin was 3.57%. The tier 1 capital ratio was at 10.47%, well in excess of the 6% for well capitalized banks.

3. The Malaise in the Hampton's: I would submit that an objective view of the Obama administration can not possibly be formulated by Cramers of the world. You here them complain repeatedly about new federal regulations and Washington's Jihad against American business. When Cramer is venting the most hyperbole on this subject, as he did on Monday's show, the low multiple of the stock market is caused by the Democrats trying to destroy the very fabric of American business in his opinion. CNBC.com Due to the "palpable and justifiable fear that earnings will be crimped by Washington", the market is not cheap at just 12 times earnings and the shrinkage in the market's multiple is deserved given Washington's hostility toward business. Earnings are "under attack" or "even wiped out by meddling, meddling from an activist anti-business federal government". (2:30 to 3:05 CNBC). I have no doubt, by watching the interviews with so called professional money managers on CNBC, that his views are shared by many of those managers who probably share their opinions frequently with one another. And unfortunately for their clients, they manage money with those information biases front and center.

I suspect when the earning from the financials and the healthcare companies, apparently the two primary targets of Obama's Jihad against business, are reported in the months ahead, the preposterous views being expressed by those who believe any regulation will bring an end to American capitalism will be exposed as meaningless, unfounded gibberish. I would view the regulations in the "financial reform" bill to be a modest response to the wreckage brought to the world by the Masters of Disaster. The healthcare bill will probably end up benefiting virtually the entire healthcare industry: hospitals, device companies, and Big Pharma.

4. Hussman's Stark Warning to Investors: In his most recent market commentary, John Hussman, manager of the Hussman Funds, gives a stark warning to stock investors. He believes that the American economy is headed into a second leg of a "challenging downturn". While I do not agree with him, he offers a cogent analysis to support his position. His Hussman fund was up just 5.9% in 2009 reflecting his on-going bearishness. HSTRX - Fund returns I regard his argument that a fall in the ISM purchasing managers index below 54 to portend all kinds of economic pain to be just silly however. His funds are currently positioned for a downward spiral. HSTRX - Fund Top 25 holdings This fund did perform well in 2008 with a total return of 6.3%. Morningstar has it rated five stars and classifies it in the conservative allocation category.

I do not have a position in Hussman's mutual funds and have no intention of starting one. I can implement the fear trade without assistance.

5. Zions (own ZBPRA, ZBPRB, ZBPRC): This article from TheStreet names Zion's as one of the financial institutions, along with most regional banks, that mostly dodged the "financial reform" bullet.

6. Case Shiller: The headline of the Case Shiller report, covering home prices in April 2010, was that home prices do not yet show "signs" of a "sustained recovery". The 20 city composite did show a gain of 3.8% over the levels from April 2009. The chart at page 3 shows prices hovering at 2003 levels. Most cities showed gains in April compared to March. The data can be downloaded from www.standardandpoors.com/indices/sp-case-shiller-home-price-indices

7. Sold 2 Double Shorts When DJIA Fell More than 300 Points Yesterday-Bought 200 WIW and 500 CAD with Most of the Proceeds (See Disclaimer): I guess the double shorts made me feel a little better yesterday. I decided that I would prefer having an income producing security so I bought the 200 WIW back which I just sold at $12.5. WIW is a CEF that invests mostly in U.S. treasury inflation protected bonds. Fund Overview The CEF was selling at over a 7% discount to its net asset value. This is a link to the fund's last annual filed with the SEC.

The fund closed yesterday at a $12.3 with a net asset value of $13.3. This translates into a 7.52% discount to NAV at yesterday's closing price.

I previously discussed buying shares in Item # 4: Bought 300 of the CEF WIW at $11.94

I can not buy a U.S. 10 year note yielding less than 3%. I refuse to do it. About all that I can do is to buy this TIP CEF at a discount to its NAV, which gives me close to a 3.9% yield paid monthly with some inflation protection provided by the TIPs. The NAV can be found at the Western Asset site, the CEFA - Closed-End Fund Association web site, or at the WSJ CEF page for Investment Grade CEFs. This brings me back to owning 600 shares of the Claymore TIP CEFs since I still own the 300 shares of the CEF IMF bought at 16.51 in May. IMF closed yesterday at $16.62 and a discount of 8.38% to its NAV of $18.14.

Both of these CEFs pay monthly distributions which is always a plus for me. Still, these kind of buys are very low expectation purchases. I would be satisfied to collect a few monthly dividends and to sell some of the shares at a $1 profit. Buying those WIW shares back yesterday was more of an insurance kind of buy in case the dire forecasts being thrown around turn out to be prescient rather than the usual fear mongering. I view many of the recent bond buys to be placeholder kind of purchases.

The CAD also fell against the USD as part of the fear trade so I added $500 to my CAD position.

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