Thursday, November 10, 2011

Sold 100 BBN at $20.51-ROTH IRA/Earnings: R.R. Donnelley (RRD), Corelogic (CLGX), Ally, Cincinnati Bell (CBB), USG

I am growing more pessimistic as evidence by my posts this year.  Possibly my current mind set is at least partly due to my views about the human species, which I view as objective and unsentimental based on several centuries of historical evidence. It is fascinating how people fail to effectively deal with a potential crisis until it explodes in their faces. A corollary is that most humans do not learn anything from history and are unable to process information that clearly points to a really serious problem. Without question, the inhabitants of most developed countries have been living far beyond their means on borrowed time and money. This would be true for both the governments and their citizens.

The governments funnel increasing amounts of borrowed cash to their citizens, in a variety of ways, as  state debt clearly spirals to the point of unsustainability. Yet, the borrowing binge continues. And, what happens when the spigot is turned off, as in the case of Greece, or has started to drip in the case of Italy. The government and the citizens are still unable to deal with the problem. A very large number of Greek citizens still want their money from the government even after being told that there was no money.

The situation in Greece still appears to be chaotic, as noted in  article found at Bloomberg and  Reuters last night. It is fitting that the word "chaos" is derived from a Greek word.  And there were numerous articles yesterday about a potential crack up of the EU (see, e.g.  Reuters)

It is generally well understood that a high government debt to GDP ratio can lead to serious adverse consequences. Italian government debt as a percentage of GDP currently stands at close to 120%, a level above the 90% threshold that historically has caused problems. Reinhart and Rogoff - Bloomberg At a minimum, the need to refinance an extraordinarily high level of debt can subject a nation to untoward and ultimately unpredictable adverse economic developments, as several European countries have already experienced or soon will.

There was some evidence last night that the Italian Senate was making some progress in advancing "austerity" legislation for a vote, based on a story appearing in Bloomberg.

Does anyone really disagree that the U.S. is moving at a rapid clip in the same direction as the PIIGS? For now, investors view the U.S.D. as a safe haven, even though the U.S. government is increasing its budget deficit by well over a trillion dollars per year. The treasury auctioned $24 billion in ten years notes yesterday to yield 2.03% with the O.I.D. www.treasurydirect.gov.pdf

And does anyone really believe that the two U.S. political parties are capable of effectively dealing with either the existing or the looming fiscal crisis?

Basically, the GOP's answer is to give rich people more tax breaks and to lower the corporate tax rate. Another mildly ridiculous claim is that more jobs would be created with less regulation. Mostly, this has to do with the desire to increase the profits in a few industries by permitting more pollution. Oddly, less regulation would mean fewer net jobs since so many people are employed in our society to cope with regulations from governments at all levels.

Magically, and contrary to all credible evidence, the GOP still believes that giving more tax breaks to the rich will lead to a shrinking budget deficit and full employment. Bush Tax Cuts and Jobs "Blondes" and Fox "News"/Irresponsible Fools with Power/Taxes and the "Job Creators" Their real motive has been apparent for decades, and it has nothing to do with the financial well being of the middle class. I do admire their ability to convince middle class voters to vote for that agenda, though a lot of that success has to do with the successful exploitation of wedge issues like abortion and gay marriage. After all, nothing much is being done for the middle class, the wealth gap is increasing and most Americans are falling further behind. And, several proposals have been strongly endorsed by the GOP that would bankrupt the middle class in their golden years while increasing the tax breaks for their true constituents. GOP's Plan To Bankrupt the Middle Class  Even when the evidence is clear, as in the case of their near unanimous approval of a plan to change Medicare, which would double the premium cost to seniors foisted on to private insurance with government vouchers, their middle class supporters fail to recognize it, possibly due to their conditioning to avoid altogether most media outlets.

The Democrats, on the other hand, will continue to create programs to spend money that has to be borrowed, frequently underestimating the future cost of such programs. It would not be unreasonable to believe that costs are intentionally underestimated. If left alone, the Democrats will have the total, effective tax rate back up to 50% for the top 10% or so. {the health care reform package has a .9% increase Medicare surtax on wages in excess of $250,000 plus applying the medicare tax for the first time on investment income, Tax Changes, and those increased amounts would need to be added to the higher marginal rates and other changes being advocated by the Democrats to arrive at a total tax rate for the well off}.

It is no accident that the Democrats have proven unable to make any meaningful changes in social programs that would ensure their long term viability without excessive borrowing. The answer for them is to drain more money from the wealthy and to borrow the rest. Their wealth transfer gambit is reasonably well understood by the population. Their resemblance to the Greeks has not gone unnoticed here at HQ. At least some hard core Democrats are not entirely rigid in their thinking, open minded to a limited degree, and capable of learning a lesson or two from the past. I can not say the same about the core GOP voters.

Italian bond yields rose above 7% yesterday. The buyer of last resort, the European Central Bank, reportedly was buying Italian bonds aggressively according to traders interviewed by Reuters. I would doubt that "aggressive" is an accurate term to describe what the ECB was actually doing yesterday.

Bond buying by central banks does not solve the underlying problem which is simply an unwillingness to spend less borrowed money.

 I also suspect that money creation will eventually lead to significant currency debasement and inflation.  There is a reason why gold is selling over $1700 an ounce.

The EU finance ministers have apparently asked the leaders of Greece's new "unity" government to sign in writing their willingness to implement austerity measures. NYT What does that tell you? The leader of the "New Democracy" party declined, saying his word was good enough. Really? The rest of the EU already know for a fact that this party lied to them for years about the true state of Greece's finances. And that party has consistently opposed virtually all austerity measures demanded by the EU since the Socialist party came into power. Oddly, it was the Socialists who backed the austerity package, and what just happened to their leader?

For most of yesterday, the most dominant event to the Old Geezer was the constant and repetitive playing in his head of a song heard somewhere recently. The OG does not know the name of the group but the singer had a Robert Plant type voice. The lyrics were something like "trouble found you", "you look for trouble and I found you,"  and "i'll tell you to take my hand.".  It was better than having Neil Sedaka's song, "Breaking Up is Hard to Do" run on auto pilot. At least the OG remembered where he heard that one, as background music in an Allstate commercial.  Now, the OG needs an exorcism to get rid both of those songs out of his head.

The double short stock ETFs, recently purchased, did cushion the blow a tad yesterday. Those purchases were made in accordance with a recent modification of trading rules for the Unstable Vix Pattern. Mark Hulbert and the Use of the VIX as a Timing Model/Modification # 1 To Vix Asset Model Approved re: Hedging Possibly, if today is another down day, I will sell them. The  VIX had a really good day yesterday, rising almost 32%. The double short ETFs that are owned rose about 10% yesterday, sufficiently canceling out the depreciation of the securities listed next to them. So, that did not provide much in the way of solace.

Kenneth Rogoff argues in Retuers' column that the EURO needs to fail. He views the threat of a "profound crisis" in Europe as high. No one really knows. The OG wants to lay low until there is more clarity. The market is still pricing a favorable outcome based primarily on hope and wishful thinking.  Eventually, France and Germany will tire of dealing with the Mediterranean nations.

JZV was ex interest yesterday for its semi-annual interest payment. The underlying security in this TC is a senior CNA bond maturing in 2023. The TCs KCW and JZJ were also ex interest for its semi-annual interest payment yesterday. Trust Certificates: New Gateway Post

The two CPI floaters issued by SLM (Sallie Mae), OSM and ISM, were ex interest for their monthly distributions yesterday. The quotes from my broker show a $.1195 penny rate for OSM and $.1206 for ISM. I own 100 shares of each. Floaters: Links in One Post

My only purchase yesterday was a bond TC that I will hopefully discuss in next Monday's post, since I am likely to run way behind discussing my trades at least for several more days.

1. Corelogic (CLGX)(own 1 bond: FINRA): I have sold all of my shares in the trust certificate PJS, which has as its underlying bond a CLGX 2028 senior bond. My sole involvement is a direct buy of the 2028 bond in the bond market. The underlying bond and the TC PJS both have the same coupon. But the underlying bond is selling at a significant discount to its $1000 par value, while the TC is selling near its $25 par value.  Trust Certificates: New Gateway Post

The problem is that the underlying bond has almost no volume and it would be extremely difficult to trade a one bond lot.  The TC is infrequently traded but I could get out of it with relative ease by accepting the bid price. 

CoreLogic reported a third quarter loss from continuing operations of 3 cents per share. SEC Filed Press Release   The company increased its adjusted E.P.S. to $.75 to $.8. As of 9/30/11 CLGX had $138.7 million in cash and $911.1 million in debt. The debt is discussed in CLGX-9.30.11-10Q at page 15. The 2028 bond is the longest dated maturity. 


2. Ally Financial (own 3 GMAC bonds:  2017 2018 2019):  Ally Financial reported a net loss of $210 million for the third quarter, compared to a $269 million net income for the 2010 third quarter. The loss was largely due to a "$471 million pre-tax loss related to the negative impact of the mortgage servicing rights, net of hedge, resulting from a decline in interest rates and market volatility".  Excluding that change in MSR valuation, the company would have had pre-tax income of $573 million during the 2011 third quarter.  The global automotive services segment had net income of $747 million.

3. USG (USG) (own 1 bond: FINRA): USG's business continues to be negatively impacted by the aftershocks from the housing bubble. USG reported a loss of $1.09 per share on revenues of $792 for the third quarter.  SEC Filed Press Release  The operating loss, which excludes restructuring charges and non-cash impairment charges, was $17 million. The CEO noted that many of USG's markets continue to experience recessionary conditions. As of 9/30/11, USG had $356 million in cash and another $161 million in short term investments. Long term debt stood at $2.298 billion.

4. Cincinnati Bell (own 3 bonds: FINRA): I recently pared my CBB bond position, and currently own 3 "senior subordinated" bonds maturing in 2018. CBB reported GAAP net income of 7 cents per share on a 5% increase in revenues for the third quarter.   SEC Filed Press Release The earnings increase was driven primarily by CBB's IT services and hardware sales and its Data Centers operations. Wireline revenues decreased 1% and wireless revenues declined 6%, compared to the third quarter of 2010.

5. Sold 100 of the Bond CEF BBN at $20.5135 Last Monday-ROTH IRA (see Disclaimer): BBN is a closed end fund that invests in taxable municipal bonds issued under the Build America Bond program. This sale was primarily profit taking since I had bought the shares last July at $18.15. That is a good percentage gain for a bond fund over a short period of time. Another reason is that I am building up cash in the retirement accounts as I wait for better buying opportunities.

2011 ROTH IRA BBN 100 Shares +$224.76 

BlackRock Build America Bond Trust closed at $20.34 yesterday.

6. R.R. Donnelley (RRD)(own 2 bonds: 2017 and 2029): RRD reported third quarter GAAP net income of $158 million or 83 cents per share on net sales of $2.7 billion.  SEC FILED PRESS RELEASE The net income included a number of extraordinary numbers. Excluding those items, net income for the quarter was $51 million or 51 cents per share, up from 44 cents in the third quarter of 2010. The company ended the 2011 third quarter with $368.1 million in cash. Long term debt stood at $3.42 billion. The amounts and maturity schedules of the debt can be found in note 14, page 19, of the recently filed Form 10-Q.

I am looking for an opportunity to sell the 2017 near par value. Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89 This is the kind of junk rated bond that I have been selling on pops to or over par value. 

1 comment:

  1. Italy suggesting they'll raise the retirement age from 65 to 67 by 2026
    is laughable. 15 years?

    ReplyDelete