Saturday, March 14, 2009

Can any Conclusion Be Drawn from the Ray of Sunshine?/Savitz on Ebay/Shilling: Always Bearish/Investment Grade Bond Prices Still Show Fear/

The bounce last week was not irrational. A number of indicators turned positive recently suggesting a possible economic turnaround may be underway, including the recently released retail sales figures and the baltic dry index.  Copper prices have at least stabilized, and there was a brief uptick in the ISM manufacturing index from depressed levels. These charts can be found in a WSJ article.

Low mortgage rates will improve affordability along with the dramatic fall in home prices. The stimulus spending will start to kick into gear, along with the modest tax cuts. Energy costs and gasoline have fallen to more affordable levels and will have a positive impact on the spending habits of a large number of consumers. Inflation is still under control at least for now. The Fed is doing everything possible to improve liquidity and a properly functioning credit system. The 3 month LIBOR no longer has a fear premium baked into them.   Reuters 

It also helped that the big banks claimed to be profitable in January and February, profitable before taxes, write-downs and credit losses which are some pretty big qualifications.  

While it is too early to know whether this is just a brief interlude before the downturn returns, or the start of the healing process, my right brain sensed a ray of daylight and proceeded to take control over the trading desk on March 6th and continued with gusto last Monday, buying around 15 stocks, most but not all were mentioned in these posts . The party pooper left brain side is certain that no conclusion can yet be drawn from a temporary respite in the gloom and doom, and opposed every single purchase made during the right brain's frolic and detour. There was after all similar optimism last December before the downturn started to accelerate again. 

 One stock that I added is Avery Denison (AVY) which I may have not mentioned yet.   Avery, along with the buys of DuPont (at 16.68), Disney (15.49), Ingersoll Rand (at 11.82) and NYX at 14.76) from March 6th, were my economically sensitive company buys. The Most Abused Word: Reform/Buys of IR & DD/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an IdeologyBuys of JWF KSA DIS and NYX/SOLD Entire Position in TFI/ Just a Day of Ignoring My Own Rules 

Some would not classify NYSE Euronext as economically sensitive, but I would. An economic downturn and a recession go hand in hand with a decrease in trading activity and new listings. 
A bond analyst from Gimme Credit, Kathleen Shanley, recommends several bank bonds maturing in 2013 including those from Bank of America. The Weak Must Merge With the Strong -   This is the maturity year for the 5 bonds that I own, and I would be happy to arrange a transaction somewhere near par value for them.

One interesting aspect of her interview is her reference to J P Morgan bonds maturing in 2013 with a coupon 4.75% and a current yield of around 6.4%.  I own a TC that contains a junior Morgan bond maturing in 2014 that is current selling at more than a 20% discount to par value and has a current yield of about 4.23%.  This security went ex dividend on 3/13.PYV Stock Quote - Pplus Tr Stock Quote - PYV Quote - PYV Stock Price What attracted me to PYV was not the current yield but the large discount from par value and a relatively short time period to maturity. Buys of a First Mortgage Bond EMO and a JPM TC PYV I also have more confidence in J P Morgan than any of the other large banks, as does Ms. Shanley apparently.  My buy was at $18.5.  I almost bought more when it recently dipped to below 18 but I am still trying to moderate my hostility to bank Trust Preferred securities.  

Investment grade bonds continue to sell at a historically large premium to comparable treasury bonds, with the average premium being around 6% according to the Merrill Lynch High Grade Index. 

This suggests a continuation of a fear premium built into the pricing for even investment grade corporate bonds. The fear is not only driving the price of investment grade bonds down but also the price of treasuries up,  the same fear acts on the pricing of both categories of bonds which results in a widening of the spread. It was a recent bout of fear that was the underlying cause for LQD falling fairly quickly in price from over 100 to under 92. The fear which causes volatility in pricing of investment grade bonds ebbs and flows in intensity. I recently bought back a position in LQD after one of these periodic flair ups in fear.  While fear driven trading is still with us in the bond market, I do not view it as intense now as it was in October and November of 2008. 

Among those who are perma bears, always predicting some financial calamity or another, who are like that broken clock in being right twice a day, is Gary Shilling, an economist.  Shilling is predicting a 2 to 3% rate of deflation for many years after the current economic downturn ends.  If that prediction comes true, then a ten year treasury yielding 2.9% might make sense which is what Shilling owns for his clients.

Shilling also predicts an S & P 500 index decline to 600 in 2009. He also expects the recession to run "at least" through 2009.

The interview with him at Yahoo's tech ticker was done last December.  While I can remember a few months when Alan Abelson was bullish in the 1980s, I can not recall hearing Shilling ever being positive.  The only useful point that perma bears make is to instill caution about the dangers of stock investing, which includes a recognition, as Shilling said in this interview, that it takes a 100% gain to recover from a 50% loss.  But when you start with a macro view that calls for 2 to 3% deflation for several years, the investment alternatives are meagre at best.  I expect another few months of low inflation, possibly the CPI may dip below zero in a monthly read, once or twice more.  Then I would expect inflation to start coming back next year, and be generally recognized as a significant problem by mid year in 2010. I have a hard time seeing deflation coming out of the massive debasement of the U.S. currency due to vastly increased borrowing needs, the federal stimulus spending and the Fed's quantitative easing. But then I am not an economist like Shilling either. 
Eric Savitz considers EBAY a value trap at 8 times 2009 estimated earnings. Eric is one of my contrary indicators, in that I will consider buying whatever he is panning. So I am going to put EBAY on my list for a possible add when allowed by the trading rules. EBAY closed Friday at $11.93.  It has almost 4 billion in cash with a market cap of 15.3 billion.   

Alcoa is looking at all options to generate sufficient cash to survive this economic downturn even it worsens.  This would include the possibility of selling a stake in itself to another company.   While I am just inching my way to a 100 share position, and it really does not matter much to me, I would hope Alcoa does not sell a stake at the currently depressed price of its shares.  

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 

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