Saturday, March 7, 2009

The Most Abused Word: Reform/Buys of IR at $11.82 & DD at $16.68/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology

I did go off way off the reservation last Friday.  In addition to engaging in prohibited transactions by buying common stock in Disney (DIS) and NYSE Euronext (NYX), I also bought shares of Ingersoll Rand (IR) at $11.82 and DuPont (DD) at $16.68.

My teachers in grade school always rewarded my spells of disobedience with long sessions of writing on the blackboard that I will not do again whatever bad thing which caused the discipline. I may still have calluses on my fingers- even today- from that futile exercise in discipline.  I may be too old for that punishment now for my flagrant violation of my own trading rules. Besides, I do not have a blackboard handy around the house.

Yes, the actions of all of the adults back in my grade school years were all futile. I told them that but no one would listen.

Writing on the blackboard, standing in the corner, and walking to the Man's office for a few smacks on the bottom with a specially designed wooden artifact, heard as loud pops carried down long corridors designed for carrying such noises, had more of an impact on those willing to learn from my experiences than on me.   

Both DD and IR were averaging down transactions.  Disney, another purchase on Friday, is currently selling at below its book value. DIS: Key Statistics

Barclays recently reduced Ingersoll's earnings estimates to $1.5 for 2009 and $1.6 for 2010 while maintaining an equal weight recommendation with a $14 target.  S & P has a $19 target and a hold recommendation. S & P has a sell rating for DuPont. Barclays reduced its earnings forecast for 2009 in January to $1.4. The current stock price of DD is near 20 year lows. The yield at the current price for DD shares is close to 10%.

It is impossible for me to have any faith in dividends being maintained so I no longer rely on that kind of information. IR is back to 1995 levels.  Morningstar is more favorable on these companies at their current prices with IR rated 5 stars and DuPont at 4 stars.   

One of the most popular words uttered by politicians of both Tribes is "reform".

When uttered by the Democrats, I just reach for my wallet since I know that whatever they want to reform is going to cost me money. Obama says that he is going to reform health care.  I will translate what reform means in that context. Obama is going to increase taxes on the well to do and skin the HMOs and drug companies within a hair of their lives in order to partially pay for health care plans for those who do not want to pay for it, preferring to spend their money elsewhere, or who can not afford to pay it but do not qualify for medicaid.

When uttered by a member of the GOP tribe, reform usually means tax cuts for the wealthy and a sop to everyone else. Like, they are going to reform the "death tax" by eliminating it.  Never mind that the vast majority of people would never have to pay it and elimination would primarily favor the wealthy, lead to further concentrations of wealth, and deny a government running a trillion plus deficit a source of revenue. Even the Democrats would exempt about 7 million from the estates of a husband and wife, combined, from paying any estate tax. I could go on but one example will suffice for this post.  Of course, another way for the government to gather some revenue is find out the names of those 50,000+

Americans who are using Swiss bank accounts at UBS to hide money and income. The same set I suspect that talk about eliminating the death tax as reform. So my policy is just to ignore politicians when they use the word reform. It is just a sales pitch which is usually misleading. Whatever is in real need for reform always seems to escape it somehow.

As I have said before, anyone buying now has to have strong hands and a stronger stomach, with at least a five year time horizon. I am breaking what would normally be a 100 share positions into 2 or three separate orders and a 200 shares position into 4 to 6 purchases as a risk reduction technique.   

Lloyds (LYG), one of the large British banks, is now majority owned by the government after the U.K. government agreed to insure 367 billion of the bank's toxic assets. NYT This is on top of an earlier bailout of the bank.  Lloyds closed at 2 and change last Friday, down from 47 in October 2007. 

Median home price as a multiple of per capita disposable income, another measure of housing affordability, has fallen to the most affordable level seen in the last 40 years. NYT 

One of the ways individual stock prices are being manipulated is for someone to bid up the price of credit default insurance, which sends the signal of a company in distress, and then short the stock. This would be done by someone buying credit insurance who does not even have a position in the bond.  This practice is discussed by Michael Santoli in this week's The result is that the cost to insure a default by the Republic of Vietnam is now lower than the cost to insure against a default of Berkshire that has around 25 billion in cash on hand. Morningstar has a video on its web site discussing the Berkshire credit default issue. 

Barron's always finds the gloom and doomsters to feature every week, even in the best of times.  This week featured David Levy who sees no recovery in GDP until 2010 at the earliest and recommends 10 year treasuries, now yielding less than 3%. I have no interest in a ten year bond that pays 2.875% as of Friday.  There is an ETF, which I do not own, that contains 7 to 10 year treasuries. If I get really scared one of these days, I may buy some IEF which has an expense ratio of .15% and a weighed average maturity of 8.25 years. iShares Barclays 7-10 Year Treasury Bond Fund (IEF): Overview

I heard Melissa Francis on CNBC do a promo for a segment asking whether Obama was the cause of recent poor jobs report.  Herbert had a good retort to those who want to blame Obama for the economy, ignoring all events that occurred prior to this year. NYT  I wonder if Melissa is a plant from Fox. To me it is just mind boggling to hear commentators blame a President who has been in office for less than two months for the current financial crisis.

No wonder Santayana said what he did: "Those who cannot remember the past are condemned to repeat it". George Santayana Quotes It is like nothing has seeped into the minds of those who are fervent True Believers from the obvious and well documented recent events occurring prior to this year. Many of them know about the reasons why the world is in an economic downturn. TOP TWELVE CAUSES OF THE NOT SO GREAT DEPRESSION, but they can not accept the causes since they are inconsistent with a cherished  belief system.

So, I would add a twist to what Santayana said, it is more of a willful act, a refusal to learn from history that causes the True Believers from learning anything really, than an inability to remember. They remember but refuse to learn. The revisionism of recent history is just astounding, almost beyond comprehension at least until I recall that those individuals never process information that is inconsistent with an existing worldview, either recent historical events as in the past year, or anything from the more distant past, so they will never learn from history because history is always distorted by them into an alternate reality in real time.

Andrew Bary wrote an article in this week's Barron's trying to make a case that the end to the carnage may be close at

No one really knows. We all know for certain how far the market has fallen, and that a number of large American companies are selling at prices last seen 15 to 20 years ago. This fact alone takes out a lot of risk for buying shares in likely survivors.  A lot depends on much money can be placed at risk now and how long can I hold without being forced to sell. For me, the pendulum is shifting to a realization that I have strong hands and can hold for a very long time without having to sell anything. I just do not want to have to hold for more than five years. This kind of thought process is ultimately what caused a breakdown in following my own trading rules.   

Ken Lewis apparently found a receptive audience at Barron's for his spiel that BAC will survive and prosper in the year's to come as a result of his acquisition efforts.

No comments:

Post a Comment