Friday, September 4, 2009

Sold 50 GYB at $15/Jobs Report/Forest City Bonds/Aussie Dollar/Bought 50 KEY-Lottery Ticket

1. Jobs Report: The Labor Department reported an increase in the jobless rate to 9.7%, compared to expectations of 9.5%, due in part to more jobless workers entering the workforce looking for employment. That unemployment rate is the highest since the 10.1% jobless rate from June 1983. Private sector shed less than 200 thousand jobs in August with the total job loss number reported as 216,000, slightly lower than the forecast. Employment Situation Summary Hours worked was unchanged at 33.1. I would generally expect that number to trend up before the jobless rate starts to decrease, as employers would be more inclined to increase hours worked before hiring new workers. Average weekly earnings increased 6 cents to $18.65, partly due to the minimum wage increase.

This is a statement made by the Fed about the labor market contained in the minutes of its last meeting:

Conditions in the labor market remained

poor, and business contacts generally indicated that

firms would be quite cautious in hiring when demand

for their products picks up. Moreover, declines in employment

and weakness in growth of labor compensation

meant that income growth was sluggish

(page 7:

Labor market conditions remained of particular concern

to meeting participants. Though recent data indicated

that the pace at which employment was declining

had slowed appreciably, job losses remained sizable....

The unusually large fraction of those

who were working part time for economic reasons and

the unusually low level of the average workweek, combined

with indications from business contacts that

firms would resist hiring as sales and production turn

up, also pointed to a period of modest job gains and

thus a slow decline in the unemployment rate. Wages

and benefits continued to decelerate.

(page 8). I do not see any basis for disagreeing with any of those statements, though it is possible that a return to job growth could occur by the end of the 4th quarter.

2. Marty Whitman on Forest City: Although I do not own any of the Third Avenue mutual funds, I do read Marty Whitman's shareholder news letter: pdf#TAVFX I noted that fund purchased 2.4 million common shares when Forest priced its offering recently at $6.6. I bought somewhat less shortly after the offering, 50 shares at $6.3 as a Lottery Ticket. LOTTERY TICKET PURCHASE: 50 SHARES OF FCEA-FOREST CITY COMMON/ADDED: SOLD FCY I was more interested in his discussion of "performing loans" at p.3 of the report. He characterizes a performing loan as having an 80% probability of remaining performing and providing a 20% or better yield to maturity. He would also expect "little or no loss" in bankruptcy. He identifies Forest City senior obligations to be candidates for purchase in this category. He is talking about shorter term debt obligations, with current ownership at the end of the last quarter (7/09) in Forest senior debt issues maturing in 2011 and 2015, with a smaller position in one maturing in 2017. I did previously own an exchange traded senior debt issue, FCY, maturing in 2034 at a $25 par value (, that was bought at slightly less than $10 and sold at $14.6. SOLD FCY The profit on FCY funded the 50 shares of the common. My trepidation on the issue is out of concern about the liquidity situation and the asset coverage for the senior bonds after satisfaction of the much larger secured debt financing. FCY: Forest City Senior Bond & Discussion of Process Use to Make a Purchase Decision/ FCY: Forest City Enterprises Senior Bond (FCY)/FCZ Whitman seems to be saying that the senior debt bought by him is in his judgment adequately protected by the value of the assets after taking care of the secured debt, at least at his cost.

Some other discussions of Forest, and criticisms of its management can be found at:

The Forest City earnings release is scheduled for next Tuesday. I do not have a position in FCY, though I might buy another 50 shares on a fall to 14 or below.

3. Sold 50 GYB at $15 Yesterday in Roth (see Disclaimer): GYB is a synthetic floater tied to a junior Goldman Sachs bond maturing in 2034. I bought this security at less than $11 in April,Bought GYB, so I netted close to a 40% gain with the dividends. I also purchased 100 GYB in the regular IRA at around $11 and intend to keep those shares, purchased at a total cost of $11.09. Added another 100 GYB in Regular IRA/

4. Australian Dollar (owned): My position is in the currency ETF FXA. Australia's GDP increased .6% in the 2nd quarter. Goldman Sachs raised its forecast of the Aussie dollar against the U.S. dollar to 87 cents in 3 months. The consensus forecast had been for a .2% rise in GDP. The Asia Pacific economist for Societe Generale is predicting a 25 basis increase by the Reserve Bank of Australia at both their November and December meetings. Goldman Sachs is predicting a 1/2% rise by the RBA in November. The current rate is 3%. Since FXA pays interest based on the short term rates in Australia, any such raise by the RBA will increase FXA's monthly distributions. FXA Fund Quote - CurrencyShares Australian Dollar ETF Fund

5. Yahoo Finance Stock Screener: In addition to the Morningstar stock screener, I like to use the one at YF: Stock Screener - Yahoo! Finance The stock purchased yesterday, EXAR, was found a couple of weeks ago using this screener which allows me to use cash per share as one of the criteria. I would then limit the selection to stocks less than $10 in price. For that screen, I used a greater than $4 a share in cash and a price to book value of less than 1.5. I juggle criteria all of the time, and another screen might substitute a PEG ratio of 1 or less for book value as an example. A lot of banks will show up on the screen. I can get rid of them by putting in a total debt criteria of less than 20m which brings it down to a manageable 22 names. Of those names, I owned prior to 2008 Radvision and Novatel Wireless, both sold at profits before the bear market, and I currently own EXAR from this list which was bought on Wednesday.

6. Tidbits: I recently added small positions in two closed end funds from Nuveen, JDD & JTD. Both of those funds declared their quarterly dividends for the September quarter, with JTD remaining at 25 cents while JDD increased its distribution by a penny to 22 cents. I also recently added to a pre-existing position in JQC which also increased its distribution by a penny to 16 cents. Nuveen Closed-End Funds Declare Quarterly Distributions I have a small position in JSN. That position is in the ROTH primarily for its income generation, with close to a 11% yield at the current price: JSN - Nuveen Equity Premium Opportunity Fund That CEF attempts to replicate the price movements of a 75%/25% combo of the S & P 500 and Nasdaq 100 Indexes, respectively and will sell call options to moderate volatility. I also own JGT: JGT - Nuveen Multi-Currency Short-Term Government Income Fund

I still own shares in First Industrial's cumulative preferred (FRPRK) in a retirement account. FR declared its regular preferred dividends. First Industrial Realty Trust Declares Preferred Stock Dividends This one is in an enhanced danger of deferral due to the elimination of the common stock dividend last year.

With more evidence of green shoots popping up recently, except for the jobs numbers, you would think the 10 year treasury would have been falling in price and rising in yield. But, instead, it has gradually risen in price recently to yield just 3.36%. The real yield on the 10 year TIP has fallen to 1.64 with a break even spread now around 1.72. Government Bonds Maybe the bond ghouls are less impressed with the recovery than stock investors.

7. Bought 50 Key Bank (KEY)-Lottery Ticket (see Disclaimer): I made this LT purchase this morning at $5.88. I previously bought and sold KEY as a LT in a regular IRA. This purchase was in the main taxable account, so that I can realize a tax benefit, if need be, by selling at a loss. This is part of RB's campaign to buy bank stocks, which have been shellacked in price, hold them for 3 to 5 years, and hope for a recovery in price to more normal levels. It might take at least that long for KEY to return to prices prevalent in 2004 to 2007, mostly in the 30 to 40 range. The five year chart is certainly ugly, a prerequisite for an LT. KEYCORP Share Price Chart
There is nothing much in the way of positive news that could be reasonably anticipated for months. KEY comes up on the Morningstar screens that I use with the criteria of large discounts to fair value and low price to book. Price to book is around .6. I do not expect all of these bank lottery tickets to prosper in the years to come. The approach is to put a small amount of money in several of them and hope for the best in a few years. Some may even work out. The origins of this particular strategy comes from my memory of what happened after the last near death experience of the banks in 1990-1991. That period did set the stage for a long bull move in bank stocks. This can be seen by looking at long term charts going back to 1990 and looking at the price gains in the ensuing fifteen year period. While I believe the overall damage is greater during the latest banking debacle, that earlier period may be the best guidepost for developing an investment strategy for the banks now. My problem is that I view banking executives as incompetent, with exceptions, and mostly incapable of managing their businesses capably over long stretches of time, similar to many homebuilders in that regard. Ultimately, they will find a way within a decade or so to blow their firms up through incompetence that is unbelievable.

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