Monday, November 2, 2009

CIT/JBI: Why not Be Satisfied with Just the Interest Payments for 22 Years/Abelson & Rosenberg Pooh the GDP Number/Foreign Bond ETFs/VZ & T-Forbes

1. JBI: In a post from last Friday night, I discussed repurchasing the TC JBI, which contains a senior bond from Duke Capital as it underlying security. / Bought 100 of the TC JBI at $25.1 I mentioned that I would be satisfied with one or two semi-annual interest payments and to sell the security for a $5 profit. I recognized that JBI has little upside price potential at an entry point at or slightly above its par value of $25. After thinking about it some more, I would also be satisfied with close to 8% per year in interest payments generated by this security until it matures in February 2032, provided Spectra Energy survives to pay the bond off which goes without saying. I have already enjoyed a price spurt from around $17 to $25. TRUST CERTIFICATES JBI DUKE

So, I would also be content to earn just the interest for almost the next 22 years which is an Old Geezer kind of statement, clip coupons and play bingo at the Old Folks Home. Yes, the Young Stock Stud is almost gone forever. When you look back over the past decade, eight per cent per year looks good in comparison. During the next two decades, I would expect periods when the value of this bond to decline due to spurts in inflation and inflation expectations. The price might even return to $17 or lower depending on the severity of inflation. The price could fall due to credit concerns about Spectra. So, while I would be content with 7.8% to 8% in interest per year, I will nonetheless sell many, if not all, of the fixed rate coupon long bonds that have yields of 7 to 9% at my cost when I become concerned about inflation. This is part of my trading mentality, always searching for the better price. I would hope to buy many of them back at lower prices. I do not see any evidence yet of inflation concerns in the long bond market or in the break-even yield offered by the 5, 10 or 20 year TIPs. Two of the several criteria that I will use as a signal for reducing this category of long bond exposure are the 10 year TIP break-even rising to over 2.0% and the CPI number running hot, both for several months.

There are a number of long bonds, which I own, that fall into this category. I previously mentioned, for example, a first mortgage bond from Entergy Louisiana (EHL), bought at $22.75 in October 2008 for a yield at my cost of 8.35%. This is a long bond maturing in 2032, and I still own it. I would be satisfied with that 8.35% every year until maturity but the trader says sell this kind of bond when the LB starts to see inflation problems. Now I do believe inflation is coming, but I am not going to pull the trigger on this kind of trade until I am confident that it has arrived at problematic levels for the long bond. I have several bonds that fall into this category and I may add a few more in the upcoming weeks.

2. Abelson and Rosenberg: Abelson suggests in his weekly Barrons column that the market woke up on Friday and realized that the GDP report was not so hot. Abelson looks to spin positive information in the most negative light conceivable, or to dismiss or ignore anything remotely positive. He relies on a fellow named John Williams, who runs a publication called Shadow Government Statistics, to pooh the 3.5% GDP estimate for the 3rd quarter released last Thursday. (and who exactly is John Williams?: Home Page) The bear case is that the number was goosed by cash for clunkers and the 8 thousand dollar tax credit for new home buyers, as if all consumer spending during the quarter was for the purchase of automobiles under that program and all houses were bought by first time home buyers. About a third of consumer spending was auto related and there were people who bought cars during the 3rd quarter without participating in the cash for clunkers program. Even after the clunkers program ended, demand for autos in September remained above the 2009 trough. Consumer spending increased 3.4% during the quarter.

Abelson also puts a negative spin on the .9% draw down in inventory. Inventories were drawn down in the third quarter by 131 billion, less than the 160.2 billion in the second quarter, which positively impacted GDP by .09%. (a slower pace of inventory drawdowns translates in government accounting to a higher GDP number NYT) I would not look at the inventory number negatively. Inventories have been liquidated for 12 consecutive months and inventories are now at the lowest percentage of GDP in fifty years. Federated: Inventories will have to be rebuilt. The contribution from increased production to build those inventories back up is not in the GDP number yet. So, I would view the inventory drawdown as positive.

When inventory is stripped out, and you look at final sales (GDP less inventories), then the increase in final sales in the third quarter was estimated at 3% annualized rate: MarketWatch And will the GDP number be revised up or down for the third quarter in subsequent revisions? My guess is that it will end up closer to 4% than 3.5%.

As one would expect, Abelson has brings out his fellow ghoul David Rosenberg to spin the number in a negative manner. Why negative? That is what Alan and David do, that is their shtick. Now, David has some explaining to do having forecasted a fractionally positive number for 3rd quarter GDP, so why not turn the 3.5% positive number into a flat one. Then, Voila, he hit the number square on the head. Some may say that it just a piece of legerdemain. Dave says that, without government generosity, GDP would have been zero so there, he is right again. Another point is a statistical one, relating to the fall in consumer saving during the quarter from 4.9 to 3.3% referred to by Alan as "precipitous" to make it sound menacing. This is a link to the government's chart on the savings rate and anyone can draw their own conclusion. BEA : Personal Saving Rate Does it support the point made by Alan and Dave? Rosenberg neglects to mention that in the months preceding that decline in the savings rate there was a large percentage rise.

Distortion and manipulation of facts to fit a preexisting opinion or disposition is never helpful to an investor.

There are a lot of negatives and many positives too. I have noted many times that I doubt that a sustainable economic recovery can be built just on a return of consumer spending to pre-2007 patterns and levels. Besides the jobless rate, there is also the problem that many consumers are still carrying too much debt and their access to credit has been limited by more cautious lenders. The days of borrowing ever increasing amounts of money to fund spending, using parabolic increases in asset prices to support that spending as collateral, are gone for the foreseeable future. The consumer's balance sheet will need to be repaired by an increase in the savings rate and lower spending. The positives that are often overlooked by the perma bears is the increases in American manufacturing activity and the growth in exports. A large percentage of the population still have jobs and are spending. I would not assume that the bulk of American consumers have decided to withdraw into a shell, change their lifelong habits, and turn over a new leaf of frugality, at least not for a long period. I also believe that there is ample proof that American have an entrepreneurial culture, new businesses are constantly being created to provide goods and services to the people in the U.S. and throughout the world. Lastly, the last recession which began in late 2007 and ended this last summer was due to a financial crisis. The governments in the world stopped the crisis from escalating into another Great Depression. The flood of money sloshing around the world and the extremely low interest rates throughout the world will have the desired impact of jump starting a worldwide recovery which is underway now, whether or not Alan and Dave wish to see it.

If the market ends up higher today, does that mean Alan that the market reconsidered its reconsideration of its initial opinion about the GDP report?

3. EPropertyWatch: I read a NYT article about this free service from First American that has data bases of home titles. ePropertyWatch I just registered my home at the site and I can keep track my property value and sales in my neighborhood using this service, which is also the kind of information that is also available at Real Estate, Homes for Sale & Real Estate Values - Zillow What distinguishes the First American site is that I will be notified in the event my title is transferred. As the NYT fraudulent transfers of titles are becoming a problem and I will generally take proactive steps to protect myself from fraudsters even if the odds are remote of being a victim for a particular scam. I would not depend on the government to take meaningful measures to protect me. I certainly would not rely on the SEC who was incredibly negligent and cavalier in its investigation of fraudsters like Bernie Madoff. This is a summary of the interview with Bernie, when he was in jail, conducted by the SEC Inspector General. exhibit-0104.pdf

4. Foreign Bonds ETFs WIP and BWX: I still own some shares of two ETFs that contain foreign government bonds, BWX and WIP, although I have pared BWX with three recent sells. /Pared BWX for the Third Time/ /Pared BWX WIP is an ETF containing inflation protected bonds issued by foreign governments. I would agree with the argument that the currency fluctuations will overwhelm any advantages of the inflation protection. Given the low yields of both the WIP and the BWX, I regard both of those bond funds to be more of a currency bet against the dollar than income vehicles. These international bond ETFs are are discussed in a recent article in the NYT. The value of the U.S. dollar against the Japanese Yen is particularly important for an owner of BWX which has over a 20% weight in low yielding Japanese government bonds.

5. GOP Evolving into a Fringe Party?: I have discussed in prior posts my opinion on the need for the GOP to evolve. The GOP: Does it Need to Evolve?/ If the recent events in an upstate New York congressional race are a sign of evolution, then I suspect that the GOP is evolving into a 21st century equivalent of the "Know Nothing" party of the 19th century, where ignorance is prized along with ideological purity rivaling any religious sect, and intellect is confused with parroting worn out cliches. In a traditional GOP district, the Glen Beck, Sarah Palin tea party crowd has successfully caused the GOP candidate to withdraw from the race in favor of a gent called Dan Hoffman who at least talks the talk. The local Watertown paper interviewed Mr. Hoffman, who does not even live in the district, and he showed no grasp of local issues. NYT Watertown Daily Times In fact, for this crowd, a person who actually reads the paper, or tries to learn about the issues in anything other than a superficial manner, is immediately suspect, and probably a "liberal" or worst. Come to think about it, like the Strom Thurmond Dixiecrats (Strom Thurmond Opposes Civil Rights ), the Know Nothing party merged into the GOP so in that sense the party is evolving. I am admittedly old fashioned, sort of throw back to some other era, a veritable stick-in-the-mud, in that I try to learn the facts before forming an opinion, rather than forming the opinion first and then sifting through opinions and cliches, masquerading as statements of facts, to justify the previously formed opinion.

I thought that I would make a note of another reference where the Democrats are claiming that their "health reform" proposals will end up saving money. HealthCareDeficit.pdf NYT I will want to refer back to these statements in a few years when the costs end up being two or three times the current projections.

6. U.S. Dollar and Commodity Prices: I thought that this was a useful article on the correlation of the U.S. dollar and commodity prices

7. Microsoft Technical Patterns: Since I still own 50 shares of Microsoft with about a $500 unrealized profit, and have constantly been asking myself why, this article on the historical technical patterns of MSFT was of interest:

8. First American (own senior bond in TC PJS only): Excluding items, The First American Corporation reported earnings of 64 cents for the third quarter, one cent better than the consensus estimate. Revenues rose 3% to 1.6 billion. FAF forecasted a sequential decline in revenue for the 4th quarter, reflecting a normal seasonal slowdown in November and December (see page 3: Transcript). The company is also proceeding with the spinout of FADV, a majority owned information solutions company, a negative factor for my bond position in my opinion.

9. Forbes' Negative Article on VZ and AT & T (OWN COMMON STOCKS AND BONDS) The cover story in the current issue of Forbes takes aim at the long term viability of Verizon and At & t and basically comes to the conclusion that serious problems lie ahead for them. The argument has to do with a company called MetroPCS that has bought 4G spectrum for the purpose of lowering the cost of wireless phone service, and will be able to offer with the new technology wireless service at a provider cost of close to a tenth of a cent per minute. This would make the wireless phone service into a cheap commodity type product. The Forbes' analysis assumes that a large percentage of wireless users will choose a voice plan, with no data or internet capability, and that the move to smart phones is a passing fad.

10. CIT: CIT filed for bankruptcy after its plan tender for its debt failed to garner enough support. Apparently, it received considerable support from its bondholders for a pre-packaged bankruptcy. If true, this may allow for a speedy exit from bankruptcy court. The preferred and common shareholders, including the government 2.3 billion in preferred stock, would likely be rendered worthless. (see page 6 of the prepackaged bankruptcy offer at the top of the page- exv99w2) I have never owned the common stock, since I have lacked confidence in CIT's management. Also, the company borrowed heavily short term, a model that is subject to failure during a credit contraction. CIT was able to finance itself for several months in late 2007 and early 2008, when the institutions quit buying its paper, by selling several hundred million dollars of debt to individual investors through brokerage companies like Fidelity. Bloomberg ran an interesting piece on how the small investor's capital was soaked up by CIT when the big boys exited the refinancing gambit. CIT sold 827 million in bonds in this way to individual investors just between December 2007 and March 2008.

11. European Manufacturing PMI: This index, the European version of the of the ISM for the U.S., rose above 50 in October for the first time since November 2007. The reading for October was 50.7. This information is accessible at the Markit web site: Media centre - Markit Economics

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