Monday, November 16, 2009

Retail Sales/Chinese Currency/The Movie "Precious"-LGF/Medicare Fraud & the Government/ING SNV

1. Retail Sales: The government reported that retail sales for October rose a greater than expected 1.4%, and .02% excluding autos. However, the number for September was also revised down from -1.5% to -2.3%. Economic These statistics are seasonally adjusted, but no adjustment is made for price. Gasoline sales are included in the retail sales, and that is just one item where there is a lot of price variation. Gas retail sales were down 15% from October 2008, and that shows the impact of price on this data release.

2. VOLATILITY INDEXES: After spurting to over 30 at the end of October, the S & P 500 volatility index is moving back toward 20, the demarcation line between bullish and bearish action in the Vix Asset Allocation model. The move toward 20 is itself positive. At the time of this post, the VIX had fallen to 22.83 and the DJIA volatility index is making another push toward below 20.

3. Chinese Currency ETF: I bought last week 100 shares of the Wisdomtree currency ETF for the Chinese Yuan, based on what appeared to be a possible relaxation of the desire to keep a peg to the U.S. dollar BOUGHT 100 CYB at $25.36/ An article in the NYT over the weekend suggested that this may be premature, at least for several more months. (compare that article with this one earlier in the NYT) I have no idea who is right on this issue, but suspect that China will allow its currency to float some next year. If CYB is not up more than 5% by this time next year, including any dividend paid at year end, then I will reassess holding it. I mentioned in the post discussing the purchase of CYB that I expected at best modest appreciation, and did not see at least for now much in the way of downside. (see also this article: ETF Expert) At the APEC meeting in Asia, the leaders did not include in their final statement a reference to currency exchange, though a near final draft called for a move toward market oriented exchange rates. Mark Zandi anticipates that China will allow the Yuan to increase against the dollar next spring at the rate of 5% per annum.

In another story over the weekend, Liu Mingkang, the Chairman of China's Bank Regulatory Commission, chastised the Federal Reserve for indicating that it will maintain the current abnormally low interest rates for 12 to 18 months. Liu said that this approach was fueling speculation in assets and creating "new, real and insurmountable risks to the recovery of the global economy". You know, it sounds to me like China would like to give the U.S. a spanking. This is a link to the website for this regulator: China Banking Regulatory Commission

This is a link to an article from this morning in Seeking Alpha about CYB.

4. National Association of Independent Businesses: This organization conducts surveys, similar to the ISM, except the concentration in on America's small businesses. The November report is available as the Associations web site: .pdf The Index of Small Business Optimism rose in November to 89.1, 8.1 points higher than its lowest reading in March. However, the index has spent six quarters below the threshold 90 level, compared to just 1 quarter during the 1980-1982 recession. Overall, I view this report as a continuing negative. The small business job machine "is still in reverse". Capital spending is at historic lows. Reduction of inventory and price cutting, as opposed to new orders, is still the trend. Credit availability does not appear to be a serious problem for most small businesses, though credit terms continue to be an issue.

5. Medicare Fraud: As the Democrats try to advance "health reform" with a public option, I am struck by the continuing flow of information about fraud in the government's medicare program and the lackadaisical approach for decades to control it, nothing even resembling a good faith comprehensive stab at reducing the sheer magnitude of fraud and theft, just the usual politician jive at election time. I previously referenced a story on Sixty Minutes about how easy it was for Fraudsters to falsely bill Medicare for medical supplies that were not provided to patients by firms that really did not even exist. It would be relatively straight forward to substantially eliminate that kind of fraud estimated at 60 billion. CBS News You would start with a certification process for medical suppliers, requiring proof of financial capability, and some background checks. Then there would be periodic audits. And, acts of fraud would be prosecuted and punished with serious jail time after a conviction. The AP ran a story over the weekend about the government paying close to 50 billion in suspect claims. Whenever the government starts distributing large amounts of money, the amount lost to theft and fraud is invariably a staggering sum. It does not matter whether it is the billions allocated for Iraq reconstruction, Medicare, defense spending or anything.

6. ING: I am not aware of anything in the form ING hybrid prospectus that requires ING to buy back the hybrids. It is solely up to ING whether or not to redeem a hybrid at par value. INZ is callable now at ING's option. All calls are at ING's option: ISG after 1/15/2011; ISP now; IND now; IDG after 10/15/2012; ISF after 6/15/2012; IGK after 9/15/2013 Hybrid Securities - ING

Also, while it may never come up, the mere announcement of a dividend does not cut off ING's optional deferral right. The next IGK dividend is payable on December 15th. ING may defer by giving notice "not less than 16 business days prior to the interest payment date". So the optional right to defer is lost if the notice is not given before that cut-off date. There are 10 business days in December excluding the 15th. So anyone anxious about this issue may want to check the news from now until around next Wednesday.

7. Lion's Gate (LGF): LGF was bought as a lottery ticket last week. When I looked at the top box office films for last week, I noted that the LGF release, "Precious", moved up to #4 with 6.1 million in revenues, and the film is still in limited release, playing in only 174 theaters and averaging around $35,000 per venue, compared to the 19 thousand average for the recently released 2012 which played in over 3400 theaters. I referenced in a prior post a favorable 4 star review from the Washington Post, and here are a few other reviews by major publications:

8. Japan GDP: Occasionally, I will buy an ETF that focuses on stocks from one country. The RB likes Canada, so it bought EWC during its frolic and detour in March. Buy of EWC at $15.55 I don't know who is responsible for buying the ETF for Japan, EWF ( Japan Index Fund (EWJ), all the "its" disclaim any involvement and the OG does not remember as usual. I did not mention the buy of 100 shares of EWJ for that reason, none of the its would claim it. Really, talk about stocks for the long term to someone from Japan who bought stocks in 1989 when the Nikkei was at 39,000, now hovering 30 years later at less than 10,000. NIKKEI 225 Index Chart Maybe it is time for another spurt in Japan, a Barron's columnist seems to think so. And, it was reported today that Japan's economy grew at an annualized rate of 4.8% in the third quarter, beating the expectations for a 2.6% rise.

I do own some funds that are country specific. For Switzerland, as an example, I own the CEF Swiss Helvetia fund (SWZ) rather than the ETF EWL ( MSCI Switzerland Index Fund (EWL) The ETF is just too highly concentrated in a few issues for me.

9. Synovus (SNV-Lottery Ticket owned): SNV was a recent lottery ticket purchase that is in the red some, and I have had nothing positive to say about it from the time of purchase. I own just 50 shares based on the hope that some day it will recover, a strategy based in part on the recovery cycle of banks after their last near death experience from 1990-1991. Bought 50 LT SNV at $3.73 SNV-Just Awful/ It helps to have the Old Geezer around to remember these long ago historical events. SNV issued a press statement today saying its capital position was strong, it was not under any regulatory requirement to raise additional capital, and that it had an opportunity to earn a profit in 2010. exv99w1 The LB being a stickler for words and phrases, parsing everything into bits and pieces, wondered what exactly is meant by an "opportunity" to earn a profit. The market apparently does not think that this reassurance means much, with the stock up seven cents this morning to $2.

In another post, I mentioned that the magic coin may be called into action to decide whether or not to add 50 shares to SNV, rounding the lot to 100 big ones. For those unfamiliar with the rules relating to the magic coin, this is a brief summary: a magic coin needs to be found which is not easy to do, then placed into a cup of your two hands, it must be shaken vigorously with the eyes closed, tossed way up in the air, the coin must land on a hard floor, and heads means buy (or hold) and tails means sell (don't buy), though some magic coins may have different indicators. If the coin rolls under a refrigerator, then forget about that stock for the rest of your life.

10. Empire State Manufacturing Survey: This index is still positive for growth, but fell 11 points to 23.5 from the September number. The chart provided by the NY Fed shows the slump and the recovery: Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York


  1. I appreciate the level of detail in your blog. I am trying to discern your rules for retirement vs taxable account allocation. Do you have a post that explains your rational?

  2. jeffs0: I am contributing the maximum each year into a retirement account, which for me is $6,000 and funding it entirely from my main taxable account. My retirement accounts are about 1/10th the size of the taxable accounts.

    Most of my risk taking occurs in my taxable accounts, almost all of my Lottery Ticket purchases for example are in that account. If I suffer a loss in the taxable account, at least it has some benefit to me. A loss in the retirement account is just gone. So, I am far more conservative in the retirement accounts, but I can afford to be. Others may need to take more risks based on their personal situation so the kind of allocation each person may need to take will depend on their circumstances. One benefit of the conservative approach is that I am up about 30% in the retirement accounts over 10/07 levels adjusted for subsequent contributions.

    I also used the decline in the market starting last October through March 2009 to do a number of Roth conversions, and my Roth account is now five times larger than my regular IRA, reversing the size of those two accounts.

    Generally, I am close to be 70% in bonds and bond like investments in the retirement accounts. A security paying interest would be taxable at the highest marginal rate in the taxable account.

    In a retirement account, I do not receive any benefit from the favorable tax rules for qualified dividends or long term capital gains, nor am I able to claim a tax credit for foreign taxes paid on dividends. I prefer to place securities paying tax advantaged distributions in a taxable account, along with all foreign companies that pay dividends. This would include equity preferred stocks that pay qualified dividends.

    If I speculate in a retirement account, it will be in the regular IRA. If the investment fails, I will include it in a Roth conversion. This strategy is explained in a number of posts. Just use the search term "roth conversion" in the google box.

  3. There are some more considerations. For example, if I am about to buy a junior bond whose distributions are cumulative, and I have some concerns about a possible deferral, I would prefer to place the security in a retirement account. A few months ago, when I had concerns about Aegon and ING hybrids, for example, I started to place new purchases of those securities in a retirement account. The concern about deferral then outweighed the tax benefit of qualified dividends paid by those European hybrids.

    There are tax issues associated with a deferral of a cumulative distribution which I do not have to worry about in the retirement account.

    I would also be more likely to put a security that is the subject of this kind of concern (possibility of deferral of a cumulative distribution) in the regular IRA rather than the Roth. Any actual deferral will wreck havoc on the share price, and I would then include it in a Roth conversion. There are income limits still this year on Roth conversions.

    Recently, I have funded mostly my Roth account with new contributions, but I will fund my regular IRA some in 2010, in order to provide more funds to implement the strategy on Roth conversions that I have discussed in the blog.

  4. Re ING, the EC has now approved ING's plans. See EC doc1 and EC doc2. Quote from the latter (my bold): "In the ING case, given that the bank recently launched a €7.5 billion capital increase aimed at repaying more than 50% of the capital injection of the Dutch State (including the accrued interests and exit premium fee), it will not be obliged to defer coupon payments on Tier 1 and Tier 2 instruments. Nevertheless, for the next three years or as long as ING will not have repaid the entire capital injection of the Dutch State (whichever is shorter), the calling of Tier 1 and Tier 2 instruments will have to be authorised by the Commission on a case by case basis. The Commission took note that the bank called a lower Tier 2 bond on 14 October 2009 without prior consultation. This was taken into consideration in the overall appreciation of the restructuring package."

  5. Dutchperplex: thanks for the information about ING. I made a reference to it in my blog this morning.