Sunday, November 8, 2009

Unemployment Report-Bull Spin Not Convincing/ East West Bank/MACY'S UPGRADE/LONG TERM BEAR MARKETS/Bought Vanguard Bond Funds-Another Rule Violation

1. The Real Unemployment Rate: I am unable to find much in the way of positive news anywhere in the most recent employment report. I am aware that some positive spin was placed on the addition of 34 thousand temporary workers in October, as possibly presaging more full time workers soon. But why hasn't the hours work per week increased from 33? There was also a story in the WSJ about how companies were so reluctant to hire now, and were interested in improving the productivity numbers for their existing workforce. The broader statistical measure of unemployment, which include those unemployed or underemployed, stands at 17.5%, exceeding the previous record of 17.1% in December 1982. This can be found in category U-6, Table A-12 of the Labor Department's report: Table A-12. Alternative measures of labor underutilization If statistics were available on that broader measure going back to the Depression, then the 17.5% number would most likely be the worse number since the Great Depression. Another troubling highlight from the report is that the Household survey showed a net job loss of 589,000, capping a 3 month decline of 1.8 million.

CNBC points out that Americans have 3 times more debt than in 1982, the last time the unemployment rate went over 10%, and have less than 1/2 of the savings.

2. United Commercial Bank Seized by the FDIC: UCBH is the parent of the United Commercial Bank, and it became the 120th bank to fail this year. One of my LTs, East West (EWBC) will assume 10.2 billion of United's assets and has entered into a loss sharing agreement with the FDIC covering about 7.7 billion of those assets. The FDIC estimated that United's failure will cost it about 1.4 billion.East West Bank Reuters Both of these banks serve the Chinese community and have branches in China. My LT purchase was at $5.7. Buy of 50 EWBC as Lottery Ticket One word of caution that I have voiced repeatedly in this blog is that an FDIC seizure of a bank would likely result in that bank's junior bonds being rendered worthless.

3. Macy's (own senior bond only in TC form-DKQ): J P Morgan upgraded Macy's to overweight based on two successive months of improving sales. Macy's is scheduled to report results on 11/11. This upgrade apparently was the cause for a 6.44% spurt in the common price on Friday. DKQ, the TC with the senior bond, also rallied 4.86% on above average volume (3 thousand shares), closing at $16.37. This TC is discussed in several prior posts: Bought 50 of the TC DKQ at $15.95 trust certificate macy's bond dkq The underlying bond trades infrequently: FINRA - Investor Information - Market Data - Bonds - Bond Detail This is a link to the list at FINRA for the Macy's bonds, their symbols and trades: Search Results

4. Mutual Fund Flows: One argument, advanced by those who remain bullish after the 58.1% spurt in the S & P 500 off the March lows, is the vast amount of cash still on the sidelines earning close to nothing in money market funds and similar low yielding investments. There is certainly a great deal of cash still sitting in those type of investments, though fairly large sums have moved into bond mutual funds and bond ETFs over the course of 2009. Risks of Bond Funds Mark Hulpert points out in his column in Sunday's NYT that individuals are not moving funds into stock mutual funds. This is unlike their usual behavior, when individuals become more confident after a bull move is underway and pour money into stock funds. Between 2002 to 2007, there was a net inflow of 250 billion into domestic stock funds. From 2007 to March 2009, Hulbert says there was a 200 billion outflow. But since the market's huge rally off the March low, only 7.8 billion of net new money has found its way into domestic stock funds. So, a natural question to ask is whether this huge pile of cash sitting on the sidelines is going to come back into the market, aiding fuel to an upward impetus in stock prices from current levels. I would not make the assumption that the money sitting in low yielding investments will return to the market anytime soon.

I know the feeling. Although I am well aware of the risks in investing in bond mutual funds, I found myself switching some funds out of a Vanguard stock mutual fund bought a few months ago (item # 6: RB FLIES OFF THE RESERVATION AGAIN) into the Vanguard Intermediate Term Investment Grade fund ( VFICX). ( Yes, the Old Geezer is firmly in control now, no more of that RB committing large sums of capital to stocks now, though Headknocker is thankful for the RB's allocation shift to stocks in early March) I broke that important barrier of staying away from bond funds altogether now after looking again at the paltry seven day yield in the Vanguard Prime money market fund (currently .16% -Barron's). I initiated a new position in the Vanguard Intermediate Tax Free bond fund (VWITX) (see Disclaimer) This relatively small change of heart, measured in terms of capital deployed, is based on an evolving belief that it will take longer than I previously expected to recover from the near Depression. I am not going to commit much to bond mutual funds for the reasons given in several recent posts: Risks of Bond Funds For BND: Is it Safe is not the Right Question. Instead Ask What are the Risks & Rewards/Assume Lost of Principal Possible. Mostly, I am parking some profits realized from stock mutual funds purchased in the March to June period into bond funds. Instead of committing significant capital to bond ETFs or mutual funds, I will continue to increase my exposure to individual bonds, emphasizing floaters with guarantees and fixed coupon bonds yielding over 7%.

My inclination is not to view the rally off the March lows as the start of a new long term secular bull market. Instead, at least for now, I am classifying it as a cyclical bull rally within the long term secular bear market pattern, similar in many respects to the rally in 1975 (moving up about 50% from 62 in 9/1974 to 95 in 6/1975) after the horrible cyclical bear of 1973-1974, with both moves occurring in a long term secular bear market lasting until 1982. 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? More on 1982 or 1974/Barclays Raises GDP Forecast Louise Yamada goes back to the 1930s to draw comparisons. I don't think that is necessary, since the prior long term secular bear market which occurred before the current one provides some good analogies. Louise Yamada Unlike others, I do not start the current long term bear market as starting in 2000 but in 1997. My definition of long term secular bear market starts with what I view as the end point of the long term bull market, even though the market averages may continue to rise thereafter. I judge that point by the market continuing to come back to that level during the bear market so that we are really going nowhere over an extended period of time, perhaps 15 years being a normal cycle, longer in the event of a Depression. During that 15 years, there will be a number of powerful up and down cycles, which I would simply classify as shorter term bull and bear cycles within the dominant trend of a bear market. When it is over, and you look back 15 years, you have gone nowhere. Using this methodology, this chart dates the start of the current dominant trend in 1997: S&P 500 INDEX,RTH Index Chart - Yahoo! Finance

5. Video of Barron's Interview with Oscar Schafer: I thought that Schafer made a good case for buying Yahoo.

6. Tidbits: Stephen King has a new novel that explores what would happen if a town was cut off from the rest of the U.S. by a mysterious bubble. He calls the novel "Under the Dome" ( NYT), but I would call it "TBs Gone Wild", for they are anti-democratic at their core.

The health care "reform" bill did not find much love from several of the Tennessee blue dog democrats, with Democrats Tanner, Davis, and Gordon voting against it. All of those Democrats are from conservative, primarily rural and small town areas of Tennessee. The representatives from Nashville and Memphis, far safer districts for the Democrats, voted in favor. How the House Voted

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