Tuesday, January 5, 2010

Added to Nasdaq Omx at $20.17-Adding All 125 Shares of NDAQ Shares to 2010 Speculative Category/Refiners/Intel/5 Yr Treasuries/Bought 100 GLW at 19.6

1. ISM: The ISM's manufacturing index rose to 55.9 in December, greater than the expectation of 54.3. The new order component rose to 65.5 compared to 60.3 in November. I viewed this component's upturn last year to be very important based on past cycles.{Post Dated 4/6/09 /ISM Index of New Orders} I went into more detail in this post from May 25, 2009:

"The new order component of the manufacturing surveys has been turning up.
In the recessions which bottomed in March 1975, July 1980, March 1991, and November 2001, the new order index from the ISM bottomed 1 to 3 months before the recession bottomed. The ISM new order component hit bottom in December 2008 at 22.7. ISM
For April 2009, it was at 47, up from 38.8 in March. ISM

The longest lag was in the recession that bottomed in August 1982 when the new order index bottomed 12 months prior to the end of the recession." Some Signs of Light at the End of the Tunnel: End of the Recession?

In response to that belief, I added two ETFs focusing on U.S. industrial companies and still own the 100 shares of VIS bought at $42.46. Since the Old Geezer is in charge of the trading desk here at HQ and is known to be uncomfortable with sector ETFs in general, this one may be sold with the proceeds reinvested into VV or VTI: Bought VTI at $47.57 BOUGHT VV at $41.45

2. 5 Year Note Auction at 2.665%-There are Risks Besides Credit Risk: The treasury auction last week for the five year note resulted in a yield of 2.665% with the O.I.D. The coupon rate was 2.625% treasurydirect.gov/.pdf As an individual investor, I have to constantly make decisions on how to allocate my capital, and frequently that involves a decision on whether or not to buy a security based on weighting the risks and potential rewards. That process often requires some judgment about future possibilities. I did not participate in this auction based on an assessment that 2 5/8% on a five year treasury has negligible rewards, and several risks. I am not including in those risks credit risks but I would just describe them in the following ways.

First, I view it as more probable than not that the average inflation rate over the next five years will equal or exceed the coupon yield for this security, thereby my real return would be some number below zero before taxes. Most of my funds are in taxable accounts and the return after inflation and taxes would increase the real negative return.

Second, I believe that it is more probable than not that the U.S. is near the end of low interest rate cycle, and rates will turn up significantly in 2011. I could avoid a loss on that 5 year note by holding until maturity. For those funds used to buy that note, however, I have the risk of lost opportunity. The risk of lost opportunity can be narrow or broad. The narrow risk is that I could wait a year and invest those funds in a higher yielding five year note. The broader risk of lost opportunity is that I could invest those monies in another asset class now that would provide me with a higher return. Given the low return of the five year note, I would assign a very high probability that a higher rate of return could be realized in alternative assets over the next five years .

Third, there is the risk that investing in 5 year notes yielding 2.625% will not get me to the point where I need to go with my investments. It will take 27.38 years before taxes and inflation for me to double my money at that rate. Estimate Compound Interest Vanguard's Total Bond market ETF, with a low expense ratio, has a current SEC yield of 3.45%. Vanguard - Vanguard Total Bond Market ETF Overview

At the beginning of his Mad Money show, Cramer said it was "nuts" that investors had poured 349 billion into bond funds, and people buying bond funds now are being "reckless". Bond funds may be the worst "bet in the universe" now. CNBC.com

I have sold all of my bond ETFs. Bond ETFs: Links in One Post The reasons are generally described in this post: For BND: Is it Safe is not the Right Question. Instead Ask What are the Risks & Rewards/Assume Lost of Principal Possible I also recently liquidated by TIP, WIP and BWX ETFs:

I have a tendency to ask myself frequently what if I am wrong? This generally results in betting against my judgment about the likely future course of events. I am not channeling Jeane Dixon. So I have kept smaller positions in three Vanguard bond funds and I even added $500 to the Vanguard Inflation Protected bond fund for settlement today. {VIPSX VWITX VFICX} I do not expect favorable results from those funds this year, but I also do not like leaning entirely one way either. Though, this predilection did cause some problems in late 2007 and well into 2008, as previously discussed: Buy High & Sell Low /Retrospective on the Good & Bad I would say in my defense that my small bets against my better judgment would have worked in 2008 without the second phase of the bear market, which started after the Lehman failure.

3. VIX: The VIX broke above 20 last week (^VIX: Historical Prices for CBOE VOLATILITY INDEX). The volatility index for the DJIA remains under 20. VXD Index Quote - Cboe Djia Volatility Index Index For now, I am going to keep the count running on continuous movement below 20, with 3 months being the requirement under my VIX Asset Allocation model for the formation of a Stable Vix Pattern. Vix Asset Allocation Model Explained Simply With as Few Words as Possible VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern VIX and S & P Compared 1990 to 1997 The reasons are the small break in the VIX above 20 during a holiday period, and the movement of the VXD still being consistently below 20.

The VIX closed Monday at 20.04. The VXD is still under 20 closing at 18.2: VXD Index While this may only be important to me, I will restart the count if the VIX closes at over 21 even if the VXD stays under 20.

4. Refiners: I recently added small positions in Valero and Delek. Bought 50 VLO at 16.3 Bought 50 DK at 5.75 I noticed on Monday that Deutshe Bank upgraded the refining sector to neutral from underperform. The reasons apparently given include the improvement in demand likely over the course of 2010 and the shut down of many U.S. refineries. New Upgrade Fuels Refining Sector - CNBC

5. Intel (owned): The Robert Baird analyst upgraded Intel on Monday to outperform from neutral, raising the price target to $26 form $24, apparently based on the belief that corporate demand for computers will increase this year. My previous buys of Intel were at $14.65 and $15.25, with the last buy at $19.08 last November. Added to Intel and CEF JQC I am reinvesting the dividends, but may quit doing that when and if the price approaches $25.

6. Added to Nasdaq OMX Group (NDAQ) at $20.17 (see Disclaimer)(Adding Entire 125 Share Position to 2010 Speculative Category): I mentioned buying NDAQ at $19.98, and I thereafter discussed briefly the Goldman upgrade to buy: Item # 7 Bought 200 GRU at 5.43/ Bought GE at 15.48 I was disappointed in Nasdaq's last earnings report however: Item # 4 Earnings from NDAQ NADX The CEO sounded upbeat in the last interview that I watched with him: CNBC Part of the reason for increasing my position yesterday was a gut belief that trading and new listing activity will pick up in 2010. I am also hopeful that Nasdaq's efforts to expand geographically will start to work, including the acquisition of the Nordic exchange in early 2008 and the Philadelphia exchange in late 2008 which should add to the derivatives trading business. Morningstar has it rated 4 stars currently. Price to book is .85 and price to sales is 1.16, based on 1/4/10 date, according to YF: NDAQ: Key Statistics for The NASDAQ OMX Group, Inc. - Yahoo! Finance Of course, that kind of data changes with price, and with new earnings reports.

7. Oceanfirst (OCFC)(owned): OCFC bought back the government's preferred stock for 38.5 million, and is negotiating to purchase the warrants. Reuters Press Releases: OceanFirst Bank

8. Bought 100 Corning at $19.6o (2010 Speculative Category)(See Disclaimer): I will first mention that Jim Jubak sold his shares yesterday, believing that GLW is overvalued and carries too much risk for him. The main thrust of his argument is that GLW will have a spurt of earnings growth for the first six months of 2010, and then one analyst predicts earnings will start to tail off. Jubak also accepts the consensus of 6.7% average growth per year for the next five years, which is something that I would never do, for a company like Corning. There are just way too many material unknowns. Jubak adds that long term investors may want to hold since the 6.7% growth rate may prove to be conservative, though even those investors might want to sell before the second half slowdown. MSN Money

Barclays Capital has an overweight rating and a 23 price target by mid 2010. Barclays expects $1.75 in 2010, which gives GLW a P/E well below the average 17x for large cap tech. S & P has GLW rated 4 stars with a $21 target and 2010 earnings at $1.65.

I mentioned in an earlier post that Corning would be the kind of stock that I would be buying in this new category. I am approaching this one with a somewhat simpleton perspective. Actually, I should not have added the qualifier "somewhat" to that last statement. It is a simpleton approach. The current consensus estimate for 2010 is for an E.P.S. of $1.64: GLW: Analyst Estimates for CORNING INC I multiplied that number by 15 and came up with a target price of $24.6 which seems reasonable to the OG, who readily admits to a considerable lack of knowledge on all matters dealing with technology. Most likely, I will sell those 100 shares anywhere in the $23 to $25 range, whenever that may happen.

OG does understand that Corning is one of the leading makers of a glass for LCD displays used in LCD TVs, flat panel desktop monitors, & notebook computers. Based on some comments made by the CFO in early December, it appears that the LCD TV business is booming now Reuters Barrons At that time Corning forecast 2010 LCD glass demand worldwide to be between 2.7 to 2.8 billion square feet up from 2.4 billion in 2009. Davenport did downgrade the stock to neutral in early December, based on valuation, when the stock was trading in the mid 18 level. Barrons.com

Corning also has a lot of cash on the balance sheet which is always comforting. Debt to capital ratio as of 9/30/09 was low at 12%. Operating cash flow for the first nine months of 2009 was 1.2 billion, and GLW ended the 3rd quarter with cash at 2.3 billion and debt at around 2 billion.

The company also produces optical fiber and cable for the telecommunications market: Reuters.com Fiber-to-the-premise had 7 % sequential growth in the 3rd quarter.

For the 3 months ending 9/2009, the "display" segment had revenues of 679 million and the "telecommunications" segment realized 450 million. GLW has other business segments including "environmental" with 3rd quarter revenues of 167 million, "life sciences" at 92 million and "specialty materials at 90 million. (page 35: www.sec.gov/)

This is a link to Reuters Key Development's page.

9. Dividends and Interest: Medtronic and AT & T go ex dividend tomorrow: Dividends I check this page from the WSJ every night.

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