Saturday, January 2, 2010

Alan Abelson & the Levys/ Also A Lost Decade for Jobs & Income Growth Adjusted for Inflation/Recent Criteria Used in Search of LTs/

1. Criteria for A Recent Lottery Ticket Screen: I was asked about the screening criteria that disclosed some of the names recently purchased such as the ones discussed in my first post for the new year: 2010 Strategy/Interest Rate Risks- Bonds/Bought 100 ETN LSC at 9.3/Bought 50 VTAL at 12.68/Bought 50 HQS at 7.04-LT/Bought 50 ACET at 5.2-LT/SCEDN Some of the recent Lottery Ticket purchases were found using a simple screen with three criteria at YF: Cash per share greater than $2, Last Price less than $10 and total debt of less than 10m. Stock Screener Those criteria produced 71 names including the recent purchases of the following stocks which are still owned: ACETO (ACET), DSP Group (DSPG), Landec (LNDC), HQ Sustainable Maritime (HQS), Action Semiconductor (ACTS), & Friedman Industries (FRD). (see, e.g.: /Bought 50 HQS at 7.04-LT/Bought 50 ACET at 5.2-LT Bought 50 DSPG at 5.62 BOUGHT ACTION SEMICONDUCTOR AT $2.21-LOTTERY TICKET BOUGHT 50 FRD AS LOTTERY TICKET) Two stocks previously discussed in this blog from this list have already been bought and sold: Tradestation (TRAD) and Silicon Image (SIMG), and one was successfully traded before I started this blog-Innovative Solutions (ISSC). It remains to be seen how successful this particular approach will be since most of the names are recent purchases. LOTTERY TICKET PURCHASES: LINKS IN ONE POST As I have mentioned I will use several screening services and will constantly tweak the criteria, but this particular screen did not include some other usual criteria such as price to sales of less than 1.

2. Setting Time Correctly on the Computer: I have frequently entered orders near the close. So it helps to have the time set correctly on my computer. I use this web site to make sure my time is correct, and my bookmarked link is to CST: CST: Central Standard Time (USA & Canada) - What's the time in Central Time Zone now?

3. The Lost Decade: It is not just stock returns that were dreadful over the past decade. Other negative comparisons are equally noteworthy. A story in the washingtonpost highlighted that there was no job growth during the prior decade, compared to 20+% growth in every previous decade since the Great Depression. Middle class families were making less money in 2008 adjusted for inflation than they were in 1999. And the net worth of American households declined over the decade adjusted for inflation.

4. Alan Abelson Featuring Kindred Spirit Ghouls David & Jerome Levy: The subtitle of Abelson's column in this week's Barrons is "a grim view of the new decade". Alan is the kind of person who would maintain a grim view of a prior decade even with overwhelming evidence that the positives substantially outweighed the negatives. This process requires him to accentuate the negative news and to ignore or dismiss positive developments.

In this week's column Alan regurgitates the views of Jay and David Levy. Possibly Barron's needs to hire a college student with a dash of sarcastic wit to write his columns summarizing the most recent missives of David Rosenberg, the Levys, Gary Shilling and similarly like minded individuals. After all I am sure that Rupert is looking for ways to save a few bucks.

The Levys forecast for the upcoming decade is dire indeed. High unemployment will become a chronic condition, averaging "at least" 8%. Bouts of deflation will be the new normal. The price of equities, real estate & risky debt instruments will fluctuate up and down, but at the end of the next decade those assets will be a "cut lower" in price than today. Trillion dollar budget deficits will be the new normal, and international tensions will accelerate. And there is a "possibility" of a "sweeping" global and financial decline sending the entire world into the abyss. And, just in case you might think that we made it through our 100 year storm, the Levy's caution that more 100 year storms are yet to come. Wow! I need a bottle of aspirin. RB even said that it needed a swig of Maalox.

Now, Alan of course does not view the Levys as gloom-and-doomers, and even says so in this column. From Alan's perspective, there are "down-to-earth" and "common-sensical". Why? Well, they share Alan's view of the world which ipso facto means that they have oodles of commons sense. Before we buy into that claim without nary a question, I would first read some prior Barron's issues from last year attempting to spread the Gospel according to the Levy. In fact, I would start with this article from the week of March 9, 2009, when Alan and David Rosenberg were predicting more troubles ahead for the stock market. In that same issue Barron's featured David Levy forecasting a very heavy dose of gloom, and any objective readers would call it doom and gloom. No Doom, Just Gloom - He viewed in that article a ten year treasury yielding 3% to be "pretty attractive". Corporate profits would be flat to down, and will remain, according to David, at very depressed levels. The housing market will continue to decline. If you weather the next year or two without losing your shirt, you will be a "hero". Buy Treasury Bills, David says with conviction, if you can not buy long dated treasuries. And deflation is spreading around the world. I am curious why Alan did not refer back to this interview in his column this weekend.

Wait, I may have an explanation as to Alan's memory lapse. Subsequent to that article and before the ink could dry on Barron's paper, stocks which were supposed to keep on tanking began one of the most historic runs in history. And what about that 3% 10 year treasury bond. Well, it is not doing so hot. The 10 year treasury ended 2009 yielding 3.837%. The owner who bought long dated treasuries on 3/9/09 based on the recommendations made by Alan and the David Bobsie Twins (Rosenberg and Levy) in that week's Barron's magazine have a significant unrealized loss on that position, easily wiping out the meagre interest payments, and would have missed the 60+% stock market rally (UP 64.8% off the low in the S & P 500 but David and Alan do not need to mention that shared wrong way forecast: Bear Markets) Nothing more needs to be said about the value of their prognostications to date.

But maybe Alan is right when he says that Jay and David Levy are not gloom -and -doomers, more like the seers of a thousand plagues, famines and pestilence, mass disasters, wars, end of days, kind of guys.

5. The Point Where My Concerns Intersect with the Levys: There is one point where I share a concern. The last decade did not work so well for the vast majority of people. No jobs were created, the average family balance sheet has lost equity to inflation, while the amount of debt has soared. Wage growth has been non-existent. Sure the Masters of Disaster became enormously wealthy over the past ten years, the very rich became richer until 2008 by paying less in taxes, but overall the policies followed by government failed miserably to advance the interests of the average middle class family.

I would share the concerns expressed by the perma bears in what will replace the era of leverage and provide the fuel for a lasting and stable economic expansion that would benefit the average working stiff. The U.S. government spending ever increasing amounts of borrowed money to fill that hole is not the answer, at best a short term band-aid that will mostly expire by the end of 2010. I do not see the policy of printing money to buy ever increasing amounts of debt as a prescription for deflation, however, and view that opinion as odd.

Initially, there was some growth in jobs during the first six years of W's stay at the big house, but most of that was fueled by consumers spending an ever increasing amount of borrowed money and the improvident extension of easy credit that fueled the housing booms. And, the few gains were quickly lost when the leverage bubble burst. I simply refer to as the Age of Leverage. What Will Produce Growth after the Age of Leverage? Household debt as a percentage of disposable income really accelerated during the last decade, rising from around 90% to 133% in 2008 before starting to decline again. (chart of this ratio from 1961 to 2009). But the norm was closer to 60% until about 1985, when both the government and the average American family started to live beyond their means. It took about 15 years to rise from 64% around 1985 to the low to mid 90% level in 2000, arguably an unsustainable amount before the ratio really took off after 2000. So, I would not be giddy going into the next decade.

If the two Levys and Rosenberg are anywhere close to being right about the next ten years, then secure and safe longer term bonds would be one of the few asset classes that have a chance of working, even at their currently low rates. While I do not want to make recommendations for them, I think the ghouls would be recommending the purchase of long dated U.S. paper, like the 10 or 20 year bonds, and long dated investment grade corporate bonds. I do not currently own any individual treasury notes or bonds, but I do have a significant number of fixed coupon investment grade corporates, mostly in the Trust Certificate form of ownership but also a number of baby, exchange traded bonds (plus a few short term bonds bought directly at the time of issuance)Exchange Traded Bonds: Trust Certificate Links in One Post Trust Preferred Securities: Links in One Post ING Preferred Stocks (hybrids): Links in one Post Aegon Hybrids: Gateway Post

As I mentioned in a recent post, I intend to keep the long term, investment grade bonds bought at large discounts to par value, where the yield at my cost would equal or exceed 10%. In addition, any bond bought at a favorable price maturing prior to 2025 most likely would be kept as long as I am comfortable with the credit risk. So I most likely to keep intermediate term individual bonds.

The question mark for me now is for how long to hold fixed coupon bonds maturing after 2025 where my yield is less than 10%. Into this category, and just by way of example, would be the following:

1. First Mortgage Bonds issued by Entergy Mississippi (EMO) and Entergy Louisiana (EHL):

2. Trust Certificate JBI : Maturity 2032 Yield 7.8% at my cost (Spectra Energy)

3. Recent Buy of 100 of the TC GJX (Burlington Northern)

4. The Last Buy of a TC containing an AT & T bond maturing in 2031 (but not the purchases of JZE and JZJ bought at substantial discounts to par value): Item # 4 Bought GJF

5. The last buy of a TC (PJL) at $24.2 containing a Verizon bond maturing in 2030 (But not the earlier buys): Bought PJL

6. And, all of the fixed coupon bank Trust Preferred issues and junk rated issues yielding less than 10% would fall into this questionable category.

7. The recent buys of DKK but not the shares of KTN and KVW bought at substantial discounts to par value. (all containing the same AON TP maturing in 2028).

And any corporate bond could be jettisoned upon serious concerns developing about credit quality.

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