Saturday, January 23, 2010

Bought 100 MKN at 9.85/Sold 100 BTZ at 11.69/WBS ED ACET HBAN GOOG/Sold 100 GLL at 10.27/Sold 50 VTAL at 14.26 /Bought 50 PJL at 25.37

The VIX skyrocketed on Friday, moving up 22.63%, to close at 27.31. The last three trading days marked the largest percentage increase in the VIX since February 2007 (+55%), when the mortgage news turned noticeably negative and the VIX gave an "Alert" signal in my Vix Asset Allocation Model:

Since August 2007, the pattern in the VIX is characteristic of what I call an Unstable Vix Pattern, a more dangerous market for individual investors. The pattern was first defined as a Phase 1 Unstable Vix Pattern, where most of the movement is between 20 to 30 on the VIX, with short term spurts above 30 and below 20. That pattern was broken in September 2008 by the formation of a Phase 2 pattern, the most dangerous and potentially catastrophic phase of the Unstable VIX Pattern for a long only stock investor. In late September 2008, there was a decisive break in the Phase 1 pattern by a move to over 40. Volatility, Catastrophic Event Formation A phase 1 of the Unstable VIX Pattern reasserted itself in June 2008, and the VIX had been working to form a Stable Pattern, particularly over the past few weeks with continuous movement in both the VIX and the VXD below 20. The model requires 3 months of continuous movement below 20 before I will commit any of my 30% of cash reserves to stock purchases. The movement in the VIX last week disrupted the movement toward a stable pattern, and therefore reaffirmed its caution signal.

The VIX did break its 200 day moving average, which was 26.33 last Friday. VIX Index Charts - Cboe Market Volatility Index For a long stock investor, breaking the 200 moving average in the VIX to the upside is an unfavorable event. You want to see the index fall below its 200 day moving average which is what happened last April 1, 2009.

This kind of strong upward movement in the VIX will cause me to pause any additional common stock purchases, other than purchases made with cash flow. However, since I have already purchased stocks in 2010 with the anticipated cash flow for the first two months of 2010, this will cause a cessation of stock purchases for at least 30 days. And, I am required to raise some cash, primarily from positions just purchased that are still profitable, recognizing that I may soon be able to purchase them at lower prices if so desired.

I will look for adds in bonds, particularly senior bonds from investment grade companies. Some of this shift started last Thursday and continued into Friday. As previously discussed, I had already eliminated all stock mutual funds in the retirement accounts, and those accounts held up very well during last week's action containing mostly bonds now. The last mutual fund in the retirement accounts was sold 1/6/2010: See item # 3 Added 50 PFK in Roth at 20.88-Averaged UP Still, even though these developments are negative, I view most of what happened last week to be an overreaction primarily to the increasingly populist political rhetoric and also to news late last week that Bernanke's confirmation is in trouble.

Some of the anxiety was caused by the postponement of the vote confirming Ben Bernanke as Fed Chairman. Two more Democrats announced that they would be voting no on Friday, Barbara Boxer and Rush Feingold, proving once again that no good deed will go unpunished by Congress. I agree with Buffett that Bernanke saved the U.S. from collapse back in September of last year. I would not go as far as Uncle Warren and predict chaos in the event Bernanke is not confirmed by the Senate. Chaos WSJ But it does appear that he may become a victim of the know nothing politicians WSJ.com The 200+ loss last Friday may be mostly due to this news.

If I had to put my finger on what happened last week, it comes down to a fear that politicians will stick their nose more into matters beyond their feeble degree of competence and to otherwise cause more mischief and harm. The most important developments from last week were not any earnings report under this view, but three political developments: the increasingly populist rhetoric from Obama; the delay in confirming Ben Bernanke for political posturing reasons; and Barney Frank saying that he wants to abolish Fannie and Freddie and replace them with something of his liking (see # 14 below).

I am still characterizing the current market as a long term secular bear market currently in an Unstable Vix Pattern. I am also of the opinion that the rally off the March 2009 low will end up being more like the rally off the cyclical bear market low in 1974 rather than the start of new long term secular bull market. more on 1982 or 1974 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market?

1. Google: I sold my Google shares at $447 in July: Item # 3 Sold Google/ LB must have been at the trading desk that day and was just trying to clip a profit on shares that had just been bought at $395. Both the OG and the RB thought that was typical short term thinking by the LB and were waiting for an opportunity to buy some of those shares back, similar to what happened with the baby Berkshire shares recently: RB BUYS BACK BABY BERKSHIRE SHARES at $3,298 SOLD BY THE LB It is difficult at times, actually all of the time, for all Head Traders here at HQ to work in unison to secure a common objective, a phenomenon that is worse here at HQ than in Washington. It must be a miracle that Headknocker's capital position is advancing at a far faster clip than the market averages over the years. In fact, the RB just said that we need to report this miracle to the Vatican. Excluding items, Google reported earnings of $6.79 in the 4th quarter, better than the consensus forecast of $6.48. Investors are now in the mood of searching for anything disappointing, grab it, and then magnify its importance. Apparently, for Google, the concern involved the 2% sequential increase in cost per click, the amount paid by advertisers to Google when surfers click an add, compared to the estimate of 5%. The China controversy is also weighing on the stock price. Revenue increased 17% or 13% excluding currency changes. Operating margin increased to 37% compared to 33% a year ago.

Since a buy of Google would have to put into the 2010 Speculative Strategy, and I have already invested the cash flow for about the first two months of 2010 already, I will need to wait to reinitiate a small position, though I could buy a couple of shares at anytime now.

After the close in trading the founders of Google announced that they will be selling 5.5 billion in stock combined, over a five year period.

2. Huntington Bank (owned LT-Category 1 Regional Bank Strategy): HBAN reported another ugly quarter, losing 369.7 million in the 4th quarter of 2009. The net loss was 56 cents, and analysts were expecting a 27 cent loss. Huntington Bancshares predicts that it will return to profitability in 2010. The 4th quarter loan loss reserve totaled a whopping 894 million, up 88% from the third quarter. The capital ratios are well above the minimum levels for well capitalized: Regulatory Tier 1 at 12.05%, Total Risk Based Capital Ratio at 14.43%, and tangible common equity ratio at 5.92%. The "aggressive" target for 2010 is 275 million in "pre-tax, pre-provision earnings for the 2010 third quarter". I am not impressed by that aggressive target. But, I am not being aggressive with my investment in HBAN, having bought just 90 shares after its meltdown in price, with the last 40 shares bought at $3.7: /Added to LT HBAN/ In any event, I am looking now more at whether or not the bank will survive. And if HBAN survives, which apparently it will, I will be more interested in the numbers for 2011 than 2010. A lot of these regional banks like Huntington, Synovus and Marshall & Ilsley made very poor decisions during the real estate bubble, and I do not view them as sufficiently strong now to weather another financial storm anytime soon. So, a lot depends on the U.S. economy recovering without another financial crisis within the next several years.

3. Applied Materials (AMAT) and Brooks Automation (BRKS)(owned): Citigroup's analyst, Timothy Arcuri, downgraded the chip equipment sector on Friday. He cut his rating on AMAT to hold from buy, apparently based on his belief that chip inventory is building and this sector may face up to a 30% correction in stock prices. Brooks was a recent LT buy, just 30 shares, and this analyst included it in the downgrades to sell from hold.

4. ACETO (owned LT): The manager of Perritt Micro Cap Opportunity mutual fund (PRCGX) is a big fan of Aceto, which he views as "incredibly cheap" TheStreet TV He also mentioned a couple of stocks that I knew nothing about (INOD and JBSS) Both of those companies looked interesting enough to add to my small cap monitor list. Only INOD would be appropriate as an LT buy given the price of JBSS.

5. Webster Financial (WBS)(own LT-Category 1 Regional Bank Strategy): Webster has been one of the most successful buys in the regional bank strategy, with 50 shares bought last March at $4.58. Buy of 50 WBS: Lottery Ticket The price of WBS surged to over $15 yesterday. Still, after reviewing the 4th quarter report, I am keeping it in Category 1 of the of the Regional Bank Stocks' stratagem. Although I view the results as moving towards being satisfactory, and the trend is positive, I still view the report as unsatisfactory. Webster Reports Fourth Quarter WBS is one of the LTs in the regional bank strategy that has become increasingly difficult to hold after its very fast and huge appreciation in price. Ultimately, I will have about 30 names in this basket. And, I still believe that its ultimate success is dependent on keeping almost all of them for at least 5 but no more than 10 years, except for the ones deemed to be moving toward a FDIC seizure which will of course be sold. (one has been sold to date and it was later seized by the FDIC)

6. Bought 100 MKN at $9.85 (see Disclaimer): This security is lightly traded and I used a limit order to buy 100 shares last Friday. My trade was grouped with another 300 shares. Shortly after those trades were done, the bid changed to $10.81 and a ask of $10.83. That is another reason why limit orders have to be used in thinly traded securities. There can be a lot of movement quickly on virtually no volume.

I discussed this unusual security briefly in connection with my purchase of MKZ, a similar security. MKZ vs. MKN To sum up, MKN is a senior note from Citigroup that matures on April 7, 2014. It pays a minimum guarantee of 3%. So none of that is enticing. If Citigroup survives to pay me $10 in 2014, I will make about 7 bucks on the shares, and a 3% yield is not worth the risk. The interesting aspect of this security is that it can pay up to 33% per year based on the rise in UBS commodity index from each start date. Pricing Supplement No. 2009- The starting index value for the current year is 112.43. The ending date will be March 30, 2010 for the first interest payment. The index is current trading near 135: MDC - Java Chart - WSJ.com So if index closed at 135 on March 30, 2010, the yield for the first annual period would be around 20%, with the following caveat. If there was one close during that annual period when the index closed above 149.53, the interest payment would revert back to 3% no matter where the index closed on 3/30/2010. So that would be a bummer. The reason that I did not buy MKN earlier was that it was climbing to close for comfort to that 149.53 number. On 1/6/2010, the index closed at 145.03. If I had owned MKN then, I may have sold it rather than risking a reversion back to 3%. That would be a double whammy. A large rise in the first year would makes it more likely that 3% would be the payment for the second year, since the starting value in year two is the closing value in year one, and so on.

The index has since pulled back some, giving me some breathing space, and the time period has shortened some to the closing date since I last considered buying it, which does reduce my risk some in my opinion. In other words, if I had to wait six months, I would view that as creating more risk whereas my current time exposure is less than 10 weeks. From my perspective, the security was worth a 100 share buy at below par value. I would view it as a success with one payment over 20% and another over 10%, with the remainder at the 3% guarantee, provided of course Citigroup survives to pay the principal at maturity.

7. Mort Zuckerman: I respect Mort. He is intelligent, well-informed and successful. Importantly, I do not view him as an ideologue. In my opinion, all citizens need to identify ideologues from both the right and left and then ignore them completely, since they are far more likely to mislead than to inform, and it would be accidental for any to convey accurate information in a "fair and balanced" manner.

Mort wrote an opinion piece in the WSJ yesterday asserting the the Near Depression (my term, or the Great Recession in his words) is not yet over. I would agree with his opinion when the focus is entirely on job creation to date. I believe that the job picture will gradually improve throughout 2010, but it will take at least five years after the nation quits shedding jobs to replace the jobs lost since October 2007. I agree with him that any recovery in jobs will be a slow process. The job losses have unquestionably gone down over the course of 2009 from their nadir, but there is precious little job creation anywhere, particularly in small businesses. I also saw Mort's interview yesterday on CNBC and I would agree with his criticism of the Democrats stimulus program. There was insufficient attention on infrastructure projects, which the country needs. Mort voted for Obama. I would give Obama a C- for his first year, but my grade for McCain would have probably been lower. At least the Beanpole may have discovered now that he can not govern effectively by turning the liberal members of his party loose to make policy on such contentious issues as healthcare.

I have heard several liberal members of the House say that they would prefer having no bill rather than approve the Senate version. Similar sentiments were echoed by Howard Dean recently. This kind of ideological purity is what I would expect from all GOP House members, cookie cutter, group think, ideologues from central casting. Paul Krugman pointed out in his NYT column that the Senate bill would be better than nothing from his liberal perspective, and the House Democrat ideologues need to reconsider. The Senate version could become law at anytime with the House simply voting to approve it.

8. Consolidated Edison (owed- part of core utility holdings): On the positive side, the 4th quarter earning report will mean that I will be able to buy more shares with my next reinvested dividend. Con Edison reported earnings of 73 cents for the 4th quarter. Excluding items, the earnings were 67 cents. Analysts were expecting 76 cents excluding items. The forecast for 2010 was slightly disappointing too, with a range bound forecast of $3.1 to $3.3. Analysts had forecast prior to this earnings release an E.P.S. of $3.36 for 2010. The company did declare a 59.5 cent dividend, a two cent annualized increase, payable on March 15th to stockholders of record on February 17th.

9. BLS Data on State Unemployment Rates: The BLS reported on Friday that 43 states reported higher unemployment compared to November. Regional and State Employment and Unemployment Summary The unemployment rate in Tennessee rose to 10.9% from 10.2%. North and South Dakota are a couple of states where job hunting might actually produce a result.

10. Sold 100 GLL at $10.2741 (see Disclaimer): This double short ETF for gold was sold on Friday at $10.28 just based on a gut feeling that the current choatic environment might be conducive to a rally in gold prices. Of course, I have no idea whether or not that will happen, but I would feel more comfortable hedging my gold bullion position with GLL when and if the spot price hit a point within the $1300 to $1400 price range. This sale resulted in close to a $100 short term gain. Normally, I do not take the price out to four digits when I make a note of a transaction, and will just round the number. I am curious how the market order was filled at 10.2741.

11. Sold 50 VTAL at 14.26 (see Disclaimer): This is a recently purchased stock in my 2010 Speculative Strategy, with those shares bought at 12.68 on 1/1/2010. This sale has nothing to do with my opinion of VTAL, but was part of the paring done on Thursday and Friday to raise some cash in response to the disturbing movement in the VIX.

12. Sold 100 BTZ at 11.69 (see Disclaimer): This CEF was recently bought in the taxable account, and I was just raising cash by selling it. I made a small profit, and will keep the other 100 shares in an IRA bought at a slightly higher price in October: Bought BTZ in Roth

13. Bought 50 of the TC PJL at $25.37 (see Disclaimer): I saw a narrow bid/ask spread yesterday afternoon in this TC containing a senior Verizon bond, so I bought some more shares. My last add was back in April at $24.2: Bought PJL As I stated in that post, I prefer to buy the TCs with the same Verizon bond as the underlying security at below $20, but I am not likely to be granted another opportunity to do so anytime soon.

The prospectus for PJL can be found at sec.gov. The coupon is 7.625% on a $25 par value, so my yield is close to 7.5% on those shares bought Friday. The bond matures in 2030. So, this is one of the positions that would be jettisoned as soon as I become rationally concerned (hopefully rationally) about a serious inflation problem, meaning likely to run hot for more than a couple of years over 4%. This note just went ex interest and pays semi-annually on June 1 and December 1. I have a position in XFL taken at below $20. Some prior posts on the Verizon TCs include: Trust Certificates PJL and XFL: Verizon Bond Functional Equivalence in Bond Trading

Trading activity on the underlying bond which has a slightly higher coupon at 7.75% can be found at FINRA - Investor Information - Market Data - Bonds - Bond Detail. Based on the last price for the underlying security, the current yield on the bond was about 6.51% and selling at a 19% premium to par value. The yield on the TC at a total cost of $25.37 would be about 7.51% and at about a 1.5% premium to the $25 par value. This kind of analysis does not end with the conclusion that an individual should buy this bond either in the TC form or in the bond market. This analysis only means that the TC is a better value provided the investor is comfortable buying Trust Certificates. It is certainly easier to buy the TC (particularly with small amounts of money to invest), and the TC did present more value for the buck last Friday than buying the individual bond (a percent more in current yield and a higher yield to maturity given the lower premium to par value).

14. Barney Frank: Barney has not come to terms yet with the fact that he bears some responsibility for the failure of both Fannie and Freddie. And it is not exactly reassuring to hear that he wants to abolish those institutions now and to replace them with something more to his liking. It was Frank who led the charge for Fannie and Freddie to expand their subprime lending, to enable more people who could not afford a home to buy a home with a loan that they could not afford to pay.

To be fair to Barney, and right wing ideologues have never been fair to him to my knowledge, a significant amount of the problems at both Fannie and Freddie did not originate from subprime lending but from Alt-A loans made in five states that experienced extreme bubble conditions in home prices. Marsha Blackburn and the Bailout And, those who perpetually prefer to mislead rather to convey accurate information overlook the role played by the Government-sponsored enterprises' management to increase profits in response to pressure from private institutions by expanding lending to include even more borrowers who were not "prime" customers. NYT (article from The Reckoning series focusing on Fannie and Freddie) And the idealogues always neglect to mention that the total amount of subprime loans bought by Fannie and Freddie were a small fraction of the total, most of them originated from independent mortgage companies who in turn sold them to investment banks. Then the loans would be packaged into pools, sliced and diced into tranches, stamped with a AAA seal of approval by the ratings agencies, and sold to uninformed and gullible investors throughout the world. This graph from the washingtonpost.com shows the breakdown.

But having said all of that to be fair to Barney and to place events in proper perspective, Barney and many other politicians used Fannie and Freddie to further a social agenda in such a way that irresponsible lending was encouraged by the politicians and therefore Barney is part of the problem not the solution.

It goes without saying that the self-described "conservative" ideologues and all members of the GOP tribe (maybe there is one or possibly two exceptions in the U.S. somewhere) will never admit or recognize the role played by the central tenets of their ideology in fostering and creating the conditions that led to the Near Depression, summarized only in list form in this post: /Revisions to top Twelve Causes of the Not So Great Depression (later added the failures of the FBI to investigate widespread mortgage fraud: adding failures of law enforcement to my top 12 causes) This is why they blame poor people, minorities, the Community Reinvestment Act and poor Barney. More detailed discussions of the rankings are found in numerous posts throughout this blog.
Examples:

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