Monday, January 25, 2010

GE Intel Yahoo/Conspiracy of Silence/Added 100 HRPN AT 19.15/BERNANKE CONFIRMATION

I mentioned in my post from Saturday a belief that Friday's slide was due primarily to anxiety about Bernanke's confirmation. Over the weekend, Senator McConnell (R) predicted that he would be confirmed as did Senator Gregg (R) in a joint statement with Senator Dodd (D). It is not surprising to me that Senator McCain indicated that he was leaning against voting for confirmation. McCain said on Face the Nation that Bernanke was in charge when the natione hit the iceberg and he should be held accountable:

"I'm very skeptical about his nomination. I'm worried that if his nomination is turned down the effect that it might have.But the fact is that Chairman Bernanke was in charge when we hit the iceberg and his policies were partially responsible for the meltdown that we experienced. I think that he should be held accountable." cbsnews

In other words, try and deflect responsibility onto others and maybe you will not look inward to assign responsibility to yourself. McCain is a typical member of the GOP tribe who has yet to find a financial regulation to his liking. I have discussed since I started this blog how members of the GOP tribe will never accept any responsibility for what happened, or the relationship between their core beliefs and the causes of the Near Depression. Top Twelve Causes of the Not So Great Depression In many cases, those core beliefs were accepted by Clinton Democrats like Larry Summers and Robert Rubin and implemented into policy, with the most far reaching and catastrophic policy change being the rule implemented in 2004 by the SEC allowing investment banks to increase their leverage. (I remember Katie asking Sarah to identify when McCain had ever voted for a regulation: YouTube). McCain tried to show during the campaign that he favored tightening regulatory oversight over Fannie and Freddie. It was documented during the campaign that he did not sign onto that one regulation until a republican lobbying firm had all but killed that effort: Palin and Supporters in Ohio/McCain and Freddie & Fannie

Instead of recognizing the obvious, and looking inward to reassess the validity of some of their core beliefs about government regulation in the financial sector, members of the GOP tribe will instead blame poor minorities, Barney Frank, and the liberal Democrats, just about anyone other than themselves. Idealogues on A Mission: Revisionism Already Well Under Way to Explain the Origins of the Mortgage Crisis

While Bernanke was part of the Greenspan Fed, whose interest rate policy contributed to the real estate bubble, and he was slow to recognize the pervasiveness of the problem in mid 2008, his actions thereafter saved the U.S. from falling into the abyss. I would blame Greenspan more than Bernanke for keeping interest rates too low for too long. Greenspan took the federal funds rate down below 2% starting in November 2001 and the rates stayed below 2% until November 2004.

The improvement in the market today is based primarily on Senator McConnell's statement over the weekend.

Sometimes I link an interactive chart from Marketwatch, referring to a 200 day moving average. My link to the chart will work, but the reader will have to plug in the moving average line. I referenced earlier the chart for the Dollar Index, DXY Index Charts - US Dollar Index Future. To draw moving average lines, click "Technicals" on the left hand side, then click "Price Trends", then click "Simple Moving Average", and then click 200. You can draw one other line using "Simple Moving Average 2" and I will generally draw a 50 day line. This shows DXY trading now above its 200 and 50 day moving average lines. This would indicate dollar strength against the basket of the six currencies in the Dollar Index, heavily weighted to the Euro.

1. GE Reports (own common stock): The recession revealed that the vaunted GE managers were nothing special, and the head honchos at GE Capital were as clueless as Chuck Prince, possibly more so. The payout to the shareholders was cut by 68% last year, but there was no pay cut for GE's management. GE Pay Cut for Shareholders But Not Management & Kicking Sand in the Wound GE is starting to see some light at the end of its dark tunnel, and possibly it may be in a position in 2011 to raise the dividend. For the 4th quarter, GE beat expectations, which are now low, by reporting only a 19% decline in profit from the year ago quarter, earning just 28 cents. For the year, GE net income fell 38% in 2009 compared to 2008. Immelt predicted that earning in 2010 will not be an improvement over the disastrous 2009. NYT Losses in commercial real estate jumped to 593 million in quarter, up from 60 million in the 4th quarter of 2008. GE Capital boosted its losses by 700 million in the last quarter to a total of 8.1 billion. Incompetent would be the only descriptive word adequate to describe it, and that is being generous. Possibly, the level of incompetence has to do with a failure to focus on big picture, macro type issues. Most of the problems were foreseeable once you open your eyes and look at the facts objectively.

I am not sure why I have been buying GE common stock, mostly in the $10 to $15 range. GE is unquestionably a dog now, one ugly stock. And I own close to 400 shares. Possibly, if and when Jeffrey R. Immelt is sacked and new management is brought into the mix to replace those who have obviously failed miserably, it is conceivable that GE might return to growing its businesses again, and to venture into new businesses that actually earn more than the cost of capital, similar to what happened after the recession in 1980-1982 under Jack Welch who became CEO in 1981. Those were the glory years. But the first step is to engage in a thorough house cleaning at the top.

2. Yahoo (owned-2010 Speculative Category): I mentioned in a prior post that Oscar Schafer was recommending Yahoo. His reasoning made sense to me then, so I bought 100 shares at $15.95. He repeated his recommendation and reasoning in the Barron's Roundtable. He believes that Yahoo is worth $24 to $25 a share, and most likely I would be a content seller at $22. His reasoning during the Barron's interview is the same. Yahoo's 40% stake in the Chinese companies Taobao and Alipay, its stake in Yahoo Japan, and the cash on the balance sheet is worth $12 to $13 a share. That means that Yahoo's core business is value at only 4 to 6 billion. The earlier interview was last October:

3. Added to HRPT Senior Bond AT 19.15 this Morning (HRPN) (see Disclaimer): I went ahead and added 100 of this senior note issued by HRPT Properties in my taxable account. This brings me up to 200 shares which is my limit for this security. The WSJ dividend page shows that the first quarterly interest payment of .3333 was declared with an ex date of 1/28/2010, payable on 2/15. This bond matures on 11/15/2019 at $20. I discuss it in more detail in an earlier post: Item # 2 Bought 100 HRPN at 19.32

I also own HRPT common shares with the last shares added at 6.46. The common shares at least have the possibility of dividend raises, which will increase my yield over time, but I also bear the risk of a dividend cut. HRPT did cut its common dividend to conserve capital, which is something that happened to virtually all of the REITs that I follow during this last economic downturn. The current dividend rate is 12 cents per quarter or around 7.43% at a total cost of $6.46: HRP Stock Quote

4. Excerpt From Scott Patterson's Book "The Quants": WSJ has an excerpt from Patterson's soon to be released book that focuses on how quant run funds blew up in unison during the early days of the Near Depression. I have previously discussed those failures. I would assume that Patterson discusses the quant theory that caused the most damage to the world's financial system elsewhere in his book. As Buffett has said many times, beware of the quants.

The most far reaching and catastrophic damage was caused by the mindless adoption by Wall Street and the ratings agencies of David Li's Gaussian copula function which led to the explosion of collateralized debt obligation and the monstrosity CDO-squared. Recipe for Disaster This disastrous reliance on a quantitative formula is also discussed in this article from In a previous post, I referred to this formula as a Nerd Abstraction, divorced from reality, and those who used it lacked either common sense or good judgment based on real world experience. The model attempted to predict default of mortgage pools based on statistical correlations rather than what was actually happening in the real world. A real world analysis would have included an analysis of how home price had risen so far that most families (sometimes up to 85%) in a community could not afford the median price home, that household debt as a percentage of disposable income was approaching extreme levels, that subprime lending had mushroomed to unprecedented levels, and that home prices were moving in a parabolic manner fueled by easy credit, funky mortgage products and a speculative frenzy (22% of the homes in 2006 were bought by speculators: Subprime mortgage crisis).

5. Conspiracy of Silence: Given the likelihood of catastrophic consequences for a mistake in the application of radiation therapy, you would think that doctors would be attentive and careful. For example, if you had pancreatic cancer, you would expect the doctor to aim the dose of radiation at your pancreas rather than the penis. Unfortunately, in the real world, mistakes due to carelessness will frequently happen. The NYT did an investigation about the frequency of errors in radiation therapy, focusing on a few that had catastrophic consequences for the patient where inattentive physicians applied extreme levels of radiation that killed the patient. I am not surprised by the number of incidences or the consequences. Most likely, if the truth were known, the injuries called by careless errors would be shocking if known.

When I read the article, I was focusing also on the lengths that hospitals, physicians and the government will go to keep information material to a patients' decisions secret. If I was going to have radiation therapy, I would want to know at a minimum about the number of mistakes made in the application of radiation at each hospital in my locality. This kind of basic information is not available. Even in New York, which does try to collect some of the information, a patient can not check on which institutions and doctors have made mistakes. And, even the Federal government can not access the NY data under most circumstances. Notwithstanding all of those protections for the doctors and hospital, many mistakes are not reported. This is what I call the conspiracy of silence. The government and the medical profession believe that consumers and voters are not entitled to know anything about such matters which would have an important impact on the choice of physicians or hospitals, and whether to pursue an alternative course of treatment rather than risking radiation therapy.

A physician to one of the patients who was killed had recommended surgical intervention rather than radiation. The patient chose radiation, received a fatal overdose after a series of mistakes, and died an excruciating death. As the NYT described it, the relatively young man lost his hearing, struggled to see, had his teeth fall out with ulcers in his mouth and throat, suffered horrendous pain, and ended his life unable to breath. You would think that doctors would be cautious knowing the consequences.

6. Intel (owned): Notwithstanding my statement in Saturday's post that I will pause buying common stocks for 30 days due to last week's action in the VIX, I may add 50 shares of Intel provided my purchase can be made at lower than $20. Barrons has a favorable article on Intel, written by Jacqueline Doherty, worthy of a read to anyone who owns the stock or is contemplating buying it. Some of what she says dovetails with comments made by Abby Cohen during the Barron's Roundtable, to the effect that there is likely to be a refresh cycle in both computers and servers among businesses. Abby pointed to a Goldman survey, completed a few weeks ago, that 75% of companies indicated a pent-up demand for computers. The average age of computers used in businesses is around 4 to 5 years. The introduction of Windows 7, which has been favorably received, is a plus for this upgrade cycle. An analyst from UBS, cited by Doherty, has a $30 price target on Intel based on a discounted cash flow analysis and a 17 multiple on his earnings estimate for 2010.

The $30 price would be about twice the average cost of my first three purchases in 2009, INTEL AT 15.87 INTEL at 15.25: Intel at 14.46 I then started to average up after gaining more confidence in an economic rebound and an acceleration in Intel's earnings. Added to Intel at 19.08. Intel did just raise its dividend by 12.5%: WSJ

Most likely, I would be a seller in the $26 to $30 range based on the historic cyclicality of Intel's business. I generally would be hesitant to place a 17 multiple on what may be peak earnings from a cyclical company. The consensus estimate for 2011 is $1.79. If I slap a 15 multiple on that estimate, I come up with $26.85 which seems to me to be a more reasonable target for 2010.

7. 2009 Bond Mutual Funds: In 2009, TrimTabs reported that investors poured 421 billion dollars into bond funds and withdrew 35 billion from stock funds. As I have discussed many times, I do not believe that most individuals have a good idea about the risks of bond funds. See item # 2 /Interest Rate Risks- Bonds A 1% rise in long treasury rates in 2009 caused a 12% decline in Vanguard Long Term Treasury Fund: VUSTX

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