Thursday, January 21, 2010

Sold 300 RJI at 7.6/MI BAC PSEC SLM/Housing Starts/Bought 100 TAXI at 8.17

1. Sold 300 RJI at 7.6 Yesterday (see Disclaimer): RJI is an ETN that gives me exposure to a broad basket of commodities. I sold my entire stake yesterday. Those shares were bought in two lots, with the first 100 shares bought at $5.97, bought rji, and the second lot of 200 bought after a rally in RJI at $6.71 after I sold a competing product, GSG. Bought RJI ; (item # 7: Sold GSG)

2010 RJI 300 SHARES +$309.76
Yesterday, around noon, I pulled up a chart of the Dollar Index, DXY, and drew a 200 day simple moving average line which showed 77.59. Based on that chart, it appeared that DXY had broken its 200 day line to the upside, trading at 78.35 when I sold RJI yesterday afternoon. Since the commodities' index had been moving inversely to the dollar since the start of their bull move in March 2009, I thought that it was best to pare my commodity exposure some. I currently own the ETNs RJA for agriculture (150 shares only), 200 GRU (wheat, corn and soybeans) and 100 LSC which is a long/short commodity fund. I also own 200 MKZ which is a note whose interest rate is linked to the commodity index with a few twists and turns described in earlier posts. Bought 100 MKZ at 9.91 in the Roth IRA MKZ vs. MKN

The only reason for my success at trading commodity ETNs over the past two or so years is that I take good percentage profits when I have them. And, I at least try to buy after a correction, and sell into a bull move. I am not much of a commodity trader. I did watch last night an interview with Dennis Gartman on Fast Money who was bullish on the dollar and negative on commodities: (3 minutes into the video). DXY is now trading above its 50, 100 and 200 day moving averages.

I have previously established small positions in the double short ETF for the Euro (EUO) and the double short ETF for gold. Sold BWX at 59.38/Bought 50 EUO at $17.17 as a Hedge /Added to Gold Hedge with buy of 50 GLL at $8.49 Bought 50 GLL I have also timed the elimination of my holdings in foreign bond ETFs based on the movement of DXY. I no longer have a position in BWX and WIP, both of which are viewed as primarily bets against the dollar rather than income generating securities.

2. Marshall & Ilsley (MI) (owned-LT, Category 1 Regional Bank Strategy): I have zero confidence in the management of this bank. Yet, I own just 50 shares bought as a Lottery Ticket, recognizing that it may recover with an improving economy notwithstanding their management. MI reported a loss of 54 cents per share for the 4th quarter of 2009, worse than the consensus estimate of a 48 cent loss. The loss for 2009 was 858.8 million or $2.46 per share. The bank lost $7.92 or 2.056 billion in 2008 which included a 1.487.9 billion impairment charge after tax. The allowance for loan losses increased during the 4th quarter to 3.35% of total loans and leases. The net interest margin was only 2.95%. The Bank's CEO, Mark Furlong, said in the release that there are "some encouraging signs that credit quality has stabilized and core earnings trends have improved". MI ended the year with a tangible equity ratio of 8.2% up from 6.4% at the end of 2008. MI did sell 136 million shares at $5.75 in October. Marshall & Ilsley This was a highly dilutive share issuance at a price prevalent in 1991, a disaster for long term share holders: NEW M&I CORPORATION Share Price Chart | I bought 50 shares in December 2009 after this share issuance, and after the bank's management had lost almost 20 years of price appreciation in the stock Bought 50 MI at 5.84-Speculative Lottery Ticket Book value was listed at $10.21 down from $17.58 in the end of 2008.

MI did rise after the release of these results in yesterday's trading.

3. Prospect Capital (owned): Prospect Capital has made a last minute bid to acquire another BDC ( WSJ) , Allied Capital that is in the process of being acquired by Ares. Allied Capital rejected the bid and urged its shareholders to vote in favor of the Ares proposal. I discussed PSEC when I made my last purchase in an IRA. Bought 50 PSEC at 10.48 I own 150 shares in a taxable account. PSEC has done well since that last purchase closing yesterday at $13.2 and yielding over 13% at that price. The better performance of the BDC sector stocks recently encouraged me to add another one, TAXI, discussed below.

4. Housing Starts: The Commerce Department's reported that housing starts fell 4% in December from the revised November estimate. While this is referred to as unexpected by analysts, I would expect new construction to suffer until the excess supply created by foreclosures is absorbed by the market. Cold weather probably also played a role in the slowdown of new construction.

5. Bonuses: I am curious about a lot of things. Possibly, at this moment in time, I am curious about how the large financial institutions justify paying huge bonuses after losing money in 2008 and 2009. Morgan Stanley reported a loss for 2009 and will pay out 62% in net revenue in salaries and bonuses. WSJ Yesterday, Bank of America reported a greater than expected 4th quarter loss of 5.2 billion and a 2.2 billion dollar loss for the year. NYT You have to dig into the report to find the net loss number for the year since the headline number indicates "net income" of 6.3 billion in 2009. The last report that I read about BAC bonuses suggested that they will be close to what was paid out in 2007 before the start of the recession. Bank of America bonuses

David Stockman, Reagan's budget director, had an interesting column in NYT about the bonuses. Stockman correctly points out that the zero interest rate policy of the Fed is causing about a 250 billion annual reduction in interest paid to the savers and responsible Americans. This gives an artificial boost to the banks, in what amounts to interest free loans, and creates another bonanza for them on the steep yield curved reflecting the spread between their cost of funds and the interest payable by their borrowers. Stockman is advocating a more sensible federal reserve policy that is based on "sensible" interest rates and an end to the monetization of the ballooning federal deficit. But, since this does not appear to be an approach favored by the Federal Reserve, he has no problem with reigning in the "dangerous institutions" by taxing some of the big banks liabilities as proposed by Obama.

But, whatever the solution, it is clear to me that the savers are in essence financing the 145 billion that the Masters of Disaster will be paying themselves in bonuses for 2009, indirectly, but paying for it nonetheless. To the extent that any of the Masters of Disaster made money for their firms, I would submit that most of them owe their recent trading profits to the good graces of our Uncle Sam and Uncle Ben, along with the saps who are savers, spend responsibility and pay taxes without causing harm to the very fabric of the financial system from time to time.

6. New York Times: The NYT is one of the papers that I read everyday, and I subscribe to the print edition. Starting in early 2011, the NYT will start charging non-print subscribers a flat fee to view more than a few articles per month. NYT

7. SLM (own CPI floater OSM only): Sallie Mae reported 4th quarter income of 41 cents per share on a core earnings basis and 52 cents based on GAAP. The consensus estimate for core earnings was 44 cents. I am fine with the report as an owner of a senior bond maturing in March 2018.

8. Bought 100 TAXI at $8.17 Yesterday (see Disclaimer): This buy is emblematic of just how far I am willing to go to find a security with a decent yield. Medallion Financial Corp (TAXI) is a BDC and hence is obligated to pay out at least 90% of its income to shareholders. This is why the current yield at my cost is close to 9.3%. Medallion is a specialty finance company whose main business is taxi medallion loans. About Medallion Diluted income per share fell to 16 cents per share for the Q/E 9/09 from 23 cents in the year ago quarter. Form 10-Q The breakdown between the taxi medallion loans and other commercial loans is set forth at page 30. The medallion loans constituted 68% of TAXI's loan portfolio as of Q/E 9/09.

This video interview with the President of TAXI was interesting: Street TV

The company pointed out in its last earnings release that it had paid out $9.10 a share in dividends since its initial public offering in 1996: Medallion Financial Corp.

9. Bank of America (own common, TP, and equity preferred): What can you say? Boy, these big financial institutions can lose a lot of money fast. Some say that only death and taxes are for certain. I would add to that litany the fact that bankers will blow up their institutions multiple times during the course of an individual's life. It would be exceedingly foolish to hold their common stocks and forget about them for the long term. Over a long term period, the managers of most of them will destroy the enterprises and make a great deal of money doing it. Just in my lifetime, there has been multiple near death experiences among the banks, with many failures along the way. So, when I say that I am thinking long term on my regional bank strategy, I am not talking 15 or 20 years, but five to ten. If I let some of those stocks run for more than ten without selling them en masse, I risk losing all that I hope to gain with this strategy. This means that I will have to sell after a long period when the banks appear to be prosperous, well run, and when the dividend yields look sumptuous based on my cost. With the passage of time, the risks of owning them increase rather than decrease, and the only question is whether they will implode again in 10 years or sooner, or at some point during the next 10. It will happen again. Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets Duality of Long Term Risks

At least the big banks are starting to sound a tad optimistic that the worst is over, and that consumer credit losses have started to stabilize. NYT

10. Berkshire (own Baby Bs): As expected the Berkshire shareholders approved the 50 to 1 split of BRK-B: Those shares rose $144 per share yesterday. The options are being adjusted to reflect this split today: Reuters

11. Cap and Trade: I suspect that the stunning defeat of the Democratic candidate for the Senate in Massachusetts by a relatively unknown state senator will most likely be the end of any cap and trade legislation. Bloomberg It is possible that some of the utility companies that have fallen some in price on concerns about this type of legislation may start to recover some lost ground. It is interesting that the bluest of the blue states will be so disruptive to so many liberal objectives, ranging from health care to environmental policies. On health care, the Democrats in the Senate have no one to blame but themselves for dithering for almost a year, an observation made by E. J. Dionne in his recent WP column. Nonetheless it is interesting that Massachusetts put a stake in the heart of Ted Kennedy's lifelong dream.

12. China: China's GDP increased at a 10.7% rate in the fourth quarter, compared to the same quarter a year ago, more than the consensus estimate and the fastest rate of growth since 2007.

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