Wednesday, January 13, 2010

Sold All of GCI/What Do I Mean by Preservation Of Capital/Bought 100 STLPRA at 8.87

1. Andrew Sorkin: In Sorkin's column in yesterday's NYT, he has some good questions worth asking to Lloyd Blankfein at the first hearing of the "Financial Crisis Inquiry Commission". I am not sure that this Commission, headed by Phil Angelides, will shed much light on the Wall Street activities that led to the Near Depression, beyond what we already know, but possibly the inquiry would shed some light on the actions of the Masters of Disaster, doing 'God's work' at a few million a year ( FCIC - TIME) Sorkin would be a good person to have on the panel asking questions.

2. Sold Gannett at $17.10 Yesterday (see Disclaimer): I did not want to press my luck on GCI any further. My 109+ shares have had an enormous run since March. I looked at my account and was struck by the return on one reinvested dividend. On 4/1/2009, the return shown in the account was 588% on 1.697 shares bought with a dividend that day, at a cost of $2.24. Wow! As Headknocker said in a recent post, maybe one of the Head Traders could have bought more shares at that price. (Item # 1 Gannett) In the last analysis, I do not have much confidence in the long term viability of the newspaper business.

3. Alcoa (owned): I am also going to sell the Alcoa shares before the end of 2010, but I am going to give that company more time to get its act together. The sequential increase in revenues is a positive. UBS did increase it price target yesterday to $18. Many of the analysts also remained positive about AA, as summarized in this WSJ story. I am not a fan, and my small position is on the chopping block. And, like the buys of GCI, I bought shares of AA only when they appeared to me to be deeply undervalued by the market, with the last purchase made at $5.6.

I heard Cramer say last night that he thought Alcoa was a buy. I would not go that far. (4:28 into this broadcast- I view my meagre number of shares to be a hold at $15.5, worthy of a possible add in the $10 to $12 range. A more bearish slant on Alcoa's report is contained in this WSJ article. The top line surprise was due to trading in aluminum which was done at low profit margins.

4. Applied Materials (owned): AMAT was upgraded on Monday by FBR Capital markets to outperform, based on expected growth over the next two years. MarketWatch AMAT had a 4.5% pullback in yesterday's trading. This may have been a reaction to the forecast made yesterday by the number two chip equipment maker, Tokyo Electron (Quote:, for orders to be flat for the current quarter with the last 3 months of 2009. This company also said that its orders for flat display and solar panel equipment fell 86% during the 4th quarter as customers requested delays in delivery. Reuters Total orders increased by 17% during the October-December period.

5. What Is Meant by Preservation of Capital?: I was born in 1951. I went to the Minneapolis Fed web site to calculate what it would cost me in 2009 to buy goods or services which would have cost me $1 in 1951. The answer is $8.2: The Federal Reserve Bank of Minneapolis My father was born in 1921 and is still alive. I did the same calculation for him, using the BLS calculator (CPI) and it gave me $12.09. So, when I ask myself what do I mean by preservation of capital, I am referring to something more than Mark Twain's famous saying about the return of my money. I include within the definition of preservation of capital to be the return of my money after taxes and adjusted for inflation. In other words, I try to avoid money illusion which views returns only in nominal dollars. Possibly a view of this chart once a week may be the medicine needed to cure investors of thinking in terms of nominal dollars: St. Louis Fed: Series: CPIAUCSL, Consumer Price Index For All Urban Consumers: All Items

Over long periods of time in the U.S., inflation has averaged 3% per year, sometimes a lot more and occasionally a lot less. I just lifted that number from John Gibson's book "Asset Allocation" which covered only the period from 1926 to 2005. Over the next 20 years, it would be reasonable to expect a few hot CPI years, and even a few years with negative CPI numbers. When I plan now, I need to make some kind of forecast about future inflation rates, simply to have a ballpark number of what my investments need to earn after taxes to keep me constant in real dollar terms. Thus, just to preserve capital with a 3% annualized average rate of inflation over the next 20 years, I will most likely need to earn 3% per year after taxes just to stay even. Needless to say, at a 4% annualized average rate, it would be worse. Over 30 years the purchasing power of a dollar after a 4% inflation rate would be around 31 cents.

But, most retirees would need to do better than to merely preserve capital as defined above. Funds would be needed to pay bills which would deplete capital. If the 10 year TIPs bond had been bought at auction yesterday in a retirement account, I would be protected against the loss in purchasing value of those dollars provided the security was held to maturity. However, the coupon of just 1.43% in addition to that inflation adjustment for my original principal does little to advance my overall nominal cash position after ten years. Still, I view TIPs bought at the treasury auction to be an alternative for preservation of capital, and then some, but I want more than that 1.4% or so real rate of return.

With the long bonds which I intend to keep, I have locked in a 7% or greater real return (before taxes for those held in the taxable account) per year over the next 18 to 28 years, depending on the bond, and that is why I will keep them provided I remain comfortable with the credit risk. I seriously doubt that a stock jock extraordinaire will equal that kind of return over such an extended period. And, my return is guaranteed provided the firms survive to pay me. I like that guarantee of current yield, year in and year out, plus the prospect of being paid par value for bonds bought at deep discounts at their respective maturities. So, if the bonds fall in value in a few years as a result of an inflation scare, taking away some of unrealized profits based just on the share price, I will take that risk, and may use it as an opportunity to buy more assuming I still have comfort with the credit risk.

6. Bought 100 STLPRA at $8.87 (see Disclaimer): I just sold 50 shares of this security at a small profit in the regular IRA shortly after the ex interest date (Sold 50 STLPRA at $9.4), and decided to bring my position to 150 shares by buying 100 in the taxable account yesterday. I also own 50 shares of the common, STL, as part of my Regional Bank Stocks' strategy. I would just refer to my previous posts explaining this security. (item # 4 Bought 50 of the TP STLPRA) It has a $10 par value, a 2032 maturity date, and a coupon of 8.375% paid quarterly. My yield is around 9.3% at the $8.87 price. Even at a 9.3% yield it will take 7.79 years to double my money before taxes. Estimate Compound Interest

7. Michele Bachmann-Sarah's Soul Sister: I am not going to say that Michele has never told the truth about matter of public concern. I can only say for certain that I am not aware of a single example. When she appears on Sean's show, any absurd and patently false statement made by her will either be endorsed and not challenged by Hannity as you would expect. PolitiFact does document some of her "Pants on Fire" False and Just Plain False statements. As far as I can tell, telling the truth is not one of those Christan values adhered to by many who wish to be called conservative since a more appropriate label would sound less appealing to them.

8. National Federation of Independent Businesses: The NFIB released its survey for December, which continued to show serious and significant problems among small businesses. .pdf The optimism index fell .8% to 88.3, and has remained below 90 for six quarters, for greater than the one quarter below 90 during the 1980-1981 recession. The small business job generating machine is still operating in reverse. In November of 2009, small businesses shed .58 workers with 21% reducing workers by an average of 4.2 workers per firm. This survey continues to be disconcerting.

No comments:

Post a Comment