Saturday, February 27, 2010

Bought 100 of the CEF NFJ at 15.15/Sold 100 of the TP STLPRA at 10.25/Sold 50 of the 150 IAE at 18.03/Greece/ Unum Bonds/GDP/Existing Home Sales/PBIB

Senator Bunning, a Republican from Kentucky, is utilizing a Senate rule to prevent the extension of unemployment benefits that will expire for many Americans this weekend. But, Senator Bunning let it be known to the bleeding hearts that he was sacrificing too, in that he had to miss a Kentucky basketball game to do his duty on the Senate floor. ESPN BusinessWeek

The republican governor of Nevada, Jim Gibbons, denied that he took his alleged mistress with him to the recent governor's conference in Washington, D.C. Unfortunately, a photo showed up of him, posing with her, and none other than the infamous republican governor from South Carolina, Mark Sanford, the one with the Argentine firecracker mistress ( YouTube Sanford's Latina Lover Press Conference) and one of the beacons of conservative family values. Politics Las Vegas Now Those liberal mainstream pinko commie, effeminate girlie men media folks can sure be annoying for the family value, Christian politicians. And those reporters can really go too far when one had the nerve to ask the Nevada governor whether the lady, not his wife, accompanied him to D.C. and he said no. And then pointed to her stepping out of the same plane and getting into a state owned SUV with him. No wonder the Nevada governor was pissed when he vehemently denied she was on the plane (see the unbelievable video embedded in Las Vegas) What ever happened to Senator Larry Craig? Sometimes, these clowns make Bill's testosterone levels look tame in comparison.

1. Greece: Greece has about 20 billion Euros of debt maturing in April and May. Altogether Greece has to refinance 53 billion Euros in maturing debt this year. The NYT states that Greece will try to sell 3 billion euros of 10 year bonds next week in Europe. It has postponed its offering to investors in the U.S. and Asia. It is not trying to raise that relatively small sum in an auction however, and that is in itself a bad sign. The Greek government is concerned that the auction might fail and that would be devastating for that nation. Instead, the Greek government representatives are meeting with institutional investors in an effort to arrange a private placement according the the NYT story. It is also interesting that the Times states as a matter of fact that Goldman Sachs helped Greece disguise it debt by "essentially" transforming "loans into currency trades that Greece did not have to disclose under European rules". There were some reports on Friday about Germany using one of its banks to buy Greece's bonds. If that proves accurate, I would consider it to be an emergency action to keep an implosion from happening before anything can be done to salvage the situation.

2. Existing Home Sales: The National Association of Realtors reported yesterday that new homes sales fell 7.2% seasonally adjusted in January. At the current sales pace, the inventory represents a 7.8 month supply. Distressed homes accounted for 38% of the homes sold last month. The expectation was for a slight increase:

3. GDP: The Commerce Department did revise its estimate on Friday for 4th quarter GDP to an annualized rate of 5.9% from 5.7%: News Release: Gross Domestic Product While this is a positive, it is nonetheless a historical number. The main question is what happens after the government's fiscal stimulus winds down and the inventory restocking cycle ends.

4. Porter Bancorp (owned- Regional Bank Stocks strategy): Porter Bancorp declared its regular 20 cent quarterly dividend. In a prior post, I mentioned that Porter had reported disappointing earnings for the 4th quarter after the market closed on a Friday. The bank was expected to earn 44 cents and reported a 3 loss instead. This was due in large part to a 58.6 million increase in nonperforming loans to 84.9 million. The bank explained that this "aggressive" action was due to a review of its loan portfolio in light of the prolonged weakness in the economy, its concentration on real estate loans, and the impact of the downturn on real estate values. Item # 6 PBIB This raised a suspicion in my mind that the bank had been sandbagging its loan loss reserve, but it is hard to know one way or the other. I decided to stay with PBIB as long as it maintained its dividend.

The regional banks will generally have a large book of real estate loans. For loans on commercial real estate, where the owner leases to tenants, it would be fairly typical to have a loan term of 3 or 4 years. So, loans made before the real estate bust would need to rollover for many borrowers this year. Some of those borrowers have lost tenants and/or have had to reduce rents to keep an existing tenant. While the borrower may still be current on the bank loan, the property now has negative equity and it is hard to keep up with the payments. The result is that many current loans for these small banks may soon go into default, and the bank would be unlikely to recover the full balance of its loan after foreclosure. And for residential real estate, losses on foreclosure have been commonplace.

5. Unum (own senior bonds only in TC form): I switched from owning the TC with a senior bond issue from one that contained a junior bond after noting a pricing discrepancy. bought 50 pjr at 16.72 ADDED TO PJR at $20.70 The senior bond, which matures about a decade sooner in 2028, was then yielding more than the TC with the junior bond. After Unum Group reported its 4th quarter results, Fitch upgraded its rating on the senior bonds to BBB from BBB- Unum Group While I have no interest in buying more of Unum's debt, I checked Friday and noticed that PJR, the TC with a senior bond, was yielding about the same at the then current prices as the TCs with the junior bond. (Compare: PJR Stock Quote - Preferred Plus Tr UPC-1 7.4% with KSA Stock Quote - Corts Tr Provident Fing Tr I CORTS 8.50% Stock Quote)

6. Deficit Commission: The Senate failed to pass a bill that would authorize a Commission to examine ways to reduce the deficit. The republicans voted against it. Mitch McConnell, the GOP Senate leader, was for the commission until the Beanpole said he supported it. (" Senate Minority Leader Mitch McConnell turned against a GOP-inspired plan for a deficit commission once Obama endorsed the idea." ) No republican can be seen supporting anything favored by Obama so Mitch decided to oppose the formation of the deficit commission. So, Obama formed one on his own by executive order and the nominees to the panel have now been named. WSJ The objective is to find ways to reduce the budget deficit to 3% of GDP by 2015. Sitting members of Congress will make up 12 of the 18 members of the panel, and the politicians know what has to be done. The problem is a lack of political will to make the tough decisions and a desire by both tribes to basically give everyone most of what they want without paying for it. The formation of a commission is just another Washington trick to punt the hard choices and kick the can down the road, postponing the day a little further when there will be no choice but to make the hard choices.

7. Powershares ETF for Closed End Funds: I do not own this new ETF. This ETF has around 70 closed end funds as its holdings. PCEF - CEF Income Composite Portfolio Holdings So, it has the expenses of the acquired funds of 1.31% and a management fee for Powershares which together would equal close to 1.81% based on the current configuration. - CEF Income Composite Portfolio - PCEF I have my own portfolio of closed end funds which I have selected with 31 holdings, sort of a portfolio within a portfolio. And, I do not have to pay a management fee to myself. I also pay a lot of attention to selecting CEFs with lower expense ratios so my average expense ratio would be less than 1%. I did look at the portfolio and saw about 8 names that overlapped with my own. I did see a fund in the list of holdings that was new to me. I looked into it and bought 100 shares of NFJ on Friday, bringing my total number of CEFs now to 32.

8. Bought 100 NFJ at $15.15 (see Disclaimer): The CEFs have to file their reports with the SEC. I looked at the last filed report by the sponsor of this CEF, which was for the period ending on 10/31/2009, and liked its conservative equity focus. -- (NFJ) Dividend, Interest & Premium Strategy Fund As of that report, 71.7% of the portfolio was in common stocks, 13.9% in convertible bonds and notes, and 12.1% in convertible preferred stock plus 1.9% in cash. The fund does do some index option writing. I found the expense ratio in its annual report filed with the SEC at page 26: .97%: I did not see any leverage. The current yield at my cost is close to 4% paid quarterly. I also checked the latest information on its discount to NAV. I found that information at the sponsors web site, NFJ Investment Group, part of Allianz. Allianz Global Investors: Closed End Funds | Performance As of 2/25/2010, NFJ was selling at a 14.7 discount to NAV.

9. Sold 50 of the 150 IAE at 18.04 (see Disclaimer): IAE is a CEF that focuses on higher yielding Asian stocks. The shares sold on Friday were in the Roth and were up about 80% since the acquisition in that account in the Fall of 2008. While this CEF pays a generous dividend, my overall appreciation with the dividend would be close to 90% in less than 1 1/2 years which is a reason, at least for me, to trim. Another reason is that the CEF was bought at a good discount to net asset value and is currently selling at a premium to its NAV. ING Asia Pacific High Dividend Equity Income Fund - Overview I am not going to change the way I manage my CEF portfolio which is to sell positions when there is either a substantially narrowing of the discount to NAV or a transition from a discount to a premium. Lastly, I have been transitioning the retirement accounts to fixed coupon and synthetic floating rate bonds with guarantees, along with REIT common and preferred, and a few non-synthetic floaters like AEB, PFK and METPRA primarily for the inflation hedge of those securities. While I am now up over 30% in the retirement accounts since October 2007, adjusted for subsequent contributions by substracting those contributions from the existing balances, I did not care for the effort that had to be made to get myself back to even which took a lot of time and effort over about 18 months. I do not want to do that again. Where can I send my bill at a reasonable hourly rate to the Masters of Disaster?

10. Hedged Remaining Stock Positions in Retirement Accounts: Late Friday I created a short term hedge by using a double short ETF for the remaining stock positions in my retirement accounts. I do not want to sell the any of the remaining positions except for AT & T in the Roth at some point. An example would be a position in DuPont bought at $16 and change during the meltdown and yielding almost 10% at my cost. I would have to say that I am becoming increasingly concerned about the lack of net new jobs and the recent information about housing. The tightening of credit in China and the apparent slowdown already underway in Europe add to those concerns.

11. Sold 100 of the 150 shares of STLPRA at $10.25 (See Disclaimer): This trust preferred issue was sold after it popped on Friday above its $10 par value. This is the second time this security has been sold on a pop. The shares were recently purchased in mid January at 8.87.

12. Dividends and Interest: I noted the following dividend and interest declarations at the WSJ dividend page for securities that I own. The TC XKK with a Goodyear Tire senior bond goes ex interest with its semi-annual interest payment on 3/10. MJH, a TC with a Bank of America TP as the underlying security, goes ex interest for its quarterly payment. MJH was a good buy at a price to yield close to 25% per year until the bond matures. The yield would be at my cost of $7.51, the security closed Friday at $23.05. MJH Enerplus (ERF), a Canadian energy trust, goes ex dividend on 3/8 with its monthly dividend. I hold my shares in Canadian dollars and receive the dividend in Canadian currency without converting it to dollars. GDV, a CEF, declared its monthly dividend distribution dates for April-June. VNOD, a senior bond from Vornado and a recent buy, goes ex interest for its quarterly payment on 3/11. Added 50 VNOD at 24.65 in the Roth UZV, a senior bond from U.S. Cellular and another recent buy, goes ex interest for its quarterly payment on 3/10. Bought 100 UZV at $24.42 JWF, a good buy on a meltdown, is a Wells Fargo TP that will pay me based on my cost of $9.15 close to a 15% annualized yield until it matures in 2034. Buys of JWF KSA DIS and NYX/ Just a Day of Ignoring My Own Rules It goes ex interest for its quarterly payment on 3/15. GFW will go ex interest on its quarterly payment on 3/11. The ASBC TP, ABWPRA, goes ex on 3/10 with its quarterly interest payment. /Added 50 ABWPRA at $19.42 Other securities making dividend declarations include the aforementioned Porter Bancorp, STLPRA (still own 50 shares), WSBC and WIBC. I also noticed that Waste Management increased its dividend from 29 cents to $.315. Piedmont Natural Gas, another security that is frequently owned for brief periods here at HQ, also increased its dividend by a penny to 28 cents.

Friday, February 26, 2010

Rampant Medicare Fraud/Added To AT & T at 24.75/Aegon Earnings/Sold 70 of 170 of JDD/Jobs & Mortgage Applications/Sold 50 RRST at 10.43/Sold 100 IGK at 23.55

Given the news yesterday, I thought the market did well to lose only 53 points.

I am not sure what the Beanpole was trying to accomplish yesterday in the confab with the Republicans about "health reform". The meeting did show again how politicians of both Tribes have trouble with their facts Senator Alexander from Tennessee was, as I expected, the leader in making factual errors. Health Care Summit Squabbles | (and see Krugman's comments on Alexander: Yes, I did vote for him. Senator Alexander at least appears to know what he is talking about, with that serious professorial glumness.

There is after all a basic philosophical difference between the two tribes on this issue. The Democrats want to transfer wealth from the Republicans constituency to help pay for health insurance for those who normally vote Democratic and the Republicans object to that plan. I do not see how that gap can be bridged with a compromise.

What is lost in that debate is the absence of a protracted effort by all sides to eliminate waste and fraud in the medicare system, which should be separate and apart from the issues that divide the two parties. While the exact number lost to fraud is debatable, it is without question a very large sum measured in the tens of billions: PolitiFact Medicare fraud Most of the medicare fraud exposed in a recent CBS news story could easily be stopped with better enforcement, stiffer penalties for the fraudsters and a certification process for those engaged in medical supply to screen those seeking to bill the government.Medicare Fraud: A $60 Billion Crime - 60 Minutes - CBS News

Politicians only talk about eliminating fraud and waste to get elected, and then do nothing. Invariably, when I hear a politician like that new senator from Massachusetts talk about eliminating fraud and waste as the way to control government spending, and then further advocates reducing taxes, it is simply a ruse to distract voter's attention from the candidate's unwillingness to tackle the major spending problems and to give the voters everything that they want, since any discussion about tackling the real spending problems would cost the candidate votes. When the nations is running trillion plus dollar deficits, eliminating fraud and waste, even if it was possible to do so to the last nickel which is of course impossible, would still leave a gaping trillion plus dollar hole.

Yes, the Republicans say they want small government, but then that does not include cutting defense spending (who is responsible for the Iraq war), medicare, and social security. Interest on the national debt is off the table for obvious reasons unless the GOP wants the U.S. to default on its debts. Well, I just identified where government is really big, by far the four largest categories of expenditures. (see page 26: .pdf) Maybe they want to eliminate money for federal prisons and education. So, in short, the GOP members know that any serious effort to cut spending where it matters would ultimately result in a landslide victory for the Democrats during the next election cycle, so just talk about eliminating waste and fraud, then talk some more. Better not actually do anything about it however. Why? If a concerted effort was made to substantially reduce waste and fraud, then what would they talk about next as the way to reduce spending?

1. Unemployment Claims: The Labor Department is scheduled to release its unemployment report for February on March 5th. Some of the recent data is far from encouraging. The Labor Department reported a few days ago that the number of mass layoffs swelled to 1,791 in January that resulted in the "separation" of 182,161 workers "seasonally adjusted". Mass Layoffs Summary Yesterday, the Labor Department reported that seasonally adjusted initial claims for unemployment insurance rose to 22,000 from the previous week to 496,000. ETA Press Release: Unemployment Insurance Weekly Claims Report Some analysts blamed the weather for the jump. Maybe the snow had something to do with it. Still the four week average is still well above a level which would indicate net hiring in the workplace.

2. Mortgage Applications: The Mortgage Bankers Association reported that mortgage applications decreased by 8.5% for the week ending 2/19: Mortgage Applications Decrease in Latest MBA Weekly Survey This is happening even with the housing tax credit, low mortgage rates and a substantial correction in prices. In the Commerce Department's report on new home sales, it was estimated that the inventory of new homes rose to a 9.1 months supply at the current sales rate.

3. Aegon (own common as a Lottery Ticket & its hybrids): AEGON reported a profit of 393 million Euros for the 4th quarter, beating the forecast of a 150 million euro profit. Its underlying pretax profit was slightly better than estimates at 427 million Euros. After paying back the Dutch state in the 4th quarter 1 billion Euros plus interest and a premium for repayment, Aegon ended the quarter with excess capital above the S & P AA capital adequacy requirements of €3.7.

4. SOLD 70 of the 170 shares of the CEF JDD in Roth (see Disclaimer): This was profit taking. The 70 shares sold yesterday were part of a 100 share lot purchased last August at $8.4, and I have received two quarterly dividends on those shares to date. Item # 6 /Bought 100 JDD in Roth

5. Sold 50 RRST at $10.43 (see Disclaimer): The shares in this Israeli company were purchased recently at $9.92, so this was a negligible profit on the shares plus a dividend payment. Bought 50 RRST at $9.92 The funds were deployed yesterday in the short side of the Long Short strategy with a sector double short purchase.

6. Long Short Strategy (see disclaimer): With the double short sector ETFs, I am trying to identify stock sectors that have had tremendous run ups in price since March 2009, which has of course devastated the prices of several sector double shorts to single digit levels. A continued increase in price in those stock sectors would, in my opinion, have to be based on a robust expansion going forward. While the sectors may continue to increase in price in the near future, I hope that the double shorts for them will give me the most bang for the buck as hedges in the developing long short strategy. As previously mentioned, I have only a cash account, so I am not set up for short sells, and I do not trade options. This leaves me with the Proshares products as a default option. If I bought an out-of-the-money put on an index, I could easily lose the entire sum. At least with the double short ETFs that I am buying, I may take a loss but not a total one, and I trying to exercise a few brain cells in selecting ones with less downside risk at this point in time.

7. TIPs: This is a link to a worthwhile article at Morningstar that highlights an issue with TIPs. While the principal amount of the TIP bond is adjusted for inflation, this may not protect the investor for a rise in interest rates that is not associated with the percentage rise in CPI. The real yield on a ten year TIP (coupon rate) is just 1.5%. The difference between that real yield and the nominal yield of a non-inflation protected bond is called the breakeven point, that is, the amount amount of inflation needed per year to break even with the nominal yield on the 10 year treasury which is currently around 3.64%: Government Bonds The breakeven point on the 10 year TIP is the market's current anticipated average rate of inflation for the next 10 years which is about 2.15%. Real yields in the 1990s on TIPs were in the 3 to 4% range. If inflation starts to rise, and the market reprices what it wants in terms of a real yield to a higher level than the current 1.5%, the older TIP will have to fall in price to remain competitive with the new offerings.

The author of the Morningstar article estimates that a rise of 1% in real yields will cause a 6% loss in a TIPs portfolio with an average duration of just six years. Another issue that I have discussed frequently is whether or not the market is pricing the breakeven point correctly. It is after all an estimate of inflation, and the market does make a prediction on future inflation that proves to be wrong. In the later part of 2008 for example, the TIP was being priced with the prediction of an average inflation rate of zero. Advantages and Disadvantages of Treasury Inflation Protected Securities TREASURY INFLATION PROTECTED BONDS (TIP)

I sold my TIP ETF based on concerns about the current price of the TIP. Bill Tedford's Inflation Prediction & His Sell of TIPs /Sold All Shares TIP ETF I do not have the same concern about my direct purchases at auction of the 10 year TIP, as far as potential loss of my principal. 10 Year TIP Auction For those bonds, I can hold to maturity and receive my original principal back, as adjusted by the inflation/deflation numbers over their ten year life. What I may lose is just the opportunity to invest the same amount later at a higher real yield. For a TIP bond fund, that is not an option. Remember, the bond fund has no maturity date.

8. Sold 100 IGK at $23.55 (see Disclaimer): This hybrid issued by ING was ex dividend yesterday. It was the last ING hybrid that I bought after I started to trade them in October 2008. ING Preferred Stocks (Hybrids): Links in one Post I am just uncomfortable with what is happening in Europe now, and I was intending before year end to reduce my exposure in ING hybrids anyway. Soon after I bought IGK on 8/13/2009, the price took a swoon after the market digested what the EC was doing with its burden sharing policy and the possible impact on the hybrid owners, a frequent topic in this blog for several months thereafter. I bought the IGK shares at $22.04 and the price soon collapsed to a close of $14.98 on 8/27. IGK: Historical Prices for ING Group While the EC and ING have reached a settlement that permits ING to continue making distributions to its hybrid owners ( item # 2 More on ING), ING still has issues. I still own shares in INZ, IND and IDG. For purposes of weighting the European hybrids in my portfolio, I prefer to give more weight to the ones from Aegon than ING.

The 4th quarter report from ING did not inspire much confidence in me: Item # 3 /ING/ And ING still owes a lot of money to the Dutch government, having paid back one-half of the 10 billion in Euros of bailout funds. And maybe one of my Dutch readers can explain this press release about ING appealing part of the EC's ruling approving ING's restructuring plan: ING to appeal against specific elements of EC decision - ING I just came across this press release after I sold IGK yesterday morning, so it played no role, and I do not know what to make of it. It does not appear as a listing at Yahoo Finance or the other financial services that I routinely consult for news about my holdings. I do know that the European hybrids have been a rewarding holding for me, though they have taken up an inordinate amount of my time trying to figure out the implications of European policy such as burden sharing while sitting at a desk in Brentwood, Tennessee.

I also try to identify how psychological issues can impact my investment decisions. The LB of course has no psychological issues, never has and never will, but the Old Geezer carries a lot of that kind of baggage. In fact, Headknocker has been contemplating a change in the Head Trader here at HQ due to the OG being stressed and confused by all of that psychological crap.

This is what I said when I bought IGK back in August:

"Another mental issue is that I own a number of these securities already, including IND, INZ and ISF, and have had some success trading them to lower my cost basis. . . . Having established a low cost basis, I did not want to muck my record up by buying one after they had more than tripled in price. That was just a lot of mental baggage to be carrying around."

So what happened within a few days after buying IGK, an unforeseeable event particularly for a U.S. based investor who has trouble figuring out what is really happening in the U.S. and is ill-equipped to add Europe to the litany of imponderables that need to be followed daily? I just answered that question, IGK tanked soon after buying it and I mucked up my successful record trading IGK hybrids, at least until IGK recovered in price. Now, I am back to a successful record having unloaded IGK for a profit, and I do not want to muck that up again. As discussed in many prior posts, the investor may go back to the well one time too many or even increase the risk by holding for the long term. Duality of Long Term Risks

9. CAPITAL GOODS: The Commerce Department reported that durable goods orders increased by 3% in January. pdf The core number, which strips out defense and aircraft orders, fell 2.9%. This durable goods report caused Morgan Stanley to revise its number for 1st quarter GDP to 2.2% from 2.5% according to the

10. Added to AT & T at $24.75 in Main Taxable Account (dividend growth strategy) (see Disclaimer): I believe that AT & T is the only stock purchased during February and March 2009 that has not had good gains. In fact, AT & T is about where it was in February 2009 when I reinitiated a position which had been sold in the high 30s. I am not going to try and explain the market's disfavor. Possibly, there are some long term issues that may impact AT & T a few years down the road. Item # 9 VZ & T-Forbes The yield at my cost is close to 6.8%, and the dividend is qualified for U.S. tax purposes. I am reinvesting the dividends. I did reread some analysts reports yesterday. S & P has AT & T rated five stars with a $31 price target. Barclays rate it equal weight with a $30 target and Morningstar gives it 4 stars. I do have some shares in the Roth bought at a lower price which I intend to sell when and if the stock rallies back to $28.

Looking at the dividend data in the S & P report on AT & T, I see a dividend increase in every year since 2000, with an anomaly in 2002 to 2004, going from $1.07 in 2002, to $1.37 in 2003, and then back to a more normalized path of $1.25 in 2004. I do not recall the reason. It is currently at $.42 per quarter or $1.68 annualized. The Value Line data going back to 1993 shows 76 cents in 1993 and continuous raises thereafter except for the above referenced anomaly. While that is not as fast as KO's growth rate, or some other stocks within this strategy, it is growing and provides a bond like yield now even without additional increases. It looks like a historical double in about 14 years which would be about a 5% annualized growth rate: (enter 14 in the second box at Estimate Compound Interest).

Thursday, February 25, 2010


The market reacted positively to Bernanke reasserting the need for a zero federal funds rate for an extended period. This is an excerpt from this testimony:

"The FOMC continues to anticipate that economic conditions--including low rates of resource utilization, subdued inflation trends, and stable inflation expectations--are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

My takeaway is not so positive. He does not know, and no one really does, what will happen when the government withdraws its massive fiscal stimulus and the inventory restocking cycle ends. This is the pertinent part of his prepared remarks that suggests to me that he is unable to predict whether private demand will pick up when the government stimulus and inventory replenishment ends:

"Indeed, the U.S. economy expanded at about a 4 percent annual rate during the second half of last year. A significant portion of that growth, however, can be attributed to the progress firms made in working down unwanted inventories of unsold goods, which left them more willing to increase production. As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services."FRB: Testimony--Bernanke, Semiannual Monetary Policy Report to the Congress--February 24, 2010

He also referred to the recovery as "nascent".

1. Freddie and Fannie: Whenever my attention is drawn to the housing debacle in the U.S. by the latest dreadful news on Fannie or Freddie, I can not help but think of that movie staring Tom Hanks called The Money Pit.

Freddie Mac reported yesterday that it managed to lose 25.7 billion in 2009, bringing its total since the onset of the housing crisis to a staggering 80 billion. The 4th quarter loss for FRE was 6.5 billion. The U.S. government has propped these GSEs with around 111 billion dollars and that sum is expected to rise to close to 200 billion. FRE did say in its press release that it expects housing to bottom sometime in 2010, but the housing recovery remains fragile. Hopefully, a few lessons will be learned from this debacle. The most important one is that extensive and improvident extensions of credit to achieve a political or social objective will distort price, create a bubble in housing prices, which will end up inevitably causing considerable and widespread damage to the economy and to financial institutions.

2. Limited (own senior bond in TC form only-PZB): The reports from the retailers have generally been positive. After the bell yesterday, Limited Brands (LTD) beat expectations by 3 cents reported a 49% rise in its 4th quarter E.P.S. to $1.01 or $1.08 after adjustments. LTD sees 2010 E.P.S. in the range of $1.4 to $1.6. The consensus estimate was $1.19. This is more than satisfactory to me as an owner of its senior bond.

3. Revision in Regional Bank Strategy: I have been implementing my Regional Bank Stocks strategy since March 2009, and currently have 28 holdings that have been purchased to date to implement it. The general thrust of the strategy will remain the same. I intend to hold most of the names for at least five years and to sell them at some point within a five to ten year time frame after their respective purchase dates. I previously made an exception to that holding period for a bank who appeared to be backsliding in its its performance, and I could substitute another name for that institution. Modification of Regional Bank Strategy: Sold 100 Wilmington Trust (WL) at $14.13 The second modification will be to allow the sell of one, which has a low dividend yield, and more than a 100% unrealized long term capital gain. Several of the ones bought initially have one cent quarterly dividends and have appreciated too much in price to ignore. For example, I bought East West Bank at $5.7 Buy of 50 EWBC as Lottery Ticket, and it closed yesterday at $17.06. I bought Webster Financial at $4.58 and it closed yesterday at $16.55. Buy of 50 WBS: Lottery Ticket/ Both of those banks are currently paying me just a penny per share a quarter. To improve my cash flow, which is always a goal since my entire cash flow from dividends and interest payments is reinvested into mostly income producing securities, I am modifying the strategy to permit those low yielding stocks to be sold and then replaced with other banks that pay decent dividends. I will not do anything until those low yielding bank stocks have been held at least one year, which will generally be in another 30 to 60 days depending on the security.

4. CBL Properties (own Lottery Ticket category): The announcement yesterday from CBL is what I like to see with a LT purchase. CBL & Associates Properties increased its common dividend from 5 cents to 20 cents. CBL owns several retail malls including several in the Nashville metropolitan area. LOTTERY TICKET PURCHASES: LINKS IN ONE POST Buy of CBL at $3.07

5. Brookfield Asset Management (BAM)(owned): This one was bought in early March 2009 at $13.72. I really do not know what to make of Brookfield's efforts to take a large common share stake in General Growth Properties, a retail mall REIT currently in bankruptcy. General Growth Properties Announces $2.625 Billion Proposed Equity Commitment from Brookfield Asset Management I just hope that the managers of BAM know what they are doing. Simon Properties is also making a bid.

6. Emerging Markets Technical Analysis: Michael Kahn, who writes the Getting Technical column in Barrons makes the technical case why he believes emerging markets will fall in the short term. His analysis only focuses on Brazil and Turkey, however. The Vanguard ETF for emerging market stocks, VWO, closed yesterday at $38.93. On March 9, 2009, it closed at $19.49. Adjusting for the $.545 dividend paid in December, that is a rise of more than 100% in less than a year. It would not be surprising to see a pullback after that kind of spurt over a short period of time.

7. Coca Cola (owned-dividend growth strategy): The dividend growth strategy is explained in this post at Item # 1: Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009 Generally, the idea is to buy companies with a long history of raising dividends at a time during a stock market meltdown, and then hold the security for as long as the company continues to raise the dividend. General Electric and large financial institutions will never be appropriate candidates for this kind of strategy, but it is appropriate particularly for consumer staple companies like KO which was bought at 38.72 in March 2009.

Coca-Cola is down in pre-market trading after agreeing to acquire Coca-Cola Enterprise's North American bottling operations. The transaction is not expected to be accretive to E.P.S. until 2012.

8. Heinz (owned-dividend growth strategy): Like KO, my Heinz shares were acquired in early March 2009 for the same reason . Heinz reported its 3rd quarter results for its 2010 fiscal year, earning 83 cents from continuing operations on a 13% increase in revenues. Operating free cash flow increased 88% to 439 million. Heinz reported 3% organic sales growth led by a 15.5% growth in emerging markets. Analysts had expected earnings of 76 cents. Heinz was bought at $ 31.67.

9. Greece: There are always events that surprise me. It would be surprising to me for Greece to actually bring its deficit anywhere near 3% of GDP or to hit the targets demanded by the EC in the next few years. It would be surprising to see Greece actually refinance its maturing debt this year. Both S&P and Moody's have just warned today that further downgrades in Greece's debt will be made within a month if Greece does not make the necessary spending cuts.

Wednesday, February 24, 2010

Inflation or Deflation in the Years Ahead: Fed Expects 1 to 2%/Negative Home Equity Increases/Bank Loans Decrease/Bought 40 EPV at 24.35

1. Dividends and Interest (all of the securities mentioned in this section, a frequent topic category highlighted in orange, are owned): The trust preferred stock from Zions Bancorp, ZBPRB, is ex dividend today, as is the floating rate synthetic security, which has a guarantee, and contains as its underlying security a JPM junior bond in TP form, GJN. GJN Stock Quote - Strats Tr Jpmorgan Cap Xvii STRATS 05-2 BUY 50 GJN The first mortgage bond from Entergy Mississippi (EMO) is ex interest today for its quarterly payment. Great Plains Energy (GXP), an electric utility, is also ex dividend. The bond from Ameriprise Financial, AMPPRA, is also ex interest with its quarterly payment: Bought 100 AMPPRA at $24.75 Atlantic Power is ex dividend today for its monthly dividend payment /Bought 100 ATP:TO at 11.97 CAD/ PZB, the TC with a senior Limited bond, is ex interest today for its semi-annual payment. The floating rate equity preferred METPRA from Met Life, which has a 4% guarantee, is ex dividend for its quarterly payment. The applicable rate now is the guarantee given the low 3 month Libor rates. And, lastly, PMK Capital (PMK) is ex interest for its monthly payment.

Several Aegon and ING hybrids go ex dividend tomorrow, 2/25/2010 with their quarterly payments, including AEH, AEB, AEF, IND, INZ and IGK.

Other securities which go ex dividend on Thursday include GE, MI, STIPRA (a floating rate equity preferred with a guarantee from SunTrust), ZBPRA ( a floating rate equity preferred with a guarantee from Zions), ZBPRC ( a fixed coupon equity preferred from Zions), and PFK (CPI floater from Prudential).

2. Negative Equity in Homes: First American Core Logic reported an increase in homes with negative equity in the 4th quarter of 2009. This firms estimates that 11.3 homes had negative equity at the end of 2009. This would be about 24% of all of the homes with mortgages. Another 2.3 million homes were approaching negative equity at the end of 2009. In Las Vegas, seventy percent of the homes with mortgages have negative equity, 48% in Florida and 51% in Arizona. Q4_2009_Negative_Equity_Final.pdf

3. Inflation or Deflation Ahead?: This is one of the big picture issues that is hard to predict, though I believe that inflation will gradually increase to become a serious problem in a few years, similar to the slow build up which started to occur in the the late 1960s and hit a crescendo in the late 1970s and early 1980s. Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis :


The number on the right hand side of the box is the annual percentage change (i.e. the rate of inflation). As shown in this chart, inflation began to pick up as the nation started to spend money like crazy on guns and butter. The Vietnam war spending started to pick up during LBJ's administration and federal spending on social programs accelerated at the same time.

This is a link to an interactive story from Bloomberg that makes the case for low levels of inflation. The high unemployment rate will place pressure on wage gains, and higher employment costs can be one factor feeding into an inflationary spiral. The excess production capacity and the deflation in home prices also support the low inflation thesis, along with the possibility of tax hikes in the near future as the budgetary problems become worse.

Bernanke and other Fed members are in the low inflation camp for years to come, as Bernanke made clear in his testimony today:

"Consistent with moderate economic growth, participants expect the unemployment rate to decline only slowly, to a range of roughly 6-1/2 to 7-1/2 percent by the end of 2012, still well above their estimate of the long-run sustainable rate of about 5 percent. Inflation is expected to remain subdued, with consumer prices rising at rates between 1 and 2 percent in 2010 through 2012. In the longer term, inflation is expected to be between 1-3/4 and 2 percent, the range that most FOMC participants judge to be consistent with the Federal Reserve's dual mandate of price stability and maximum employment."

FRB: Testimony--Bernanke, Semiannual Monetary Policy Report to the Congress--February 24, 2010 I suspect that forecast will end up being wrong, but the Fed's forecast is both rational and reasonable under the lingering aftershocks of the Near Depression. For now, it gives me enough comfort to continue holding long bonds that I intend to jettison when I become concerned about inflation. See Item # 7 Bought 100 PBI at 21.9/Sold 50 CVBF at 9.65/ Added to CEF RMT/ AA & ASBC Earnings/GLW Upgrades The paring of some of those long bond positions can be done gradually when and if the CPI numbers start to turn hot. If Bernanke is right about inflation, I will be able to hold my long bonds longer than I currently expect. As mentioned in prior posts, the investment grade long bonds bought during the meltdown period at large discounts to par value and to yield greater than 10% per annum will likely be kept as long as I am comfortable with the credit risk of each company and do not have a rational concern about the advent of hyper inflation.

4. Bank Lending: Bank lending in 2009 declined had its largest decline in 67 years according to a report released by the FDIC. More than 5% of the loans outstanding were past due (5.37%, see page 2), which is the highest number in 27 years, and bank failures hit a 16 year high at 702 last year. The fall off in bank lending is caused by a lack of demand and tighter lending standards. /

5. New Home Sales: New home sales fell 11.2% in January below the revised December number, a greater than expected decline. The January number would be the lowest number at an annualized rate since the Commerce Department started to keep records in 1963. Compared to January last year, sales declined 6.1% and this is with the extension of the tax credit.

6. Bought 40 EPV at $24.35: Long Short Strategy (See Disclaimer): I mentioned in a post from yesterday that I will not discuss the purchase of double shorts for specific sectors or an individual foreign country. I did take a position this morning in the double short for Europe (EPV) by buying just 40 shares at $24.35. This is part of a hedging strategy that I have started to implement recently. As I have mentioned on several occasions these Proshares' product have a tendency to lose tracking after one day, and have to monitored daily for that reason. This particular fund seeks to move 200% to the inverse of the MSCI Europe Index: ProShares ETFs: UltraShort MSCI Europe – Overview Even though I have added several of these double shorts over the past several days, I am extremely long common stocks in this slowly developing long short strategy that I am trying out in a test run.