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).


  1. There's an interesting story in the Globe and Mail that quotes Bernanke on the weather:

    "On another topic, Mr. Bernanke said that the snowstorms and bad weather that has recently plagued the country is likely to have a short-term – but not permanent – impact on unemployment and layoffs. He said policy makers will “have to be careful about not overinterpreting” coming data."

  2. CATHIE: The problem is that the numbers indicate, even after adjusting for the weather, that the economy is not adding net jobs. At this stage in a healthy recovery, the economy would be adding jobs. The last number for initial unemployment claims may have been impacted some by certain state unemployment offices being closed during the snowstorms on the east coast, and it took a week or so to process some older claims to be included in the number. Some construction jobs are probably being lost too.

    But the four week average is at 473,750, and that number indicates a soft jobs market and most likely continued net job losses through February. The number which would indicate to many net new jobs would be 425,000:

    I would not be surprised now to see another job loss number when the Labor Department reports the February number on March 5th. The housing numbers are starting to add fuel to my concerns.

  3. About the press release:

    The EC feels that ING received another €2 billion from the state in aid because it gave ING some slack with the repayment. ING disagrees. I'm not sure what the consequences will be. I'm not sure if the EC says that ING has another €2 billion to repay. But it might have something to do with the second point they're talking about:

    ING isn't allowed to be a 'price leader' in any EU member state. What this basically means they're not allowed to quote the cheapest prices. So their mortgage must be more expensive, they must give less interest on saving accounts, etc. They dispute this. And I think rightfully because helping a bank only to make it uncompetitive doesn't make much sense.

    I'm not sure what the results or consequences can be tho. I can't help you with that. But I'm confident enough to hold my ING hybrids. A few weeks ago I sold some IND in the $20.20 range and bought it back sub $18 after it went down a bunch. I think I will be selling above $21 tho.

    I know you're dabbling with regional banks. I've been looking into American micro banks. I bought WAYN at $6 a few weeks ago. The security is fairly illiquid, I had my order (as the highest bid) sitting there for a few days. Would you mind sharing an opinion about this bank, if you have the time of course?

    Oh yeah, I bought some ACU too. At $9. I just love American small and micro caps. In Europe the markets are so fragmented it can be pretty hard looking up all the data. I really hope that NYSE Euronext will harmonize the market.

    I'm looking forward to your next blog post!

  4. Paradoxianlp: My problem with the ING press release is that it does not explain the consequences to ING if it loses the appeal. I know that the Dutch government gave ING a break on the repayment of the 5 billion Euros, which originally required a 50% premium for early prepayment. The EC is apparently treating the difference between the original contract amount and what was actually paid late last year as additional state aid. To me, it is bad enough that ING the Dutch government still owes 5 billion Euros in principal.

    I am not familiar with Wayne Savings Bank. That is more of a mini micro cap at a 20 million market cap. Sometimes I drill down to that size on what I would view as a special situation. I have had some success with those small companies but I do not look at banks with much less than a 50 million market cap. I did see looking at Wayne briefly that it operates in Ohio and cut its dividend not long ago to 5 cents.

    These small companies can implode on you with bad news. So far I have been lucky with several 100%+ gainers in the mini micro caps with the biggest percentage gain over the past year being National Dentex which had around a 25 million market cap when I first bought it. NADX had drifted down to $4 and $1.27, where I bought some, the downdraft found no buyers, a near total vacuum, and it then picked up and exploded to over $8 with a couple of decent reports and on low volume. I discuss it in the blog, and no longer own it. So bad news will render these stocks an orphan.

    I have Acme on a small cap monitor list which has about 200 names in it. I do not remember how it found its way to that list. At Yahoo Finance, I can see the recent news of all of the stocks in a monitor list, and I did note early this morning its earnings for the last quarter. Most likely, ACME came up in one of my screens looking for small cap stocks with a price to sales ratio of less than 1, a low price to book, and a price less than $10.

    I am going to take my basket of regional banks to 30 names, with 28 currently owned. I have one bank on my monitor list that I might buy with a market cap of around 50 million, and a dividend yield of close to 6%. The smallest one that I currently own may be New Hampshire Thrift (NHTB) at around a 60 million market cap.