Monday, February 1, 2010

Bill Gross and Utility Funds/Eurozone PMI/XOM SYY STL

1. Long Term Secular Bear Market: The above S & P 500 chart is just a reminder of what a long term bear market looks like. The start date for this chart is January 29, 1997 and the end date is January 29, 2010. The basic pattern of a long term secular bear market consists of a number of cyclical bull and bear markets of relatively short duration, at least one catastrophic phase (e.g. 10/29/1929 to June 1932; 10/1973 to 10/1974; October 2008 to March 2009), and ends up after 15 or more years at approximately the same level as the starting point. I would start the current long term bear market in 1997. The chart of the previous long term bear market (1966 to 9/1982) can be found in this post: More on 1982 or 1974

2. Bill Gross- Fed Interest Rate Prediction/CEF Utility Funds: If Gross is right, the Fed is going to continue its Jihad against the savers and responsible Americans for much longer than I now anticipate. In the Barron's Roundtable discussion, he predicted that the Fed would keep interest rates in the 1% range for the next 12 to 24 months.

One of his recommendations was a closed end investment company called Reaves Utility Income Fund (UTG), which uses leverage. Reaves Utility Income Fund (UTG) This is a link to the annual report for the F/Y ending 10/31/2009. Dividends are paid monthly. Reaves Utility Income Fund (UTG) - Dividends As of last Friday's close, the fund was selling at a 1.93% discount to its net asset value, which is nowhere near large enough for me to initiate a position in a closed end fund. Prior to this recommendation, I have not been monitoring the fund, and will start to do so. I have no interest in it now however.

I did own a long time ago another CEF which contains both utility companies and REITs, Cohen and Steers REIT and Utility Income Fund (RTU), which was selling at a 16.8% discount to its NAV as of last Friday's close. Real Estate Investment Trusts It pays quarterly distributions and has a slightly lower current yield than the Reaves CEF. I have not looked at this one in several months, but it also uses leverage: semiAnnual.pdf

Leverage can work both ways. When interest rates start to rise, these funds will no longer enjoy large spreads between the cost of their borrowed funds and the yields paid by the securities bought with those funds. And, utility stocks are viewed by many as bond substitutes, and will most likely fall in price as interest rates start to rise. I would not expect the average dividend yield of an electric utility to be 5%, close to where it is now, when the ten year treasury note rises to 5% from current levels. So, a rise in interest rates will be a double whammy for these funds. A third problem, making it a triple whammy, would be a widening of the discount to net asset value caused by a rush out of the funds by individual investors when the conditions fostering the absence of a discount no longer exist. The Reaves fund mentions in its annual report (10/31/09) that the discount to NAV had narrowed from 15.5% to 3.3% during the 2009 fiscal year, and has since narrowed further. This is probably a response to favorable conditions for the fund now, including the lack of alternatives for income generation and the favorable spreads connected with using borrowed funds.

Gross may be recommending this kind of fund based on his belief that the low interest rate environment will last at least another 12 months, and possibly as long as 24 months. If I believed that a rising interest rate cycle would start in June of 2010, for example, and be more pronounced to the upside than forecasted by Gross, I would not go near a leveraged closed end utility fund selling at near its net asset value or worse, above it.

Gabelli has two utility CEFs. One sells at an absurd 58.85% premium to its NAV, something that is beyond my ability to comprehend. The other one, Gabelli Global Utility and Income ( GLU) closed Friday at a 1.16% premium to its NAV. Fund Performance Info This is a link to its last quarterly report: .pdf

I do not own any of these CEFs.

A few weeks ago, Gross recommended the ETF XLU which contains the utility stocks in the S & P 500 which I thereafter bought and sold. See Item # 4 Bought 100 XLU at $29.14 Sold 100 XLU at 31.25

I am not adverse to buying XLU back. My main objection is that I already own many of the constituent companies. When I sold XLU, I bought 100 shares of Southern (SO) to add to my stable of individual holdings of U.S. electric utility companies which also includes DUK, ED, PNW, POM, & GXP.

3. GDP Report-Negative Spin by Alan Abelson and David Rosenberg: Abelson and Rosenberg are not exactly fair and balanced, particularly when summarizing information inconsistent with their negativity. While it is hardly worth summarizing their view of the 4th quarter GDP report, it is helpful to compare their perception of the 5.7% gain with the comments made by Barron's Gene Epstein and the Morningstar economist Robert Johnson, focusing on their different takes on the inventory data.

Abelson & Rosenberg: Pinocchio
Robert Johnson News

4. Eurozone PMI/Unemployment: Markit surveys purchasing managers outside the U.S. and compiles a manufacturing index similar to the ISM for the U.S. This data series can be found at Media centre - Markit Economics. The January manufacturing PMI index for the Eurozone was 52.4 in January, up from a final reading of 51.6 in December. Manufacturing production expanded for the sixth straight month, and the rate of acceleration was the greatest since August 2007. Markit noted that there was a wide disparity however. Greece, Ireland and Spain manufacturing output accelerated to the downside, whereas Germany, France and the Netherlands saw stronger rates of increased output.

The euro area unemployment rate hit a seasonally adjusted 10% in December. .PDF This type of information can be found at Eurostat. About 23 million people were unemployed in the euro area consisting of 27 countries.

5. Sterling Bancorp (own common and TP): Sterling Bancorp reported E.P.S. for the 4th quarter of 11 cents after preferred stock dividends (15 cents before), compared to 22 cents in the 4th quarter of 2008. The estimate was for 6 cents. The net interest margin was 4.63% . Nonaccrual loans decreased in both the 3rd and 4th quarters. The ratio of nonaccrual loans to total loans was 1.46%. The total risk based capital ratio as of 12/31/09 was 12.75% (10% is well capitalized). The tier 1 risk based capital ratio was 11.5% (6% is well capitalized). The capital ratios however reflect 42 million in TARP proceeds that were used by the government to purchase equity preferred stock.

6. Exxon (owned): Exxon has not done well since my recent purchase. Exxon Mobil reported earnings this morning of $1.27, with expectations at $1.19, down 23% from the year ago E.P.S. of $1.54. The net income number was still a staggering 6.05 billion for the quarter. Revenues for the 4th quarter were also ahead of expectations at 89.84 billion, which were higher than the year ago quarter revenues of 84.7. Exxon Mobil Corporation announced last week its regular quarterly dividend of 42 cents per share. The results were hurt by refining. Oil production was at 2.39 million barrels, about flat with the 2008 4th quarter.

7. Sysco (owned): Sysco reported its 2nd quarter F/Y 2010 earnings of 45 cents per share, better than the 42 cents consensus estimate, and up from 42 cents in the 4th quarter of 2008. Revenues fell to 8.9 billion from 9.1 billion. Operating expenses declined in the quarter by 7.2% or 96 million compared to the prior year period, but 37 million of that was due to a favorable change in the value of corporate owned life insurance.

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