Monday, February 8, 2010

Greece-Entitlement Society Run Amok/BRKS NDAQ/Bought 100 CEF IGI at $19.89

If civil servants are unhappy in Greece and Portugal about proposals to freeze their wages, then the U.S. government may be a viable alternative for them. Basically, the U.S. does not have the money either, unless you want to call spending borrowed funds from China, Japan and other Asian countries as our money. For some reason, maybe due to my upbringing, I have been unable to see debt as an asset.

As far as paying its own employees, the U.S. government has not gone on a diet or showed any restraint during the financial crisis. When reading about the protests in Greece and Lisbon, the recent story published in the USATODAY showed that our civil servants making more than a $100,000 jumped from 14% to 19% of the federal workforce during the recession's first 18 months. The total number making more than $100,000 increased by 382,758 during that period. In our Transportation department, there was 1 person making more than $170,000 at the start of the recession, and there were 1690 employees making more than that sum after eighteen months of the worse recession since the Big D. Yes, our infrastructure may be crumbling, a subject of Bob Herbert's column in the NYT on Saturday, but we at least have enough borrowed money to feed the beast. So, besides Wall Street bankers, there is at least one other group doing well during this downturn. The amount set aside in the Democrat's 787 billion "stimulus" plan for infrastructure projects was paltry compared to transfer payments.

1. Greece-The Entitlement Society Running Amok: Civil servant salaries and pension benefits take up 51% of Greece's budget. NYT Really, everyone needs to work for the government. While the new Socialist government is making noises about reigning in Greece's entitlement society, the new PM started his new administration by hiring 2000 workers for the Energy department, adding to the government employee bloat, handed out 1.6 billion Euros to low income families, and gave the citizens a 12 month moratorium on paying their mortgages. And the union leaders for the public employees will take to the streets to protest any attempt to cut back on their take of the budget. Late last year, the Greece government basically acknowledged that it had committed fraud, saying that its budget deficit for 2009 would be 12.7% of its GDP rather than the forecasted 3.7%. Has Greece really come clean? There are some reports that there may be 40 billion Euros of hidden greek debt, so its deficit may be worse than currently represented by the government. I am curious why anyone would buy Greece's debt.

And it is hard to believe Greece is really serious after the government hired Joseph Stiglitz who called the EC's budget rules a "fetishism". Telegraph As I understand Stiglitz's economic theory, which is not really economic theory at all, lenders are morally obligated to throw money at reckless borrowers and the EC needs to bail Greece out and reward an out of control entitlement society.

It would not be surprising to see some backdoor bailout of Greece by the EC, so that the citizens of Germany and the Netherlands can look forward to footing the bill. Headknocker might volunteer to help the Europeans out, but he is already lending more than a helping hand to the Masters of Disaster, involuntarily of course, along with all the other savers and fellow saps in the U.S. I checked on Sunday some money market funds for Vanaguard and Fidelity funds. The Vanguard Prime fund, with almost 92 billion in assets, has a current seven day yield of .03%. Taxable Money Market Funds - V Before tax and inflation, this would give the saver a total of around $300 on a million dollars over one year. Fidelity Cash Reserves is surprisingly much better at .07%. Taxable Money Market Funds - F Whenever I see those kind of figures, and realize that the government's Jihad against responsible Americans will continue for at least several more months, I start to be more receptive to taking more risks to achieve some income with my cash stash earning nothing, and falling in purchasing value by the day. This thought process led directly to a purchase this morning.

On the bright side for the more responsible European governments, Greece's GDP is close to that of Michigan so the bailout will be less painful than the one arranged in the U.S. for the UAW. Oops, I meant to say GM. There is an acronym for the problem nations in the EC, PIIGS, which is appropriate, and it stands for Portugal, Italy, Ireland, Greece and Spain. Barclays recently banned that acronym from its research notes. Another acronym, which preceded PIIGS in common usage, was PIGSTY, short for Portugal, Italy, Greece, Spain, Turkey and Yugoslavia, used commonly by economists at the Bank of England. Swine Sensitivity

I want to fair. Several states in the U.S. may make Greece look good. Several U.S. states have huge budget shortfalls, and have had to replenish their bankrupt unemployment insurance funds by borrowing funds and/or increasing taxes. Twenty seven states have borrowed a total of 30 billion so far from the federal government to replenish those depleted funds. ProPublica Unemployment Insurance Tracker

Several states, moreover, are sporting huge unfunded pension liabilities for state and local government employees. Looming pension liability Illinois, for example, faces a 83 billion unfunded pension liability which is of course growing by the day: Illinois Policy Institute Forbes recently compiled a list ranking the states' unfunded pension plans per capita.

Illinois' deficit as a percentage of its GDP is estimated at 4.7%.#50 Illinois New York's debt is estimated at 5.9% of its G.D.P. It is ranked dead last by Forbes. Tennessee is at .7%: #13 Among the U.S. States The U.S. is ranked #35 below Thailand, Estonia and Peru which gives me goosebumps. Greece is at # 73 below the Dominican Republic, El Salvador & Romania but above Pakistan. (Qatar is # 1, Australia # 6, Netherlands # 12: Global Debt Crisis -

And, to prove that I am fair and balanced, I would note that Trichet emphasized over the weekend that the deficit level among all countries in the Euro zone is about 6% of GDP whereas the U.S. may be approaching 10% by the end of this year. NYT

2. Brooks Automation (BRKS) (own Lottery Ticket Category): Brooks Automation had an uninspiring first quarter of its 2010 fiscal year, though the market reaction last Friday may be a tad overdone. BRKS fell $1.03 to $7.49. Brooks somehow managed to increase revenues for its Q/E 12 /31/09 by 44.6%, compared to the year ago quarter, and by 65.7% sequentially. Notwithstanding that surge in revenue, BRKS lost 2.8 million or 4 cents a share or 2 cents excluding charges. Analyst estimated breakeven excluding charges. That loss is better than the loss from the year ago quarter, when Brooks managed to lose 35.1 million. Losing less money is not however the goal of American business. And if you can not report a profit in a strong up cycle, when will the company turn a profit? The company CEO did make this remark about the upcoming year: "Our customers are currently projecting strong demand over the course of the next several quarters and we believe that trend will translate into excellent financial performance for Brooks in the quarters ahead." On the bright side, the balance sheet remains solid with 85.192 million in cash and marketable securities as of 12/31/09 and another 26.157 in long term marketable securities. Brooks has no debt.

As of yesterday, the current consensus estimate is for an E.P.S. of 19 cents in the F/Y ending in September 2010, and 75 cents in F/Y 2011. BRKS: Analyst Estimates for Brooks Automation

I bought just 30 shares as an LT: Bought 50 DSPG at 5.62 and 30 BRKS at 8.62 as LTs . The earnings report was not sufficiently awful to sell those shares, but will keep me on the sidelines. If Brooks fell another $2 bucks, below its 200 day moving average line ( Chart), I would consider averaging down, taking the position to 100 shares, as a value play.

3. Bought 100 of the CEF IGI at $19.89 in Regular IRA this morning (See Disclaimer): This is what happens when I start looking at what my cash stash is earning in money market funds. I spent some time over the weekend trying to find a closed end bond fund, which did not use leverage, and invested mostly in investment grade corporate bonds. And, keeping in mind that most bond funds do not have a maturity date, so there is no promise ever to return your original principal or the value of your reinvested dividends, I was curious whether there was a CEF that had something analogous to a maturity date. I knew that Blackrock had several closed end municipal bond funds with a specific term date. Two of the Blackrock national municipal bond funds with terms sell at premiums to net asset value: BPK BKK The first linked CEF terminates in 2018 and the second in 2020. There is no guarantee that the original principal amount of $15 per share will be returned on those dates, but that is at least the objective of the fund. And both of those funds use leverage (click the Fact sheet link). Leverage can juice the yield in a low interest rate environment but will be harmful when rates starts to rise, since the cost of funds will increase and the value of the bonds will be falling to compensate for the rise in rates.

Blackrock also has term municipal bond funds for California (BJZ), Florida (BFO) and New York (BLH). The ones from NY and CA expire in 2018 and FL in 2020. I have no interest in those funds of course. This link may go to the Blackrock CEF fund page: BlackRock - Individual Investor (or just google Blackrock closed end and navigate to the right page).

It goes without saying that I would never buy a municipal bond fund in a retirement account.

I did find one CEF selling at a small discount to NAV that invested in corporate bonds that had a term date. It is a Legg Mason fund called Western Asset Investment Grade Defined Opportunity Trust LGI)(preceding link is to the annual report filed with the SEC). The expense ratio is listed on page 19 at .83%. It was selling last Friday at a 3.44% discount to its NAV. Closed-End Funds by Category - Markets Data Center - The fund will liquidate on or about December 2, 2024. At least 80% of its assets under "normal market conditions" will be in investment grade corporate bonds of varying maturities. The other 20% can be invested in below investment grade securities. When I looked at the portfolio, there were a number of bonds in the fund's portfolio expiring after 2024, so this CEF is not like a target date fund which owns bonds maturing at or near the term date. There is a risk that the fund will not be able to return my original principal amount in 2024, but I would view this fund as posing less of a risk than a non-term bond fund (particularly one investing in junk bonds) or a term bond fund which uses significant leverage (i.e. over 20% in my opinion) Distributions are paid monthly, and the fund does not employ leverage. The current yield is around 6.3%, and the effective duration is 6.62 years. The current distribution rate is $.1045 per month per share $1.254 per year). The current NAV as of Friday's close (2/5/2010) was $20.62. So, if it liquidated today, for example, I would at least get my money back. If the share price falls more than $2 from my original purchase, due to an expansion of the discount to NAV and/or a fall in the value of the bonds, I may include this CEF in my next Roth conversion. If the CEF starts to sell at more than a 5% premium to its NAV, I would consider selling it, provided I had a reasonable profit in it based on my purchase price.

4. Gretchen Morgenson Buys Into David Rosenberg's Forecasts Hook, Line and Sinker: I am not sure why anyone would accept Rosenberg's forecasts unless you are of the determined pessimistic bent like Alan Abelson who always sees the glass empty or full of untreated sewage. It is just my opinion, but I suspect that Morgenson sought out Rosenberg's opinions since they were in line with her own or her political agenda. Before touting him, as she did in her column on Sunday in the NYT, a more complete analysis of his wayward calls, and I mean way off in the extreme, may have been mentioned by her. But, my purpose as always for a bird like Rosenberg is just to summarize his forecasts in my blog so that I can refer back to them when appropriate. For housing prices, Morgenson says that Rosenberg sees a 10 to 15% further decline over the next several years, and that 1/2 of the mortgaged properties will be under water by 2011. And the next recession will happen more quickly than people think.

5. Nasdaq OMX (own 2010 Speculative Strategy): This purchase is a tad under water since my purchase. But, contrary to the consensus opinion about me, I am a patient and understanding person. NASDAQ OMX reported 4th quarter earnings of 20 cents on a GAAP basis, compared to 17 cents in the 4th quarter of 2008. For the full year, NDAQ earned $1.25. Excluding certain one time items, the non-GAAP number was 46 cents, up from 42 cents in the 3rd quarter of 2009 but down from the 52 cents earned in the 4th quarter of 2008 on a non-GAAP basis. The non-GAAP number beat expectations by one cent. Reuters


  1. Greece will either find a fix internally or be bailed out, with the last being more likely. The fact that their government is corrupt and the general population unrealistic doesn't change this. There is no other available option.

    There is one pitfall: not punishing Greece enough. Creaing a moral hazard for all the other 'bad' countries would be the worst thing that could happen.

    In the end I think that the tax payers of the healthy countries will benefit from it. The spread on the 10 year bonds is huge and Germany, Austria, the Netherlands and maybe France could make a fair amount of money by buying Greek bonds to bring down the price. But it's an unwanted situation of course.

    Personally I would be buying Greek bonds here if I wanted to own governmental bonds and had access to them.

  2. Greece is not that much different than many countries, including the U.S., where the citizens view that they have an entitlement to benefits without having to pay anywhere near the full cost.

    Instead, both the citizens and the government live beyond their means by borrowing every increasing sums of money, until the market forces some kind of restraint. The time is now to show restraint for several European countries running large deficits who are not able to issue debt in their own currency. But it is extremely difficult to impose spending restraint in a democracy, where votes are basically bought by promising and delivering benefits paid for with borrowed funds.

    The U.S. is fortunate now in being able to finance our trillion plus dollar deficits by issuing paper denominated in dollars. That is not an option for the PIIGS. The U.S. day of reckoning is not now but in the not too distant future, when interest rates start to rise, and the cost of financing the national debt, growing in parabolic fashion now, consumes ever larger chunks of tax revenue, at a time when the baby boom generation starts to draw their social security benefits and to drain the medicare fund currently set to go broke in 2017. It would not be surprising to me for the interest on the U.S. national debt to exceed 1 trillion per year in a decade.

    Greece may not find any takers for their bonds which will have to be sold soon other than other EC countries, which would be one temporary band aid on the problem. (Or, something similar like a payment by Greece for a guarantee of its debt). I have read that Greece will need to sell about 50 to 60 billion euros in bonds in 2010. It is hard for me to see how that can be done without EC backing or actual implementation of spending cuts as opposed to just talking about doing something.

  3. This is one form a "bailout" might take form. An option being considered is "the establishment of a centralized fund that could be tapped by troubled member states and could prove more appealing than a bridge loan from one member to another." Whether states like Germany go for something like this is another question not to mention the political hurdles involved in setting something like this up. Referenced from the following article:

  4. Luther, I've heard proponents of centralized borrowing the last few years. They proposed a system where an EMU agency borrows money from the capital markets and member states borrow from the agency. A result would be a more harmonized market for borrowing giving all the states the same rate. A big problem will be that the healthy states will be paying a higher interest rate for the debauchery of the PIIGS.

    I think it's politically impossible to introduce it. Germany and the Netherlands don't want to give up their cheap money. And probably rightfully so.

  5. In and of itself a Greek bankruptcy or bond default should -in theory- not affect the Euro as such very much, Greece being maybe 3% of the total. However, just as a Californian bankruptcy would reflect badly on the "state of the Union" as a whole so would the default of on EU country, coupled with the rising interest rates and thus further destabilisation of the remaining over-leveraged member states, make investors wonder when sovereign default across the board is likely. Thus they wouldn't commit themseves to bonds of longer maturity and that's the beginning of the end. And greek's 'entitled' masses will prove their own undoing.