ISM SERVICES/List of Financial Time Bombs/SIVBO/Hanover Insurance & the TCs KRH and PKM/Yahoo/Sovereign Debt Issues In Europe

I am still expecting, hoping may be a better word, for a push up in the S & P 500 average to the 1250 to 1300 range before 9/30/2010. If that occurs, I will lighten up some of my stock holdings, and possibly buy some protection. The reason for lightening up is based on the concern about the ability of consumers to fill the void left after the withdrawal of the worldwide government fiscal stimulus. (see generally 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? & more on 1982 or 1974)

While the market has dismissed generally positive earnings from technology companies throughout January, it is becoming increasingly difficult for the bears to justify their negative spin. Cisco handily beat both earnings and revenue expectations for its last quarter and estimated revenue growth in its fiscal third quarter of 23% to 26%, well above the consensus forecast of 16% growth. Visa reported a 33% increase in net income compared to the year ago quarter on a 13% rise in revenue. Total processed transactions rose 12% from a year ago. In 2010 VISA expects revenue growth of 11 to 15% and an operating margin in the mid-to-high 50% range. UPS reported a 4th quarter profit of 757 million. UPS believes the recession is over, and it should know. It is sufficiently confident about 2010 to reinstate pay raises and to provide an annual forecast for 2010, which it had refused to do previously due to uncertain economic conditions. The forecast was a profit increase of between 17% to 32% over 2009.

The present concern, at least for today, revolves around the governmental debt problems of a few European countries. Those problems are summarized in an article in today's WSJ. Insurance on 10 million € in Greece's sovereign debt rose € 7,000 to €414,000 for five years of insurance after the EC gave a qualified endorsement to Greece's budget plan. WSJ I noted in a post from 1/27 that this insurance cost €397,000 so that is not that much of a change. ITEM # 5. Portugal, another problem for the EC, tried to sell €500 million in its treasury bills and received bids for only €300 million. If that happened in a U.S. treasury bill auction, held each Monday, the repercussions would be catastrophic, but it is hard to draw any worldwide significance to Portugal's problems. The CDS for Portugal is less than Greece at €226,000, according to the figures cited in the WSJ article. I would add that the CDS market is subject to manipulation by hedge funds who may be shorting the debt, and to panic buying by institutions trying to hedge their long sovereign debt exposure.

1. ISM SERVICES INDEX: The ISM Non-Manufacturing index for January was reported yesterday at 50.5%, below the 51 expectation which is not material. It is material that the index is still barely above the 50 demarcation line indicating expansion. The new orders component did increase to 54.7% from 52 in December. The employment number is still below 50, though it increased to 44.6 from 43.6. The price index increased to 61.2 from 59.6. The services index has lagged behind the ISM manufacturing index since the economy bottomed last year.

2. List of 20 Financial Time Bombs: I thought that this article written by Paul B. Farrell contained a good list of things that could go wrong in the coming years. Ultimately, the only solution will be to find ways to grow the economy without leverage, while controlling spending by both the federal and state governments.

3. No Recession for Banker Pay: Bloomberg reported that Bank of America was planning to pay its investment bankers about 4.4 billion in bonuses for last year's work, or about $400,000 per employee. Managing directors will receive in the neighborhood of 2.5 million to 3 million, while some of the more productive Masters of Disaster will be paid bonuses of 5 million. The few employees still working for the AIG Financial Products unit, the one that destroyed the company which required a 180 billion bailout, will soon be receiving 100 million dollar in bonuses: CBS News The wizards in the AIG's Financial Products unit in London received hundreds of millions per year using AIG's then AAA credit rating to write credit default insurance policies. The compensation for the Masters of Disaster in this small unit ranged between 423 million to 616 million per year, sometimes hitting as much as 46% of the revenue generated by their idiocy and recklessness. NYT The role played by those wizards of finance in creating the subprime fiasco and the credit meltdown is discussed in Michael Lewis' article in vanityfair.com

4. SVB Financial Group (own TP SIVBO only): I know this bank as Silicon Valley Bancshares. J P Morgan upgraded this bank to outperform yesterday with a price target of $54. SVB Financial Group announced last month better than expected 4th quarter earnings of 47 cents per share, excluding an item relating to the repurchase of the government's preferred stock. The estimate was for 36 cents: | Reuters I own its TP, SIVBO: Added 50 SIVBO AT $19.20 IN ROTH/ Added 50 SIVBO at $19.15 /Bought 50 SIVBO AND DKK

5. Hanover Insurance (own junior bond only): I own a Trust Preferred issue that is the underlying security in two Trust Certificates, both have done well since my purchase: ITEM 2 /Bought 50 KRH in IRA at $18.62;

Item # 3 Bought 150 TC PKM in two lots: 100 at 17.8 in taxable account and 50 shares at 17.6 in retirement account/; ITEM # 1 Bought 50 of the TC KRH at $19 . KRH and PKM closed yesterday at $23.25 and $23.69 respectively. Based on the yield at my cost and my overall current comfort level with the credit risk, I am in a holding pattern for both PKM and KRH after selling 50 of the 150 of PKM. The current yield for my remaining shares of PKM is over 11% per annum.

Of the junk rated securities that I own, I am the most comfortable with this Hanover TP. FINRA keeps changing the link information on the underlying bond. This is the current link: FINRA - Investor Information - Market Data - Bonds - Bond Detail

The Hanover Insurance Group (THG) reported 4th quarter income of 57.3 million or $1.14 per share, an increase over the 66 cents earned in the year ago quarter, and above the consensus estimate of of 99 cents. The net income figure for the quarter included 22 cents of investment gains. Net income for the year was 197.2 million or $3.86 a share.

6. Regional Banks and Interest Rates: Most of the regional bank stocks that I own fell in price yesterday. While I did not tally up the decline, I suspect that the average percentage decline was significantly above the loss for the S & P 500. Profit taking probably had something to do with the decline. I am monitoring another correlation however. These banks are currently benefiting from the low interest rates that they are paying to their depositors. It would be reasonable for investors to be concerned by banks' net interest margin. Yesterday, there was a decline in bond prices, resulting in increased yields across the maturity spectrum. Using some ETFs as surrogates, the 7 to 10 year treasury ETF IEF declined .48% and the 20 year treasury ETF TLT fell 1.16%. The decline was modest at the shorter end of the maturity spectrum, as shown by the price changes at the main page at the WSJ Market Data Center. The ten year note fell 18/32 to yield 3.707 in trading yesterday.

A similar decline was noted yesterday in my electric utility holdings.

7. Yahoo (owned): YHOO managed to turn 436 million into 225 million by agreeing to sell HotJobs to Monster Worldwide for the later sum after purchasing it for the former in 2001. And this does not account for funds used since the acquisition. Still, Hotjobs was a better deal for Yahoo than Skype for EBAY or AOL for TimeWarner. And, people are paid great sums of moola to do these kind of deals too.

8. Projections of Global Growth for the Middle Class: A recently released report from Goldman Sachs estimates that 2 billion people could join the middle class by 2030 mostly from the BRIC nations: (Goldman Sachs) This may be the foundation for the next secular bull market in stocks.

A Goldman Sachs study from 2008 goes into great detail about its projections for global growth in the middle class www2.goldmansachs.com/ideas/global-economic-outlook/expanding-middle.pdf