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.


  1. Bernanke: "a sustained recovery will depend oncontinued growth in private-sector final demand for goods and services..."

    I sense there is a lot of pent up demand building among consumers, which may account for the negative consumer sentiment reading recently. They want to spend, but for whatever reason (or no reason) they're still worried. I predict this pent-up demand will come roaring to life. Already the signs are there; in your blog today there are two which you've highlighted:

    "The reports from the retailers have generally been positive."

    "CBL & Associates Properties increased its common dividend from 5 cents to 20 cents. CBL owns several retail malls..."

    Two consumer stocks I own, DIS and HD, are doing well, and HD also raised its dividend. I'm cautiously optimistic.

  2. CATHIE: I have turned more cautious. In my opinion, consumer sentiment was already sour before the last reading and has just turned more negative. I suspect that the primary reasons are the jobs situation and the lack of real income growth for the average American family for the past decade. As Greenspan said the other day, the recovery so far has been lopsided in favor of the well to do and is "extremely unbalanced".

    Before the recession the lack of real income growth did not result in a change in spending habits, but simply more borrowing including using the home as an ATM card. Now, this can not be done and a quarter of the homes with mortgages are under water.

    I do not have any debt. However, it is easy for me to empathize with those trying to make ends meet. All of my significant bills are increasing at far greater rates than inflation, some at more than 10% from last year, such as insurance (home, auto, & health), property taxes, utilities, etc. For many that has to reign in discretionary spending. I am naturally a tightwad.

    The recent job numbers, which I will discuss tomorrow, including the Labor Department's recent report on mass layoffs for January and the initial unemployment claims number today, suggests that the unemployment picture is not getting any better. This could place downside pressure on consumer demand in the months to come. At the present time, I think that it is far from clear whether private demand will pick up the slack once the inventory restocking cycle ends and the government's fiscal stimulus peters out.