Monday, March 1, 2010

The Reactionary Philosophy of Glen Beck/Property Taxes and Errors in Square Footage Estimates/KO Anika DILLARDS/Qualified Dividends-1099/Bought 50 ANIK at 6.3/Bought 100 BTF at 13.65

The rightful order in the Universe has been restored with the Young Stock Stud restored as Head Trader and that Old Goat sent back to the Old Folks home to play checkers, read War and Peace, and listen to Frank Sinatra. 

The Old Geezer is an embarrassment to the LB. Look at LB's fine head of hair. The OG does not even need a comb. Just wet a finger and pat down a square inch and he is ready to go. 

Besides, everyone knows that the LB is the real star of HQ's operation, the glue that keeps it all together, the one who keeps that lame brain RB from losing all of Headknocker's capital. And, the LB has no fear- no confusion.


1. Property Taxes, Appraisals and Square Footage Estimates: For some reason, it did not occur me to ever check the square footage number used by the property tax appraiser in estimating the value of my home. Sometimes, the obvious escapes me as the LB focuses on a few million other matters, some of which are actually important to advancing Headknocker's capital position. 

A few years ago, I decided to check the value assigned to my home at the Zillow website. 

I noticed that the square footage of my home, which is the base number for determining value for property taxes, had been overestimated by over 400 square feet. 

I then determined that the square footage number used by Zillow originated from the Williamson County Property Tax Assessor. The property tax notices that I had received over the years did not have the square footage number being used by the assessor. If that number had been on the notice, I would have caught it in 1983. I would be interested to know whether the errors made in the square footage estimate had ever been in the homeowner's favor.

After talking with an employee at the assessor's office, I found out that they had assumed an area over the garage in my Cape Cod home was finished space, which had never been accurate. 

This added about 400 or so square feet to the estimate being used by the assessor to determine my home's value. Fortunately, this error did not amount to a staggering sum since property taxes are low in Tennessee, at least compared to other areas of the U.S. 

Even now, the total county and city real estate taxes would be around 2 thousand or so on a $400,000 home. And there is no state income tax on earned income. So Headknocker has a favorable view of Tennessee's state taxes, comparatively speaking and it is all relative.

This episode at least honed the LB's attention on the appraisal estimates made by the tax assessor's office. Home values have fallen a lot in my city as elsewhere. When the next appraisal is made, and reappraisals are done every four years in Tennessee, I am going to at least spend some time comparing it to recent sales data in the neighborhood.

2. Coca Cola (owned-dividend growth strategy): Christopher Williams, writing a column in the "Follow Up" section in Barrons, argues that the market overreacted to the downside last week in response to Coca Cola's acquisition of Coca Cola Enterprises. He views the closing price last Friday at $52.72 to be a reasonable entry point at 14 times 2011 estimated earnings. 

It has been my opinion for years now that the value of KO shares will be determined by its success outside of the U.S., particularly in emerging markets in Asia and South America. I view the recent acquisitions of bottlers in the U.S. by Pepsi and Coca Cola to be more of an acknowledgement of slow or even no growth in their North American beverage businesses. 

The bottler acquisitions will give KO and PEP more flexibility in battle for minor market share increases in a stagnant market. In my dividend growth strategy, I would require a better value as an entry point than the current price. 

While I often falter in implementing my own strategies, the basic premise is sound. I will try to wait and buy a company with a long history of raising dividends until at least a year into a bear market and will then hold the security for as long as the company continues to raise its dividend every year. My buy of KO shares was at 38.72

My most recent failure in executing this strategy did not have to do with the buying side. Instead, it was allowing the trading mentality of the LB to take a quick profit once a good long term entry point was made by the RB. This would be true for my buys of Nestle, Pepsico, General Mills and Proctor & Gamble. (see e.g.: .Sold Pepsico/ Sold General Mills / SOLD NESTLE). 

Those sales were usually preceded by a comment made by the LB that no one ever went broke taking a profit. I did manage to hold onto Unilever, Heinz, Coca Cola, Emerson, Medtronic, Sysco, Campbell Soup and a few others bought at levels deemed appropriate under the strategy.

3. CAP and Trade-Electric Utilities: It is starting to look like cap and trade is dead. The Washington Post reported that three key senators, including Senator Kerry, have abandoned the cap and trade idea and are working on alternative legislation. This would be important to those electric utilities that are still reliant on coal fired generation. Some electric utilities with more exposure to nuclear power would have benefited under the proposed cap and trade legislation.

4. Miscellaneous Comments: I really got a kick from a quote from Thomas Brackett Reed, a republican speaker of the House of Representatives in the late 19th Century who described many of his fellow congressman as "never opening their mouths without subtracting from the sum of human knowledge". Abelson led off his column in Barron's this week with that quote.

In modern American politics, disinformation and misinformation are the coins of the realm. This process results in a net subtraction of knowledge by large segments of the population, where false information is believed and accurate information is ignored or dismissed as unreliable. 

The conscientious American voters, the ones who are interested in separating fact from fiction and learning the truth, have to make a determined effort to gather reliable information and to recognize how their pre-existing opinions will frequently hinder that search.

In many cases, the statements made by politicians can only be viewed as a deliberate effort to mislead and deceive the public. The most recent such efforts have involved the GOP's attacks on the Democrats' "health reform" proposals. 

Personally, I do not favor the Democrat's plans, nor do I approve of the frequently dishonest or at best uninformed criticisms of it. My opposition is based on my opinion that the nation can not afford a massive social welfare program when the government is already incurring deficits of over a trillion dollars per year and at an unsustainable rate of close to 10% of GDP. 

Another reason is that there is not enough focus on cost reduction, a point made by Buffet in an interview broadcast today. And, it is just plain irresponsible to embark on such a program without first dealing with unfunded obligations in existing programs including Medicare, Medicaid and Social Security. 

Before adding to the fiscal problems, and placing some burdens on small businesses with over 50 employees, the first order of business needs to be addressing the spiraling costs of health care. A comparison of the latest version from Obama and earlier versions can be found in simplified form at Chart: Comparing Health Reform Bills: Democrats and Republicans 2009, Republicans 1993 - Kaiser Health News

It is interesting that one GOP attack on the Democrat's plans has them complaining about cuts in Medicare spending NYT The cut proposed by Obama was in the subsidies for Medicare Advantage plans that provides coverage not included in Medicare, which Obama claims costs 14% more per patient than regular Medicare: USATODAY Medicare Advantage

In 2008, the nation spent 2.3 trillion on medical care, which would equal about $7,681 per person, and 16.2% of our GDP according the government's estimate: Of that 2.3 trillion the federal government spent 817 billion and states spent 290 billion. Historical National Health Expenditure Data 

The NYT highlighted a report from the Commonwealth Fund that estimates the cost of failing to adopt legislation proposed under several Presidents from Nixon to Clinton: The Costs of Failure - The Commonwealth Fund 

The average family premium is currently around $13,000 and is estimated to rise to $24,000 by 2020, which is probably too conservative in my view. NYT The costs would be much higher for individuals trying to obtain comprehensive coverage outside of a group plan. 

The roundtable discussion on Meet the Press about the competing health care plans was informative, particularly the comments of Ron Brownstein.

The Census Department closed its book on W's two terms in office. Median household income declined during those eight years, poverty increased with childhood poverty increasing more, and the number of Americans without health insurance rose dramatically, www.census.gov/prod/2009pubs/p60-236.pdf Bush Legacy - Politics - The Atlantic

Libya's leader for life, Muammar Gaddafi, wants Muslims around the world to engage in an armed Jihad against Switzerland. The latest offense by the Swiss was to prohibit the building of minarets, though Gaddafi is also upset with the Swiss for arresting his son in 2008 for allegedly assaulting a servant. The voters in Switzerland approved a constitutional amendment last November banning the building of minarets.

The Treasury Department reported that it had underestimated the amount of treasury debt held by China at the end of December. Previously, the Treasury estimated that China owned 765.7 billion and now believes China owns 894.8. I can understand how the government could misplace 130 billion, after all a 100 billion here and 100 billion there, can at some point amount to some real money. www.ustreas.gov.txt

One of the sponsors of the recent Conservative Political Action Conference (CPAC) confab in Washington of those who wish to call themselves "conservative" was the John Birch Society who called President Eisenhower a dedicated agent of the communist conspiracy in America. Far-Right 

Frank Rich had an interesting column in the NYT appropriately labeled in my view "Axis of the Obsessed and Deranged". 

It is interesting to listen to a Know Nothing like Glen Beck rail against Theodore Roosevelt to the cheers of his comrades at the CPAC conference. T.R., a Republican president over a hundred years ago, is viewed as a progressive by Beck and progressivism is in his view a "cancer" that "must be cut out of the system." 

Yea, Teddy was a real liberal evildoer when he favored such things as the passage of the Meat Inspection Act of 1906 or the Pure Food and Drug Act (no rats in the ground beef vive Upton Sinclair author of the 1906 novel The Jungle) , or his actions to break up the Standard Oil Trust or to establish national parks. Actually knowing anything which is accurate would be an automatic disqualification to becoming a spokesman for the True Believers. 

Every nut job in America wants to be called a conservative now. Conservative does sound better than fruit cake or ignoramus. As I have argued many times in this past, these people have virtually nothing in common with True Conservatism.

The government reported that personal spending rose .3% in January. The savings rate declined to 3.3% from 4.2% in December.

5. Qualified Dividends: Since my 1099 from my broker is to say the least long and complicated, the firm obtained a delay in furnishing me with the first version until 2/28/2010 for 2009. I checked the report for qualified dividend classifications this morning and confirmed that the dividend distributions from the following securities were classified as qualified dividends: AEB, AEF, BMLPRH, BACPRE, GSPRA, IND, INZ, IGK, METPRA, ZBPRC and ZBPRA. 

Those are the only non-REIT equity preferred stocks or european hybrids owned in a taxable account for which I received a dividend payment in 2009. The qualified status of those dividends is one of the attractive characteristics of those securities: Advantages and Disadvantages of Equity Preferred Floating Rate Securities Aegon Hybrids: Gateway Post ING HYBRIDS: Links in one Post

I also noticed that a number of closed end funds classified significant percentages of their payouts as returns of capital. Return of Capital Definition | Investing Answers

6. Anika (owned 2010 Speculative Strategy)-Added 50 shares at 6.30 (See Disclaimer) While visiting the SEC site on Sunday to ascertain whether there were any new filing relating to Anika, I found that an asset management firm based in Rhode Island called Eliot Rose Asset Management claims to own 950,453 shares of Anika or 8.3% of the total. www.sec.gov This firm focuses on micro-cap value stocks according to its web site: About Us Anika's market capitalization is around 71.6 million at the closing price last Friday of $6.26: Anika Therapeutics Inc. 

Prior to the announced acquisition of Fidia, the stock had closed on 12/30/09 at $8.49 and proceeded to slide on the news. I suspect that the negative reaction was due to Anika expressing its intent to market MONOVISC in the U.S. on its own, rather than partnering with a large drug company that would have provided it with cash and royalty payments. As I mentioned in an earlier post, marketing the product without the backing of a major drug firms sales force has its risks: Item # 1 2010 Speculative Strategy-Gateway Post

The next major development for Anika is the FDA's decision on MONOVISC. In Anika's press release discussing its acquisition of Fidia Advanced Biopolymers, it mentioned that the final data was submitted to the FDA on 12/24/2009, and the firm expected a decision by the FDA in the second half of 2010. This drug has been approved in the European Union.

I placed a limit order to buy 50 shares before leaving HQ this morning and it was filled at $6.3, bringing my total to 150 shares near breakeven. It would have possibly been better to wait to review the 4th quarter earnings report before buying any additional shares.

7. Dillards (own TP DDT only): Dillard's reported net income of 79.5 million or $1.08 per share for its fiscal quarter ending 1/31/2010. For is F/Y, the company had net income of 68.5 million. Dillards ended its fiscal year with 341.7 million in cash and no short term borrowings under its credit facility. Cash flow from operations for the F/Y rose to 554 million 350 million in the previous fiscal year. Inventory was reduced by 5% year-over-year. At year end, the company operated 297 Dillard's department stores and 12 clearance centers.
The common shares were trading up close to 5% in early trading this morning.


8. Bought 100 shares of the CEF BTF at 13.65 Today (see Disclaimer): A reader asked me about this CEF several months ago. I had some familiarity with it and told him that the expense ratio was too high in my opinion. The morningstar data shows the expense ratio at 2.53% as of 11/30/2009. Morningstar Off hand, I am not aware of another CEF that invests primarily in U.S. stocks with a higher expense ratio. 

And, it was my judgment that there was nothing exceptional about the management of this CEF to justify what was being paid. I have not changed that opinion. Others may disagree. BTF claims that it returned a cumulative annualized return of 4.4% per year since 1999, compared to zero for the S & P 500. (see page 1 www.sec.gov)

As of 2/26/2010, BTF was selling at a 19.16% discount to net asset value. WSJ.com I suspect that one reason for the large discount is that this CEF's assets are concentrated in one company. In the last shareholder's report for the six month period ending 11/30/2009, BTF reported owning $100,261,600 of the Berkshire Hathaway A and B shares out of total assets of 247,133,304. 

If my math is correct, this means as of 11/30/09, Berkshire stock represented 40.57% of the CEF's assets. Since 11/30/09, Berkshire has rallied so it is possible that this percentage has increased to the present time. The B shares, adjusted for the subsequent 50 to 1 split, closed on 11/30/09 at $67.06, and are trading down some today after Berkshire posted its results over the weekend, trading around $79.5 at the time of this post. BRK-B: Historical Prices This is a link to the recently released annual report: www.berkshirehathaway.com .pdf

There are two ways to look at this concentration. One way is to simply view a purchase of BTF at close to a 20% discount to its NAV as a way to purchase Berkshire at a discount, though in an indirect manner. 

 Another way is to look at it is why pay 2.5% per year, just buy the Berkshire stock. One problem here at HQ on that last way is that none of the Head Traders here at HQ can hold onto Berkshire shares for more than a few weeks. At least the honcho who controls this CEF holds the shares owned by BTF.

I do not have a major problem with most of the other holdings in BTF. There are a few that I would not buy myself.

BTF is leveraged with 74.9 million in face amount of auction rate preferred stock outstanding. As many are aware, one of the casualties from the meltdown was the auction rate market. Before the meltdown, auctions in BTF's preferred securities were conducted every 28 days, and the auctions for this type of security began to fail in February 2008. I have never purchased one of those securities. 

 I looked in the last shareholder report for BTF just to see what it is paying now in dividends, and the answer provided by BTF is not much: "A successful auction for the Fund’s AMPS may not occur for some time, if ever, and even if liquidity does resume, holders of AMPS may not have the ability to sell the AMPS at their liquidation preference. 

As such, the Fund continues to pay dividends on the AMPS at the maximum rate, set forth in the Fund’s Articles Supplementary, the governing document for the AMPS. The Fund’s maximum rate is set at the greater of 1.25% of 30-day LIBOR or 30-day LIBOR plus 125 basis points." (page 21 www.sec.gov

The fund has bought some of these securities back at an average cost of $84,923 per share for the $100,000 par value shares.

The expense ratio can be found at page 12 at www.sec.gov.

The data at Morningstar shows no dividends paid since 2008. The historical price data at YF shows the last dividend of $.273 was paid in October 2008: BTF: Historical Prices for Boulder Total Return Fund

I am busy doing other things today so the remainder of my trades will have to be discussed in tomorrow's post.

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