The downdraft in the markets yesterday came soon after S & P cut its rating of Greek government to debt to junk. Portugal's debt was cut by two notches. The Greek government debt was reduced by S & P to BB+. In a recent post, I mentioned that the only long term solution for Greece is to give 60% of its citizens a brain transplant. Greece Well, I hit that number on the head. A poll yesterday found that 60% of the Greeks believe that they do not have a problem. Tech Ticker Strikes to protest the austerity measures are scheduled for May 5th.
After the downgrade yesterday, the cost for credit default insurance rose to $800,000 a year to insure 10 million of Greek debt for five years.
I would agree with Senator Levin on at least one of his points made yesterday. The creation of synthetic CDOs magnified the financial credit crisis. MarketWatch These abominations need to be abolished, notwithstanding the protestations of the Masters of Disaster about interfering with their "innovations".
The short Europe part of my long/short strategy worked yesterday. EPV was my best performer yesterday, rising almost 10% to close at $22.54. ProShares ETFs: UltraShort MSCI Europe – Overview This move just brings me back to break-even though.
Yesterday, the fear trade from the Near Depression period returned, with the U.S. dollar, the Japanese Yen and U.S. treasuries gaining strength and most other asset classes losing value. If this continues, it may create another opportunity for me to hedge my long corporate bond exposure with TBT, which I no longer own, after LB sold that insurance for a quick profit.
The escalating problems in Europe highlight that there is no real mechanism to prevent one or more EU members from undermining the EURO currency. I may go back to my short on the Euro with a small buy of EUO (Bought 50 EUO at $17.17 as a Hedge). While the reluctance of Germany to bail out the Greeks is understandable, the more probable than not scenario is that Greece will be bailed out by the IMF and the more responsible EU nations after Greece agrees to the IMF's terms. The stakes are just to high to allow the Greek contagion to spread, threatening the viability of the EU and their common currency. A recent poll showed that 57% of the Germans were against bailing out the kleptocracy.
In his Barrons column Randall Forsyth summarizes the estimate made by two Citigroup economists on the stock market impact from two potential tax changes. If Congress does nothing on the dividend tax rate, and the top tax rate then reverts back to 39.6% (the rate in effect prior to the 2001 return), and given the 3.8% additional Medicare tax on investment income starting in 2013, the Citigroup economists estimate that those two changes will reduce the present value of U.S. stocks by 10% to 15%. The 3.8% new tax on investment income is intended to help fund the cost of the Democrat's welfare plan for health insurance and would apply to interest, dividends, annuities, royalites, capital gains and rents for individuals earning more than $200,000 and joint filers earning more than $250,000. National Center for Policy Analysis CBS News MSN Money (also includes gains on the sale of a home for high earners: FactCheck.org) A good analysis of the wealth redistribution aspects of "health reform" can be at The Tax Foundation - Health Care Reform: How Much Does It Redistribute Income?
The NYT reporter covering the GS flagellation yesterday noted that the Fabulous Fab admitted that GS never wanted to keep part of the Abacus deal, but was just stuck with it (see reference after 2:59 p.m.). Now, if Congress would recognize their own culpability, and give themselves some of the same treatment, I would pay for admission to see it.
1. VIX Spikes Above 20: The VIX is apparently not ready to form a Stable Vix Pattern. As previously discussed, I require 3 months of continuous movement below 20 before declaring the formation of a Stable Vix Pattern. The ^VIX rose 31.14% yesterday to close at 22.91. A question was raised yesterday from a reader about whether I would restart the count for the stable VIX pattern. I will simply copy my response to him for some comments that I had written before making that response:
" There was a similar interruption in the formation of the Stable Vix Pattern in 2003, which is allowed without starting the count over, provided the VIX soon returns to below 20. The movement above 20, starting in September 2003, lasted for 7 days, and then the dominant pattern of movement under 20 reasserted itself. However, this movement never got above 23 and was short lived. If the VIX closed over 25, I would restart the count. If it did not return to below 20 soon, I would restart the count.
I do not recall what spooked the market in September 2003 to cause a short duration spike into the low 20s. The VIX closed at 17.54 on 9/23/2003. By 9/25/2003, it hit 22.26, similar to what happened today based on the fear that Europe was about to collapse, causing the world to fall into a black hole of financial destruction or so it would seem.
I discussed the aberration from September 2003 in the following manner in an earlier post:
"By mid July 2003 I would be encouraged by the duration of the moves below 20 and the brief movement into the low 20s and no higher. I will start my three month count, not knowing what is about to happen, on August 8 2003. I will disregard the closes in the low 20s in late September/early October numbers as meaningless noise in the overall pattern developing which is clearly a dominant Stable VIX Pattern of continuous movement below 20. So I will start the Stable VIX Pattern Start Date as of 11/10/ 2003. A few weeks sooner would be okay given the steady movement below 20 most of the time in June and July."
So, this does require some interpretation. But I would not personally allow any interpretation if the VIX closes near 25 or does not resume steady movement below 20 soon" "
Hopefully, this link will work to show historical VIX prices during the period in 2003 where there was a brief movement over 20 before the Stable VIX Pattern reasserted itself: ^VIX: Historical Prices for VOLATILITY S&P 500
If the VIX continues to spike, closing in the high 20s, then I will have to infer that the developments in Europe are more serious than I now believe to be the case. This would lead me to pare some long positions. There are a few whiffs of possibly significant repercussions. Besides the sovereign debt downgrades, there was a recent failure of a 30 year German bond auction. WSJ.com And there was a near failure of an Italian government auction of short term debt: WSJ.com Italy auctioned €9.5 billion in six month bills and received bids for €9.78 billion.
2. DuPont (owned): DuPont reported a E.P.S. of $1.24 for the 1st quarter of 2010, up from 54 cents in the prior year, beating the consensus estimate by 16 cents. Sales were 8.5 billion, representing a 23% increase from the 1st quarter of 2009. This beat the consensus forecast of 8.06 billion. Volume in the Asia Pacific region was up 65%. DuPont forecasted that its sales of photovoltaic supplies to increase from 550 million in 2009 to in excess of 2 billion by 2014. Forbes. The company raised guidance for 2010 to a range between $2.5 and $2.7. The company also expects free cash flow to be 200 million higher than previously forecasted by it. DD was bought at $16.68 on March 6, 2009. Since my dividend yield at that cost is close to 10%, I have stated previously an intent to keep those shares, held in the Roth IRA, for as long as DD maintains the dividend.
3. Case Shiller Index: For the first time since December 2006, the Case Shiller index of home prices turned positive year-over-year. .standardandpoors.com .pdf Home prices are still 30% below their May 2006 peak.
4. Apollo Investment Corporation (own): One of the problems with Business Development Corporations is their frequent offerings of common stock. During the recession, it was not unusual for several firms to offer common stock priced below net asset value.
Apollo Investment Corporation announced yesterday that it intends to sell 15 million shares, and up to an additional 2.25 million shares for the underwriters over-allotment option. The stock fell in trading yesterday. Based on the the earnings report for the Q/E 12/31/2009, the net asset value per share was then $10.4. Apollo
The offering was priced at $12.40 per share. Price Public Offering
I currently own 150 shares of AINV. I view BDC's as a disfavored asset class and consequently will trade my positions and keep the positions relatively small. I also own 150 shares of PSEC.
5. Bought 50 STD at $12.35 (see Disclaimer): I was surprised that my limit order to buy 50 shares of STD was filled yesterday. When I entered the order, STD was trading much higher, but continued to decline into the close to hit my limit. Banco Santander declined 7.22% yesterday. As far as I can tell, this was due solely to the negative developments in Europe rather than any adverse news about Santander. The stock is ex dividend today. The purchase yesterday is an average down from my recent purchase at 13.35 and brings me up to a round lot of 100 shares.
6. Southwest Bancorp (OKSB) (own- Regional Bank Stocks strategy): Southwest Bancorp priced its stock offering at $12.5 per share. OKSB gained back yesterday most of what it lost after OKSB announced its intent to sell stock rising 9.14% to $14.93 in trading yesterday.
7. Delphi Financial (DFG)(own bonds only-DFP and DFY): Delphi Financial reported operating earnings of 47.5 million in the 1st quarter or 86 cents per share, beating estimates by 4 cents. This report is satisfactory from my perspective as an owners of Delphi's bonds. Once I own a firm's bonds, I will review the quarterly reports and important news items for the limited purpose of determining financial viability. Bought DFY at 22.48 Bought 100 DFP at $17.1 Bought 50 DFY at 24.36
8. NAL (own-regional bank stocks): This one was Cramer's contribution to the Regional Bank strategy. I am lukewarm on it. NewAlliance reported earnings per share of 17 cents. That amount included a 2.6 million dollar gain related to tax-exempt life insurance proceeds which I would exclude from consideration. Without that gain, NAL reported earnings of just 14 cents. Briefing.Com calls it a 1 cent beat since the analysts were at 13 cents, so the consensus number of 13 cents probably does not include the extraordinary gain from those life insurance proceeds. Net interest margin was only 2.97. I view that number as mediocre. The NPLs to total loans increased to 1.35%. The allowance for loan losses as a percentage of NPLs was 83.47. The total risk based capital ratio was 21.03% as of 3/31/2010, which is the highest that I have seen to date. The Tier 1 leverage capital ratio increased to 11.34% from 11.05% as of 12/31/09. The Board declared the regular quarterly dividend of 7 cents per share.
9. EWBC (own- Regional Bank Stocks-Cat 2) East West Bancorp beat expectations by 6 cents per share, reporting earnings of 13 cents per share. The bank guided the 2nd quarter earnings to a range of 13 to 17 cents, and the consensus was for 13 cents.
This one has been one of the huge winners in this basket. Buy of 50 EWBC at $5.57. LB wants to sell it now and is receiving some support from other staff members other than RB, due to this bank's dividend policy. Dividends are viewed as critical by the Old Geezer, and important by the LB. The RB wants to sell some dividend stocks to buy back the baby Berkshire Hathaway shares (BRK-B) for the third time in 12 months, which fell $2.55 yesterday to close at $76.69. This stock is a frequent source of tension among staff. RB has been known to howl for hours in the staffs' urinal after either the LB or the OG sells the Baby B shares after a pop. Sold All Baby B Shares at $76.51 RB BUYS BACK BABY BERKSHIRE SHARES at $3,298 SOLD BY THE LB /Bought 1 BRK/B at $3244/ SOLD BABY BERKSHIRE SHARES/ (Baby B shares split 50 for 1 in January 2010)
EWBC was not exactly generous with its payout when times were good. The annual dividend was kept at 20 cents for 2003, 2004, 2005 and 2006 and was raised to 40 cents annually for 2007-2008. The dividend is currently 4 cents annually. This history is viewed negatively. Prior to 2008, the payout ratio to net profits hovered in the 10% to 15% most of the time. This is also view negatively.
I have very large percentage gains in EWBC and WBS. I would expect WBS to be more investor friendly on its dividend policy during favorable economic times. So I am inclined to keep WBS and to sell EWBC. Both positions are currently unrealized long term capital gains. EWBC was trading up over $20 in late night trading yesterday. I have, however, not reached a decision.
What may have spooked the markets in late September 2003? Perhaps it was the Congressional hearings on a proposal to alter the regulation of GSEs like Fannie Mae and Freddie Mac.
ReplyDeleteFrom Barney Frank's opening remarks: "I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury.
"I must say we have an interesting example of self-fulfilling prophecy. Some of the critics of Fannie Mae and Freddie Mac say that the problem is that the Federal Government is obligated to bail out people who might lose money in connection with them. I do not believe that we have any such obligation. And as I said, it is a self-fulfilling prophecy by some people.
"So let me make it clear, I am a strong supporter of the role that Fannie Mae and Freddie Mac play in housing, but nobody who invests in them should come looking to me for a nickel--nor anybody else in the Federal Government. And if investors take some comfort and want to lend them a little money and less interest rates, because they like this set of affiliations, good, because housing will benefit. But there is no guarantee, there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee. Invest, and you are on your own."
http://www.taxfoundation.org/blog/show/23617.html