Saturday, May 29, 2010

Sold 100 HMA at 9.28/Spain/ Large Cap Valuation Strategy-A New Long Term Strategy

1. Fitch Downgrades Spain's Debt: On Friday, the DJIA fell almost 100 points after Fitch downgraded the sovereign debt of Spain to AA+ from AAA. NYT Did anyone actually believe Spain was a AAA credit? As of late last week, it would cost about $240,000 annually to insure 10 million of Spanish government debt. This does not sound to me as being consistent with a AA+ rating.

S & P downgraded Spain two notches already this year. S & P cut Spain's AAA rating to AA+ at the beginning of 2010 and then reduced it another notch to AA in April: MarketWatch Moody's still has Spain a AAA. WSJ Maybe Spain is an A. Italy did conclude a successful auction 11.5 billion in 3, 5 and 10 year paper last week. MarketWatch

In the interview with Ray Dalio in Barrons , he contended that 1.9 trillion of government debt has to be rolled over just in the European periphery nations over the next three years. The sovereign debt issues are not going away anytime soon. It is hard to see these nations returning to robust growth or taking any actions to meaningfully reign in spending over the long term.

2. SOLD 100 HMA at 9.28 on Friday (See Disclaimer): I recently bought HMA at $8.82. I will come back to this name when I have more confidence in the market. The proceeds will be grouped with other stock sales and cash flow to implement the new long term large cap valuation strategy. This represents a transition out of the 2010 Speculative Strategy which was a short term, trading based strategy into a new long term strategy.

3. Multiple Compression for Many Large Cap Stocks/Long Term-Large Cap Valuation Strategy: Over the weekend, I was looking at long term charts for JNJ, IBM and several other large cap stocks, along with the Value Line data on their earnings per share and dividends.

In 2001, JNJ stock was trading at a higher price than now, hitting a high of $61. The E.P.S. number for 2001 was $1.91, resulting in a P/E of 32 at the high price. Since 2001, JNJ has continued to increase its E.P.S. in every year. In 2005, the price hit a high of 70 when earnings were $3.5 but the P/E had shrunk to 20 from the 32 number five years earlier. As the earnings continued to grow, the share price continued to stagnate in a fairly narrow range bound trading band. While JNJ came close to a 73 price in 2008, that represented only a 16 P/E on the E.P.S. number of $4.57. The estimate for 2011 is currently $5.25: JNJ: Analyst Estimates for JOHNSON & JOHNSON At the closing price of $58.3 from last Friday, the multiple has now shrunk to just 11.1 on that forward 2011 estimate.

I don't think that multiple contraction is explained by a slowdown in earnings or dividend growth. The dividend has expanded from 80 cents per share in 2001 to $2.11 in 2010, an expansion of 164% and that would be close to the earnings increase too.

A chart of the S & P 500 between 1995 to 2001 reveals the ultimate cause of the sideways pattern. The market went up too fast and too far during those years, a move that resulted in clearly absurd valuations for technology and other Nasdaq stocks but also extended the valuations of large, established blue chip companies to levels that could not be justified by their rates of growth. This kind of euphoria should be expected in the final blow out phase of a long term secular bull market in stocks. Now, after almost a decade, the pendulum has swung from clearly over valued to under valued based on a sideways stock movement and a continuation of steady earnings growth over the past decade.

So, without trying to over think what has happened, I would explain this phenomenon as JNJ becoming over-priced when it was selling at a 32 P/E, relative to its prospects for earnings growth. The ensuing decade was marked by increasing earnings, and a relatively stagnant stock price, that have resulted in JNJ's P/E multiple shrinking over the past decade.

The market is not an efficient pricing mechanism. In an efficient market, JNJ's price would not have risen to a 32 multiple, nor would it shrink to the multiple in place now. Instead, a more rational multiple would be 15 to 18 times earnings. If I took 16 times earnings as a fair price, then the 2001 price would have been hovering around 30.56 rather than in a 40 to 60 range, and so on.

If I attached a 16 multiple to 2011 earnings, I arrive at a $84 price. Yet, this price would undoubtedly bring in sellers assuming it was reached in 2011, whereas institutions would have jumped at the opportunity to buy JNJ in 2001 or 2002 at 16 times earnings.

Eventually, I suspect the perception will change and many of these large caps that have continued to grow earnings during the last decade will eventually be rewarded with much higher stock prices.

JNJ is not unusual in this regard. Medtronic would be another example. MDT had an E.P.S. number of $1.21 in 2001 and a high price of almost $61. MDT may earn around $3.5 during its next fiscal year and is currently having trouble staying over $40.

It is impossible to say when the market will afford these steady growers a higher multiple, and they deserve a higher multiple than companies whose earnings are more cyclical and less reliable. I believe that this will happen, the timing is the only open issue. When it does start to happen, those who bought these kind of stocks now will experience decent appreciation on the stock price based mostly on a multiple expansion from undervalued to fairly valued. In the 1990s, it was not unusual for MDT stock to sport a 30 P/E. Now a good return could be achieved with just a 15 multiple.

IBM would be another example. In 1999, IBM reached $139 per share with an E.P.S. that year of $3.72. Even after the recession, the stock hit $126 in 2002 when earnings fell to $3.95 from $4.35 in the previous year. Since that down year, IBM has reported year-over-year earnings increases reaching an E.P.S. of $10 in 2009 and the consensus estimation is for $11.27 this year. Yet, the price of the shares closed last Friday at $125.26. When IBM was selling at $125 in 2002, the P/E was over 31 and now it is at 11.11 times 2010 earnings and slightly less than 10 times estimated 2011 earnings. A 15 multiple on 2011 estimates would give me a $184 price target. IBM: Analyst Estimates for INTL BUSINESS MACHINES IBM recently forecasted $20 per share in earnings by its fiscal 2015: At 15 times, that would translate into $250 per share, a double from its current price.

There are many others that fit into this category: large, financially stable companies that have grown earnings over the past decade, selling at a low multiple of current earnings, and near a 1 PEG.

The strategy has to be long term. I do not know when the perception will start to change, and investors consequently start to recognize that these companies are steals at the current prices. I asked myself a question. If I had the dough to buy JNJ  for 10 or 11 times earnings, would I do it? Needless to say, I am more than a few bucks short of being able to do that, but that is how an investor needs to think. I doubt that investors' perceptions will change anytime soon, so there may be plenty of time to gradually implement the strategy as cash flow is received from interest and dividends. Otherwise I will need to pick up the pace of some stock or mutual fund sells.

While the strategy is long term, it is not forever. These companies are subject to the law of large numbers. One of more of them could make serious mistakes that impacts their long term growth potential. Barring unusual circumstances, most of these large stocks will need to be sold when and if the multiple approaches 25 or even starts to exceed 20 on forward earnings estimates. An unusual circumstance would for example include one or more new products that would justify a temporary multiple expansion into the 20s, or a recession that might temporarily cause a decline in earnings and an expansion of the multiple.

Another component of the strategy will be to add an ETF that contains only the largest companies where these values are now congregated. One such ETF, which is not currently owned, is iShares S&P 100 Index Fund (OEF). There are some others that I would consider buying including iShares Morningstar Large Value Index Fund (JKF) and the iShares S&P Global 100 Index Fund (IOO).

Headknocker has allowed a fifty grand initial funding for this strategy.

Friday, May 28, 2010

Heinz (HNZ)/Cramer MAD Trading Recommendation/JNJ-In Need of a Spanking/

1. Heinz (owned-Dividend Growth Strategy): Heinz raised its dividend for its fiscal 2011 year by 12 cents to $1.8 per share, a 7% increase. This stock was purchased in early March 2009 at 31.67. The best time to implement a dividend growth strategy is during a catastrophic phase of a long term bear market. All of the consumer staple stocks purchased in March 2009 maintained their dividends during the Near Depression period and continued to increase them. After the stock price plummeted, the starting dividend yield on those Heinz shares was about 5.4% at my purchase cost. My cost remains constant. With this recent raise in the dividend, my yield is now 5.68%. With another 7% raise in the dividend during calender 2011, my yield would cross 6%. As the dividend is increased, my yield will increase based on my constant cost basis. This is the essence of the dividend growth strategy. Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds

Heinz reported earnings for its 4th fiscal quarter of 60 cents on a 8.3% increase in sales. The consensus estimate was for 59 cents. Global ketchup sales rose 7.7%. Heinz estimates that its fiscal 2011 revenues will be in the 10.8 to 10.9 billion range, with an E.P.S. range of $3.06 to $3.16.

2. Cramer Says Investors Needed to Sell Into Rally Yesterday- I thought that this advice at the start of the Mad Money show yesterday was unusually bad. He was saying that investors should have bought on one of the recent down days, one of his accidental high yielders, and then sell some into the rally yesterday.

As a practical matter, few individuals could have such impeccable timing. I would have had to buy on one of the recent down days, almost at an intraday bottom, and then sell near the close yesterday. I would have had to buy in bulk to make it worth the effort. This is a link to the recent closing numbers for the ^DJI . The DJIA was almost 200 point higher than the close yesterday, after the 285 point spurt, on May 19th. It is just ridiculous, even reckless, to tell individual investors to try and time market moves in such a hyper manner. Now, if the market falls 300 points early next week, do I buy those shares back? And if it falls another 300 points in the ensuing days, then when do I sell, on another 285 point pop? Just asinine.

Yesterday, I added to my position in Medtronic for reasons that had nothing to do with what was happening in the market. ADDED TO MDT at 38.99 It was based solely on the price of MDT, which had actually declined some intraday at the time of my purchase. The price of MDT shares had declined by about 6 dollars since mid April or about 13%. This decline made the shares attractive again to me on a valuation basis. I am not going to sell my position on a two dollar rise in price, but instead have targeted a $50 price, regardless of what the market is doing. I would consider at least paring the position at that target price (shares have been bought in the $26 to $39 range). A $50 price would still be less than 15 times forward earnings and I would not regard MDT as expensive at $50.

It would make sense to pare positions some as the market rose over 70% from its March 2009 low. Those kind of moves have historically started to fail after such a rise. Why press your luck and refuse to take some precautions? If you believe that the market is still in a long term bear market, it is always important to pare positions after a strong cyclical move, and then start to add them back or to establish new ones after a significant decline. This is not the kind of timing recommended by Cramer. But no one can time the markets gyrations with the precision that Cramer recommended in his show last night. It is just not feasible or practical, and ultimately it would be foolish to even try.

3. Greece Default Inevitable: I mentioned yesterday that the market still expects Greece to default. The country is basically bankrupt and would have already defaulted but for the recent bailout, which is ultimately only a short term solution. An article in the WSJ points out that Greek government debt totaled €273.4 billion at the end of 2009, representing 115% of the country's GDP. By 2012, it is estimated that the debt will total 150% of GDP, rendering it all but certain that Greece will default.

4. Bank Funding Problems Starting To Crop Up Again: I read a story in the WSJ that Spain's Banco Bilbao Vizcaya Argentaria, or BBVA, was not able to rollover 1 billion in the U.S. commercial paper market this month. I have noticed that the 3 month LIBOR rate has started to creep up, and that rate rose to .54% yesterday. WSJ This rate has hovered at around .25% until recently. I would view the recent rise to be credit risk related.

5. Dividends and Interest: I noted the following dividend and interest payments in last night's The TC containing an Aon junior bond, KTN, goes ex interest for its semi-annual payment on 6/28. KTN add at below $14 TRUST CERTIFICATE AON BOND KTN ORDER FILLED at $13.1 Another TC with the same bond, KVW, also goes ex interest on June 28th. DKK, another Trust Certificate with the same junior bond as KTN mentioned above, goes ex interest on 6/14, a couple of weeks earlier than KTN and KVW. I intend to keep KTN and KVW since the yield at my cost is viewed as more desirable than harvesting a good one time capital gain on the shares. The remaining shares of KVW were bought at $16.08 on 9/30/08, shortly before starting this blog. I was then in a trading mode for the AON TCs, attempting to take advantage of wildly disparate pricing discrepancies among 4 of them. DKK, a more recent acquisition with a much higher cost basis, will occasionally be bought and sold. Bought 50 DKK AT 24.5 Added 50 of the TC DKK Bought 50 DKK at 24.78

GFW, a bond issue from AAG Holding, goes ex interest for its quarterly payment on 6/11. Bought 50 GFW at 22.76 Bought 50 GFW at 22.63 The TP for Associated Bank, ABWPRA, goes ex interest on 6/11. I recently sold 100 of my 150 shares after reviewing this bank's last earnings report. Sold 100 of the 150 ABWPRA at 22.2 I have kept the 50 shares bought at $19.42 in the taxable account. JWF, one of my best TP buys, goes ex interest for its quarterly payment on 6/14. JWF is a Wells Fargo TP bought at less than $10. The recently purchased TP, CPP, goes ex interest on 6/10 for its semi-annual interest payment: Bought 50 of the TC CPP at $24.2/ PFBI, part of the regional bank strategy, goes ex dividend on 6/11. The current yield is over 5%. BACPRW, another BAC TP, goes ex on 6/10. BAC Capital Trust I, BACPRW

6. JNJ (owned): I am not surprised to hear that the FDA is weighing whether to seek criminal penalties against JNJ as described in this WSJ article. The latest fiasco for JNJ's McNeil Consumer Healthcare Unit is the recall of more than 136 million bottles of children's over-the-counter medicines. Earlier in the year, there was a massive recall of Tylenol. The FDA commissioner testified yesterday that McNeil has a pattern of noncompliance with good manufacturing practices. Possibly, the only way to wake JNJ up is with criminal sanctions. I am curious why Colleen Goggins still has her job. The kind of problems experienced at McNeil just in the past year or so would justify the guillotining of the entire top layer of its management, figuratively speaking of course.

7. Article on Five Bank Stock Bargains: Of the five mentioned in this article, I own Flushing Financial (FFIC) and Northwest Bancshares (NWBI) in the regional bank basket strategy: Regional Bank Stocks. This basket has 36 stocks in it. I do not own common stock in Oriental Financial (OFG), another one mentioned, but I did buy one of its equity preferred stocks: Bought 50 OFGPRA at 19.55. I have Bank Mutual (BKMU) on a monitor list for a possible addition. And, I had never heard of Westfield Financial (WFD). I will look at it today to determine whether it would be a worthwhile addition to the monitor list. That is the first step in the process of selecting names for this basket strategy.

Thursday, May 27, 2010

ADDED TO MDT at 38.99/FT Story On China Reviewing Euro Holdings Sinks Market Wednesday/Cramer On VOD/National Australia Bank/

1. National Australia Bank (NABZY) (owed): Yesterday, I mentioned buying 50 shares of NABZY at 19.51. I neglected to mention the last earnings report, which is summarized in this pdf release from the bank. For the first half of its 2010 year, NAB reported cash earnings of 2.2 billion AUD, a 20.9% increase compared to the six month period ending in September 2009. The capital ratios of National Australia Bank and its principal subsidiaries appear to be good to me and can be found at page 6 of this report: pdf. This earnings report is discussed in the following publications: NZ Herald BusinessWeek More information about this bank can be found at the site. The market cap is close to 50 billion.

2. Vodafone (VOD): Cramer attempted to make a case for an investment in Vodafone (VOD). CNBC He recommends starting a position when VOD's yield rises to 7%. While he doesn't mind exposure to the British Pound, I am not so comfortable with pound exposure. This is a link to the GBP/USD Currency Conversion Chart. I do not find much much comfort looking at a five year chart: GBP/USD Currency Conversion Some might argue that the current exchange rate has returned to the five year low from March 2009, where the pound found some support.

The ADR for Vodafone closed yesterday at $19.2. VOD was recently at $23.69 on 4/15/2010, and has declined 18.95% since that time to yesterday's closing price. The shares traded in London fell about 15% during the same period: VODAFONE GRP Share Price Chart | VOD.L The difference is due to the fall of the British Pound against the U.S. Dollar. On 4/15/2010, a British pound would buy $1.547 U.S. and $1.44 U.S. yesterday: GBP/USD Currency Conversion Chart

In a post from Tuesday, I referenced some commentary from an analyst from Davenport who had downgraded Verizon (VZ) to neutral. Item # 3 VZ T A reason for the downgrade was that Verizon Wireless would have to start paying out cash flow to Vodafone within two years. VOD owns 45% of Verizon Wireless, and the cash flow was around 14.77 billion in 2009. Cramer mentioned this point in his analysis. In my earlier post on this subject, I thought that this potential future development was "more supportive" of a purchase of VOD shares than a sell of VZ.

3. FT Story On China Reviewing its European Holdings: The market swoon yesterday was caused by a report in the Financial Times, repeated in this article from Reuters, that China was reviewing its Euro holdings. I would assume that China reviews its holdings all of the time. When the knuckleheads hear a story like that, the first reaction is to sell without thinking. I wonder why anyone allows knuckleheads to manage their money when they are sufficiently incompetent that a conservator needs to be appointed to manage their own assets.

The gist of the report was that representatives of China's State Administration of Foreign Exchange met with some bankers who liked to talk to reporters and expressed concern about China's holdings of PIIGS debt. Wasn't there stories about China being concerned about holding so much of U.S. debt, not so long ago (NYT) ? This state agency in China holds an estimated 630 billion of Eurozone bonds.

China said this FT report was groundless today:

I have read reports that the CDS market is pricing a Greek government default at 75% within five years. WSJ I would hope that any significant holder of that debt would be reviewing their options.

4. FIRST QUATER GDP: The Gross Domestic Product number for the first quarter was revised down to an annualized 3% rate, down from the Commerce Department's earlier estimate of 3.2%. This number represents the annualized increase over the 4th quarter of 2009, when the GDP rose 5.6%. Consumers increased their spending by 3.5% in the 1st quarter, up from 1.6% in the 4th quarter of 2009.

5. More Facts Dribbling Out About BP's Gross Negligence: A WSJ today summarizes some key decisions made by BP, apparently to save money, that made the Deepwater Horizon well more vulnerable to a blowout. There is more than enough evidence for prosecutors to open a criminal investigation. More information is provided in an article in today's about the latest NYT .

6. Spain's Parliament Approves Modest Austerity Measure by One Vote: The austerity package was just 18 billion and a temporary one, lasting through 2011. MarketWatch To me, this just shows the difficulty that politicians around the world have in reducing spending by even very modest amounts. The Spanish unions have called for a general strike to protest.

In some ways, another Great Depression would have some long term beneficial results. While many people would not learn anything from it, still expecting the government to take care of them even it has no money, most people coming of age during the depression would learn to because more self-reliant and less dependent on others. The Great Depression generation for the most part learned to be frugal, to take on only the debt that could clearly be serviced by them, and to live well within their means. The same can not be said for subsequent generations.

7. Added 40 shares to MDT at $38.99 Using Remaining Cash Flow (See Disclaimer): Apparently the knuckleheads were disappointed when MDT management noted that it was more comfortable with the bottom part of its 3.45 to 3.55 guidance for fiscal 2011. Some naysayers are concerned about the lack of growth in the U.S market for defibrillators during the recession. I would suspect that the slowdown is related to two events connected to the economic downturn: the growing number of uninsured and the expiration of Cobra period for those individuals who were laid-off. laid-off workers - Management wants to see better results in its spine business before having more comfort with the upper end of its estimated E.P.S. range.

The last quarterly report had an E.P.S. number of 89 cents which beat expectations by 1 cent. A summary of this report can be found at MarketWatch I would just point out the obvious. At a $39 price, MDT is selling for just a 11.14 forward P/E using the midpoint of that estimated range. Excluding the impact of share dilution for acquisitions and an extra week in fiscal 2010, the earnings growth number for fiscal 2011 is estimated to be in the 10 to 13 percent range. The P.E.G. for this quality blue chip company is therefore around 1. A good report to review about this earnings report is the one from Barclays Capital that some brokerage firms, such as Fidelity, make available to their retail customers A negative and myopic view is summarized in this Forbes article summarizing the opinions of a Bernstein analyst, Derrick Sung.

I purchased some MDT shares in early March 2009 at less than $26 per share. I am staying with my target of $50 per share discussed in Item #6 of this post from September 2009. My last add, discussed in that linked post, was at $37.58, so I have been averaging up some since the purchase in March 2009.

The stock did recently fall below its 200 day moving average: Medtronic Inc. Common Stock Share Price Chart | MDT The current price is close to around where MDT was trading in 1999. Given MDT's history of raising its dividend, this purchase would qualify for the dividend growth strategy except that the starting point for the dividend yield is too low to qualify. The current yield is around 2.1% at the $39 price. My dividend growth strategy requires a starting yield of 3% along with several other conditions: See Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds

Looking at the dividend data available at VL, I see dividend increases every year since 1994 which is as far back as the current VL report shows. The dividend doubled between 1994 to 1996 (annual 5 to 10 cents-VL uses rounded numbers), and doubled again by 2001 when the annual rate was at $.2225.

The double in the rate occurred again by 2007 when the rate hit .485. I am going to call that a double in six to seven years. A history of MDT's dividends and splits can be found at Medtronic Inc. - Dividends & Splits. If the current rate doubles to around $1.64 in 2017, that would give me a 4.2% yield at a total cost of $39.

Wednesday, May 26, 2010

Added 50 FNFG at 12.62/ ADDED 50 NABZY AT 19.51 (National Australia Bank)/U.S. Dollar In Parabolic Move

1. Dollar in Parabolic Move: I am certainly no technician. It is hard to look at the Dollar Index (DXY) and have a great deal of comfort in the sustainability of the dollar's fast climb. You never know when a parabolic move will end and then crash. I mentioned in a prior post that I would consider buying back BWX or another foreign bond ETF "when and if the dollar index starts to approach 90". Item # 5 The Dollar Index & Foreign Government Bond ETFs WIP & BWX At that level, I suspect that the currency risk inherent in owning foreign bonds would shift in my favor. In addition to currency risk, which is critical for this kind of investment and renders foreign bonds inappropriate investments for many individual investors, recent events have highlighted credit risk even in sovereign bonds for developed nations. Interest rate is omnipresent after such a long term bull market in bonds.

Daryl Guppy, a CNBC contributor, believes that his technical analyst supports a collapse in the dollar after the DXY reaches the $.89 to $.91 range late in June. I am not so interested in the time frame as the range. That range in DXY will most likely be associated with further weakness in BWX and other foreign bond ETFs. I had already concluded that selling the foreign bond ETFs when the DXY approached 75 was advisable, and all of my positions were liquidated by that time. Now, with the parabolic rise in the dollar, these foreign ETFs have declined in value due primarily to the decline in foreign currencies against the dollar. So, when the DXY approaches 90 again, I will consider reestablishing a small position. I am not inclined to go into foreign bond ETFs too deep due to their low dividend yields and interest rate risk considerations, even if the currency risk has possibly tilted in my favor.

2. Added 50 FNFG at 12.62 Today ( Regional Bank Stocks strategy)(See Disclaimer): The recent squall cut my unrealized profit in the regional bank basket by about 3 grand at its most recent apex and several positions went from unrealized profits to losses. One of those stocks was First Niagara. I bought 50 shares of FNFG at 13.7 last February. My last discussion concluded with a summary of FNFG's earnings and capital as of 12/31/2009. Since that post, FNFG reported an E.P.S. for the 1st quarter of 2010 at 16 cents per share, up from 14 cents a share in the year ago quarter. Form 10-Q The net interest margin was 3.61%.

The current dividend penny rate is 14 cents per quarter which gives me around a 4.44% yield at a total cost of $12.62. While First Niagara did not cut its dividend during the Near Depression period, it has not increased it from the current annual rate of 56 cents per share, established in 2008. Before then, the bank was in the habit of raising the dividend, moving gradually from 11 cents in 2000 to 56 cents in 2008, which is an excellent percentage increase over that period of time. This history of raising the dividend prior to 2008, and keeping the dividend steady during the Near Depression period, are two reasons supporting my decision to move to a 100 share round lot on FNFG. However, I do not expect the bank to increase the dividend anytime soon.

As of 3/31/2010, nonaccruing loans as a percentage of total loans was 1.05% and the allowance for credit losses as a percentage of nonaccruing loans was at 115%. At page 59, the bank lists its capital ratios which are good. Tier 1 capital was 7.55%; Tier 1 risked based capital was at 13.08; and total risk based capital was at 14.2.

On 4/9/2010, First Niagara also completed its acquisition of Harleysville National, whose banking subsidiary had 83 branch locations in Eastern Pennsylvania.

3. List of UnderCapitalized Banks: This article at has a list of 161 undercapitalized banks. This list is discuss in an article at MSN Money.

4. David Rosenberg: In this interview with Rosenberg, he continues to be bearish, and recommends safe income investments. He is looking for S & P 500 at 850 Dave Rosenberg’s Unfortunately, Melissa Lee introduced Rosenberg as having some kind of crystal ball, when he was in fact advocating that investors avoid stocks in March 2009. Barrons's & David Rosenberg Abelson and Rosenberg Again and Again In what I refer to as the last phase of the current long term bear market, I have previously mentioned that I expect the S & P 500 to meander in the 950 to 1250 range for the next two or three years.

5. Greek Wage Increases and Competitiveness: Jim Jubak mentions in his column that wages in Greece, under the national collective labor agreement, rose 6.2% in 2006, 5.4% in 2007, 6.2% in 2008 and 5.7% in 2009 and even more generous pensions at earlier ages as the clock ticked merrily to that nation's current credit meltdown. And Jubak focuses on the fact, frequently mentioned in this blog, that Greece is not alone in its fiscal irresponsibility. It is not like any western democracy has yet to recognize that it has promised more than it can deliver to an aging population. The U.S. government and most of its citizens are among the leaders of those living in a perpetual state of denial.

6. EX DIVIDENDS & INTEREST: PJL a Trust Certificate with a VZ senior bond as the underlying security, went ex interest today for its semi-annual interest payment. Several of the Aegon and ING hybrids are ex dividend tomorrow, including AEB, AEF, AEH, INZ and IND, all owned. PFK, the CPI floater from Prudential, goes ex for its monthly distribution on Thursday, May 27th. The TP from Zions, ZBPRB, was ex interest today. Bought 50 ZBPRB in Roth at $19.9 The two Zions equity preferred stocks, ZBPRA and ZBPRC, are ex dividend tomorrow.Bought 100 ZBPRA at $7.8 Bought 50 ZBPRA at 12.5 in IRA Bought 30 ZBPRC at 18.4/ Analysis of Prior Question: ZBPRA vs. ZBPRC OR ZBPRB The senior bond from Ameriprise, AMPPRA, is ex interest today. The TC with the Embarq senior bond (FJA), now part of CTL, also went ex interest on Wednesday. CTL Bonds BOUGHT 100 of the TC FJA at $15.35 Bought another 50 FJA at $ 14.2

9. Used Mid-May Cash Flow to Buy 50 NABZY at $19.51 Earlier Today (see Disclaimer): I am operating under strict trading rules now. I can buy a stock with cash flow or by selling another stock. I elected to use some of my accumulated cash flow this afternoon to buy 50 shares of the National Australia Bank, buying the shares on the pink sheet exchange. This is a link to the five year chart for the National Australia Bank Ltd. (Victoria, Australia) - NABZY. The stock has fallen from a high of around 29 in October 2009 to $19.51 this afternoon, a decline of 32.76%. Part of this decline can be attributed to the recent slide in the value of the Australian dollar against the U.S. dollar. So, in that sense, it makes more sense now for me to use my U.S. dollars to buy a security that is ultimately priced in Australian dollars than just a few weeks ago.

I checked the price of National Australia Bank on the Australian exchange and found that it has fallen about 25.9% in local currency since October 2009: NAB Stock Charts - (NASDAQ) National Australia Bank Ltd. Stock Charts The closing price was 23.65 AUD. The Australian stock market of course closes well before the U.S. exchanges. I then went to YF to convert 23.65 AUD into U.S. dollars and got $19.5213: Currency Converter This told me that my price on the pink sheets was about the same as the closing price on the Australian exchange for this large bank.

It would make more sense for me to limit myself to U.S. banks. It is after all hard enough for me to figure out what is going on with a domestic bank. But I like to wonder the world with my investments. NABZY pays a good dividend and is scheduled to go ex dividend in a few days. Marketwatch calculates the yield at the $19.51 price at 6.71%. As with other foreign stocks, there will be a withholding tax and the value of the dividend to me will vary based on the relative exchange rates at the time of payment.

While I am certainly have no expertise in trading foreign currencies, I believe in the Aussie Dollar long term against the U.S. dollar and hope to make money over time just on the exchange rate. As I just said, the Aussie dollar has fallen a lot in recent days, possibly due in part to an unwinding of the carry trade as well as weakness in certain commodity prices. This weakness can be seen in the recent price action of FXA, the currency ETF for the Australian Dollar, which has fallen from around $93 in late April to below $83 now. I am more willing to take currency risk in the Australian and Canadian dollars than any other foreign currency with the possible exception occasionally of the Swiss Franc and the Norwegian Krone. I am not yet ready to take the currency risk of the Euro. I have noticed several European consumer staple stocks approaching March 2009 type prices expressed in dollar terms, due to the declines in the Euro and the market, and this is tempting me virtually everyday now. I hesitate due to lack of confidence in the Euro, but I may overcome that problem at some point north of parity with the dollar.

This is a link to the long term chart for NABZY.PK at Yahoo Finance. The later part of 2008 and early in 2009 were in retrospect a good entry point for this stock.

The buys were before the market turned south. I noticed FXE accelerated its decline late in the day. I am contemplating selling one of my double shorts if the DJIA falls to about 9800. As I write this post late in the trading day, it looks like we are headed toward another retest of the February lows soon.

Tuesday, May 25, 2010

CASE SHILLER/Spanish Banks/CPB VZ T MDT/MBC/Bought 50 OSM at 15.74

May 2010 is starting to be a faint echo of October 2008, at least as measured by the decline in my portfolio, and I am conservatively positioned for this kind of turmoil. I was encouraged that the S & P 500 managed a small gain today. When I left HQ to deal with a problem involving my parent's 1987 Mercedes, the DJIA was down over 200 points. I remembered what Louise Yamada had said in a recent interview about the importance of staying above 9800. (Yamada Interview) For now, it looks like the market successfully retested that low from February.

The rally off the March 2009 low was a short duration cyclical bull rally within the confines of a long term secular bear market starting in October 1997, typical for a counter move response to a catastrophic bottom which occurs in every long term bear market. More on 1982 or 1974 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? The VIX did give excellent warning signals of the pending end of the short duration cyclical bull cycle (summarized in an earlier post: Continuation of the Long Term Secular Bear Market Pattern).

Some would quibble with my terminology and simply call the dismal action in May as a correction in that bull cycle. For now, I am saying that the short duration cyclical bull which started in March 2009 is kaput. Hopefully, the market can stabilize at the current level, meander around the low 10,000 area in the DJIA until most people realize that the fears about Europe are overblown. The 1 trillion dollar rescue package does buy Europe enough time to get its fiscal house in order. The PIIGS are starting to implement some fiscal restraint. Now, what about the U.S.?

I was not exactly reassured today when the St. Louis Fed President, James Bullard, opined that the European crisis would "probably" fall short of sending the world into another recession. St. Louis Fed | Newsroom | James Bullard | Speeches & Presentations Personally, I think using the word "crisis" to describe what is happening in Europe now is overly dramatic. It does represent another warning shot across the bow of western governments about the levels of government spending and debt.

A number of stocks have already reached valuations that are hard to justify. I noticed the Exxon hit a 52 week low today and has now fallen below its low reached in early March 2009: Exxon Mobil Corporation Common Share Price Chart | XOM The current price is around 10 times 2010 estimated earnings.

1. Campbell Soup (owned): Campbell reported adjusted earnings of 54 cents for its fiscal third quarter, beating the consensus estimate of 51 cents , on an increase in revenues to 1.802 billion. U.S. soup sales rose 2%. CPB forecasted that its adjusted E.P.S. for fiscal 2010 will be at the upper end of its targeted range of $2.41 to $2.45. U.S. soup sales increased 2%.

2. AT & T and Verizon (own senior bonds and AT & T common): Eric Savitz summarized in his daily Tech Trader column the analyst reports on AT & T and Verizon published by Davenport & Company analyst Drake Johnstone. This analyst downgraded VZ to neutral based on concerns that Verizon will not be able to grow its dividend when it has to start paying 45% of the cash flow from Verizon Wireless to Vodafone, which he contends will happen sometime in the next two years. The same analyst cut his rating on AT & T to neutral based on his estimate that as many as 40% of the AT & T's IPhone customers may defect to VZ once AT & T's exclusivity with Apple ends and VZ is able to offer the IPhone on its network. I did note that AT & T raised its early termination fee to $325 from $175 on the smart phones. CNET News

I would simply note that VZ is yielding almost 7% at its current price. I suspect most investors would be satisfied with that yield even without a dividend raise, at least for a few years.

It is my understanding that Verizon can use the Verizon Wireless cash flow to repay inter-company debt owed to VZ, but that debt will be repaid sometime in mid 2010. Seeking Alpha VOD has not received a dividend from Verizon Wireless since 2005. Verizon Wireless had free cash flow of 14.77 billion in 2009 according to the WSJ. The argument made by the Davenport analyst may be more supportive of a purchase of VOD shares than a downgrade of VZ at its current price.

3. Spanish Banks: Okay, who has ever heard of Cajastur, Caja de Ahorros del Mediterraneo, Caja Extremadura and Caja Cantabria. There is a growing recognition that some of Spain's banks have not exactly come to grips with their problem real estate loans. These four Spanish savings banks announced plans to merge on Tuesday to "strengthen solvency". It does not appear that the market is buying the strengthen or the solvency part of that phrase. Spain bailed out another savings bank on Monday with a $691 million bailout. This problem has been brewing for a long time. Bloomberg ran an article last October about the Spanish banks efforts to avoid recognizing losses on their soured real estate loans. Apparently, there was a belief in Spain that refusing to recognize their problems is tantamount to solving them. But recognizing that you have a problem is the first step toward recovery. Reuters

4. Spit as Weapon: The NYT had an article on the front page today about NYC taking extended paid leaves after allegedly being spat upon by a passenger. A total of 51 drivers took an average of 64 paid days off from work after claiming about such an incident, apparently a very traumatic event in their lives. One driver spent 191 days. The transit authority is facing a budget shortfall of 400 million. While I have never read about or heard of such an incident in my neck of the woods, I would not question that some of these incidents actually occurred in NYC. How many paid days can be justified even if such an event actually happened? I would say none, and it is time for politicians to exercise some backbone in dealing with public unions.

5. Case Shiller Index: This was a disturbing report. Home prices fell .5% March compared to February in the Case Shiller 20 city index, notwithstanding the home purchase tax credit which expired at the end of April. This was on an unadjusted basis. The seasonal adjustment resulted in no change between February and March. CNBC

6. Medtronic (owned): Medtronic reported adjusted earnings of 89 cents per share for its fiscal 4th quarter, 1 cent better than the consensus expectation, on revenues of 4.196 billion. MDT forecasts an E.P.S. of $3.45 to $3.55 for fiscal 2011 which includes 5 cents of share dilution due to the acquisition of Invatec and the pending deal to acquire ATS Medical. The 4th quarter cash flow from operations was 1.237 billion. For MDT's fiscal 2010, international revenue grew 13% in constant currency terms and those revenues constituted 41% of total revenues for that year.

7. Record Low Yield for the 2 Year Note: What can you say? The treasury held the auction for the 2 year note today. The yield was the lowest in history at .769%. pdf Such a low yield is a manifestation of palpable fear, so thick that you can cut with a knife. Obviously, people are more concerned about the return of their money than the return on their money. It is almost impossible to believe, but the treasury sold almost 43 billion in 2 year notes at that measly yield. This is a link to the Federal Reserve's data on the 2 year note yields since 1976. There was a story at CNBC that this auction had weak demand. I would not characterize the successful sell of 43 billion in 2 years notes to yield .769% as anything resembling weak.

8. MBC (owned): I mentioned that MBC was ex dividend for its annual distribution today. I knew that this principal protected note with a $10 par value would pay its guarantee of 3%, rather than an amount tied to the increase in the ^RUT due to a maximum level violation during the first annual coupon period. The first period ended on May 21, 2010 with the Russell 2000 at 649.29. This will be the Starting Value for the second annual coupon period which will end on 5/20/2011. Final Pricing Supplement MBC will pay the greater of 3% or the percentage gain in the Russell 2000 from the Starting Value to the closing date, but only up to 30%. And, as previously discussed, there will be a reversion to 3% irrespective of the increase if the Russell 2000 has just one closing day above a 30% increase from the Starting Value of 649.29. Such a reversion occurred in the first annual coupon period. Bought 100 MDC at 9.84 This places the maximum level at 844.077 in the Russell 2000 index.

9. Bought 50 OSM at 15.74 (see Disclaimer): This purchase brings me up to 200 shares. OSM is a $25 par value senior note issued by SLM (known as Sallie Mae) that matures in March 2017. The return on this note would be good just with the profit realized on the shares at maturity, assuming SLM survives to pay value. I have discussed this note several times in the past. It pays interest monthly based on a 2% spread over a CPI computation, which uses a 12 month period with a 3 month lag. The calculation will use the non-seasonal CPI numbers that can be found at The April CPI number was released in May, and it will be relevant in the calculation for the August monthly interest payment. This is how it is computed:

April 2010 Non-Seasonal CPI 218.009
April 2009 Non-Seasonal CPI 213.240
Divide 4.769 by 213.240= .02236 +.02 Spread= .04236
Multiply .04236 x $25 par value= $1.059 (annualize rate for the month)
Multiply $1.059 x. 31/365= $.08994 penny rate for August 15th monthly payment

The computation for July was done in an earlier post as follows:

March 2010 217.631
March 2009 212.709
Divided by 212.709=.02314
Add .02 Spread=.04314
Multiply by $25=$1.0785
Divide by 30/365=$ .0886 for July

The penny rate for the next payment on June 15th is $.088.

February 2010 216.741
February 2009 212.193
Divided by 212.193=.02143
Add the Spread (02% for OSM; .024% for PFK)= .04143% for OSM
Multiply .04123% by $25 par value=$1.03575
Multiply $1.03575 x 31/365= $.08796 rounded to $.088.


So that is how it is done. It is going to vary by the month and there is a built in lag of 3 months. I just work off the assumption that a decent guess for the average annual inflation rate over the next six years would be 2.5%. Adding the 2% spread to 2.5% gives me an average coupon rate of 4.5%. Multiply 4.5% by the $25 par value and I arrive at an average annual penny rate of $1.125. Divided that number by a total cost per share of $15.74 and I arrive at 7.147%. That is just an assumption based on a 2.5% annualized inflation rate. It could turn out to be higher or lower of course. That does not entice me given the risk of a SLM note. I am interested in the yield to maturity number. If I plug in a 4.5% coupon into the Morningstar Bond Calculator, a $25 par value, a $15.74 cost, and a maturity on 3/15/2017, I arrive at a YTM of 13.08%, That is the number that is worth taking the risk connected with SLM's survival.

Some earlier posts on this note include these posts from 2008: CPI FLoaters PFK AND OSM CPI and CPI Floaters-OSM CPI FLOATER: OSM OSM is discussed in this recent Seeking Alpha article (the author incorrectly calls OSM a preferred stock however, so I left a comment).

The government will be ending soon its subsides to SLM for originating student loans. Anyone interested in SLM notes needs to read some analyst reports on how this company will likely cope with the government becoming the primary originator of student loans. SLM will service loans originated by the government, and it has a large book of loans outstanding that will run off in the coming years. (free site with registration) has the Moody's rating of OSM at Ba1 and the S & P rating at BBB- . Ratings and trading information about SLM bonds can be found at FINRA.

I am willing to take only a small risk on OSM. If and when the bond starts trading over $20, I will assess then whether or not it would be prudent to continue taking the risk or to harvest the profit that I now have in those 200 shares.