1. Canada: The Canadian central bank became the first among the G-7 nations to raise its benchmark rate since the start of the Near Depression. The Bank of Canada increased its overnight rate by 1/4% to 1/2%: Bank of Canada increases overnight rate target In its press release, the Bank of Canada noted that the Canadian economy grew at a 6.1% pace in the first quarter of 2010 and employment growth has resumed.
Canada largely avoided the real estate meltdown, as their banks and citizens proved to me far more prudent than those in other countries.
The Bank of Nova Scotia, Canada's third largest bank, reported that its earnings for the 1st quarter rose to a record amount.
2. Delays in the Foreclosures Process as Encouraging Defaults: The NYT had an article on the front page yesterday that focuses on the long delays experienced by lenders in completing the foreclosure process. This process takes longer in the 21 states, including Florida, that require the lender to initiate a judicial proceeding as part of the foreclosure process. As you would expect, this results in delays, as the courts are clogged with these cases and the mere filing of a motion by the homeowner's attorney can result in months of delay. The end result is that homeowners can continue to live in their homes for months rent free. The average number of days that homeowner continues to live in their home has risen to 438 days. Homeowners are aware of this delay. When coupled with the deterioration in home prices, the temptation to quit making mortgage payments is understandably very strong.
The delays also encourage strategic defaults by homeowners who are capable of making the mortgage payments. This has already become prevalent in 10 states that do not allow the lender to collect a deficiency judgment against the borrower's other assets. Item # 4 Strategic Defaults
When you read stories about the rationale given by homeowners for defaulting, it is rare to read that a homeowner actually taking any responsibility for their own predicament. Invariably, someone else is too blame. There is just an undeniable reality that a large and growing percentage of Americans believe that they have a right to be free from taking any responsibility for their own actions and mistakes.
If politicians were really anxious to prevent another meltdown cause by a real estate bubble, then there would first need to be a recognition that all Americans do not have the inalienable and constitutional right to buy a home that they can not afford. While this seems obvious after what just happened in the U.S., the financial reform bill, touted by the Democrats as an effort to prevent another Near Depression, does not address the real problem, primarily for political reasons, of improvident extensions of credit to buy homes.
If politicians of both tribes were interested in actually dealing with the core issue that caused the recent Near Depression, the solution is relatively simple. You have to be able to afford the home that you want to buy. This would not be accomplished by hoping or praying that financial institutions and individuals will behave rationally and in a somewhat responsible and intelligent manner. Instead the goal would be accomplish by first recognizing that a prolonged bout of responsible behavior is not likely to occur and that national minimum standards for the extension of credit need to be established. This will never happen which goes without saying. The Tea Party crowd will complain about the government "taking over" the mortgage business. The Democrats will be concerned about their constituents being able to buy homes that they can not afford.
In a more ideal world, the minimum standards would not be difficult to visualize. A certain amount would have to be paid as a down payment and this number could be 5%. You want the homeowner to have some skin in the game to encourage rational decision making. There could be a limit on the ratio of disposable income to the mortgage payment, say 32%. Interest only loans would be barred and all of the funky mortgage "innovations" like negative amortization loans would be prohibited.
Possibly, if there was a strong desire to be a little irresponsible and to accept some of Wall Street's "innovations", you could allow up to 5% of the home mortgage loans made by a financial institution to be exempt from the national minimum standards, but the financial institution had to eat those loans. No packaging them in Wall Street abominations like CDO squared to be peddled to every sucker on the planet would be allowed in this new epidemic of responsible behavior. Lastly, the Supreme Law of the land would be that a lender can collect a deficiency judgment against anyone who defaults on paying a note. This would cut down on strategic defaults and make individuals accept responsibility for their own mistakes. Those kind of sensible rules would prevent a credit fueled bubble in housing prices which is what just happened. However, there is no political will to actually implement rules that would actually work.
Possibly the new rules could be lifted for a few years after the nation underwent another Great Depression lasting fifteen years or so. Such an event would at least serve the salutary purpose of reeducating the American population about self reliance and fiscal responsibility that have are now quaint and largely forgotten virtues.
3. ISM: The ISM Manufacturing index for May was a stronger than expected 59.7. The consensus estimate was for a reading of 58.7. The new orders component was unchanged from the prior month at a strong 65.7. Employment ticked up to 59.8 from 58.5 in April. The market rebounded after this report yesterday.
4. Bought 100 OEF at $49.41 and Sold 102 VV at $49.43 (Large Cap Valuation Strategy)(see Disclaimer): OEF is an ETF for the S & P 100: iShares S&P 100 Index Fund (OEF): Overview The expense ratio is .2%. As mention in the earlier post discussing the large cap valuation strategy, I mentioned that this was one of the ETFs that I might purchase to gain quick exposure to many of the companies that fell into this category. Some of the companies contained in this ETF would not qualify for purchase under any strategy, but a majority would so qualify under the large cap valuation strategy or the dividend growth strategy, or both. This is a link to the current holdings and weightings: iShares S&P 100 Index Fund (OEF): Holdings The top ten holdings include in the order of their weightings the following: Exxon, Apple, Microsoft, PG, GE, IBM, JNJ, BAC, JPM, & WFC. The financial companies would not qualify for purchase under any existing strategy. The next ten in order of weightings are CVX, AT & T, CSCO, PFE, KO, INTC, Google, BABY BERKSHIRE, HPQ AND WMT. I would personally prefer that grouping of ten stocks to the first ten.
Under the restrictive trading rules now in effect, a security had to be sold to pay for the OEF purchase. I sold another ETF roughly equal in value, VV, from Vanguard that has about 750 large companies. That one is viewed as potentially more vulnerable to a continuation of a market correction than OEF. Both would go down in the event the market continued its downdraft, but I suspect OEF would go down less. I have close to a $800 long term capital gain in VV, having purchased 100 shares in May 2009 at $41.45. Morning Notes May 27 2009: BOUGHT VV at $41.45
I also sold the shares purchased with the dividends. I like VV for large cap exposure, and the expense ratio is low at .12%: Vanguard - Large-Cap ETF - (VV). But I view the current valuation advantage to be in a concentrated list of the mega cap companies so I in effect substituted OEF for VV. I am also inclined to take some long term capital gains in 2010, when I at least know that the maximum tax rate for a long term capital gain is 15%, rather than waiting until 2011 when I suspect that it will be higher.
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| VV 101+ SHARES +$781.6 |
I also sold the shares purchased with the dividends. I like VV for large cap exposure, and the expense ratio is low at .12%: Vanguard - Large-Cap ETF - (VV). But I view the current valuation advantage to be in a concentrated list of the mega cap companies so I in effect substituted OEF for VV. I am also inclined to take some long term capital gains in 2010, when I at least know that the maximum tax rate for a long term capital gain is 15%, rather than waiting until 2011 when I suspect that it will be higher.
Cash flow from dividends and interest will be able to support only very modest purchases of stocks fitting the criteria of the mega cap valuation strategy. I would anticipate that most of the purchases in the coming months will be in the 30 to 50 share range, which will work out assuming the market continues to drift down. If IBM continues to decline some, I will most likely target it for a 30 share buy with cash flow received in late May to mid-June along with the proceeds from the sell of HMA last week.
5. Vix: Yesterday, the ^VIX rose over 10% to close at 35.54. Since late April, the VIX has been signaling a market correction. The current pattern is an Unstable Vix Pattern that has been in place since August 2007 when a Trigger Event ended the long standing Stable Vix Pattern that had formed in 2003. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern The rise yesterday to the mid 30s is consistent with the pattern of an ongoing correction and a continuation of the Unstable Vix Pattern, as the market gropes for a level where investors are comfortable buying again. We are not there yet.
6. Added 100 CLF:TO at $20.32 CAD and Sold 100 CPD:TO at 16.35 CAD (see Disclaimer): I view the ETF CLF:TO to be a safer credit risk than CPD:TO, which explains this exchange. The ETF CLF:TO invests in Canadian government bonds, whereas the ETF CPD:TO invests in "preference" shares. I also view the ETF CLF:TO to have less interest rate risk since the maturities are rolled every year. This Claymore Canadian ETF will invest equal amounts in 1 to 5 year bonds issued by Canadian governments. Once the five year bonds reach year six, then the proceeds are rolled back into bonds maturing in 1 year. This process helps to insulate the investor from interest rate risk, though not entirely of course. I basically came to the conclusion that the 1% advantage in yield of CPD was not worth the credit and interest rate risk.
The purchase of 100 CLF:TO adds to my current 100 share position bought at 20.10 CAD: Sold HSE:TO at 30.48 CAD/Bought 100 ETF CDZ:TO at 19.24 CAD and 100 of ETF CLF:TO at 20.10 CAD/ The ETF with preference shares issued by Canadian corporations was bought at $16.09, so it was sold at a few dollars loss after commissions: Bought 50 EUO at 21.73/ Bought 100 CBO:TO at 20.4 & 100 CPD:TO at 16.09
The web site for Claymore ETF CLF can be found at Claymore 1-5 Yr Laddered Government Bond ETF - CLF. Management fees are .15%. The next ex date is 6/25/2010, and distributions are paid quarterly. I will take my distributions in Canadian dollars. A list of the holdings can be found at Claymore.
7. BP: I do not own shares in BP. BP shares fell another 15% yesterday, falling to $36.52, after its top kill approach failed and the government announced a criminal investigation was underway. NYT The information trickling out about BP's conduct at the Deepwater Horizon rig prior to the explosion lends support to a criminal investigation.
The latest revelation originates from the WSJ reporters who are doing a good job of unearthing relevant information. One of its latest modifications at the site of the explosion, the use of a single 7 inch pipe to reach into the well, was less expensive than the better option and less safe. This seems to be the modus operandi at BP. Use the less safe and less expensive option of dealing with a problem. BP determined that the option it followed was the "best economic case". Those kind of statements, quoted from a BP document in the WSJ article, will come back to haunt BP in subsequent proceedings.
Though I have no desire to be a shareholder of BP or to have any connection with it whatsoever (and this extends to a refusal to buy gas at a BP station), it is hard to see how the destruction of almost 70 billion in share value since the explosion is a reasonable approximation of BP's potential liability and losses. money.cnn.com
I am inclined to agree with Cramer that this incident will put the kibosh on any new, U.S. deepsea offshore drilling for many years to come. Cramer highlighted in his show yesterday the awful technicals of the ETF OIH, which contains oil service stocks, many of whom have minimal connections to drilling in the Gulf of Mexico and no connection to this oil spill. CNBC While that is true, investors are not reacting in a totally irrational manner, though most of the trading in names unconnected to the oil spill appears to be mostly fear driven, sort of like imagining the very worst and then convincing yourself that it is about to happen. Many investors are probably shaken by what they are reading everyday in the press now, which is revealing a mind numbing level of incompetence in deep sea drilling, plus the overall lack of preparedness to deal with the worse case type of scenarios and the incessant cutting of corners on safety to enhance profits. The result of this mostly fear driven thought process is a realization that the next accident resulting from gross negligence might involve a different set of players. The possibility of this kind of disaster happening to another firm is probably being factored into the share prices now, in addition to the potential loss of new business associated with drilling offshore in the U.S.
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