Thursday, July 1, 2010

ADP-Another Awful Jobs Report/WMT/Consumer Debt Levels-Still Way too High/Sold FRPRK AND CEFs BDT BDV

Maybe the next quarter will be better. In the second quarter, the S & P 500 lost 11.9% and closed at 1130.71. The S & P 500 is currently trading comfortably below its 50 and 200 day moving average lines, and is setting up for a death cross, where the 50 day moving average line falls below the 200 day line. S&P 500 INDEX,RTH Index Chart The S & P 500 closed on 2/18/1998 a couple of points higher than the close yesterday. ^GSPC: Historical Prices for S&P 500 For those of us who need calculators or have to use our fingers and toes for addition and subtraction chores, we are moving into year 13 of a long term secular bear market, defined as a period of a lot of up and down movement before ending up about where you started the journey. When all is said and done, the buy and hold investor in the S & P 500 who bought at the start of the current long term bear market, reinvested their dividends, will lose about 1% per year after inflation. The Roller Coaster Ride of the Long Term Secular Bear Market

The market may need a massive surprise on private sector job creation in order to jolt it out of its current dark doom and gloom mood, having decided that nothing of a positive nature is going to happen on the jobs front for the remainder of our lives, the lives of children and grandchildren, and for the children of our grandchildren.

I suspect, but do not know of course, that an investor willing to do a Rip Van Winkle by buying broad base stock ETFs now, then reinvest the dividends, go into hibernation for about 15 years and disturb nothing, would end up being pleased with the results, particularly compared to the knuckleheads buying a U.S. treasury bond maturing in 15 years yielding around 3%.

Joseph Cassano, former head of AIG's Financial Products Unit which was largely responsible for the 183 billion taxpayer bailout of AIG, told Congress yesterday that he really did an excellent job managing risk and maybe AIG would be rolling in dough if he had been allowed to stay. He earned close to 300 million while working at AIG according to the WSJ.

I ordered a couple of books from Amazon about preferred stock investing, just to see whether the authors really knew anything, and both were worse than worthless. One of the authors clearly confused trust preferred stocks with traditional preferred stocks.

The WSJ contains a compilation of the daily closing prices of what it terms as "preferred stocks". Within the listing, there are traditional preferred stocks, trust preferred securities, senior bonds, trust certificates, special investment products (senior notes tied to an index), and first mortgage bonds. No wonder people are confused. Exchange Traded Bonds Advantages and Disadvantages of Equity Preferred Floating Rate Securities Trust Certificates Trust Preferred Securities Aegon Hybrids Synthetic Floaters ING Hybrids Regular Preferred and Trust Preferred

1. Consumer Confidence & Debt Levels/Retailing Stocks: During the Age of Leverage, as consumers and governments spent ever increasing sums of borrowed money, the consumer debt level as a percentage of disposal income rose from around 65% to over 133%. (see chart on page 1 Household debt doubled between 2000 to 2008:

Between 1961 to 1985, the consumer debt level as a percent of disposal income hovered within a few percentage points of 65% and then started to accelerate during the Age of Leverage. The current figure is 120% This suggests to me that the consumer deleveraging process has a ways to go, and it might take another two to three years for consumers to reposition their balance sheets to a more sustainable and prudent level. This can only be done by increasing the savings rate, reducing spending and paying down debt since wage increases are just too paltry to do much good. For many years now, wage increases have not kept up with inflation in most years. Source of Problems: No Real Wage Growth USATODAY So, faced with no real wage growth, consumers borrowed and spent their way to prosperity until the chickens came home to roost.

The personal savings rate was 4% in May 2010: News Release: Personal Income and Outlays, May 2010 During the age of leverage the savings rate turned negative. Before the Age of Leverage, the savings rate was between 8 to 12% of disposable personal income between 1959 to 1985: See Figure 3 at Needless to say, money that is saved by consumers is not spent by them.

What does all of this mean? The conditions are just not ripe yet for the onset of a new long term secular bull market in stocks. More work has to be done to clear away the wreckage from the Age of Leverage. I am still predicting a continuation of the long term secular bear market in stocks for another 2 or 3 years. { Managing Interest Rate Risk/Continued Discussion on 1982 or 1974/ and see posts fromSeptember 2009: 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? More on 1982 or 1974; other discussions include: The Roller Coaster Ride of the Long Term Secular Bear Market Underlying Cause of the Current Long Term Bear Market is Too Much Debt}

The foregoing explains in part why I have no positions in retailers, though I am tempted from time to time to buy WMT at below $50. I do not own any shares but I am looking at it. WMT fell 83 cents yesterday to close at $48.07. At that price, WMT is selling at around a 12 P/E on its estimate earnings for the fiscal year ending in January 2011 and about 11 times the 2012 fiscal year consensus estimate. WMT: Analyst Estimates for Wal-Mart Stores The stock is back to close to where it was in 2000, Wal-Mart Stores, Inc. Chart Earnings have increased during that time from about $1.40 in 2001 to the estimate $4.01 in the current fiscal year. It would not be surprising to see a continuation of that multiple compression for as long as the current long term bear market continues. The multiple may expand some during cyclical bull moves within the long term bear pattern but ultimately the stock returns to its starting point even as earnings increase. Eventually, when the new long term secular bull market starts, investors look around and see a bunch of blue chip stocks paying good dividends and selling for single digit multiples, or in the low teens, and will start to buy them again, eventually driving the multiple over a period of about 15 or so years back into a clearly untenable level. So a stock like WMT was selling in 2000 at close to a 40 multiple and may end this long term bear cycle in the high single digits, earning a great deal more than at the start of the period.

2. Another Anemic Jobs Report from ADP: ADP reported an anemic nonfarm private employment increase of just 13,000 in June: This was considerably below the 60,000 increase in jobs expected by economists. I would characterize a 60,000 jobs increase number to be anemic so I need to find another word to describe 13,000.

3. Sold FRPRK at $17.01 (see Disclaimer): This position had been bought in the regular IRA at $8.4 in February 2009. Although First Industrial has continued to pay its preferred stock dividends, it has eliminated its common stock dividends, which removes the impediment to a deferral of the equity preferred dividend. This one just became too risky to continue holding it in an IRA account, particularly considering the number of dividends received to date and the 100+% gain in the shares. The final straw was Fitch's downgrade of the preferred stock to CCC based in part on their assessment of a potential deferral. I had successfully traded the two equity preferred stocks from First Industrial on several occasions during the Near Depression period and the 30 shares sold yesterday was part of the net profit realized in those trades. I am willing to accept less in yield for more safety now.

4. Bought 500 CAD with Part of Proceeds from the Sell of BDT at 8.72/Sold 114 BDV in ROTH (See Disclaimer): I decided to dump two of the Blackrock CEFs yesterday. I sold 114 of BDV in the Roth as part of the de-risking process in the retirement account. BDT was sold in a taxable account and the proceeds will be used to buy Canadian dollars as the CAD continues to decline against the USD.

No comments:

Post a Comment