Friday, July 2, 2010

ISM for June/Pending Home Sales/Bought 50 GJP at 20.55/ Bought 50 BKMU at 5.51/Sold BDJ at 7.86/Initial Jobless Claims/ WIBC

I am going to look at the market's recent swoon in a positive light. For those who have strong hands and an even stronger stomach, these kind of market events do present opportunities to buy better quality companies at cheaper prices. The catch is that the trader has to become a long term buy and hold investor, only shaken out of any newly acquired position when there is a clear fundamental deterioration in the business and its long term outlook. Since I believe that another two or three years remains in the current long term secular bear market, and no one really knows for certain what happens next, the best alternative for me is to slice and dice the buy orders into very small slivers, such as a 30 share order for a $35 stock, or 40 shares for one at $20 or $25, and 50 shares for one around $15. In other words, I would keep the purchases mostly in the $600 to a $1000 range and that range will dictate the number of shares purchased in each sliver.

The unrealized appreciation in the Regional Bank Stocks basket strategy has taken a hit, falling from a high of around 7 grand to around 2 thousand currently. I have harvested about $1760 in gains after including the recent 100% pop in Wainwright (WAIN) which I sold after it received an acquisition offer.Sold 50 Wain at $18.7-Being Acquired I will keep adding names to this basket, though in smaller quantities. So, if I would have bought 50 shares, I will now buy just 30 shares. I did buy a new regional bank that I will discuss in the next post, one of those where I invested less than $300 and placed in Category 1 of the regional bank strategy.

Greenspan said yesterday that the economy has hit an invisible wall. He then he added that, "as far as he" can see, this was a typical pause in a recovery from a recession. (2:30 into the interview) It may be normal but many investors will assume the worse until proven otherwise. Sort of a stock market version of Abandon hope all ye who enter here.

The new Claymore term short term corporate bond ETFs with liquidation dates declared their initial monthly dividends and went ex yesterday (BSCB, BSCC, BSCD, BSCE, BSCF, BSCG, and BSCH) The dividend yields are not much given the current low rates for investment grade debt. The data can be found today at the WSJ dividend page and in Claymore BulletShares Corporate Bond ETFs Declare Initial Distributions. I bought the ETFs BSCE, BSCF and BSCH which liquidate in 2014, 2015 and 2017 respectively. The first two are in retirement accounts, sort of a placeholder type of investment, and I will be reinvesting the dividends on those two to buy additional shares. The one liquidating in 2017 is held in a taxable account and I will take the distributions in cash. {Items 1 and 7 Claymore Introduces Term Corporate Bond ETFs; Bought 100 BSCE;

1. Initial Jobless Claims: The initial jobless claims number, released weekly by the Labor Department, is just not consistent with a healthy and growing jobs market. ETA Press Release: Unemployment Insurance Weekly Claims Report For the week ending June 26th, the seasonally adjusted initial claims number was 472,000, an increase of 13,000 from the previous week. I really do not expect good news later this morning when the Labor department releases the jobs number for June. A positive surprise would likely send the market much higher, since the consensus now is to anticipate doom and gloom around every corner and as far as the eye can see and the mind can dream.

So far, Congress has not agreed to extend unemployment benefits for the millions who will lose those benefits in a matter of days. Without federal assistance, most states would not be able to pay for extended benefits, and many state unemployment funds are already technically bankrupt. (see data at ProPublica Unemployment Insurance Tracker)

2. SOLD 279 of the CEF BDJ at $7.86 (see Disclaimer): This is part of the de-risking process. After selling BDV and BDT on Wednesday, I decided to just complete the elimination of the Blackrock general stock CEFs and keep my shares in the Blackrock Real Asset CEF (BCF).

3. ISM Manufacturing Survey for June 2010: Apparently, the market did not like this report and declined yesterday soon after its release. I did not have the same negative reaction to this report. ISM The index was 56.2 which did represent a decline of 3.5% from the May 2010 reading. Still, the number is consistent with growth in the manufacturing sector but at a slower pace. Any number above 50 indicates expansion. The new orders component was reported at 58.5, still a good number, but the market was spooked apparently since this component declined 7.2%. I suspect the market is forecasting a continuation of that trend. Unfortunately, humans will take a snapshot in time and forecast a continuation of whatever trend shown in that snapshot until the end of days.

The consensus forecast was at 59 so the fall to 56.2 was much worse than the consensus estimate. The slowdown in the U.S. manufacturing sector is consistent with similar surveys in China and in Europe. Bloomberg There was a slight slowdown in the U.K.: MarketWatch.

4. Pending Home Sales Index/Car Sales in June: The National Association of Realtors reported that its pending home sales index fell 30% in May, following the expiration of the home purchase tax credit, to a reading of 77.6. The consensus forecast was for a reading of 98.4. Freddie Mac reported yesterday that the 30 year mortgage fell to a 50+ year low at 4.58%. This data series only goes back to 1971. This information can be found at the web site for Freddie at Primary Mortgage Market Survey PMMS - Freddie Mac.

Eventually, home sales will pick up based on these extremely favorable long term rates and the overall decline in housing prices, assuming Congress does not interfere again in the natural process of the marketplace by offering another short term bribe to buy a home.

Sales at GM, Ford and Chrysler fell between 12 to 13% in June compared to their respective numbers in May. However, the year over year numbers for Ford were strong, with the June 2010 number up 15% year over year excluding Volvo.

5. Wal-Mart: WMT recently sold some debt at favorable rates: 750 million at 2.25% due in 2015; 1.5 billion at 3.625% due in 2020; and 750 million at 4.875% due in 2040. For many companies, the Near Depression and the FED's Jihad against against savers are providing them with excellent financing opportunities that will hopefully inure to the benefit of their shareholders when economic conditions improve.

6. Bought 50 GJP at $20.55 in the Roth (See Disclaimer): After raising some funds by selling the stock CEF BDV, I was able to buy 50 of the synthetic floater GJP, a security that I have bought and sold several times. Since GJP is a Synthetic Floater, which carries some difficult to comprehend tax issues, I will only buy it in a retirement account. I am comfortable with the credit risk of the underlying security in this TC, a senior bond from Dominion Resources (D), a large electric utility company based in Virginia.

I have discussed this synthetic floater in several prior posts and will only hit the high points now. {Bought 100 GJP at $18.97 Sold 100 GJP at 22.42; Bought GJP More on Recent Floater Purchases (April 2009 posts); see also Floaters: Libor or T Bill Float Better?/}

As long as the swap agreement is in force which creates the synthetic float(originally with Wachovia, now part of Wells Fargo), GJP will pay the greater of 3% or 1.15% over the 3 month treasury bill (close to zero now) with a maximum interest payment of 8%. Interest is paid monthly and the current rate is the guarantee given the Fed's ongoing Jihad against savers and other responsible people in America.

Par value is $25. The underlying security is a senior Dominion Resources' senior bond with a 5.95% coupon and a maturity date on 6/15/2035. The TC will mature on the same date.

If the swap agreement with Wachovia, now part of WFC, is terminated for whatever reason, the owner of the GJP will be entitled to recent interest semi-annually at the 5.95% coupon rate of the Dominion senior bond. The TC represents a beneficial interest in that bond and the in force swap agreement which are the only assets of the trust administered by an independent trustee. All of the foregoing is explained in more detail in the prospectus: Anyone unwilling to do the grunt work, which includes a review of the material terms of the prospectus, has no business buying these type of securities. That would include anyone unwilling to take the time to understand this security and to assess the credit risk of the issuer.

Information about the underlying Dominion bond can be found at FINRA. The underlying bond is trading at above par value. As you would expect, the swap counterparty is pleased with the current arrangement, since the trustee collects the interest at 5.95% paid on the bond and delivers those funds to WFC. Then WFC pays the trustee the guarantee of 3% and keeps the difference. Some would recommend avoiding the security because WFC has a good deal. I view that as nonsensical, the only relevant criteria for me as an individual investor is whether I am satisfied with the terms for me. I would prefer better terms, but it is what it is.

The maximum 8% rate will be reached when the 3 month T Bill crosses over 6.85% during the relevant computation period. This is not going to occur anytime soon, needless to say. Historically, it is not unusual for the T Bill rate to exceed 6.85%: (weekly date since 1982 from the Federal Reserve). At 8% my yield at a total cost of $20.55 would be 9.73% annualized. That is my maximum rate for GJP at the price paid excluding the small brokerage commission. My minimum yield will be what I will currently be paid, the 3% guarantee on the $25 par value, which translates to a 3.65% yield at a total cost of $20.55. Theoretically, I could hold the security until the underlying bond matures in 2035 and collect a profit on the shares, a tad over $4 per share. If I plug in the minimum yield of 3.65% in the Morningstar Bond Calculator, I receive a YTM of 4.91%. So the reader can see the problem that I have had in holding onto this security when I can clip a profit on the shares plus a few interest payments.

Maybe I will hold it for a year or so now given what is going on. The reason is that 3.6% paid monthly does not look so bad now, particularly given the quality of the credit. And, over the remaining life of the bond I would expect the average monthly interest rate to be close to 6% which is reached with a just an average 4.85% 3 month T Bill rate. Assuming that prediction is reasonable and actually happens over the next 25 years, the YTM at a 6% rate would be 7.63% so I would do better than the buyer of the underlying bond with that assumption over the life of the bond, even though I am worse off now in terms of the current yield.

7. Wilshire Bancorp (WIBC)(not owned): Before the current downdraft hit, I decided to sell two stocks in the regional bank stock basket. The criteria for selection was a good percentage gain in the stock, a nominal dividend, and a history of small dividends before the Near Depression period. My largest gain was in EWBC but I also decided to sell my shares in WIBC for the same reason. Sold 110 WIBC at 10.99 Now, some readers might remember that LB was saying sell all of them but the OG resisted, wanting to follow the long term strategy and that is what happens when the OG starts making decisions around here rather than the LB.

I am not going to buy those shares back even if the stock declines 20% today. After the bell Wilshire Bancorp eliminated "temporarily" its meager quarterly dividend of 5 cents a share. The bank says that it is experiencing an acceleration of loans migrating to non-performing status and will consequently report a loss for the second quarter. The CEO was far more upbeat in April (see quote in I do not care to hear a company call an elimination of a dividend a temporary "suspension", as if it is just being deferred a few days and was to be paid in full after the "temporary suspension". WIBC closed at $8.55 and fell 14.97% in after hours trading.

While a dodged a small bullet on this one, I fully expect to be blindsided by several of the banks currently in the regional bank basket over the next 5 to 10 years. That is one reason for keeping the investment in each one of them small.

Sometimes, though not always, it pays to be a little suspicious about why a bank has not paid back the TARP funds. In Wilshire's last quarterly report, the government's preferred stock is still listed on the balance sheet: The bank made the following statement at page 41: "For the purposes of our regulatory capital ratio computation, our equity capital includes the $62.2 million Series A Preferred Stock issued by the Company to the U.S. Treasury as part of our participation of the TARP Capital Purchase Program."

Some of the small banks regard the 5% preferred dividend to be cheap compared to alternative sources of financing for them. Others need to cling to the funds since they are in no position to pay it back or need that equity capital to maintain a "well capitalized" bank.

There was also a big jump in the last quarter in non-performing loans as a percentage of total non-covered loans (i.e. loans not subject to a loss sharing arrangement with the FDIC) That number jumped from 2.42% as of 12/31/2009 to 3.83% on 3/31/2010. (page 35:

I will be reviewing the 10-Q for the Q/E 6/30/2010 and then make a decision whether or not to buy back some of the shares previously sold. But the price will have to be below $6.50 and I will not invest more than $300 given the additional risk (now viewed as a potential category 1 investment in the regional bank strategy basket rather than a category 2: Regional Bank Stocks strategy)

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