LB opened the staff meeting at 6:00 A.M. by placing the OG on an intravenous drip of chill pills and valium, and then wanted to make it clear to all concerned why the ETF PLW was bought on Tuesday (see Item # 2 below). LB is convinced that this ETF will end up being a loser, but it became imperative to buy it for the good of the organization here at HQ. As you would expect, the OG was whining, constantly asking the LB whether it might be wrong about inflation being more of a problem than deflation for the intermediate and long term. Of course, it goes without saying that the LB has never been wrong about anything, all of the mistakes made here at HQ are the sole responsibility of either the OG or the Nit Wit RB or some unholy amalgamation of the two. But, then the OG said, "what if Krugman and the doomsayers are right, and the 10 year treasury falls to 2% or even lower." The only way to silence the OG was to buy some PLW, which hopefully would work in a deflation scenario, but it really does not matter. Its purchase served the salutary purpose of quieting the Old Goat so that the LB could get back to considering the million or so variables, alternate scenarios and contingencies that are both relevant and material to its decision making process.
The LB can sense trouble brewing sometimes, so the sell of Cisco shares earlier in the week was propitious. It now appears that the market wants to have a nervous breakdown about a slowdown in orders occurring late in second quarter. Chambers did not help relieve the spreading angst when he said there was "an unusual amount of conservatism and caution" and that Bernanke's comment about "unusual uncertainty" in the economic outlook was an accurate description. Cisco also forecasted sales for the next quarter below estimates. NYT Gartner fanned the anxiety by predicting that worldwide business spending on information technology will grow 2.9% in 2010, a reduction from its April estimate of 4.1% growth.
I mentioned in yesterday's post that I had sold CSCO in anticipation of buying more of Intel. Item # 6 Sold Cisco - Intel Downgrades My order for Intel was not filled at $19.25, the low during regular trading hours yesterday was $19.3. My target for today would be to add shares only at $18.75 or below as I now expect further weakness based on an acceleration of fear. Or, I may just wait and buy CISCO back at below $20.
I have already received the proceeds for the full redemption of JZE plus accrued interest. Call Warrant Exercised on JZE and JZJ
The first two trades discussed below were made on Tuesday. I am falling behind in summarizing the trading activities here at HQ.
1. Bought 50 Citizens & Northern at $11.77 on Tuesday (Category 2-Regional Bank Stocks basket strategy) (See Disclaimer): This bank is bank in Wellsboro, PA. and currently operates 24 full service offices throughout Tioga, Bradford, Sullivan, Lycoming, Potter, Cameron and McKean counties in Pennsylvania. Citizens recently repaid TARP: Citizens & Northern Announces Treasury Approval To Repay TARP Funds - Citizens & Northern Bank The dividend is currently at 10 cents per quarter which gives me about a 3.4% yield at a total cost of $11.77.
C&N reported earnings of 37 cents for the 2nd quarter of 2010. One analyst following this bank predicts an E.P.S. of $1.44 in 2010. CZNC: Analyst Estimates for Citizens & Northern Corp
The bank has just filed the 10-Q for the Q/E 6/2010. The capital ratios are excellent (see page 38), but this data would have included the TARP funds as part of equity.
I did not see the efficiency ratio in the quarterly report. It was listed at 56.97% as of 12/2009, page 12 of the 2009 SEC Filed Annual Report.
CZNC had a particularly bad day yesterday, declining 7.61% to close at $10.81. So CZNC will likely be another average down. There are some advantages to slicing orders into small increments, particularly in a cyclical bear phase within a dominant long term bear market.
2. Bought 40 PLW in Roth IRA at $28.98 on Tuesday (see disclaimer): LB's plan for PLW is relatively straight forward for one of LB's plans. The intent is to buy a PLW position only in the ROTH IRA in small increments of 40 to 60 shares, with subsequent purchases after the initial one made only from cash flow into that account and at prices below the initial purchase price. The general intent is that each subsequent purchase will be made at more than $1 below the price of the previous purchase. And, distributions will not be reinvested until the price sinks below $26.
In a way, I can view this low yielding ETF as equivalent to a municipal bond in a taxable account. I do not expect much in the way of yield from municipal bonds. No taxes are paid on the distributions made by securities held in the Roth IRA, and distributions from the account will be free of taxation after the age of 59 1/2. That was one justification given by the OG on Tuesday in support of this purchase, which the LB did not view as entirely ludicrous.
So what is PLW? It is an ETF containing treasuries laddered in maturity from 1 to 30 years. PowerShares Exchange-Traded Funds | 1-30 Laddered Treasury Portfolio | PLW The current distribution yield is around 3.48%, as shown on that web page, and the expense ratio is .25%. Distribution are made monthly.
I could not buy 50 shares of PLW on Tuesday since I ran out of cash with the 40 share buy along with the 50 of IPB discussed in yesterday's post. Bought 50 of the TC IPB at 21.3
PLW did rise .97% in trading yesterday to close at $29.27.
3. ING (own hybrids IND and INZ only): ING reported that its underlying net profit increased to €1.202 billion. The net profit per share was €.29. Improved results were most evident in ING's banking operation where underlying profit before tax rose to €1.613 billion from a loss of €186 million in the 2nd quarter of 2009. I have trimmed my positions in the ING hybrids to the point where I am playing with the house's money. I currently own 200 IND in a taxable account and 50 INZ bought at 7.82 in a regular IRA. This report is discussed in a NYT article.
4. MACY's (own senior bond in TC DKQ only): I recently pared my position in the TC DKQ by selling 50 shares and keeping the 50 shares with a lower cost basis. Sold 50 of 100 DKQ at 21 That process is a typical trading pattern here at HQ. Since I still have a Macy's bond position, I will look at its earnings reports. Macy's reported earnings for its 2nd fiscal quarter (Q/E 7/2010) at a better than expected 35 cents and raised its outlook for the year to $1.85 to $1.9 from $1.8. The outlook for same store sales increased from 3.5% to 4.2%.
5. Microsoft (own): S & P lowered its price target and rating on Microsoft based on concerns about PC demand. The recommendation was reduced to hold and the target price was cut from $35 to $31. I own only 30 shares of Microsoft and may buy more on further weakness.
6. Added 50 Provident Financial Services (PFS) at 11.68 Wednesday (Regional Bank Stocks basket strategy)(see Disclaimer): I discussed this bank a few days ago when I purchased 50 shares at 12.74. I have nothing to add to that discussion. The stock fell 5.59% yesterday while the S & P 500 declined 2.82%. PFS is ex dividend today. The yield at a total cost of $11.68 is around 3.77%.
The regional bank basket did worse than the S & P 500 yesterday falling 3.31%, with 14 declines over 5% and several positions going into negative territory.
7. Calculations on Re-Creating the TC IPB: Sometime, I confuse myself. If I was going to re-create IPB at Tuesday's closing prices, which I tried to do in yesterday's post (Bought 50 of the TC IPB at 21.3), I would have to buy the treasury strip which pays no current interest at a double weight to the corporate bonds. So, for purposes of running the calculation, I would have 15 equally weighted corporate bonds and a strip equal to two corporate bonds. That gives me a divisor of 17. I believe that my prior use of 15 as the divisor was incorrect in determining the current yield of a newly created IPB based on the closing prices from Tuesday of the underlying securities contained in IPB.
This was the current yield (not yield to maturity!) of the underlying securities as of Tuesday's close:
1. Boeing 5.35% FINRA
2. Citigroup 6.23% FINRA
3. Credit Suisse 5.87% FINRA
4. Daimler 6.52% FINRA
5. Ford 7.45% FINRA
6. GE 6.14% FINRA
7. GMAC 8% FINRA
8. Goldman 6% FINRA
9. JNJ 4.53% FINRA
10. May (now part of Macy's) 7.16% FINRA
11. Time Warner 6% FINRA
12. Valero 6.96% FINRA
13. Verizon 6.26% FINRA
14. Viacom 5.8% FINRA
15. Weyerhauser 7.38% FINRA
16 Treasury Strip 0% (strips do not make interest payments- price for 2030 strip found at WSJ.com)
17. Treasury Strip 0%
Total 95.65 divided by 17=5.63%
This is a link to the prospectus for IPB: www.sec.gov The underlying securities list starts at page S-2. The purpose of this exercise is to determine how IPB is priced in relation to its underlying securities. IPB had a current yield of over 7% at my purchase price on Tuesday, down from 8.9% at my earlier purchase of $16.99 in August 2009.