Thursday, September 2, 2010

ISM/Wrong Way Rosenberg/ David Levy's Predicts a 2011 Recession/Sold 300 WIW at $12.53/Bought PG at 59.81/Sold 101 POM at 18.09/Sold 50 GFW at 25.13

The market reacted positively yesterday to two surveys of purchasing managers in China that showed a pick up in production and new orders. The Australian government reported a better than expected GDP increase of 1.2% in the second quarter from the 1st quarter. Australian National Accounts: National Income, Expenditure and Product, Jun 2010 The ADP released its monthly jobs report for the U.S. private sector that showed a decrease of 10,000 jobs on a seasonally adjusted basis from July to August. ADP Employment Report

While the DJIA was showing gains yesterday morning based on the foregoing news from China and Australia, the market kicked into another gear after the ISM released a better than expected report on manufacturing. ISM The ISM manufacturing survey for August was reported at 56.3, up from 55.5 in July. The employment component increased to 60.4 and new orders were reported at 53.1. (see story in MarketWatch)

David Levy believes another recession will more likely than not occur in 2011, CNBC. It is noteworthy that Levy was predicting more trouble for stocks in the March 9th issue of Barrons, just as the stock market was about to begin a 70+% advance. His fellow ghouls Alan Abelson and David Rosenberg were also recommending that investors avoid stocks in the same issue, If one is forever predicting doom and gloom, then without question such a forecaster will be proven right periodically. The March 2009 recommendation made by Levy and Rosenberg to buy long treasuries has at least returned to near break-even, after a double digit loss in 2009, as a result of the huge long bond rally in recent weeks.

David Rosenberg told Tiernan Ray at Barrons that the ISM report was a bit of a freak show. When the ISM manufacturing survey first showed an increase in new orders over 50 in mid-1999, Rosenberg dismissed it in an interview on Fast Money on 6/1/2009. I am still waiting for the Ss & P 500 to hit 450, one of Rosenberg's many wrong way predictions, that was made in April 2009. Rosenberg: A New Bull Market Are You Out of Your Mind The S & P 500 closed at 1080.29 yesterday.

The Federal Reserve Bank of NY purchased 900 million in treasury debt maturing in 2012 and 2013 in furtherance of the recently announced Fed policy to reinvest cash from maturing mortgage-backed securities and GSE debt. Federal Reserve Bank of New York - Permanent Open Market Operations

The SEC is going to investigate a couple of practices used by high frequency traders, "quote stuffing" and "sub-penny pricing", to determine whether those Masters of Disaster are using those techniques to manipulate the market. WSJ

1. SOLD 101 POM at 18.09 on Wednesday (see disclaimer): I re-initiated a position in the electric utility Pepco (POM) last June by buying 100 shares at 15.96. I mentioned in that post that I would be content collecting a few dividends and then selling POM in the $18 to $22 range. I received just one dividend and use it to buy additional shares. The current consensus estimate for POM is for earnings of $.98 per share for 2010. POM Analyst Estimates Pepco was recently downgraded at Wells Fargo to market perform based on valuation. MarketWatch

2. Sold 50 of GFW at $25.13 (see Disclaimer): GFW is an exchange traded bond with a $25 par value issued by AAG Holdings. I bought those shares in a taxable account at 22.76 last February. I am keeping for now the shares bought in the ROTH IRA at 22.63. It makes more sense for me to hold bonds in the retirement accounts.

The WSJ dividend declaration page does show the regular quarterly interest payment for GFW was declared with an ex date of 9/13.

3. Sold 300 WIW at $12.5319 (see Disclaimer): I had previously sold 200 of 300 WIW at $12.5, with those shares bought at $11.94. I then added 200 shares o WIW at 12.29. After receiving a few monthly dividends, I have liquidated the position. I still own 300 shares of a similar CEF, IMF, that is trading at a greater discount to its NAV. Bought 300 CEF IMF at 16.51 Both of those position are viewed as placeholder type positions and as a temporary alternative to money market funds yielding zero. WIW closed on Wednesday at $12.6.

4. Bought 50 shares of Procter & Gamble Company (PG) at 59.81 (primarily bought pursuant to the Dividend Growth Strategy & secondarily the Large Cap Valuation Strategy)(see disclaimer): The proceeds from POM WIW, and GFW, plus cash flow, were used to increase my equity exposure in part by re-initiating a position in Procter & Gamble common shares at $59.81. I sold 100 PG shares at $59.45 last November that were bought at $52.85 in 9/2009. Another trade was buying shares at $47.59 in March 2009 and then selling those shares at $56.49 in 7/2009. So, I am in a trading mode for PG shares but will at some point keep some shares for the long term.

Anyone buying shares in a large slow grower like PG can not expect much upside. If I held this stock for ten years, I would be pleased with a total return of 8-10% annualized and compounded. I would expect the dividend to provide anywhere from 30% to 40% of that total return. The current dividend rate is 48.2 cents per quarter which translates into a yield of 3.22% at a total cost of $59.81. PG Stock Quote The dividend has been paid for 120 consecutive years and has been increased 54 consecutive years. News Release The annual rate was 70 cents in 2000 and at $1.45 in 2007. The annual rate in 2009 was $1.8. Assuming PG doubles the dividend over the next 7-8 years, this would equate to a $3.6 annual rate which would result in a 6% yield at a constant cost of $59.81. The payout ratio is less than 50%. This stock fits the criteria for the dividend growth strategy: Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds; Item # 5 Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans.

PG has hit a sluggish period and its last report was a disappointment. The June quarter showed a decline in E.P.S. to 71 cents per share, below the 73 estimate. Press Release June 2010 Quarter The current fiscal year ends in June 2011 and the estimate now is for an E.P.S of $3.96 in FY 2011 and $4.33 for F/Y 2012. I am just okay in buying PG shares at 15 times forward earnings. Given the P/E, this purchase barely qualifies under the large cap valuation strategy: { Item #3 Large Cap Valuation Strategy-A New Long Term Strategy and in Item # 1 Large Cap Valuations}

I will discuss the remaining 3 transactions from Wednesday in the next post.

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