Thursday, September 9, 2010

Obama & The Bush Tax Cuts/Bought 40 WIBC at 6.09/Sold 100 CWHN at 21.22 in Roth/Bought 50 YCS at 16.92/Bought 50 BOFI at 11.84/Intel & HP

On a few occasions in the past, I have compared the Tea Party movement to the Know Nothing party that gained some prominence in the 1840s and 1850s. I have read in the past few days two opinion columns making similar analogies. America’s History of Fear - & Tea Party today's Know Nothing movement -

Facts do not matter to the True Believers. Opinions are formed by a warped process of reality creation. Reliable and accurate information is dismissed when it is inconsistent with pre-existing beliefs, and their beliefs are just a series of cliches repeated in parrot like fashion. A deliberate effort is made to avoid contact with any facts inconsistent with their ideology. It should come as no surprise that a majority of Republicans believe Obama is a Muslim and wants to turn the U.S. over to a one world government. Another 25% believe that he may be the Antichrist, 45% believe that he is a domestic enemy, and 38% believe that he is doing things that Hitler did. Party of Nuts ( I was watching a documentary last night on HBO called the "Right America-Feeling Wronged", and heard these sentiments expressed many times. HBO: Right America Feeling Wronged: Home (a film byAlexandra Pelosi, and I am no fan of her mother being a reasonably well informed true conservative rather than someone who masquerades as one). One of the frequent lines of conversation from the TBs is to compare young people supporting Obama to the Hitler youth. And, they are serious.

In the event some of the Tea Party candidates emerge victorious in November, it may be advisable to limit their public exposure to puff interviews on Fox and this would particularly be the case with Sharron Angle, Dan Maes, Rand Paul, and Christine O'Donnell. (see also Politics which has copies of Christine's tax lien) Ultimately, the GOP will need independents who are not crazy, delusional extremists in order to acquire and maintain power.

According to a New York Times article, Obama has ruled out any compromise on extending the Bush tax cuts for the wealthy. Instead, he wants to extend those cuts to about 98% of the population. NYT An article at, however, claims that the administration has not drawn such a bright line in the sand.

The GOP will be united in allowing the Bush tax cuts to expire for all Americans rather than to vote for any legislation that has the effect of raising taxes on the top 2%. Obama's position will increase the possibility that the Bush tax cuts will expire at the end of this year for all Americans. For investors, it is important to keep in mind that the 15% tax rate for qualified dividend and capital gains expires at the end of this year. Dividend Tax Rate in 2011? & 2011 Dividend Tax Limbo. A summary of the major tax provisions that will expire at the end of this year can be found at The Tax Foundation.

In addition to maintaining his position on the extension of the Bush tax cuts beyond 2010, Obama is proposing 180 billion in expanded tax cuts for small business and infrastructure spending. The general idea is to pay for those tax cuts and spending initiatives by eliminating some favorable tax breaks for corporations. The contours of these spending and tax initiatives were the subject of Obama's speech in Cleveland yesterday. NYT

The GOP candidate for South Dakota's congressional seat, Kristi Noem, apparently enjoys racing her car on the highway, receiving 20 speeding tickets since 1989. MarketWatch Warrants for her arrest were issued on two occasions when she failed to pay the fines.

1. BOUGHT 50 BOFI Holdings (BOFI) at $11.84 (Category 2 Regional Bank Stocks' basket strategy)(see Disclaimer): BOFI Holdings owns Bank of Internet USA that provides banking services primarily over the internet. This bank was included in the top ten cheapest bank stocks for 2011 in an article at TheStreet.

Only two analysts follow the company and provides earnings estimates. The estimate from that analyst is for earnings of $1.73 for the F/Y ending in June 2011 and $2.05 for the 2012 F/Y. BOFI Analyst Estimates (updated from original post on 9/9 since YF added another analyst estimate this morning)

As of 6/30/2010, the bank had a net interest margin of 3.63%; an efficiency ratio of 35.97%; a Tier 1 risk-based capital ratio of 14.56%; a tangible book value of $12.25 per share; and NPLs to total loans of 1.48%. Press Release The bank earned 44 cents in the latest quarter. The bank does not pay a dividend, a major negative from my point of view.

BOFI closed yesterday at $11.71 and traded as low as $11.44 after my odd lot purchase.

2. BOUGHT 50 YCS AT 16.92 (see disclaimer): When it comes to currencies, going long or short for me is primarily a matter of feel. The Japanese Yen recently hit a 15 year high against the U.S. dollar, and the Japanese government is becoming more displeased by the day in the Yen's rise. Earlier this week, the Bank of Japan and the Finance Ministry both hinted at government intervention. Hopefully this is a link to a USD/JPY Currency Conversion Chart that highlights the dollar's weakness.

YCS is a double short ETF for the Japanese Yen. As one would expect, it has been going down as the Yen has gained in value against the USD, Ultra Short ETF YEN Chart In May 2010, YCS was trading near $22. As the Proshares website makes clear in bold letters, "this ETF seeks a return of -200% of the return of an benchmark (target) for a single day" (emphasis supplied) ProShares ETFs: UltraShort Yen – Overview After one day, the ETF may start to lose tracking.

I recently had some successful trades on the double short for the Euro. Bought 50 EUO at $17.17 as a Hedge Sold 50 EUO at $19.58 Bought 50 EUO at 21.73 SOLD EPV at 26.32/Sold EUO at 23.4 I just wanted to give the double short for the Yen a try. I have a sizable amount of realized short term capital gains in 2010. If this purchase does not work out, I will just take the loss later in the year and then net it out against the realized gains. This kind of purchase, even when I have rational reasons supporting, is nothing more or less than a bet whose success depends in large part upon fortuitous timing.

I would also view the long term fiscal position of the Japanese government to be more serious than ours, which is potentially disastrous. The Global Debt Bomb - The ratio of Japanese debt to its GDP is approaching an astounding 200%.

YCS closed yesterday at $16.91, up 6 cents. The historical prices found at YF show a steady decline for several months.

3. Bought 40 WIBC at $6.09 (Category 1 Regional Bank Stocks' basket strategy)(see Disclaimer): Fortunately, I previously sold 110 shares of Wilshire, bought in two lots at $6.84 and $8.6, at $10.99. One reason for selling Wilshire was to harvest the profit. The primary reason had to with these Bank's apparent policy to pay only a small dividend in good times. The regional bank strategy does allow for the purchase of low yielding bank stocks, at least where the bank has some recovery potential and the possibility of a much higher dividend when and if that recovery happens. Wilshre was paying a miserly dividend before the Near Depression. As noted previously, "(i)f I am going to hold a stock with a large unrealized gain now, I would want at least the prospect of receiving a good dividend when the bank returns to more normal earnings." Item # 4 Sold 110 WIBC at 10.99 It was just fortuitous that I avoided the subsequent decline in Wilshire shares due to an unexpected loss in the 2010 second quarter.

On July 2, 2010, Wilshire Bancorp announced that it was going to record a loss in the second quarter due primarily to an elevated provision for loan losses and an increase in net loan charge-offs. The average estimate at that time was for a 11 cent profit per share. The bank also eliminated its small dividend.

I expect that some of the banks in my regional bank basket will issue warnings about lower than expected earnings due to loan write-downs. And, I anticipate that a few are deliberately refusing to take the proper allowances for potential loan losses. I just do not know which ones. That is one reason for the basket of over 40 names and the limited amount of funds devoted to each bank in the basket. I am playing more of a theme and believe that spreading my risk far and wide is simply the best way for me to play that theme.

I decided to buy back some Wilshire shares after the price decline due to its recovery potential. Given my extremely negative view of what happened in July, I decided to limit my exposure to less than $300 and to classify this purchase as a Lottery Ticket (i.e. a Category 1 purchase in the regional bank stock basket strategy)

The bank subsequently reported a loss of 15 cents per share for the 2nd quarter: As of 6/30/2010, the Wilshire State Bank had a total capital to risk-weighted assets ratio of 14.75% and a Tier 1 capital ratio of 13.3%. The holding company, Wilshire Bancorp, had slightly higher ratios. (see pages 45-46 The bank still has government preferred stock on its balance sheet, which is viewed as a negative. The amount is 62 million (see page 45)(the agreement can be found a The dividend is 5% on that preferred stock for the first five years and then 9% thereafter.

Wilshire caters to the Korean community primarily in California. The current estimate is for earnings of 83 cents per share in 2011: WIBC Analyst Estimates The bank is listed among the 10 cheapest bank stocks for 2011 in a recent article in TheStreet. Of course, that depends on Wilshire not surprising the analysts in 2011 with more unexpected loan losses. While acknowledging the recent problems, Morningstar has an upbeat report on Wilshire's prospects.

4. Sold 100 CWHN at $21.22 in the Roth IRA (see Disclaimer): CWHN is a senior bond from Commonwealth REIT (formerly known as HRPT Properties) that has a $20 par value. When I bought this exchange traded bond, the symbol was HRPN. As a result of the REIT's name change, the symbol for this bond was changed to CWHN. I previously sold the shares bought at 19.15 in a taxable account. Sold 100 CWHN at $20.57 In that post, I mentioned that the shares owned in the IRA were on a "short leash". The shares sold yesterday were bought in the ROTH IRA at 19.32 I no longer have a position in CWHN.

I still own a position in this REIT's common shares, CWH.

5. UBS Downgrades Intel and HP: UBS cut Hewlett-Packard and Intel due to concerns about PC sales for the remainder of 2010. (see article at MarketWatch) HP was cut to neutral from buy with the price target reduced from $54 to $44. Intel, which is owned, was also cut to neutral from buy with a target reduced to $19.50 from $28. The downgrades from UBS are just another manifestation of myopic group think. I would simply ask why a company is being valued on what may prove to be a slowdown in sales for the remainder of 2010.

While Hewlett's stock price fell 2.78% yesterday to close at $38.81, investors jumped at the opportunity to lend HPQ 3 billion dollars. Eight hundred million of a two year note was priced at 12.5 basis points above the 3 month Libor rate, currently around .29%. A five year note (1.1 billion) was priced 70 basis points over treasuries. The 5 year treasury closed yesterday at 1.456%. This article in the WSJ highlights the recent deluge in corporate debt offerings.

I have a question and the answer seems obvious to me, though I may be in a miniscule minority, which is usually the case anyway irrespective of the topic.

If I bought a 5 year note yielding say 2.2%, what is the likelihood that the total return of that bond over its 5 year life could be exceeded by buying HPQ stock at $38.81 yesterday? A 20% return on the stock, excluding the HPQ dividend, could be realized with a sell at over $46.72 without commissions. If that price was hit at anytime during the next five years, the total return from the stock would clearly exceed the bond's return by a significant amount and the miserly dividend of around .8% annually (assuming no hikes) would increase the stock's total return advantage. Before Hurd's ouster, the bidding war for 3PAR, and the slowdown in PC sales, HPQ was selling at over $50 per share: HPQ Stock Charts

There are a number of Exchange Traded Bonds that I own which go ex interest tomorrow, including GYC, XKK, GJP, GJS & UZV.

The remaining trades from Wednesday will be discussed in the next post.

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