Wednesday, November 3, 2010

Bought: 100 CAR-UN.TO @ 17.35, 50 MWA @3.04, 100 VEU 47.73/Sold: 101 ENY @ 17.93, 100 NDAQ @ 21.53, 50 SUSQ @ 7.5, 50 BNCN @ 9.7, 102+ AT&T @ 28.96

I am just glad that I will not be bombarded with false and misleading political ads for at least another year. Yes, lying works in politics, and apparently being truthful and straight with the voters are not among the conservative values practiced by those who profess to be conservative.

One GOP ad, which ran throughout the nation in various forms, was an attack on Democrats who voted to restrain the growth of Medicare spending. PolitiFact | Republican exaggerations about cutting Medicare Apparently, as noted recently by David Stockman, entitlements are off the table for both parties.

I do not recall hearing or seeing any specific proposals from a republican on how they intend to restrain spending going forward in any meaningful way. As I have said, it is just a fact that interest on the debt, social security, defense, medicare and medicaid, and benefits to federal retirees and veterans account for 74% of the 2010 budget. I then added in a prior post the following: "If I add other safety net programs like unemployment insurance, food stamps and school meals, the total becomes 88%. The remainder goes to education (2 %), transportation and infrastructure (3%), scientific and medical research (2%), international security (1%), and other (4%). The interest on the national debt will most likely become a far more serious problem soon, as the total debt has increased dramatically due in large part to the Near Depression, caused in significant part by the negligence and malfeasance of both political tribes, and the interest rate on that ballooning balance will eventually increase to levels that many can not imagine now. So, where are the 1.3 or 1.4 trillion dollars in annual cuts going to take place? Will the GOP cut defense? Is there some kind of emerging political consensus among either party to slash social security and medicare? Isn't the cost of servicing the national debt ultimately controlled by the market rather than politicians? Maybe the GOP wants to dramatically reduce expenditures for education and infrastructure improvements or to eliminate school meals for the needy children. In the last analysis, the American people do not want to pay for what they believe are entitlements somehow connected with their birth as citizens, and politicians know that the road to their early retirement would be to say no in any meaningful way." Center on Budget and Policy Priorities

Since political ads are either outright lies or at best misleading, or contain nothing of substance, the only way for responsible citizens to deal with them is to change the channel with the remote whenever one starts, which means keeping the remote in one's hand during the election season. The ads sponsored by political action committees with pleasant sounding names, funded by special interests or the rich wanting to avoid taxes and regulations, are just reprehensible and disgusting.

Two of my best years as an investor have been in 2009 and this year. And, the worst year was 2008. When the Beanpole was sworn in as President on 1/20/2009, the S & P 500 was at 805.82, ^GSPC Historical Prices. The S & P 500 closed yesterday at 1,193.57 or a gain of 48.13% during the Obama Presidency so far. I have done much better than the market averages. I also did very well during the Clinton years. On 1/19/2001, the S & P 500 closed at 1342..54, ^GSPC Historical Prices, and declined 40% after 8 years.

1. BOUGHT 100 CAR-UN.TO at 17.35 CAD on Monday (see Disclaimer): CAR-UN.TO is the Yahoo Finance symbol for a Canadian apartment REIT known as Canadian Apartments Real Estate Investment Trust. Capreit - Investor Relations This REIT pays monthly dividends, currently at 9 Canadian cents per month. At that rate for an entire year, the yield would be around 6.22%, before the 15% Canadian withholding tax, based on a total cost of $17.35 CAD.

I view this investment as primarily a means to earn a return on my Canadian dollars, which are part of a long term investment strategy. As with all of the securities purchased on the Toronto exchange, I take the distributions in Canadian dollars.

I did not spend much time looking at this one. I did note reading the last shareholder report that it owns a large number of apartments in Canada, see pages 4-6 phx.corporate-ir.PDF The occupancy rates at page 10 look good to me. The average monthly rent is starting to trend up (page 14).

2. Added 50 MWA at $3.04 on Monday (LOTTERY TICKET category)(see Disclaimer): This last purchase of MUELLER WATER PRODUCTS (MWA) was an average down from a prior LT at $3.74. I was able to slightly exceed the $300 limit on LT purchases due to the prior profit realized from an MWA trade, which can be added to the maximum under current LT rules, LB noted. Bought 50 MWA as a Lottery Ticket at 3.62 Sold MWA at $5.61 For MWA to work, there will need to be an economic recovery in U.S., particularly in the construction industry. Price to sales is currently around .34 and price to book is close to 1. MWA Key Statistics The company is expected to lose 20 cents per share in its fiscal year ending in September 2010, with a return to profitability expected in FY 2011. Debt is viewed as a serious issue and a matter of concern: MWA Balance Sheet Mueller did recently float 225 million of 8.75% senior bonds maturing in 2020. Form S-4 MWA Closing of $225 Million of 8¾% Senior Notes Due 2020

The lack of earnings and the debt level justify the LT classification. There is recovery potential, assuming the economy cooperates. The stock did sell at over $18 in July 2007. MUELLER WATER PRODUCTS The company lost 2 cents per share in the Q/E 6/30, an improvement over the 16 cents lost in the Q/E 6/09. Form 10-Q MWA is paying a small dividend, which produces a decent yield of over 2% at the currently depressed share price. Morningstar does rate MWA four stars: Morningstar Water infrastructure products account for about 67% of sales. A recent analyst presentation can be found at SEPTEMBER 28, 2010 PRESENTATION.

MWA closed at $2.96 on Tuesday. After the close yesterday, Mueller Water Products reported its fiscal 4th quarter results for the Q/E 9/2010. The company reported a net loss of 5 cents, and an adjusted E.P.S. of zero. Net debt decreased 70.2 million in the quarter. Excluding 2 divisions that were divested, net sales for the 4th quarter increased by 1.1% year over year.

3. Sold 101+ of the ETF ENY at $17.93 (see Disclaimer): This ETF was sold at a small profit. The shares were bought at $17.56. The shares started to slide thereafter, closing at $15.27 on 8/25. ENY Historical Prices | Guggenheim Canadian Energy The shares were bought in one of the satellite brokerage accounts where preservation of capital is a primary objective. Stock investments in the two satellite accounts are viewed as temporary income generating vehicles for a part of those funds normally allocated to bank CDs, money market funds, and a savings account.

4. Fauquier (FBSS)(own- Regional Bank Stocks' basket strategy): I was surprised by a substantial dividend cut by FBSS in September, as the Board slashed the dividend by 40% without providing any explanation. I did not see anything in that press release suggesting belt tightening by the bank, or a reduction in executive salaries and perks. The one analyst who has an estimate for this small bank based in Virginia predicted earnings for the 3rd quarter of 29 cents. Fauquier Bankshares reported earnings of 27 cents per share. As of 9/30, the net interest margin was 4.14%; NPLs decreased to .44% of total loans; the allowance for loan losses as a percent on NPLs was at 276.84%; and the total risk based capital ratio was at 12.34%.

The regional bank basket rallied yesterday to close up $565 or 1.35%.

5. Sold 100 NDAQ at 21.53 (see Disclaimer): LB became impatient with the stock performance of The NASDAQ OMX Group, Inc. and sold Headknocker's shares for about a $100 profit. Bought 50 NDAQ at $19.98 Added to Nasdaq Omx at $20.17 The last earnings report from NDAQ was better than expected at 50 cents per share versus the consensus estimate of 46 cents. Average share volume for U.S. listed equities fell to 7.55 billion from 9.31 billion a year ago.

NDAQ closed at $21.5 on Tuesday.

6. Sold 50 SUSQ at $7.50 and 50 BNC Bancorp (BNCN) at $9.7 (Regional Bank Stocks' basket strategy) (see Disclaimer): I was sufficiently disappointed with the lack of earnings progress from Susquehanna Bancshares that I elected to sell my 50 shares bought at $5.85 slightly over a year ago. My discussion of SUSQ's last earnings report can be found at ITEM # 1, SUSQ

I was not pleased with the earnings report from BNC Bancorp and sold my 50 shares bought at 9.99 for a small loss.

7. Sold Remaining 102+ shares of AT & T shares at 28.96 (see disclaimer): After this sale, I no longer have a any position in the common stocks of either AT & T or Verizon, but still own their senior bonds in TC legal form. I previously sold 100 shares of AT & T common at 28.69. The profit on Tuesday's sale was over $300: Bought 50 AT & T at 25.45 Added To AT & T at 24.75

8. Bought 100 of the Vanguard ETF VEU at 47.73 (see disclaimer): This purchase was the tail end of a process that involved selling three WisdomTree stock ETFs and buying two Vanguard stock ETFs in my Vanguard brokerage account, for the reasons discuss in a prior post. Item # 4 Sold 100 DHS @ 38.16, 100 DEW @ 42.51/Bought 100 VV at 54 I have previously bought and sold VEU at lower prices: BOUGHT 100 VEU at $29.8 Sold 100 of the ETF VEU at 38.6 VEU is the Vanguard ETF for world stocks outside the U.S., and it has a .25% expense ratio: Vanguard - FTSE All-World ex-US ETF - Overview As of 9/30, about 26.6% of the portfolio was in emerging market stocks, 44.5% in Europe, and 22.8% in the Pacific region. The remainder would be Canadian and S.A. companies.


  1. Does owning a TC tied to a corporate bond offer some protection from disaster when the bond bull market corrects (whenever that might be)? I am trying to understand the longer term risks of continuing to hold bond funds (like GDO) and bond-like issues (for example, an Aegon hybrid) in this environment. I do not own US Treasuries.

  2. Cathie: The main risk of a bond fund is a rise in interest rates. That risk becomes acute when there is a long term gradual rise in rates, where there is no escape hatch for the bond investor other than to sell the position at a loss. Exchange traded bonds whether it be a TC, a mini-bond, or a TP, will have a maturity date. The existence of that date does provide an out, when the investor can recover par value, assuming the firm survives. During a period of rising rates, both the bond fund and the individual bonds, will be losing value, and investors in both will be subject to the risk of lost opportunity, that is, investing that money tied up in a bond or bond fund in the same kind of investment at a lower price and a higher yield.

    The difference is that the bond fund investor will not likely ever be made whole by investing in a period where rates are at historic lows, as now, and then being hit with a prolonged period of rising rates like the 1960s and 1970s. A repeat of those two decades, which is a possibility, would result in more than just losses on the original principal amount for that bond fund investor, but also the value of the dividends would be lost too, as the price declines more than value of the dividends. It does not take much of a decline in price to wipe out a 3% dividend.

    The way that I look at it is that there is more credit risk by holding a few individual bonds rather than a bond fund. However, particularly now, there is more interest rate risk in the bond fund compared to an individual bond with a maturity date. If the investor can achieve broad diversity by buying individual bonds, then that will mimic the credit risk of the bond fund while reducing the current interest rate risk inherent in owning a bond fund.

    GDO and IGI, both owned, are term date bond funds, and will liquidate in 2024. While this provides more protection against interest rate risk than a normal bond fund, it is not equivalent to owning bonds maturing in 2024. It does reduce interest rate risk compared to a bond fund without a term date, while maintaining the better credit risk profile of the bond fund with a large number of diverse holdings.

    The Aegon and ING Hybrids have no maturity dates, and may never be called. There is no obligation to call those securities. In that sense, they are perpetual obligations, with many characteristics of a common stock, and lacking the bond feature of a maturity date. I would anticipate that they will react similarly to a very long term bond in a rising rate period. As shown from events during the Dark Period, they are also hyper sensitive on the downside to concerns about credit risk or deferrals.