Wednesday, February 23, 2011

SOLD 100 QQQX at $14.96/Sold 100 KFT @ 31.33/Sold 200 IMF at $17.15/MDT Hawker WMT/Case Shiller-Double Dip in Housing Prices Well Underway/

The  VIX exploded to the upside yesterday, rising 26.6% or 4.37 points to close at 20.8. For anyone interested, this is not sufficient for me to restart the count relevant to the formation of a Stable Vix Pattern. It is sufficient to cause me to perform a minor adjustment in my stock allocation.

On the bright side, I do not have to worry about a reversion to the 3% guarantee for the "principal protected note" MOU, which ends its second annual period today. (see page PS-2-Pricing Supplement) The Russell 2000 index hit an air pocket yesterday and declined 2.62% or 21.86 points to close at 812.96.  Java Chart - WSJ  I calculated the maximum level at 856.349: Item # 8 Update on MOU One close above that maximum level in the Russell 2000 during the second annual period, which ends today, would have triggered a reversion back to the 3% guarantee for the annual interest payment. So that one is about to have a good pay day. {Bought 100 MOU at $10.12 (this security closed at $13.36 yesterday)}

I believe that this note has the highest maximum of the Citigroup Funding exchange traded "principal protected" senior notes at 37%. The annual interest payment is scheduled to paid on 3/2.  I will know by the close of trading today what the coupon will be for the second annual period.  A close at 813 in the Russell 2000 today, by way of example, would create close to a 30% coupon payment, which is what makes this type of security worth the gamble. Where else am I going to get a 30% interest rate on a senior note, maturing in 2015, from an investment grade credit?

Many investors who bought "principal protected" notes issued by Lehman Brothers claim that they were misled by their brokers into buying those unsecured senior notes, and they found a champion for their distress in the NYT's Greta Morgenson, who called these securities convoluted and difficult to understand. NYT  I thought that her article, written in the vein of an advocate rather than a journalist, sounded like one of the plaintiff's attorneys representing purchasers of Lehman notes, which I never touched by the way.  Principal Protected Notes  It is not surprising to me, nor to anyone else,  that most financial journalists, financial planners, brokers, and individual investors do not understand these securities, because none of them have ever taken the time to read a prospectus before buying or recommending one. I do not find them difficult to understand, nor are they convoluted, but I made an effort to understand the terms by reading the prospectus.

The cover story in Barrons this week, titled "King of Bonds", is about Jeffrey Gundlach, who apparently knows no bounds in praising himself. After reading the article, I wanted to preserve for future reference some of his predictions emanating from his brilliant mind.  He believes the S & P 500 "will hit 500 in the next couple of years". He does not see a surge in inflation since he believes that a rise in the 10 year treasury note to 4% to 4.5% would "cause economic growth to short-circuit".  He expects U.S. housing prices to fall another 10% to 15%, which is not an outlandish prediction.  He appears to be more bearish on the municipal bond market than Merideth Whitney. (see Steve Kroft interview of Whitney at State Budgets: The Day of Reckoning) He predicts a collapse in municipal bonds and hopes to acquire municipal bond CEFs at 40% of their net asset value.  

Possibly the most worthwhile piece of information in the article is his statement that the spread of 300 basis points between the 20 year treasury and junk bonds is the lower than at anytime in the prior credit cycle.  This implies to me that he believes the run in junk bonds is over, given his views on treasury yields.  

John Hussman pointed out in his most recent missive that the Shiller P/E (S & P 10 year average earnings adjusted for inflation) is now in excess of 24.  Unless the reader misses his drift, Hussman adds that, prior to bubble mania in the late 1990s, the Shiller P/E had hit such lofty levels only once once, just prior to the Great Crash of 1929.  Hussman provides a long term chart of the Shiller P/E. going back to 1871. Generally a spike to the current level or higher would be a signal to reduce or even to eliminate stock positions.  Those spikes occurred just prior to the 1907 crash (Panic of 1907), the 1929 crash,  and the advent of the long term secular bear markets starting in the mid-1960s and the late 1990s. Virtually everyone other than me dates the start of the current long term bear cycle in 2000, whereas I start it in October 1997 for the reasons discussed in several prior posts.  Dating the Start of the Current Long Term Secular Bear Market   The Roller Coaster Ride of the Long Term Secular Bear Market/Unhelpful Comments By Important People   Underlying Cause of the Current Long Term Bear Market is Too Much Debt I would add that Hussman has been bearish for one of the most unprecedented rallies in U.S. stock market history and his mutual funds have badly underperformed the market since March 2009:  HSGFX - Fund returns   HSTRX - Fund returns 

I would note, as a counterpoint, that the current 10 year period includes the 2001 recession,, and the recent Near Depression. What will the Shiller P/E be in two years, assuming earnings growth of 10+%, and the numbers from 2001 and 2002 are no longer included in the ten year computation?  After all, the market is principally forward looking.

Still, a cautious approach is appropriate in my opinion, given the elevated Shiller P/E number and its accurate signals over the past 100 or so years when it reaches the current level or higher. The Shiller P/E can be interpreted too narrowly on the entry point by Professor Shiller and many who use the Shiller P/E as a justification to avoid stocks.  (see interview with Shiller in late February 2009 at Tech Ticker) The S & P 500 is up 93.8% as of last Friday's close, since hitting its bottom in March 2009: The professor is still waiting for his buy signal. 

LB wants to emphasize that it wanted to add a double short for the Russell 2000, last week, as a form of hedging, an noted in Item # 6 Bought 50 of the ETF DLN at 48.24. The Nit Wit RB and its slacker ally the Old Geezer put the kibosh on it.  The small caps have enjoyed a very robust rally since March 2009. The Russell 200 is currently selling at a large valuation gap compared to the DJIA and the S & P 500, and even the Nasdaq Composite: P/Es & Yields on Major Indexes -

It is not surprising that the GOP, in its current configuration, is hostile to the Environmental Protection Agency and virtually any regulation that inhibits the pollution or the air and water in pursuit of profits.  The republicans in the House of Representatives want to cut the EPA's budget by 1/3 GOP, saving about $21 for each person filing a tax return in the U.S.  The House Republicans are also proposing rules to limit the EPA's power to stop hazardous pollutants from being released by power plants.  Ralph Hall (R) from Texas, whose district includes a number of refineries, want to compel the National Academy of Sciences to study the harmful effects of arsenic  for two years before allowing the EPA to implement a rule regulating emissions.  The GOP also wants to block the EPA from regulating emissions of mercury. Times Union  The GOP does not like a proposed EPA rule that would limit mercury emissions to just 16,600 pounds by 2013.

1. Wal-Mart (own-Large Cap Valuation Strategy): Walmart reported diluted earnings per share of $1.41 from continuing operations for its Q/E 1/31/2011. Adjusting for a tax benefit of 7 cents per share, the company earned $1.34.  The expectation was for $1.31. The comparable adjusted E.P.S. number in the year ago quarter was $1.21.

Sales increased to 115.6 billion dollars, an increase of just 2.5% from the year ago quarter as U.S. comparable same store sales declined by 1.8% for the 13 week period ending on 1/28/2011. This marked the seventh consecutive decline in U.S. for the U.S. Walmart stores. Net sales in Walmart U.S. fell -.05%, but international sales grew by 8.9%. Sam's Club also experienced a 4.4% increase in sales and a 2.7% gain in same store sales.

Return on investment for the F/Y was 19.2% and free cash flow for the year was 10.9 billion.

For F/Y 2012, WMT forecasts that earnings per share of $4.35 to $4.5. WMT estimated profits in the first quarter between 91 to 96 cents. The consensus estimate was at $4.45 for the year and 96 cents for the 1st quarter.

The general consensus among talking heads on CNBC yesterday was to sell WMT shares, with the tone being only a fool would buy at current levels.  I bought 50 WMT shares at 53.52 last December, and will round the lot to 100 shares at or near $50.

Wal-Mart Stores' stock fell $1.71 in trading yesterday to close at $53.67.

2. Case Shiller:  The Case Shiller index for home prices in 20 major metropolitan areas fell 1% in December, the fifth consecutive decline,  with prices falling in 19 of the 20 areas. Over the past year prices have fallen 2.4%. This data is consistent with a double dip in housing.

The National Association of Realtors is looking at whether it has over counted home sales going back to 2007. CoreLogic, which compiles data from registers' offices, concluded that the NAR data may have over-stated home sales by as much as 20%.

At the moment, my greatest concern is the future course of U.S. housing prices and the possibility that a continued decline could trigger another recession. The stimulus package, passed in the early days of the Beanpole's administration, is winding down, and there is no inclination to do anything more. There is also underway a strong political movement to cut government spending at every level, and that spending has provided a base for the anemic economic recovery out of the NEAR DEPRESSION period.

3. Medtronic (MDT)(Large Cap Valuation Strategy): MDT reported earnings for its fiscal third quarter, which ended on 1/28/2011, at $.86, on revenues of $3.961 billion dollars. The E.P.S. number beat the consensus estimate by 2 cents per share.  Revenues increased 2.9% year-over-year. The company stated that it is comfortable with the current consensus estimate of $3.40 for its current F/Y.  

MDT fell $1.05 yesterday to close at $40.22.

4. Hawker Beechcraft (own senior bond only: Junk Bond Ladder Strategy):  RB is responsible for the purchase of 1 Hawker Beechcraft senior bond, viewed by responsible staff members here at HQ as the riskiest purchase in the Junk Bond Ladder Strategy.  Hawker, a private company, recently filed a report summarizing its 2010 results.  The company reported a loss in 2010 of 304.9 million and an operating loss of 173.9 million dollars.  The operating loss for 2009 was 712 but that loss included 522.8 million in asset impairment charges. Hawker says that it generated 297.8 million in cash from operations in 2010 on sales of 2.643 billion. Bought 1 8.5% Hawker Acquisition Senior Bond at 75.5 Maturing 2015 S & P rates this bond CCC-. RB was encouraged that the rating could not go lower without a default.  "What a Nit Wit" was all the LB could say in response to that last comment.    

5. Sold 100 QQQX at $14.96 on Tuesday (see Disclaimer): QQQX is a CEF that owns Nasdaq listed stocks.  With the spike in oil yesterday, I elected to do a minor reduction in my non-energy stock allocation which was the only reason for selling this stock CEF.  I bought the 100 shares @ 14.08 last November. At the time that I disposed of QQQX, I intended to re-deploy the proceeds in an ETF containing energy stocks. Who knows what will happen in the Middle East and what those events will have on the supply of oil and oil prices?  I later bought 50 shares of ENY with the proceeds.

Last Friday QQQX closed at a 2.75% discount to its net asset value.

6. Bought 50 of the ETF Guggenheim Canadian Energy Income (ENY) at $22.44 on Tuesday (see Disclaimer):  I mentioned ENY, which is traded in the U.S., as an alternative ETF for Canadian Energy companies to the Canadian ETF that I recently bought which is traded on the Toronto exchange. See: Item # 1 Bought 100 XEG:CA at $21.1 CAD I previously discussed ENY when I purchased some shares  at $17.56 last June.

The expense ratio is relatively high at .65%:   Canadian Energy Income As of 2/18/2011, the fund own 36 stocks. A list can be found at ENY  Holdings. Needless to say, I am not worried about a Canadian civil war disrupting the operations of companies in Canada.

This is a link to a recent article at Seeking Alpha regarding ENY. Andrew Bary recently penned a column in Barrons about the Canadian oil sands play.

I would add that there is one ETF that focuses solely on oil sands companies, but it has only 13 positions:   CLO - Claymore Oil Sands Sector ETF The symbol at Fidelity for that ETF, available on the Toronto exchange, is CLO:CA.  I do not own it. Instead, as previously mentioned and discussed, I bought 100 of XEG:CA, which is broader in scope.

7. Sold 100 KFT at 31.33 (see Disclaimer): I have been disappointed in Kraft's performance since I purchased these shares  at $29.86 last March. In response to the surge in the VIX, I decided to slightly reduce my equity exposure and the underperforming KFT shares seemed like a candidate to sell.

8.  Sold 200 of the Bond CEF IMF at $17.15 on Tuesday (see Disclaimer): I had a GTC AON limit order to sell 200 of IMF at $17.15 which was filled yesterday.  I just bought those shares at $16.64 and will receive 1 monthly dividend payment.  (2/15/2011 Post). As discussed in that last linked post, I am in a hyper trading mode on the bond CEFs WIW and IMF, both of which contain treasury inflation protected bonds. The turmoil in the Middle East has caused many investors to run back to U.S. treasuries which has caused the rise in this particular bond CEF.

IMF closed yesterday at $17.16 and had a net asset value at that time of $17.95, creating a -4.4% discount. 


  1. "I had a GTC AON limit order to sell 200 of IMF at $17.15 which was filled yesterday. I just bought those shares at 11.65 and will receive 1 monthly dividend payment."

    WAY TO GO!

  2. did you see VALE has a preferred?
    VALE.P -looks like 2.5% yield, dividend been lower each quarter.
    from .24 to .19

  3. On IMF, I going to contribute my profits on both WIW and IMF to increase my holding in the Vanguard Inflation Protected mutual fund, at some point. The coupon yield on TIPs is just unattractive to me now.

    On Vale, I know about the preferred. I have deliberately avoided it since it is way too difficult to figure out the coupon payment. The coupon is the greater of 3% of the book value per share or 6% of the preferred classes' pro rata share of the paid-in capital.

    The common appears to me to me hostage to the whims of hedge fund traders as well as any move by the Chinese goverment to slow down their economy. I own 100 shares of the common.