Monday, April 18, 2011

GOP Comes Out of the Closet on Medicare/CPI/SOLD 500 FAX @ 7/ TRMK CZNC/Sold 30 MDT at 41/Sold 50 of Remaining 100 SIVBO at 24.9/Reduced Exposure To GS: Sold 50 GSPRD @ 22.72, 50 PYT @ 19.54, 50 PJI at 23.6/Bought 100 of the Stock CEF ETV @ 12.73

The NY FED reported that its April manufacturing survey showed accelerating improvement, as the general business condition index improved to 21.7, the highest rate in a year.  Empire State Manufacturing Survey (overview) - Federal Reserve Bank of New York

I really do not take the government's CPI number seriously.  It is important to me only in evaluating how other investors and the Federal Reserve may react to the government's number. The CPI is also important given its use in the interest calculation for several securities that I own, including TIPs and floaters whose payments are tied to a spread over CPI. It will be relevant in a few years to the OG since Social Security payments are indexed to it.

For March, the Labor Department reported that CPI increased .5% on a seasonally adjusted basis.  Consumer Price Index Summary The core index was more tame at just a .1% increase.  For the CPI exchange traded floaters PFK, OSM and ISM, the non-seasonally adjusted CPI number is used to calculate the monthly interest rates, and that index can be found at the  St. Louis Fed.  This is a link to the relevant data series used to compute the penny rates:

Cash inflation which excludes the hypothetical "owner's equivalent rent" is up 7.7% at an annualized rate over the past three (see Kevin Phillips' critique of owner equivalent rent in his book "Bad Money: Reckless Finance, Failed - Google Books  at pp. 85 et seq.)

I have copied this chart in a prior blog, but it is worth noting again.  The following chart shows the CPI from around 1910 to date:

Paul Ryan stated in an interview on Sunday that the GOP will cause the U.S. to default on debt by refusing to raise the debt limit, unless the GOP receives concessions.  The Treasury Secretary warned the GOP that a failure to raise the debt limit would be catastrophic to the U.S. and would "shake the basic foundation of the entire global financial system".   CBS   Needless to say, it would be extremely irresponsible to cause the U.S. to default, but the GOP has already shown that it was willing to shut the U.S. government down based on the Democrat's refusal to eliminate 363 million in funding for family clinics.

As expected, the House of Representatives passed with no Democrat votes the 2012 budget proposed by Representative Ryan that would end Medicare for anyone under 55 in a few years, replacing Medicare with a vouchers for the purchase of private insurance.   NYT This is a link to the votes on Ryan's budget: Final Vote Results for Roll Call 277 Four republicans voted against it: Ron Paul (Texas), Danny Rehberg (Montana), David McKinley (West Virginia) and Walter Jones (N.C.)(originally a Democrat).  Rehberg has his eyes on the Senate seat held by John Tester (D), and voting to eliminate Medicare would not be helpful to him in that endeavor, at least until he is elected and then he could vote to do it.  McKinley won election by 1% of the vote in a traditional Democrat district, with one of the highest percent of Medicare beneficiaries in the country. The Hill  McKinley noted that the CBO had determined that Ryan's plans would nearly double the cost for seniors. Ryan_Letter.pdf

This is an excerpt from that CBO letter, at page 21:

Under the proposal, the gradually increasing number of Medicare beneficiaries participating in the new premium support program would bear a much larger share of their health care costs than they would under the traditional program. (The magnitude of that change is discussed in the following section.) That greater burden would require them to reduce their use of health care services, spend less on other goods and services, or save more in advance of retirement than they would under current law. 

This excerpt is from page 23:

A private health insurance plan covering the standardized benefit would, CBO estimates, be more expensive currently than traditional Medicare. Both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare. Those higher costs would be offset partly but not fully by savings from lower utilization stemming from two sources. First, private health insurers would probably impose greater utilization management than occurs in Medicare. Second, private plans might restrict enrollees’ ability to purchase supplemental insurance plans; enrollees would thus face higher out-of-pocket costs than they do in Medicare, and that increased cost sharing would encourage lower utilization. . . 

Moreover, CBO projects that total health care spending for a typical beneficiary covered by the standardized benefit under the proposal would grow faster than such spending for the same beneficiary in traditional Medicare under either of CBO’s longterm scenarios. For the period before 2030, the difference in projected growth rates occurs primarily because CBO expects that the payments to providers in Medicare will grow more slowly (especially under the extended-baseline scenario) than those in the private market. As a result, total health care spending for a typical 65-year-old in Medicare under the extended-baseline scenario in 2022 would be 66 percent of total spending with a private plan with the standardized benefit; in 2030, the figure would be 60 percent of that benchmark. . .

With a few more votes in the Senate, and a GOP President, this budget would be enacted into law. It will be extremely interesting to the OG to see how voters react in 2012 to the competing deficit reduction plans. The OG is well off, and would benefit by the GOP's fervent need to enlarge the gulf between the top 1% and everyone else.

While the GOP wants to end the "death tax" for the wealthy (i.e. the name given to the estate tax by the GOP PR wizards), their proposal on Medicare will inevitably result in a 100% death tax on the middle class, as whatever amount is saved during the lifetime of the average American will be devoured in health costs in their retirement years. Medical decisions will have to be made by them based on their out-of-pocket costs. Undoing Medicare: The Real 'Death Tax

I will describe Ryan's embrace of Ayn Rand in a later post, for it is Rand's warped vision of America that is providing Ryan and the modern day GOP with the underlying philosophical basis for undoing most of the last 100 years of progressive legislation in the U.S.

Without going into detail, other programs for the poor would not be totally eliminated by the republican approved budget, but funding for them would be slashed by large amounts  (e.g.   Ryan Budget Would Slash SNAP Funding by $127 Billion Over Ten Years — Center on Budget and Policy Priorities)  But Ryan would say that the poor can receive all of those benefits that the rich decide to bestow on them with the tax cuts given to them.

My congressional district is overwhelmingly Republican, gerrymandered in a ridiculous way for that objective, and Tennessee has recently turned deep Red in statewide races, with two republican senators and a republican governor.  I discuss how gerrymandering polarizes American politics in Item # 2  More Silliness from Ideologues.

I voted for the current GOP governor who is not a zealot.  I am not sure what else to call those whose first objective after gaining control in the state legislature was to pass a law permitting guns in bars.

Two large cities, Nashville and Memphis, are deep Blue. If the Republican senators embrace the Ryan plan, I suspect that a popular, business oriented Democrat, Phil Bredesen, could win a Senate race in the next showdown.  Bredesen won two state wide races for Governor and has a great deal of money to spend on advertising. The GOP, having come out of the closet, is particularly vulnerable to attack ads. Recent polling already shows that  Bredesen is competitive against Corker who is up for re-election in 2012 and that was before the GOP launched their most recent attack on programs that primarily benefit the middle class and the poor. There are a lot of moderate and rational people in this state who are not devoted members of either political Tribe.

Corker is not an extremist and zealot like Ryan, my congressional representative in Tennessee's 7th Congressional District, and virtually all of the House GOP members. He is more of a traditional republican. The modern GOP is no longer a conservative party, but a reactionary one.

Since Corker is more of a traditional republican that a TB, the OG would consider voting for Corker until he examined the 2012 GOP budget.  Bredesen would never vote to end Medicare, but Corker might follow the GOP line.  The poor and the middle class would bear the burden of the GOP deficit reduction plan, the wealthy would be the only real beneficiaries, and the True Believers will rejoice that they are being screwed, unable to process any accurate facts. The"states rights" crowd and religious zealots, two other important parts of the modern GOP coalition, will not change party affiliation for reasons that have nothing to do with the pocketbook. What is the Appropriate Political Label  We know the true meaning of the code phrase "states rights" in the south.

The Republicans in Arizona are about to officially become the first "Birther" state, as both the Arizona House and Senate passed legislation requiring Presidential candidates to prove they are natural born citizens to the satisfaction of Arizona's Secretary of State.  Long live Katherine Harris as living proof of the independence of such state office holders.

An article in the about the pathetic 1st quarter earnings report from Bank of America had an interesting fact that just can not be true. Or maybe it is. It has to be a typo.   The author states that 85% of Countrywide 1.3 million mortgage customers were at least 60 days behind on their mortgage payments.  The bank set aside another 1 billion to cover the claims connected with Countrywide in the first quarter.  Countrywide was just a disastrous acquisition.   Just one of the many legacies of Ken Lewis.

Trump played the Birther card at a Tea Party rally in Florida, to stirring applause, as he now has move into first place among GOP Presidential hopefuls.  He also referred to Obama as the worst President in U.S. history.  Since a majority of GOP voters are Birthers, I could not disagree with his strategy in pandering to them.  Donald Trump Tries To Breathe Life into the Birthers

1. Further Reduced Exposure to Goldman Sachs: Sold 50 GSPRD at 22.72; 50 PYT at 19.54 in Roth IRA; and 50 PJI at 23.6 (see Disclaimer):  All of these shares were recently purchased and sold for small profits.  Bought 50 GSPRD at 21.58 Bought 50 PYT at 18.06 Bought 50 PJI at 23.11  I also recently received distributions from all of them. PJI was sold due to my ongoing reduction in low yielding long term bonds.  A consideration for reducing exposure to GS was the possibility of more adverse headline risks associated with the release of a bipartisan Senate Report that highlights some unsavory business practices.  Bloomberg  The Big Picture  

This is a link to the 650 page report: WallStreetCrisis.pdf

The OG, who is naturally jumpy even under heavy sedation, reacts to this kind of news in a conditioned reflex action, and the OG could have been one of those Pavlov's dogs in a prior life.  RB just said "Go All In".  Part of the OG's thought process is that those securities, at their current yields, are not worth the event risk.  LB said that it would not use the word "thought" to describe the mental functioning of an addled brain with a few billion malfunctioning synapses.

GSPRD Profit:

2. Sold 50 shares of the TP SIVBO at $24.9 (see disclaimer):  This TP originates from SVB Capital II, a Delaware Trust created by SVB Financial Group.  I have done well with this particular TP. The shares sold last Thursday were bought at $19.15 or at a total cost per share of $19.31 with the commission, back in November 2009:

SIVBO TP AVG Cost Per Share=$19.31
Interest payments are made quarterly at a coupon rate of 7% on a $25 par value.  This security just went ex interest a few days ago.

This is my second recent sale of SIVBO shares: Item # 3  Sold 50 of the 150 SIVBO at 24.65 (March 2011)(snapshot of purchase in the preceding linked post)-Bought 50 SIVBO at $19.49 (October 2009)

I still own 50 shares bought in the ROTH IRA. Added 50 SIVBO AT $19.20 IN ROTH (October 2009)

For a bond, I would consider my foray to be a success given the long term capital gain on the 100 shares sold so far plus several quarterly interest payments.

The total cost of the remaining 50 shares of SIVBO is $968:

In 2011, I have a realized long term capital gain of $513.54:

When I add the interest payments received on 150 shares, I am now playing with the house's money on the remaining 50 shares.  The interest payment on the 150 shares bought in 2009 was $131.25 per quarter.   The gambling analogy comes from LB who is by inclination a trader, always calculating the odds of potential gains and losses, assessing what is known and unknowable, sifting information based on reliability and materiality as opposed to conformance with pre-existing beliefs, and then making a non-emotional judgment free of influences from the RB and the ego.  That later trait requires the LB to look at the portfolio everyday as if some other fool bought those 400+ securities. 

3. Bought 100 of the Stock CEF ETV at 12.73 on Thursday (see Disclaimer):  This stock closed end fund uses a buy-write option strategy.  On 4/14/2011, the fund has a net asset value of $14.19 per share, creating about a -10.22 discount to net asset value at a total cost of $12.73.  The daily NAV information on Eaton Vance closed end funds is available at Eaton Vance Investment - Closed-End Funds.

This is a link to the sponsor's web page for this CEF: Eaton Vance Investment Managers - Tax-Managed Buy-Write Opportunities Fund

This is a link to the last Annual Report: Eaton Vance Tax-Managed Buy-Write Opportunities  The expense ratio is shown as 1.07% at page 11 of that report.  

This fund's covered call writing strategy is discussed in this article published at Seeking Alpha.

Eaton Vance Tax-Managed Buy-Write Opportunities Fund closed at $12.74 last Thursday and had a 10.44% yield at that price. The current quarterly dividend is $.3323 per share, recently reduced from the 40 cents last paid for the September 2010 quarter, which had an adverse impact on the share price.  The fund has been supporting the dividend with a return of capital.  The fund is currently rated 4 stars by Morningstar.

4. Pared Medtronic by Selling 30 shares at $41 Last Friday (see Disclaimer): MDT is a long term holding under my Large Cap Valuation Strategy.  This pare of 30 shares booked some profits and reduced my share position to 208.186.

I am reinvesting the dividend.  My lowest cost shares were purchased on 3/4/2009 at a total cost of $27.34 and I have 20 shares remaining from that purchase.  My most recent add was in late March 2011: ADDED 35 to MDT at 37.46  I sold 30 shares using a GTC limit order. 

5. Bought 100 of the Stock CEF EXG at $10.57 in the ROTH IRA on Friday (see Disclaimer): I bought 100 shares of the Eaton Vance Tax-Managed Global Diversified Equity Income Fund  (EXG) last Friday at $10.57. This fund pays quarterly dividends and last went ex dividend in February. 

I will occasionally buy individual stocks in the retirement accounts, but most of the individual stock purchases will be made during a bear market. An example would be the purchase of DuPont shares at $16.68 in March 2009.  My last purchase of a common stock was 50 shares of Duke Realty:  Bought 50 DRE @ 13.45-ROTH IRA.

Generally, my stock allocation in the retirement accounts is limited to "principal protected" senior notes whose interest rates are tied to the performance of a stock index and to high yielding stock closed end funds.  EXG is a high yield stock CEF that uses a buy-write strategy, like ETV discussed in Item # 3 above.  Morningstar gives this fund a 4 star rating.  The fund was selling at greater than a 10% discount to its net asset last Friday and was yielding about 10.8% at that price.  As shown in the data presented at Morningstar, this fund has supported that dividend recently with returns of capital, which is not unusual for buy-write funds in recent years.  The fund does not use leverage.  

This is a link to the last SEC form N-Q for the Eaton Vance Tax-Managed Global Diversified Equity fund, showing the holdings as of 1/31/2011. 

This is a link to the Annual Report for the F/Y Ending 10/31/2010 (SEC Form N-CSR): Eaton Vance Tax-Managed Global Diversified Equity  The expense ratio is shown at 1.06% at page 11.

As of 4/15/2011, EXG's net asset value was $11.8 and the market price closed at $10.64, creating a 9.83% discount to net asset value at that time. Closed-End Fund Association 

6. Sold 500 of the Bond CEF FAX at 7 last Thursday (see Disclaimer):  I am mostly in a trading mode on bond CEFs. These shares were bought in late December 2010  @ 6.71. So I clip some monthly dividends and realized about $130 or so on the shares. This CEF invests mostly in Australian bonds.   The Aussie Dollar is knocking the pants off the USD:   USD/AUD Currency Conversion Chart    1 AUD currently buys about $1.06 USD.   On March 9, 2009, 1  AUD would have bought 63 U.S. cents.  Wow!!

FAX closed last week at $7.01 and at a 7.03% discount to its net asset value of $7.54.

7. Citizens & Northern (CZNC)(own: Regional Bank Stocks' basket strategy):  Citizens, a small regional bank operating in Pennsylvania, reported net income of 5.5 million or 45 cents per diluted share, up from 40 cents in the first quarter of 2010.  As of 3/31/2011, the bank had a tangible common equity to tangible assets ratio of 10.26%; a total risk based capital ratio of 18.44%; a Tier 1 risk based capital ratio of 17.13%; and NPAs to total asset at .88%. Those capital ratios are good, and none of the equity consists of government equity preferred stock.

This is a link to the bank's 2010 Annual Report.  The current dividend rate is 13 cents per share.

Bought 50 CZNC at 11.77 (August 2010)

Added 50 CZNC at 10.46 (August 2010)

The total cost number, reflecting commission costs, is $11.27 per share.  The current dividend yield at that total constant cost number is about 4.61%. 

Citizens & Northern closed last week at $16.5.