Wednesday, April 27, 2011

Sold 100 EBTC at $15.95/Updated Regional Bank Table/Pared Trade: Sold 100 CUF_UN:CA @ 22.66 CAD & Bought 100 CDZ:CA at 21.26 CAD/Bought 30 NYT as LT @ 8.61/Bought 1 Knight Ridder 5.75% Senior Bond Maturing 9/1/2017 at 85/WASH EBTC

The Case Shiller Index of home prices in 20 major metropolitan areas continues to confirm an ominious double dip in housing prices. This report can be accessed at  www.standardandpoors. PDF

Cramer says everybody got "Alcoa wrong". Seeking Alpha Apparently, everybody does not include the OG and our Chief of Research LB. 

The 787 billion "stimulus" passed by the Democrats early in the Beanpole's administration is now winding down. While this stimulus did create some jobs, and prevented job losses at local governments by massive transfers of borrowed cash from the federal government, the stimulus was ill conceived and largely ineffective for the amount of borrowed money spent. The design of that package reflects a typical mind set of Democrats, which includes failing to consider the long term consequences of their actions.  

All of that money was borrowed, and the U.S. government will be paying interest on those borrowed funds for as long as the U.S. exists as a viable nation. Maybe the GOP needed to consider that point too before giving Bush Junior the go ahead to attack Iraq. Most of the "stimulus" money needed to be devoted to the nation's infrastructure projects (water, sewer, roads, bridges, etc.) that are in need of replacement or repair. Those expenditures would have to be done at some point anyway and would have provided a long term stimulus impact, lasting at least five years and possibly as many as ten.  Infrastructure spending represented about 105 billion of the 787 billion and some of those projects are on their face questionable.  Only 27.5 billion was devoted to bridge and highway construction projects and a much smaller amount to clearly identifiable water and sewer projects.  

Instead, to relieve what they consider to be suffering of some people, the Democrats spent most of that wad of cash with little of a non-temporary nature to show for it. Most of the tax incentives for example were temporary in nature or inefficient such as the homebuyer tax credit. Some of the funds were devoted to infrastructure projects, and some programs were funded that may have a longer term benefit such as the digitization of medical records or the energy efficient tax credits.  But, a large chunk of the money was used to prevent government job losses at the local level, to provide temporary help for  local government funding needs, and other transfer payments of a transitory nature. American Recovery and Reinvestment Act of 2009  Maybe those state and city workers could have learned how to use a shovel.  Some sun and exercise could do wonders for them too, plus the added benefit of free Spanish lessons. 

Now, the GOP and the Democrats, each in their own grossly incompetent way, have managed to add close to 2 trillion to the nation's debt with just two stupid decisions. Based on history, more stupid decisions can be expected from them that will add to the deficit.  

1. Pared Trade: Sold 100 Cominar REIT at 22.66 CAD and Bought Again the Canadian Dividend ETF CDZ:CA at 21.26 CAD Last Thursday (Canadian Dollar (CAD) Strategy)(see Disclaimer):  In an opinion column in the  last Sunday NYT, Reagan's former Budget Director, David Stockman, provides several reasons for my Canadian Dollar Strategy.

Ultimately, I view it as highly unlikely that the U.S. will put its fiscal house in order, due in large part to failures by both political tribes and the unwillingness of the American people to change their entitlement mindset.   Stockman describes the current reality as a  The Bipartisan March to Fiscal Madness. I could not agree more, except that I would use stronger language than "Fiscal Madness". Financial Armageddon-Avoided or Just Delayed (December 2010); U.S. Debt to the Penny (Daily History Search Application) (Link to U.S. Treasury Calculation).  

The entitlement mindset of Americans exists in all income groups, but is most noticeable at the highest and lowest income levels.  The rich do not see themselves as the beneficiaries of government entitlements. Perhaps, they need to cease funneling any money to GOP politicians and to lobbyists, and then they would be quickly reminded of the panoply of  entitlements bestowed upon them.  

Eventually, sooner rather than later, the value of the dollar and U.S. debt will collapse due to profligacy of federal and local governments and an unwillingness of most Americans to live within their means or to pay taxes to support the liberal benefits promised by the government.

Stockman's roadmap to prevent financial armageddon would be impossible to achieve politically.  An example would be his proposal to increase taxes on the middle class in addition to the tax increases proposed by Obama on those deemed well off by the Democrats, or to end the lower tax rate for capital gains that Stockman calls a tax subsidy to the rich. Since neither political Tribe is even close to proposing workable solutions, and are highly unlikely to ever do so before it is too late, due largely to the American population's entitlement mindset, the inevitable result will be a collapse in the value of U.S. government debt, the value of the USD and most likely hyper inflation.  Maybe this will not happen in five years or even ten. I am convinced that it will happen in my lifetime, and I view this outcome as close to inevitable.  

While the ETF CDZ:CA has a lower yield than the Canadian REIT that I sold, it is more diversified and therefore viewed as less risky. Both of these securities pay monthly dividends in Canadian currency.  One goal of the Canadian Dollar Strategy is simply to increase my CADs by receiving dividends paid in CADs and hopefully to realize net gains on the Canadian securities purchased with my Canadian dollars.  I previously bought and sold CDZ:CA at a profit.  Sold: 200 CDZ.TO @ 20.13  Bought 100 ETF CDZ:TO at 19.24 CAD Bought: 100 CDZ.TO @ 18.64 CAD Cominar was sold at a profit after receiving several monthly dividend payments. Bought 100 CUF-UN.TO  (11/2010 Post)

This is a link to the sponsor's web page: Claymore S&P/TSX Canadian Dividend ETF - CDZ - Claymore Investments, Inc. Dividends are paid monthly. The expense ratio is shown as .6%.  The current holdings can be found at CDZ - Claymore S&P/TSX Canadian Dividend ETF

This is a snapshot of some of my recent sales of Canadian securities purchased pursuant to the Canadian Dollar Strategy, with the profits calculated by my broker (USD conversions for income tax purposes- purchases made, and proceeds taken in CADs):

Canadian Apartments-Monthly Dividends 2011 ST Gain of $220.45
Husky Energy 2010  Gain $198.4 Quarterly Dividends
Husky Energy 2011 Gain $234.30
Canadian Dividend ETF 2010 Monthly Dividends  $295.19
Enerplus ST 2010 Gain $435.44-Monthly Dividends
Cominar 2011 Gain $196.7-Monthly Dividends

2. Bought 30 New York Times at $8.61 on Thursday (LOTTERY TICKET strategy)(see Disclaimer): Yes I know. The newspaper business is dying.  Even many educated young people are at best occasional readers of online newspaper editions and may never actually pay for a subscription in their lifetime. I know a few that would have to be paid to read a newspaper who attend some of the best universities.  The problems originating from the internet, and the unwillingness of many to pay for access to a newspaper, are also well known.  

Another problem for a paper like the NYT is the long standing and successful strategy of the GOP to convince millions to ignore virtually all media outlets as biased organs of the liberal elite. This successful strategy, which started in earnest with Spiro Agnew,  has reached the point where millions of Americans would never even read a newspaper like the NYT even if someone gave them a subscription, nor would they even consider going to the online edition even if access was totally free to them.

I personally find the reporting to be excellent and would characterize the NYT as the best overall daily source for world news. I am a subscriber to that publication and many others. While I view information gathering as an obligation of my citizenship in a free society, it is imperative to being a successful investor. 

As a consequence of this relentless attack on the news media by the GOP and their media  apparatchiks for over four decades, witnessed by me for my entire adult life, there are now tens of millions of U.S. citizens, who have an unshakeable belief that the New York Times, the Washington Post and virtually all media outlets in the country other than Fox "News" and right wing radio personalities like Rush Limbaugh, are incapable of reporting the news in an unbiased way.  
Conservative ideology has been hijacked in the U.S. by those who are boisterous, ignorant, closed minded, lacking in curiosity about the world, intolerant, in denial about their own glaring bias, often practitioners of the vitriolic spiel, and rigidly ideological. 

Those pseudo-conservatives will actively exclude any information that is not consistent with their previously formed ideological beliefs which requires them to ignore or to dismiss any information not disseminated in an accepted media outlet, which excludes virtually all news media with a few exceptions, the most prominent being the personalities at Fox "News". All information is screened through an ideological prism formed without much, if any, accurate information and what little information used to form their rigid and unassailable opinions can often be proved to be inaccurate, incomplete or a gross exaggeration. Part of the effort to exclude information and facts from consideration is done simply by placing a label on the source, like “liberal”, originating from any non-sanctioned outlet. The label, in and of itself, is to them a winning argument, the only thing needed to be said about it. Consequently, by successfully excluding reliable information from most of America's news media, they can successfully be manipulated to believe just about anything.  

The Birthers, who make up a clear majority of the modern day GOP, are simply one manifestation of the GOP's 40+ year campaign against the free press. Do NOT Consult the Free Press for Information is the GOP Message-Just Listen to Rush Limbaugh or Sean Hannity!  For those indoctrinated in the GOP's line, and have already accepted as gospel the GOP's line about media bias, facts do not matter and no amount of facts could convince the Birthers that Obama was born in Hawaii.  Instead, the overwhelming facts supporting his claim to have been born in Hawaii are the product of the liberal media who are just trying to mislead the Birthers.

Each citizen has an obligation to make an active effort to discover the truth and that is a true conservative value. The Founding Fathers protected the press in the First Amendment, another conservative value, to further that truth seeking obligation of all citizens. Once the news stories are read, no matter the source, then a person can sift through them, separate the wheat from the chafe, fact from opinion, using all of the tools now available to a free person in a free society including the vast array of sources available over the internet, and then use their life experiences, knowledge and intelligence to make sense of it all. Sure, I see some bias in reporting, but that is after I read the article or listened to a news story. 

When you hear Republicans since Spiro Agnew repeatedly rail against the liberal and elite media, their ultimate goal for using these labels of “elite” or “liberal” is to convince people not even to access information to determine the truth for themselves and instead accept whatever version that they happen to be advocating at the moment without any effort to verify it. Their approach is at its heart and core anti-Conservative and anti-democratic in its purpose and intent and instead designed and intended to achieve a political goal, maintaining power by whatever means necessary.

The millions who make no real effort to discover accurate information will not believe, for example, that the recently passed Ryan budget proposal, supported by virtually all House GOP members,  would decrease the tax rates for millionaires again, while in effect imposing a 100% death tax on virtually all members of the middle class younger than 55.   GOP Comes Out of the Closet on Medicare  That last statement is based on the analysis made by the CBO that, by 2022, the seniors who are now under 55 will be paying almost twice as much as those under traditional medicare, so whatever amount is saved by the middle class before retirement would likely be devoured before their death to pay spiraling increases in private health insurance.  I do not believe that the number could be seriously disputed and I suspect that it would end up being much worse for those folks now under 55.  Yet, the GOP wants to end the estate tax for billionaires (currently there is a five million dollar estate tax exemption that can be doubled with a by-pass trust)  A GOP politician would not want to have to explain that vote to the middle class voters that normally support them, and most likely most will not have to defend their vote due to the voter's lack of accurate information.   

So there are three main negatives for buying shares in the NYT which is why I have classified the purchase as a Lottery Ticket:

1. The availability of free alternative news outlets on the internet which includes free access to online editions of newspapers. 

2. The successful 4+ decade campaign by the GOP to convince millions to refrain from even accessing the "mainstream" media outlets, so that the GOP message will not be contradicted by facts. This results in fewer readers for newspapers or viewers for online editions of most media publications. 

3.  The unwillingness of younger readers to read, let alone, subscribe to a newspaper. 

The NYT does, however, have a number of important factors in its favor.  There are also millions of Americans who remain open-minded and curious about world news. The NYT may be the only national paper that can successfully navigate to an online subscription model. The paper has recently started to charge for online access, but is now allowing access to 20 articles a month for free. After the recent transition to the paywall, 100,000 free loaders opted to pay for online access.  Bloomberg  An improving economy will lead to some modest improvement in advertising sales. 

I bought the stock last Thursday after the shares slid in response to the latest disappointing earnings report:  SEC Filed Press Release  The shares fell to an intra-day low of $8.54 before recovering to close at $8.92.   The current consensus estimate is for an E.P.S. of 54 cents in 2011 and 72 cents in 2012. In addition to the NYT, the company also owns the Boston Globe, 14 regional newspapers, and several web sites including  

3. Washington Trust (WASH)(own-Regional Bank Stocks' basket strategy): Washington Trust reported 1st quarter net income of 6.8 million or 42 cents per share, up 31% from the 5.2 million earned in the 1st quarter of 2011. The consensus estimate made by 3 analysts was for 40 cents. 

Net interest margin improved to 3.16% from 2.78% in the 1st quarter of 2010.  As of 3/31/2011, NPAs to total assets was an excellent .77%; the tangible equity to tangible assets ratio was 7.36%, up from 7.14% as of 12/31/2010; the tier 1 risk based capital ratio was 11.65%; the total risk based capital ratio was 12.92%; no government preferred stock is on the balance sheet contributing to equity; and the allowance for loan losses as a percentage of NPLs was a comforting 1.43%.

I bought 100 shares of WASH  at $15.26 and sold 50 of those shares at $22.44

4. Sold 100 Enterprise Bancorp (EBTC) at $15.95 (Regional Bank Stocks' basket strategy)Enterprise Bancorp reported net income of 2.5 million or 26 cents per share, down from 2.9 million or 32 cents in the 1st quarter of 2010. The decline was due mainly to the levels of gains from security sales and foreclosed real estate in the 2010 quarter.  Still, this report was not impressive.  NPAs increased to 1.67% from 1.51% as of 12/31/2010.  The net interest margin remained relatively good at 4.43%. 

I decided to sell my 100 shares of EBTC at a good short term capital gain.  Bought 50 EBTC at 11.75 Sold   50 EBTC @ 13 Added 50 EBTC at 10.33 Bought 50 EBTC at 11.27  The shares sold were my lowest cost shares: 


This sale brings my realized gains to $6,364.37 for this particular strategy. Item # 3 Realized Gains Regional Bank's Basket Strategy 2010-2011

EBTC closed at $16.10 in trading yesterday. 

This is my regional bank table as of 4/26/2011 which contains 1 new addition that I will discuss in the next post: 

Regional Bank Basket as of 4/26/2011 
The dividend yields shown in this table are calculated by YF at the closing price from yesterday.  My dividend yield would in most cases be higher, sometimes much higher.  For multiple purchases, I use a weighted average cost and use the purchase date of the last trade as the trade date.  I have two problem children in this basket, HCBK and PBIB.  

5. Bought 1 Knight Ridder 5.75% Senior Bond Maturing 9/1/2017 at 85 on Monday) (Junk Bond Ladder Strategy) (see Disclaimer):  This bond is  currently rated at Caa2 by Moody's and CCC+ by S & P, well into junk territory and deservedly so. The Knight Ridder newspaper chain was bought by the  McClatchy Company (MNI) in 2006 for 4 billion in cash and stock, when it was well known that the internet would be a growing negative influence on newspaper profitability. MNI also assumed 2 billion in debt.  Boneheaded is the only appropriate description.  At one point in 2008, MNI common stock fell below $1 per share, down then over 98% since the Knight Ridder acquisition. The entire market value of MNI's common stock now is less than 300 million. 

While some papers were sold, McClatchy retained ownership in 20 former Knight Ridder publications:  "The Tribune in San Luis Obispo, Calif.; The Bellingham Herald and The Olympian in Washington; The Idaho Statesman in Boise; The Kansas City Star in Missouri; The Olathe News and The Wichita Eagle in Kansas; the Fort Worth Star-Telegram in Texas; the Belleville News-Democrat in Illinois; the Columbus Ledger-Enquirer and The Telegraph in Georgia; the Sun Herald in Biloxi, Miss.; the Lexington Herald-Leader in Kentucky; the Centre Daily Times in Pennsylvania; The Miami Herald, Bradenton Herald and El Nuevo Herald in Florida; The Charlotte Observer in North Carolina; and The Sun News and The State in South Carolina."  The McClatchy Company  This acquisition added way too much debt in my opinion to MNI's balance sheet and it is still struggling under that weight.   The 2010 Annual report shows 1.703 billion dollars in long term debt. (page 43). The maturity schedule can be found at pages 54-57.  Both the amount and maturity date of a senior secured note is important. That notes has almost 866 million in principal amount outstanding and matures in February 2017.  This makes my senior unsecured note very risky without any doubt in my mind.  

The same negative trends discussed in Item # 2 above would also be applicable to McClathchy's newspaper operations.  

In all of the papers shown at page 6 of the Annual Report, subscriptions are in decline.  The company did earn 39 cents per share from continuing operations in 2010. 

This is a link to the FINRA Information on the 5.75% senior unsecured bond maturing in 9/2017.  

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