Wednesday, May 25, 2011

Foreclosures and Home Prices/MDT/Added 30 MSFT at 24.15/Voters Send the GOP a Message/Eliminated Exposure to GS Bonds-Sold 100 PYB at 23.68/Sold 50 BMLPRH at 17.64

CNN, the Washington Post and the NYT predicted that the Democrat Kathy Hochul will win the special congressional election against the Republican Jane Corwin in a heavily republican district. CNN Political Ticker NYT  The Washington Post Jane Corwin was a solid candidate too.

It will not be hard to visualize the Democrat attack ads against GOP candidates in 2012. Those ads could even be accurate, a rarity for political ads from either Political Tribe, by simply stating the conclusions from the CBO's letter to Paul Ryan previously referenced in this blog.  The ads would simply state that the GOP has now shown who they really represent, voting en masse to cut the tax rate again for millionaires while in effect imposing a 100% death tax on the middle class with their radical plan to change medicare for those now under the age of 55.   The ad really does not need to say anything else.

According to study published in this morning, the baby boom generation is already fearful of outliving their savings, now try to convince them that they need to pay twice as much for health insurance during their retirement, compared to traditional medicare, in order to save Medicare.

An article in the NYT, based largely on data from RealtyTrac, highlights why housing prices will continue to fall.  The main problem is the glut of foreclosed homes that are already owned by the banks or soon will be in the months and years ahead. As I have highlighted in several recent posts, the Case Shiller index of home prices, covering twenty major metropolitan areas, has been signaling a double dip in housing prices for several months now. The article in the NYT explains one of the major reasons for it. According to that article, banks already own 872,000 homes and are attempting to foreclose on a million more. When the repercussions of the housing bubble are finally tallied, the number of foreclosed homes will be well into the millions.

The NYT article further notes that Moody's is predicting another 5% nationwide decline in prices in 2011. Another statistic that is troubling is that ratio of foreclosed homes to homes sold by the banks. In Minneapolis, the ratio is six foreclosed homes for each foreclosed home sold by the bank.  The ratio is 8 to 1 in Atlanta.

The HSBC preliminary manufacturing PMI for China fell to 51.1, a 10 month low.

An article in the  NYT claims that Europe is splintering over the ongoing bailout problems with Greece. 

Dave Kansas penned an article, published over the weekend in the, about the compelling valuations of large cap tech stocks. This is not news to anyone. Nothing much has changed since I wrote a post last September making a similar argument. Explaining Low Valuations of Large Cap Tech Stocks One of my earliest blogs, written in October 2008, made the same point. TECH STOCKS The stocks mentioned in the WSJ article are Intel, Google, Microsoft, and Cisco. I would add HPQ to that list. I own all of those stocks and intend to buy more in small lots. I am not going to make a large investment in any of them. I now have only a profitable position in Intel. I have bought and sold, profitably, MSFT, HPQ and CISCO,  and have recently re-initiated positions in those stocks. I am in the red on all of those new positions so far. I can wait. 

My general approach will now be to nibble on them during downdrafts.  By nibbles, I am referring to purchases in the 30 to 50 share range except for GOOG where adds will be more like two or three shares. A more appropriate description would be "chicken buys", RB noted just in case anyone thought the LB was daring with this strategy.

I would add that patience will be required since all of those companies are hated by large segments of the investing public, and many of the reasons for that disdain are justified by the evidence.  The Masters of Disaster think in terms of days, and are simply incapable of valuing  a company based on a long term stream of earnings discounted to present value.

At times, it appears that CSCO may be attempting to imitate EK or XRX.

Notwithstanding a boatload of talented people, MSFT is easily surpassed by newer and/or smaller companies in innovation. Nimble is not a word that would be used by many to describe MSFT. And it would not be rationale to expect the next hot new gadget to originate from that behemoth. And, the 8.5 billion dollars about to be spent on the Skype acquisition makes sense only to a few analysts mentioned in Eric Savitz's Forbes blog and to Eric.  Eric argues in his article in this week's Forbes that the deal is a good one for MSFT.

HPQ has the most compelling long term valuation in my opinion at its current $35 to $36 price, but there are no short term catalysts to energize the stock.

Investors do not have confidence that their capital will be spent wisely by GOOG's current management and those concerns are rational ones.    

Still, MSFT, HPQ, and CSCO are cash machines with strong balance sheets, selling at substantial discounts to the market multiple, and with low P.E.G. ratios.  MSFT is now selling at less than 10 times earnings and at a forward P/E of 8.5.  The expected five year P.E.G. ratio is less than 1.  The company has almost $49 billion in cash or $5.78 per share. That kind of data can be found at Yahoo Finance under "Key Statistics".  MSFT Key Statistics  

And, for MSFT, INTC and CSCO, I would not have high expectations.  A price in the $32 to $35 range for MSFT within two or three years seems doable, but I would be surprised by a price higher than $35 during that time frame.  CSCO seems to be the most troubled company of the large cap tech companies, so I would be hoping for a $23 to $27 price at some point within the next two years.  I do not expect much from CSCO anymore and the market expects far less than I do.  

I thought that the deranged harangue by the Republican Patrick McHenry against Elizabeth Warran, summarized in this NYT's article was interesting, in that it shows the desperation of the GOP to shoot down an effective consumer watchdog over the financial industry.  

1. Added 30 MSFT at $24.15 on Tuesday (own: Large Cap Valuation Strategy)(see Disclaimer): After discussing chicken buys of large cap tech stocks, I decided to make one on Tuesday by adding 30 shares of MSFT to my losing position.  I did not own MSFT shares from at least 1999 to 2009, when I started to nibble at them.  While I in now in the hole on 230 shares recently bought, I do have some trading gains from 2009 and 2010 that more than offset my current unrealized loss, at least at MSFT's current price:

MSFT 2009 Realized Gain +$527.43

MSFT 2010 Realized Gain +96.46

This is a link to a recently published positive article about MSFT in Seeking Alpha. An article in this morning discusses the looming battle between MSFT and Google over cloud computing.  MSFT recently released a "near final version" of Office 365 for the cloud.

It is hard for me now to see much long term downside risk in this stock. It is certainly hated by a large segment of the investing public now. "RB is not a WIMP", a voice was heard to say in response to this 30 share buy by the Stock Stud LB.

2. Eliminated Exposure to Goldman Sachs' Bond-Sold 100 of the TC PYB at $23.68 on Monday (See Disclaimer):  I discussed the reasons for eliminating my exposure to GS bonds in yesterday's post.  Sold 100 GYB at 19.7 in Roth IRA-Reducing Exposure to GS Bonds to Zero  This TC contains the 2033 senior GS bond.  Given its yield and long maturity, I was also concerned about interest rate risk.  

3. SOLD 50 BMLPRH at 17.64 on Monday (see Disclaimer): I have been trading in and out of BAC equity preferred floaters for some time.  Floaters: Links in One Post I bought the shares sold last Monday at $16.2 and have bought them as low as $13.25 before selling those shares at $17.42.

I discuss this type of security in the following Gateway Post:  Advantages and Disadvantages of Equity Preferred Floating Rate Securities  BMLPRH was originally issued by Merrill Lynch and had a different symbol back then. When Merrill was acquired by Bank of America, the symbol changed to BMLPRH.  BAC pays the greater of 3% or .65% over the 3 month LIBOR rate on a $25 par value.  Dividends are classified as "qualified" but are non-cumulative.  

This leaves me only with 100 shares of BMLPRJ among the BAC equity preferred floaters with minimum payments.

4. Medtronic (MDT) (own:Large Cap Valuation Strategy): Medtronic reported lackluster results for its F/Y 4th quarter ending on 4/29/2011. SEC Filed Press Release On a GAAP basis, MDT reported an E.P.S. of $.72 per diluted share, down from $.86 in the year ago quarter. Revenues were $4.295 billion compared to $4.196 in the 4th quarter of F/Y 2010. Revenues were flat year-over-year on a constant currency basis.  On a non-GAAP basis, the earnings came were 90 cents, up from 89 cents.  The consensus estimate for Non-GAAP earnings was for 93 cents.  The market reacted negatively to the report and justifiably so in my opinion.

It is debatable whether an investor needs to pay attention to the GAAP number, rather than the Non-GAAP earnings, for purposes of valuation. Frequently, the company wants the investor to overlook charges included in the GAAP number, even though the charges occur with regularity and would be properly considered costs of doing business.  The charges excluded from MDT's GAAP number include such items as employee termination costs, asset write-downs, and contract termination fees, which amounted to 18 cents for the quarter.

I did recently pare my MDT position by selling 30 shares at $41 and may have an opportunity soon to buy those shares back at a much lower price.  Item # 4  Sold 30 MDT at 41  My average cost is $36.46 per share for the remaining shares.  And repurchase would have to be below that average cost number.  Based on this last report, I am not going to buy more MDT shares, and may dispose of my shares to buy shares in large cap tech companies.  I am reinvesting the dividend to buy additional shares and will continue to do so until I dispose of all of my MDT shares.  


  1. CNPF - new Canadian preferred etf, any idea the yield? tia.

  2. re:CNPF- found the list on globeandmail, looks like yield could be 4.8% to 8.5% looking at largest existing preferred etfs with financials-

    stockhouse very slow.

  3. I have not seen any disclosures yet about the CNPF yield. Eventually, the sponsor will probably provide that information at its web page:

    The main advantage for CNPF, compared to other ETFs owning Canadian preferred shares, is that it is listed on the NYSE. Any buyer would still be subject to currency risk, but it would be somewhat cheaper to buy shares on the NYSE than on the Toronto exchange.

    I pay Fidelity 18 CADs to buy on the Toronto exchange. If you do not own CADs already as I do, then you would have to convert USDs into CADs to make the purchase of a Canadian ETF traded on the Toronto exchange which owns preferred shares, and there would also be a fee for that conversion. So, a cheaper option would be to buy CNPF compared to the Canadian ETFs that trade in Toronto on those two factors.

    I have owned in the past a Toronto listed preferred share ETF that invests in Canadian preferred shares.
    That ETF is sponsored by Claymore Canada, CPD:CA.
    The current yield for those shares shown today at the sponsor's web page is 5.18%. The dividends for that fund, when bought on the Toronto exchange, would be paid in CADs on a monthly basis subject to a 15% withholding tax.

    I would suspect that the dividends paid by CNPF would be in USDs and would fluctuate up and down based on the conversion value of the CAD to the USD. If the CAD rises, then it would buy more USDs, and then the reverse is true. But ultimately, even though you buy shares in CNPF using USDs on a US exchange, the value will be dependent on the value of the Canadian securities owned by that fund, which in turn will be impacted for a U.S. holder of CNPF by the exchange value of the currency. I discuss this topic in several posts. It is hard for many individuals to grasp. You would also be subject to a 15% withholding tax for the dividends paid in CNPF.

    Unless you are using a broker that actively seeks rebates for foreign taxes paid on distributions into a U.S. retirement account, I would not buy a security where there is foreign withholding in a retirement account. I have never seen Fidelity recoup those funds, but I did experience some recoupment many years ago from another broker.

  4. An article published later today in Barrons states that the yield of the underlying index used by CNPF is around 5.1%. If you subtract the expense ratio of .58%, then you get 4.52%.

  5. thx, I only bought 200sh $15.18.

  6. I like it paying monthly, got 300sh and will scalp it like a CEF for cap gains into dividend-ramp.