Monday, May 23, 2011

The GOP Budget Plan and The Middle Class/Bought 30 FCF at 5.86 as LT/Bought 50 TAN at 7.54/Sold: 100 CBLPRC at 25.36 and 50 LXPPRD at 24.41/Cash Allocation At Highest Level Since Spring of 2009

I wonder what Newt Gingrich was smoking when he criticized Paul Ryan's medicare plan, approved by virtually all House Republicans, as right wing social engineering. After all, Gingrich wanted to be the GOP candidate for President and those comments are not likely to endear him to the GOP apparatchiks. Gingrich later told the titular head of the Republican party that he was misinterpreted, and shows that he is just trying to change his story after recognizing the damage caused to his Presidential aspirations.

The GOP wants to lower the marginal tax rate for millionaires again, and to abolish the estate tax for billionaires while imposing a 100% death tax on the middle class.  Paul Ryan does not characterize his own plan in this manner, but that will be the inevitable consequences of the GOP plan.

The GOP medicare proposal, approved by virtually all House GOP members, would double the health insurance costs for those now under 55, compared to traditional medicare. That cost estimate comes from the  GOP Comes Out of the Closet on Medicare Whatever is saved by the average family during their working life would be devoured by health premiums during retirement, in effect a 100% DEATH TAX on 98% of Americans.

In the last analysis, the GOP is just innately hostile to programs like Medicare, Social Security, Medicaid, Head Start, and Food Stamps. It is rare for them to openly acknowledge that hostility, or to reveal so plainly the identity of their real constituents, as they did when approving Ryan's budget plan. Gingrich was correct in calling Ryan's plan right wing social engineering.

As David Stockman noted in a WSJ editorial recently, the GOP wants to solve the budget problems on the backs of the poor while increasing the wealth gap in the U.S. with even more tax breaks and tax subsidies for their ultimate constituency.  The Bipartisan March to Fiscal Madness in Sunday's NYT Stockman says the Ryan plan "appears" to be an attack on the poor while coddling the rich. I would not use the word "appear", and I would add the "middle class" to his statement (particularly the upper middle class who normally vote for the GOP) which Stockman appears reluctant to do.  Traditional medicare and social security are primarily for the benefit of the middle class.  I would also agree with many of Stockman's criticisms of Democrat politicians.

Ryan's budget plan is up for a test vote in New York's 26th Congressional District which consists of the suburbs outside for Buffalo.  The Republican, who held that seat, Chris Lee, resigned after responding to a woman's personal ad from Craiglist with a shirtless photo of himself.  Lee is married. This district is solidly republican with 30,000 more registered Republicans than Democrats.

Jane Corwin, the GOP candidate, has endorsed Ryan's plan for Medicare.  NYT Ms. Corwin contends that the GOP plan is intended to save Medicare (POLITICO), by forcing those under 55 to buy health insurance from private insurance companies with some voucher support from the federal government. Ms. Corwin appears to be an attractive and intelligent GOP candidate in a heavily GOP district. If she loses, then the GOP is in deep trouble in 2012 due in large part to their virtually unanimous approval of Ryan's budget plan. When I first read about the Ryan plan, it sounded like the GOP wanted to jump off a cliff together.

No party has yet put forward a "share the burden" plan for dealing with the looming debt crisis.  If you have at least a million plus dollars, own your home and all of your possessions with no debt at retirement, then the GOP plan would makes sense to you. The billionaire, Stanley Druckenmiller, made it clear in his WSJ interview that he was all for the Ryan plan.

And the Democrats have yet to make a meaningful effort to come to grips with the breadth and funding for their entitlement programs.

The government reported that there were 44,199,391 recipients of food stamps in February 2011. SNAP Current Participation - Persons  One out of twenty-one Americans between the ages of 25 and 64 are claiming social security disability benefits, receiving over 115 billion dollars in 2010.  NYT  Are we to believe that so many Americans are disabled? Really? Medicaid enrollment topped 50 million for the first time in June 2010.

1. BOUGHT 30 First Commonwealth Financial (FCF) at $5.86 (LOTTERY TICKET Strategy)(see Disclaimer): I have not purchased FCF before last Thursday. The maximum limit for its purchase at a LT was therefore $300, and the reasons why it did not qualify for a larger purchase are numerous, including the meager quarterly dividend of 3 cents and the level of non-performing loans.  For those reasons and others which I will discuss, this bank does not qualify for purchase under the  Regional Bank Stocks' basket strategy that has a $3000 limit per bank stock.

The bank has some long term recovery potential, sufficient to justify purchase under the LT category with the concomitant low dollar exposure. That judgment is buttressed by the bank's refusal to participate in TARP, viewed positively here at HQ.  (see page 9 Form 10-K) Another positive factor is the good capital ratios shown at page 60 of the Form 10-Q for the Q/E 3/2011, though part of the equity capital comes from TPs which are viewed by me as bonds. Those TPs are listed at page 102, and have a principal amount of $105.7 million. The net interest margin is okay at 3.87%.  Financial Results Press Release I would anticipate holding many of the recently purchased bank LTs for five to ten years.

I would prefer to see a house cleaning at the top given the negatives discussed below.

The CEO has been in that position since 3/1/2007 at a total compensation level of $555,946 for F/Y 2009 according to BusinessWeek.  He was the CFO for this bank from 1987 to 2007 according to Forbes.  Forbes shows that his compensation package decreased to $476,758 in 2010. He has a B.S. degree from someplace called West Liberty University, which is fine, except I have never heard of it. So the LB had to look it up: West Liberty University - Wikipedia 

Some of the major negatives from my point of view include the following:

(1) The last quarter show diluted earnings per share of just 5 cents. While that is an improvement over a 15 cent per loss in the first quarter of 2010, it is not viewed positively compared to other small regional banks. The consensus  estimate is currently 35 cents per share for 2011 and 48 cents in 2012. 

(2) The dividend is negligible at 3 cents per quarter. That run rate of 12 cents per year represents a substantial decline from the 68 cents paid in 2008, see page 21  Form 10-K

(3) I am extremely critical of the large investments made by this bank in TP pools that have poorly rated securities in them, including many TP that are apparently in deferral. I have made money on all of my TP purchases over the past three years, and I am not even a professional investor. Trust Preferred Securities: Links in One Post And, many of those investments were up over 50%, with a few over a 100%. Why on earth would a bank pay anyone to produce over a 30 million unrealized loss in a bunch of crappy TPs? (see page 18 of Form 10-Q). One would hope that the person responsible for making the decision to invest in those pools, or sanctioning the decision in any meaningful way, is no longer employed by the bank, but that would be contrary to American business values.  Instead, making boneheaded decisions is more of the norm for financial institutions, worthy of promotions, bonuses and generous compensation packages. 

(4) The non-performing loans to total loan ratio was high at 3.45%, up from 2.79% as of 12/31/2010, both numbers viewed negatively.  The allowance for loan losses as a percentage of NPLs was a potentially worrisome 54.67%.  (see p. 57).  The net interest margin was okay at 3.87% (see page 46).

(5) Another negative in my opinion is that the bank recently sold 16.125 million shares at $4.65 per share, excluding the over-allotment option.  Form 8-K  The total offering with the allotment was 18,543,750 shares at $4.65 (page 123 Form 10-K) Tangible book value per share was $5.61 as of 3/31/2011.   Financial Results Press Release I view that kind of capital raise negatively, particularly in light of the poor investment decisions and loan losses made by management. 

(6) The maximum chart at YF, which starts in 1992, highlights in graphic form the many failures of this banks Board and managers.  FCF Interactive Chart  The stock is currently trading below the level at the start of this long term chart.

This bank has 115 branches in 15 counties in western and central Pennsylvania. First Commonwealth Bank The network is heavy around Pittsburgh. Possibly, some better managed financial institution will want to take this bank out. 

First Commonwealth Financial closed at $5.76 last Friday.

I am giving an extended discussion on this one just too highlight how I decide whether a bank fits the criteria for a LT purchase or a more serious buy under the Regional Bank Strategy. This one clearly does not qualify for a major purchase using the criteria that I deem important.  I view the current Board, who are allowing management to stay in place, as the most basic negative. 

None of the banks recently purchased in the LT category have risen in value to any significant degree, but I am not judging success or failure of those choices in units of days or months.  These include the following:

Bought 30 SUSQ at 8.75 (brief mention in introduction)

I had traded some of those successfully in the past in similar small amounts:   Sold KEY at 8.12 Sold 90 HBAN at 5.83 Sold 50 SUSQ @ 7.5

I will not discuss most LT purchases until I sell the security and I may not discuss that either.  The LT category is not material in its totality.  It can be material when a large number of securities doubled and tripled in a short period, which happened in 2009-2010, and that is highly unlikely to happen again.

2. Sold: 100 CBLPRC at $25.36 AND 50 LXPPRD AT 24.41 on Thursday (see Disclaimer): REIT preferred stocks are now, and have always been, a disfavored security here at HQ.  I will not go into why in this post, but will simply refer anyone interested to my prior discussions.  REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages (Gateway Post on REIT Preferred Stocks)  Trading Rule for Disfavored Asset Class: Sold BDNPRC  (May 2009 Post) Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock (May 2009 Post); Equity Preferred Stocks as a Disfavored Sub-Asset Class (May 2009 Post) Managing Risk for Each Security in the Asset allocation (January 2009)

I view the downside of these stocks to be far more important than the potential upside when they are bought anywhere near par value.  So, at best, I am a short term holder of any REIT Preferred stock bought now.  I did very well buying them during the Near Depression period, when most of them, even preferred stocks from the better quality REITs, could be purchased at over 50% discounts to their par value, thereby dramatically juicing their yields at my cost.  As I have mentioned, I still own one bought at $2.9 with an annual yield of 75% at my cost.

I made a small profit on last Thursday's sales of CBLPRC and LXPPRD: Bought 100 CBLPRC @ 24.36 Bought: 50 LXPPRD at 23.28 I received at least one quarterly dividend from each of them.

An example of the kinds of returns available on this stocks when their prices were crushed during the DARK PERIOD is another small trade of LXPPRD shares made in the ROTH IRA:

LXPPRD Profit +$807.03 on $358 Investment Plus Dividends: Roth IRA 

3. BOUGHT 50 of the ETF TAN at $7.54 Last Thursday (see Disclaimer): I know nothing about Solar Energy stocks.  I have noticed that the ETF TAN has been on a continuous downward trajectory since it was launched back in 2008, hitting a high of $29.5 in 2008 before sinking to around $5 per share in March 2009: Guggenheim Solar ETF ETF Chart I have only simple opinions about the Solar Energy industry.  Prices for solar panels need to fall,  their performance needs to be improved, and the world needs a lot more power generated by the sun and less by coal. So that is pretty simpleminded.

One of the leading companies, First Solar, recently took a small hit after releasing its first quarter earnings report:   SEC Filed Press Release This company has over a 14% current weighting in the ETF TAN: TAN - Guggenheim Solar ETF

I have been reading a number of articles, pointing out some of the problems and potential catalysts for higher prices. I would just refer anyone interested in this sector to those articles:  Seeking Alpha (May 18. 2011 Article);  an article at from 5/4 discussing a bear's take on First Solar; a  Motley Fool article on solar subsidies from 5/17/11; a Barrons blog entry discussing Total's plan to buy 60% of Sunpower from 4/29/11;  and Barrons blog from 5/17 on Trina's earnings miss.

Claymore/MAC Global Solar Energy Index ETF closed at $7.47 last Friday.

4. Cash Allocation at Highest Level Since Spring 2009: At the moment, I am probably at my highest cash level in the IRAs ever.  Part of that is due to a host of bonds being redeemed, due to the Fed long standing JIHAD against all savers and responsible American, coupled with the relative unattractiveness of replacement securities. Both go together.

I have also been selling some bonds in those retirement accounts for one reason or another, just booking some profits on some of them and liquidating all of my GS bonds.  I sold the last one held in an IRA last week, which will be discussed in the next post. I am concerned about Goldman's headline risk. I am using a very small part of that cash to buy back some BDCs previously sold in those accounts.

I find the risk-reward balance to have decisively shifted against bonds and against most stocks, unless the investor is willing to make very rosy assumptions about future economic conditions for the next several years that seem unwarranted to me based on currently available evidence.

For bond risk, I am most concerned about interest rate risk and the inflation adjusted return for bonds bought today with short or intermediate maturities. When I consider that most of my funds are in taxable accounts, ten times larger than the retirement accounts, I have to include a calculation for the potential return after inflation and taxes.  I see that number as negative for investment grade bonds with short and intermediate maturities, and longer dated bonds have too much interest rate risk at this point, almost 30 years into a long secular bull market in bonds.

Junk bond yields for many issuers do not even begin to adequately compensate me for the credit risk.

I am also at my highest cash level in the taxable accounts since the Spring of 2009. 

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