Thursday, May 26, 2011

Sold 300 of the Bond CEF ACG at 7.82/Sold 50 NRIM at 20.05/Added 50 FMER at 16.18/David Stockman and the GOP/GOP Reaffirms Commitment to Ryan's Plan for Medicare, Medicaid and Food Stamps

The treasury auctioned five year notes yesterday with a yield of 1.813%. The 2 year note went at a .56%. Recent Note, Bond, and TIPS Auction Results Please note that the period is before the number on the two year note.

Hedge fund manager, David Einhorn, publicly called for the Microsoft Board to retire Steve Ballmer.

David Stockman, Reagan's Budget Director and a former GOP Congressman, is not showing much love these days to the modern day GOP.  He penned an article blaming the GOP for wrecking the U.S. economy, which is article is discussed in Paul Ferrell's column at MarketWatch.

To be fair, Stockman would lay some of the blame on the Democrats. Ferrell is referring to Stockman's opinion column written in 2010 and published in the NYT. Ferrell opines that Stockman may be the GOP's best candidate to run for President. Stockman is no longer welcomed in the modern day GOP and would have to run as an independent. I would certainly give serious consideration to voting for him. But let's get serious for a second. Stockman proposes increasing taxes on the middle class, in addition to tax increases for the rich, along with spending cuts. That approach, while sensible and pragmatic, might get him a few hundred republican votes in the upcoming GOP primaries.  

In many states, there is a legal doctrine known as "comparative fault". When there is an auto accident, for example, both drivers may be at fault but to different degrees. So, the jury is asked to assign a percentage of fault to both drivers where both are found to be negligent in some degree. Both the Democrats and Republicans are at fault for causing the Near Depression and the current and reasonably anticipated death spiral for U.S. government debt resulting from exponentially growing budget deficits. While there is certainly room for disagreement, I would assign the GOP about 60% of the fault and 40% to the Democrats.

Some would raise a number of objections to that assignment. When assigning blame for the Near Depression, which has greatly contributed to the budgetary problems, why not assign blame to the Wall Street Masters of Disasters responsible for such satanic creations as CDOs squared, fraudulent loan applications, and the aiding and abetting by the rating agencies in pursuit of their private gains. Ultimately, the government provided the milieu for those conditions to thrive.

Both parties drank the kool aid of financial deregulation, giving the Masters of Disaster free rein to bring down the world's economy by allowing them to police themselves and to increase their leverage by the 2004 SEC Rule change.

Both parties contribute to the worsening debt crisis, each in their incompetent and irresponsible ways. The GOP, for example, gave us the 1 trillion IRAQ WAR, justified with what was known to be unreliable and even false reasons. The Democrats gave us a 700+ stimulus program that was poorly designed given the long term budgetary problems that such a massive spending program will cause for generations to come. Just those two decisions, incompetent and irresponsible in their own ways, will add close to two trillion dollars to the long term debt, which will have to financed and re-financed for generations to come.   

While I do not want to write several hundred pages justifying my assignment of comparative fault, I would briefly discuss another typical problem. The GOP has a tendency to slash taxes for the wealthy, including a desire to eliminate the estate tax for billionaires, and it is unquestionable that the BUSH tax cuts have contributed significantly to the current budget woes.

On the flip side, the Democrats insist on passing new programs, such as the recent health care "reform" law, without making any serious attempt to fund the massively underfunded existing social programs, particularly medicare. Yet, part of the funding for the new program comes from increasing taxes on the well off, as if increasing taxes on the wealthy was a bottomless well that the Democrats could tap. (for a discussion of how that legislation increases tax rates, see Wichita Business Journal) Though, the GOP is constantly misrepresenting the scope of that increase as noted in this article from PolitiFact.

My point is simply that the nation is running well over a trillion dollar budget deficits per year now, and has not even addressed the looming crisis in funding medicare and social security for the baby boom generation. So, while the rich could be required to pay more taxes, the trade off has to be the repeal of several recently enacted programs, including the drug benefit plan for medicare and the health "reform" bill.  And that would just be the start of the "shared" pain. This is not going to happen, so I view the situation as hopeless. The U.S. federal and local governments make the Greeks look responsible.

I do pay attention to the medicare drug benefit plans being administered by private companies, and have been helping some older folks make choices among the very large number of competing private plans. My opinion is that it is a costly federal program that needs to be eliminated to save money. It is about to become more costly starting this year for the federal government due to the gradual elimination of the doughnut hole (Medicare Part D coverage gap), and substantial discounts for those hitting the doughnut hole starting this year. Medicare's Drug Coverage Gap to Shrink Away Under Health Care Reform

I have noticed several trends occurring under my mother's plan. The cost goes up every year while the coverage goes down. Some drugs are not covered at all. For most generics, the plan provides no financial assistance. The generics could be purchased just as cheaply by someone with no insurance. Other more expensive brand names drugs were originally covered but have since been dropped from coverage.  She had to switch one of her brand name prescriptions to a lower cost generic, and now receives virtually no financial assistance from the plan for the required generic. The universe of non-favored brand name drugs seems to increase every year. In short, I have already decided to forego participation in this crap program when I become eligible for medicare, in the not too distant future.

I can see how it might help some elderly folks who have to take a large amount of brand name drugs. Many take far too many in a futile effort to feel better, often making their overall quality of life worse with the side effects and adverse drug interactions. And, as we now know, this law was passed in a sleazy manner anyway, with Congress kept in the dark about the cost projections as just one example. {in an article by Tony Pugh, published in 2004 The Boston Globe, evidence was produced to show the Bush Administration ordered that the true estimates be withheld from Congress. After the bill was passed, the cost estimate was revised substantially higher  Los Angeles Times}

Due to lower enrollment than originally predicted, the use of more generic drugs and fewer brand name drugs coming to market, the cost to the government is running below projections, with 52 billion spent in fiscal year 2010 net of premiums. Reuters Wealth However, with the recent changes made in the Affordable Care Act, explained in this pamphlet from the Kaiser Foundation, I would anticipate those costs to accelerate significantly.  So, like every social program, it grows until everybody is happy with the bill sent to the Chinese.

This is a link to the critique, made by the National Council on Aging, to the GOP's plan for Medicare and Medicaid.

The House Republicans reaffirmed yesterday their intent to go forward with the Ryan budget plan. WSJ  An effort to advance Ryan's budget in the Senate failed on a 57 to 40 vote, with no Senate Democrats voting for the plan and none ever will. There were a few GOP defections, including the two Maine senators, Scott Brown from Massachusetts who is up for re-election and very vulnerable, Lisa Murkowski from Alaska and Ron Paul from Kentucky who said that Ryan did not go far enough in his cuts. Senator Corker, who is up for re-election in Tennessee in 2012, voted to advance the Ryan budget plan.

1. Sold 50 NRIM at $20.05 on Tuesday (Regional Bank Stocks' basket strategy)(see Disclaimer): I bought shares of NRIM over a year ago at $16.66, so this is just more profit taking. I redeployed the proceeds into FMER which has better long term growth prospects and pays a higher dividend. This sale brings the total realized long and short capital gains for this strategy to over $6,600. Item # 3 Realized Gains Regional Banks I have taken a hit over the past several weeks in my unrealized gains, by over a $1,000.  I have nothing adverse to say about NRIM and would consider buying the shares back on a dip back to $17.

Northrim Bancorp closed yesterday at $19.72.

2. Added 50 FMER at $16.18 on Tuesday (Regional Bank Stocks basket strategy)(see Disclaimer): Bank stocks have started to roll over. This may be due in large part to the slowing economy and the ongoing double dip in housing prices. I suspect that the recently passed "financial reform" package is further weighing on the stocks. The purchase of another 50 shares of FMER was a quick average down, since I just purchased 50 shares at $16.96 earlier this month. I have nothing to add to that earlier post, except that the dividend yield is closer to 4% at my latest purchase price.  

FirstMerit closed yesterday at $16.23.

3. Sold 300 ACG at 7.82 on Tuesday (see Disclaimer): It will be impossible for me, given my views about U.S. government debt, to hold this bond CEF for very long. This bond fund uses leverage to buy mostly low yield U.S. treasury debt.  The fund is subject to what I sometimes call the triple whammy. This can occur with leveraged bond funds when the cost of the short term borrowings rise, the value of the bonds owned by the fund fall, and the discount to net asset value widens as investors flee.  For ACG, I am basically clipping the monthly dividend and hopefully making a few bucks on the shares which I have done successfully so far over the past year. Added 400 ACG at 7.85 Sold 200 ACG at 8.35 SOLD 200 ACG 8.45  The shares sold last Tuesday were bought about a month ago at $7.63.

AllianceBernstein Income Fund closed yesterday at $7.78.


  1. In light of your discussion of health care issues, you might find this Morningstar chart of sector returns interesting. Year to Date, Healthcare leads the pack with a 14.77% return. I wonder if this is somehow related to the passage of the health care "reform" bill just over a year ago. Cui bono indeed.

  2. Cathie: Over the past several weeks, there has been a sector rotation. Buying power has moved into health care, consumer staple and utility stocks. I view that rotation as a defensive move by institutional portfolio managers who are probably losing confidence in the sustainability of the market's rise and becoming more concerned about the softness in the economic recovery, with good reason.

    You can see this rotation by pulling up 3 month charts of three sector spider ETFs at Yahoo Finance: XLV, XLP and XLU. You can pull up lines for all three at the same time, starting in mid-March, all of those sectors starting to move up in tandem, ranging from 7 to 12% up moves over the last 3 months, while the ETF SPY is hugging near a zero gain over the same period. Technology (XLK Spider) is negative, but may be due for a rebound.

    I would view the "health care" reform to be overall positive for that industry, particularly for hospitals assuming the law goes into effect in 2015 where everyone has to have insurance. Bad claims are generally over 10% for most hospitals now.

    Another reason may be that the sector has not exactly been a great performer since March 2009.

    But I believe the overall positive trend for the last several weeks is primarily due to sector rotation into sectors perceived to more defensive.

  3. Can you take a look at PVA bond on Fidelity? It's callable in 2015 at premium, I own PVR, this is coal holding company parent bond. tia

    need to replace ALJ bonds we sold.
    paying over 7%, BB rating.

  4. cathie- I own some MPW, around 7% yield, acute care REIT, also checkout SBRA, I've traded in an out of, also about 7% yield.
    MPW ex-div date 6-11, pays .22/Q, they expect FFO to rise to $.90 annual in next 1-2 yrs. There is some talk of Calif investigation into their main tenant for Medicare abuse, but it's not clear if this is not a short hedgefund's work, the stock is holding well, 11.55 is support/ 12.50 is resistance.
    SBRA is in a clear channel 16.00-17.00 support-resistance, I scalped the dividend it's a spinoff from Sun Health.

  5. Your relative share of the historical blame is not unreasonable. Bush's fiscal policies were horrific. But I think you overlook two points:

    1. WIth all its flaws, the Ryan plan is at least a serious attempt to address the problem, despite heavy political negatives.

    2. The Senate Democrats are not even putting out a budget. Neither is Obama, who withdrew his initial attempt.

    At this moment, I would say that the Democrats are 80% to blame for the lack of a serious attempt to fix the problem. The remaining 20% is at the Republican's feet for their obstinancy on tax increases.

    Either way, I agree that there is zero chance that the problem will get fixed and that we are heading off a cliff. I wonder if some Democrats actually want this to happen, under the assumption that only a disaster can lead to the radical changes they want.

  6. For all the talk about not liking Barney Frank (mostly for his sexual preference I think) he made the best interview and made me proud yesterday, saying he voted against Iraq, Afghanistan, Medicare part D, the richest tax cuts, and we are subsidizing Europe, Japan, Korea The Check Republic, Poland for their security with our military folly and we're not talking about cutting that CRAP OFF, but talking about taking away something that helps our seniors, OUR PEOPLE, and (we damn paid for it!(my emphasis!)
    Look up the interview. MSNBC I think, yesterday. Like he said, Boehner wants to cut Medicare and STAY IN AFGHANISTAN ANOTHER YEAR! That's another $120 Billion or $10 bil a month, we have $3-4 trillion already in worldwide war against a Bogeyman that can walk on water they want us to believe.

  7. My percentage allocation was more historical, as to how we got into the current predicament.

    I do not view the RYAN plan as serious and is equivalent in my opinion to no plan at all. It will never receive a single Democrat vote and several GOP senators jumped ship on it already. Both sides are refusing to give on critical points that have to be conceded.

    For the GOP, there has to be tax increases. For the Democrats, there needs to be serious spending cuts including a serious effort to address medicare spending.

    One issue on Medicare spending is discussed in an Opinion piece in todays NYT. A large number of expensive procedures are being paid now where there is no scientific support of a benefit. That should simply be stopped, like now. A massive increase in the budget for criminal investigations of Medicare fraud is in order. There needs to be a gradual increase in the eligibility age for medicare. But RYAN's budget clearly places the entire onus on the poor and the middle class which is equivalent in my book to no plan at all.

    As to the PVA bond, I am familiar with it. I do not find the yield enticing. I just sold two 2017 Dean Food bonds today that yield about the same, mature earlier, and at least DF is profitable now. I might buy the 2019 PVA at a lower price, since I am becoming less picky as we move further into the third year of the Fed's Jihad against savers.

    An alternative to the PVA bond might be the Senior Sub 8.75% CBB bond which is now selling at 97 and change maturing in 2018.

    I have passed on your MPW REIT before, but I will look at SBRA since I am unfamiliar with that one.

  8. I see PVA has about $509 mil debt and their oil/gas production is flattish, so they must be secured by what's in the ground reserves, and their PVR coal holding is not collateral for PVA debt, I'm sure you would point out, so I agree, if it was $97 and not par, too much risk.
    Not wild about Cinn Bell, I checked their financials before, thx, as always.
    See GOV-- they took it to $24, Commenwealt REIT owns 10 mil shares, and the news hit of a filing to issue another preferred as Commenwealt had talking about selling their GOV, so now, investors put 2+2 and GOV rebounding strong, 98% leased to govmint.

  9. All of the junk bonds in my ladder are dangerous to varying degrees. I have been pushed into this strategy by Uncle Ben.

    I rate them internally from risky to extreme risk, in a general kind of way. At the extreme risk end, I would put a bond like the Senior Sub from First Data, where it is junior to the other bonds, the company is losing money largely due to the enormous interest payments, has made no progress in reducing the debt since the leveraged buyout, and has way too much debt on the balance sheet. Reddy ICE and Solo Cup would be others in this top risk tier level of 8 to 10.

    In the middle tier of risk, I would put bonds like the Appleton, Dillards, and Cenveo bonds. So, if First Data is a 10 on the risk scale, those bonds would be roughly in my 5 to 7 range of risk.

    I would put in the top tier the CBB, MWV, Macys (now investment grade at S & P), First American (now a CoreLogic bond) and the Supervalu bonds. All of those companies are profitable while having too much debt, too varying degrees . Macy's might be a 3 and CBB a 4.

    CBB has assets that could be sold. They have been successfully raising new funds with bond sales at about the same coupon rate. And, the company recently raised its estimate for 2011 EBITDA above street expectations. I added 1 today in an IRA at around 97.

    Credit Suisse did recently upgrade PVR common to a buy. I am just not interested in that 2019 bond at its current price for a variety of reasons.