Thursday, June 2, 2011

ISM Manufacturing Survey/ADP Employment Number/Bought 50 OIIM at 7.04 as LT/Sold 100 of MNP at 14/Sold 50 MDCI at 9.69/Sold 50 FRN at 22.92

The ADP May report on nonfarm private employment was far below expectations. May .pdf ADP reported that only 38,000 jobs were added in the private sector. The expectation was for an increase of 177,000.

The ISM manufacturing index for May was reported at 53.5, a significant decline from the 60.4 reading in April. The new orders component fell sharply to 51 from 61.7 and production declined from 63.8 to 54. 

The best case scenario is that the economy is experiencing a temporary soft spot, lasting a few months, and will start to pick up steam later in the year. This is the scenario baked into stock prices.  The stock market has ignored for weeks the mounting evidence of an economic slowdown until yesterday's slide.  Over the past week or so, there has  been far too many confirming negative data points which at least calls into serious question the  rationality of the market's continued upward trajectory. Those data points include the following: the weak job's number, increasing unemployment claims, further confirmatory evidence of a serious double dip in housing prices, a troubling ISM manufacturing report, the never ending sovereign debt problems in Europe with yet another bailout of Greece needed to avert a default, a weak unrevised 1st U.S. Quarter GDP number, a slowdown in China's economy, the recessionary conditions in Japan, and the withdrawal of the government fiscal stimulus worldwide. And there is considerable historical evidence that the kind of financial crisis experienced in 2008 takes at least seven years to heal itself.

The only rationale for ignoring the evidence of a slowdown was a belief, described here at HQ as more of a prayer, that the economy would recover later in the year. There is yet no significant evidence that such a pickup will in fact occur, notwithstanding the FED's three plus year Jihad against savers and all responsible Americans. Without a doubt, federal stimulus is nearing an end and the argument now is how much spending to cut. The upbeat scenario is not impossible or inconceivable, but it is no way as certain as currently forecasted by the stock market.

There are always competing and possible scenarios for the future. Frequently, as in October 2007 or March 2009, the market is expressing certainty in one scenario when a competing scenario has far more evidence supporting it. Those who believe in efficient markets will easily be duped into believing the market is actually predicting the most likely outcome for the future, as if the judgment of a herd of fallible, biased and frequently uninformed humans is miraculously superior and wiser than the judgment of each fallible human in the herd, notwithstanding overwhelming historical evidence that such a presumption is a false one.

With a cut back in government spending at all levels, a consumer still reeling from excessive debt, and now burdened with rising energy, food and health care costs (real cash inflation running at over 7% on an annualized basis over the past few months), an alternate scenario is that the 1.8% increase in first quarter GDP will be the high point for 2011 and it will be downhill for the remainder of the year, possibly hitting a negative GDP number before the end of the year. That forecast is consistent with a considerable amount of the current evidence and with the action in the bond market, which is still being driven by a fear of something far worse than a mild economic downturn.   

The ten year treasury note slid below a 3% yield yesterday, rising 30/32 to close at a 2.948% yield.  The five year treasury closed yesterday with a yield of 1.595%. The 3 month treasury bill is at .046%.  

All of those yields, mentioned in the preceding paragraph, could easily earn investors negative real rate of return after inflation, particularly at the short end, made worse by those who have to pay high marginal tax rates on the meagre amount of interest. And, there is great demand to lend our destitute Uncle Sam money at what is likely to be negative real rates of return before taxes.  Maybe, without much if any warning, that spigot will be turned off.

What concerns me the most is that the future will be a repeat of the late 1960s to the early 1980s, the worse possible scenario for investors in both bonds and stocks. So, in that scenario, both bond and stock market investors have it wrong now, and understandably so, since this particular scenario unfolds very slowly.  It does appear to me that we are repeating the same policy mistakes made during that earlier period, while expecting a more benign result this time around. I believe that it was Albert Einstein who said insanity was doing the same thing over and over again and expecting different results. 

1. Bought 50 OIIM at 7.04 on Tuesday (LOTTERY TICKET strategy)(see Disclaimer): While Lottery Ticket purchases have a $300 limit, I have successfully booked profits in OIIM, and before tax profits can lawfully be added to that $300 under LB's "stinking rules" as the RB just noted in order to be helpful.  The only transaction discussed in the blog was the purchase of 50 shares  at $5.12, later sold at $6.5. The earnings have improved since I last bought shares at $5.12. I mentioned in the post discussing this last purchase that the company has a lot of cash on the balance sheet.  As of 3/31/2011, the cash per share equaled $3.34 and OIIM had no long term debt. OIIM Key Statistics | O2Micro International Limited At that same page linked to YF's Key Statistics page, the price to book is shown at 1.28 and the five year estimated P.E.G. ratio is .72. The forward P/E, based on estimated earnings for 2012, is 11.05. The 2012 consensus estimate from five analysts is for an E.P.S. of 64 cents, up from 50 cents in 2011.

O2Micro announced on Tuesday that the U.S. Patent Office issued it 12 claims for its Battery State Monitoring circuitry, which the company claims can extend battery life for devices like notebooks, cell phones and PDAs.

O2Micro's recently reported earnings for its first quarter. The company reported GAAP net income of 3.1 million, up from a loss of $636,.000 in the year ago quarter.

This is a link to the Reuter's Profile page and to the Key Developments page. As noted in the Key Developments section the company did guide down second quarter revenue projections.

Looking at a long term chart, going back to August 2000, the stock hit a double top at around $24 per share in 2002 and 2003, and then has been volatile, mostly in a $5 to $15 channel:  OIIM Interactive Chart 

OIIM fell 1.98% in trading on Wednesday to close at $6.93. 

2. Sold 100 of the Leveraged Municipal Bond CEF MNP at $14 Last Tuesday (See disclaimer): I have a number of open GTC Limit Orders to sell leveraged bond closed end funds (CEFs). Those bond CEFs are the most vulnerable type of bond funds to a rising interest rate scenario, the much feared triple whammy. I collected several monthly dividends and sold the shares for a buck or so profit. Bought MUNI CEF  100 MNP @ 13.78 (November 2010 Post)  If interest rates continue to slide, there may be more room for leveraged bond funds to run.  But, if the economy is on the road to another recession, the fiscal problems of municipalities would become acute.

I may use the proceeds to add to a leveraged taxable bond CEF.   I still own several of them. 

3.  Sold 50 Medical Action Industries (MDCI) at 9.69 Last Tuesday (see Disclaimer):  I was just not pleased with MDCI's first quarter earnings report. I had not looked at the report until Tuesday afternoon, when I noticed the stock had spiked over 6%. I expected to read some good news, but the earnings reported last week missed expectations and were overall unimpressive.  The company reported 7 cents per share in profits, versus an expectation of 10 cents. SEC Filed Press Release Dated May 25, 2011 Rising raw material costs continue to adversely impact profits. I bought this small position last February at $8.11.

MDCI closed yesterday at $9.68. 

4. Sold 50 FRN at 22.92 Last Tuesday (see Disclaimer): This sale was part of an ongoing pare of my stock exposure.  The shares were recently bought and only a small profit was realized on the transaction.  Bought 50 of the ETF FRN at $22.37 When reducing stock exposure, I will frequently sell stock ETFs and then buy them back when I become more comfortable.  I am not comfortable with either stocks or bonds at the present time. 

Claymore/BNY Mellon Frontier Markets ETF closed at $22.64 on Wednesday. 

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