Tuesday, June 21, 2011

There are Positives According to the RB/Market is Not Pricing In a Greek Default/Sold 100 FCBC at 14.44/Regional Bank Basket Table

Many of the negatives are known. Greece is of course bankrupt. A default is inevitable, unless most  Greeks have a brain transplant, and it is only a question of when. Over the weekend, I read a number of articles that indicate that many Greeks are blaming just about everyone, other than themselves, for their current predicament. The prevalence of mass delusion is startling at times.

The Europeans would like to kick the can down the road, hoping for a less painful "restructuring" in 2013, that might then have less serious repercussions on European financial institutions and less of a contagion impact on other EU sovereign debtors, particularly Spain and Italy. However, it now appears that further aid will not be forthcoming unless the Greek parliament takes some concrete steps to approve an austerity package. Reuters NYT (see Statement by Commissioner Rehn on Greece) It is my understanding that the Greek Parliament has been given two weeks from Monday to approve further austerity measures. The market is acting as if a deal will be struck to avert a default. I see no reason to have that level of confidence, nor would I be sanguine about the potential repercussions of any such default. And, given the rise of the market off the March 2009 low, I see no reason to be brave at the moment either. LB is In a Slow Mo Trading Mode While Preserving Recently Raised Cash Stash (6/7/2011 Post); Introduction to Jobs (6/6/2011 Post).

A loss of confidence in sovereign debt issued by other EU nations, beyond Portugal, Ireland and Greece, could easily have adverse effects on what appears to be a fragile economy recovery in developed countries. Until there is at least a temporary resolution of the Greece problem, I am going to remain mostly on the sidelines, doing no more than small purchases of income generating securities. Assuming the EU sovereign debt problems can successfully be kicked into 2013, there are some positives, when one focuses on the big picture, the focus of our RB,  rather than the here and now:

1. As previously mentioned, about one-third of American households have no mortgage debt. census.gov/pdf. Another large segment have been able to refinance their mortgages at historically low rates, thereby lowering their monthly payments and increasing their ability to pay down other debt or to spend some or all of the savings.  The household debt to service ratio (DSR) for the first quarter was 16.39. This ratio has gradually been declining since hitting a high of 18.85 in the 2007 third quarter. The DSR ratio is an estimate of the ratio of debt payments to disposable income. Household Debt Service and Financial Obligations Ratios This ratio has not been so low since 1994. Part of the decline is no doubt due to mortgage defaults and bankruptcies. The 30 year average is 17.2%. 

2. Energy and other commodity prices have started to come back down. The ETN for the DJ-UBS Commodity index (DJP) has fallen below its 50 day moving average and is sitting at its 200 moving average. 

3. Corporations have been able to refinance their debt, lowering their interest costs and extending the maturities. Corporations are flush with cash, as American corporations are sitting on 2 trillion dollars in cash, and generated 1.68 trillion dollars in profits in the 2010 4th quarter. And the GOP wants to cut their taxes. TIME The lower cost of debt will help to generate increased profitability in the years to come.  

4. Notwithstanding inflation problems, and attempts to cool growth, emerging markets are continuing to grow at rapid clips.  The larger emerging markets have huge and growing pools of middle class consumers, who are not over leveraged, that are capable of picking up slackening demand from over leveraged consumers in developed countries, due to their sheer numbers.  I am referring to what some are already calling the next super cycle of growth (see 152 page report at www.standardchartered.com/The_Super-cycle_Report.pdf Consumer spending in China may overtake the U.S. by 2017-2018 (p. 3).  Thirty million middle class consumers are created each year in just China, Brazil and India. TIME In short, the U.S. consumer is becoming less important by the year to a sustainable worldwide recovery.

5. Some of the current weakness in manufacturing is due to the tsunami and earthquake in Japan, and the worldwide supply chain disruptions caused the those events. Toyota recently said that it expects to return to full North American production by September 15.

UZV, the exchange traded senior bond from United States Cellular, was redeemed yesterday at its $25 par value.  I owned shares in both a taxable account and the Roth IRA. U.S. Cellular Announces Redemption of 7.5 Percent Senior Notes I did sell some of my position prior to the redemption announcement. Sold 100 UZV @ 25.67

The P.M. London gold fix on 6/20/11 was $1,544. MTY Down to the Wire

1. Sold 100+ FCBC at 14.44 (Regional Bank Stocks' basket strategy)(see Disclaimer):  First Community Bancshares' stock was a recent edition to the regional bank basket strategy. I am in a retrenchment and consolidation mode for this particular basket.  I bought those shares at $13.89 and had reinvested one dividend at $13.75 per share.

This brings my realized capital gains to $6,649.45 for this basket: Item # 3 Realized Gains Regional Banks

The unrealized appreciation in the basket continues to fluctuate in the $1000 to $2000 range, and is currently nearer the top end of that range. This is down from a range of $3000 to $4000 when the market topped out in April/May 2011.

2. Regional Bank Basket Table:  This is a snapshot of this basket as of the close on 6/20/2011.  The yield is at the closing price rather than at my cost. I am not keeping track of reinvested dividends in this table.  The cost per share does not include commissions. The realized gain number referenced above does include commission costs.  Where there has been more than one purchase, I use the average weighted cost and the last purchase date as the "trade date".  I have two problem banks in this basket, PBIB, which is probably a lost cause, and HCBK.  I am reinvesting the HCBK dividend to buy additional shares, and intend to give it more time to recover.  If I average down, it will be an odd lot purchased at below $8.  The unrealized gain in this basket has gone down a few thousand since hitting a high earlier in the year.

The general intent is to pursue this strategy for five to ten years, with my total exposure ranging between $40,000 to $50,000.  I am near the bottom of that range now after selling a number of positions.  Over time, I would expect the dividends to make up a substantial part of my total return, although capital gains will at times be a more significant contributor.  

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