Bought 100 of the Bond CEF BBN at 18.15/REIT Valuations/Delusions and The Budget Crisis/EXC NYB FFIC GABC CBU TRMK

The market declined yesterday after news reports circulated that S & P believed that cuts of 4 trillion would be a good start. Reuters S & P is more likely to downgrade U.S. government debt than Moody's. So what spooked the market? The proposals on the table now from both sides do not cut 4 trillion.  Based on his conversations with Chinese officials, Steven Roach says that the Chinese government is just appalled at what is happening in the U.S. now. Bloomberg

The NYT reported yesterday that large investors have recently yanked 37.6 billion from money market funds investing in treasury debt.

An increase in the debt limit does not mean more spending, but only pays for the spending already made and/or authorized by separate legislation. Debt Limit Debate Round-Up | FactCheck.org

That spending includes Bush's IRAQ war (ultimately a trillion of borrowed money), the Medicare drug benefit (bipartisan), and Obama's stimulus program (Democrats), all financed with borrowed money. The American Recovery and Reinvestment Act of 2009 included around 275 billion in tax cuts, usually forgotten now, with the remainder in spending initiatives. Notwithstanding the statements made by GOP politicians, the Bush tax cuts added to the nation's deficit woes.

There is a real need for a centrist party in the U.S. There is certainly no party representing the center now. In a recent poll of voters, 58% believed that the republicans were taking the country in the wrong direction. While this may sound good for Democrats, the poll found that 53% believed the Democrats were doing the same. NYT

I heard John McCain back down on his criticisms of the Tea Party republicans last night when confronted by the Deep Thinking True Believer Sean Hannity, who blamed the President for all of the debt problems "FoxNews.com" I would just point out to Sean that Obama did not authorize the trillion dollar Iraq War, did not participate in the huge budget deficits incurred under the Reagan and Bush Administrations (National debt by U.S. presidential terms), was not responsible for the Bush tax cuts benefiting primarily the wealthy, and inherited an economy already sinking into the deepest recession since the Great Depression which inevitably causes decreases in revenues and increases in expenses like unemployment compensation. That would just be too much information for Sean or his loyal viewers to process.

I mentioned in the comment section to an earlier post that I agreed with Robert Arnott that REITs were overvalued now. That statement was made by Arnott in this interview published at Morningstar.

The same point was made by Russ Koesterish, the global chief investment strategist at iShares. CNBC.com Investors are paying a "big premium" for an unexceptional amount of income. I am avoiding REIT CEFs and ETFs, but will consider selectively a few individual names. I recently added to a small position in CommonWealth REIT, which yields over 8% for example.  Added 30 CWH at 24.08-Bringing Total to 130 Shares (7/15/2011).

One of my double short ETFs is for the REIT index, and I added to it yesterday.  I am using double short stock and bond ETFs as hedges and as insurance for a potentially catastrophic self-inflicted wound.  

In the event of a U.S. government default, Credit Suisse estimates that the market will lose 30% of its value, and GDP will decline by 5%. CNBC Since something like that has never happened, few things would be certain. It would be certain that the OG will not want to get out of bed, a Mexican will be hired for a dollar a day to start farming in HQ's back yard after the crap hits the fan, the OG will start eating vegetables rather than steak, and a shotgun will be bought to replace the Louisville Slugger bat as the main act of defense.

One of the GOP canards is that the Bush tax cuts did not decrease the government's revenue.  I noted recently a statement by Senate Minority Leader McConnell (R-KY) that there is "no evidence whatsoever that the Bush tax cuts actually diminished revenue".

He added that all republicans agree with him. When attempting to arrive at sensible solutions to the increasingly dire U.S. financial crisis, it is important for both sides to avoid reality creation which is simply impossible for GOP tribe members to do. Some undoubtedly actually believe in McConnell's statement, while others know better. The only credible evidence contradicts the republican position expressed by McConnell, and I am confident that he knows that his statement is false.

I have summarized in prior posts some of that evidence. One way to raise about 3.6 to 4 trillion dollars in revenue over the next ten years would be to allow the Bush tax cuts to expire for everyone. The treasury department estimated that allowing those cuts to expire in 2011 would have generated an additional 3.6 trillion in revenues over the next ten years. WSJ

Newer predictions, which start with the expiration in 2013 rather than 2011, estimate the amount at 4 trillion dollars. 

In a  NYT opinion column, a former Reagan and Bush official, Bruce Bartlett, summarizes in detail some of the evidence, known to the GOP, that the Bush tax cuts contributed to the current budget crisis. I have previously summarized some of that same evidence.

Speaker Boehner had to postpone the vote in the House last night on his budget plan since too many GOP members were going to vote against him. Arm twisting continued into the night. Washington Post

Mike Kelly, one of the newly minted extremist politicians, was all in favor of Ryan's budget plan. And, he has made it clear that he will not vote for an increase in the debt ceiling under any circumstances. US News Kelly represents the Third Congressional District in Pennsylvania. Mr. Kelly does not worry about having to pay premiums for health insurance to a private insurance company at twice the rate of traditional medicare. GOP's Plan To Bankrupt the Middle Class

He "purchased" a car dealership from his daddy and married some bucks, referred to here at HQ as being born on third base and believing that you hit a triple. He does believe the oil companies need a lot of subsidies from our destitute Uncle Sam, though, voting along with other GOP House members to keep 4 billion in subsidies for them. Final Vote Results for Roll Call 153  According to Kelly and his ilk, Exxon needs a big subsidy or it will have to cut its dividends to pension funds which is what this TB in effect told his constituents. Erie Times-News If those dumb constituents could see the big picture like Big Mike, then they would understand the need for those subsidies. Exxon reported yesterday a profit of $10.7 billion in the second quarter. Lets take up a collection plate for them.

Another extremist, Congressman Louie Gohmert representing Texas's 1st congressional district, told a NYT reporter late yesterday that he would vote against the Boehner plan. I remember Louie from his rant on Anderson Cooper, occurring two minutes into this YouTube video, which started when Anderson asked for his proof that female terrorists were coming to the U.S. to have their babies, so they would be naturalized American citizens under the 14th Amendment.

After birth, the "terror babies" would be taken back to the Middle East somewhere to be trained as Jihadists, and would then return to America with bad intentions. This TB is fairly typical, becoming quite incensed when asked for facts to support his reality creation. (see Jon Stewart's take on this zealot: Video Clip | Comedy Central)

The ostensible reason for tax cuts for the super rich is that they will create more jobs. WSJ Article: Bush On Jobs: The Worst Track Record On Record & Lost Decade for Jobs & Income Growth Adjusted for Inflation; and my recent post "Blondes" and Fox "News"/Irresponsible Fools with Power/Taxes and the "Job Creators" (7/14/2011 Post)

A dollar in tax savings does not contribute a dollar in GDP growth either. Testimony of Mark Zandi.pdf (see page 5) The rich will pocket most of their tax savings which makes commons sense.  

To reduce the budget deficit, a centrist, as distinguished from a reactionary who has another, far more important ideological agenda other than just addressing the budget crisis,  would be looking at increasing tax revenue and cutting spending, including entitlement spending, rather than taking 8 or 9 trillion dollars out of discretionary spending which would eviscerate of course most social programs (the desired goal), vastly increase the wealth gap (Wealth And Inequality-Charts), send millions into hopeless and dire poverty, and even hurt GDP growth and reduce corporate profits.

Randall Forsyth made the obvious point in his recent Barrons' column that draconian reductions in federal spending could "stifle the economy".   

Obama's proposal of one dollar in increased revenue for every $4 in spending cuts is reasonable, provided those spending cuts are real rather than fictional. And, some of those spending cuts need to come from entitlement programs, spread out over a long period of time. While the GOP needs to change their orthodoxy about tax increases for the wealthy, the Democrats need to refrain from their typical mind set that the wealthy are bottomless pits to fund an array of existing and expanding social welfare programs.  The rich are understandably skeptical that the Democrats have yet to grasp that fact. I am certainly skeptical based on decades of observations.  But it is equally important for the middle class GOP voters to realize that they are being played for chumps by their politicians. 

Obama's approval rating hit 43% in the last  Gallup Poll, the same as Ronald Reagan in his third year (1983), while Bush Junior was at 60% (July 2003) after launching the 2003 invasion of Iraq to widespread public support and cheering.    

1. Exelon (EXC) (own): I mentioned in Wednesday post that I sold 100 shares of EXC as part of my ongoing stock allocation reduction. SOLD: 100 EXC @ 44.67 This lowered my average cost for the remaining shares while booking a small profit. I am reinvesting the dividend. 

Exelon reported reported net income of $697 million or $1.05 per share on an adjusted basis, meeting expectations, and raised its full year E.P.S. estimate to a range between $4.05 to $4.25. The previous range was $3.9 to $4.2. 

2. New York Community Bank (NYB): This article in the HEARD ON THE STREET column in the WSJ calls into question the continuation of NYB's current 25 cent per share dividend. When discussing this bank's last earnings report, I mentioned that its earnings were barely covering this payout. Item # 4 NYB  While I do not see an imminent cut, a continuation of lackluster earnings could easily spur a surprise announcement.  I have already taken profits on 1/2 of my NYB position and the remaining shares bought in 2009 have a total average cost of $11.31. 

3. Regional Bank Earnings: FFIC GABC CBU TRMK (own: Regional Bank Stocks' basket strategy): 

Trustmark (TRMK):  This bank, based in Jackson, MS.,  reported second quarter net income of $31.6 million or 49 cents per share, which include a 7 cent bargain purchase gain from an FDIC assisted acquisition of a failed bank. I would not include that item in the results so the operating earnings were 42 cents. The consensus estimate was for 39 cents. TRMK Analyst Estimates

The bank had earnings of 37 cents per diluted share in the second quarter of 2010. I am waiting for an opportunity to add to my existing 50 share position purchased at $19.57 (August 2010). I am not inclined to take a profit in those shares. As of 6/30/2011, the net interest margin was 4.29%; the total risk-based capital ratio was 16.47%; and the tangible equity to tangible assets ratio was at 9.43%.   

Flushing Financial (FFIC) reported net income of $9.1 million or 29 cents per diluted share, up from 25 cents in the year ago quarter. I recently pared my position by selling 50 shares @ 14.51 (May 2011) and still own 50 shares bought at $11.05. I am inclined to keep those shares, based in part on the dividend yield. I do not plan on adding to that position, however, unless I can reduce my average cost per share. 

Community Bank System reported net income of 18 million or 49 cents per share which included 7 cents of acquisition related charges. I would exclude those charges, relating to the Wilber acquisition whose shares were owned at the time of the merger announcement. Sold 151 GIW @ 9.26 (November 2010 Post)

The consensus estimate was for 50 cents. CBU Analyst Estimates The Board approved a 8.3% increase in the dividend to 26 cents per share. I will be looking for an opportunity to add to my holdings, but only when I can reduce my average cost per share. Bought 50 CBU @ 23.18 Added 50 CBU @ 25.19  Most likely, I would be looking for another buy at less than $22.5 As of 6/30/11, the net interest margin was at 4.13%; NPAs to total assets was at .35% (exceptional); allowance for loan losses to NPLs is also very comforting at 238%; and tangible equity to tangible assets was at 6.44%. 

German American Bancorp (GABC) reported net income of $4.864 million or 39 cents per share, up from 31 cents per share in the second quarter of 2010. The consensus estimate was for 32 cents. GABC Analyst Estimates The net interest margin increased to 3.95% from 3.83% in the prior quarter. As of 6/30/2011, the efficiency ratio was 58.67%; NPAs to total assets was at 1.09% down from 1.27% as of 3/31/2011; and NPLs to total loans was at 1.59% down from 1.73% as of 3/31/11. I will be looking for an opportunity to add to my 50 shares recently bought at $17.05, but only when I can reduce my average cost per share

4. Bought 100 of the Bond CEF BBN at 18.15 on Wednesday-Roth IRA (see Disclaimer): Having reduced my stock allocation,  I am not sitting on a pile of cash earning nothing. Now, I am starting to invest a tad of that stash in income producing securities. The goal is not to make anything on the shares, which would be just a bonus, but to earn something greater than nothing on some of the cash.

BBN is a bond CEF that invests in Build America Bonds (BABS). Those bonds are of course taxable municipal bonds issued under the Build America bond program that expired last year. I track the three main closed end funds that invests in BABS. I currently own NBB and have sold some of my shares in that Nuveen fund.  I have also bought and sold GBAB.

I decided to go with the Blackrock CEF BBN since it was selling at the largest discount to its net asset value.  Before making the purchase, I also checked two BABS ETFs (BAB & BABS) and saw that their prices were stable while BBN was falling about 1.5%. I also checked the closing NAV for Tuesday and saw that the fund was selling at a -7.49% as of Tuesday's close. The closing price last Tuesday was $18.39 and the NAV then was $19.88 per share.

The discount to net asset value did widen on Wednesday as I suspected when I bought the shares. As of 7/27/2011, the net asset value was $19.92, up four cents from 7/26, and the shares fell 31 cents in price to close at $18.08. This created a discount to net asset value as of that date of -9.24. The BABS CEFs are listed under "Other Domestic Taxable Funds" at the WSJ CEF section. WSJ.com

I will buy taxable municipal bonds in a retirement account. I would never buy a tax free bond or fund in a retirement account for obvious reasons.

BBN is a leveraged fund.  This is a link to a Barrons' article that mentions BBN. Most of the bonds are rated "A" or higher as shown in the following link: Sponsor's web page: Build America Bond Trust:

Morningstar Page: BBN (not rated)

The current monthly dividend rate is $.1183 per share. At a total cost of $18.15, the yield at that rate would be around 7.8%. When held in the ROTH IRA, that is equivalent to a tax free yield.

BBN rose 21 cents yesterday to close at $18.29.

The impact of a U.S. default on the municipal bond market is impossible to gauge, since such an event has never happened, but would most likely be negative.   

FIBK FNB BRKL FMER/SOLD 100 PIS at 25.95/Bought 100 ERH at 11.69/Continuation of Unstable VIX Pattern/Possible Head and Shoulders in the S & P 500 Forming/Some Disconcerting Earnings Reports

A GOP Congressman from Georgia, Paul Broun, wrote an opinion column in USATODAY.com explaining why he would not vote for any increase in the debt ceiling or to increase taxes on the Job Creators. Mr. Broun represents the   10th Congressional District in Georgia. Mr. Broun is a member of the GOP Tea Party Caucus.

Possibly, the market will see some light at the end of the tunnel today when and if the House votes to advance Boehner's plan.  If there are not enough GOP House members willing to vote for their Speaker's plan, then I doubt that enough could be mustered to approve Senator Reid's alternative. Senator McCain lashed out yesterday at the Tea Party GOP members, calling them "hobbits" and their obstinacy "bizarro". CBS News  CNN Some GOP adult needed to make those statements. 

Several newly minted GOP representatives from Tennessee are part of the Tea Party Caucus. At least two of those representatives, Diane Black and Stephen Fincher were elected in districts that formerly supported Democrats.  Those new representatives have voted for the Ryan Medicare plan which would have the inevitable result of bankrupting most of their middle class constituents who are currently 55 years old or younger. GOP's Plan To Bankrupt the Middle Class  The GOP Budget Plan and The Middle Class I would support the adoption of the GOP plan for Medicare, applied to those now 55 years or younger and living in those two congressional districts, as well as their lineal descendants for the next 300 years. GOP It is important to visit consequences on the voters for their actions.  GOP representatives from 235 congressional districts in total supported this plan to bankrupt the middle class. Final Vote Results for Roll Call 277

As an alternative, those residents could opt instead for the plan advocated by a former GOP senate candidate, where medical bills are settled with chickens (live ones only): Sue Lowden Stands by Chicken Health Plan

One of the new GOP representatives from Tennessee, Stephen Fincher, is a gospel singer farmer who has never lived outside of Frog Jump, Tennessee. Bloomberg The Federal Election Commission recently found that Fincher violated election laws in his disclosure relating to a $250,000 donation received from Gates Banking and Trust Company according to the The Jackson Sun This bank is a very small institution located in Gates Tennessee. Fincher is a vast improvement over my congressional representative.   

Glen Beck, one of the leading TB intellectuals, compared the young victims in Norway, murdered by a right wing extremist, to "Hitler Youth". USATODAY In this country during the last election, several GOP candidates talked about resorting to Second Amendment remedies in the event the nation did not reverse course. NYT

This is a link to an article published at  Fidelity about the dangers of prioritization in the event the debt limit is not raised by Congress. Fincher is giving the Treasury advice on how to prioritize payments. Congressman Stephen Fincher

The Fed's release of its Beige Book added to anxiety yesterday, as it showed the spreading of the "soft patch". FRB: Beige Book--Summary--July 27, 2011 The industrial bellwether Emerson Electric stated in a regulatory filing that it saw a "definite weakening of general business activity in June and July". SEC Form 8-K The poor results from Juniper added to the angst as the market started to reconsider the consensus upbeat economic forecast.  Juniper Communications Press release Emerson (EMR) declined 6.7% in trading yesterday to close at $50.43.  JNPR fell 20.89% to close at $24.66, as the analysts fell over one another downgrading the stock. Barrons.com Corning (GLW) reduced its forecast for LCD glass demand. Corning Earnings Release This is a continuation of a trend previously noted in several prior earnings releases.

In my opinion, notwithstanding the financial headlines to the contrary, the market's decline yesterday had to with an acceleration in worries about an economic slowdown, rather than the dysfunction among the nation's governing class.

I am currently more concerned about the impact of reduced federal spending on an already weakening economy than I am about a potential refusal to raise the debt limit, which I hope is avoided at all cost. I suspect that a downgrade of U.S. debt now would simply accelerate and aggravate a potential economic downturn.  The level of spending cuts made under both the Democratic and Republican budget plans would result in approximately a 1.5% lower GDP in Fiscal Year 2012. The U.S. fiscal years run from September. Washington Post That analysis is based on a study prepared by the IMF: www.imf.org .pdf The reduction in governmental spending is happening at all levels of government in developed countries. So this could easily turn into one of those Damned if You Do and Damned If You Don't Choices.

The  ^VIX rose 2.75 yesterday to close at 22.98. The market is still in an Unstable Vix Pattern, which has its own trading rules here at HQ. Vix Asset Allocation Model Explained Simply Even though I have recently raised cash by reducing my stock allocation, one of my trading rules requires that I take advantage of the volatility inherent in the Unstable Vix Pattern, buying and selling small increments of certain stocks at prearranged levels.  If one of those stocks stays below $36 today, I am required to place a buy order, though our HT has the option of buying anywhere between 30 to 50 shares and to move the position gradually back up to 200 shares by averaging down in similar increments.

This kind of trading pattern, in force since the advent of the Unstable VIX Pattern in August 2007, will stay in effect until a Stable VIX Pattern is formed, whereupon I will start to maintain positions for longer periods of time with much higher sell target levels for most securities.  VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern (showing formation of Unstable Vix Pattern-Sell Signal August 2007)

Part of the trading rules in the Unstable VIX Pattern is the establishment of hedges when the VIX starts to meander below 20 for several weeks, preferably adding most of them when the VIX is near 16.  Item # 1 Current Status of the Vix Asset Allocation Model/Illiquidity for the Small Investor in the Bond Market  More on VIX AND ASSET ALLOCATION  (November 2008 Post-Discussion about timing hedging by movement of VIX in a defined Unstable Vix Pattern) Earlier in 2011, the VIX was not able to sustain continuous movement below 20 for over 3 months, a condition precedent for the LB to declare the start of a Stable Vix Pattern.

A number of technicians are pointing to the possible formation of a head and shoulders pattern in the S & P 500:  MarketWatch  Barrons.com The formation of that pattern would be complete with a break below the neckline, which is a tad over 1250 looking at the chart in the Barrons' article.

1. Earnings Regional Banks (FNB FMER BRKL FIBK: own)(Regional Bank Stocks' basket strategy):

Brookline Bankcorp (BRKL): Brookline, a recent edition to this basket, reported an uninspiring second quarter. Net income was $7 million or $.119 per share, including $.013 per share in expenses relating to acquisition activity. The earnings were $.1121 in the 2nd quarter of 2010. The bank is expanding, having recently completed its acquisition of First Ipswich Bancorp and is in the process of acquiring Bancorp Rhode Island. When the announcement was made on the later merger, the market reacted negatively which was when I initiated a position. Added 70 BRKL at 8.45 Bought 30 BRKL at 9.06 Net interest margin as of 6/30/11 was at 3.7%, down slightly from 3.7% as of 3/31/2011. 

FNB Corporation (FNB): FNB reported 2nd income of $22.4 million or 18 cents per share, up from 16 cents in the second quarter of 2010. The consensus estimate was for 17 cents. As of 6/30/11, the efficiency ratio was at 60.54%; the net interest margin was 3.79%; the dividend payout ratio was 75.25%; NPLs to total loans was at 1.9%; allowance for loan losses as a percentage of NPLs was at 85.84%; and the tangible equity to tangible assets ratio was at 6.5%. I have taken profits on all but 50 shares of FNB, and those shares were purchased at $7.8. (July 2010 Post)  

First Interstate (FIBK): First Interstate reported net income of 9 million or 21 cents per share, up from 14 cents in the 2nd quarter of 2010.  The consensus estimate was for 20 cents. FIBK Analyst Estimates NPAs increased to 4.05% of total assets as of 6/30/2011. The bank believes that those NPAs are at or near their peak. I would hope so. As of 6/30/2011, the net interest margin was 3.84%; the allowance for loan losses as a percentage of NPLs was 47.28%; NPLs to total loans was 6.15%; net tangible book value per share was at $13.45, and the total risk based capital ratio was at 16.01%. I made the mistake of following Cramer's recommendation on this one.  Bought 50 FIBK at 15.64 

FirstMerit (FMER): FirstMerit reported net income of $29.8 million or 27 cents per share, down from 32 cents per share in the 2nd quarter of 2010. The consensus estimate was for 28 cents.  The CEO commented that the economic recovery continued at a "very modest pace".  As of 6/30/11, the net interest margin was 3.77% (down from 4.02% a year ago); the allowance for loan losses to NPLs was at 158.3%; NPAs as a percentage of total assets was at 1.38%; and tangible common equity to tangible assets was at 7.79%.  Overall, this was a slightly disappointing report and the market took the shares down almost 7% last Tuesday, the day of the release. FMER Historical Prices The shares were smashed again yesterday, falling another 5.11% on heavy volume and establishing a new 52 week low at  $14.67.  I am reinvesting the dividend and plan to keep my shares.  The capital ratios are good, the dividend yield provides support, and I am comforted by the below normal NPLs and high allowance for credit losses.      

2. Sold 100 PIS at $25.95 on Tuesday (see Disclaimer): I sold the 100 shares of the Trust Certificate PIS, which has a $25 par value, the day before its semi-annual ex interest date.  I bought that 100 shares in two fifty share lots. Bought 50 PIS at 25 (October 2010 Post); Bought 50 PIS @ 24.32 (February 2011). This trust certificate represents a beneficial interest in a senior Liberty Media bond maturing in 2030: Prospectus The TC's coupon is 8.75% on a $25 par value, higher than the underlying bond at 8.25%. 

I still own 50 shares bought in the ROTH IRA: Bought 50 PIS at 24.88 in Roth IRA (December 2010).  These shares are on a short leash due to the persistent unfavorable actions taken by John Malone to disadvantage Liberty Media's bondholders. The latest salvo is discussed at Liberty Media and its Bondholders (June 2011 Post) I will wait until the dust settles on that Delaware litigation before deciding what to do with the 50 shares in the IRA.

Unlike bonds traded in the bond market, TCs trade flat. You have to own the TC on the ex date to receive the interest payment. PIS closed at $24.93 in trading yesterday which was up 4 cents taking into account the interest payment.  

3. Added 100 ERH at 11.69 on Tuesday (see disclaimer): I now have way to much in my cash allocation, due mostly to my stock allocation reduction. I am now starting to look around for some income producing securities to put some of that cash to work. The CEF ERH has a balanced portfolio of bonds and utility stocks and pays monthly dividends. It was selling at close to a five percent discount to its net asset value when I added to my position last Tuesday. I have nothing to add to my prior discussion.   Bought 100 ERH at 11.88 (April 2011)

Morningstar Page on ERH

Stock Quote: Wells Fargo Advantage Utilities & High Income Fund 

Closed-End Fund Association Page on ERH

Last SEC Filed Shareholder Report

ERH closed at $11.55 in trading yesterday, down 11 cents.

The current monthly dividend is $.075 per share. Wells Fargo Advantage Closed-End Funds Declare Monthly Dividends  

SOLD: 100 EXC @ 44.67, 100 APF @ 17.47, 50 DLN @ 49.38, 100 PEO @ 30.62, 100 MSFT @ 27.9/Mortgage REITs and U.S. Debt Downgrade/ What Are the Reasons for a Continuation of the Fed's Jihad Against the Saver Class/BDGE WASH UBSI EK SVU

In his  Barrons.com column, Jim McTague discusses a study by two economists that attempts to quantify some of the harmful effects of the Federal Reserve's Jihad against savers. I referenced that study in an earlier post: The Real Cost of The Federal Reserve's Jihad against the Saver Class The saver class is very large in the U.S. Over 24 million homes are owned free and clear for example. census.gov/pdf. The authors of that study found that interest rates are now about five percent points lower than at comparable times in history. Given the sheer size of yield sensitive and safer investments, this translates into anywhere from $256 billion to $587 billion in lost consumption which has an adverse impact on job creation and GDP.  

While the Federal Reserve maintains that a continuation of its Jihad is necessary now to support the economy, that argument has more than a few flaws in it. The lost consumption derived from savers spending their interest income is just one counterpoint to the Federal Reserve's position.

It is also true that corporations and individuals, capable of refinancing their debt to lower their interest payments, have already done so. I have lost over one-half of my bonds to corporations refinancing their debt. Large public corporations have already reduced their interest payments on existing debt and many have raised cash for no current reason other than to take advantage of abnormally low rates. Individuals capable of refinancing their mortgages have already refinanced and will have more funds to devote to spending and/or saving as a result. A continuation of abnormally low rates does not help those entities or individuals, but unquestionably harms the vast saver class. 

Contrary to the Federal Reserve's position, the abnormally low interest rates have not caused a flight from safety. As McTague points out, savers still have their money in money market funds, bank CDs and and savings accounts. 

I suspect that the Fed's Jihad will continue primarily to assist the government in refinancing its debt. Currently, a short term treasury bill yields almost nothing (just say nothing really), and the ten year treasury note is close to 3%. If those rates were anywhere near normal, the already bloated federal deficit would became an even more serious problem.  Even with historically low rates, the U.S. paid over 413 billion in interest payments in the F/Y September 2010.  Government - Interest Expense on the Debt Outstanding That could easily double with a less accommodative Federal Reserve. A 1% rise in interest rates would result in approximately another 150 billion in the deficit.

The Reserve Bank of India hiked its key lending rate by 1/2% to 8%. This is the 11th increase since the bank started to increase rates in March 2010. The higher than expected increase was due to rising inflation. One of my concerns is inflation in emerging markets, and the efforts being undertaken to tame surges in the inflation rate.

I knew that Eastman Kodak (EK) must have released its earnings report yesterday after I noticed that its 2013 bond had fallen to around 81-82. The market does not have high hopes that EK will survive until November 2013 to pay off that senior bond, which I own, and that is not an irrational belief. The last report was stunningly bad. Kodak: Investor Center: News Release I suspect that many individual investors considering the purchase of that bond are failing to even review earnings reports, a lazy and reckless practice.  I have never held out any hope for EK's long term survival, meaning survival beyond 10 years from now.  I was just making a small "bet" that it would survive until November 2013.  That is starting to look more questionable.

Unlike my 2 EK bonds, I am in the black on my three Supervalu (SVU) bonds and have sold two already for profits.  Supervalu reported first quarter earnings of 35 cents, beating the consensus estimate by 2 cents, and reaffirmed its guidance for the current 2012 Fiscal Year. Reuters  SUPERVALU Earnings Press Release

The new managing director of the IMF, Christine Lagarde, said that a U.S. debt default or downgrade would be a "very, very, very serious event", The Washington Post. Apparently, she thought that the TBs would pay more attention by using "very" three times in conjunction with "serious". Ms Lagarde is French and the TBs will not pay any attention to anyone who is from France.  Remember their temporarily successful effort to rename the "French Fry" to "freedom fries" after France cautioned the U.S. about invading IRAQ. Before spending a trillion or so of borrowed money, and sacrificing the life and limb of so many people, one would hope that future TBs in Congress will actually spend a moment or two questioning the rational for invading a country who had not attacked the U.S. and actually look at the evidence then existing which the TBs refused to do in 2003. Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent?  Accurate Information is Not a Side to an Issue/ Lying Works In Politics Curveball  Do not hold your breath.  Making decisions on reliable information is not important to them.

According to the latest Pew Research Center poll, most republicans do not see a major problem in Congress refusing to raise the debt limit.

Boehner will likely need some Democrats to vote for his scaled down budget plan tomorrow. Representative Jim Jordan, one of the leading reactionaries in the House, said yesterday that he would vote against Boehner's budget plan. WSJ.com Jordan's group thought that they were compromising by backing off their demand for 9.5 trillion dollars in cuts.  GOP's "Cap Cut and Balance" Plan Those individuals are not conservatives, and no one should assign that label to them. The only appropriate words would be extremists, radicals, and reactionaries.

Last night, Boehner delayed the House vote on his plan, due to opposition within his own party.  His latest plan is not draconian enough. NYT  Washington Post CNN.com (4 trillion in cuts plus no tax increases is necessary to satisfy the reactionaries). I am going to the WP web site frequently now, since that paper has the best coverage of events taking place in D.C.  The CBO said that Boehner's plan only had 850 billion in cuts in its first phase, as opposed to the advertised 1.2 trillion. www.cbo.gov/.pdf

In several recent stories, recent tax collections by the treasury have exceeded expectations so some argue that it may be possible to extend the 8/2 deadline for one week. NYT I have done my part to help our destitute Uncle Sam in his hour of need by mailing an estate income tax payment earlier this week.

Whites now have 20 times the net worth of blacks, up from 7 to 1 in 1995. CBS News

This chart, based on IRS data, shows how various income groups have fared under Democrat and Republican Presidents from 1948 to 2005. The Great Divergence

The stock and stock fund sales mentioned in this post completed my ongoing stock allocation reduction. I am just going to mention those sales briefly.

1. Regional Bank Earnings (BDGE WASH UBSI)(own: Regional Bank Stocks' basket strategy):

Bridge Bancorp (BDGE) reported second quarter net income of $2.5 million, which included $265 thousand in after tax acquisition costs, or 38 cents per diluted share. Core net income without the costs related to the Hamptons State Bank acquisition was 42 cents per share. The estimate, originating from one analyst, was for 34 cents. The E.P.S. for the 2nd quarter of 2010 was $.34. As of 6/30/11, the tier 1 capital to risk-weighted assets was at 13.1%; the NPLs to total loans was at 1.21%; the allowance for loans losses as a percentage of NPLs was at 132.95%; and the net interest margin was at 4%.  I am reinvesting the dividend. I am also in the hole on this one: Bought 50 BDGE at 23.11 Bought: 50 BDGE @ 22.14

United Bankshares (UBSI) reported net income for the second quarter of 17.5 million or 40 cents per share, which included a non-cash impairment charge of $4.1 million on investment securities. The consensus estimate from 9 analysts was for 40 cents. UBSI Analyst Estimates. As of 6/30/11, the net interest margin was 3.83% (up from 3.69% 6/10); the efficiency ratio was 52.03%; NPLs to total loans was at 1.22% (average for peer group as of 3/31/2011=3.89%);  the total risk-based capital was 13.9% (10% well capitalized); and the Tier 1 capital ratio was 12.5% (6% well capitalized).  I am not reinvesting the dividend. Bought 50 of UBSI at 16.65 (November 2009). While I have a good unrealized long term capital gain, I have kept this one due to the dividend yield at my cost which is around 7.2%. United Bankshares Inc., UBSI Stock Quote

Washington Trust (WASH) announced net income of $7.6 million for the 2nd quarter or 46 cents per share. The consensus estimate generated from 3 analysts was for 44 cents. WASH Analyst Estimates This was an increase over the 33 cents earned in the second quarter of 2010. I have already booked a profit on 1/2 of my 100 shares bought at $15.26 (January 2010) Sold 50 of 100 WASH @ 22.44 I am content to hold the remaining 50 shares. The dividend yield at my constant cost basis is good, close to 5.8%. WASH Stock Quote

50 SHARES WASH AVERAGE COST PER SHARE=$15.34

50 Shares 2010 Realized Gain =347.03

If I reduce the cost of the remaining shares by the before tax gain, which is something that I will just do in my head, then the yield would become 21%, lower of course after adjusting the $347.03 gain for taxes.

2. Sold on Monday: 100 Microsoft (MSFT) at $27.90 /100 PEO at $30.62/100 EXC at $44.67/50 DLN at $49.38/ Sold 100 APF at 17.47-Tuesday  (see Disclaimer): All of these positions were sold as part of the ongoing reduction of my stock allocation. These transactions brought me to a comfort level based on currently known information.

I may buy some or all of those positions back at lower prices. I am reinvesting the dividends on my MSFT and EXC positions. To buy back EXC, it will have to lower my average cost. I sold my highest cost MSFT and EXC shares shares using FIFO accounting. This lowers my average cost for the remaining shares. I still own 131 shares of MSFT: Added 30 MSFT at 24.15 (May 2011); Added 50 MSFT at $25.55 (May 2011); ADDED 50 MSFT at 25.81 (March 2011). I am not likely to add the MSFT shares back at over $25.

I do not believe that there is a zero chance of a non-temporary worldwide economic slowdown, nor do I agree with the market that the politicians in Washington are certain to raise the debt limit and/or avoid a downgrade in U.S. sovereign debt.

PEO was sold for a small profit. It is a CEF that invests in energy companies. Bought 100 of the CEF PEO at 29.77 (2/28/11 POST). I will buy the stock ETF DLN back only after a 10% decline from current market levels.

Exelon shares were up a $1 when I pared my position on Monday, due to an upgrade of merchant power producers by Merrill Lynch/Bank of America, MarketWatch.

With the exception of the EXC transaction, these sales were of recently purchased stocks.  The only one generating a significant profit was the 103+ shares of OEF, netting over a thousand.  Sold 103+ of the Stock ETF OEF at $59.98 (7/25/2011 Post) I was growing pessimistic before the Crazies put into play the full faith and credit of the U.S. government. Jobs (6/6/2011 Post); Item # 1 Consumer Debt Levels-Still Way too High (7/1/2011 Post);   LB is In a Slow Mo Trading Mode While Preserving Recently Raised Cash Stash (6/7/11 Post); Underlying Cause of the Current Long Term Bear Market is Too Much Debt; The Roller Coaster Ride of the Long Term Secular Bear Market.  The recent pares were made due the increasingly worrisome dysfunction in Washington.  When doing an asset allocation pare, I will frequently jettison recently acquired positions, particularly reductions where I can reduce my average cost for the remaining shares while realizing a gain.

I also decided to continue de-risking some on Tuesday and sold 100 of the stock CEF APF, recently bought at   $16.84. (7/1/2011 Post).

3. Mortgage REITs and the Possible U.S. Debt Downgrade:  I mentioned in a previous post that Mortgage REITs would react negatively to a U.S. debt downgrade since they use considerable leverage to buy GSE mortgage-backed securities.

One investor, who writes frequently about Mortgage REITs, published an article at Seeking Alpha recommending that investors sell all of their MREITS. If I had a significant position in them, I would have already pared the position some in response to the latest dysfunction in Washington. Instead, I recently added 50 shares of MFA, bringing my total to 100 shares, a totally immaterial investment for me. GOP's "Cap Cut and Balance" Plan Added 50 MFA at 7.78 in Roth IRA (7/21/2011 Post, where I mentioned that I hoped the Crazies will not cause a default which would have adverse effects on MREITs).

The article does provide a number of factual reasons why a U.S. debt downgrade would negatively impact MREITs. Since they borrow so much money, and use the GSE mortgage backed securities as collateral for the short term loans, their creditors may require them to post more collateral and to pay more interest.

I am not the kind of person to hyperventilate about anything. If I did not panic during the Near Depression period, then I am not likely to panic at all. I am not likely to add to my small position in MREITs until there is more clarity about events in Washington.

Randall Forsyth also discusses this issue in his recent Barrons column. The subject is also discussed in this recent column found at MarketWatch. As noted in that last article, the CME will increase this Thursday the "margin haircuts" for Treasury and GSE debt from 10% to 11%: cmegroup.com.pdf

If there is a significant decline in MREITs before there is any firm news on default, I may even add a few shares to a MREIT holding as a contrarian move.

A Reuters poll of economists found that a majority of them believe that the U.S. will suffer a downgrade from at least one credit agency.  

Sold 50 UNB at 19.5/TRST OCFC MOL GE/Pared JSN-Sold 100 at 12.38 in ROTH IRA/

In my opinion, the market still believes that the U.S. will manage to raise its debt limit, avoid a default and a debt downgrade from AAA. A zero possibility is being assigned to negative outcomes.

I would agree that a debt downgrade is more probable than a debt default, but both have greater degrees of occurring than the current market forecast.

Many pundits believe that a debt downgrade is no big deal. WSJ  I would strongly disagree with that opinion, believing such a downgrade would soon cause a 5% to 7% fall in the S & P, possibly another 5% to 10% in a few days thereafter.  This decline could accelerate based on more negative economic news which I would view as highly likely after a failure to raise the debt limit.

I listened to the President last night. As I have said, you can not reason with people who are totally out of balance zealots. My representative is one such person. It would be a waste of time to ask her to be balanced about anything. As far as I have been able to determine after many decades of intense study, the zealots are out of balance upon inception.

Another market consensus, which appears to me to be mostly wishful thinking, is that the current soft patch will be temporary and the U.S. will resume more robust economic growth in the second half of 2011 and into 2012. The current market level is not consistent with negative GDP growth in one or more quarters over the next year, a continuation of anemic growth and high employment, and/or a significant slowdown in growth in emerging markets particularly in China.

There are many who believe in the rationality of the market. I am not one of them, though sometimes the market may actually price securities within a zone of reasonableness. Efficient Market Hypothesis as Hokum  Somehow, a belief has crept into economic thought that human beings become rational and capable of exercising good judgment when they are in a herd, or when one focuses on their collective decisions rather than each individual decision? Is the collective judgment of all of those investors somehow prescient, more valuable than the judgment of one in isolation?  Yes, that rational man is one difficult to find person.

Can the market predict the future? On October 8, 2007, the DJIA rose 120 points to close at 14,164:  ^DJI Historical Prices At that time, the handwriting on the wall was already clearly visible, housing prices were going to implode and a recession was unavoidable. The only question remaining to be unanswered on 10/8/07 was whether the recession would turn into another Great Depression.  Nothing could have been done at that time to save the world from a severe recession.

It was clear that the Nasdaq Composite average was ridiculous when it closed at 5,048.62 on 3/10/2000. ^IXIC Historical Prices | NASDAQ  Was that level a rational forecast of future earnings growth, or more of a statement about the herd behavior of mostly irrational investors?  Due to the robust rally off the March 2009 lows, the Nasdaq Composite has returned to 2850 and change, recovering slightly more than 50% of its March 2000 value.

Cramer said yesterday morning that investors should not be selling stocks now, primarily due to the difficulty in timing news developments about the debt limit. And, of course, the lack of options to earn an acceptable return enters into his thinking.

I am not trying to time a news development on the debt limit issue. I am simply de-risking based on the uncertainty and the more than remote possibility of a catastrophic outcome. I am also de-risking based on my assessment that the market has excluded all possible economic scenarios other than the rosy one when there are rational and cogent reasons to expect less favorable economic data to continue and even accelerate to the downside. It is also relevant that I do not need to take unnecessary risks and can quickly shift gears in the event that I become more comfortable than now about a lot of things.

I did complete yesterday the paring of my stock allocation.  I just kept selling until I reached my comfort level.  Most of those sales will be discussed in the next post.  I decided to do finish this stock allocation reduction all at once rather than on a daily basis. The market could easily head south any day now.  I am not likely to buy any stocks, other than LOTTERY TICKET purchases, until I have more clarity.

A poll conducted recently by Pew shows that the GOP has made major gains since 2008 in those who identify themselves as republican or leaning in that direction. The gains are primarily among whites and voters under the age of 30. White Voters | Pew Research

The Washington Post has an article on Eric Cantor's opposition to a tax increase on hedge fund managers and private equity firms and campaign contributions receive by him from those groups. Perhaps, that is what Cantor means about taxing "working families".  It is good that the hedge fund types have a champion in Washington to protect their "carried interest" tax loophole.  And Cantor knows how to carry that interest.

I ran across an interesting story about John Boehner giving away campaign contributions from the tobacco industry on the House floor before an important vote impacting that industry. Bloomberg  It is better to hand out some of the  dough before the vote and some after.  That is not bribery of course. And my authority for that last statement is the Chief Justice of the Supreme Court, John Roberts, along with four other justices, who say that it is constitutionally protected First Amendment speech by corporations.

1. Sold 50 Union Bankshares (UNB) at 19.5 Last Thursday (Regional Bank Stocks' basket strategy)(see Disclaimer): These shares were purchased at $18. (July 2010). I was not pleased with the earnings report for the June quarter.  Sec Filed Press Release Many of the recent sales in this basket strategy are also part of my ongoing stock allocation reduction. 

2011 UNB 50 Shares +$59.08

2. Trustco (TRST)(own: Regional Bank Stocks' basket strategy): One of my three problematic holdings in this basket is TrustCo which reported net income of $7.8 million for the second quarter or 10 cents a share. The net income number increased 9% compared to the 2010 quarter. As previously discussed, I was somewhat peeved with this bank when it recently launched a large share offering, for no good reason as far as I could tell, that was at a 1995 price. Item # 1 TRST Rather than sell my shares, I decided simply to vote against the Board for as long as I have a position. 

As of 6/30/11, the efficiency ratio was at 51.33%, better than most of my banks; NPAs to total assets was at 1.34%; the NPLs to total loans was at 2.04%; the net interest margin was 3.47%; the coverage ratio was at 92%; the bank had 135 offices; and tangible equity to tangible assets was at 6.59%.

3. General Electric (own): GE reported operating earning of $3.7 billion or 34 cents a share for the second quarter. GAAP earnings were reported at 33 cents.  GE Capital's earned $1.7 billion.  Revenues were $35.6 billion, down 4% from a year ago, due primarily to sale of GE's majority position in NBC to Comcast. Excluding that impact, revenues increased 7%. The consensus estimate was for 32 cents on $34.7 billion in revenues.

Infrastructure orders increased 24% with equipment up 33% and service orders up 16%. I own close to 500 shares and have been reinvesting the dividend.  I will likely continue to reinvest the dividend until the shares trade at over $25 consistently for several weeks. See Item # 4 Snapshot of GE Purchases Made with Cash Flow

I decided not to pare GE yesterday.

4. Sold 100 JSN at 12.3845-ROTH IRA Last Friday (see Disclaimer): This was a partial pare of my position in this stock CEF from Nuveen and is part of my ongoing stock allocation reduction. These shares were bought at $9.04 (MARCH 2009), so the total return with the dividends was good:

100 JSN IRA 2009 Purchase at Total Cost per share =$9.04

The current quarterly distribution rate is 31.5 cents per share, down from 33.6 cents when I first purchased the shares in March 2009.  JSN - Nuveen Equity Premium Opportunity Fund

This sale was also part of my ongoing stock allocation reduction.

5. OceanFirst (OCFC)(own: Regional Bank Stocks' basket strategy):  OceanFirst Financial reported  somewhat disappointing 2nd quarter earnings last week. The bank reported reported net income of $5.1 million, or  28 cents per share up from 27 cents in the year ago quarter.  This missed expectations by one cent.

As of 6/30/11, the net interest margin was 3.67%; tangible equity per share was $11.32; the allowance for loan losses as a percentage of NPLs was at 45.93% (prefer 100% or higher); NPLs as a percentage of total loans was at 2.85% (at the high end of banks in my basket); and the efficiency ratio was at 56.86. The Board also declared the regular quarterly dividend of 12 cents per share.

This is a marginal hold.   Bought 50 OCFC at 10.4 (December 2009 Post)

6. MOL (own): This unsecured senior note issued by Citigroup Funding suffered a maximum level reversion yesterday, as the P.M. London gold fix exceeded the maximum level for the current coupon period.  The P.M. fix for 6/25/11 was $1613.50 per ounce. The maximum level was $1609.79. Stocks & Politics (November 2010 Post) As a result, this note will pay its minimum 2% coupon soon after the end of its current annual period.  I own 100 shares bought at less than the $10 par value. The note matures in 2014.   Prospectus  I will not be able to determine the starting value for the next coupon period until the London P.M. Gold Fix on 11/17/11. 

Sold 103+ of the Stock ETF OEF at $59.98/NYB/EK Exploring Sale of 1,110 Patents/FNFG

This article at Wall St. has a list of the states where individuals pay the most and the least amount of taxes. Tennessee is the 4th lowest. The Lowest Five While some say that this is due to Tennessee being a Red State, it was a Blue State until recently. The GOP has only recently gained control over both houses of the state legislature and the governorship. There is no state income tax on earned income, nor any statewide property taxes. The city and county property taxes on my home are around $2300 in total. If I was living in one of the highest tax states, I would just leave whenever that could be done.  It is not going to get any better when the politicians start looking for ways to fund the unfunded liabilities. Forbes.com pewcenteronthestates.org/.pdf  Unfunded Pension & Disability at State & Local Governments

An HSBC survey of purchasing managers in China showed contraction for the first time in 28 months. The Euro Zone composite PMI for June was reported by Markit at 50.8 in July, down from June's reading of 53.3.  The Markit data can be downloaded at Media centre - Markit Economics. Over the past several weeks, evidence of an economic slowdown has been consistent, a serious concern before the latest emergence of dysfunction among U.S. politicians.

A recent  Washington Post-ABC News Poll (item # 6) found that 80% of Americans were dissatisfied or angry with Washington, and 63% would like to vote for someone other than their current congressional representative.    

A Washington Post reporter interviewed voters in Eric Cantor's district in Virginia that provides some enlightenment on who is ultimately responsible for the current generation of GOP politicians. After over 100 lives were lost in the Joplin, Missouri tornado, Cantor said that disaster relief had to be conditioned on spending cuts.  The State Column

The Bipartisan Policy Center published a report confirming that the U.S. government will indeed run out of money on August 2nd. www.bipartisanpolicy.org .pdf Starting on 8/3 and continuing for the remainder of August, the government would run a 134+ billion dollar deficit, and will be unable to borrow. If the government elected to pay Medicare, Interest on the Debt, Social Security, Unemployment Benefits, and only Defense Vendors, then the government would not be able to pay out anymore funds. A list of programs deprived of any funding under that scenario is provided at page 15 of the report.  Other scenarios are also explored in this analysis.

Ezra Klein wrote a column late last week titled "Everything you need to know about the debt ceiling in one post."  Of course, for True Believers (TBs), anything remotely resembling a fact in proper context is anathema to them, a form of liberal propaganda by the liberal, mainstream elite media.

Perhaps, the TBs in the House of Representatives, who have been receiving private lectures by the ratings agencies over the past week, may learn something about the potential consequences of using the full faith and credit of the U.S. government as leverage to achieve their political aims. The lecture begins with "what is the debt limit, and why it is important". Some of those repercussions are discussed by Rick Newman in his column at usnews.com.

Jason Zweig refers to a U.S. government debt default and/or downgrade to be a Neon Swan,  WSJ.com, a blindingly obvious catastrophic event. Jason must not get around much, or maybe his circle of acquaintances do not include any True Believers. But, I will accept the characterization of "neon swan" for those who are not brain dead zealots incapable of exercising good judgment.  

For the reasons set out in a letter sent to Obama and congressional leaders, five American Nobel Laureates in Economics opposed the GOP's balance budget amendment.  Press Release

A conservative economist at the American Enterprise Institute pointed out the obvious, the amendment proposed by the GOP would turn recessions into depressions. Norman Ornstein quoted in CNN Money Story For anyone with their eyes open, this is what the GOP tried to do in the summer of 2008. Forty six republican senators are in favor of that result:  Senate Vote 116

The GOP senators were asked what programs would be slashed to meet that deficit target and declined to answer the question. Bloomberg When the Constitutional Amendment passes, then they will inform the American people how they intend to comply.  Based on their approval of the Ryan budget, there is no doubt who will pay the price of their 6 trillion in budget cuts. Their plan would require substantial cuts in a variety of social programs:  Economic Policy Institute  Center on Budget and Policy Priorities

A well known legal scholar, Eric Posner, argued in a NYT opinion piece that the President does have the power to raise the debt limit without congressional approval. He referred to the approach of the Tea Party republicans who apparently believe that only a "purifying Götterdämmerung" would cleanse the nation. It is hard to reason with anyone that is totally out of balance, and on a personal mission from God.

David Frum, a thoughtful republican and former speechwriter for President Reagan, placed the GOP's position on using the debt limit to appease the Tea Party crowd in perspective in Stumbling Toward Disaster | FrumForum.

Protecting the top 1% from any tax increase is the most important mission for GOP politicians.

This is a link to a balanced, factual article from FactCheck.org that provides useful information about the spending and revenue sides of the equation. In that article, it is mentioned that federal revenues are expected to drop to 14.8% of GDP this year, the lowest rate since 1950.

The events leading up to Boehner walking out of the debt limit talks with Obama are summarized in this Washington Post article.

Boehner called into the Rush Limbaugh on 7/21 to assure the GOP puppet master that no deal had been struck on the budget.

I have a significant position in the Canadian currency and Canadian government and investment grade bonds, a position that is larger than many of the other strategies discussed in this blog. Canadian Dollar (CAD) Strategy There are many reasons for that strategy. Part of it is based on dysfunction in the U.S., where there are millions of ideologues, from both political tribes, who are incapable of exercising good judgment.  One Canadian Dollar will now buy more than 1 U.S. Dollar:  Summary for CAD/USD  Needless to say, the value of my CAD stash has done well. Snapshots of some of my 2011 trading profits can be found in these posts:  Sold 200 Artis REIT at 13.88 CAD  Sold 100 Killam @ 10.99 CAD/Sold 100 Transglobe @ 11.19 CAD Pared Trade: Sold 100 CUF_UN:CA @ 22.66 CAD & Bought 100 CDZ:CA at 21.26 CAD (snapshots of 6 trades from 2010-2011)  Sold 100 of the Canadian Bond ETF XRB:CA at 23.08 CAD

I have about 6 thousand in uninvested CADs. The two largest bond positions are low cost ETFs bought on the Toronto Exchange:

400 CLF:CA Canadian Government 1-5 Year

300 CBO:CA Canadian Corporate Bond 1-5 Year

CBO - Claymore 1-5 Yr Laddered Corporate Bond ETF
CLF - Claymore 1-5 Yr Laddered Government Bond ETF

All dividends are paid to me in Canadian Dollars after the 15% withholding tax. Some of my discussions can be found in the following Posts: Added 200 CBO:CA @ 20.58 CAD Bought 100 CBO:TO at 20.4 BOUGHT 200 CLF:TO AT 20.20 CAD Added 100 CLF:TO-Sold 100 CPD:TO  Bought 100 of ETF CLF:TO at 20.10 CAD As shown in the forgoing snapshots, I am near break-even on the shares in USDs and ahead in CADs. I will not be buying anymore CADs at the current exchange rate.

1. Eastman Kodak (EK)(Own Two 2013 Senior Bonds): According to the WSJ, Reuters and a SEC filed EK Press Release, Kodak is exploring the sale of 1,100 patents involving digital images. Some analysts believe that this portfolio could be sold for up to 2 billion. If that occurs, and it may take up to a year to conclude, I would be comfortable in receiving par value for my two 2013 bonds. FINRA INFORMATION 2013 BOND

Without a substantial settlement from Apple or RIMM, or an infusion in cash from such the sale of patents, it is dicey whether or not EK will be able to pay off the 2013 bond. I am still inclined to believe that EK will survive until the 2013 bond maturity date, even without any major capital infusion.  The market has been telling me over the past two weeks or so that other investors lack that measured degree of confidence.  

Kodak is skating on the edge and needs to raise enough cash until its operations can turn profitable.  The company has reported a full year profit only once since 2004 and has been bleeding cash. The most recent setback was a decision by the ITC in EK's patent litigation against Apple and RIMM that was viewed unfavorably by the market.   ITEM # 2 ITC Decision on EK Patent Litigation Royalties from patent settlements have been EK's profitable business.     

Kodak has secured debt. (See note 4 SEC Form 10-Q for the Q/E 3/11) It is certainly possible that the holders of that debt would want part of the proceeds, originating from the sale of those patents, to be used to pay down that debt.  

2. Sold 103+ of the Stock ETF OEF at 59.98 Last Thursday (see Disclaimer):  One way to manage my stock allocation, moving it up and down, is to buy stock ETFs. I have previously sold a number of stock ETFs based on a combination of profit taking and an increasing concern about the economic recovery. I will start selling some stock CEFs and ETFs, possibly every other trading other, based on the ongoing developments in Washington.  I had over a thousand dollar gain on the OEF shares, mostly a long term capital gain on the 100 shares bought at $49.11. (6/11/2010 Post). This snapshot was taken last Thursday:

103.764 Shares OEF Average Cost Per Share= $49.33 Mostly Long Term

I had elected to dispose of this position before the market opened last Thursday based on my overall cautious nature and inability to comprehend the thinking of zealots. The shares did pop soon after the market opened allowing me to sell the shares at near $60. I continued paring the stock allocation on Friday and added to a double short stock ETF.

Even with a debt deal, I would not be inclined to add significantly to my stock allocation until I see more favorable indications about the U.S. economy. A reduction in government spending and job reductions at all levels of government will further reduce aggregate demand and lower GDP.  

iShares S&P 100 Index Fund closed at $60.38 last Friday.

3. First Niagara (own: Regional Bank Stocks' basket strategy): FNFG is now my largest position in this strategy at 300+ shares. 

First Niagara reported a Non-GAAP operating net income of $71.2 million or 25 cents for the 2nd quarter. That number was one cent better than the consensus forecast. The GAAP number was 5 cents due to charges related to the recent acquisition of New Alliance.  The Texas Ratio is extremely low at 10.12%. As of 6/30/11, the allowance for loan losses to NPLs was a comforting 129.7%; NPLs to total loans was a very good .51%; NPAs to total assets was an even better .31%; the total risk-based capital ratio was at 12.65%; the tangible equity to tangible assets ratio was at 7.44%; the number of branches stood at 346;  and the net interest margin was at 3.72%.  Excluding loans made by New Alliance, FNFG grew loans by $248.4 million in the second quarter, a 9.4% increase.

4. New York Community (NYB: own Regional Bank Stocks' basket strategy): This bank missed the consensus estimate by 1 cent, reporting net income of $119.5 million or 27 cents per share. SEC Filed Press Release The bank is barely earning enough to cover its 25 cent per share dividend.   I have sold the 100 shares bought in an IRA and still own only 100 shares held in a taxable account:

100 NYB Shares Acquired 2009 at Average Total Cost of $11.31

I am not likely to add to this position given the lackluster earnings report. The dividend yield at my constant cost basis, which is around 8.8%, is one reason to keep the remaining shares.

On one fifty share lot purchased in the regular IRA, I realized already a gain of $331.03:

NYB and some Other Realized Gains 2010 Regular IRA

The other fifty shares must have been sold in 2009.

As of 6/3/0/11, the GAAP efficiency ratio was 40.99%; NPLs (non-covered) to total loans was at 1.76%; the allowance for non-covered losses to non-performed (non-covered) loans was only 26.73%; and the net interest margin was at 3.54%.

New York Community Bancorp fell 57 cents on Friday to close at $14.43.