Tuesday, July 5, 2011

The "60 Plus" Front Group and the GOP's Plan for Medicare/MSFT/Edison Mission/Added 100 PSEC at 10.1-Bought 50 GJO at 18.55: ROTH IRA/TRST/ISM Manufacturing-PMI for China

According to recent polling, only a narrow majority of Americans believe that a crisis will be caused by a failure to raise the debt limit. Of those who believe a crisis will ensue, 37% would still oppose a raise in the debt limit.

I recall talking to several members of the GOP tribe during the summer of 2008, all of whom would have preferred another Great Depression rather than support the TARP legislation which averted Financial Armageddon. TARP might actually end up turning a profit for the U.S. government. The Economist Notwithstanding all of that, the Tea Party members are still outraged that the federal government averted a financial meltdown. The Atlantic It would not do any good to give rigid ideologues a history lessons about he Great Depression and the economic conditions that gave rise to WWII.

Senator Orrin Hatch is repeatedly apologizing for his support of TARP, after seeing what the Know Nothings did to his fellow senator Robert Bennett.

It was humorous to see a political ad from a republican front group called "60 Plus" claiming that Ryan's Medicare proposal was a "reform" designed to save medicare for our seniors. The ad can be viewed at YouTube. Politicians regularly abuse the meaning of the word "reform", in order to convince the ignorant, gullible and weak minded that they are trying to improve something for the benefit of the voters when the opposite is true or some other undisclosed objective is being pursued.  The Most Abused Word: Reform/Buys of IR & DD/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology (March 2009 Post)

The ad did not mention that the GOP "reform" would cost the intended beneficiaries, those poor souls who are now 55 or younger, about twice as much as traditional medicare according to the CBO. Most likely, it would end up being far more costly than that estimate. After all, the cost risk is passed to the individual under the GOP plan, medical costs have been increasing at a much faster rate than inflation for a long time as noted by the CBO, and the private insurance companies are in the business to make money. And, it is better to put that increased burden on those least able to afford it, rather than to have the wealthy pay more taxes. Paul Krugman asks rhetorically how the republicans could insist on deep cuts in Medicare and Medicaid while insisting on tax breaks favoring hedge fund managers. His opinion does cut to gist of the matter.

Under Ryan's plan, approved by the House of Representatives without any Democrat voting for it, the government would provide partial support for the purchase of health insurance from private insurance companies for individuals who are now 55 years old or younger. The general idea of this plan is to pass the risks of medical cost inflation to individuals and away from the government. (see analysis of Ryan's proposal by the CBO at www.cbo.gov.pdf). The government pays less and the individual pays more, compared to traditional medicare, and that is how Medicare is saved- by ending it in its current form.  (see analysis by the National Council on Aging)

Needless to say, the "60 Plus" ad neglected to mention those little tidbits when talking about the GOP's proposed reform of medicare. In effect, the GOP would impose a 100% death tax on the middle class, whose usually meager savings would be devoured by health insurance premiums paid to private insurance companies during their retirement years, while at the same time granting additional tax breaks to the very wealthy. GOP Comes Out of the Closet on Medicare The GOP Budget Plan and The Middle Class David Stockman and the GOP/GOP Reaffirms Commitment to Ryan's Plan for Medicare, Medicaid and Food Stamps Never in my lifetime has the modern day GOP shown its true colors so clearly.

The 60 Plus Association, the purported sponsor of this ad, has lobbied for the privatization of Social Security, the next goal for the GOP, the abolition of the estate tax (already abolished except for the super rich-larger than 10 million dollar estates with use of bypass trusts for spouses) and for gun rights.  More about the funding for that right wing organization can be found at StealthPacs.org. Let's just say that this front group receives a lot of donations in excess of $5,000.

From my perspective, none of this will have any adverse impact on me. If the GOP is able to achieve its objective, it may be a form of divine justice for a large segment of the population including the Tea Party crowd. I wonder how much the victims of this plan will squeal when they finally figure out that they are being roasted and hosed by the GOP.  To accomplish this objective, it is only necessary to elect a GOP President and a few more senators to implement all of their plans for Medicare, Social Security and other entitlement programs for the poor and the middle class. If they achieve their objective, it will certainly be a financial benefit to me, but I am not under any illusion about what they are up to either.

I read an editorial in the Nashville Tennessean over the weekend, where the author claims that forcing contributions into Social Security interferes with our freedoms.

There is a great deal that could be done now to slow down Medicare spending, provided there were sensible and practical people in Washington willing to address the problem. I am referring to members of both political tribes now. Just as an example, there are all kinds of expensive procedures, paid for by Medicare, that are unnecessary and even harmful to patients.  Some of those procedures are discussed in this NYT opinion column. A typical example is giving a patient two CT SCANs, when only one is necessary, a process that unnecessarily exposes the patient to radiation, while enriching the provider which is probably the main goal in virtually all cases. Two CT Scans are roughly equivalent to 700 X Rays. The potential harm to the patient far outweighs any benefit, and it costs a lot of money. This was the subject of a recent article in the NYT.

I regularly read articles about waste and fraud in the Medicare system, and the waste could be eliminated provided there is a political will by both political tribes to do so.  The rampant fraud will require more extensive investigations and criminal prosecutions.  Rampant Medicare Fraud (FEB 2010 Post); Medicare Fraud & the Government (November 2009 Post); Medicare Fraud: A $60 Billion Crime - CBS News

PolitiFact has an article summarizing their fact checking for the demagogue and reactionary Glen Beck, who like Michele excels in the "Pants on Fire" rating.  

China's PMI data showed a decline to 50.9 in June, the lowest reading in 28 months. As with U.S. PMI data, any number below 50 indicates contraction. 

Moody's downgraded Edison Mission's senior debt to Caa1 from B3, with a negative outlook. As previously discussed, I own 5 Edison Mission bonds after the OG mistakenly bought 2 in the wrong account. At some point before the end of this year, I intend to sell 1 or 2 of them. Item # 1 Bought 2 Edison Mission 7.75% Bonds Maturing 6/15/2016 I am not comfortable holding 5 into 2012.  

The ISM manufacturing survey for June was reported at 55.3, better than expected. The consensus estimate was for a reading of 51.8. New orders were reported at 51.6, up slightly from the prior month. The price component dropped to 68 from 76.5 in May. 

1. Trustco (own: Regional Bank Stocks' basket strategy): The stock of Trustco Bank (TRST) has been sliding since the bank announced its intent to sell common stock. Trustco announced its intent to sell 13.6 million shares on June 8th.  

An offering of 13.6 million shares, plus an over allotment option of an additional 2.04 million shares, was priced at $4.6. SEC Form8-k The bank claims that it will use the proceeds for general corporate purposes, "including investment in its subsidiary, TrustCo Bank". SEC Filed Press Release

As a result of this transaction, undertaken for no good reason publicly disclosed, TRST stock has been regularly hitting new 52 week lows virtually every trading day since TRST announced its intention for this offering. The stock has recently sunk to levels last seen in 1995.  (see TRST Maximum Period Chart at GF).

TRST did not participate in TARP so it does not need to raise funds to pay back the government.  (page 5 of 2009 form10k)

Institutional investors may be dumping the stock for one or more reasons. This kind of transaction may signal accelerating loan losses in the quarters to come, and consequently the need to replenish capital in the operating bank.  If that fear is unfounded, and only time will tell, then the competency of TRST's management is in doubt.  Raising capital at a 1995 price, when it is not absolutely necessary, would be a clear manifestation of incompetency to many investors. Possibly, TRST intends to use the new capital in furtherance of an acquisition or expansion. That would possibly be the most benign explanation, compared to the first two options. Tangible book value was $3.34 per share as of 3/31/2011: SEC Filed Press Release 

I am reinvesting the dividend to buy additional shares.  Needless to say, this one has turned into a loser for me.   I may add some shares at below $5, but would prefer to wait until I can review the next earnings report due soon.  I will vote for as long as I own shares against the election of all members of the Board of Directors, and against management's pay packages.  When the stock price is hovering at 1995 levels, there is no other choice for me or for any other shareholder in my opinion.     

2. Bought 50 GJO at 18.55 Last Thursday (see Disclaimer):  This purchase was made in the ROTH IRA due to tax issues associated with Synthetic Floaters.

I am trying to think ahead on this one. GJO is a trust certificate with a $25 par value.  The underlying bond is a 7.55% senior bond issued by Wal-Mart maturing on 2/15/2030.  GJO is a synthetic floater, which means that an owner of this TC does not receive a fixed coupon payment unless the swap agreement creating the float agreement is terminated for any reason. The swap counterparty is identified in the prospectus as Wachovia which has been acquired by Wells Fargo. If the swap agreement was terminated, then the owner of GJO would be entitled to receive the 7.55% coupon payment made by WMT, which would be clearly advantageous to the owner of GJO.  This is unlikely to happen however. For all practical purposes, it would require a bankruptcy by WFC.  

For as long as the swap agreement remains in effect, the owner of GJO will receive a monthly interest payment based on a spread of .5% above the 3 month LIBOR rate. However, the rate can not exceed 7.5%: www.sec.gov 

Given the abnormally low LIBOR rates now, the coupon payment is less than 1%. There is only one positive comment that I can make about the current yield. It is far better than the yield on the money market fund, which was used as the source of funds for this purchase.

The maximum yield at a total cost of $18.55 would be 10.1% ($25 par value multiplied by 7.5% maximum coupon=$1.875 annualized per Certificate divided by total cost per Certificate of $18.55= 10.1%). At a 5% annualized 3 month LIBOR rate, the yield at that cost number would be around 7.4%.  

Once I avoid focusing on the current yield, I can see a few advantages to this security in the ROTH IRA:

a. While the owner of GJO is still exposed to the credit risk of WMT, I am not concerned about that risk.  The underlying bond is rated Aa2 by Moody's and AA by S & P. FINRA Therefore, I view it as likely that WMT will survive until 2030 to pay off the note, whereupon the owner of GJO will receive the $25 par value. That will make the actual Yield to Maturity look much better given the purchase at a substantial discount to the $25 par value.  It is conceivable that WMT may redeem the bond early, but I would not view that as likely given the presence of a "make whole" provision.  If WMT did elect at some point to redeem the bond owned by the trust, that would result in the payment of GJO's $25 par value, which would of course be beneficial to me given my purchase price.   

b. I suspect that this floater will increase in value when investors believe short rates will start to rise. A return to just normal LIBOR rates may result in this security selling near its par value, which would give me the option of capturing the spread between par value and my cost before the redemption date.  I have given up trying to estimate when the FED will end its JIHAD against savers.  

c. Hopefully, we are nearer to the end, rather than to the beginning. of abnormally low short rates. Consequently, the main disadvantage of this security, its current yield, may not last that much longer. It would be a pure guess as to when the FED will end its JIHAD against savers. LIBOR Rates History (Historical)

I have bought and sold GJO.  Buy of GJO at $16.5 (March 2009)- SOLD GJO at $17.08 (April 2009).  I changed my mind soon after that 2009 purchase, based on the likelihood of the low current yield remaining in effect for an extended period.  That proved to be an accurate prediction. Hopefully, savers will see the end of the Jihad being waged against them by central banks.

GJO closed at $18.5 last Friday on volume of 500 shares.

3. Bought 100 PSEC at 10.1 in the ROTH IRA (see Disclaimer):  I do not intend on holding those shares for the long term.  The price has declined recently due in part to yet another issuance of common stock by this Business Development Corporation. Item # 1  Prospect Capital (PSEC)

Issuing more stock near or below book value hurts existing shareholders. Ultimately, if PSEC is lucky enough to invest those funds wisely, there would be a benefit to shareholders but that remains to be seen.

In that last linked post, I discuss PSEC in more detail and highlight the many disadvantages of this security.  Constantly selling shares at low prices is just one of the negative issues from my point of view.

The main advantage is the dividend yield, close to 12% at my purchase price according to  Marketwatch. That kind of yield is enticing for the ROTH IRA. In effect, it is equivalent to a tax free yield when held in that type of retirement account for a U.S. taxpayer. Money will double in about 6.12 years at a 12% rate.  Estimate Compound Interest

The trick will be to exit the position with a profit after collecting some dividends, which are paid monthly.  My commission cost in that account is $7, so I will need to sell those shares at $10.25 or higher.   I view the AGNC shares held in the same account in the same way. 

This brings me up to 350 shares of PSEC.   

PSEC closed at $10.14 last Friday.

4. Microsoft (own: Large Cap Valuation Strategy): I recently repurchased shares of MSFT as part of the Large Cap Valuation Strategy,  and I am reinvesting the dividend to buy additional shares.

This article at Seeking Alpha describes the launch of Microsoft's Office 365 product last week.  This  is a cloud product, allowing customers to access several products, including Microsoft Office, online for a subscription fee.  More about this product can be found at Microsoft's web site.

MSFT stock did climb 7% last week to close at $26.02.  After that rise, and based on the consensus $2.77 E.P.S.   estimate for the F/Y ending 6/2012, the P/E is 9.39. Cash per share was $5.78 as of 3/31/2011. MSFT Key Statistics  Five year estimated P.E.G. is 1.02.

Yesterday, Baidu announced that it would use Microsoft's Bing for English language searches.   Reuters  Bloomberg

A reporter at ZDNet claimed that a trusted source told her that MSFT's Windows 8 is "on track" to be released for manufacturing by April 2012, earlier than expected.

I did not have any interest in Microsoft for at least one decade prior to repurchasing shares in 2009.  ADD 50 MSFT at $17.99 (January 2009 Post);  Bought 50 MSFT at $17.79 (April 2009).

The long term chart is fairly typical for a large cap stock whose valuation became stretched during the blowout phase of the prior long term bull market which started in August 1982.


HPQ, another holding, has a similar chart:


The blowout phase of the prior bull market took Microsoft stock up to a level in early 2000 that could not conceivably be justified by any rational human being. The P/E was over 50 in 2000, a totally unrealistic valuation given MSFT's size and the law of large numbers.

After bottoming in early 2000 near 20, the stock has meandered largely in a channel range between $20 to $30. During that long churning phase, lasting over a decade, MSFT increased its annual earnings from around 45 cents in 1998 to over $2 per share now.  A regular quarterly dividend was initiated in 2003 and has been raised every year since that time.  The dividend rate doubled from the annual rate of 34 cents in 2006 to the 64 cents now.  The payout ratio is hovering around 25% so there is room for further dividend increases.

I reinitiated a position in 2009 when the stock fell to below $18 and sold the sold the stock when it approached $30 a share. I sold out of MSFT in November 2009 at $28.11.

I decided to re-enter the position for the reasons given in Item # 3, RB BOUGHT 100 MSFT at 27.08. (February 2011). After the RB paid too much, it was necessary for the LB to average down in three increments:  Item # 1 Added 30 MSFT at $24.15 (May 2011)(Snapshot of trading gains in 2009 and 2010 =$623.89); ADDED 50 MSFT at 25.81 (March 2011);  Added 50 MSFT at $25.55. I am currently near break-even and may sell the highest cost lot, purchased first, when and if the stock crosses $30 per share.

WMT has a similar tale of woe over the past decade, as earnings and the dividend have risen:

ADDED 50 WMT at $52.68 (7/1/2011 Post).  As previously mentioned, I do not view the problem with that stock as having much to do with the company, as the knuckleheads who drove the price skyward in 1997 to 2000. 

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