Friday, July 29, 2011

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.   

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