Friday, July 15, 2011

The Importance of A Few People In Times of Crisis/Google/GOP's Plan To Bankrupt the Middle Class/Bought 50 ZBPRA at $20/Added 30 CWH at 24.08

I refer to this table periodically that shows the compounded value of $100 invested in Treasury Bills, Stocks, and the 10 year treasury bond since 1928, updated through 2010: Historical Returns

According to the, several Republican candidates for President signed a pledge from a self-styled "conservative" Christian group whose preamble started with a statement suggesting black children were better off under slavery than under the first black President. Michele was one of those luminaries to sign that pledge.  Michelle is open to the possibility of raising the debt limit provided the Democrats agree to repeal their health reform legislation.  The Hill

A spokesman for the Chinese government told the U.S. yesterday that China hoped the U.S would behave responsibility to "guarantee" the interests of investors. China owns more than 1 trillion of U.S. debt. NYT

S & P said late yesterday that there is "at least" a 1 in 2 chance that it would downgrade the U.S. government debt rating by one or more notches within the next 60 days. Reuters MarketWatch  Bloomberg

The Obama administration claimed yesterday that he had agreed to 1.5 trillion in spending cuts without a tax increase and had identified another 200 billion, provided the GOP agreed to a debt limit increase that would take the the government past the 2012 election, according to the WSJ.

Eric Cantor, the GOP Majority Leader, who was called childish yesterday by Senator Majority Leader Harry Reid (D), claimed that the cuts agreed to by Obama were around 1.4 trillion.  According to the Democrats, Cantor kept interrupting the President at their last meeting,  NYT, a frequent method used to show disrespect for this President.  Bill O'Reilly interrupted Obama 42 times during his interview.

I mentioned yesterday that the GOP leaders were claiming that the President was not offering anything specific in the way of spending cuts. Mitch McConnell said the President's proposed cuts were "smoke and mirrors" and Boehner referred to the President's proposals as jello or jello turning into liquid.  According to the, one of the smoke and mirror offers was the President's willingness to increase gradually Medicare eligibility to 67, saving about 125 billion over 10 years. Given the current financial condition of Medicare, this probably needs to be done now.

The consensus opinion appears to be that something will be done to avert a catastrophic meltdown resulting from a failure to raise the debt limit. I hear that opinion frequently from talking heads, and it is further manifested by strong treasury auctions this week. MarketWatch While that may turn out to be an accurate forecast, I believe that the market may be underestimating the resolve of the Crazies to torpedo the AAA rating of U.S. debt unless the Democrats submit precisely to their demands. That is what the Crazies call a good faith negotiation.

Previously, I have added some double short ETFs  on U.S. treasury debt to hedge my corporate bond portfolio.  I am now considering additional purchases to provide some insurance against a market meltdown caused by a U.S. default. I added 30 shares to one of those ETFs yesterday, serving a dual purpose as a hedge for my corporate bonds and as a tiny piece of insurance.

Marc Faber told  CNBC yesterday that it was "mind-boggling" than investors are buying 10 year treasury notes yielding less than 3%. He did not believe the U.S. would actually default, in the sense of failing to pay interest or principal. Instead, he believes the "default" will occur due to a depreciating dollar.

I am currently reading on my Kindle a book about the central bankers who managed to turn a recession into the Great Depression by tightening the availability of money after the 1929 Stock Market Crash. Lords of Finance: The Bankers Who Broke the World (see review at  NYT) The book won the 2010 Pulitzer Prize for history. Possibly, if one man had lived beyond 1928, the then President of the New York Federal Reserve, Benjamin Strong, there could have been a far more favorable outcome than a Great Depression that created the conditions for the rise of Hitler and the onset of  WWII. Strong was at least adaptable, knowledgeable and intelligent. (see extensive discussion of this gentleman made in a research paper published by the Richmond FED:

My father was born in 1921, and married my mother a few days before Pearl Harbor. He had to borrow two dollars to buy a wedding band. Like other young men of that generation, he got to experience a depression and a war before reaching his 21st birthday.

The author of that book, Liaquat Ahamed, made what I thought to be a valid point in an interview published at  Barron's. Only a few people saved the world from another Great Depression by taking decisive action in the fall of 2008. Sometimes, one or two individuals can make a huge difference. If ideologues had been in power just in the House of Representatives, a Great Depression would have resulted from their inability to comprehend the gravity of the financial system's meltdown.

The WSJ published an article on Wednesday pointing out how the deficit cutting will squeeze the Middle Class.  In that article, the author pointed out that eliminating food stamps, jobless benefits, welfare cash benefits, Supplemental Security income for the aged poor, children's health insurance, housing assistance and most of the funds spent on training, employment and social services programs would have reduced the budget deficit in 2010 by about 1/3rd.

1. The GOP's Plan to Bankrupt the Middle Class: The GOP plan for Medicare would cost that middle class person about twice as much as traditional medicare. That is not my estimate but originates from the CBO and is consistent with common sense. PolitiFact

A similar calculation was made by the Kaiser Foundation: This is a table from the Kaiser Foundation's report on the GOP Plan:

A typical middle class couple might be able to save 25 to 100 thousand by their retirement, an amount easily wiped out by the increase costs for Medicare proposed by the GOP during their retirement years. Bankruptcy would likely occur early soon after retirement, though the more prosperous ones may be able to postpone the day of reckoning for a few years by selling their homes and living with the kids. This plan is called "courageous" by the self-professed "conservative intellectual" Charles Krauthammer who claims that any attempt to criticize the GOP plan is demagoguery.

In the same plan, the GOP approved a reduction in the top marginal rate from 35% to 25% and by extending the other Bush tax cut provisions beyond their 2012 current expiration date.   The GOP plan is called by them the "Path To Posterity".  Yes, I would agree that it is most likely true for the OG, more prosperity ahead particularly since he would be covered under traditional medicare and would receive some nice tax cuts too.

Incomes for middle class families have remained stagnant since 2001, as their cost of living expenses have skyrocketed according to MSN Money. They are without question being squeezed even those where both spouses still have jobs (see also article by Rex Nutting at MarketWatch)

Fortunately for the GOP, millions of their supporters who are in the middle class have not yet realized that targets have already been painted on their backs in preparation of throwing them overboard in order to protect and even enhance the wealth of the super rich. There is no other way to view Ryan's budget plan approved by virtually all GOP politicians.  ABC News (235 GOP members voted for it)

A recent survey by Wells Fargo found that middle class citizens had saved an average of $29,000 by the age of 59. Wells Fargo - News Releases

I do find it interesting that the GOP has found the fiscal responsibility religion after engaging in so many years of deficit government spending when in power, making it so very hard for independents to see much difference in the two parties except in the nature of their wasteful spending.   (opinion column of Nicholas Kristof)  But I can at least understand the need for the GOP, so hungry for power, to do everything conceivable to torpedo the Obama Presidency, including putting the AAA credit rating of the U.S. government in potential jeopardy.

2. Light Bulbs: The GOP dominated House of Representatives voted to repeal the recently passed bipartisan legislation on lightbulb efficiency standards. The vote was 233 in favor of repeal and 193 against.  Since the bill was brought to the floor of the house under a rule that required a two-thirds affirmative vote, the repeal legislation failed to pass, at least for now. The NYT has a tabulation on how the representatives voted on this bill. Many of the GOP congressman who voted for the original legislation, signed into law by President Bush, voted for repeal, in what I would refer to as the typical herd mentality of GOP tribe members. NYT

Consumer reports estimates that an incandescent bulb replaced with a $1.5 fluorescent will save an individual $56 in electricity cost over the life of the bulb.  The lower energy costs could result in 30 fewer coal plants being built. ZDNet

It is somewhat difficult for me to understand the GOP position, but it has something to do with the government taking away our freedom to choose energy inefficient light bulbs that cost consumers more over the useful life of the bulb.  

2. BOUGHT 50 ZBPRA at $20 on Wednesday (see Disclaimer): I do not like this security. Notwithstanding my disfavor, it is has treated me well and I am playing with the house's money on it:

100 Shares ZBPRA 2010 Realized Gain =$1,099.21
50 Shares ZBPRA 2010 IRA Gain +$201.53
I made the 100 share purchase when the shares were being thrown overboard. Bought 100 ZBPRA at $7.8 (May 2009). The shares in the regular IRA were bought at $12.5 (January 2010).

ZBPRA is a floating rate equity preferred stock issued by Zions Bancorporation (ZION). Dividends are non-cumulative. During the Near Depression period and its aftermath, Zions lost a ton of money financing real estate developments in Nevada and Arizona, viewed as the lands of opportunity during the real estate bubble.  Zions lost $9.92 per share in 2009 and suffered losses in 2008 and 2010 as well. Form 10-K at page 22. The consensus estimate does call for a profit in 2011.

The coupon of ZBPRA is the greater of 4% or .52% above the 3 month LIBOR rate based on its $25 par value. Dividends are classified as qualified dividends for U.S. taxpayers and are paid quarterly. Given the long standing Jihad by the Federal Reserve against savers, likely to continue into 2012, the applicable rate now is the 4% minimum. The 3 month LIBOR rate would have to rise above 3.48% to activate the float provision. Still, a  qualified dividend yield of 5% is not bad in the current abnormally low rate environment.  

I have discussed this security in a number of posts and would just reference them here rather than to repeat myself.  Analysis of Prior Question: ZBPRA vs. ZBPRC OR ZBPRB (December 2009); Item # 2 Pared Trade Added 50 ZBPRC @ 25.3-Sold 100 ZBPRA @ 18.95

Zions still has government preferred stock on its balance sheet.  For the reasons discussed at Item # 7 Bought 50 ZBPRB in Roth at $19.9, Zions would have to defer paying the cumulative preferred dividend to the government in order to eliminate the ZBPRA and ZBPRC dividends.

Zions Bancorp Depository Preferred Series A (ZB.PA) closed at $20.18 yesterday.

3. Bought 30 of the REIT CWH at 24.08 Wednesday (see Disclaimer): This brings me up to 130 shares, with the last shares bought at $25.2 last October. The shares dived over 5% on Wednesday after CWH priced 10 million shares at $24. CWH Offering of 10,000,000 Common

The shares closed down $1.41 as a result of this share offering last Wednesday. CWH Historical Prices 

CWH is paying a $.50 per share quarterly dividend, which is the main reason that I own a few shares.  The REIT recently announced dividends on its common and preferred shares. CommonWealth REIT Announces Quarterly Common and Preferred Dividends The common shares went ex dividend on 7/7/11. At a total cost of $24.08 the dividend yield is around 8.3%: CommonWealth REIT, CWH Stock Quote

I have also bought and sold its senior exchange traded note, currently trading under the symbol CWHN.  Since the common provides me with more yield, and that bond is selling at a premium to its par value, I have elected to go with the common shares.   Sold 100 CWHN at $20.57  Sold 100 CWHN at 21.22 in Roth  Bought 100 HRPN at 19.32  Added 100 HRPN AT 19.15 The symbol changed from HRPN to CWHN when this REIT changed its name from HRPT Properties to Commonwealth. Some investors still might prefer the senior bond over the common shares. The common dividend can be cut. The bond has a $20 par value and matures in 2019.

Commonwealth is a large REIT owning office buildings and industrial properties.  FORM 10 for the Q/E 3/2011

CommonWealth REIT (CWH) continued to slide in trading yesterday, falling 29 cents, to to close at $23.71.

4. Google (own): Actually, to be more precise, RB owns Google shares. LB disavows any responsibility for that purchase. The OG keeps asking when will GOOG start paying a dividend.  LB said "don't hold your breath on that one".

In a SEC filed Press Release, reported that revenue for its Q/E 6/30/11 rose 32% year on year and GAAP E.P.S. rose to $7.68, compared to $5.71 in the 2010 quarter.

Non-GAAP E.P.S. was reported at $8.74. The consensus estimate was $7.84 on a non-GAAP basis according to the

Aggregate paid clicks increased 12% year over year and 6% compared to the 1st quarter of 2011.  

1 comment:

  1. "...there could have been a far more favorable outcome than a Great Depression that created the conditions for the rise of Hitler and the onset of WWII."

    "I can at least understand the need for the GOP, so hungry for power, to do everything conceivable to torpedo the Obama Presidency..."

    I hope we avoid a repeat of Germany in the 1930s, but as Voltaire said, "Those who can make you believe absurdities can make you commit atrocities."

    And, sadly, "It is not worth while to try to keep history from repeating itself, for man's character will always make the preventing of the repetitions impossible." (Mark Twain)