Wednesday, August 17, 2011

Extremism and Rick Perry/WMT/Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89/AGY/

Governor Perry is going to give our favorite Uncle Ben a Texas style whooping, "treat him pretty ugly", adding that it would be treasonous for the Federal Reserve to engage in another round of quantitative easing. He received clapping from the Iowans in attendance after those remarks. [Video] - latimes.com

After listening to Rick pontificate about economic matters, I thought about the "D" that he received in an introductory economics course, and thought that Texas A & M must have had one liberal grading curve. Rick Perry's Texas A&M Transcript

A recent poll shows that Rick Perry has a wide lead over the other GOP candidates. WSJ Perry and Michelle represent the mainstream GOP voter. I currently believe that Perry has a greater than 50% chance to win the GOP nomination for President.

Some of Rick's extremist views are discussed in this TIME article. With the GOP in control over the House and Senate, and Rick as President, most social programs and environmental laws would be at risk. The GOP has already voted for a plan to fundamentally change Medicare for those 55 or under. GOP's Plan To Bankrupt the Middle Class (discussing their Medicare plan citing the CBO and Kaiser evaluations of its costs).

Perry would clearly like to get rid of Social Security as we know it. (see this interview transcript from November 2010 where Perry called Social Security and Medicare unconstitutional: Rick Perry Newsweek Interview) His reactionary views and asserted religious zealotry will resonant well with the TBs. He should win several of the early primaries, particularly those in the South, starting with S.C. on 2/28/12 and in the earlier Nevada caucus.

In an interview at Breakout, Louise Yamada says do not buy stocks now. She believes that we have ended the cyclical bull market off the March 2009 low. Her 3 momentum indicators suggest that stocks are currently in a cyclical bear market. She characterizes the cycles now as cyclical bull and bear moves within the context of a long term secular bear market, which is also my characterization. Louise dates the start of that long cycle in 2000, whereas I start it in late 1997. Item # 2 Dating the Start of the Current Long Term Secular Bear Market (May 2010). I view this type of characterization as extremely important to individual investors.  The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets (July 2011); VIX and Trading Rules in An Unstable Vix Pattern Within the Context of a Long Term Secular Bear Market (August 2011); 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 2009); LONG TERM SECULAR BULL PATTERN 1950 TO 1966/ Long Term Secular Bear Pattern from The Great Depression (September 2009);  More on 1982 or 1974 (September 2009); The Roller Coaster Ride of the Long Term Secular Bear Market (May 2010); Long Term Stock Risks and Situational Risk (March 2009). 

Yamada also mentioned that investors also need to pay attention to the Death Cross, where the 50 day moving average has fallen below the 200 day moving average for the S & P 500. ( see also in MarketWatch on muliple "death crosses")

Among the largest infrastructure projects undertaken by the government, completed or started during the Great Depression, were the Hoover Dam, Grand Coulee Dam, the Tribourough Bridge (PBS: The Bridge to Somewhere), the Lincoln Tunnel, and the Blue Ridge Parkway.  The cost of construction for the  Lincoln Tunnel was $85 million. The winning bid for the Grand Coulee Dam was $29,338,301.  Now, name a legacy project from the $700+ billion Obama stimulus.  Those funds are just about gone, and Obama is now talking about funding an infrastructure bank.  Obama has the paved the way for a resurgence of the always powerful reactionary forces in America. 

This is a link to the article about the Public Works Administration's (PWA) construction activities in Tennessee during the New Deal period, including many structures that are still in use. Tennessee Encyclopedia

Other New Deal programs, involving large scale infrastructure builds, include the Tennessee Valley Authority and Rural Electrification. Tennessee is a public power "red" state. TVA provides the power and publicly owned municipal power systems or Utility cooperatives owned by their members distribute it. HQ sits near the dividing line for the service territories of the Middle Tennessee Electric Membership Corporation and the Nashville Electric Service. All of this type of activity, which started in the Great Depression, was part of the infrastructure build.

Back in the 1930s, most rural areas had no electricity. Private power companies found that it was too expensive to extend distribution lines to serve sparsely populated areas. The REA was formed to provide low cost loans to rural electric cooperatives to bring electric power to those unserved areas.  

A recent study found that the U.S. needs to spend two trillion dollars on infrastructure. WP And what exactly did the Democrats allocate to road, bridges, sewer and water projects in their 700 trillion "stimulus" plan. For all practical purposes, it was negligible. American Recovery and Reinvestment Act of 2009

Net outflows last week from stock mutual funds totaled $11.4 billion.

An article in the  WSJ points out that the Shiller P/E was 20.3, as of 8/12/11, well above its historic norm of 16.4. And, that is after the precipitous drop in the S & P 500 starting in the later part of July.

Most of the stocks in my Regional Bank Stocks' basket strategy have been pummeled over the past few weeks. Fortunately, I reduced my exposure to them before the downdraft, and I have realized gains from this basket of $7,378.83. Item # 3 Realized Gains Regional Banks All financial stocks have been under selling pressure for a variety of reasons. One reason is that the market has already started pricing in the possibility of a recession. The abnormally low interest rates will likely compress their net interest margins further.  Still, many of the them are now yielding over 5%, and some are currently yielding over 6%, so I may start to dip my toe back into them.  Some are even back to where they were in March 2009. While a recession is certainly possible, it is not certain. For many regional bank stocks, the market appears to be pricing in that possibility at close to 100%, when the odds might be closer to 50/50. 

I have other options to increase my exposure to financial stocks. I sold back in February a low cost Vanguard ETF for financial stocks, VFH, at $34.88, having bought those shares at 30.85 (November 2010 Post). I do not pay a brokerage commission when buying this ETF at Vanguard. This ETF has been smashed pretty good since I sold my shares, closing at $27.38 yesterday. Vanguard Financials ETF, VFH

Another ETF option is the SPDR KBW Regional Banking ETF (KRE), which has a .35% expense ratio, compared to .27% for the Vanguard  Financials ETF. Another low cost ETF has the financial stocks in the S & P 500, which would give me more of a large cap exposure: Select Sector Financial SPDRs (XLF).

I mentioned in a post from June that the financial stocks were telegraphing then a slower than consensus growth, and that was before the bottom fell out. LB is In a Slow Mo Trading Mode While Preserving Recently Raised Cash Stash A similar signal has been flashing by the pricing of investment grade corporate bonds, U.S. treasuries, and gold.

Roubini says that we are lucky that the Great Recession did not turn into another Great Depression. Amen to that one. He clearly blames Bush policies for the fiscal mess. MSN Money Video-WSJ.com I wonder how many GOP tribe members would accept any of the reasons for his opinion?  I do not know any, and I am surrounded by them.

Some 23 states have lower unemployment rates than Texas, including all of the states that border Texas.  Statesman.Com (Austin newspaper) Texas also has by far the largest amount of workers employed at or even below the minimum wage. Minimum Wage Workers in Texas - 2010   CNN.com

Ezra Klein details the gimmicks used by Rick Perry to close a 27 billion dollar budget gap, in addition to spending cuts for education.

Stock markets fell yesterday after a report was released showing that GDP growth in Germany and the EU27 slowed to a crawl in the second quarter.  EUROPA - Press Releases - Flash estimate for the second quarter of 2011 Euro area and EU27 GDP up by 0.2% +1.7% in both zones compared with the second quarter of 2010 Germany GDP was up only .1.

1. Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing on 1/15/2017 at 89 Last Monday (Junk Bond Ladder Strategy)(see Disclaimer): R.R. Donnelley & Sons Company (RRD) is a printing company whose shares are publicly traded. The current consensus estimate, made by 5 analysts is for an E.P.S. of $1.88 in 2011.

RRD is highly leveraged, and its debt was downgraded from investment grade to junk a few months ago.  According to FINRA, the 2017 senior bond is rated Ba1 by Moody's and BB+ by S & P, so a higher grade of junk than most of the bonds in my junk bond ladder strategy.

Prior to the junk bond selloff in late July and early August, this bond was trading near its par value.

As with all of these junk bonds with relatively short maturities, I am more concerned about the credit risk than interest rate risk.  If RRD survives to pay me the $1000 principal amount for this one bond, then I am not concerned about declines in price.

Prospectus: Final Prospectus Supplement

The common shares did decline after RRD released its last quarterly report.  Press Release Dated August 3, 2011

My confirmation states that the current yield at my cost is 6.82% and the YTM is 8.515%.  Some of these better quality junk bonds have fallen recently, making their yields someone enticing when the alternative is to keep a cash stash earning nothing in a money market fund. If this bond approaches its par value, I may elect to sell it.

2. Wal-Mart (own: Large Cap Valuation Strategy): I have been moving into and out of WMT shares. The general tendency is to buy shares in the low 50s and then sell them on a pop. I currently own 100+. ADDED 50 WMT at $52.68 (July 2011); Added 50 WMT at 52.21; Item # 1  WMT and the Large Cap Valuation StrategyBought 50 WMT at 53.52 (December 2010); Sold 1/2 WMT at 56.17 (May 2011)

Walmart announced  FY12 second quarter EPS from continuing operations of $1.09 yesterday on revenues of $108.6 billion. E.P.S. increased 12.4% over the F/Y11 second quarter results of 97 cents.

WMT raised its full years E.P.S. guidance to $4.41 to $4.51. The current estimate if for $4.46.  U.S. same store sales fell for the 9th straight quarter, declining .09% ex fuel, more than anticipated by analysts. Whatever WMT is doing to improve that number is not working. WMT projects an E.P.S. for its F/Y 12 third quarter in a range of $.95 to $1. The consensus is for $.97.

While the Walmart U.S. stores stagnate, international operations reported a 16.2% increase in the quarter, but that increase was juiced by currency exchange. Sales in the in the international division rose 7.1% on a constant currency basis.  And Sam's club did show a 5% improvement in same store sales without fuel.

This is a link to an article from MarketWatch discussing what analysts expected from this report.

WMT closed at $51.92 yesterday, up $1.94.

3. AGY Holdings (own: Junk Bond Ladder Strategy): AGY reported a net loss of $6.12 million on total sales of $50.519 million, roughly flat with the year ago revenues. : Form 10-Q The company claimed adjusted EBITDA of $5.526 million.  I own just 1 bond and will not buy another one.  

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