Friday, August 12, 2011

Rick Perry Has Come to Save Us/Obama's Stimulus Program & Infrastructure Spending/LARK/Bought 2 Windstream 7% Senior Bonds Maturing on 3/15/2019 at 96

Are we having fun yet? The excitement continued unabated yesterday as the DJIA rose 422.84 points and the  ^VIX declined over 11% to fall back below 40 once again. Perhaps, the players in this casino need a dose of what staff here at HQ administers to the Old Geezer when he becomes excitable.

On days like yesterday, I will not chase the market up. My buying yesterday was limited to two bond purchases.  It would be difficult to defend the market's recent behavior as rational. RB said that it was in sync with this market.

The OG was thinking about hiring a chimp as a market timing strategist. The OG would ask HQ's new trading guru, early every morning before the morning banana, whether the market was going up or down by 400 or more points, and the chimp would either raise a green or red card card signaling the trading instructions for the day.

What worked on the last two big down days took a hit yesterday. The ETF for the 20+ Year Treasury (TLT) lost $5.5 or 5.04% (the double short ETF for the 20+ year treasury, TBT, rose 10.05%). The ETF for investment grade corporate bonds (LQD) fell $2.33 or 2.05%. The SPDR Gold Trust (GLD) declined $3.83 or 2.19%. The Swiss Franc Currency ETF (FXF) fell $6.38 or 4.69%.

The TC PJA (own) was ex interest yesterday for its semi-annual interest payment.  PJA This TC contains a senior Qwest Capital bond maturing in 2031,  FINRA. The TC has a 8% coupon on a $25 par value. (see generally: Bought 50 PJA at 19.45). Qwest has been acquired by CenturyLink (CTL).

CISCO (owned) had a good day yesterday rising $2.19 or 15.95%. Another day like that and I will be back to even on my 100 shares.

Barrons has a favorable article on Unilever (own).  Added to UL at 18 (March 2009)

Mitt Romney certainly has fluid beliefs. Sometimes, it is not good to be so flexible that you look mushy. When he was Governor Mitt Romney, he had one set of beliefs. As a candidate running for the GOP Presidential nomination, he has entirely new set of opinions. He is of course opposed to tax increases now. When he was Governor, however, his administration told S & P that it had acted decisively to stem the state's fiscal crisis after 2001. Those measures included tax revenue increases of $1.1 billion to $1.2 billion for F/Y 2003 expanding to $1.5 to $1.6 billion in fiscal 2004; tax loophole legislation added 269 million per year in revenues, and fee increases adding 271 million yearly. WSJ CBS News A copy of his administrations presentation to S & P can be found at

Rick Perry, the Texas Governor, may throw his cowboy hat into the ring soon. CBS News What could go wrong, another Texas Governor? Rick recently proved his bona fides to the TBs by leading a prayer revival in Texas. As noted in this  CNN article, one of the True Believers at the revival was heard to say that Mormons were kind of a cult and how could the TBs vote for Mitt when a "real Christian" was running for President. A compendium of remarks from the Rick's fellow preachers at the revival might raise a question or two from the sober independents. Outlandish Beliefs

But, I am glad for one that Rick is coming to save us, and I forgive him for the remark about Texas succeeding from the union. Perry seems the ideal candidate for the TBs, better than Michelle even. He advocates the repeal of the 16th and 17th Amendments allowing for the direct election of U.S. Senators and the income tax respectively.  And the real kicker is that he favors allowing the states to opt out of Medicaid and Social Security. Texas Gov. Rick Perry  The Dallas Morning News  Apparently those thoughts are in his book "Fed Up!: Our Fight to Save America from Washington Did he really write that book?

Perry was sort of a scholar at Texas A & M, similar to W at Yale, both excelling in the letter "C".  He received a "D" in economics which may make him the TB's leading deep thinker on the economy, surpassing Michelle and even Sarah. Rick Perry's College Transcript  This is a link to his transcript: Rick Perry's Texas A&M Transcript I did not need to be told that he received an "F" in organic chemistry.  It is really hard to decide whether Michelle or Rick would make a better President.

Goldman Sachs believes that there is greater than a 50% chance that the Federal Reserve will launch QE3 later this year or in early 2012. Reuters I would not disagree with that assessment.

The FED's statement about keeping the federal funds rate near zero for two more years will cause me to buy more higher quality bonds.   

Joseph Stiglitz, a winner of the Nobel Prize for economics, believes that the best case for the U.S. is a Japan style malaise lasting for a long time. Daily Ticker YF His prescription for avoiding that result has no chance of being adopted by the GOP. Stiglitz is a liberal.

Given the government's fiscal situation, I would agree with his argument that the government needs to negotiate drug prices for Medicare (saving about 1 trillion over 10 years), to eliminate the Bush tax cuts, and to engage in  federal government stimulus provided that stimulus is limited solely to infrastructure projects.  The Democrats failed miserably in designing the 700+ billion dollar stimulus plan, including only $27.5 billion for highway and bridge construction projects and $18 billion for water and sewage infrastructure projects, which included such items as 650 million to the Forest Service, 300 million to the EPA for reductions in diesel engine emissions, and 750 million to the National Park Service.

I am not questioning the need for a stimulus plan, then or now. One of the basic problems is a lack of demand caused by consumers having too much debt. That is a long term problem likely to last for years. Another issue is that the Saving Class has suffered a sharp drop in their incomes due to the Fed's Jihad against them, likely to continue unabated for two more years. The prolonged period of abnormally low rates, near zero for short term instruments like money market funds and treasury bills (and now the 2 year treasury note), causes an overall reduction in spending by savers, a very large and important segment of American consumers including our OG and the majority of retired persons. But, to tell the truth, our OG is frugal regardless of how much money is made on investments.       

The stimulus passed by the Democrats in 2009 failed to address the long term nature of the underlying problem.  The core problem is not remedied with temporary and relatively small tax breaks. It can only be done with a large scale infrastructure build program lasting five to seven years. This money needs to be spent anyway, and now is as good a time as any.  I doubt that Congress will do anything now. I suggested the immediate passage of a 200 billion infrastructure bill funded by the closure of abusive tax loopholes and subsidies. The Need for Immediate Decisive Action

Many of the infrastructure projects build during the early years of the Great Depression are still in existence over 80 years after their construction. Some are in Middle Tennessee where I live. And that is another important consideration for concentrating on those types of projects, since the taxpayers are receiving something with a long term value for the borrowed funds.

The lessons of the Great Depression were lost on Obama and the Democrats in Congress. I did not expect the GOP members to exercise sound judgment in the 2008-2009 period.  They are incapable of dealing with this kind of crisis and that will never change. Their inability is caused by their rigid ideology, lack of critical thinking, and overall disinterest in acquiring accurate information and to process information free of their dogmas.

The Democrats are more open minded, and willing to learn, but they have a profound soft spot to relieve temporary suffering, even if their solution to temporary suffering makes the solution far more difficult and prolongs the pain unnecessarily. By literally wasting most of the stimulus money on transfer payments and tax cuts of a temporary nature, the Democrats failed to pursue the best, long term alternatives.

1. Landmark Bank (own: Regional Bank Stocks' basket strategy):   Landmark (LARK), a very small bank based in Kansas, reported net earnings of $722,000 or 27 cents cents per share in the second quarter, up from a loss of 1 million in the year ago quarter. The Board declared a cash dividend of 19 cents per share.  As of 6/30/11, NPLs to total loans was an excellent .26%; NPAs to total assets was .81%; the allowance for loan losses to NPLs was the highest among banks in my regional bank basket at 496.28%; the net interest margin was at 3.81%; boWindstream Corp., WIN Stock Quote - (NASDAQ) WIN, Windstream Corp. Stock Priceok value per share was at $21.26; and the tangible equty to tangible assets ratio was at 7.36%.

2. Bought 2 Windstream 7% Senior Bonds Maturing on 3/15/2019 at 96 Last Wednesday (Junk Bond Ladder Strategy) (see disclaimer): Junk bonds are being hit hard as concerns about the economy grow.  Windstream is a fairly large phone company that I recently discussed in connection with a 50 share purchase of its common stock. Bought 50 WIN at 12  The common yields more than this senior bond. I mentioned in that post that I would consider buying one of Windstream's bonds at below par value. The advantage of the bond is its superior claim on the assets of the company and, unlike the common dividend, the payout can not be reduced or eliminated outside of a bankruptcy proceeding (or possibly in some limited cases a recapitalization approved by bondholders).  This bond purchase may cause me at some point to sell the common stock, though I am no hurry to do that given the yield. I own 300 shares of WIN. Windstream Corp., WIN

This is a link to the FINRA information on this 2019 bond: FINRA According to FINRA, it is rated at Ba3 by Moody's and B+ by S & P.

The prospectus can be found at Definitive Prospectus. The notes are "unsecured unsubordinated" obligations. That simply means that the notes are senior and are not secured.

I realize that I am taking a lot of risk in this strategy. The alternative for me is cash yielding zero, and likely to yield zero for at least two more years, or this kind of bond which is a better quality piece of junk.

Based on my current view of the economy, and its likely course over the next year or so, I suspect that all of my junk bonds will suffer price depreciation.  The main issue is default given the relatively short maturity for most of them. I now expect at least three defaults, possibly as many as five.

My confirmation states that the current yield at my cost is 7.261% and the YTM is 7.632%.

With this bond purchase, I would hope to dispose of the common shares at an opportune time within the next two years.

I will discuss my two bond trades made on Thursday in the next post.  One of them was another Windstream bond.

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