Friday, September 2, 2011

ISM Manufacturing/Decline in Mortgage REITs Linked to Prepayment Risks/Unit Labor Cost Increase/Sold 100 CZNC at 16.53/Sold 50 CPP at $24/Sold 115+ SGL at $11.51

All of the talking heads have an opinion now on the likelihood of another recession. Mark Zandi says the odds are 40% that the U.S. will have another recession within the next six to twelve months. That seems about right to me.  Roubini told Bloomberg last Wednesday that the U.S. has already entered a recession based on his numbers. I am not inclined to agree with that assessment. Jeremy Siegel places the odds at 25%. Daily Ticker

Labor costs fell 2% in 2010, the largest decline on record. Those costs are starting to trend back up. The government reported yesterday that labor costs rose at a 3.3% annualized rate in the second quarter, while productivity declined at an annual rate of .7%. The increase in labor unit costs originates from a 2.7% increase in hourly compensation and the .7% decline in productivity. Productivity and Costs, Second Quarter 2011, Revised The decline in productivity suggests that employers have wrung out all of the productivity gains from their existing labor force.

The ISM manufacturing index for August was reported yesterday at 50.6, still showing expansion, and higher than the consensus estimate of 48.5. After some really bad regional reports, I was surprised that the number remained over 50.  The new orders component remained slightly below 50 at 49.6, up .4 over July. Employment fell to 51.8 from 53.5.

Headknocker has imposed a restriction on junk bond buying starting yesterday. No more than 1 junk bond can be bought per month until further notice.

The decline in Mortgage REITs yesterday was probably due to Sandler O'Neill downgrading its dividend and earnings expectations across the board, according to an article in Barrons. There are two concerns. One is that the low interest rates will increase prepayments, thus taking away higher yielding securities from these firms. Another is that the Obama administration may try to assist underwater homeowners refinance at lower rates. I mentioned the prepayment risk in a recent post.  Stocks & Politics (8/29/11 Post).

According to a NYT story, the Federal Housing Finance Agency, the overseer for Fannie and Freddie, will soon file  suits against Bank of America, Goldman Sachs, JPM and other banks accusing them of misrepresenting the quality of mortgages sold by them during the housing bubble. (see also Reuters)

1. Sold 100 CZNC at 16.53 (Regional Bank Stocks' basket strategy)(see Disclaimer): This 100 share holding turned into an unrealized long term gain earlier this month, and I decided to harvest it.  The total realized gain was $517.61 on a $1,127.40 investment:


The realized gain for this particular basket strategy now stands at $7,896.44: Item #3 Realized Gains Regional Banks 

Profit taking was the sole motivation behind this transaction: Bought 50 CZNC at 11.77 Added 50 CZNC at 10.46  I had fortunately harvested a number of large percentage profits earlier in the year, and in 2010. Over the past several weeks, I have seen several of the remaining positions go from unrealized profits to losses, though many issues have bounced back over the past several days.  While the composition of this basket will change, I intend to stay with the strategy for at least the next five years.

Citizens & Northern closed yesterday at $15.69.

2. SOLD 50 CPP at $24 (see Disclaimer): I just bought this security at $21.4 (8/14/11). I was content to harvest that quick gain.  CPP closed yesterday at $23.9.

I am becoming somewhat nervous about Bank of America, finding myself agreeing with most of the points made by Jim Jubak in his recent MSN Money column.

I read an interesting article about the Berkshire deal written by Jesse Eisenger for ProPublica and reprinted in the NYT. He points out that the preferred stock issued to Berkshire could not be included in Tier 1 capital.  I was not sure about that point, so I researched it some. This appears to be the case. At page 3, footnote 13, the Basel I excludes perpetual cumulative preferred stock from Tier 1, while allowing non-cumulative preferred stock to be included in that category The 1998 update kept this requirement for preferred stock, page 3, footnote 2 at .pdf. The preferred stock in the BRK-BAC deal will be cumulative.

Eisenger's main point is that BAC kept claiming that it did not need capital and then does this deal with Berkshire that adds nothing to Tier 1 capital while giving BRK a ten year warrant to buy common shares at a small premium to the stock price then prevailing.

Trust Preferred Securities: Links in One Post

3. Sold 115+ of the Bond CEF SGL at $11.515 (see disclaimer): This is the bond CEF omitted from the table published yesterday since I intended to sell it.  This bond CEF went ex dividend for a large distribution of $1.0882 per share after I bought it (SGL) and later reduced its monthly dividend. Since it is selling near its net asset value now, I elected to sell my shares at near break-even. Over 15 shares were acquired through reinvestment of dividends. My open market purchase was 100 shares @ 11.71 last November.

SGL closed yesterday at $11.40 with a net asset value of $11.59.  WSJ

I had some other trades from Thursday that I will discuss in the next post. I am not doing much now other than improving my cash flow some.  

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