Tuesday, September 6, 2011

Jobs Report: Consistent with Movement Toward Recession/Sold 50 MSFT at 26.7/Decline In Mortgage REITS

The Federal Housing Finance Agency (FHFA), as conservator for Fannie and Freddie, filed lawsuits against 17 financial institutions late Friday, claiming misrepresentations in the sale of mortgages. Those institutions include Bank of America, Ally Financial, Citigroup, Goldman Sachs, J P Morgan, General Electric, Morgan Stanley and several others identified in the FHFA's press release: www.fhfa.gov .pdf Word was leaked about these suits prior to the market open last Friday, and that led to significant losses already in the share prices of those firms.  This is a link to the filings against those firms: Federal Housing Finance Agency - FHFA (and OFHEO) Legal Filings  These are very detailed and long complaints. I just perused one filed against First Horizon (FHN). www.fhfa.gov.pdf

The value of the mortgages included in claims against BAC, Countrywide and Merrill Lynch totaled $57.5 billion, though only $6 billion of that total originated from BAC.  This is just another legacy problem originating from Ken Lewis who just had to acquire Merrill and Countrywide.  GE had the lowest total at $549 million, whereas JPM had the highest individual total at $33 billion. While it is too early to make a prediction, I would anticipate that these suits will be settled by the financial institutions buying back some but not all of the mortgages including in the pools sold to the GSEs.

I noticed at the FHFA website that the government is hiring. For "managers and experts" the salary range is $128,811 to $218,978. Federal Housing Finance Agency - Accountants

I am reinvesting the dividends paid by both of my Royce CEFs, RMT and RVT. Both of those stock CEFs were ex dividend on 9/1/11. 3Q Distributions Declared for Royce Closed-End Funds

Barrons has a favorable article on the MLP Penn Virginia Resource Partners (PVR). I recently bought a PVR senior bond. Bought 1 Penn Virginia Resources 8.25% Senior Bond Maturing 4/15/2018 at 98

A recent article in the WSJ highlights how Hewlett-Packard is scaring off its customers with its latest series of dysfunctional acts and idiotic plans. I would never make an assumption that highly compensated managers are even capable of exercising sound judgment.

Barrons also has a favorable article on GE (own). I have been buying GE shares with cash flow and currently own close to 500 shares. (see snapshot at Item # 4 ADDED 30 GE at 19.95 with Cash Flow) I am reinvesting the dividend. I am not likely to make another open market purchase with cash flow at over $15 per share.

According to a report at the WSJ, the Federal Reserve has asked BAC for its contingency plan in the event economic conditions worsen.

The Labor Department reported that no new jobs were added in August. Employment Situation Summary Job gains for June and July were revised down. I suspect that the August number will later be revised to show a job loss. Private sector jobs increased by 17,000 and that number would have been higher except for 45,000 striking Verizon employees who have since gone back to work. Government employment continues to trend down. Since hitting a peak in September 2008, there have been 550,000 government job losses. I would expect those losses to continue. Importantly, the average work week fell .1 hour and the average hourly earnings decreased three cents. When you spread those numbers over the workforce, the negative impact is significant. I would not be surprised now to see a negative GDP number for the third quarter. The U-6 number, a better reflection of total unemployment and underemployment, rose to 16.2% of the labor force from 16.1%: Table A-15. Alternative measures of labor underutilization  Based on this report, the odds of a recession occurring within the next year have increased in my opinion to about 50/50% from 40%.  Martin Feldstein says the odds are greater than 50%. Video | Reuters.com And, I would also increase the odds significantly that the U.S. has already slipped into one.

Immediate and decisive action is needed to regain momentum in the economy.  I seriously doubt that the Fed can do anything now to pull the economy out of a recession. Some have suggested that the FED could buy longer dated treasuries in order to bring down long term rates. The ten year note closed last Friday at 1.99%, the lowest yield on record. Even lower long term interest rates will only serve to hurt demand further by depriving the saving class of income.  

On the fiscal side, I doubt that the GOP will allow the Obama administration to do much, if anything, seeing a political advantage to a deteriorating economy in the upcoming 2012 election.

I also fault the Democrats for failing to design a long term stimulus program. While the $700+ billion dollar plan did stabilize the economy, and assist in an economic recovery starting in 2009, that stimulus is now gone. The economy needed a massive infrastructure build, lasting at least five years, and the Democrats totally failed in passing such a needed stimulus when they had the votes in Congress.

Both political parties are incompetent now.

I am not exactly sure why anyone would believe the GOP has any answers. Did they learn anything after 8 years of Bush and the Near Depression?  Taxes and the "Job Creators" WSJ Article: Bush On Jobs: The Worst Track Record On Record Their plan involves cutting government spending, more tax breaks for the super wealthy and corporations hoarding their cash, and abolishing the EPA in order to permit more pollution.  The S & P 500 non-financial companies have about $1.1 trillion dollars in cash on their balance sheets, Barrons. So, the thinking is that a lower tax rate for them will give them the confidence to hire, rather than increasing their cash hoard.

Possibly, the GOP's idea of a stimulus package would be to require all adults to buy a bevy of handguns and automatic weapons. Then they could abolish food stamps and require the poor to hunt for their food.

While this might not work well in the intercity, there is plenty of game here in the SUV Capital of the World.  Just the other day, I counted 26 wild turkeys foraging in HQ's front yard, illegally LB just added and with no compensation paid for grazing rights to the HK. And I have an apple tree that attracts deer, and there is an abundance of squirrels and rabbits. Though, it would be necessary to compete with the hawks for the small critters.  So there may be some merit in abolishing food stamps once the poor are taught how to hunt. The Ryan budget plan substantially reduces food stamp expenditures. Ryan Budget Would Slash Food Stamp Funding by $127 Billion Over Ten Years 

If a recession is about to happen, the current level of the stock market does not represent a buying opportunity.   The fear of the unknown will drive the market down further. There are some stocks whose prices seem to me to already reflect a mild recession.

My downside target in the S & P 500 remains 950 during the current cyclical bear market. I hope that it does not fall that low.  I do not see events in the U.S. taking the market to that level. Instead, the precipitating event is more likely to originate from Europe (see  Businessweek article for latest news on the Greek saga).

The Deutsche Bank CEO warned Monday that the sovereign debt crisis in Europe could "kill" weaker banks. CNBC In trading last Monday, Deutsche Bank AG shares fell 7.79% to close at €23.79. Royal Bank of Scotland Group fell 12.32%. Societe Generale S.A shares fell 8.64%. All of those banks were included in the FHFA's lawsuit mentioned above.

The DAX fell 5.28% on Monday.

The incoming European Central Bank President, Mario Draghi, stated that the "solvency of sovereign states should not be taken for granted".

1. Sold Last Thursday 50 MSFT at $26.7 in Satellite Taxable Account  (see Disclaimer):   I wanted to improve my cash flow into this satellite taxable account, which means substituting a bond for the MSFT common shares. The main reason for selling MSFT is that I want to hold my entire position in the main taxable account, where I am reinvesting the dividend. I will buy back the 50 shares sold whenever the price moves below $25. I suspect that this opportunity will occur soon enough which was the primary reason for selling the shares in the satellite account.  

The MSFT shares were bought at $25.55 last May, so I realized a negligible gain. On the bright side, I have never lost money trading MSFT. Since I started to buy shares again in 2009, after a long hiatus lasting a decade, my largest gain was $527.43, as shown in the snapshot found at Item # 1, Added 30 MSFT at 24.15.

2. Decline in Mortgage REITs Last Week:  Another reason for the sharp decline in Mortgage REITs, other than the prepayment risk issue, was the announcement from the SEC last week requesting public comment on matters relating to the regulation of these companies. SEC Seeks Public Comment on Asset-Backed Issuers and Mortgage-Related Pools Under Investment Company Act This announcement is discussed by Ben Levisohn in this WSJ column.  He phrases it as a "plan" to cause these companies to choose one of two bad options: keep their leverage and lose their REIT tax exempt status or lose the leverage and keep the tax exemption. That conclusion is premature.  As noted by Levisohn in another column, two analysts noted that the most likely outcome would be no significant change. WSJ  A similar opinion was discussed in this Seeking Alpha article.

Since individuals have gravitated toward Mortgage REITs due to the Fed's Jihad Against the Saving Class, any action by the SEC to undermine those companies would at least be consistent with government's policy to flagellate savers, keeping them in Money Market Hell "for an extended period of time".  Possibly, Mary realized that Uncle Ben was not causing enough pain to responsible Americans and wanted to rub some salt into their wounds. Without question, the SEC will be doing more harm than good by attacking these companies. {I met Mary many years ago when she was still attending law school. She worked for my firm during the school year}   

It is too early to draw any judgment about the impact of any rule change until an actual rule is proposed by the SEC. The SEC may do nothing after receiving comments, or may simply clarify existing rules without making any substantive changes impacting the Mortgage REITs.

However, the fact that the SEC is thinking about this issue adds an additional risk to owning these companies. I am already concerned about the fall in long term rates causing an acceleration of mortgage prepayments, thereby taking away higher yielding mortgage securities owned by these companies. I only have small positions in mortgage REITs due to their many risks. Regulatory risk, including a change in their status under the Investment Company Act, is just one among many risks and one that has just come out of the nowhere. I doubt that anyone was anticipating that SEC announcement.

At a minimum, the SEC's announcement adds a risk to owning Mortgage REITs which will keep me on the sidelines until the issue is resolved or the price corrections run deeper.  And, due to the heightened risk, I will not do anymore adds in an IRA.

I had no trades from last Friday.  I am now in a slower than slow motion trading mode. LB is In a Slow Mo Trading Mode While Preserving Recently Raised Cash Stash ( June 2011 Post). This will lead to much shorter posts, since I will not be buying much, if anything, until I have a better comfort level than now. During the initial stage of this kind of discomfort, I am content to collect and to hold onto my cash flow.  I may sell a double short stock ETF bought last week on a 5% or greater pop from Friday's close. (see last paragraph: Stocks & Politics 8/31/2011 Post)

My main decision will be what, if anything, to do about the rise in gold and silver prices that have entered parabolic territory. While I always will at least start selling into parabolic rises (Selling into Parabolas), I have never sold yet any silver or gold bullion, primarily due to the reason for owning this type of asset in the first place.

I do regret, however, failing to sell my junk silver during the period when the Hunt brothers were trying to corner the market. Silver Thursday In early 1980, I could have sold that junk silver at only a slightly higher price than now as a result of the Hunt brothers' activity.

By junk silver, I am referring to common date U.S. coins that contain 90% silver (dimes, quarters, and half dollars) minted during or before 1964, as well as common date Peace Silver dollars. U.S. Silver Coin Calculator | Coin News I put a number of those away when I was a teenager, many moons ago, when they were still in circulation. They have been in a bank safety deposit box for close to fifty years. I am not referring to the pretty American Silver Eagle coins (1 ounce), where I was buying rolls of those when silver was less than $7 an ounce. The front side of those U.S. mint silver dollars uses the Walking Liberty front.

I am almost to the point of being able to sell a 1 ounce gold eagle (proof), bought in 1988, and using the proceeds to pay all of my property taxes that are about to come due. I had forgotten that I was buying in 1988, the decades start to blend together. In 1988, 1 ounce of gold was selling at between $400 and  $480 per ounce.  Gold and silver prices are in a parabola now. The gold eagle proof coins are the most beautiful coins every minted in my opinion, using the Saint-Gaudens design. American Gold Eagle 

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