Friday, October 28, 2011

GDP/AVY Disappoints Again-Sold 50 AVY at $27.36/Sold 50 SIVBO at $25 ROTH IRA/FFBC/Added 50 of the Bond CEF FAM at $16.08/ CBO Report on the Wealth Gap Increasing

Yesterday was a most welcomed day. I am just glad the LB did not have any hedges in place. Still, under the Unstable VIX Pattern, hedges will generally be bought when the VIX falls below 20 and will be sold when either the VIX shoots near 30 again or the formation of the Stable Vix Pattern, whichever occurs first. Vix Asset Allocation Model Explained Simply Mark Hulbert and the Use of the VIX as a Timing Model The VIX closed at 25.58 yesterday, down 14.33%.

While I like to see a five figure green number, I could not get excited about another huge government bailout fund being approved  and a 50% haircut on bank loans to the flagrantly irresponsible Greeks.  Basically, the Greek government has been rewarded for committing fraud from the time that nation first applied to join the EU until the Socialist government came to power recently.

I used the rally yesterday to sell a number of minor positions which will take several posts to discuss.

Greenspan believes that the situation in Europe is "very dangerous".  He also said the European Union is doomed due to the fundamental differences in cultures. This forecast may be too far on the pessimistic side. 

A lengthy study by the CBO substantiates the growing wealth disparity in the U.S. between 1979 to 2007.  HouseholdIncome.pdf  Warren Buffett noted that there is class warfare in the U.S., being waged by the top 1%, to increase that disparity, and they are winning. MarketWatch

The flat tax being advocated by Rick Perry will substantially increase that wealth gap, and that is the desired objective.

Did the Bush tax cuts for the Job Creators cause the creation of jobs? Were those cuts for the purpose of creating jobs?

It is impossible for the TBs to even accept that more jobs were created during Jimmy Carter's four years than under 8 years of Bush Junior. In fact, the TBs will deny that fact.  During Carter's administration, there were 10.5 million jobs created. How many under Bush with the tax cuts going to the Job Creators? This article in the WSJ compiles job data for U.S. Presidents since Harry Truman. Bush On Jobs: The Worst Track Record On Record - Real Time Economics - WSJ

I did a somewhat different analysis of the Labor Department's data. I did not believe that it was fair to credit a President with the jobs lost or gained during the first year of his Presidency. My analysis of the Labor Department's data consequently credits Bush with the jobs losses in Obama's first year, and deducts the losses during Junior's first year. Bush's first term started during a recession.  My analysis using that one change results in  -184,000 jobs after 8 years of George Bush who did everything he could do for the Job Creators.  Bush Tax Cuts and Jobs (8/10/11 Post) (see also: "Blondes" and Fox "News"/Irresponsible Fools with Power/Taxes and the "Job Creators"  7/14/2011 Post)

Anyone who mentions a study on the widening wealth gap will be accused by Larry Kudlow or Maria Bartiromo as attacking the rich and engaging in class warfare. The fact that most people in the U.S. are falling behind is not disputed by these pundits. I happened to be listening to CNBC when Maria made that simple minded statement in response to a reporter discussing the CBO report. CNBC Her net worth is estimated at 22 million with a 1 million dollar per year salary. So it is understandable that she does not want her marginal tax rate increased by a couple of percent by the Democrats and would much prefer paying a 9% flat tax as her share. The Masters of Disaster, the most overpaid doofuses in the history of mankind, certainly share that opinion. After all, they are not the kind of people who would be storming Omaha beach on D-Day.

Marc Faber claims to be an optimist. CNBC As proof, he asserts that he must be an optimist, otherwise he would have already committed suicide given the kind of governments in place today. He does believe that stocks will outperform bonds over the coming decade, a view that I share. With that comment, I am not saying that either asset class will produce positive returns adjusted for inflation and taxes.

Bloomberg reported that a nurse employed by California made $269,810 last year.

The government released its first estimate of GDP for the third quarter yesterday. News Release: Gross Domestic Product The estimate was that GDP grew at an annualized rate of 2.5% in the third quarter, compared to the second quarter. The price index for gross domestic purchases increased 2%, compared to a 3.3% increase in the second quarter. The personal savings rate decreased to 4.1% from 5.1% in the second quarter.

The treasury auctioned $29 billion of seven year notes yesterday at a yield of 1.791%.

I was pleased to hear that HP is going to keep its PC division.  SEC Filed Press Release  And, I am glad that Leo was fired, though richly rewarded for stupidity. Leo is viewed by the LB here at HQ as an idiot. The spinoff would have cost HP billions. Reuters

I was more than pleased to see the government bring criminal charges against several individuals in connection with disability benefits claimed by certain employees of the Long Island Railroad.  NYT  This is a link to the criminal complaint: Fraud Complaint Virtually all employees who retired from that railroad claimed disability benefits, partly funded by Social Security. Item # 1 Unfunded Pension & Disability at State & Local Governments. I first discussed these claims made by that railroad's employees in a 2009 post after reading the following story in the NYT that was just disgusting.

Burton Malkiel, author of "A Random Walk Down Wall Street", believes that Chinese stocks are "extremely undervalued".  CNBC

1. Sold 50 Avery Denison (AVY) at $27.36 Yesterday (see Disclaimer): I  bought 50 shares of AVY last Friday, hoping that the shares were scraping bottom. Bought 50 AVY at 25.71 On Wednesday, AVY released another disappointing earnings report and reduced guidance again for 2011. SEC Filed Press Release The company reported a GAAP E.P.S. of 47 cents, down from 60 cents in the third quarter of 2010. The adjusted E.P.S. number was 48 cents. The consensus estimate was for 58 cents. AVY also lowered its full year outlook to a range between $2.15 to $2.3 on an adjusted basis. The company expects weak demand to continue into the 4th quarter.

I am not a long term holder of AVY shares. A long term investor buying might be satisfied with a $25.71 entry price, even with the recent earnings report. I just used the pop yesterday to sell my shares at $27.36. I would consider buying those shares back at below $25.

AVY rose 9.37% yesterday to close at $27.78.

I substituted a China stock CEF for AVY that I will discuss in the next post. I bought that CEF before reading the article about Malkiel's opinion on Chinese stocks. 

2. First Financial (FFBC)(own: Regional Bank Stocks Basket Strategy): FFBC reported net income of $15.6 million or 27 cents for the third quarter. SEC Filed Press Release  However, that number included $3.4 million, or 4 cents per share, of non-recurring items such as acquisition expenses. The consensus estimate was for 27 cents. One service claimed that the consensus was 29 cents.

As previously noted in a prior post, this bank recently adopted its policy to pay out 100% of its net income to shareholders. Reuters

As of 9/30/11, First Financial's net interest margin was 4.55% (the highest so far of banks in this basket); the tangible equity to tangible assets ratio was good at 10.31%; the total risk-based capital ratio was excellent at 20.08%; the allowance for losses to NPLs was at 71.35%; and NPLs to total loans (non-covered) was above average for banks in my basket at 2.6%. The company has been growing recently through FDIC acquisitions. As of 9/28/11, 28.2% of FFBC's loans were covered by a loss sharing agreement with the FDIC. (see page 14).  

3. Sold 50 SIVBO in Roth IRA at $25 (see Disclaimer): SIVBO is a TP with a 7% coupon on a $25 par value. Trust Preferred Securities: Links in One Post The TP and the underlying security mature in 2033: I am interested in buying and holding this security when I can purchase it at a significant discount to par value. I made three 50 share purchases below $20 and held those shares for over a year before selling them near par value. Added 50 SIVBO AT $19.20 IN ROTH  Added 50 SIVBO at $19.15 Bought 50 SIVBO at $19.49 Sold 50 of the 150 SIVBO at 24.65 Sold Remaining SIVBO at $25 Snapshots of those gains can be found in the post discussing my last 50 share buy at $24.5 in the Roth IRA last September. The total LT realized gain was $788.82, as shown in those two snapshots found at that post.

 I am not interested in holding for very long a junior long term bond with a 7% coupon, when the purchase is made near par value. I decided to unload this security for a small profit plus one quarterly interest payment. I also wanted to increase my cash allocation in the ROTH IRA to take advantage of better opportunities which hopefully may arise soon.

SIVBO closed at $25.08 yesterday.

4. Averaged Down by Adding 50 of the Bond CEF FAM at $16.08 Last Tuesday (see Disclaimer): This brings me up to 200 shares in a taxable account and I also own some shares in a retirement account. With the dividends, I am close to break-even, but I have an unrealized loss on the shares that more than wipes out the dividends received so far.  Bought  100 FAM @ 17.9 November 2010  Bought: 50 FAM @ 17.37 in both Roth IRA and Taxable Account The only reason that I am close to even is that the dividend is rich and paid monthly. The current monthly dividend is 13 cents per share: FAM DISTRIBUTION HISTORY This CEF is a leveraged world bond fund that may invest up to 60% of its assets in non-investment grade bonds. FAM Fund Summary This is the credit breakdown as of 9/30/11:

This is a link to the last SEC filed shareholder report:

Morningstar currently has it rated 3 stars. A negative is that part of the dividend recently has been supported by a return of capital.  Another negative is the high expense ratio.

At the CEF section at the WSJ Market Data Center, daily NAV information can be found under the category "World Income".  WSJ  On the day of my purchase, 10/26/11, the fund closed with a net asset value per share of $17.26, a market price of $16.12, and at a discount to net asset value of -6.6%.

CEFA page on FAM.

The next ex dividend date is 11/1/11. At a  total cost of $16.08, and assuming a continuation of the 13 cent monthly dividend, the dividend yield would be around 9.7%.

FAM closed at $16.36 yesterday. 

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