Wednesday, November 23, 2011

Earnings: HPQ MDT/U.S. GDP/International Swaps and Derivative Association-Greek Government Debt: Another Example of Rot/

Spain sold three month bills yesterday at a 5.22% yield. The yield on those bills, auctioned in October, was 2.35%.

The U.S. sold 5 year treasury notes at the lowest yield on record. With the original interest discount (O.I.D.), the yield on those notes was .937% (coupon .875%).

The government revised its estimate for third quarter real GDP from 2.5% to 2% on an annualized basis. News Release: Gross Domestic Product

I sold my double short stock ETFs during the market decline yesterday. I use those securities only on a short term basis to cushion the initial impact of a market decline. I am now down to two, recently purchased triple short stock ETFs. My primary hedge technique for my stock allocation is to sell stocks, which I have already done. I am at my minimum allocation now.

The market may have a snapback rally soon but maybe not today. The HSBC PMI manufacturing survey for China was reported last night at 48, a 32 month low, which is a number indicating contraction.

The S & P 500 closed at 1188.04 yesterday, a 6.89% decline since the 1275.92 close on November 8th. The decline since October 28th is 7.55%.  With another 3% decline, I am likely to sell the triple shorts.  The proceeds from these sales are simply increasing my oversized cash allocation earning nothing in money market funds.

With rot being so pervasive in the financial services industry, it is relatively easy to find an example on a daily basis.  Over the weekend Greta Morgenson discussed an example in her NYT column. That column relates to the decision by the International Swaps and Derivative Association (ISDA) that the 50% haircut on Greek government debt was voluntary, and therefore the owners of credit default swaps on those bonds would not be able to claim a default.  This is a canard when the banks that own that debt are having their arms twisted to accept that "voluntary" haircut by their respective hosts government. If the owners of credit default swaps could collect on that insurance for what is in fact a default, the recapitalization could easily fail since many would elect to keep their bonds and collect on the insurance.

Greta highlights another issue that shows the odor emanating from the ISDA. The French bank, BNP Parabas, has been hired by the Greek government to "persuade" owners to "voluntary" tender their bonds. This bank will receive a fee for each such tender. A BNP official discussing this matter with bondholders in a "forceful" manner is a member of the ISDA that determines what events trigger a default under a credit default insurance. The shenanigans are non-stop. 

I have no direct financial interest in this matter. I do have an indirect interest as do other investors. Basically, the European governments and ISDA are telling bondholders that they can not protect themselves by buying credit default insurance, even in an obvious default case like Greek government bonds. If a large institutional investor can not hedge themselves with credit default swaps, then they would be less likely to keep those sovereign debt bonds on their balance sheets. This could then trigger a wave of selling, and no buying of sovereign debt issued by the PIIGS, that would end up severely aggravating the problem. The press has been filled with articles about banks and other institutions selling European sovereign debt after the ISDA rendered its decision on Greek government debt.

The bankruptcy trustee in the MF Global proceeding said that he did not have control of $1.2 billion in what should have been in segregated customer accounts.  Bloomberg  NYT In short, a lot of money has gone missing.

Herman Cain said in a recent interview that he is "not supposed to know anything about foreign policy".  He would rely on the generals to tell him what to do. What happens if the generals disagree? CNN

Warren Buffett recently pointed out that the effective tax rate on the rich averages around 17%. An article in Bloomberg focuses on how some Job Creators reduce their tax liabilities even further using complex transactions.

On Monday, Moody's warned that a continued rise in France's borrowing costs, along with weaker growth, could threaten that nation's "AAA" rating. As of 2010, France's debt as a percentage of GDP was at 82%.

Germany's debt as a percentage of GDP was 83% in 2010, according to information found at Reuters. The Bundesbank reduced its forecast for 2012 German GDP to .5% from 1.8% last Monday.

This is a link to the 25 worst passwords for 2011: Minyanville

United Bankshares (own) increased its quarterly dividend to 31 cents per share, the 38th consecutive year of dividend increases. Bought 50 of UBSI at $16.56. UBSI closed at $24.65 yesterday, up $1.03 for the day. UBSI  Quote

1. Hewlett-Packard (own)(Large Cap Valuation Strategy): I am not pleased with HP. The recently fired CEO was viewed here at HQ as an idiot. The frequently idiotic decisions made by the HP Board over the past few years seem to be solely designed to destroy shareholder value.

I had traded the shares profitably until my last re-entry, which is a good example of LB going to the well one too many times.  Headknocker is now a long term investor reinvesting the dividends to buy additional shares. Long term in this context means years, not months. HK mentioned that he did not want to be a long term investor in this stock and wanted to know which lame brain bought it.

In the market decline on Monday, HPQ fell -1.13 to close at $26.86. After the bell, HPQ reported adjusted earnings per share of $1.17 on revenues of 32.1 billion for its 2011 4th fiscal quarter.  SEC Filed Press Release The consensus estimate was for an E.P.S. of $1.13 on revenues of $32.05 billion. For the first quarter of F/Y 2012, the company expects non-GAAP E.P.S. of $.83 to $.86 and GAAP E.P.S. of $.61 to $.64.  For the full 2012 F/Y, HPQ expects non-GAAP E.P.S. of "at least $4.00."  The consensus estimate was for a Non-GAAP E.P.S. of $4.84. The guidance for the 1st quarter is well below the consensus estimate of $1.11.

Consumer hardware printing revenue fell 8% year over year. Revenues for the imaging and printing group fell 10% year over year.

The personal systems group revenue declined 2% year over year. There was a modest 2% increase in revenues from the enterprise, storage and networking segment.

 Hewlett-Packard closed at $26.65 yesterday, down 21 cents.  

2. Medtronic (own)(Large Cap Valuation Strategy): I am on automatic pilot to buy back the MDT position sold earlier this year. SOLD 209 MDT AT 40.68 Given my negative macro views, I have been more than a little hesitant buying back those shares. So far, I have bought back only 30 shares last August at $33.4. I do not have a target price for the next lot, though I would prefer to buy at below $32. I will not start reinvesting the dividend until I own 100 shares and will stop that reinvestment whenever the price consistently goes over $40.

For its second fiscal quarter, MDT reported an adjusted E.P.S. of 84 cents on a 3% rise in revenues to $4.132 billion. SEC Filed Press Release

Medtronic stock responded positively yesterday to this report, rising $1.48 to close at $34.75.

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