Friday, November 18, 2011

MOL/Sysco/Gingrich and the Blackhole Freddie Mac/ADX/European Sovereign Debt

Doug Kass tries to make the case of the double short ETF, TBT, in his column at TheStreet.  TBT is the double short ETF for the long U.S. treasury bond (20+ years). He believes that the flight to safety move is nearing an end.

I would just add a couple of points. In my lifetime, possibly within the next five years, investors will dramatically change their opinion about the safety of U.S. government debt. There will be a flight from that debt, similar to what is being seen now in Europe. However, it is impossible to predict now when that transition will occur. It may occur suddenly and without much, if any warning, preceded only by gradually increasing yields at the auctions.

The other point is that investors will continue to flee to U.S. treasuries when they become worried and scared about other asset classes, as now, firmly believing that the bonds issued by our destitute Uncle Sam, aided by a freewheeling money printing machine running at full tilt, are "safe", notwithstanding the budget deficits siphoning off the world's capital at a rapid clip (trillion plus dollars annually), and an abundance of politicians unable and unwilling to do what is necessary to stem the crisis before it blows up in our collective faces which I view as inevitable.  It is only a question of when.

I mentioned in an earlier post this week that many Americans blame the free press for the nation's problems. If only the NYT and other mainstream media outlets would cease to exist, all of our problems would be solved after everyone formed their opinions in lockstep with those uttered by the faux blondes at Fox. It is hard to make that statement without a load of sarcasm.

Perhaps some of the TBs would recognize another possible source of our problems, the fact that so many politicians increase their wealth while representing their constituents, and then acquire really serious money after leaving Congress to become lobbyists. I suspect that the interest of the average citizen becomes lost somewhere in that shuffle. (see information on revolving door at Revolving Door | OpenSecrets). Members of both parties are part of that lucrative revolving door.

New Gingrich was put on a monthly retainer of $25,000 to $30,000 per month by the black hole Freddic Mac soon after leaving Congress in 1999. Altogether, Gingrich was paid between $1.6 to $1.8 million by this incinerator of borrowed government funds. Bloomberg

According to a recent Fox poll, Gingrich is now leading the pack for the GOP nomination. USA Today Apparently, while being outraged about Clinton's marital indiscretions, the GOP has moved on when it comes to Newt's issues in that department. Christian Science Monitor

Both Romney and Perry have both asserted that Obama recently called Americans lazy. Both have to know that their statements on that point are misrepresentations by them. That article from FactCheck quotes Obama's statement in its entirety which clearly shows that both Perry and Romney are deliberating distorting it. Lying works in American politics because so many voters chose to remain uninformed or misinformed. Perhaps that is another source of our problems, along with the relative ease of spending borrowed money.

Spain's auction of ten year notes yesterday was at the highest yield since 1997. Italy has to refinance 273 billion dollars of bonds between now and April 2012. Randall Forsyth notes that the natural buyers of European sovereign debt have fled, leaving the ECB as the buyer of last resort. The question now is whether Germany will capitulate and allow the ECB to print money to buy that debt.  I am not sure why Germany, given its history, would capitulate on this issue.

Italy 10 Yr: IT 10Y Govt Bond Benchmark
Spain 10 Yr: 10YR_ESP Bond
France 10 Yr: FR 10Y Govt

(see Video at

France sold yesterday €3.33 billion in notes due in July 2016 at a 2.82% yield, up from 2.31% at the last auction.

Adams Express (owned), a stock closed end fund, was ex dividend for its year end distribution yesterday. The total amount was 50 cents per share. Of that amount, forty two cents was a long term capital gain distribution. I am reinvesting the dividend. After adjusted for the 50 cent dividend, ADX shares fell 21 cents in trading yesterday.

1. Sysco (own common-SYY)(Common Stock Dividend Growth strategy)Sysco increased its quarterly dividend by one cent to 27 cents per share. This represents only a 3.8% increase, well below SYY's historical rate as discussed in Item # 4 Sysco. This is not surprising since SYY's earnings growth rate has slowed too.

Earlier this month, Sysco reported an adjusted E.P.S. of 55 cents per shares for its Q/E 10/1/2011, up 7.8% over the adjusted number in the year ago quarter. The current consensus estimate is for an E.P.S. of  $1.97 for the F/Y ending June 2012 and $2.14 for the 2013 F/Y. If those numbers are hit, the rate of growth year-over-year would be around 8.6%.  

My purchase was at $19.46 in March 2009. At my constant cost basis, my dividend yield goes up with every raise. The yield with the latest raise would be about 5.54% at a total cost of $19.46. If the rate of growth does not increase to over 5% by 2013, I will seriously consider selling those shares. 

In 2009, the annual dividend rate was 96 cents, up from 23 cents in 1999. At a 3.8% annual increase, it would take over 18 years to double. That is way too slow. I understand SYY's problems now, with energy and food inflation, so I will cut it some slack.

2. MOL (own): MOL ended its annual coupon period on 11/17/11 and will pay its minimum 2% coupon on 11/25/11 after suffering a maximum level reversion back in June: Item # 4 MOL. This security is an unsecured senior note issued by Citigroup Funding and guaranteed by Citigroup as provided in the prospectus.

MOL pays annually the greater of 2% on a $10 par value or the percentage increase in the price of gold up to 19% with the following important caveat. If the P.M. London gold fix is above 19% for a single day during an annual period, then the owner of MOL will receive the 2% coupon no matter where gold closes at the end of that annual period.   MOL Prospectus

The P.M. London gold fix yesterday was $1742.5 per ounce. Past Historical London Fix That is the starting value for the current annual period which ends on November 19. 2012. The maximum gold price for MOL's current coupon period is $2,073.57. If the P.M. London fix is greater than that amount on a single day during the current annual period, then MOL will again pay its 2% minimum, assuming Citigroup Funding and Citigroup are still solvent at that time.  

I currently own only 100 shares of this $10 par value note after having sold 100 shares. Bought 200 MOL at 9.95 Sold 100 MOL @ 10.3 November 2010

I prefer the other Citigroup Funding exchange traded unsecured note, MTY, that has a 3% minimum and a 35% maximum. That preference is not due to the higher minimum payment but to the significantly higher maximum allowable gain. The higher amount also gives the security more leeway to run without triggering the maximum level reversion.  I own 200 MTY. (MTY Prospectus: Final Pricing Supplement) I added 100 a few weeks ago: Bought 100 MTY at $10.03 MTY also has a $10 par value and matures in 2014.

I am coasting until the end of 2011. My stock allocation is already at a minimum level, and partially hedged. My cash allocation is very high. While I would prefer to see the market rise from today's level, I am in a position to take advantage of a significant decline. 

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