Friday, June 29, 2012

Supreme Court Upholds Individual Mandate in Obamacare/RVT and RMT Reinvestment/GIS/Bought 1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 at 94

While I am mildly opposed to Obamacare based primarily on my opinion that it will end up costing far more than currently envisaged, I thought that the law was constitutional. Without question, Congress has the power to tax. Article I, Section 8 of the U.S. Constitution provides in unambiguous terms, except to reactionary True Believers like Sen. Rand Paul, that "The congress shall have Power to lay and collect Taxes". The U.S. Constitution Online

The majority categorized correctly the fine associated with a refusal to buy health insurance as a tax. Politicians do not want to use the "tax" label.

Initially, both CNN and Fox reported incorrectly that the Court had struck down the individual mandate as unconstitutional, NYT, proving once again that the "news" can travel around the world before the truth has an opportunity to put on its shoes.

A majority also held that the Commerce Clause did not authorize the individual mandate. This part of the majority decision was in effect a reversal of 75 years of precedent, as noted by the conservative constitutional law professor Charles Fried. NYT That part of the decision was also 5-4, with Roberts this time joining Scalia, Thomas, Kennedy and Alito in the majority. Ginsburg, Breyer, Sotomayor and Kagan dissented from that part of the opinion which, in their view, was "a stunning step back that should not have staying power".

I believed that the Court would invalidate the individual mandate provision in a 5 to 4 decision, with the 5 GOP nominees banding together to make an ideological and  political decision acceptable to their party members. Most observers believed that the only possible swing vote would be Justice Kennedy (Bloomberg).

As it turned out, the swing vote was surprisingly Chief Justice Roberts, appointed by Bush Junior, who wrote the majority opinion. (copy of decision: Supreme Court Decision on Health Care) As is now apparent, Roberts was less inclined than the 4 dissenters to overturn a law passed by the democratically elected members of Congress and signed by the President into law, and certainly more willing to strictly construe the unambiguous meaning of the Constitution.

Scalia, Alito and Thomas are "strict constructionists" only in a limited sense. Without question, they would become strict constructionists or "originalists" when deciding a case involving abortions or some other law that draws their collective ideological ire. And they would like to gradually eviscerate the scope of Congresses power under the Commerce Clause, for the purpose of rolling back progressive legislation.

In an abortion case, the so-called "conservative" Justices would show disgust and disdain about the "right to privacy" created by the liberal justices in Griswold v. Connecticut and later applied in the abortion context in Roe v. Wade.

A true Judicial conservative would have dissented in Griswold and would have joined the majority in yesterday's decision, at least in that part dealing with the Constitution's enumerated taxing power reserved to Congress. For Obamacare, those dissenters were inclined to take a pair of scissors and cut out the part of the Constitution viewed as inconsistent with their reactionary ideology. And, for true Judicial conservatives, eliminating Constitutional provisions to suit an ideology is no more acceptable than creating provisions that are not in the Constitution.

When I was in my 20s, 30s and 40s, I elected to invest the money that otherwise would have gone to paying health insurance premiums. I was in excellent health and took a chance. It worked out for the best.

I would have been mildly irked during that period by a government edict that would fine me for that personal decision. I would have accepted it, however, based on a number of factors, including the preeminent one. It was necessary to have healthy young people paying premiums if insurance companies were going to be required to insure anyone regardless of a pre-existing condition. Otherwise, a person could simply wait until they needed the insurance before buying it, and that would cause premiums to skyrocket for those participating in the plan.

{I have never been employed by an organization that pays for health insurance. I took out a health insurance for myself only a few years ago. I now pay almost $400 a month for a comprehensive medical policy with a $5,000 deductible. I have made contributions to a Health Savings Account (a GOP version of a healthcare plan for use by the well to do), which were deductible, though I have not had a reason to use those funds to pay a medical bill  I have never been hospitalized, have not even had a cold in a decade, and have no medical issues. My premium rose 23.5% last December. Based on prior experience, a 10% increase would cause me to rejoice.}

According to the latest Reuters poll, 61% of Americans oppose the individual mandate but 82% support the provision on coverage for pre-existing conditions. Opinions do not have to make any sense, particularly those that involve having your cake and eating it too. Those kind of contradictions are part of the culture, a desire to receive a benefit without paying for it which gradually becomes a right to receive something for nothing.  The same poll found solid majorities favoring other provisions in Obamacare. Largely through skilled misrepresentations about the law, Republicans have won the media battle, as most independents oppose the law while favoring its individual provisions when asked about each one. The President has done a dismal job selling this program to those Americans who are at least open to hearing his arguments.

Hospital stocks rose in response to the ruling. If most people have health insurance, one of their major expenses-bad debts- would become far less important than now. Part of that major benefit would be offset by lower Medicare reimbursement rates. HCA Holdings rose 10.8% in trading yesterday. I own two senior HCA bonds, and have no position in the common. I do own 50 shares of Health Management Associates as a LT and that hospital operator rose 9.01% yesterday. Another mild beneficiary of the Supreme Court's ruling was hospital REITs. I own 100 shares of Medical Properties Trust in the Roth IRA, which rose 3.63% yesterday to close at $9.41.

The NYT reported yesterday that J P Morgan may incur up to $9 billion in losses from the London whale trade. (I have a strong distaste for the phrase "up to". That could mean anything from $1 to $9 billion.) The WSJ now pegs the loss at $5 billion, which could go higher or lower. Reuters is using a $4 to $6 billion range. Whatever, that is more than the original estimate of $2 billion and is by any measure a disastrous trade.

Yes, of course, the Masters of Disaster know what they are doing and need to be free from any governmental restraint according to the GOP. Why you may ask, so that they can work their Nerd magic formulated by "risk models" that are frequently divorced from reality. One of their best magic tricks is cause billions of dollars to vaporize. When those billions are incinerated, the risks inherent in their carelessness and greed can then become socialized in order to avoid financial Armageddon, at least when their mistakes endanger too many large financial institutions. The result is that those who had no responsibility for, and received no benefits from the frequently idiotic schemes are required to pay for the clean up in a variety of ways. Freedom from Regulations and Irresponsibility (March 2009 Post)

I am currently reinvesting the quarterly dividends paid by RVT and RMT, two closed end stock funds that invest in small and micro caps respectively. Earlier this week, I received the shares purchased with their last dividends:

Both of these CEFs are selling at close to a 10% discount to their respective net asset values. For me, that is borderline discount for the reinvestment of a stock CEF's dividend. I will likely cease reinvesting those dividends once the discount to net asset value falls below 10% on a consistent basis.

The debt of European countries as a percentage of GDP can be found in this interactive map at

FYI, Powershares has a low volatility ETF, S&P 500 Low Volatility Portfolio (SPLV). This fund will select 100 stocks out of the S & P 500 "with the lowest realized volatility over the past 12 months". Before I looked at the holdings, I knew that the fund would be heavily weighted in utilities, consumer stables and health care stocks.

After the close yesterday, NIKE missed the consensus estimate by 20 cents for its fiscal 2012 4th quarter. I have no position.

My main taxable account actually increased in value yesterday.

1. Bought 1 U.S. Steel 7.5% Senior Bond Maturing on 3/15/22 at 94 Last Tuesday (Junk Bond Ladder Basket Strategy)(see Disclaimer): This is a new bond from U.S. Steel, issued last March. So, I was able to buy it cheaper than the original purchasers.

Prospectus for 2022 Senior Unsecured Note: Prospectus Supplement

Interest will be payable semi-annually on 3/15 and 9/15.

FINRA Information on this bond

According to FINRA, this bond is currently rated B1 by Moody's and BB by S & P.

The next call date is 3/15/17 at 103.75% (page S-11, which premium declines thereafter until 2020 when the bond may be called at 100% (page S-10) The bond may be called prior to that time subject to a make whole provision.

For the first quarter of 2012, U.S. Steel reported a net loss of $1.52 per share on revenues of $4.833 billion. Form 10-Q On an adjusted basis, net income was reported at $110 million or $.67 per share. The GAAP number included a $399M loss from the sale of U.S. Steel Serbia and two extraordinary gains of $58M and $12M after tax.

As of 3/31/12, the company had $3.802 billion in long term debt and $652 million in cash and cash equivalents. The foregoing debt number includes a 2013 senior 5.65% note, with $300 million in principal amount outstanding as of 3/31/12, that was redeemed with the proceeds of the 2022 note in April, so the overall amount of debt is now less.  As noted above, the 2022 is included in the $3.802 billion debt number as of 3/31/12.

The maturity schedule for that debt can be found at note 12, page 14. The size and maturity schedule of that debt is potentially worrisome, so I limited myself to just a one bond buy.

Morningstar has a five star rating on the common stock of United States Steel.

The current consensus earnings forecast is for an E.P.S. of $1.69 in 2012 and $3.34 in 2013. X Analyst Estimates I would not place faith in earnings estimates for such a highly cyclical company unless those analysts have been blessed with some kind of divine foresight about worldwide economic conditions in the coming months and years.

Profile page at Reuters
Key Developments page at Reuters

The company is currently paying a five cent per share quarterly stock dividend.

My confirmation states that the current yield at my cost is 7.911% and the YTM is 8.297%:

U.S. Steel 2022 Bond Confirmation
This broker includes the commission cost in the price. Whenever I mention the price paid for a security, I will exclude the commission. When calculating profits, I will include both the buy and sell commissions. Vanguard will have the bond brokerage commission as a separate item.

Common Stock Yesterday: X: 20.79 +1.05 (+5.32%)

2. General Mills (own: Common Stock Dividend Growth Strategy): General Mills reported on Wednesday its 2012 fiscal 4th quarter results. GIS reported diluted GAAP E.P.S. of $.49 on a 12% increased in revenues to $4.1 billion, with the international Yoplait acquisition contributing nine points of net sales growth. That acquisition was completed in July 2011. The adjusted E.P.S. was $.6, up 15% from the $.52 earning in the year ago quarter. The consensus forecast was for $.59 on $4.11 billion in revenues.  Reuters

For the F/Y 2013, GIS expects net sales growth in the mid single digits. Operating profits are expected to increase slightly faster than sales. Increased pension expenses and a higher tax rate are expected to reduce E.P.S. by 8 cents per share, while share repurchases will add to E.P.S. Overall, the company currently estimates F/Y 2013 E.P.S. at $2.65, lower than the current consensus forecast of $2.75.

General Mills also announced earlier this week a 8% increase in its quarterly dividend 33 cents per share. I am reinvesting the dividend.

I have traded GIS and currently own shares bought at $35.53. Although I have not bought anymore shares in the market, I intend to do so at some point, but I am not in any hurry to do so.  The long term chart provides a measure of comfort to the OG: GIS Interactive Chart

Yesterday's close: GIS: 37.80 +0.25 

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