Monday, August 20, 2012

VIX Asset Allocation Model Update/LEAP/EARNINGS: CSCO, AMAT, First Data/Bought 200 RMT at $8.81 in Roth IRA/Sold 50 FPCPRA at $26-Roth

S & P raised the credit rating on the Leap Wireless subsidiary Cricket Communications last week TEXT-S&P Cricket's senior unsecured debt was raised to B- from CCC+. The recovery rating was raised to a 3 from a 5, which indicates a 50% to 70% recovery in the event of a default. I own one Cricket bond. Bought 1 Cricket Communications 7.75% Senior Note Maturing on 10/15/2020 at 96.5 (June 2011)


The current alternative to traditional Medicare is called the Medicare Advantage program which is heavily subsidized by the federal government and is offered by private insurance companies. As you would expect, the Republicans under Bush Junior promoted this alternative as a way to save the federal government money. Medicare Advantage - Wikipedia It has not worked out that way however.

The cost per patient is 14% more than traditional Medicare. A publication by the Kaiser Family Foundation, an unbiased authority on health issues, shows this information at figure 3 ‎ Similar numbers come from the non-partisan Medicare Payment Advisory Committee. Free Perks With Medicare Advantage Plans Aren't Really Free. (link to government's website on Medicare Advantage Plans |

The members of the all girl band "Pussy Riot" were given a two year prison sentence for "hooliganism". Their crime was singing a "profane" song requesting the Virgin Mary to rid Russia of its 21st Century Czar Vladimir Putin. The NYT has Youtube links to their arrest and to the video.


Closing Price for the ^VIX: 13.45 -0.84 (-5.88%) last Friday. This is the lowest close in five years.

Doug Kass stated recently that it would "rarely" be a buying opportunity when the VIX was at 14.  That is simply incorrect as I mentioned in the last post. The investor has to place the number in context. Since the formation of the Unstable VIX Pattern in August 2007, a decline in the VIX below 20, and particularly below 15, would be a signal to sell or pare long positions and to establish hedges. A fall below 20 would be short lived, usually a few weeks, and then stocks would start to decline again and the VIX would shoot back up into the 20s or higher. That is the defining characteristic of the Unstable Vix Pattern-Phase 1. Vix Asset Allocation Model Explained Simply

Historically speaking, there will eventually be a continuous movement below 20 that will form the Stable Vix Pattern, a pattern consistent with the onset of a powerful stock market rally lasting several years. Once that pattern forms, almost all movement in the VIX is below 20, possibly with temporary and very infrequent moves slightly above 20, until there is a major disruption in that cycle, which I call a Trigger Event, where the VIX shoots up into the high 20s, staying at that level for several days, as something in the world has spooked stock investors in a major way. You could look at the VIX chart from 2007 and tell when something important and adverse was happening in the world. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern

When there is a transition to the Stable Vix Pattern from the Unstable VIX Pattern, the VIX will continue to fall below 20 toward 15 and then below 15.  Historically, when that movement continues for 3 months, the Stable Vix Pattern signal is given and then the model is predicting a much stronger up move with minimum volatility. Then, the movement to 14 is not a sell signal but a long term buy signal. Kass is just wrong in making such a categorical statement.

VIX and S & P Compared 1990 to 1997
Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2

A Stable Vix Pattern was formed in early Spring 1991. The S & P was at 373.5 on 3/14/1991. The Trigger Event occurred in October 1997. VIX Historical Prices (10-11/1997) The move back to below 20 in February 2008 provided the opportunity to sell. VIX Historical Prices (2/1998) The S & P was near 1050 in February 1998. ^GSPC Historical Prices

The Unstable VIX Pattern would last about 6 1/2 years after the first Trigger Event. When the Stable VIX Pattern emerges again, starting in March 2004, the S & P 500 is basically unchanged from that February 1998 level, though it had moved considerably lower during the Unstable Vix Pattern period.

This is a snapshot of the Vix movement as it formed the stable pattern in 1991. I would urge the reader to go to March 1991 historical prices and just keep clicking forward. It just keeps moving below 20 with an occasional print above 20. By December 1992, the movement is down around 11-13.

Vix  Forming a Stable Vix Pattern
Starting  March  12, 1991  
^VIX Historical Prices

The same kind of movement started in March 2004: ^VIX Historical Prices Once again, there was a clear formation of a Stable Vix Pattern with a number of closes below 15 starting in mid-June 2004.

By August 2004 there was continuous movement below 15. In the context of the Stable VIX Pattern, this would be the most bullish signal so far in this cycle. ^VIX Historical Prices The S & P was hovering near 1000 when the VIX started moving below 15, ^GSPC Historical Prices. As previously noted, the Trigger Event occurred in August 2007, with the opportunity to lighten up in October 2007 when the VIX fell back below 20. The S & P 500 was trading at over 1500 in October 2007.  ^GSPC Historical Prices

The model is agnostic on the duration of the up cycle. Historically, there would be several years after the formation of the Stable Vix Pattern before the next Trigger Event. It is possible for something to disrupt the Stable Vix Pattern sooner. Basically, the model is just saying that conditions are ripe for a multi-year up move in the market with low volatility. Investors are less fearful and worried about whatever was causing them to be so jumpy and are now comfortable again with stock risks.

While the VIX has been moving below 20 (with one minor exception) since June 25, 2012, the market is still in an Unstable VIX Pattern. The movement below 15 may be signaling now a selling or a buying opportunity. If the movement below 20 continues to around September 25, 2012, then the movement below 15 would in retrospect be a long term buy signal, at least until the next Trigger Event.  If the VIX pops back into the mid to high 20s before 9/25/12, or starts to have continuous movement above 20, then the Unstable VIX Pattern continues, and the movement below 15 was a short term selling opportunity.

1. Cisco (own): I started to trade CSCO shares after the price crashed, which is also true for Applied Materials, discussed below, and Microsoft. While Cisco shares are tempting from a valuation perspective, investors are having difficulty seeing earnings growth, as shown by the consensus earnings forecast. CSCO Analyst Estimates For the F/Y ending July 2012, the consensus E.P.S. forecast before the latest earnings report was $1.83 and $1.91 for the next fiscal year. That 4.37% forecasted E.P.S. will not excite most value investors, and the growth crowd have already abandoned ship.

For its 4th fiscal quarter, Cisco reported GAAP E.P.S. of 36 cents and 47 cents non-GAAP on a 4% increased in revenues to $11.69 billion. SEC Filed Press Release

The consensus forecast was for 45 or 46 cents, depending on the service compiling the estimate, on $11.6B in revenues.

Cash flow from operations was $3.1B. Cash and cash equivalents stood at $48.7B. Cisco repurchased 108M shares during the 4th fiscal quarter at an average price of $16.62 per share.

Cisco raised its quarterly dividend by 75% to 14 cents per share from 8 cents. I am reinvesting the dividend.

Cisco's E.P.S. projection for the current quarter is 45 to 47 cents, in line with the 46 cent consensus estimate.

I currently own 100+ shares bought in two 50 share lots: Bought  50 CSCO @ 19.55 November 2010;  Bought Back 50 CSCO at $19.95 February 2012 At least those prices are better than the $77 price tag hit in 2000. CSCO Interactive Chart The OG, even when he was a younger OG, would never be caught up in the Madness of Crowds.

Prior to those purchases, I was content trading the shares for small profits.  Bought 50 CSCO at $22.45 June 2010-Sold Cisco August 2010: Bought CSCO at 20.39 September 2010-SOLD 50 CSCO @ 24.42 November 2010;  Added 50 CSCO at 18.75 February 2011-Sold 50 CSCO at $20.4 February 2012 (satellite taxable account). At least I did not lose anything with those trades. I am not much of a technology investor.

2010 CSCO 100 Shares +$247.64
This earnings report is discussed in article found at BloombergMarketWatch and Reuters.

Stock Quote: Cisco Systems 

2. AMAT (own): I am even less adventuresome with AMAT than CSCO. I currently own 80+ shares and I am reinvesting the dividend for some reason that is not entirely clear. My last purchase was not a vote of confidence.  Added 30 AMAT at $10.99 I am slightly under water.

Previous to acquiring my current position, I flipped 200 shares for a total profit of $84.24 back in 2010, which were my first ever transactions in this stock.

I am content holding this small position and may add up to 50 more shares provided I can buy them at less than $10. After the earnings report, Susquehanna Financial downgraded AMAT to "negative" from neutral, expecting the price to fall into the high single digits. Barrons

Applied Materials reported earnings of 24 cents per share on a 16% decline in earnings. The comparable number for the year ago quarter was 35 cents. For the current quarter, AMAT expects adjusted earnings to be between break-even and 6 cents. The consensus forecast was for 12 cents per share

3. First Data (own 1 senior subordinated 2015 bond: Junk Bond Ladder Strategy): For the second quarter, First Data reported a net loss of $157.4 million, down from $175.8M in the 2011 second quarter.

As of 6/30/12, the company had $483.5M in cash and long term debt of $22.514+B, mostly due to a private equity leveraged buyout that turned this viable company into an over leveraged one whose future is dependent on refinancing its huge debt load. The company had not made progress paying down the debt incurred in connection with that leveraged buyout. A recent offering was $1.3B in a 6.75% senior secured note maturing in 2020.

10-Q for Q/E 6/30/12

In the event of a bankruptcy, I would not expect the senior subordinated bond to be worth anything. I have therefore assigned it a risk rating of 10  in my Personal Risk Ratings For Junk Bonds.

4. Bought 200 RMT at $8.808 Roth IRA (see Disclaimer): I sold a TP held in the ROTH IRA, summarized in Item # 5 below. In its place, I bought 200 shares of the closed end stock fund Royce Micro-Cap Trust (RMT) which invests in micro-cap stocks, as do I.

I currently own 651+ shares of RMT in a taxable account.

RMT is currently paying a quarterly distribution of 13 cents per share. During the Near Depression, all of the Royce closed end funds quit paying dividends, a decision that I supported since a return of capital has no advantage to me and that approach can be destructive of shareholder value over time.

At a total cost of $8.81 and assuming a continuation of that rate, the dividend yield would be about 5.9%. I could receive more depending on the total realized gains for the year.  I am not giving up much income compared to FPCPRA. I do not view FPCPRA as having any meaninfgul upside potential over $26, whereas RMT does, provided of course the market enters one of those longer term secular bull markets.

I will hold some dividend paying stock CEFs in the ROTH IRA, usually for several years. I can wait for an opportune time to sell the shares.

On 8/15/12, the net asset value was $10.15. Based on a closing price that day of $8.82, the discount to net asset value per share was -13.1.

Morningstar page for Royce Micro-Cap Trust 

Closed-End Fund Association page on RMT

‎SEC Form N-Q for the period ending 3/31/2012 (list of holdings)

‎2011 Annual Report

{a return of capital can have two potential advantages in a taxable account.There is no tax on that part of the dividend received as a return of capital, but that amount reduces my cost basis. In that sense, the amount is just tax deferred until I sell the security. When the tax rate on dividends is higher than the tax rate on long term capital gains, which is not the case now, I could in effect turn higher taxed dividends into the lower taxed long term capital gain by selling the security after a one year holding period. This could become relevant particularly when dividends are taxed at my highest marginal rate, which has been the case for most of my life, and the long term capital gain rate is significantly lower than that highest marginal rate. It is possible that the tax rates for dividends and long term capital gains will diverge again next year or soon thereafter depending on the outcome of the upcoming election and those in the future. The second example of a benefit would be to hold the security until I die. If Uncle Sam allows my heirs to step up the tax cost basis to fair market value at the time of the OG's demise, then the return of capital issue could go from a tax deferral issue to a legal tax avoidance, depending of course on the price of the security.}

Some investors will look at a fund in their account and conclude that it is a dud based on the profit reflected in the shares. The correct approach is to look at the unrealized profit or loss from the shares, including those bought with dividends, plus the total amount of dividends. The sponsor's website, and other financial websites, will compute for you the average annualized returns.

The closing price on 12/15/1993 was $6.87 per share. YF calculates the adjusted price, which subtracts subsequent dividends, at $2.04. RMT Historical Prices

The annualized return of RMT since inception on 12/14/1993 through 6/30/12 is 9.15%. The five year return is a negative -4% for the obvious reason. Royce Micro-Cap Trust (RMT)

Stock Quote: Royce Micro-Cap Trust (RMT)

Last Friday, RMT closed with a net asset value per share of $10.37. Based on a closing price of $8.94 on 8/17/12, the discount to net asset value was -13.84 at that time.

5. Sold 50 FPCPRA at $26 Last Wednesday-Roth IRA (see disclaimer):  When SUSQ redeems my 80 shares of SUSPRA in September, I will no longer own any TPs. FPC Capital I 7.10% Cum. QUIPS Series A (FPC.PA) was ex interest for its quarterly distribution on 8/10/12. I will receive that distribution. And, I exited this position at a profit after collecting several interest payments, which was my modest goal.

Stock Quote: FPC Capital I 7.10% Cum. QUIPS Series A

I took a snapshot of cash flow into the Roth IRA on 8/15/12, which includes the last interest payment from 50 shares of FPCPRA.

Cash Flow Roth IRA 8/15/12
Please note the $.85 monthly interest payment from 50 shares of the Synthetic Floater GJR, which has no minimum coupon, and the $31.15 quarterly interest payment from 150 shares of the synthetic floater GYB which has a 3.25% minimum coupon on a $25 par value.

The two synthetic floaters that I own in this account, which pay monthly, are GJT and GJR, both 50 share positions, and neither will pay much until there is a significant rise in the three month treasury bill rate. This may not happen until 2015. GJR pays .7% over the 3 month T bill rate, up to a maximum of 7.5%, and the underlying security is a senior Proctor & Gamble bond maturing in 2035. GJT has a senior 2036 Allstate bond as its underlying security and pays .8% above the 3 month treasury bill rate, up to a maximum of 8% on a $25 par value. The three month treasury bill might as well be zero now. When looking at this kind of security that just pays a float over a treasury bill rate, I will assume a zero percent 3 T Bill rate for at least two years from now. Those securities will look better when the 3 month treasury bill returns to a more normal level which I would define as being between 4%-5% using historical data going back to 1980. Last Friday, the the three month treasury bill yield was at .08%.  Chart  Historical interest rate data can be downloaded into excel from the Federal Reserve's website: FRB: H.15 Release--Selected Interest Rates--Historical Data

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