Monday, September 10, 2012

JOBS, INTEL Warning, China Infrastructure Spending/Closed End Portfolio Table as of 9/7/12/BOUGHT 1 U.S. Steel 7.5% Senior Bond Maturing in 2022 at 98.95/Sold 150 KFN at 9.78/Sold 50 of 100 LIT at $14.74

The jobs report was another downer that deflated the animal spirits some last Friday. Total nonfarm payrolls increased by only 96,000 in August. Employment Situation Summary The consensus estimate was for 125,000. The U-6 number decreased to 14.7 from 15. Table A-15. Alternative measures of labor underutilization Both the June and July payroll numbers were revised down by a total of 41,000. Average hourly earnings fell by one cent, another bad sign. I would agree with Morningstar's Bob Johnson that this report doesn't quite add up. The government may not be picking up new jobs at start ups and small firms that ADP is including in its jobs report since that company is handling the payroll. ADP is showing much better private sector job growth than the government.

The unemployment rate did decline from 8.3% to 8.1%, but that was due to a 369,000 shrinkage in the labor force. Of that number, 226,000 quit looking for jobs and dropped out of the labor force.

This report may be enough to provoke the Federal Reserve to launch QE3 at its meeting next week. With short term rates near zero, and the ten year treasury note at 1.672%, it is difficult to imagine what tangible benefit to the economy will emerge from another Fed bond buying binge. The past two quantitative easing programs did cause a spike in asset prices (stocks, commodities, and gold). An article in USATODAY published on 8/31/12 identifies some asset classes that did well after the Fed announced QE1 and QE2.

Late last week, China approved several new infrastructure projects involving highways and rail construction initiatives. By one count, the plan encompasses 60 infrastructure projects at a total cost of $157B.

Material stocks rallied late last week. I recently bought 50 shares of Vale at $15.9 (August 31, 2012 Post). Those shares have rallied strongly: VALE: 18.03 +1.14 (+6.75%). I tried to pick up 50 shares of a new ETF, iShares MSCI Global Select Metals & Mining Producers Fund (PICK) early last week on two occasions, but my limit order was not filled at $18.75.  The ETF quickly moved out of my buy target range: PICK: 20.72 +1.14 (+5.83%)

Intel (own) slashed its third quarter outlook based on lower demand. The revenue estimate was reduced to $13.2B, plus or minus $300M, from an earlier range of $13.8B to $14.8B. The data center business is meeting expectations, but the PC market is worse than expected due to softness in the enterprise PC market, inventory reduction in the supply chain, and slowing demand in emerging markets. INTC: 24.19 -0.90 (-3.61%) : Intel

Last week the market rallied strongly on the ECB's promise to buy a potentially unlimited amount of sovereign bonds, focusing on maturities of less than three years. There are some reasons to be less exuberant about the latest "cure". First, the bond buying would be sterilized, apparently to meet German demands. Secondly, the ECB would only buy bonds issued by EU members that agreed to "strict condition" Reuters Spain and Italy have already started to push back on further austerity measures, and the Germans are castigating the ECB for this policy which is viewed as too stringent by the countries who need assistance. While Merkel and the German Finance Minister are now supporting the ECB, it appears that support for this type of action in Germany is becoming thiner by the day. Some of the discord that emerged soon after the ECB announcement is discussed in this NYT's article.

The ECB also lowered its forecasts for real GDP growth in the Euro area. The new ranges are for -.6 to -.2 this year and -.4 to +1.4% in 2013. ECB: Introductory statement to the press conference (with Q&A) Eurostat currently has slightly different estimates: Eurostat

1. Added 1 U.S. Steel 7.5% Senior Bond Maturing 2022 at 98.95 (Junk Bond Ladder Basket Strategy)(see disclaimer): I added this bond in a taxable account, where I already owned one bond bought at a lower price. Bought 1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 at 94 While I am okay with the current yield, the primary purpose for this add was to improve my liquidity. Normally, I could sell just 1 of these bonds, but the price would normally be around .5 to 1 point lower than the price generally available for a 2 bond lot. The bid spread between a 1 and 2 bond lot was narrower than .5 when I took this snapshot last Friday of the order book:

2022 U.S. Steel Order Book
The number in parenthesis indicates the minimum order. As shown in this order book, I could have sold my two bonds at 98.388, whereas a one bond lot could have been sold only at 98.

Vanguard now has a similar order book. 

I recently added this bond in the ROTH IRA and have nothing to add to that discussion. Item # 1 Bought 1 U.S. Steel 7.5% Senior Bond Maturing 3/15/22 at 99 (9/4/12)

Prospectus Supplement

My current yield will be slightly above the 7.5% coupon rate. Before taxes, money will double in 9.58 years at a 7.5% interest rate, Estimate Compound Interest.

Common Shares Not Owned: X: 20.89 +1.68 (+8.75%) : United States Steel

2. Sold 150 KFN at $9.7826 Last Thursday-Regular IRA (see Disclaimer): This one served its limited purpose which was to secure a total return close to 10% in less than one year. I received one dividend payment of $31.50 ($.21 per share), received on 8/23/2012. I realized a $103 gain on the shares:

2012 KFN 150 Shares +103
Total Profit with Dividend=$134.5

Total Investment=$1356.4

KFN: 9.97 +0.20 (+2.05%) : KKR Financial Holdings

3. Sold 50 of 100 LIT at $14.74 Last Thursday ($500 to $1,000 Flyers Basket Strategy)(see Disclaimer): As previously mentioned, I intended to sell 50 of my 100 shares of this ETF to bring my position within the cost parameters of the $500 to $1,000 Flyers Basket Strategy. I view this ETF to be an appropriate position for that strategy. Of its limited number of holdings, I counted 10 positions that were selling for less than $1 per share.  Some of those companies would not be purchased by me even under my Lottery Ticket Basket Strategy. In other words, I view several of the positions as garbage.

For anyone wanting exposure to lithium companies and want some diversity, a position could be divided into two or three companies that are the largest holdings of this ETF. Sociedad Quimica y Minera De Chile S.A. ADS (SQM)Rockwood Holdings (ROC)FMC. The 4th largest holding, Talison Lithium (TOR: TLH), is being acquired by Rockwood, assuming antitrust clearance, which was announced after I purchased LIT. Lithium ETFRockwood Holdings Agrees to Acquire Talison Lithium

I bought 100 shares of LIT last July and consequently made a small profit by selling 1/2 of that position. Bought 100 of the Stock ETF LIT at $13.72

2012 LIT 50 Shares +$39.06
LIT: 14.98 +0.26 (+1.79%) : Global X Lithium ETF

4. Closed End Fund Table: This table includes two purchases that will be discussed in tomorrow's post. I mentioned above that the ETF PICK rose above my buy limit price last week, so I bought back 100 of the CEF IDE instead. I also added 100 of the bond CEF NBD.

The CEF portfolio is a balanced world portfolio that emphasizes income generation. I will shift allocations to bonds and stocks based on my perceptions about relative valuations. Many positions have been held for several years.

5. Recent Canadian Dollar Cash Flow-Monthly Dividends:

CADs Received 9/7/12
CADs Received 8/31/12

C$106.5 before 15% withholding tax; C$99.26 after tax.

The Canadian dollar rose in value against the USD last week: CAD/USD Last Friday, C$1 would buy about USD $1.0218.  

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