GDP/AVY Disappoints Again-Sold 50 AVY at $27.36/Sold 50 SIVBO at $25 ROTH IRA/FFBC/Added 50 of the Bond CEF FAM at $16.08/ CBO Report on the Wealth Gap Increasing

Yesterday was a most welcomed day. I am just glad the LB did not have any hedges in place. Still, under the Unstable VIX Pattern, hedges will generally be bought when the VIX falls below 20 and will be sold when either the VIX shoots near 30 again or the formation of the Stable Vix Pattern, whichever occurs first. Vix Asset Allocation Model Explained Simply Mark Hulbert and the Use of the VIX as a Timing Model The VIX closed at 25.58 yesterday, down 14.33%.

While I like to see a five figure green number, I could not get excited about another huge government bailout fund being approved  and a 50% haircut on bank loans to the flagrantly irresponsible Greeks.  Basically, the Greek government has been rewarded for committing fraud from the time that nation first applied to join the EU until the Socialist government came to power recently.

I used the rally yesterday to sell a number of minor positions which will take several posts to discuss.

Greenspan believes that the situation in Europe is "very dangerous".  He also said the European Union is doomed due to the fundamental differences in cultures. This forecast may be too far on the pessimistic side. 

A lengthy study by the CBO substantiates the growing wealth disparity in the U.S. between 1979 to 2007. cbo.gov  HouseholdIncome.pdf  Warren Buffett noted that there is class warfare in the U.S., being waged by the top 1%, to increase that disparity, and they are winning. MarketWatch

The flat tax being advocated by Rick Perry will substantially increase that wealth gap, and that is the desired objective.

Did the Bush tax cuts for the Job Creators cause the creation of jobs? Were those cuts for the purpose of creating jobs?

It is impossible for the TBs to even accept that more jobs were created during Jimmy Carter's four years than under 8 years of Bush Junior. In fact, the TBs will deny that fact.  During Carter's administration, there were 10.5 million jobs created. How many under Bush with the tax cuts going to the Job Creators? This article in the WSJ compiles job data for U.S. Presidents since Harry Truman. Bush On Jobs: The Worst Track Record On Record - Real Time Economics - WSJ

I did a somewhat different analysis of the Labor Department's data. I did not believe that it was fair to credit a President with the jobs lost or gained during the first year of his Presidency. My analysis of the Labor Department's data consequently credits Bush with the jobs losses in Obama's first year, and deducts the losses during Junior's first year. Bush's first term started during a recession.  My analysis using that one change results in  -184,000 jobs after 8 years of George Bush who did everything he could do for the Job Creators.  Bush Tax Cuts and Jobs (8/10/11 Post) (see also: "Blondes" and Fox "News"/Irresponsible Fools with Power/Taxes and the "Job Creators"  7/14/2011 Post)

Anyone who mentions a study on the widening wealth gap will be accused by Larry Kudlow or Maria Bartiromo as attacking the rich and engaging in class warfare. The fact that most people in the U.S. are falling behind is not disputed by these pundits. I happened to be listening to CNBC when Maria made that simple minded statement in response to a reporter discussing the CBO report. CNBC Her net worth is estimated at 22 million with a 1 million dollar per year salary. So it is understandable that she does not want her marginal tax rate increased by a couple of percent by the Democrats and would much prefer paying a 9% flat tax as her share. The Masters of Disaster, the most overpaid doofuses in the history of mankind, certainly share that opinion. After all, they are not the kind of people who would be storming Omaha beach on D-Day.

Marc Faber claims to be an optimist. CNBC As proof, he asserts that he must be an optimist, otherwise he would have already committed suicide given the kind of governments in place today. He does believe that stocks will outperform bonds over the coming decade, a view that I share. With that comment, I am not saying that either asset class will produce positive returns adjusted for inflation and taxes.

Bloomberg reported that a nurse employed by California made $269,810 last year.

The government released its first estimate of GDP for the third quarter yesterday. News Release: Gross Domestic Product The estimate was that GDP grew at an annualized rate of 2.5% in the third quarter, compared to the second quarter. The price index for gross domestic purchases increased 2%, compared to a 3.3% increase in the second quarter. The personal savings rate decreased to 4.1% from 5.1% in the second quarter.

The treasury auctioned $29 billion of seven year notes yesterday at a yield of 1.791%.  www.treasurydirect.gov.pdf

I was pleased to hear that HP is going to keep its PC division.  SEC Filed Press Release  And, I am glad that Leo was fired, though richly rewarded for stupidity. Leo is viewed by the LB here at HQ as an idiot. The spinoff would have cost HP billions. Reuters

I was more than pleased to see the government bring criminal charges against several individuals in connection with disability benefits claimed by certain employees of the Long Island Railroad.  NYT  This is a link to the criminal complaint: Fraud Complaint Virtually all employees who retired from that railroad claimed disability benefits, partly funded by Social Security. Item # 1 Unfunded Pension & Disability at State & Local Governments. I first discussed these claims made by that railroad's employees in a 2009 post after reading the following story in the NYT that was just disgusting.

Burton Malkiel, author of "A Random Walk Down Wall Street", believes that Chinese stocks are "extremely undervalued".  CNBC

1. Sold 50 Avery Denison (AVY) at $27.36 Yesterday (see Disclaimer): I  bought 50 shares of AVY last Friday, hoping that the shares were scraping bottom. Bought 50 AVY at 25.71 On Wednesday, AVY released another disappointing earnings report and reduced guidance again for 2011. SEC Filed Press Release The company reported a GAAP E.P.S. of 47 cents, down from 60 cents in the third quarter of 2010. The adjusted E.P.S. number was 48 cents. The consensus estimate was for 58 cents. AVY also lowered its full year outlook to a range between $2.15 to $2.3 on an adjusted basis. The company expects weak demand to continue into the 4th quarter.

I am not a long term holder of AVY shares. A long term investor buying might be satisfied with a $25.71 entry price, even with the recent earnings report. I just used the pop yesterday to sell my shares at $27.36. I would consider buying those shares back at below $25.

AVY rose 9.37% yesterday to close at $27.78.

I substituted a China stock CEF for AVY that I will discuss in the next post. I bought that CEF before reading the article about Malkiel's opinion on Chinese stocks. 

2. First Financial (FFBC)(own: Regional Bank Stocks Basket Strategy): FFBC reported net income of $15.6 million or 27 cents for the third quarter. SEC Filed Press Release  However, that number included $3.4 million, or 4 cents per share, of non-recurring items such as acquisition expenses. The consensus estimate was for 27 cents. One service claimed that the consensus was 29 cents.

As previously noted in a prior post, this bank recently adopted its policy to pay out 100% of its net income to shareholders. Reuters

As of 9/30/11, First Financial's net interest margin was 4.55% (the highest so far of banks in this basket); the tangible equity to tangible assets ratio was good at 10.31%; the total risk-based capital ratio was excellent at 20.08%; the allowance for losses to NPLs was at 71.35%; and NPLs to total loans (non-covered) was above average for banks in my basket at 2.6%. The company has been growing recently through FDIC acquisitions. As of 9/28/11, 28.2% of FFBC's loans were covered by a loss sharing agreement with the FDIC. (see page 14).  

3. Sold 50 SIVBO in Roth IRA at $25 (see Disclaimer): SIVBO is a TP with a 7% coupon on a $25 par value. Trust Preferred Securities: Links in One Post The TP and the underlying security mature in 2033: www.sec.gov I am interested in buying and holding this security when I can purchase it at a significant discount to par value. I made three 50 share purchases below $20 and held those shares for over a year before selling them near par value. Added 50 SIVBO AT $19.20 IN ROTH  Added 50 SIVBO at $19.15 Bought 50 SIVBO at $19.49 Sold 50 of the 150 SIVBO at 24.65 Sold Remaining SIVBO at $25 Snapshots of those gains can be found in the post discussing my last 50 share buy at $24.5 in the Roth IRA last September. The total LT realized gain was $788.82, as shown in those two snapshots found at that post.

 I am not interested in holding for very long a junior long term bond with a 7% coupon, when the purchase is made near par value. I decided to unload this security for a small profit plus one quarterly interest payment. I also wanted to increase my cash allocation in the ROTH IRA to take advantage of better opportunities which hopefully may arise soon.

SIVBO closed at $25.08 yesterday.

4. Averaged Down by Adding 50 of the Bond CEF FAM at $16.08 Last Tuesday (see Disclaimer): This brings me up to 200 shares in a taxable account and I also own some shares in a retirement account. With the dividends, I am close to break-even, but I have an unrealized loss on the shares that more than wipes out the dividends received so far.  Bought  100 FAM @ 17.9 November 2010  Bought: 50 FAM @ 17.37 in both Roth IRA and Taxable Account The only reason that I am close to even is that the dividend is rich and paid monthly. The current monthly dividend is 13 cents per share: FAM DISTRIBUTION HISTORY This CEF is a leveraged world bond fund that may invest up to 60% of its assets in non-investment grade bonds. FAM Fund Summary This is the credit breakdown as of 9/30/11:

This is a link to the last SEC filed shareholder report:  www.sec.gov

Morningstar currently has it rated 3 stars. A negative is that part of the dividend recently has been supported by a return of capital.  Another negative is the high expense ratio.

At the CEF section at the WSJ Market Data Center, daily NAV information can be found under the category "World Income".  WSJ  On the day of my purchase, 10/26/11, the fund closed with a net asset value per share of $17.26, a market price of $16.12, and at a discount to net asset value of -6.6%.

CEFA page on FAM.

The next ex dividend date is 11/1/11. At a  total cost of $16.08, and assuming a continuation of the 13 cent monthly dividend, the dividend yield would be around 9.7%.

FAM closed at $16.36 yesterday. 

First Niagara Downgrade/BOUGHT 50 BDGE AT $18/Bought 50 AVY at 25.71/Sold 101+ BRKL at $8.23/Junk Bond Ladder Table/GE

I noticed that Raymond James downgraded yesterday First Niagara from a strong buy to neutral based on the same concerns that I discussed in yesterday's post. Item # 2 FNFG While this bank is being negatively impacted by the Fed's Jihad, and the concomitant pressure on bank net interest margins, the main problem is the CEO's decision to buy branches from HSBC, in a geographic area where FNFG already has a number of branches, for close to 1 billion dollars. This will require a large capital raise primarily by the issuance of stock. I would agree with the RJ analyst's downgrade over the near term. I view the acquisition of the HSBC branches to be a mistake. Why would a bank add more branches in Buffalo? Prior to that pending acquisition, FNFG already had a #3 market share in the Buffalo region.  The Buffalo News (16 HSBC branches in Buffalo, 3 Niagara Falls, 19 Rochester, etc: HSBC  Branch Locations - NY)

Possibly, over the long term, the acquisition will have some minor positive impact, but the near and intermediate term negatives outweigh those potential longer term positives in my opinion. Nonetheless, FNFG has a number of positive attributes that make this bank a long term worthwhile hold in my Regional Bank Basket Strategy.  REGIONAL BANK BASKET STRATEGY GATEWAY POST An imperial CEO is not one of those attributes. Those favorable attributes include the very low Texas Ratio, the excellent loan loss record as shown by the low NPLs to total loan ratio, the high dividend yield, and the growing geographic footprint in New England.

The Obama administration is going to make it easier for underwater homeowners to refinance their mortgages under the Home Affordable Refinance Program. WSJ Reuters Fox Business This was done by scrapping the requirement that the existing mortgage balance had to be below 125% of the current appraised value. Appraisals would no longer be required to even qualify for the new loan. It would only be necessary that the mortgage loan was sold to Fannie or Freddie before June 2009 and that the borrower was current under the existing mortgage (though allowing for one late payment over the prior 12 months but not in the last six). This appears to be a last ditch effort by the Obama administration to jump start housing prices before the next election.

There are certain moral issues involved with Obama's plan that are discussed in this editorial found at the CSMonitor.com. Many of the borrowers, who will now qualify for low interest rate loans, lied about their incomes in order to receive their existing mortgage. To qualify for the new loan, there would be no inquiry to determine whether the borrower committed fraud in connection with the existing mortgage.

Easy credit from financial institutions and mortgage fraud by borrowers were precipitating causes of the bubble in housing prices and their subsequent and inevitable decline. Mortgage fraud was almost completely ignored by law enforcement. Instead of punishing the wrongdoers, the federal and state governments have made numerous attempts to reward that behavior. The states make it difficult for the lender to foreclose, allowing the admittedly delinquent borrower to remain in the home rent free for months or even years. The federal government wants to relieve the borrower of the consequences of their mistake with taxpayer funds. That will be the inevitable result of this latest action to fix the housing debacle.

Another inevitable result will be that many borrowers will be rewarded by the government for submitting false statements about their income in order to qualify for their existing loan.  And honest citizens will be on the hook for even more, as underwater borrowers renege on those refinanced loans and thereby increase the losses to Fannie and Freddie that have already turned into $130+ billion black holes.

It is one thing to pay for another's mistakes and quite another to pay for the consequences of another's fraud and/or greed.

The refinancing of higher rate mortgages with lower ones will have some deleterious impact on those mortgage REITs who buy GSE mortgage securities. Those funds will lose some of their higher yielding securities, thus narrowing the spread between their cost of funds and the yield on their securities portfolio.  

1. Added 50 Bridge Bancorp (BDGE) Last Friday (own: Regional Bank Stocks Basket Strategy)(see Disclaimer): I averaged down by buying 50 shares of BDGE at $18 after reviewing this small bank's last earnings report.

Bridge reported net income for the third quarter of 2.8 million or 42 cents, up 20% from the third quarter of 2010. The estimate, made by just one analyst was for 38 cents. As of 9/30/11, NPLS tot total loans was 1.02%; the allowance for loan losses as a percentage of NPLs was 126.35%; the total capital ratio was 13.7%; the Tier 1 capital ratio was 12.4%; and the net interest margin was 4.04%.

Bridge Bancorp closed at $18.37 yesterday, up fifty cents per share.

2. Junk Bond Ladder Table (Junk Bond Ladder Strategy):  The Old Geezer had to avert his gaze from this table, knowing that this picture had to be part of a horror movie, almost as terrifying as the  Attack of the 50 Foot Woman (1958), where a woman grows to 50 feet after an alien encounter and goes after her cheating husband.

Junk Bond Ladder Strategy: Table as of 10/21/2011

                                         

3. General Electric (owned): General Electric reported a 11% increase in operating earnings for the third quarter last Friday morning. The adjusted E.P.S. was 31 cents, in line with estimates.Third quarter revenues were  $35.4 billion, up 12% excluding the impact of NBCU divestiture. International sales rose 25%. However, revenues in GE's energy infrastructure business fell 9%. GE Capital continued its turnaround, earning $1.5 billion during the quarter.   Margins declined in the big four industrial businesses. And, the earnings were aided by lower tax rates. The market did not care much for the results and took the shares down 1.92% in trading last Friday. The lackluster results from GE need to be contrasted with the report from Honeywell that sent its shares up 5.82% on Friday. 

A Barrons' columnist attempts to make the case for buying GE on valuation grounds.

4. Bought 50 AVY at $25.71 Last Friday (see Disclaimer): I have traded this security on several occasions. However, my last round trip was over two years ago, starting with a 50 shares purchase at a total cost of $20.66 per share. I sold those shares at $29.97 in July 2009 after the company cut its quarterly dividend from 41 cents to 20 cents:

2009 Taxable Account AVY 50 Shares Realized Gain +$457.46

Thereafter, AVY continued to rise and traded at over $40 per share earlier this year. AVY Interactive Chart The most recent decline back to the mid 20s was apparently triggered by an earnings warning in mid-July 2011. SEC Filed Press Release The company lowered its forecast for the second quarter and 2011. The reason had to do with a sudden decline in orders from apparel makers and consumer goods companies for tags and labels.

Avery has a leading market share in pressure sensitive materials and a variety of tickets, tags, labels and other converted products. 2010 AVY SEC Filed Annual Report

The second quarter earnings report was downbeat. Presentation dated July 26, 2011 AVY reported an E.P.S. of 69 cents, down from 78 cents in the 2010 second quarter. Revenues declined 2% before the benefit of currency translation.

The current forecast for 2011 at that time was $2.45 to $2.75 per share on an adjusted basis. The current consensus estimate is for $2.52 in 2011 and $2.95 in 2012. At a total cost of $25.71, the P/E on that forward estimate is around 9.35. The dividend yield is about 3.89% at the current $1 per share annual rate: Press Release

Morningstar currently rates this stock five stars. S & P is more subdued with a current rating of 3. I would go with Morningstar on a valuation basis and with S & P when focusing on near term earnings.

Avery Denison website: Avery Dennison Corporation Some basic financial information can be found at Avery Dennison Fundamentals Snapshot.

I would classify AVY as a cyclical company, but not as cyclical as a steel or copper firm.

Avery Dennison closed Monday at $27.24 up 84 cents for the day.

5. Sold 101+ BRKL at $8.23 (see Disclaimer):  This bank postponed the release of its earning report to give it more time to look at "certain booked entries that were made to correct differences between the Company's underlying loan systems and the general ledger". www.sec.gov I did not see any reason to stay around for the end result of that analysis.  I took a small loss on this transaction. I may buy the shares back when and if the company gives itself a clean bill of health. 

Sold AVY/GE Upgrade/NYX

1. General Electric (owned): GE has not received much love lately. Goldman Sachs took pity on it this morning, upgrading the stock to buy from neutral and raising its price target to $16 from $13. Based on reports, the upgrade was due to comments by Barney Frank that Congressional regulatory "reforms" might not require the separation of GE Capital. The comments made by Frank yesterday are summarized in a Bloomberg article.

2. NYSE Euronext (owned Buys of JWF KSA DIS and NYX): Excluding some charges, NYX reported a Non-GAAP number of 51 cents on a 9.5% increase in revenue. NYSE Euronext's fixed costs decreased by 6%. I am not impressed with these results. The 214 million in operating income was down from 282 million in the second quarter of 2008. The non-GAAP earnings did beat the forecast by 6 cents however.

3. Sold Avery Denison (AVY) at 29.97 (see disclaimer): Avery Dennison is one of the stocks bought in early March 2009 with the following caveat. I would stay with the company for as long as the company stayed with me, i.e, for as long as there was no cut in the dividend. AVY AVY cut its quarterly dividend from 41 cents to 20 cents this morning and I promptly sold my shares. AVY reported earnings of 38 cents per share, down from 93 cents a year ago.

There is an exception to this automatic sale in place since March. If the company cuts the dividend and announces a 5% or greater voluntary pay cut for management, a shared sacrifice, then I will forgive and forget. But my tolerance for dividend cuts, where management continues their own pay as if the good times continued to roll, is at an end.

4. More on the Fat Tax: Headknocker noted that under the Body Mass Index (BMI) chart, no doubt prepared by a bunch of commie liberals, he would owe his fair share of a Tax on excess body fat. The beauty of the Fat Tax is that revenues generated by it will grow at a faster rate than inflation, and even faster than the historic rise in medical costs. Based on his personal observations, Headknocker is positive that his BMI has grown at a faster pace than inflation since at least 1990, and can not imagine how that could be true, given the steady diet in cheeseburgers, fries and sugary soda drinks and his constant thinking about exercise.

There was a debate this morning among staff here at HQ about how Charlie Rangel would avoid paying his fair share. While some say that television makes people look more rotund than the reality, we suspect that may not be true for Charlie. Then RB chimed in, with the observation that Charlie would weigh himself and then pronounce that at a mere 125 pounds, well within the boundaries of that communist BMI index, he owed no Fat Tax.

Health care spending has increased at a faster rate the GDP since the 1960s. In 2007, the Kaiser foundation estimated that health care spending had increased 2.4 percentage points faster than GDP since the 1970s and would equal almost $13,000 per resident by 2016.