VIX/SOLD 50 EWBC at $19.04/ Greece-Citizens in Aggressive Denial/ADM EMR MRK PFE DUK/Sold LT GY at $6.4

The movement in the ^VIX was almost sufficient yesterday to disrupt the formation of a Stable Vix Pattern. The VIX shot up 18.08% to 23.84. The VIX did hit 25.7 intra-day. I only use daily closes in the Vix Asset Allocation Model. This kind of movement in the VIX, however, does not give me much confidence that a Stable VIX Pattern of continuous movement below 20 will form anytime soon. I mentioned in my post from last Saturday that I would be surprised if a Stable VIX Pattern formed, given the velocity and degree of the bursts above 20. GDP Those kind of bursts will often signal that there is something serious which is troubling the market which should not be dismissed, even if I disagree strongly. In short, these bursts are frequently warnings about a change in the market's direction. (see Soaring VIX May Signal More Trouble Ahead for Stocks - CNBC). I have been selling some of my more speculative stock positions after the first burst, including many of my Lottery Tickets, and have been buying more individual bonds along with blue chip dividend paying stocks.

I am less concerned about these bursts from below 20 now, compared to a period where the VIX had been moving below 20 for an extended period of time, measured in years rather than days. This kind of burst out of a long standing Stable Vix Pattern would be troubling, and could lead to a Trigger Event with more upward movement toward 30 under those circumstances. Both the height and the duration of the spike toward 30 are important. It is the Trigger Event which is the most important timing signal in the model. Now, the movement in the VIX is simply disrupting the formation of the Stable Vix Pattern. This gives me less confidence that the current cyclical bull move will last. However, the disruption of a Stable Vix Pattern formation, and a continuation of the Unstable Pattern in effect since August 2007, would be consistent with my opinion that the current move is a strong cyclical move of short duration within the confines of a long term secular bear market, similar to the move in 1974 to 1976 as noted below and in prior posts on this subject.

It would not take much upward movement in the VIX now for me to start the count over. Possibly, if the VIX returned to below 20 by the end of this week, or early next week, and had no closes over 25, I would consider keeping the count without a restart, provided the total number of days of movement over 20 was no more than 10. I think the more likely course at this point will be a restart in the count.

In previous posts, I expressed an opinion that the move off the March 2009 low was not likely to be the start of a new long term secular bull market, but instead a cyclical move in an ongoing long term bear market reminiscent of the move in 1974 to 1976. 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? more on 1982 or 1974 Historical Perspective on S & P Gain Since March 2009 (item #4). The most important rational underlying that opinion was that the debt problems, both at the consumer and government levels, will take more time to heal, possibly another two or three years.

In this scenario, the cyclical move off the March 2009 low is a short term bull cycle, lasting 12 to 24 months, and is a counter-reaction to the catastrophic phase of a long term secular bear market. The catastrophic phase of the current long term secular bear market ended in March 2009. I date the start of this long term secular bear market in 1997. The catastrophic phase of the prior long term secular bear market, which I start in the mid 1960s, ended in October 1974. After hitting the bottom in October 1974, there was a 72% gain lasting until September 1976, followed by almost six years of an ongoing secular bear market. I am still giving the current long term bear market another two or three years of life rather than 5 or 6. I hope that I am wrong about this forecast for one very simple reason. A long term secular bull market involves less stress and work than what has been required over the past twelve years to advance the HK's capital base.

The problem is that the short duration cyclical moves in an ongoing long term bear market look like the kind of moves made at the start of a long term secular bull market that may last fifteen or so years. The difference in characterization from my perspective has to do with my trading rules. Short duration cyclical bull moves in an ongoing bear market need an active and dynamic asset allocation process and trading strategy, unless going nowhere for 15 or so years is your objective. Buy and hold, with far less asset allocation shifts, would be appropriate only in a long term secular bull move. I am still in the trading mode for a long term secular bear market, noted by frequent trading and shifts in asset allocation. Some long term stocks positions were acquired particularly during the Near Depression phase, however, which should always be the case during the catastrophic phase of the long term secular bear market. Some long term bond positions were likewise established in the October 2008 to March 2009 time frame. And the regional bank strategy is a long term strategy.

An article in the NYT highlighted the problems in Spain, where unemployment recently hit 20%, and the federal and regional governments have done virtually nothing meaningful to reign in spending. Spain's debt is just one problem among many that does not appear to be headed in the right direction. And it is really difficult to see why a nation running trillion dollar deficits is viewed as a safe haven. The fear trade returned yesterday, as the dollar and U.S. treasuries gained while most other asset classes fell in value. The short part of my long/short strategy worked fine, with EPV gaining 8.24% as an example. Investment grade corporate bonds rose in value as a class (LQD). There was some positive action in large cap pharmaceutical, as shown in PPH gaining 15 cents yesterday. MRK and PFE, both components of PPH, had decent up days after reporting earnings before the opening bell yesterday.

1. Duke Energy (DUK)(owned-Core Electric Utility Holding): Duke Energy beat the consensus expectation by four cents, reporting an E.P.S. of 34 cents per share for its 1st quarter ($.36 excluding items), compared to 27 cents a share in the year ago quarter. Operating revenues were 3.594 billion, higher than the 3.38 billion analyst estimate. DUK: Analyst Estimates for Duke Energy Corporation

2. Emerson Electric (owned-core industrial holding): Emerson reported earnings of 54 cents per share from continuing operations, one cent below the consensus estimate. Revenues were reported at 5.14 billion, up just 1%, and below the forecast of 5.21 billion. Emerson did raise its forecast for 2010 to an E.P.S. between $2.40 to $2.55 per share, up from its February estimate of $2.20 to $2.40. In its press release, the President of EMR made the following cautionary comment: “While the pace and strength of the global recovery continue to gain momentum, we remain concerned about the sustainability of the U.S. and European economies compared to historical recovery cycles."

3. ADM (own): Archer Daniels Midland Company reported its fiscal third quarter earnings missing estimates by 6 cents. Still, I view it as a positive earnings report. ADM had net earnings of 421 million or 65 cents per share. Net sales rose to 15.145 billion, up from 14.842 the year before.

4. Merck and Pfizer (own indirectly via PPH): There is a lot of noise in the earnings reports from both Pfizer and Merck. Merck, for example, had 74 cents of charges. Excluding charges, Merck earned 83 cents per share, beating the consensus estimate by 8 cents. Merck sees 2010 Non-GAAP earnings in the range of $3.27 to $3.41. The estimate before the report was for earnings of $3.4. MRK: Analyst Estimates for Merck & Company

Pfizer reported adjusted earnings of 60 cents per share beating the estimate by 7 cents. (see discussion of PFE report at MarketWatch) PFE reaffirmed its 2010 guidance of adjusted earnings between $2.1 and $2.2.

5. Greece: The market is not convinced yet that the Greece will change its ways. And as noted in this WSJ article, there are already questions whether or not 110 billion EUROs is enough to support Greece until it can access the credit markets on its own.

It does appear that the majority of the Greek citizens are in an an aggressive form of denial. The protests continued, as union employees shut down hospitals and schools, demanding that their bankrupt government continue paying their benefits without any sacrifice by them. The strikes are being led by the ADEDY union federation that represents more than 500,000 civil servants in Greece. Bloomberg.com The population of Greece is just over 11 million people: List of countries by population I would assume that the 500,000+ number excludes children too young to join the civil service or one of Greece's commissions, and those who retired in their 40s or early 50s. I may be wrong about the children. It is entirely possible that they join the government dole while still in the womb. It would also be reasonable to assume that the Greeks see nothing odd about 51% of the government's budget being devoted to civil service pay and benefits.

Although it is difficult to gauge what is happening in Europe sitting here at a desk in the SUV capital, I gather that the Greeks believe that it is the obligation of the Dutch, Germans, and other European nations to sacrifice in order to finance the Greek entitlement society. As many in Europe now realize, it was a mistake to admit Greece into the EU. NYT Greece is undermining the market's confidence in the EURO even though its GDP represents only 2.5% of Europe's GDP: Debt Rising in Europe - Map - NYT

The market appeared to be jolted yesterday when Greece hired Lazard for financial advice. This firm helps countries that have defaulted on their debt obligations: - NYT Greece denies that debt restructuring is on the table, but who believes the Greek government? If I had to guess what sent the market in a tailspin yesterday, I would say that this was it.

6. Sold 50 GY at $ 6.4 (See Disclaimer): This is not a reflection so much on GY but simply reflects a continuation of LT sells to improve the income generating capacity of the portfolio. This was a good percentage gain with the GY shares purchased at $3.7 last February.

7. Sold 50 EWBC at $19.04 (See Disclaimer): LB wanted to sell all of the banks in the regional bank basket that paid only a penny a quarter in dividends. A compromise was reached to sell the 50 shares of EWBC, one of the most successful investments in this basket, based on the prior dividend history of this bank before the Near Depression. The reasoning for selecting this one to sell rather than WBS was explained in a prior post from last month:

" EWBC was not exactly generous with its payout when times were good. The annual dividend was kept at 20 cents for 2003, 2004, 2005 and 2006 and was raised to 40 cents annually for 2007-2008. The dividend is currently 4 cents annually. This history is viewed negatively. Prior to 2008, the payout ratio to net profits hovered in the 10% to 15% most of the time. This is also view negatively.

I have very large percentage gains in EWBC and WBS. I would expect WBS to be more investor friendly on its dividend policy during favorable economic times. So I am inclined to keep WBS and to sell EWBC. Both positions are currently unrealized long term capital gains. EWBC was trading up over $20 in late night trading yesterday. I have, however, not reached a decision." Item # 9 EWBC

I intend to plow the $900+ in proceeds into another regional bank that is not so miserly with its dividends in both good and bad times. The shares were bought at $5.7 in April 2009: Buy of 50 EWBC

Buy of 50 EWBC as Lottery Ticket/RF/Goldman Sachs Synthetic Floaters and Floating Rate Non-Cumulative Preferred/

Since I have been focusing on floaters recently, due to their depressed valuations in the current low inflation environment, trying to think ahead, I have located more.  Yesterday, I found one in TC form, PYT, a synthetic floater tied to a fixed rate Goldman Sachs bond maturing in 2034.  I found another new synthetic floater tied to the same bond originated by another broker that I did not know previously to even be a source of TCs.  I now have 5 synthetic GS floaters to monitor, and I have already noted some pricing discrepancies in these functionally equivalent securities.  This will provide opportunities to trade positions in an effort to manage risk, similar to what I did last year for the several AON TCs which contained the same underlying security.   Given the recent investment history of investment banks, I will keep the total position relatively small even though I have always had more confidence in GS than any of the others.   

The synthetic floaters are tied to junior bonds.  Goldman has also issued several floating rate preferred issues which it describes at its web site:  Goldman Sachs | Investors - Preferred Stock

Of those I own GSPRA which is non-cumulative, always a bad thing, and pays the greater of 3.75% or .75% above 3 month LIBOR.  The C series has better terms than the A series with a floor of 4%.   It is just my personal opinion that the synthetic floaters are a better deal than the preferred issues, provided the investor is comfortable with the TC form of ownership and the synthetic quality of the float.  I am comfortable with TCs and synthetic securities but others may have a different opinion.  I can only act on my own opinions which should be the case for every investor. 

I am not in the market for any of the floating rate non-cumulative preferred issues, though possibly I might add 50 shares of GSPRC and then sell the 100 of GSPRA that I own now when I can obtain a better price.  There are three negative features to them.  They are all non-cumulative, with no maturity date and are junior in priority to all GS bonds and senior only to the common.  Nonetheless, there would be no good reason for GSPRC to be priced the same or lower than  GSPRA.  GSPRC should be priced higher with the better guarantee and the same float provision, and the amount would just depend on how much an investor is willing to pay for that extra 1/4% in the guarantee that is magnified some by the current deep discount to par value. 

There is one positive factor that supports owing an equity preferred rather than a debt issue.   Interest paid on debt will be taxed at the highest marginal rate.  Dividends paid on equity preferred issues is currently taxed at the maximum rate of 15%.  Obama plans to change this cap for rich folks, but that may not happen until 2011.  His last proposal was to increase the cap to 20% for those making over $250,000. Center on Budget and Policy Priorities If and when the cap is removed for certain investors, then that would of course eliminate or modify this one advantage of the equity preferred over debt.   The after tax yield would be higher for an equity preferred now, for some one in the top bracket, than an owner of a debt issue where the before tax yield was the same.  I did confirm by looking at my 1099 for 2008 that the dividends paid by GSPRA were treated as Qualified Dividends. 

Personally, I would favor a maximum dividend tax of no more than 15%.  Some of my reasons are expressed in this article.   Seeking Alpha 

Corporations receive a deduction for interest payments but not for common stock dividends.  Those dividends are paid from after tax money.  So when I pay an income tax on the dividends received by me, the same funds are then taxed twice.  More importantly at least to me, I believe the common stock holders need to be treated more like owners of the business under the tax code.  When looked at that way, there should be a zero tax on dividends, at least to the extent the corporation has paid income tax on that money already.  To treat the shareholder more like an owner under the tax code would require the elimination of double taxation.  However, being a realist on such matters, and recognizing the government's need for money, I am okay with a 15% cap rate. 

I would agree with the WSJ article that $250,000 a year in income is not "wealthy", particularly when you have 3 kids to raise.   WSJ.com

Regions Financial announced that it will report a profit for the 1st quarter and the stock rose 30% or so this morning.   MarketWatch Stocks To Watch TodayRF was one of Right Brain's lottery ticket purchases. Buys of DKF, AA and a Lottery Ticket in 50 shares of RF/Heinz & its Boston Market Line/ Duality of Long Term Risks/Stocks Under $5: Per Se Lottery Tickets/ Left Brain is considering the possibility that RB's ruminations may be worthy of more consideration in the future.  It was RB that initiated the flagrant violation of all trading rules starting on 3/3. 

I intended to buy 50 shares of EWBC, a California bank, at the same time that I purchased UCBH. FASB Gives Leeway/Buy of 50 UCBH: Lottery Ticket/Winstream/Low Dividend Yields=Low Earnings Growth/Dividends=Most of Stocks Historical Returns I viewed both banks as lottery tickets on a recovery in California real estate.  I forgot to do it, old age memory issues.  It was around 5 bucks at the time of my memory lapse so I remembered my intent from a few weeks ago this morning and bought 50 at $5.7 in my lottery ticket category.   I have to admit that I have not even been to California since 1993, and there is nothing in my past experience which would assist me in evaluating any bank or California real estate.   I did note in a prior post that were some indications of a bottoming process occurring in California. 

VIX Below 40/Housing Recovery?/Budget Deficits & the Value of Treasuries/ABC & CBS Programs on Gun Show Loophole   I first became acquainted with East West after reading a favorable Barron's article about a year ago.Barrons.com  I did not buy it then because I was very negative on all banks.   It was trading around 12 at that time.  Like virtually all banks, it had a tough 2008 and has fallen a great deal from its  June 2007 high of 42.  Like UCBH, it has strong ties to the Chinese community in the U.S. and in China.   Morningstar has it rated 5 stars with a consider to buy at below 10.   S & P is more negative with a 3 star rating and a $8 target. For the shares of this bank to get a lift, there probably needs to be evidence of a real estate recovery in this bank's primary market, the Inland Empire region of California.  The bank has 71 branches in California and a branch in Hong Kong with representative offices in Beijing and Shanghai, China.Yahoo! Finance  

The bank has branches in grocery stores operated by Ranch Market, a large chain catering to the Asian community.Branch Locations - EWB Southern California Offices Branch Locations

Since I am very near dipping into my static cash allocation which does not include cash flow from dividends and interest payments, I am considering investing the accumulated cash flow now that has been mentally sequestered due to my 815 trading rule. 

ADDENDUM ADDED AT 1:52 P.M.:   When the ask price for PYT slid to $11, I placed a market order to buy 50 in my Roth at $11.

DISCLAIMER:

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments   NOT A RESEARCH SERVICE/Add of PWE Last Week   These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.