JOBS/SOLD: AMAT, ATVI, MRO, JPC, ZBPRA/Heineken Share Classes/Added Double Short as a Hedge

1. Jobs: This report was disappointing but I would not view it in a deeply negative fashion. Still, the number does suggest the vulnerability of the economic recovery to exogenous shocks, such as the sovereign debt crisis in Europe, and thereby raises the odds of a double dip recession in the U.S. after the massive fiscal stimulus winds down later this year.

The 431,000 increase in payrolls is not the significant number of course, since it was inflated by 411,000 temporary Census workers. The important number is that only 41,000 jobs were added in the private sector. Employment Situation Summary

Part of the reason for the disappointing number may be explained in the hours worked number, which increased to 34.2 hours from 34.1 hours in April. This suggests that some employers are increasing the hours for current employees rather than hiring new ones. This actually makes sense under the circumstances.

On the positive side, the alternative measure of unemployment, which includes unemployed persons, those marginally attached to the workforce and individuals working part time involuntarily (Table A-15, U-6), declined from 17.1% in April to 16.6%. The number of temporary service jobs increased by 31,000 bringing the total temp jobs to 362,000 since last September. I suspect that many of these jobs will eventually be filled with a permanent hire. Economists generally view the growth in temp jobs coming out of a recession as a harbinger of stronger job growth ahead.

I did not view the fall in the unemployment rate to 9.7% from 9.9% to be important. Actually, the reason for the decline has negative implications. The number of unemployed people who have given up hope and left the workforce increased by 286,000 in May.

2. Two Classes of Shares in Heineken: A reader from the Netherlands pointed out to me in a comment that Heineken has two classes of shares. One class, Heineken Holdings, is simply a holding company that owns shares in Heineken N.V.. (see comments to Response To Question About Heineken ADRs)

Heineken Holding owns 50.005% of the share of Heineken, N.V. which is the operating company. According to the annual report of Heineken Holding, each share of Heineken N.V. owned by it is matched by one share of Heineken Holding. Thus, the net asset value of both shares are the same and the dividend payable by the two companies is the same (see page 3: /www.heinekeninternational. .pdf)

The ADR with the symbol HINKY represents .5 of the ordinary shares of the operating company Heineken, N.V. The Heineken, N.V. shares trade in Amsterdam under the symbol HEIA.AS.

The Heineken Holding shares trade in Amsterdam with a lot of volume under the symbol HEIO.AS. They trade at a significant discount to the Heineken, N.V. shares. Unfortunately, the ADR for Heineken Holdings trades on the "Grey Market" in the U.S. which lacks transparency. There are no market makers and the bid/ask prices are not displayed. Volume is practically non-existent and it is frequently very difficult to trade shares. I have made maybe fifty or so attempts to buy some securities on the Grey Market without success to date. The order is routed to one of the firms that handles trades in this market. Since bids are not displayed, I have seen orders filled at lower than my bid. The sell order went to another firm who just matched it with an order on its book. The ADR symbol for Heineken Holding is HKHHF. If I felt the need to buy Heineken Holding, I would place the order on a European exchange and use EUROs to pay for the order. The symbol used by Fidelity for Heineken Holding is HEIO:NL. Their Heineken, N.V. symbol is HEIA:NL.

3. LB Reduces Risk as the First Order of Business Friday Morning-Sold MRO/ Sold AMAT/ Sold ATVI/ Sold JPC/Sold ZBPRA (See Disclaimer): Part of this risk reduction was the purchase of a double short ETF on a foreign index that had not gained much in value in early trading on Friday. It later rose about 4% during the day.

One way to reduce stock risk is to sell stock, which is a point that even LB will not belabor, and then move the proceeds to cash which is what LB did on Friday to a small degree.

The remaining 151 shares of Marathon Oil were sold at $31.2839. This included the 100 shares lot purchased in February at at 28.15 and the remaining 50 shares of a 100 share lot bought at at 31.68. I sold 50 shares of the lot bought at $31.68 at 33.05 in April. This was pure profit taking. I will most likely buy some of these shares back when and if the market finds its footing and settles down.

2010 MRO 201+ SHARES +$330.77

I sold 100 AMAT at $12.94 for a small profit. Added 50 AMAT at 12.28 Bought 50 AMAT at 12.48 I sold 100 ATVI at $10.91 for a small loss.Bought 100 Activision Both positions were eliminated just to raise cash and were chosen as sell candidates primarily for their low dividend yields. I may buy AMAT back when and if the price falls closer to $11.

JPC, a CEF with some stocks was sold at $7.42. JPC was bought at $6.85 in the regular IRA. It was sold to raise sufficient funds to enable me to place a bid for a senior bond yielding close to 8%.

The 50 shares of ZBPRA were sold at $16.85 on Friday. These are the shares purchased in the regular IRA at $12.5 last January: Bought 50 ZBPRA at 12.5 in IRA I am keeping the 100 shares bought at $7.8 in the main taxable account where I am willing to assume more risk. ZBPRA is a non-cumulative traditional preferred stock that pays the greater of 4% or .52% above 3 month LIBOR. It is rated junk (Caa3 by Moody's according to QuantumOnline.com). Like almost all equity preferred floaters, ZBPRA is issued by a financial institution, in this case by Zions Bancorporation (ZION). I also own 50 ZBPRB, a TP, bought in the Roth which I intend to keep and just 30 shares of a fixed coupon equity preferred issue, ZBPRC, held in the main taxable account. Analysis of Prior Question: ZBPRA vs. ZBPRC OR ZBPRB

4. Hungary: To add to Europe's woes, a new sovereign name has popped up a potential source of woe. The vice president of the "Fidesz" party in Hungary declared on Thursday that Hungary was in a Greece styled sovereign debt crisis. The Fidesz party wan parliamentary elections in April, unseating the Socialist government.

LB is almost sad in having to report that the OG, not being the deep thinker in the operation, actually bought 5 $20 scratch off lottery tickets earlier today, hoping to regain some of the losses. It is regrettable on so many levels. It is of course embarrassing to the LB that the OG views this act of mindless gambling to be part of his "investment strategy". Frequently, on those rare occasions where his winnings exceed the losses, he has been heard to exclaim that he was going to reinvest the winnings in more lottery tickets. And what does he mean by that? Say he wins $30 on one $20 ticket and loses $20 on another, he refers to his winnings as $30. So today, he wanted all of the staff here at HQ to know that he had won, done his part to advance Headknocker's capital by "winning" $60 on the $100 bet, and consequently could not wait to reinvest the "winnings" to buy more. So now the truth can be known, the entire LOTTERY TICKET stock strategy was an audacious plan by the LB to curtail both the RB and the OG purchases of scratch off lottery tickets and to channel their collective inanity into something that might actually be profitable. Well, what can you say, it is a never ending struggle for the LB.

Bought 30 RHHBY at $35.48/ISM Services/ HNZ/Bought 100 POM at 15.96/Bought 50 BMY at 22.95

1. HEINZ (owned-dividend growth strategy): Barrons has a favorable article on Heinz in the Weekday Trader column. I highlighted the importance of dividend growth, as it impacts my yield in Heinz, in a recent post.Heinz (HNZ) The author of the Barrons' article points out that Heinz has been increasing its dividend at a 7 1/2 percent rate for the past seven years. At that rate, it takes about 9.58 years to double the dividend. Since I started off at a 5.4% yield, I can reach a 10+% yield based on my constant cost basis by 2018-2019 assuming a continuation of this trend.

2. ISM Services: The ISM survey of the service sector showed continued expansion in May, marking the fifth consecutive month of readings above 50. ISM reported its service index at 55.4 in May. The employment component crossed the 50 demarcation line with a reading of 50.4. This was the first reading over 50 in 28 months. New orders grew for the ninth consecutive month.

3. BOUGHT of 30 Roche Holdings at 35.48 (See Disclaimer): The Old Geezer's mind wonders, and it should come as no surprise that he is unable to stick to any plan for more than a few seconds. As LB has said, it is embarrassing for the Stock Stud to even be associated with the OG, even though it is clearly beyond the LB's control, sort of like one of those forced marriages that occur in certain middle eastern lands. The OG placed an order for 100 shares of Roche at the limit of $35.48, which is about all the details his rattled and addled brain could handle, and failed to place an All or None restriction on it, which is how shall the LB say, one bridge too far for the Old Goat.

Before entering the order, the OG requested the LB to investigate what the OG refers to as the pricing issue.

The ADR symbol for Roche Holdings, the large Swiss pharmaceutical company, is RHHBY. One ADR share equals .25 ordinary shares. At a $35.5 price for RHHBY, I would have to buy 4 shares to equal 1 ordinary share for a total cost without commission of $142. The primary exchange for Roche is in Switzerland and the stock is priced in Swiss Francs (CHF). SIX Swiss Exchange - Roche Holding AG Hopefully this is the link to Roche's five year chart based on ordinary shares priced in Swiss Francs. ROCHE HLDG DR Share Price Chart | ROG.VX (link to Reuters.com for ROG.VX) Yesterday morning the shares closed at 164.7 CHF. I performed a currency conversion yesterday afternoon and found that 164.7 CHF converted into 142.42 USD (Currency Converter), which was about where RHHBY was trading for a 4 share buy. So, this told me that the U.S. ADR price was close to roughly equivalent to the ordinary shares closing price on the Swiss stock exchange.

I then wanted to determine how much of the recent decline in Roche was due to the Swiss Franc, which I view as a strong currency, but has nonetheless declined recently against the USD. I used as a proxy for the Swiss Franc the currency ETF FXF. That ETF had declined from a high of 100 on 11/25/2009, which incidentally was the day the EURO peaked against the USD, and FXF has fallen to close to $86 now, so a 14% decline. This is a link to the chart for the CHF/USD: CHF/USD Currency Conversion Chart The Swiss Franc has been gaining in value against the Euro: CHF/EUR The Swiss government debt as a percent of GDP is around 51% and growing slowly: GDC

I took a different time period for my analysis which started on 1/19/2010, the day the Roche ordinary shares peaked at 185.5 CHF. Since that time, the ADR shares, RHHBY, have declined from $45.15 to 35.5 USD or roughly 21.3%. Using the FXF chart as a proxy, the CHF has declined about 10.8% since 1/19/2010, accounting for almost 1/2 of the decline in the Roche ADR shares. The remainder is due to the decline in the value of the ordinary Roche shares price on the Swiss stock market, a decline of around 20.7 CHF from the 185.5 CHF high.

The LB reported back to the OG who concluded that Roche had already corrected a significant amount in USD terms so presto, the order was entered without giving the LB the opportunity to weigh the 1 billion or so variables relevant to the rational and deliberate decision making process. Fortunately for Headkocker, the OG was already familiar with the company.

There are not many analyst reports available to me for Roche. Morningstar has it rated five stars. Some of its major products include Avastin, Rituxan, and Herceptin, part of Genentech's portfolio of drugs. Roche acquired all of the shares in Genentech that it did not already own, around 44%, in 2009. Roche received a boost in Tamiflu sales after the most recent flu scare that is not likely to be repeated in 2010. Roche experienced about 10% revenue growth in 2009 excluding the impact of currency exchange.

This is the link to Roche's 2009 Annual Report in the pdf format. Operating profit before exceptional items grew 14% in 2009 (8% in Swiss Francs) Core E.P.S. at constant exchange rates rose 20% above the 2008 level. Roche does pay a decent dividend, but it is paid annually. The 2010 calender year dividend has already been paid.

4. Rosenberg: David Rosenberg is predicting a "meat grinder" stock market for another 6 to 8 years according to his latest missive summarized in this CNBC article.

5. Bought 100 PEPCO Holdings (POM) at $15.96 (see Disclaimer): I sold my entire position of 141 shares in POM earlier this year at 17.62. POM was never a core electric utility holding, and I had not been satisfied with a single earnings report since initiating a position in 2008. The primary cause of the earnings disappointments was Pepco's Conectiv operation. I sold my shares in April and had not been paying any attention to POM since that time until yesterday. I noticed a news story that POM had agreed to sell its Conectiv Energy power generation assets to Calpine for 1.65 billion plus the value of fuel inventory estimated to be around 50 million at closing: Conectiv Energy POM SEC Filed News Release This transaction has to be approved by the FERC, and the parties expect to finalize this transaction by the end of this month. This turns POM back into a plain vanilla regulated electric utility for the most part and will hopefully eliminate the wild up and down swings caused by the merchant power business. This is shown in this SEC filed analyst presentation at page 3: ex-99.htm At page 11 of that presentation, POM says it is committed to the current dividend. For the OG, all of the foregoing makes POM more attractive than when shares were sold back in April.

The dividend yield at a total cost of $15.96 is above average at approximately 6.83%. This is a low expectation buy. The long term chart show a lot of weakness in the stock price starting in December 2007, when shares were trading near $30. PEPCO Holdings Inc Common Stock Share Price Chart | POM I am certainly not going to hold the shares hoping for a return to that 2007 price. Instead, I would be content with POM maintaining its dividend and selling the shares in the $18 to $22 range after collecting a few quarterly dividends.

PEPCO has around 1.9 million customers in the mid-Atlantic region which includes the District of Columbia southern Maryland, Delaware and southern New Jersey. A map of its service territory can be found at Investor Relations Home - Pepco Holdings, Inc.. The current analyst estimates are for $.95 in 2010 and $1.21 in 2011: POM: Analyst Estimates for PEPCO Holdings

Price to sales is around .39, with price to book at .85 currently: POM: Key Statistics for PEPCO Holdings Inc This is the link to the 10-Q for the 1st quarter: Form 10-Q

6. Bought 50 BMY at 22.95 (see Disclaimer): Headknocker brought back the Old Geezer as Head Trader here at HQ to implement the simple large cap valuation strategy. Needless to say, the OG has not followed his instructions, paying no attention to rules or structure, and has been wandering here and there and all over in his typical scatter brain fashion. LB is sure that HK sees this lack of discipline and will restore the Stock Stud to its rightful place as HT.

The OG did not give a coherent reason for buying Bristol-Myers near the close, something about a catalyst this weekend, a rich dividend and a low valuation. The potential catalyst happens this weekend when BMY presents results of its trial for its melanoma drug ipilimumab. Forbes.com This drug does not directly attack the cancer. Instead, it spurs the immune system to attack the cancer cells. Over the years, I have invested in a few biotechs that had promising drugs for the treatment of metastatic melanoma, and ultimately they all failed at some point in the trials. In any event, it did not appear to the OG that investors were pricing in favorable results from this trial at the current stock price. BMY will also be presenting results at this American Society of Clinical Oncology meeting on Sprycel, its drug for leukemia.

As to the dividend, the current yield is around 5.58% at the $22.95 price. Bristol-Myers Squibb Co, BMY Stock Quote - (NASDAQ) BMY The stock price has retreated since 4/1 from close to $27 to less than $23, which is about where the shares traded five years ago: BMY Stock Charts

Excluding the impact of currency exchange, BMY's revenues for its first quarter increased 8% compared to the 2009 first quarter, and earnings per share accelerated 33%. Form 10-Q One main negative is that its top drug, Plavix, is coming off patent in 2011 and represents almost 1/3 of current sales. Another new drug, Baraclude, is in double digit growth. A potential blockbuster is the diabetes drug Orencia.

A list of BMY's drugs and sales figures for each one can be found at page 38 of the last Form 10-Q.

The balance sheet shows a lot of cash. As of 3/31/2010, the cash and cash equivalent number was 5.135 billion, with another 1.641 billion in marketable securities. Personally, I would have preferred that BMY keep Mead Johnson, which was split off to shareholders in 2009 in an exchange (170 Mead Johnson shares for 269 million BMY shares, which reduces the dividends payable by 344 million from the retirement of the BMY shares)

This purchase was made in a satellite brokerage account where the primary focus is an online savings account. Since I am earning around 1% on that savings now, I am investing some funds, currently around 20 grand, in high dividend paying stocks, mostly regional banks and electric utilities. The dividend yield of this grouping is close to 5% and I have realized some decent gains so far trading in this brokerage account. One percent on 20 thousand is just $200 taxed at my highest marginal rate. So my bogey is pretty low. If I can capture one or more dividends from the stocks in this satellite account, and make some money on the shares before rates move back up to say 4%, I will be pleased. Eventually, most of the stocks will be sold and the money returned to the savings account.

I have started to delve into the cash stash in the main account by buying income generating securities. Uncle Ben has finally worn me down with his two year Jihad against savers and responsible Americans. The OG was heard the other day saying that he would rather lose money than continue earning nothing in a money market account. Such a thought has never entered the LB for a nano second.

If the jobs report this morning is not pleasing to the market, LB thinks the Old Goat will take another sabbatical to study some Zen and meditate about the meaning of it all, leaving yet another mess in his wake for the Great LB to clean up.

Bought 50 CBLPRC at 21.87/Updated Information on P/E 10

I only had one fill from yesterday. Several buy orders, placed under the market bid, did not fill. I am not inclined to chase this market up, and will simply wait for it to come back down to meet the price that I am willing to pay.

1. Bought 50 CBLPRC at $21.87 (see Disclaimer): This is a cumulative preferred stock issued by the REIT, CB & L Properties. I discussed purchasing CBLPRC during the Near Depression period at $10. I have done well with the common shares bought as a LOTTERY TICKET, with shares bought in the $3 area. Since then CB & L has recovered some and recently raised its common stock dividend from five to twenty cents per quarter. CBL The common closed yesterday at $14.34.

CBLPRC has a $25 par value and has a 7.75% coupon. At a total cost of $21.87, the yield is around 8.86%. Dividends are cumulative. This security has a typical stopper provision that prohibits CBL from deferring the dividend on CBLPRC while continuing to pay dividends on its common stock. As long as common stock dividends are being paid, as now, I will receive the preferred dividend. This is a link to the prospectus: Preliminary Prospectus Supplement The stopper provision is on page S-11.

I have a general discussion of the advantages and disadvantages of REIT preferred stocks in this post: REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages I view them as a disfavored sub-asset class and will only invest small amounts in them. Notwithstanding my predisposition toward them, they have treated me extremely well so far. I still own several purchased during the Near Depression period that are yielding 15% to 25% based on my cost (doubling or tripling in price), and one that has not missed a payment at a 75% per annum yield based on my $2.9 cost, GRT-PF , now trading at around $23. GRTPRF: A WALK ON THE WILD SIDE/ KTN add RB said that that it wanted to buy a million of that one.

I have been familiar with CBL for a long time. It is one of the largest owners of retail malls in the U.S and is based in Chattanooga, Tennessee. It owns several retail malls in Middle Tennessee, including the large complex located near HQ called Cool Springs. Although I have been reviewing its quarterly reports, I had not read an analyst report on CBL for several months. I did read the S & P report before buying CBLPRC yesterday. S & P has it ranked 5 stars with an $18 price target. I also read a note in Barrons summarizing the opinion of the GS analyst Jonathan Habermann who rates CBL as a buy, apparently based on his view that it has a fairly cheap valuation.

Traditional preferred stocks will be junior to all debt issues and this REIT has a lot of debt. (see page 3 of the last 10-Q: form10q.htm) While this REIT has a lot of hard assets too, I would never want to own its preferred stock in the event CBL was not able to rollover its secured and/or senior debt. In a forced liquidation type of situation, there may be something left for the preferred shareholders after paying off the more senior obligations, but I doubt that it would be much. That is why I am being paid almost 9% to own this paper now and almost 20% when I bought shares in November 2008.

After the close CBL declared its regular preferred and common stock dividends: CBL & Associates Properties Declares Common and Preferred Stock Dividends This is a link to the firm's web site: Home Page - CBL & Associates Properties, Inc.

2. Updated Information on P/E 10: P/E 10 is my shorthand for the inflation adjusted monthly average daily closing prices of the S & P 500 divided by the 10 year average of real S & P 500 earnings. See ITEM # 2 Over-Reliance on Current 10 Year Average of S & P 500 Earnings/India GDP In that later post, I was critical of those gurus who placed undue reliance on P/E 10 to justify their bearish predispositions. This is not to say that the number is irrelevant once it is place in proper context. I view the P/E 10 number as most important when the number hits the 23- 25 range after several years of a bull run. I would sell some stocks into that kind of rally and would not pay any attention to those arguing that this time is different. I am less concerned about a reading of 20 made near the end of a severe recession, particularly when that recession was the second nasty one in the ten year period. So I view the context of the number as critical to its interpretation. The pessimists who savor this number will invariably miss every cyclical bull move, arguing that a 14 number needs to be at 7, or a 20 number in the early stages of an economic recovery is too high.

I referenced a good discussion of P/E 10 by dshort in the aforementioned post, who has updated his discussion subsequent to my earlier reference. He includes in this update the use of the inflation figures from ShawdonStats, rather than the government's CPI numbers, and that revision has a much lower P/E 10 of 14.5.

3. National Debt Surpasses 13 Trillion: It was not that long ago that the national debt crossed 12 billion, just last November in fact. The latest debt numbers equals about 89.4% of GDP: National Debt Tops $13 Trillion For First Time - Political Hotsheet - CBS News So, maybe we should not be throwing stones at Greece and Spain (Spain's debt is at 65% of its GDP and it is cutting spending, - NYT.) Obama recently signed legislation increasing the debt ceiling to 14.3 trillion, which will have to be raised again in about a year. Assuming there are around 300 million people residing in the U.S., this works out to be about 43 thousand per person. I would like to assign my share of that debt to BP or possibly those two Blue Jays that are eating all of my Sunflower seeds in a bird feeder.

4. BP: This link summarizes the 10 major mistakes that BP made before the rig explosion. Tony Hayward is tired of dealing with the Americans. He wants his life back. YouTube - BP CEO Tony Hayward: 'I'd Like My Life Back'

Bought 100 OEF at 49.61 & Sold 102 VV at 49.43/BP/Canada/ISM Manufacturing/Delays in Foreclosure Encouraging Defaults/Added 100 CLF:TO-Sold 100 CPD:TO

1. Canada: The Canadian central bank became the first among the G-7 nations to raise its benchmark rate since the start of the Near Depression. The Bank of Canada increased its overnight rate by 1/4% to 1/2%: Bank of Canada increases overnight rate target In its press release, the Bank of Canada noted that the Canadian economy grew at a 6.1% pace in the first quarter of 2010 and employment growth has resumed.

Canada largely avoided the real estate meltdown, as their banks and citizens proved to me far more prudent than those in other countries.

The Bank of Nova Scotia, Canada's third largest bank, reported that its earnings for the 1st quarter rose to a record amount.

2. Delays in the Foreclosures Process as Encouraging Defaults: The NYT had an article on the front page yesterday that focuses on the long delays experienced by lenders in completing the foreclosure process. This process takes longer in the 21 states, including Florida, that require the lender to initiate a judicial proceeding as part of the foreclosure process. As you would expect, this results in delays, as the courts are clogged with these cases and the mere filing of a motion by the homeowner's attorney can result in months of delay. The end result is that homeowners can continue to live in their homes for months rent free. The average number of days that homeowner continues to live in their home has risen to 438 days. Homeowners are aware of this delay. When coupled with the deterioration in home prices, the temptation to quit making mortgage payments is understandably very strong.

The delays also encourage strategic defaults by homeowners who are capable of making the mortgage payments. This has already become prevalent in 10 states that do not allow the lender to collect a deficiency judgment against the borrower's other assets. Item # 4 Strategic Defaults

When you read stories about the rationale given by homeowners for defaulting, it is rare to read that a homeowner actually taking any responsibility for their own predicament. Invariably, someone else is too blame. There is just an undeniable reality that a large and growing percentage of Americans believe that they have a right to be free from taking any responsibility for their own actions and mistakes.

If politicians were really anxious to prevent another meltdown cause by a real estate bubble, then there would first need to be a recognition that all Americans do not have the inalienable and constitutional right to buy a home that they can not afford. While this seems obvious after what just happened in the U.S., the financial reform bill, touted by the Democrats as an effort to prevent another Near Depression, does not address the real problem, primarily for political reasons, of improvident extensions of credit to buy homes.

If politicians of both tribes were interested in actually dealing with the core issue that caused the recent Near Depression, the solution is relatively simple. You have to be able to afford the home that you want to buy. This would not be accomplished by hoping or praying that financial institutions and individuals will behave rationally and in a somewhat responsible and intelligent manner. Instead the goal would be accomplish by first recognizing that a prolonged bout of responsible behavior is not likely to occur and that national minimum standards for the extension of credit need to be established. This will never happen which goes without saying. The Tea Party crowd will complain about the government "taking over" the mortgage business. The Democrats will be concerned about their constituents being able to buy homes that they can not afford.

In a more ideal world, the minimum standards would not be difficult to visualize. A certain amount would have to be paid as a down payment and this number could be 5%. You want the homeowner to have some skin in the game to encourage rational decision making. There could be a limit on the ratio of disposable income to the mortgage payment, say 32%. Interest only loans would be barred and all of the funky mortgage "innovations" like negative amortization loans would be prohibited.

Possibly, if there was a strong desire to be a little irresponsible and to accept some of Wall Street's "innovations", you could allow up to 5% of the home mortgage loans made by a financial institution to be exempt from the national minimum standards, but the financial institution had to eat those loans. No packaging them in Wall Street abominations like CDO squared to be peddled to every sucker on the planet would be allowed in this new epidemic of responsible behavior. Lastly, the Supreme Law of the land would be that a lender can collect a deficiency judgment against anyone who defaults on paying a note. This would cut down on strategic defaults and make individuals accept responsibility for their own mistakes. Those kind of sensible rules would prevent a credit fueled bubble in housing prices which is what just happened. However, there is no political will to actually implement rules that would actually work.

Possibly the new rules could be lifted for a few years after the nation underwent another Great Depression lasting fifteen years or so. Such an event would at least serve the salutary purpose of reeducating the American population about self reliance and fiscal responsibility that have are now quaint and largely forgotten virtues.

3. ISM: The ISM Manufacturing index for May was a stronger than expected 59.7. The consensus estimate was for a reading of 58.7. The new orders component was unchanged from the prior month at a strong 65.7. Employment ticked up to 59.8 from 58.5 in April. The market rebounded after this report yesterday.

4. Bought 100 OEF at $49.41 and Sold 102 VV at $49.43 (Large Cap Valuation Strategy)(see Disclaimer): OEF is an ETF for the S & P 100: iShares S&P 100 Index Fund (OEF): Overview The expense ratio is .2%. As mention in the earlier post discussing the large cap valuation strategy, I mentioned that this was one of the ETFs that I might purchase to gain quick exposure to many of the companies that fell into this category. Some of the companies contained in this ETF would not qualify for purchase under any strategy, but a majority would so qualify under the large cap valuation strategy or the dividend growth strategy, or both. This is a link to the current holdings and weightings: iShares S&P 100 Index Fund (OEF): Holdings The top ten holdings include in the order of their weightings the following: Exxon, Apple, Microsoft, PG, GE, IBM, JNJ, BAC, JPM, & WFC. The financial companies would not qualify for purchase under any existing strategy. The next ten in order of weightings are CVX, AT & T, CSCO, PFE, KO, INTC, Google, BABY BERKSHIRE, HPQ AND WMT. I would personally prefer that grouping of ten stocks to the first ten.

Under the restrictive trading rules now in effect, a security had to be sold to pay for the OEF purchase. I sold another ETF roughly equal in value, VV, from Vanguard that has about 750 large companies. That one is viewed as potentially more vulnerable to a continuation of a market correction than OEF. Both would go down in the event the market continued its downdraft, but I suspect OEF would go down less. I have close to a $800 long term capital gain in VV, having purchased 100 shares in May 2009 at $41.45. Morning Notes May 27 2009: BOUGHT VV at $41.45 

VV 101+ SHARES +$781.6

I also sold the shares purchased with the dividends. I like VV for large cap exposure, and the expense ratio is low at .12%: Vanguard - Large-Cap ETF - (VV). But I view the current valuation advantage to be in a concentrated list of the mega cap companies so I in effect substituted OEF for VV. I am also inclined to take some long term capital gains in 2010, when I at least know that the maximum tax rate for a long term capital gain is 15%, rather than waiting until 2011 when I suspect that it will be higher.

Cash flow from dividends and interest will be able to support only very modest purchases of stocks fitting the criteria of the mega cap valuation strategy. I would anticipate that most of the purchases in the coming months will be in the 30 to 50 share range, which will work out assuming the market continues to drift down. If IBM continues to decline some, I will most likely target it for a 30 share buy with cash flow received in late May to mid-June along with the proceeds from the sell of HMA last week.

5. Vix: Yesterday, the ^VIX rose over 10% to close at 35.54. Since late April, the VIX has been signaling a market correction. The current pattern is an Unstable Vix Pattern that has been in place since August 2007 when a Trigger Event ended the long standing Stable Vix Pattern that had formed in 2003. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern The rise yesterday to the mid 30s is consistent with the pattern of an ongoing correction and a continuation of the Unstable Vix Pattern, as the market gropes for a level where investors are comfortable buying again. We are not there yet.

6. Added 100 CLF:TO at $20.32 CAD and Sold 100 CPD:TO at 16.35 CAD (see Disclaimer): I view the ETF CLF:TO to be a safer credit risk than CPD:TO, which explains this exchange. The ETF CLF:TO invests in Canadian government bonds, whereas the ETF CPD:TO invests in "preference" shares. I also view the ETF CLF:TO to have less interest rate risk since the maturities are rolled every year. This Claymore Canadian ETF will invest equal amounts in 1 to 5 year bonds issued by Canadian governments. Once the five year bonds reach year six, then the proceeds are rolled back into bonds maturing in 1 year. This process helps to insulate the investor from interest rate risk, though not entirely of course. I basically came to the conclusion that the 1% advantage in yield of CPD was not worth the credit and interest rate risk.

The purchase of 100 CLF:TO adds to my current 100 share position bought at 20.10 CAD: Sold HSE:TO at 30.48 CAD/Bought 100 ETF CDZ:TO at 19.24 CAD and 100 of ETF CLF:TO at 20.10 CAD/ The ETF with preference shares issued by Canadian corporations was bought at $16.09, so it was sold at a few dollars loss after commissions: Bought 50 EUO at 21.73/ Bought 100 CBO:TO at 20.4 & 100 CPD:TO at 16.09

The web site for Claymore ETF CLF can be found at Claymore 1-5 Yr Laddered Government Bond ETF - CLF. Management fees are .15%. The next ex date is 6/25/2010, and distributions are paid quarterly. I will take my distributions in Canadian dollars. A list of the holdings can be found at Claymore.

7. BP: I do not own shares in BP. BP shares fell another 15% yesterday, falling to $36.52, after its top kill approach failed and the government announced a criminal investigation was underway. NYT The information trickling out about BP's conduct at the Deepwater Horizon rig prior to the explosion lends support to a criminal investigation.

The latest revelation originates from the WSJ reporters who are doing a good job of unearthing relevant information. One of its latest modifications at the site of the explosion, the use of a single 7 inch pipe to reach into the well, was less expensive than the better option and less safe. This seems to be the modus operandi at BP. Use the less safe and less expensive option of dealing with a problem. BP determined that the option it followed was the "best economic case". Those kind of statements, quoted from a BP document in the WSJ article, will come back to haunt BP in subsequent proceedings.

Though I have no desire to be a shareholder of BP or to have any connection with it whatsoever (and this extends to a refusal to buy gas at a BP station), it is hard to see how the destruction of almost 70 billion in share value since the explosion is a reasonable approximation of BP's potential liability and losses. money.cnn.com

I am inclined to agree with Cramer that this incident will put the kibosh on any new, U.S. deepsea offshore drilling for many years to come. Cramer highlighted in his show yesterday the awful technicals of the ETF OIH, which contains oil service stocks, many of whom have minimal connections to drilling in the Gulf of Mexico and no connection to this oil spill. CNBC While that is true, investors are not reacting in a totally irrational manner, though most of the trading in names unconnected to the oil spill appears to be mostly fear driven, sort of like imagining the very worst and then convincing yourself that it is about to happen. Many investors are probably shaken by what they are reading everyday in the press now, which is revealing a mind numbing level of incompetence in deep sea drilling, plus the overall lack of preparedness to deal with the worse case type of scenarios and the incessant cutting of corners on safety to enhance profits. The result of this mostly fear driven thought process is a realization that the next accident resulting from gross negligence might involve a different set of players. The possibility of this kind of disaster happening to another firm is probably being factored into the share prices now, in addition to the potential loss of new business associated with drilling offshore in the U.S.

Response To Question About Heineken ADRs

When an investor starts to compare the American Depository Receipt (ADR) price to the price of a foreign companies shares on its local exchange, you need to keep in mind that the ADR may represent some fraction of a share in the foreign company, or a single share, or even multiple shares of the stock. Many ADR shares will equal one share (1 to 1) of the foreign company shares.

The question had to do with the pricing of Heineken shares on the pink sheet exchange and in Europe. The Heineken unsponsored ADR with the symbol HINKY equals .5 of the Heineken ordinary shares. This information is shown on the quote page of the pink sheet exchange. So, to own the equivalent of 1 ordinary Heineken share, I would have to buy two shares of HINKY.

As I am writing this post, the last trade on HINKY was $21.52. If I bought 2 shares, the cost without commission would be $43.04. Then to compare the price to the 1 Heineken share trading in Europe, I would have to convert that sum into EUROs and the rough conversion amount would be about €35 at the current exchange rate. This was where Heineken closed on the the Amsterdam and Frankfurt exchanges. HEIA.AS: Summary for HEINEKEN HNK1.F: Summary for HEINEKEN

I would go further than this comparison and attempt to determine the percentage impact on the ADR price due solely to the weakness in the EURO and the amount of the percentage correction, if any, of the stock in its local currency.

Financial information is best acquired from Heineken's web site: Heineken International Heineken International I did find its last annual report that was copied and filed with the SEC: www.sec.gov The net profit in 2009 was shown in that report at €1,018 million. More information about the company is available at the Reuters profile page. I do not have a position.

Added 6/5/2010: More on the Heineken share classes can be found in the comments to this post and a subsequent post from me at Item # 2 Heineken Share Classes

Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas/Over-Reliance on Current 10 Year Average of S & P 500 Earnings/India GDP

Early this morning, markets are continuing to take their cue from Europe and particularly the declining EURO. The EURO fell this morning to a four year low, hovering around $1.21. MarketWatch The Dollar Index US (DXY) continues its march to 90 rising to the mid 87 level in early trading this morning. The DXY is heavily weighted in the Euro and bottomed on 11/25/2009 at 74.27 when the EURO hit its maximum level of strength against the USD.DXY Index Charts - (NASDAQ) US Dollar Index Future (a rise in the DXY indicates the USD is gaining in value against a basket of six currencies)

The ECB did not give sentiment an uplift by predicting that European banks would need to write-down 239 billion dollars in loans in 2010-2011. There was a report in a Spanish newspaper that the second largest savings bank, Caja Madrid, was requesting aid from the government.

Hewlett-Packard announced today that it plans to eliminate 9,000 jobs over several years as it plans to to spend 1 billion to automate its commercial data centers.

1. Buying Foreign Assets-Waiting for a Strong Currency and Weak Asset Price In Local Currency: Back in the late 1970s and 1980s, many in the U.S. were concerned about Japanese individuals and companies buying up U.S. assets. Back in those days, a dollar would buy over 200 YEN and as much as 300 Yen in 1974-1975. Between 1980 to 1985, the dollar would generally buy 200 to 250 YEN. (see table at the end of Japanese yen) The dollar was the strong currency. Now, a dollar will buy about 91 YEN. The Yen is the strong currency relative to the USD. On March 9, 2009, the dollar was buying about 99 Yen.

Now, if I was sitting in Japan waiting for an opportunity to buy U.S. assets, I would wait for the confluence of two events, and I would be patient. I would wait for my currency, the Yen, to be strong against the USD and for the U.S. assets to fall significantly in value. Then, assuming I could find assets worth owning, that would be the time to pounce. I would not want to buy U.S. assets when a dollar would buy 250 YEN. I want to use a strong currency to buy assets priced in a weaker one that have fallen a lot in value in local currency terms. This would have been the case for the Japanese investor in March 2009.

While major buying opportunities will not come along frequently, there will be a number of times when it would make sense for a U.S. investor to prepare a shopping list of foreign companies to own. Europe is one area that is becoming more interesting by the day due to the significant decline in the EURO and a correction in European stocks occurring at the same time. Australia would be another market. I just bought some shares in National Australia Bank whose shares had declined 32.76% from an October 2009 price for a U.S. investor, and 25.9% in local currency terms: ADDED 50 NABZY AT 19.51 (National Australia Bank) I have just started to analyse how much certain European companies have fallen in value in USD terms and their declines in local currency terms. Since around November 25, 2009, the Euro has declined about 18.5% against the USD.

Take a stock like Heineken. It is available for purchase on the pink sheet exchange: Heineken N.V. - HINKY The close was 23.92 on 11/25/2009 and $21.45 last Friday. HEINEKEN NV ADR Share Price Chart What does that tell me? It tells me Heineken has been rising in local currency terms during the period of the Euros major decline. So, I can scratch Heineken off this particular list, at least for those companies where I am looking for both a significant loss on the local exchange due to the stock market correction and a decline in value to me as a U.S. investor due to the more favorable currency exchange. I checked one of the European quotes, and found that Heineken had risen in value during the period of maximum loss for the Euro (since 11/25/09). HEINEKEN Share Price Chart | HEIA.AS My interest in Heineken would perk up when and if the shares and the EURO hit an air pocket at the same time. That started to occur to a minor degree in May.

A different situation is presented by Sanofi (SNY), which closed last Friday at $29.91, down from $39.5 on 11/25/09, a 24.3% decline. The decline on the Paris exchange was around 6.13%: SANOFI-AVENTIS Share Price Chart | SAN.PA This is not an argument to buy SNY, but simply points out that the down price action in the U.S. market is mostly currency related. If the Euro continues to sink against the USD, it would pay for me to wait to buy SNY. I do not know what the future will bring however. I do know that, if I bought SNY at Friday's close, it would be almost 19% cheaper to me than a purchaser on 11/25/2009 just on the currency exchange factor. For now I am more willing to play this angle with the AUD than the EURO.

Barrons has a different twist on the weakness in the EURO, suggesting in an article this week that investors focus their attention on large European companies that have substantial revenues outside the Eurozone. This involves the same logic as buying a U.S. multinational during periods of prolonged dollar weakness. I have some interest in some of the 10 stocks recommended in this article. Siemens (SI), one of the ten, might be an alternative to me for GE at some point, since I reached my tolerance level for management's ineptitude about 18 months ago. Siemens has risen about 8% on a German exchange since 11/25/2009, whereas the ADRs (SI) have fallen about 11.4% since then. SIEMENS Share Price Chart | SI

2. Brett Arends Column in the WSJ.com: Arends argues that the recent decline may be a harbinger of things to come. When there is a fast fall in the market, the technical indicators will look bad. Arends quotes John Hussman who maintains that his technical indicators had been this bad only 19 times before and the market on average fell 20% over the next 12 months. Arends asserts, without citing any sources, that the market may be as much as 50% overvalued when comparing shares prices to asset costs or normalized earnings. I have not seen any estimates that support that statement. Goldman Sachs recently raised its 2010 forecast for the S & P 500 earnings to $78 and its 2011 forecast to $93. At $93 and an index value as of Friday's close at 1089 (^GSPC), this would put the forward multiple at 11.71, which does not seem 50% overvalued to me.

If Arends is referring to the inflation adjusted monthly average daily closing prices divided by the 10 year average of real S & P earnings (P/E 10), then the market is overvalued since the historic average is around 16.3. A good discussion can be found at dshort.com: Is the Stock Market Cheap? I would note something that is frequently not admitted by those who will use a P/E 10 number to justify their predisposition to bearishness. The past 10 years includes two deep recessions. In another two years, there will only be one recession included in the 10 years of earnings data. And, assuming a mild to robust recovery in earnings, the normalized earnings for a ten year period will look a lot different in 2013 than it does now in 2010.

Looking at the chart in dshort's article linked above, the clear sell signals in history were when the P/E 10 hit 32.5 in 1929 and 44.2 in 1999. In retrospect, the 25.1 P/E 10 in the early 1900s and the 24.1 hit in the mid 1960s would have been good times to get out of Dodge and then to come back when the P/E 10 number hit the mid-to-high single digits. The article is dated in early May before most of the recent drop in the market averages started to occur. The P/E 10 number was 21.9 at the end of April, which probably added some fuel to the downdraft in May 2010.

The chart in dshort's article is the same kind of chart that was published in the NYT in March 2009, which made an impression on me at the time and actually buttressed my decision to buy stocks then. These charts also reinforce the need to sell parabolic rises such as the rise in 1999. Cramer Discusses Parabolic Rises/My Prior Discussions of Selling into Parabolas

Anyone who uses the P/E 10 number coming out of a recession may be attempting to justify a pessimistic outlook without undertaking a more thoughtful examination of the limitations of a blind adherence to a number without taking into account the entire context. David Rosenberg, who is currently forecasting 850 on the S & P, is a good example, as shown in his use of PE 10 in one of his recent missives (reprinted at ritholz.com) The fact that the P/E 10 number might be abnormally low now due to its inclusion of two deep recessions, including the one that has hopefully just ended, is an obvious point.

Notwithstanding the importance of this context, and context is invariably important, Professsor Shiller was insisting in February 2009 that the P/E 10 fall into the single digits before he could recommend stocks. Interview 2/23/2009 Shiller Stocks Not Yet Cheap Enough for Me: Tech Ticker The P/E 10 was then at about 14, impacted by two serious recessions being factored into the ten year earnings numbers. It is also important to take into account that the recent recession was not a normal one. The loss in the S & P 500 in the 4th quarter of 2008 was a record. The P/E 10 treats this type of event as something to be reasonably anticipated in every 10 year cycle even though it is more likely than not a once in a lifetime event And several large losses by financial companies and former S & P companies like Freddie Mac will distort a true picture of corporate America's profitability until 2018 for anyone placing undue emphasis on P/E 10.

Lastly, the stock market is forward looking and anyone who places undue reliance on the past will be missing major bull cycles on a continuous basis. Still, when the P/E 10 reaches 25 during a major secular bull market, it is time in my opinion to turn cautious. I am less concerned about a 20 reading after two recessions during the 10 year period, particularly a reading taken in a possible transition period to a multi-year up cycle in corporate earnings coming out of a once in a lifetime Near Depression.

At 1050 on the S & P 500, the P/E 10 is around 19.1.

Another doomsday use of P/E 10 can be found in Paul Farrell's column in MarketWatch from last Tuesday.

Dshort.com also has an interesting discussion of long term secular bull and bear markets, a frequent topic of discussion in this blog. I would use different dates to mark the beginning and end of the long term bull and and bear patterns.

3. India's GDP: India's GDP expanded 8.6% in the 1st quarter of 2010. India's government increased the GDP numbers for the 3rd and 4th quarters of 2009 to 7.9% and 6.5% respectively. Inflation is running hot at close to 10% in the first quarter.