Medicare Fraud/Regional Bank Basket Table/3rd Quarter GDP Revised Down/Bought 1 Commercial Metals 6.5% Senior Bond Maturing 7/15/2017 at 94.75/Sold 51+ CBU at $26.82/ Sold 50 ACET at $7.02

The headlines yesterday claimed that the market advanced on positive economic reports. One of those reports was a downward revision in third quarter U.S. GDP growth. The government's latest revision for the 3rd quarter claims 1.8% real GDP growth, down from the 2% estimate made last month. Two months ago, the estimate was at 2.5%.  Gross Domestic Product Consumer spending for services was revised down to 1.9% from 2.9%.

In another report, the thirty year, average mortgage rate hit an all time low of 3.91%. Primary Mortgage Market Survey (PMMS) - Freddie Mac  The 15 year was at 3.21%. Overall, I view that as a negative signal about the economy. For those who are able to refinance at those rates, it is of course positive.

I do not have a mortgage, being a confirmed member of the Saving Class, but that 15 year rate is sure tempting to the OG. RB just said, "get the loan and lets go to Vegas, play some blackjack for a $1,000 a hand, and have some fun."  LB added that the "market was providing an abundance of fund, providing many opportunities for the LB to work on its trading rules for the Unstable Vix Pattern"

A positive piece of news was the decline in initial claims for unemployment to the lowest level since April 2008.

Tokio Marine is acquiring Delphi Financial (DFG) for $2.66 in cash. Delphi has one exchange trade bond, DFP, which popped closer to its $25 par value on the news. DFP closed at $24.45 yesterday.  S & P affirmed the ratings of Tokio's core subsidiaries.  Reuters  SEC Form 8-K 

Reuters published an article earlier this week about criminals forming shell companies to fraudulently bill medicare for services and equipment. I mentioned a similar series of stories in a February 2010 Post: Rampant Medicare Fraud Rather than attempting to chase the scumbags after they bill billions to Medicare, a more viable alternative would be verify the legitimacy of every provider before they could bill anything to Medicare. For new companies, the verification could be quite extensive for new companies, including a physical examination of the firm's premises by an inspector which would often catch the criminals before their scheme even starts. By some estimates, the U.S. loses 60 billion a year to Medicare fraud and the criminals show no signs yet of being fearful of a possible conviction or serious jail time in the unlikely event that they are caught and convicted.

The TC HJO, which contains an Aon Capital TP as its underlying security, is ex interest today for its semi-annual interest payment.

The WisdomTree Emergency Market Currency ETF (CEW) went ex dividend for its annual distribution on 12/21/11. The 2011 distribution came to $1.0572 per share. I own 100 shares for diversification purposes. 

John Hussman argues in his last commentary that the U.S. is "on the cusp of observable economic deterioration". Hussman Funds  Given his generally pessimistic stance, it is not  surprising that his Hussman Strategic Growth fund declined only 9.02% in 2008 and rose a horrific 4.63% in 2009. The Hussman Strategic Total Return return rose 6.34% in 2008, which was extraordinary, but then managed only a 5.84% return in 2009. All of those numbers originate from MSN Money. I do not not own either fund.

1. SOLD 50 ACET at $7.02 Last Tuesday (LOTTERY TICKET Basket Strategy)(see Disclaimer):  I was satisfied with the percentage return in this LT so I sold it.

Item # 3 Bought 50 ACET at 5.07 as Lottery Ticket (September 2011 Post)

This post contains snapshots of realized gains and losses for this strategy: Lottery Ticket Strategy: New Gateway Post 

This is my second round trip for ACET. 

2, Trustmark (own: REGIONAL BANK BASKET STRATEGY):  BB & T initiated coverage of TRMK with a buy and a $25 price target.  Bought 50 TRMK at 19.57 (August 2010)

3. Bought 1 Commercial Metals 6.5% Senior Bond Maturing 7/15/2017 at 94.75 Last Wednesday (Junk Bond Ladder Strategy)(see Disclaimer): 

Commercial Metals is a publicly traded company. The current consensus estimate for the F/Y ending August 2012 is $1.05 and $1.76 for F/Y 2013. CMC Analyst Estimates 

Commercial Metals profile page at Reuters

Commercial Metals key developments page at Reuters. 

CMC's business is described in great detail, starting at page 3 of its recently filed  Annual Report. As of August 31, 2011, CMC had $222+ million in cash and $1.198+ billion in long term debt. The debt is described in note 9 starting at page 57.

This bond is currently rated Ba1 by Moody's and BB+ by S & P.  FINRA While those ratings are still in junk territory, they are much higher than most of the bonds purchased pursuant to this exceedingly risky strategy. 

Interest is payable semi-annually in January and July. Prospectus 

I am assigning an initial 4 rating in my Personal Risk Ratings For Junk Bonds.

My confirmation states that the current yield at my cost is 6.802% and the YTM is 7.493%. 

4. Sold 51+ CBU at $26.82 (REGIONAL BANK BASKET STRATEGY) (see Disclaimer):
Somehow, I ended up with 50 shares of CBU in two separate satellite taxable accounts. Added 50 CBU @ 25.19 Bought 50 CBU @ 23.18 I decided to sell the highest cost shares bought at $25.19, keeping the shares bought at a slightly lower price in another account. I will look for an opportunity to add to the remaining shares when and if I can average down.

Regional bank stocks had a good rally yesterday. Community Bank System closed at $27.59 in trading yesterday.

After taking a $600+ tax loss on Porter (PBIB), my realized gain for this strategy was reduced to $7,642.05: Item # 3 Realized Gains Regional Banks

This is a snapshot of my current positions in this basket, which does not include shares purchased with reinvested dividend but does include stock dividends:

Regional Bank Basket Table as of 12/22/11

I certainly may be wrong about my big picture forecasts. I currently believe that the stock market is near a cyclical top and is more likely to decline 10% than to rise 10%.  If that forecast proves to be correct, then I will have plenty of opportunities to buy securities at lower prices. If I am wrong, then my portfolio will still go up in value, but not as much as the market averages, unless there is a significant move up in non-equity asset classes such as junk bonds, preferred stocks, exchange traded bonds, Canadian bond ETFs, etc.

I have been arguing in this post for about two years now that the S & P 500 would face stiff resistance between 1250 to 1300. As an example, I mentioned in a post from June 2010 that I anticipated range bound movement mostly between 950 to 1250 for at least two more years. Stocks, Bonds & Politics and Item 2  Problems Brewing for Stocks (4/1/2010). This is consistent with my thesis that the rally off the March 2009 lows was a cyclical bull market within the context of a long term secular bear market.

The longevity of this bear market has been caused by too much debt among individuals and governments in most developed countries. More on 1982 or 1974 (September 19, 2009 Post) 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 18.2009 Post) The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets (6/27/11 Post) The Roller Coaster Ride of the Long Term Secular Bear Market (5/16/10 Post)

A new reason supporting that range can be found in Jeffrey Grantham's December 2011 commentary: www.gmo.com/ 3Q11.pdf (see Exhibit 1) I am nowhere near as pessimistic as Grantham, but I am certainly cautious now. 

Sold 200 of the Bond CEF IMF at $17.78/Bought 1 Telecom Italia Capital 5.25% Senior Bond Maturing 11.15.2013 at 96.429

European banks drew €489 billion on the European Central Banks new, first ever three year loans. Reuters Is that a positive development in the ongoing financial crisis?

There are two ways to look at it, and both are correct in my opinion. It is positive that the ECB is taking action to prevent solvency events due solely to a lack of liquidity. It would not be wise to allow sound financial institutions to fail due solely to a temporary lack of liquidity. In this context, I would draw a distinction between solvency events due to temporary liquidity problems and solvency due to poor investment and lending decisions and/or recessionary conditions.

However, it is extremely negative that the ECB believes that such a program is necessary. In my judgment, the negative outweighs the positive. These kind of central bank programs are just exceedingly extraordinary. I do not find any comfort that the ECB and the Federal Reserve believe that it is necessary to pull rabbits out of their hats. I would also place these events in a time perspective. Next September will be the 4th anniversary of Lehman's collapse.

I bought a new Apple desktop computer for less than $1200 that contains a 2.5 GHz Intel Core i5 processor. I am amazed by the speed of this computer compared to my older IMAC purchased for several hundred dollars more.

The computer came with a wireless mouse and keyboard. While I have no idea whether it is the new Lion operating system or the mouse, or more likely a combination of both, I can flip back and forth between web pages by simply moving my finger to the left and right, a really helpful feature for me.

I have noticed a major problem, however, with that feature. When writing this blog, I have lost content that has not been saved when I accidentally move my finger sideways which causes a page flip. Instead of flipping the page, a pop up message appears, asking me whether I want to leave the page since content has not been saved yet. It does not matter how that question is answered. I can click the tab that says stay on the blogger page or the tab confirming the exit from that page. Either way, I lose the content that has not been saved yet by blogger's automatic saving feature. The positives of this feature outweigh the negative.

Earlier this week, I mentioned that the federal government was running over a trillion dollars in the red every year now. A trillion dollars would be more than the entire national debt from inception to around 1980.  While reading a book about President Garfield, I noted a couple of interesting tidbits about spending during his administration. While Congress did   fund the Secret Service after Lincoln's assassination, funding was slashing in half from around $75,000 per year before Garfield became President, and there was no money to provide the President with bodyguards. Garfield was assassinated with no Secret Service protection. Garfield's wife had to enlist the aid of the news media to shame the Congress into spending 30 thousand to repair holes in the White House rugs. 

1. Bought 1 Telecom Italia 5.25% Capital Senior Bond Maturing 11/15/2013 at 96.429 on Tuesday (see Disclaimer): This bond is rated investment grade. The current ratings are Baa2 by Moody's and BBB by S & P. Telecom Italia's common stock is traded in the U.S. under the symbol TI. I had read recently a blog in Barrons.com that Gimme Credit had upgraded its credit score for TI based on improving cash flow. I do not currently have a concern about being repaid at maturity.  

Telecom Italia profile page at Reuters

Key Developments page at Reuters

Telecom Italia website

FINRA information on this bond

Link to Press Release Announcing 2011 Third Quarter Results: Telecom Italia - 6k
Link to 2010 Annual Report filed with the SEC: Telecom Italia Form 20-F

This note was originally issued in a private placement and later exchanged for one registered with the SEC. Amendment No. 1 to Form F-4

My confirmation states that the current yield at my cost is 5.399% and the yield to maturity is 6.829%.  Given the short maturity, the investment grade, and the likely continuation of the Fed's Jihad against the Saving Class into 2013, I thought that those yields were barely acceptable. 

2. SOLD  200 of the Bond CEF IMF at $17.78 Last Tuesday (see Disclaimer):  IMF is a low yielding bond CEF that invests mostly in U.S. inflation protected bonds. I have been buying and selling this CEF, along with the similar fund WIW, on multiple occasions, usually for small profits after collecting one or more monthly dividend payments. I bought these last shares last October at $17.45.  Prior trades include the following:  Bought 300 CEF IMF at 16.5 May 2010; Sold: 300 IMF @ 17.23 October 2010; Bought 200 of the Bond CEF IMF at 16.64 February 2011 Sold at Few Days later; Sold 200 IMF at $17.15 February 2011.  I trade WIW more frequently. I currently own 200 WIW shares. Item # 1 Bought:  200 WIW at $12.63 (9/29/11 Post)(contains snapshots of prior trading gains for both WIW and IMF). 

I may be prejudiced against U.S. government bonds at their current yields. Personally, while I may end up being wrong, I view the current pricing to be asinine. Five year treasury notes are yielding around .86%. The inflation protected 5 year has a negative coupon of close to 1%.

Bloomberg

The current yields of U.S. investment grade and treasury bonds do not reflect a rosy economic outlook for 2012.  What does a negative coupon suggest about the world?

The ten year inflation protected U.S. treasury also has a negative yield. IMF does have a better current yield at the indicated monthly rate of 5 cents per share. IMF Distributions  

Velocity of Money and Money Creation/GIS TRST/Sold 300 CMK at $8.19/Robust Market Rally Based on Hopium

For those who are committed Stock Jocks, the website Zerohedge provides a consistent daily dose of negativity about the stock market. The site is especially appealing to connoisseurs  of negativity. The site is viewed here as consistent with Alan Abelson's perpetual negativity about stocks, though I find it to be generally more informative than Abelson.

A reader referenced this article that contains some worthwhile discussion supporting a negative outlook for 2012. ZeroHedge One of the charts referenced in that article shows the correlation of the S & P 500 and the velocity of money. This kind of correlation varies over time but the overall correlation is positive. There was a positive correlation, as noted by the author, between 1991 and 2009. There was an overall robust move in stocks and the velocity of money between 1991 to 1999. There was a high positive correlation between 2000 to around 2009, for both the up and down moves of these two indices. There was, however, a negative correlation during the robust stock rally between 1982 and 1987. The point of the author is that the velocity of money has continued to trend down significantly while stocks have rallied since 2009. 

The St. Louis Federal Reserve has an abundance of worthwhile charts for those looking to form opinions on the big picture issues. One of these charts is the velocity of M2:

Velocity of M2 Money Stock (M2V) - FRED - St. Louis Fed

If the money does not circulate and is hoarded by financial institutions, then printing more money will not be a catalyst for growth.

It is also questionable whether the Federal Reserve's Jihad will have a net positive impact on economic growth, given the negative impact on the saving class who would be in a position to spend more but for the Jihad. The Real Cost of The Federal Reserve's Jihad against the Saver Class What Are the Reasons for a Continuation of the Fed's Jihad Against the Saver Class     

This is a link to a positive article about Trustco (TRST) published by Motley Fool. I am near break-even on my position 370+ share position. I am reinvesting the dividends. REGIONAL BANK BASKET STRATEGY GATEWAY POST

I do not believe that there was any news that justified the market's robust rally yesterday. Some traced the spurt to an uptick in German business confidence, an index that moved up to 107.2 in November from the prior month's 106.6. Bloomberg This sounds ridiculous because it is.

Another purported reason was an increase in building permits. Building permits did jump due to more apartment starts. MarketWatch I would not call a 32.2% spurt in multi-family housing starts, off historic lows, as synonymous with a housing recovery. There was also a slight downward revision in housing starts for the prior month when the consensus called for an upward revision.

The rally yesterday appeared to me to be another one based on hopium. Consequently, I made a small add near the close yesterday to a double short. My current relatively small hedges went from profit territory to slightly negative yesterday.

1. Sold 300 of the Bond CEF CMK at 8.1928 Yesterday (see Disclaimer): Other than two bond CEFs that own U.S. inflation protected securities, CMK was the lowest yielding one currently owned by me. This CEF does pay monthly dividends and was selling at over a 9% discount to its net asset value last Monday.  CEFA

I took a small long term loss on this security.  Bought 300 of the Bond CEF CMK at $8.39 (August 2010 Post)

It is important to double check the yields provided by financial websites. Marketwatch currently shows that the yield for CMK at 9.52% which is simply not correct. This CEF pays a monthly dividend at the rate of $.038 per share.  MFS InterMarket Income Trust I In December, the rate was increased to $.065 but this was not a new monthly rate. Instead, there was an additional distribution for December 2011 so the fund could pay out its income for 2011. Marketwatch assumes that the $.065 rate will be paid for 12 months which is how it calculates a 9.52% yield. A more accurate yield would be 5.56% ($.038 x. 12 ÷ by $8.19 total cost=5.56%). I would not assume any additional payment in December 2012.

I have a few other sales from yesterday that I will discuss in subsequent posts. I am coasting until the end of this year.

2. General Mills (own: Common Stock Dividend Growth Strategy) General Mills reported adjusted earnings per share of 76 cents for its Q/E 11/27/2011, its second fiscal quarter, unchanged from the year ago quarter.  The consensus estimate was for 79 cents on that basis. The company reaffirmed its full F/Y 2012 guidance of $2.59 to $2.61, excluding integration costs connected with the Yoplait acquisition and mark-to-mark effects.  Margins are being pressured by higher costs. 

AMAT/Some Positive Economic News Last Week/Sold 100 TRK at 13.96

The author of this article at MarketWatch argues that Applied Materials would be good investment for those with a two to five year time horizon. I am likely to add to my 50 share position when and if the price sinks below $10. I am currently sitting on a small unrealized loss after trading AMAT for small gains. Bought 50 AMAT at $12.45 (6/28/11 POST).

Fitch put several European nations on credit watch for a potential downgraded last Friday, noting that a comprehensive solution to the credit crisis appeared "beyond reach" Reuters Bloomberg  WSJ  

The U.S. GDP is around $15 trillion (research.stlouisfed.org). The total indebtedness is around $52 trillion (Total Credit Market, or about 350% of GDP. Debt was at 250% of GDP in 1998. Of the total indebtedness number, the federal government's share is over 14 trillion and growing at over a trillion per year annually now.

Federal Government Debt: Total Public Debt (GFDEBTN) - FRED - St. Louis Fed

The S & P 500 will need to close above 1,257.64 to end higher for 2011. ^GSPC Historical Prices This index closed at 1205.35 yesterday. Given the inflation rate and dividend yield for this index the closing number would have to be slightly higher to provide a real rate of return for 2011.  

There was some positive economic news last week. The PMI number released by the N.Y. and Philly Federal Reserve Banks showed expansion in the manufacturing sector. www.philadelphiafed.org.pdf Empire State Manufacturing Survey- Federal Reserve Bank of New York The new order index rose in the Empire state region to 9.5.

CPI was unchanged in November on a seasonally adjusted basis. Over the past 12 months, CPI has risen 3.4% before seasonal adjustment. Consumer Price Index Summary

The seasonally adjusted initial claims for unemployment fell to 366,000 for the week ending December 10, much lower than the consensus estimate of 380,000. ETA Press Release: Unemployment Insurance Weekly Claims Report This was the lowest number of initial claims since May 2008.

Bank of America closed below $5 in trading yesterday. Goldman Sachs declined $2.4 to close at $87.7, which is close to a five year low. GS Stock Charts

Paul Krugman argues in his NYT column that China's growth is not sustainable and the numbers released by the Chinese government are suspect.

1. Sold 100 TRK at 13.96 Last Friday (see Disclaimer):  I had bought this position in two fifty share lots. The first was bought at $14.65. I then averaged down at $11.65 (11/7/11 Post). I am going to re-deploy the proceeds into a higher yielding security.  I am still interested in Speedway Motorsports as a long term value play, but would prefer an entry point for 100 shares nearer $11.65 than $14.65.  The current quarterly dividend is ten cents per share. By splitting the purchase into two lots and averaging down, I was able to realize a small profit on the shares plus the dividend.  

TRK closed at $13.88 yesterday.

Bought 100 WIN at 11.31/Bought 2 Exide 8.625% Senior Secured Bonds Maturing 2/1/2018 at 81.375 /Sold 1 United Rentals 2020 Subordinated Bond at 101.125

Randall Forsyth summarizes the opinions of Louise Yamada and Richard Russell in his Barrons column. Both Yamada and Russell are decidedly negative about the stock market's prospects. I am inclined to agree with Russell that the rally off the March 2009 lows was a bear market rally, rather than the start of a new long term secular bull market. I have repeatedly made that point.

Russell believes that the appropriate analogy is to the bear market rally of 1929-1930, which occurred after the October 1929 crash, that was followed by the bear reasserting itself on steroids, punishing severely anyone who bought into the bear market rally and failed to exit their positions in time. Russell believes that the bear will take over when the DJIA falls below 10,000 and surprise everyone with its downside vigor. This is a possible scenario.

Based on what I know now, a more likely scenario would be comparable to what happened after the bear market rally, starting in October 1974 and lasting into 1976.  The decline after that rally was not as severe, but the market was unable to resume any lasting up move until August 1982. 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 Continued Discussion on 1982 or 1974 The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets The Roller Coaster Ride of the Long Term Secular Bear Market

Forsyth titles his column "survive the bear to invest another day".  If the Russell scenario happens, the only way to survive is to preserve capital in order to buy at lower prices.

A similar dire scenario was proffered by Felix Zulauf and discussed by me in an earlier post. Zulauf/Faber and Financial Armageddon Redux/Debt Burden of the American Household (June 2011 Post). As I mentioned in that post, the opinions of Zulauf, Russell and many others, relating to future events, are frequently stated with certainty, even though no one can have any degree of certainty about the future.

I prefer to create a frame of reference that includes several possible scenarios and then assign them various decrees of likelihood. Each scenario might have a particular investment strategy attached to it. If I believed now, for example, that the market rally since March 2009 was the start of a long term secular bull market in stocks, I would substantially increase my stock allocation. If I was certain about the Russell scenario, I would own almost no stocks. I do not have that kind of certainty. I view both of them as possible, even though completely at odds with one another, and have accordingly kept a significant stock allocation (the bull case) after making a substantial reduction (the mega bear case).

Whatever scenario comes to fruition, I do believe that the downside risk is more dominant now than the upside. That opinion requires a tilt toward preservation of capital. Part of that tilt is manifested by a high allocation to cash.

At the moment, it appears to me the market is forecasting a very mild and short term downturn in Europe,  a successful resolution of the European sovereign debt and banking problems, and 2 to 3% U.S. GDP growth in 2012. Those are the forecasts baked into the market's current level. A less optimistic scenario is the more likely one, which is why the downside risk is more pronounced in my opinion.

Adjusted for inflation, the S & P 500 has returned to 1996 levels. MarketWatch (see GS chart at page 2 Scribd)  This number was mentioned in this video interview with a Morgan Stanley analyst.

1. Bought 100 WIN at $11.31 Last Thursday (see Disclaimer): I recently exited my common stock position in Windstream.  Sold 300 WIN at 12.31  (August 30, 2011 Post) I sold those common shares to buy 3 Windstream senior bonds. I thereafter sold all of those bonds. Sold All Windstream Bonds: Two 2019s at 101 and One 2020 at 103.5 I then had no position in Windstream securities until I bought back 100 shares of the 300 common shares last Thursday.

Windstream is currently paying a 25 cent per share quarterly dividend. While it is debatable how long this will continue, the dividend is covered by the firm's free cash flow. The yield at a total cost of $11.31 is around 8.84%.  WIN Stock Quote

There are a couple of reasons to tread lightly with this company. It has a lot of debt and most of its revenue originates from a declining land line phone business.  As of 9/30/11, the long term debt totaled $7.297 billion and is summarized at pages 12-15 of the last filed SEC Form 10-Q.

This security was purchased with mid-December cash flow.

2. Sold 1 United Rentals  Subordinated Bond at 101.125 Last Thursday (Junk Bond Ladder Strategy) (see Disclaimer):  I bought this bond a few months ago at 91.5. Bought 1 United Rentals 8.37% Senior Subordinated Bond Maturing 9/15/2020 at 91.5 I have elected for now to take profits on some bonds bought at below par value when their prices pop over par.  And, I am then reinvesting the proceeds in bonds selling at greater discounts to par. It remains to be seen whether this aspect of the junk bond strategy will work.

I sold this bond last Thursday. On Friday, United Rentals announced that it was going to acquire a competitor, RSC Holdings, in a $4.2 billion deal. CNBC Joint Press Release This caused the 2020 senior subordinated bond to fall over 5% in price. I am not likely to buy this bond back, unless there is a substantial decline in its price. As of 9/30/11, RSC Holdings had $2.257 billion in long term debt, see page 3 Form 10-Q.

I am sitting on a fair amount of unrealized losses in this strategy, including large percentage losses from my 1 General Maritime and 1 AMR bonds, both in bankruptcy. That is just a hazard with this extremely high risk strategy. Realized Gains Junk Bond Ladder Strategy

I would have sold one or both of my Vulcan Materials bonds, but no bids have yet to materialize in small 1 bond lots. I have in effect exchanged this 1 United Rentals bond, and hopefully 1 Vulcan bond, for the bond described below.

3. Bought 2 Exide Technologies 8.625% Senior Secured Bonds Maturing 2/1/2018 at 81.375 Last Thursday (Junk Bond Ladder Strategy)(See Disclaimer): The issuer of this note is Exide Technologies, a battery manufacturer. I discussed this company in a recent post: Item # 1  Bought 70 XIDE as LT at $2.75 I mentioned then that I might buy the secured note. I would have preferred to buy just 1 bond, but two was the minimum order.

Finra Information: FINRA According to FINRA, this bond is rated B2 by Moody's and B by S & P. Both ratings were issued in January 2011 when this bond was sold in a private placement. Subsequently, the bonds sold in the private placement were exchanged for bonds with the same material terms that had been registered with the SEC, a common sequence of events. Prospectus  Interest is payable semi-annually in February and August.

This is a secured note. The security is described in the prospectus starting at page 33.

I am assigning a 7- risk rating to this bond. Personal Risk Ratings For Junk Bonds

My confirmation states that the current yield at my cost is 10.542% and the yield to maturity is 13.035%.

The SEC filings for Exide can be found at EDGAR.

Added 1/6/2013: I had a more detailed discussion of this bond in a 12/15/12 comment to this SeekingAlpha article authored by an expert on batteries:  Seeking Alpha

I took a snapshot and had to go small to capture it in one shot:

Perhaps the most detailed discussion in a subsequent post can be in Item # 1 Stocks, Bonds & Politics:  Exide

ADDED 4/4/13: There was a large drop in this bond's price today due to two news events.

The Los Angeles Times that several members of the  L.A. City Council were irate about alleged arsenic emissions from the Exide battery recycling plant in Vernon, CA. latimes.com At a minimum, this kind of news story will bring the class action lawyers out in droves.

Bloomberg reported late today, based on a story in Debtwire, that Exide had hired Lazard and the Akin, Grump law firm for "restructuring purposes". That phrase will generally would include consideration of the bankruptcy option. I have mentioned previously that Exide has a busted convertible maturing on 9/18/13 ($60M principal amount according to FINRA), which plunged in price on 4/4/13 based on the last trade. FINRA (closing at 64 and trading as high as 95 during the day)

After the close on 4/4/13, Exide announced that it had hired Lazard "to advise the company on financing alternatives to maximize the value of the company for all stakeholders", which would include the common shareholders. Exide Technologies Retains Financial Advisor In that press release, the company announced that its free cash flow for the fiscal 4th quarter would be "approximately $50 million, exceeding prior guidance of $30 million, with total liquidity (cash and availability under credit lines) at March 31, 2013 of greater than $230 million."

Moody's lowered its rating on the 2018 bond to B3 from B2 in March. Moody's

Added 4/9/13: I also discussed Exide in a post published on 4/9/13: Exide/MKN/Sold 100 DRE at 17.24-Roth IRA/Bought 100 GDO at $19.8/Initiated Position in VHCOX/Bought 50 of the Bond CEF GHY at $18.77-Roth IRA/Sold 200 STL at $11.39/MSFT/Jobs/

Added 4/26/13: The most recent piece of bad news was an order from the California Department of Toxic Substances to suspend operations at the Vernon recycling plant which supplied a significant portion of Exide's domestic lead requirements. Exide Receives Order From California Department of Toxic Substances Control Regarding Its Vernon, CA Facility; latimes.com In response to this latest adverse development, the stock plummeted to below $1 per share. Wedbush downgraded Exide to neutral from outperform and Maxim downgraded to hold.

The 2018 bond is trading now near 65, and has traded down to near 63 intra-day, which suggests to me that institutional investors are attempting now to price this bond's value in a bankruptcy reorganization. Yesterday, the online bids for the 2018 bond disappeared.

Added 5/24/13: Today the 2013 busted convertible closed at 16.25, a price consistent only with a highly probable bankruptcy filing before that bond's maturity date. FINRA - Investor Information on Exide's 2013 Senior Unsecured Subordinated Bond This bond matures on 9/19/2013

The 2018 senior secured bond declined from the lows 70s to close at 66 near what it bottomed after the CDTS shutdown the Vernon plant. FINRA

Apparently, Debtwire published a story during the day that Exide was in talks for debtor-in-possession financing for a Chapter 11 BK financing according to StreetInsider.

I found a link to the Debtwire story after the market closed on 5/24: debtwire.com

The common stock took another tumble today: XIDE: 0.4498 -0.3335 (-42.58%)

Added 6/6/13: A story in today's WSJ noted that Exide was preparing for a "potential bankruptcy protection filing by this summer" which would is not "expected" to include the firm's European subsidiaries.  Exide Technologies Prepares for Bankruptcy Filing - WSJ.com

Added 6/10/13: As expected, Exide filed for BK this morning. According to the WSJ, Exide has secured a $500M DIP loan from JPM. Exide blamed several recent events for its BK filing including the forced shutdown of its Vernon plant that purportedly wiped out $24M in earnings before interest, taxes, depreciation and amortization and the loss of sales to WMT in 2010. See also, Bloomberg, Reuters, Exide Technologies Files Voluntary Chapter 11 Petition to Restructure U.S. Operations The European operations are not included in the BK.

I sold my 2 bonds at near break-even with the interest payments within a few months after the BK filing:

2013 Sold 2 Exide Bonds -$203.5

Masters of Disaster and Risk Control/EK, AWF, INTC/Performance Numbers/IPB Ex Interest

Goldman Sachs estimates that the European crisis could cut up to 1% from U.S. GDP in 2012.  Daily Ticker GS expects a significant recession in Europe: Goldman Sachs | Global Economic Outlook - Outlook 2012 Video Part 1

Fidelity provided my performance data yesterday through November 30, 2011. I last referenced the data through 10/31/2011. Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker For the three years ending 11/30/11, the main taxable account was up 87.24% and the regular IRA zoomed from 100% to over 170%, based on investments made during the darkest hours since 1974, though a major assist was undoubtedly contributed by dropping November 2008 from the 3 year number:

Top Column Regular IRA Performance to 11/30/11/2nd Column S & P 500 

RB was heard to day "no guts, no glory, finer words never spoken and beyond the comprehension of Mama's Boy, Lame Brain".

The TC IPB was ex interest for its semi-annual distribution yesterday. Merrill Lynch Depositor Inc. 6.0518% Index Plus Trust Series 2003-1, IPB This is an unusual TC. The underlying securities consist of 14 different corporate bonds and treasury strips maturing in 2030. www.sec.gov I own 150 in the ROTH IRA:

150 IPB ROTH IRA Unrealized Gain +785.8

Bought 100 of the TC IPB at $16.99 August 2009 Sold 50 IPB at 20.28 February 2010 Bought 50 of the TC IPB at 21.3 August 2010 Bought: 50 of the TC IPB at 23.11 in IRA October 2010 Calculations On How to Recreate Trust Certificate IPB

I have no interest in IPB at its current price, and have considered selling it.  I decided to keep it for its income generation, at least for now. Trust Certificates: New Gateway Post

Motley Fool has a retrospective on the factors that crushed Eastman Kodak in 2011. While I do not own the common, never have, I am suffering enough as the owner of two senior bonds maturing in 2013.   Eastman Kodak Bonds: Update on Third Quarter Earnings Report A less negative article about EK appeared earlier this week in the USA Today business section. The 2013 bond is now selling at close to 40 on fairly heavy volume indicating a near total lack of confidence in EK's survivability to pay off this bond in November 2013.

MKM Partners remains bullish on Intel (own) even after the recent warning. A summary of its report can be found at Barrons.

The bond CEF AllianceBernstein Global High Income Fund (AWF) declared its regular monthly dividend of 10 cents per share plus a special income dividend of $.322 per share.  I own just 100 shares. There are a number of holdings in this fund that make me antsy. The ex dividend date is 12/22.

Masters of Disaster can not be allowed to police themselves. While some would call this observation an opinion, it is instead a fact, and one that can not seriously be disputed by anyone.  The MF Global debacle is just the latest example supporting the foregoing statement as a fact.  One common trait among the Masters of Disaster is an unquenchable thirst to undermine risk control.  As you would expect, the manager of risk control at MF Global was fired by the Master of Disaster Jon Corzine after questioning the risks being taken by that firm which ultimately caused its demise and the apparent "loss" of a billion or so of its customers' funds. CNBC The risk manager hired thereafter had his authority emasculated by Corzine.

If you want to be a risk manager for the Masters of Disaster, then it best to just say "yes" and read romance novels while at work. The worst possible career move would be to place your hand in between a Master of Disaster and red meat.

Undermining risk control was done frequently in the period leading up to the recent Near Depression. The NYT published a number of articles in 2008 detailing how risk management was undermined by the Masters of Disaster at several financial institutions (e.g. The Reckoning - Citigroup The Reckoning - Merrill Lynch)

The seminal event leading to the recent Near Depression was the 2004 SEC Rule change that basically allowed the Masters of Disaster to police themselves. Stocks, Bonds & Politics: 2004 SEC Rule Change 12/22/2008 Post The MDs were allowed to increase financial leverage since they understood risk so well. Rather than having debt to equity capped at 12 to 1, the Masters of Disaster could increase their leverage to just about any level, and major financial firms soon had 30 or even 40+ to 1 debt to equity, which of course increased the compensation for the Masters of Disaster while endangering their firms and the world financial system.  But, endangering the world's financial system is a small price to pay for enriching a few self-proclaimed financial "wizards".

And, how long did it take for the Masters of Disaster to bring down the world's financial system after the 2004 SEC Rule change?  What was their critical and essential roles in creating the housing bubble and subsequent collapse?


1. Cash Flow Receipts Main Taxable Account on 12/51/2011:  The following three snapshots capture most of my cash flow paid into my main taxable account yesterday. I will reinvest this cash flow to purchase income generating securities, creating a compounding effect over time. Some payments are not shown since I did not want to make a 4th snapshot to show a few additional items. One payment left out in the foregoing was a 5% stock dividend and regular quarterly dividend paid by Landmark (LARK):

12/15/11 Cash Flow Main Taxable Account Part 1 

12/15/11 Cash Flow One Account Part 2

12/15/11 Cash Flow One Account Part 3

 The general idea is to create a constant flow.

Some brokers do not even show dividends and interest on the date of payment. I found that kind of service irritating.  Charles Schwab and Vanguard, for example, do not show a distribution until the day after payment.  If the dividend is reinvested, Schwab does not show the number until two days later.  Since I have so many securities, it is not unusual for me to sell what I believe to be all shares and then have shares pop into the account thereafter which were purchased with a dividend. Admittedly, this is likely to happen to those who are very active traders and can not keep track of the dividend payment dates of all owned securities.

Since Schwab has been a discount broker for three decades, there is no excuse whatsoever for their delay in posting dividend and interest receipts. TD Ameritrade will at least show the amount on the day of receipt, though it fails to identify who paid the distribution on the date of payment.

Fidelity is at least on the ball in this regard. However, Fidelity is expanding its list of securities of securities that no individual is allowed to buy, and that is extremely disconcerting  One security recently placed on the no buy list is the exchange traded bond AEB, where I have realized good percentage gains.  (see snapshots at the end of Stocks, Bonds & Politics: Advantages and Disadvantages of Equity Preferred Floating Rate Securities).

I can not buy HBAPRF at Fidelity but I can buy the functionally equivalent HBAPRG. I can not buy any exchange traded "principal protected notes" or synthetic floaters.  Fidelity Prohibits New Purchases of Exchange Traded Principal Protected Notes I can not buy, just as another absurd example, the exchange traded bond DFP.  Fidelity Brokerage Extends Denial of Trading Opportunities to Synthetic Floaters and Even an Exchange Traded Junior Bond DFP  I have noted new trading restrictions crop up on some other exchange traded preferred stocks.  In those cases, I will use another broker.

I will discuss some of my trades from late this week in my next post.   

Added 50 MSF at $13.1/Bought 50 KRBPRD at 23.6/Vulcan Materials

Due to my absence from HQ and times constraints, I will only briefly summarize two trades in this post which occurred earlier this week.  I have explained both securities in prior posts. 

1. Bought 50 KRBPRD at $23.6-Roth IRA Last Monday (see disclaimer):  KRBPRD is a typical trust preferred, originally issued by MBNA Capital, that contains as its underlying security a junior bond issued by MBNA, later acquired by Bank of America.  The credit rating is the same as TPs originally issued by BAC. Bank of America | Investor Relations | Fixed Income Investor Relations Both Moody's and S & P have reduced BAC's TPs to junk. S & P rates the TPs at BB+ with a negative outlook. Moody's rates them at Ba3 with a negative outlook. Fitch still has them at investment grade, barely at BBB, but has a negative outlook too. A listing of the outstanding BAC equity and trust preferred securities can be found at the bank's website:  Bank of America | Investor Relations | Capital Issuances

The coupon is 8.125% on a $25 par value.  Prospectus The TP and the underlying bond mature on 2/15/2032.

At a total cost of $23.6, the current yield is around 8.6%. Since this security was bought in the ROTH IRA, that is in effect a tax free yield. 

I recently sold a similar security, KRBPRE, in the ROTH IRA. I indicated then that I would be looking for an opportunity to buy one of the MBNA TPs back at a lower price.   Sold 100 KRBPRE at $25.13-ROTH IRA (November 11, 2011 Post) (and see SOLD 50 KRBPRE @ 25.96) I no longer have a position in KRBPRE which is viewed as functionally equivalent to KRBPRD, though the "D" series matures a few months earlier.  For functionally equivalent securities, choosing one over another comes down to yield at my purchase price.  

Both KRBPRE and KRBPRD make quarterly interest payments but the time periods are different. The "E" series just went ex interest early last month, while the "D" series will go ex later in December.  MBNA Capital D 8.125% TruPs, KRB.PD MBNA Capital E 8.10% TOPrS Series E, KRB.PE 

A more extensive discussion of this security can be found in a prior post. Bought 50 KRBPRD @ 25.14  That purchase was made in a taxable account and I still own those shares. 

Being in effect junior bonds, trust preferred securities issued by banks will be extremely sensitive to credit concerns.  Interest payments can also be deferred for up to five years provided the stopper clause is not activated by a distribution on, or repurchase of a junior security.  Trust Preferred Securities: Links in One Post For BAC to defer cumulative interest payments on KRBPRD, it would have to eliminate its common dividend and non-cumulative equity preferred dividends, and defer all cumulative distributions on other TPs as well as any cumulative equity preferred stocks.  For BAC to do that, it would be an invitation for depositors to yank their money in excess of FDIC insurance limits. 

Anyone owning a TP after a bank failure will likely recover nothing, i.e., your money went to money heaven.

KRBPRD rose 9 cents yesterday to close at $23.8. 

2. Added 50 of the stock CEF MSF at $13.1 Last Tuesday (see Disclaimer): Morgan Stanley Emerging Markets Fund is a closed end stock fund.  Generally, I would expect emerging market stocks to be positively correlated with U.S. stocks except with a higher beta. That relationship has broken down in 2011, with emerging market funds falling 15 to 20% while the major U.S. stock averages are close to flat lining.  The 2011 NAV return for MSF was -16% as of 12/12/11.  A lot of the decline is associated with the overall poor performance of Chinese stocks. 

On the day of my purchase, the net asset value per share was at $14.46. 

MSF page at the Closed-End Fund Association

MSF page at  Morningstar

This is a link to the  last filed SEC  N-Q which lists the fund's holdings as of 9/30/11: www.sec.gov 

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

This fund generally pays an annual distribution in late December. I hope that it is not much since I never want to buy a large dividend. I am waiting to buy another 50 shares of the China Fund (CHN) after its goes ex dividend in a few days with its large distribution.

This 50 share purchase brings me up to 150 shares. My last transaction was to sell 100 shares at 16.2 last April. Whenever I can buy shares back at a lower price, I at least feel like I am winning or losing less, a form of winning for us Stock Jocks in bear markets.

3. Vulcan Materials (own senior bonds only: 2018 and 2021)(Junk Bond Ladder Strategy): Both of my Vulcan Materials senior bonds popped after Martin Marietta Materials made a hostile bid for Vulcan.  Press Release The Martin Marietta bonds are investment grade,  FINRA, while the VMC senior bonds are rated in junk territory.  I may sell one or both of them.  The 2021 maturity is held in the regular IRA.

4. Hedging: I have previously noted that 1250 to 1300 on the S & P 500 would likely prove to be a stiff resistance area. (e.g. Stocks, Bonds & Politics: 11/15/11 Post Introduction)  As a result of that belief, more accurately called a guess, I have been buying double and triple short stock ETFs as hedges when the S & P 500 starts to breach 1250 to the upside.  I now own two triple shorts and two double shorts and will likely dispose of all of them before the end of this year. Hopefully this can be done at a profit, possibly on the next major down day. Since I have realized gains on my hedges this year, I would not mind losing money on the recently purchased ones, but all of them are currently in profit territory based on this week's action. I sold one triple short last week on a quick pop. It would not take much of a Santa Claus rally to cause the triple shorts to lose money, a ten percent or greater daily move is not uncommon in this volatile market.

S & P 500 1 Year Chart/Red Line 50 day SMA/Blue Line 200 day SMA

Instead of using the VIX as a signal for the purchase of hedges, I am now using what I perceive to be the  resistance level in the S & P 500 as the signal.  Generally, as discussed in many prior posts, the prior hedging was limited to purchases when the VIX moved below 20 during the Unstable Vix Pattern.  Mark Hulbert and the Use of the VIX as a Timing Model/Modification # 1 To Vix Asset Model Approved re: Hedging  The primary reason for this modification revolves around concerns about a possible significant downdraft.  The stock allocation has already been reduced to my minimum level, and the hedges are small compared to even this reduced allocation.  

ERROR CREEP and the INVESTING PROCESS

I am away from HQ today. I am not doing much for the remainder of this year. My next significant decision will be whether or not to harvest some large unrealized gains early next year. 

Today, I want to discuss one of my favorite topics, the compounding impact of error creep in the decision making process. 

Many investors will not do any original source research prior to making an investment decision. When purchasing a bond, the general approach to conducting research might be to enter a search term at Google and then read whatever some other person had to say about the bond. The same would be true for a potential stock purchase. Research for a stock might also include an opinion offered by another investor or possibly a cursory review of an analyst report. No effort is made to review original source material that can easily be found at the SEC or to review even the last earnings call transcript. There is nothing wrong about reading analyst reports, but that can never be the sole extent of the research effort. Original source material has to be reviewed.   

When there is a total disregard for gathering and evaluating original source information, the odds of making incorrect investment decisions will substantially increase. That kind of investment process just adds to the error creep that will cause unsatisfactory results. Acquiring Relevant Information 9/18/11 Post 

It is also not unusual to have accurate and material information and yet fail to draw the appropriate conclusions. In such cases, I might as well not have the information, so drawing the proper conclusions from the information is just another source of error creep. 

Another source of error creep is an individual's refusal to learn much of anything about news developments in the world. Without an appraisal of the big picture issues, the investor is unlikely to arrive at a satisfactory asset allocation, except by happenstance, appropriate to what is actually happening in the world. The big picture issue will often dictate the appropriate allocations among asset classes.

Most of a successful investor's returns over time will be due to successful asset allocation rather than to security selection. And, successful asset allocations can not be performed in a state of ignorance about world events or in some static, predetermined fashion. The Big Picture Questions 8/25/11 Post I know a large number of people, particularly younger ones, who refuse to read anything about world news events.

Generally, the only way to outperform the market during a long term secular bear market for stocks is to engage in constant up and down allocation shifts, and those shifts have to be predicated upon an analysis of the big picture events. The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets 6/27/11 Post; Precipitating Cause of Long Term Bear Markets 6/30/11 Post; Instability & Volatility in Asset Correlations 5/30/09 Post

When the current long term stock bear market finally ends, the vast majority of stock mutual funds will have suffered an annualized loss since October 1997 adjusted for inflation.  The Roller Coaster Ride of the Long Term Secular Bear Market 5/16/10 Post

During a long term bull market in stocks, a different strategy has to be used, since most individuals will not be able to outperform a broad based index fund with low costs. Minor adjustments of the stock allocation may be made based simply on some valuation criteria such as forward P/E. 

So far, I have identified three major sources of error creep. Two involve an unwillingness to gather accurate factual information and to form reasonable and objective opinions based on those facts. The other is always problematic and concerns forming the best judgment based on accurate information. It is not unusual to form a sound opinion based on good research and to fail to act in an appropriate fashion for one reason or another.  This will often involve a discounting of negative information (something that I did earlier this year when purchase 1 General Maritime bond). Since I make a concerted effort to acquire relevant information, this last mentioned source of error creep is usually where a breakdown starts to develop for me.

Another error is that fact gathering and evaluation processes have to be ongoing, performed with no ideological filters. Any opinion previously formed has to be constantly challenged with new material information and without any interference from one's ego, as if someone else formed the original opinion. There can be breakdowns, and even more error creep, by failing in any of those decision making processes.

A major source of error creep is to assume that the future can be predicted based on data from the recent past. These kind of errors can take many forms. Investors might value a component manufacturer at an absurd multiple based on two or three years of 20%+ growth, when those gadgets have a short shelf life. This is relatively common. There are times when stocks are valued as if economic conditions will never get better (March 2009) or that growth will accelerate without being interrupted by a recession into infinity (1999). 

Errors can creep into the process even with all of the foregoing followed without deviation. Some errors will occur just due to unknown and unknowable factors. The future is always a wild card. Every decision has to be made with unknowable material information about the future. I have discussed the game of blackjack to illustrate this problem. BlackJack and Stock Investing: Lessons Learned & Applied 3/15/09 Post; Investing process with a story illustration 1/6/09 Post; Making Decisions with Incomplete Information 5/29/09 Post

Then, there are a lot of personality quirks that cause error to creep into the decision making process. One of the more common reasons may be a lack of confidence in the opinion, which unfortunately is a hazard to those who start to question everything. Another common issue for me involves the error creep associated with trading too much, an occasional hesitation about realizing a tax loss until it grows to the point where it no longer matters, and an occasional desire to sit too long on a large unrealized gain for tax reasons or to stubbornly adhere to  predetermined target prices.  

When the investment process is broken down this way, the possibilities of making mistakes are quite large. This compounding error creep explains why individuals are unable to beat the market. Efficient Market Theory: Do Humans Really Behave Rationally-Seek out Relevant Information & Then Process Information With Good Judgment? 6/08/09 Post; Efficient Market Hypothesis as Hokum 3/29/2010 Post

Once mistakes are minimized and an investor learns how to profit from the irrationality of other market participants, it is certainly possible to outperform the market even when making a number of mistakes.

I took a snapshot of my three and five year returns in my main taxable account and in the regular IRA. Those returns were calculated by Fidelity, not by me. Those results are shown in the post from yesterday in Item # 2 Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker (12/13/11 Post) As shown in that snapshot, the IRA was up 100% in value for the three year period ending 10/31/11 and the main taxable account handily beat the S & P 500 index by a large amount. 

Sold 50 CYS at 13.33/Joseph Stiglitz on What Needs to be Done/Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker

Moody's stated that it would review the credit ratings of the European nations. Moody's added that the recent summit failed to produce "decisive policy measures" and the risks to cohesion continue to rise.

Fitch also made some less than positive comments about the results from the recent European summit. Fitch's comments are reproduced in this WSJ.

I suspect that S & P will carry through with downgrades of European sovereign debt after placing most euro zone countries on credit watch with negative implications last week.

Italy sold one year paper yesterday to yield 5.952%, close to the record Euro era yield of 6.087% set last month.

As I previously mentioned I am checking the prices of European 10 year sovereign debt everyday now.

It is also important to monitor the Euro/USD. The Euro slumped to a two month low against the U.S. Dollar yesterday. Bloomberg One easy way is to check the price of CurrencyShares Euro Trust (FXE). (see also EURUSD)   The break yesterday below 132 concerns me. The Euro is also heavily weighted in the Dollar Index which has been rising. U.S. Dollar Index (DXY) Index Charts A rise in that index indicates USD strength against a basket of currencies. The DXY is currently trading well above its 200 day moving average.

Intel (owned) reduced its estimate for 4th quarter revenue by $1 billion due to hard disk supply shortages. SEC Filed Press Release The shortages are due to the flooding of manufacturing facilities in Thailand.

The noble laureate in economics, the liberal Joseph Stiglitz, wrote an interesting article published in this months The  Vanity Fair. Stiglitz believes that the government needs to ramp up its spending of borrowed money in order to jump start the economy. His recommendations for new spending programs are more than a bit mushy (page 37).  

Government spending is a fairly typical Keynesian prescription to replace private demand when it plunges, an approach  advocated by Paul Krugman and other liberal economists.  Both gentleman believe that the government has not spent enough borrowed money so far in order to stimulate the economy. In other words, the budget deficit needs to grow much larger in their view, which is okay for them since the government can now borrow money at low rates.  I did not find that part of the article to be interesting, since it was more of the same from Stiglitz, and is not likely to garner more than a few votes in the current Congress. The President and the Democrats already blew the nation's wad on an ill-designed, short term stimulus program. (see introduction to Stocks, Bonds & Politics Post 4/27/11)

For these liberal economists, the reason that country sank back into the Depression in 1937 was the withdrawal of fiscal stimulus, generally viewed by them as inadequate from the start of FDR's Presidency in 1933 but sufficient to keep the world from sliding even deeper into an economic abyss. 

Instead, the interesting part of the article was his non-traditional explanation for the severity and length of the Great Depression. The Depression was not due to the bursting of a stock market bubble and the subsequent tightening of credit by the Federal Reserve in this hypothesis, but to the productivity gains in agriculture. Those gains created an abundance of food and drove down agricultural prices. The nation was then dependent on the financial well-being of farmers since the transition to an industrial/service economy was still in the works. When farmers went under or cut back their purchases of goods due to lower incomes, the ripple effect was felt throughout the economy. No other source of income or employment was capable of picking up the slack, and it would take many more years to successfully transition workers to an industrial based economy. 

His analysis breaks down when it attempts to superimpose that observation, which makes some sense historically, at least as one reason for the severity and length of the Great Depression, onto today's economy. He basically maintains that the economy is going through a similar transition now, except that the current transition is from a manufacturing economy into one more dominated by services. In his view, the government needs to spend a lot more money to assist in this transition, primarily on education and training more finely attuned to the new economy.

The current problems are not caused by the transition from a manufacturing dominant economy to a service one, as Sitglitz tries to maintain. That transition was largely completed a long time ago. The U.S. industrial sector also may be coming back now as wages and costs increase in emerging market nations. The current problems are just far more complex than that simple theory.  The current predicament has resulted from borrowing too much money by individuals and governments, throughout most of the developed world, in order to live in a style beyond their means. Living on borrowed time and money.  The U.S. will see the repercussions of irresponsibility soon enough.     

Another article in this month's Vanity Fair explores the crony capitalism practice by Rick Perry that I have previously mentioned. I would simply call it  "corruption". (see previous Post on Perry's Texas Style Crony Capitalism) While politicians of both parties will exchange favors for campaign cash, Perry takes this form of corruption to a new level, unseen in American politics since the days of Mayor Richard J. Daley of Chicago or possibly going back to Boss Tweed  in NY.  

Several owned securities are ex distribution today, including the following: GFW ($.46875 per share interest quarterly); ARCC ($.36 quarterly dividend); AINV ($.28 quarterly dividend); HBAPRF and HBAPRG (quarterly dividends/floaters with minimum coupons); WIW ($.0335/monthly dividend); STLPRA (.20938/Quarterly interest); JLA ($.284/quarterly dividend); JTD ($.26 quarterly dividend); JSN ($.279/quarterly dividend); JQC ($.2 /quarterly dividend); and CBU ($.26/quarterly dividend).

Several owned securities went ex distribution yesterday, including several CEFs that pay monthly dividends (CMK, BTZ, PSY, ERC, MMT, BHK) and CPP which went ex interest for its semi-annual payment.

The most basic part of my strategy is to generate a constant stream of cash flow from income generating securities and to reinvest that cash flow.

1. Sold 50 CYS at $13.33 Last Friday-Roth IRA (see Disclaimer): I have miniscule positions in Mortgage REITs, primarily in my Roth IRA account.

I noticed last Friday morning that  INVESCO MORTGAGE CAPITAL (IVR) made a substantial and unexpected cut in its dividend, the second consecutive quarterly decline.  I read a summary of FBR Capital's downgrade of IVR.  While some of the problems seem unique to IVR, I suspected that other mortgage REITS might follow suit. I consequently sold my minor position in CYS at $13.33 Friday, having just bought the shares at $12.97. I did hold onto the shares long enough to receive one dividend.

After the bell on Friday, CYS did cut its quarterly dividend from 55 to 50 cents.  SEC Form 8-K This reduced rate still results in an oversized dividend yield at the current price. I will look for an opportunity to buy the shares back at below $12.5.  CYS was last trading consistently below that level last October, CYS Historical Prices.

I have discussed briefly in several recent posts some of the headwinds facing mortgage REITs. A primary concern is the narrowing spread between the cost of borrowed funds and the yields received from mortgage securities bought with those funds.  Decline in Mortgage REITs Linked to Prepayment Risks (9/2/11 Post).

2. Main Account Performance Numbers: Fidelity calculates these numbers. While I have not added to this account, I have withdrawn from it and do not know how Fidelity accounts for withdrawals when calculating the return. The end period is October 31, 2011, the last performance data provided by Fidelity. I do not provide a snapshot, obviously, of the total amount and the account number, but the total portfolio is substantial with well over 200 holdings. Anyone with a Fidelity account can check their performance. The top number is my cumulative performance numbers for this account, and the bottom line is the comparable S & P number.  

TOP LINE Main Taxable Account Cumulative Performance numbers to 10/31/11/Bottom Line: S & P 500

Given my large cash allocation in this account, I suspect that I will outperform the S & P 500 this year only with the market declining into year end, i.e., going down less than the market. I have been hurt in 2011 by my junk bond ladder strategy.  Yesterday, this account went down .49% compared to the 1.49% decline in the S & P 500 and some of my decline was due to the ex distributions.

This performance illustrates the importance of losing less in a major bear market and then having the capital to invest at lower prices. The performance data for the 3 year period starts soon after Lehman's failure in September 2008.

I do not know how Fidelity calculates the return from the S & P 500 but it must include dividends.  On October 31, 2006, the S & P 500 stood at 1,377.94, Historical Prices | S&P 500 The close on October 31, 2011 was at 1253.3. If you were calculating the return without dividends, then the number would not be +1.24% but a negative 9%. Since Fidelity is using a positive number for the five year S & P 500 return, that must take into account reinvested dividends over those five years (probably reinvested somehow).

3. Regular IRA Performance Numbers: The regular IRA is up over 100% over the three year period.

TOP Number is Regular IRA Performance/2nd column is  the S & P 500 Performance/3rd column  is Barclays Capital U.S. Aggregate Bond Index/ 4th column is BC U.S. 3 month treasury 

I transferred this account to Fidelity which explains the absence of five year data. The problem over the past year is that some of the exchange traded bonds have declined in price, as well as some stock CEFs and BDCs. I also own 1 Eastman Kodak 2013 bond, purchased this year, which subsequently lost about 1/2 of its value and I sold an Edison Mission bond at a loss out of this account too. So, it has not been a stellar year managing the Regular IRA. Fortunately, the ROTH IRA is about four times larger and is up a few percent. The main taxable account is about 6 times larger than the Roth IRA.

I do not have the ROTH IRA at Fidelity but believe that the performance number for that account would be substantially higher than the regular IRA, primarily due to the concentration of large and relatively quick gains from TCs and  REIT preferred stocks (see snapshots in respective Gateway Posts), as well as some opportunistic buys in other asset classes including European hybrids issued by ING and Aegon and some stocks purchased in March 2009 (e.g. Dupont at around $16). There were a large number of doubles and even triples. I suspect the performance number from that account would be over 150% over the past three years through 10/31/11. Both retirement accounts did not suffer a meltdown since they had small allocations to stocks then and now.

Both retirement accounts have an usually high cash allocation earning nothing at the moment. The cash allocation in the retirement accounts is over 10%. Generally, I will run that number up when I believe better buying opportunities lie in the future.

The performance numbers in all accounts have been hurt by money market yields being near zero, given the very high cash allocations in taxable accounts starting in 2007. 

I am busy this week on other matters and will have short or no posts for the remainder of the week.  It will probably be Thursday before I will have time to discuss the one small buy (a TP) from yesterday.