Sunday, January 30, 2011

RSY XXVII: Update, Sell FL 200 @ $17.89

Let us update some of the cash transactions since our post on January 12th. On the 13th, Alliance Resource Partners (ARLP) dipped down to $70 at the opening bell (The RSY portfolio recorded the buy as 100 shares at $70 exactly.) but has since dropped to below $62.50 on January 20th. Most of this drop has been attributed to a short mine closer by Warrior Mine which is a wholly-owned subsidiary of ARLP. Given that all operations are back to normal and Sabrient still has ARLP as a Strong Buy, RSY recommends to continue to hold this position. Obviously there was an opportunity to "buy on the dips" -- or dives, but to maintain a balanced portfolio RSY did not consider this move. Today, it hit a high of over $72 but settled back to $70.25, slightly over entry price.

The bright side of the portfolio is our continuous stream of dividends. As the chart below shows, RSY recorded dividends of $40 for MRH, $194 for IVR, $60 for FL and $68 for CODI, for a total of $362. I added the two right most columns to show the number of stocks in the transactions and prices of the dividend per share. (Click on tables for clearer images.)

No lumps of coal to sell, but time to sell some of our smelly sneakers.
Foot Locker (FL) has been downgraded to a hold by Sabrient. Just like when other ratings changes are dropped to hold, RSY recommended a reduction in exposure. RSY recommends a limit order sell of 200 shares (out of the original 400) at $17.89 (GTC). This will result in a loss of around $250. And now for a look at the current holdings:

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Thursday, January 20, 2011

WEITW Part II:Paul Krugman, Worst Economist in the World {WEOTW}

Paul Kruman is at it again with a post entitled Early Social Security Projections. This got me to exploring some of the issues about Social Security also, and for that I am grateful. This is his attempt at setting up his straw man argument.
You see, in discussions of Social Security it’s often argued that in the program’s early years, nobody could have imagined the increases in life expectancy that have actually occurred, so nobody could have imagined that we’d have as many beneficiaries relative to the number of people of working age. And I thought I knew that this was wrong — that people in the 30s and 40s did know about rising life expectancy, and expected it to continue.

When declaring that "nobody could have imagined", then it seems pretty easy to refute such comments as someone, somewhere must of at least thought about it. And sure enough he uses the 1945 Social Security Trustees’ report {PDF}. But a bigger question is whether the people (Congress and President) that were suppose to make decisions about how to maintain the fund and thus benefits for future generations were even aware of such information (or even read it) and whether they made any corrective action early enough. Several passages of the report paints a different reaction than what Krugman could be imagining.
Two estimates, based on lower and higher assumptions, of the level premium cost of the benefits now provided by the system are 4 percent and 7 percent of covered pay rolls. This means that if pay-roll taxes of this magnitude (employer tax and employee tax combined) had been levied from the beginning of the program and were continued indefinitely, the system as a whole would be self-supporting if the assumptions eventuate. But Congress has now maintained old-age and survivors insurance tax rates at 1 percent each on employees and employers for 9 years instead of permitting the scheduled increases of the act to become effective, although in the war years economic conditions have imposed little obstacle to such increases. {Page 28}

The report's conclusion goes on to ask for clarification on "its short-run and long-run financial policies for the program" considering the 1 percent rate then currently used and whether the fund should be decreased until it is "three times annual benefits". That last portion seems like not much financial backup in the trust fund if allowed to drop to that low. Even if the rates were to increase to 6% total of taxable pay rolls that still only provides positive cash flows during the 1950s and 1960s.

Rising Life Expectancies?

This is Table 9 that Krugman references in his post. It is interesting to note that while the populations of those 65 and older is increasing every time period including for both men and women, adults in the 20 to 64 age group decreased for both low assumptions and high assumptions over the period 1980 to 2000. The low assumptions table even has a decrease in this age group in 2000 that is below even the 1955 estimate with men sliding back to the same spot and women decreasing more in numbers. The two estimated sequences are derived from two reports and not from the SSA/Trust Fund. The two reports are: 1. the 1935 report by the Committee on Economic Security, and 2. the 1938 report by the National Resource Committee.

The low assumptions ratio result as Krugman pointed out was amazingly close considering all the other factors that turned out wrong like total population and immigration patterns. His ratio of adults and the elderly of the low assumptions estimate was 20.8% and the 2000 census data showed 21.1%. But he should have read the report to see that the high assumptions were not given equal consideration to the low assumptions results. The following is from the report on page 20.
(b) Mortality --- Mortality rates by sex and age have been steadily improving since the turn of the century for both sexes and virtually all ages up to 60, with very little change at ages above 60. ... In the low-cost assumptions discussed in this section, very little improvement in mortality rates is assumed. In the high-cost assumptions some improvement is assumed but their assumption of improvement beyond age 65 is believed by many to be too optimistic.

Thus, the report is saying that it is better to go with the low-cost assumptions and only to use the high-cost for the extreme possibility. It was not, like what Krugman is assuming, that the low and high are of equal value and came from the same set of data points and assumptions. The ironic aspect is that Krugman already knows that longevity is not increasing that much for the older population than it is for the younger living longer.
Live Long And Prosper
While life expectancy is rising, life expectancy at age 65 — which is what is relevant here — isn’t rising nearly as fast.

"Damn it, it is not electron shells, we are talking about electron configuration!"
That small quote was from my college professor in Chemistry, but for Krugman it should not be the demographics of age groups that matter as much as participation rates. Table 10 below shows the expected number of recipients of "old-age insurance" up to the year 2000. The difference to note from Table 9 is that even adding up all the columns does not equal the total for the population over 65. The participation rate from these two tables is just over 58% for the low assumptions scenario and 71% for the high assumptions scenario. According to the Social Security Administration, "Nine out of ten individuals age 65 and older receive Social Security benefits." That means as much as a fifth to one-third of the elderly were not suppose to receive the benefits according to these scenarios. Even with this data, it does not tell us how many of the "wives of primary beneficiaries" are 65 or older. Since husbands still tend to be older than their wives, then at least some of that pool of recipients was under 65 making the non-participation rate lower than what I calculated.

It looks like a variety of social attitudes changed since the 1945 report and possibly work/leisure incentives. Although the following quote is related more to the "reconversion" of a war time economy to a consumer economy, it does point out the writers' attitude in the report, "It is assumed, nevertheless, that a rather large number of persons eligible for retirement benefits remain in employment." Another indirect demographic trend that they completely missed is women participation in the work force. On page 23 of the report they discuss greater woman participation because of the depression and subsequent war, "Moreover, the labor market was increased by many married women seeking employment to reinforce what they hoped might be only a temporary inadequacy in their husband's income."

Confirmation Bias
From the analysis above, it shows that Paul Krugman found some shred of evidence that confirmed his political bias and then failed to fully understand the information he was sharing. He, of course, has a great burden defending big government entitlement programs and Keynesianism at all economic and political cost. I close with another quote from the report that shows they understood that the program as designed could have some major flaws that will have to be addressed at some time in the future.
In fact, for demographic reasons alone, as discussed earlier in this section, the system cannot be expected even eventually to level out to a fixed relationship between contributions and benefits.

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Wednesday, January 12, 2011

RSY XXV: Less (e)Gas and more Lumps of Coal in the Stockings.

Gas Natural Inc. (EGAS) has been downgraded to hold by Sabrient Systems and today was its latest monthly ex-dividend date. As such, let us take a little bit of profits from our position at the opening bell tomorrow. There looks to be some upward constraint above the $10.60 mark and thus RSY recommends to sell 200 shares of EGAS (half of the 400 position) at a limit price of $10.59 {GTC}. We should also note that NGPC provided us a dividend of $36.00 from our 200 shares on the 7th of this month.

If you didn't get a lump of coal in your stockings, then maybe buying some coal is a good idea now. Alliance Resource Partners, L.P (ARLP) supplies coal predominantly to utilities (91.8%) and the rest for industrial users in the US. The Motley Fool noted that they Always Raise Their Dividend. I find it more important that regular dividends are paid consistently than insistence on having the dividends increase every time but it certainly is a positive aspect of this stock. ARLP's accounting practices are quite good with a high forensic accounting score. Kapitall noted that ARLP is a company with Conservative Accounting Practices.

On the macro side of the equation, coal does not seem to have as many problems as it did a few years ago. One reason that I shorted RAIL back then. With unemployment high, the attention to pollution from coal has taken a back seat. The BP oil blowout did not help oil drilling and production here, and thus conversely electricity companies will continue to rely on coal for the foreseeable future. The Macro View of the economy has picked up and thus energy consumption will be part of this increased demand including commodities. Paul Whitfield thinks that ARLP is too thinly traded, but overall rates it and its partner Alliance Holdings (AHGP) as excellent choices.

This stock has options available for it. RSY recommends a buy of 100 shares of ARLP at a limit price of $70.39 {GTC}. The recommended moves today reduces the share of natural gas utilities and increases exposure in the production of energy...dirty coal industry.

Misc. Links:
Alliance Resource Partners: Coal and Dividends Are a Good Mix

Steelmakers expect prices to rise with Australian floodwaters

Australian Flood a Boon to US Producers?

Retiring Soon? Here Are 3 Stellar Dividend Picks

Six Consumer Stocks Paying Sustainable Dividends to Own in 2011 - Seeking Alpha

The Most Outstanding Dividend Portfolio I Know

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Tuesday, January 11, 2011

A Macro View: ISM Reports December.

Sunshine on a Cloudy Day..
ISM Manufacturing index shows expansion, as stock markets open the year in strong fashion, and the service industries expanded in December at the fastest pace since May 2006, showing the U.S. economic recovery is picking up and broadening beyond manufacturing. Econoday also stated the following summations about the reports:
ISM Mfg Index
All in all, this is a very positive report, one confirmed by strength in regional data and one pointing to New Year strength for the nation's manufacturing sector.

ISM Non-Mfg Index
The nation's businesses, at least based on the ISM's sample of roughly 350 companies, continue to do more with less. Today's report points to strong growth for the economy that will, hopefully sooner than later, trigger new hirings. There's little initial reaction to this report.

What's the Good News?
There were certainly plenty of things to be upbeat on both reports. The headline numbers came in well above the 50% break even point with manufacturing (PMI) showing 57% and non-manufacturing (NMI) at 57.1%. This last month signified near complete convergence as the NMI gained 2.1% and PMI of just .4%. The NMI showed consistent growth since last August with a low of 51.5%. The manufacturing index was just short of the consensus by .2% for Econoday and .5% by MarketWatch, but well within acceptable levels for the consensus range of 55.5 to 58.6% for Econoday. Non-manufacturing index was significantly above the consensus of 55.6 for MarketWatch and 55 for Bloomberg News and 56% for Econoday, and also beating the consensus range of 55 to 57%.

Not only did the headline numbers grow last month but even larger increases came in the new orders index and the business activities index. For manufacturing, the production index jumped 5.7% to 60.7% and the new orders jumped 4.3% to 60.9%. For non-manufacturing, the business activities index made significant gains of 6.5% to 63.5% and the new orders jumped 5.3% to 63%. All numbers were above 60 and showing broad strength especially in the non-manufacturing sectors as 14 out of the 18 reporting industries showing growth in both categories.

Dr. Mark J. Perry at Carpe Diem noted that "The 63.5 percent reading for the ISM Non-Manufacturing Business Activity Index in December was the highest monthly level since August 2005, more than five years ago."

Raindrops Keep Fallin' on My Head.
Structural rigidity is still of major concern as the converging of price indexes is occurring at such a high level, over 70. Manufacturing bumped up 3 to 72.5% which was the highest since May 2010s reading of 77.5%. Also scary is that no manufacturing industries reported lower prices and 14 out of 18 reported higher. The percentage of respondents reporting lower prices was 3% and higher was 48%, thus signifying like 16 respondents reported higher prices for every one reporting lower. Non-manufacturing made a larger jump of 6.8 to 70%. A high not seen for a long time. The ratio of respondents with lower costs to higher costs was 1 to 7.

Commodities in short supply was not a significant problem last month, but industries are reporting more commodities are rising in prices. Non-manufacturing sectors had no change on the multiple months of specific commodities (7) but the total number of commodities rose to 23 from 16 in November. The big concern going forward is that the manufacturing sectors showed a large increase in new commodities with rising prices of 23 commodities from 16 in November, and multiple months nearly doubled from 8 in November to 15 in December's report.

A business may be able to compensate for price anomalies of a single month, but multiple months will lead to margins being reduced and eventually prices being passed onto the consumer. So far, the US has not experienced inflation in the last decade, but these are not positive signs. One other factor is that as the US dollar continues its long term trend downward in value, then at some point the "pass-through" costs of this currency devaluation will affect importers and they will begin raising prices. Both domestic and foreign competitors will know this and be more willing to raise prices as margins are squeezed.

New export orders also showed weakness on both reports with manufacturing dropping 2.5 to 54.5% and non-manufacturing dropping 3.5 to 56%.

Working in the Coal Mine
Most disappointing of all was the non-manufacturing employment index as it dropped 2.2 to 50.5%. We had seen a growth trend and possible breakout from the stagnant 50% line, but it failed again at maintaining a steady growth trend. (Click on tables for clearer images.)

The trend line during December 2009 until December 2010 was very close to 0.5% per month with a R-squared of 0.5825. This meaning that the majority of the rise was related to later months than earlier months with an increase of almost one-half percent increase per month. But if we are expecting the services industries to bring us back to full employment then this is clearly too low, even if the trend continues.

Manufacturing employment index also dropped 1.8 but still maintained its mid 50s range at 55.7%, and the trend set since a high in October of 57.7% is trending down. Surprisingly, Mike Shedlock just discovered that, "The long-term trend suggests it would be a mistake to expect too many jobs out of manufacturing." Mish provides a chart of employment in manufacturing (2000-2010), and for a longer time frame I include the following chart (From Manufacturing Employment.)

'Where Do We Go From Here' {Employment}
First came news that the ADP report says 297,000 jobs added last month which is the highest gain on record. And this led to increased estimates for the BLS report for last Friday to the "median forecast rising to 150,000". But there were caveats behind the strong ADP report.
But there is a seasonal quirk in the ADP number that may have inflated the December number. ADP and Macroeconomic Advisers do a seasonal adjustment that takes into account a typical December purge, where employers who have fired workers over the course of the year but don’t remove them from officials payrolls right away clear the rolls.

Ben Herzon of Macroeconomic Advisers explains: “If companies were laying off fewer employees throughout 2010 than had been the case in recent years, the amount by which the seasonal adjustment process subtracted from [ADP National Employment Report] growth last year through November was too great. Following the same logic, fewer layoffs through November implies fewer December purges than in recent years, so the boost to December employment growth to offset the normal December purge may have been too large.”

Then sure enough the BLS stated the following in their report at THE EMPLOYMENT SITUATION – DECEMBER 2010 {PDF}.
The unemployment rate fell by 0.4 percentage point to 9.4 percent in December, and nonfarm payroll employment increased by 103,000, the U.S. Bureau of Labor Statistics reported today. Employment rose in leisure and hospitality and in health care but was little changed in other major industries.

Even with the latest drop in the employment rate, it did not reach my prediction last January. At that time I stated, "I think headline unemployment percentage will slowly creep down over the next year to 9% and continue on that trend for the next couple of years." at Hawks Eating Humble Pie.

Mike Shedlock provides a jobs growth forecast for 2011 from Calculated Risk vs. Mish . Their predictions are as follows:
Calculated Risk:
This suggests to me that private payroll employment will increase by over 2 million jobs next year, maybe as high as 3 million jobs! My guess is around 2.4 million jobs as shown on the following graph.
Mish's Global Economic Trend Analysis:
I come up with +127,000 private jobs a month in comparison to Calculated Risk's estimate of +200,000 jobs a month. That is quite a difference.

I have total nonfarm jobs at +106,000.

Mish thinks that government employment will shrink by about 21,000 per month, or he is just dreaming a little about "hope and change". Mish comes to those conclusions mostly based on general trends over 2010. This might be good for a rough estimate but it may underestimate expanding sectors as they become the engine of growth in a turnaround economy. Paul Krugman takes a different approach by considering what growth rates would be needed to lower unemployment levels at The Long Road Ahead.
Roughly, it takes two point-years of extra growth to reduce the unemployment rate by one point.

So, suppose that US growth is accelerating. Even so, it will take years of high growth to get us back to anything resembling full employment. Put it this way: suppose that from here on out we average 4.5 percent growth, which is way above any forecast I’ve seen. Even at that rate, unemployment would be close to 8 percent at the end of 2012, and wouldn’t get below 6 percent until midway through Sarah Palin’s first term.

Interesting set of data points and also shows one of Krugman's deepest fear; that the business cycles will go against the Democrats and the Obama administration over the next few years with the Sarah Palin crack. That is, the economy will be still down and thus Palin wins the 2012 election and then during her first term provides growth prospects that insure reelection of her in 2016.

"Karl Smith" counters this line of reasoning by considering that high levels of unemployment now could easily translate to higher growth rates than what the US has been traditionally at Unemployment and Growth. This higher growth rate is derived from the "massive reservoir of untapped labor which could be easily mobilized". But the US has always had a massive reserve of untapped labor and that has been traditionally fulfilled by larger participation rates and immigration. This immigration has come from both legal as in the case of H1B visas and other special visas, and of course illegal immigration. The bigger problem is a matching problem of the skills that the massive reservoir of unemployed have presently and the skills of the new work force. Of course the structural rigidity of the US could prevent quick changes in the movement of capital from one sector to another.

I am not certain that the time to panic about rising prices is upon us yet, but clearly there are signals that the Fed should be considering a change in the direction of monetary policy going forward. They need to be proactive and plan well in advance of changes in price levels. Even if unemployment is too high, they may need to start unwinding the monetary stimulus instruments. Under normal economic environments, fiscal and monetary policies should coordinate. But under situations like stagflation, then there may be a need for divergence between the two. Much as the early 1980s saw very restrictive monetary policy along with what could be considered fiscal stimulus.

Not only is manufacturing expanding in the US, and in the UK with a new 16-year high of 58.3 (more at UK Economy 2011), and in China where PMI expands, but momentum slows, but also "global manufacturing ended the year on a strong note". Only Japan and Greece were contracting out of the 23 countries listed, and 15 countries were experiencing raising index levels including Japan by 1%. While this is of course good for worldwide economic growth, it does portend that commodity prices could start to rise even more this year.

ISM - Media Release: December 2010 Manufacturing ISM Report On Business®

ISM - Media Release: December 2010 Non-Manufacturing ISM Report On Business®

MarketWatch Data:
Manufacturing ISM Forecast: 57.5%
Non-Manufacturing Forecast: 55.6%

Supply Chain News: Are Manufacturers Really bringing Back Work to US? Anecdotes and some Data Say Yes – Even as Trade Deficits with China Rise; US Now has Total Cost Advantage in Some Areas, GE Executive Says

ISM Non-Manufacturing Index showed expansion in December

Misc. Links:
Fed Watch: A Solid Start To 2011

Manufacturing activity rises to 7-month high

The Plight of American Manufacturing Since 2001, the U.S. has lost 42,400 factories -- and its technical edge.
ManufacturingEmployment-1-1-1 ABQtom

Unlike Immigrants, Robots Will Permanently Drive Down Real Wages

Labor Market Commentary Arnold Kling
The Recalculation Story: A Summary Arnold Kling

ADP: +270k Jobs in Dec., Largest Gain on Record

Trade innovation: Invented threats | The Economist

An Interview with Robert Barro: "The Lessons from the Great Depression"

The Risk of Rising Oil and Gas Prices

Robin Hanson on the technological singularity

Time to Read "Less Than Zero"

Migration wages: more evidence
I reckon there are three policy implications here.
1. A cap on highly skilled immigration is a stupid idea.
2. Insofar as emigration reduces the wages of stayers, there is more reason to worry about the possibility that higher incomes taxes might encourage high earners to migrate. Fortunately, there is - so far? - little sign of them doing so, but this weakens a little my prior support for higher taxes.
3. It’s important to ensure that the capital stock can adjust upwards in response to immigration. Exactly how to do this is of course a matter of debate: is it more important to maintain aggregate demand and get banks lending, or to reduce red tape and capital taxes and barriers to entrepreneurship? Whatever the answer, the question becomes a little more important.

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Monday, January 03, 2011

RSY XXIV: Update,

Since the last post, RSY recommended a sell of TSH at $32.99. On December 21st it nicely gaped up and thus RSY noted an opening price point of $33.23. RSY is also recording three dividend deposits distributed from EGAS of $18, GAIN of $8, and TSH of $35.50. The chart below gives a detail of the transaction history so far with realized gains of nearly $2300. (Click on tables for clearer images.)

The next table is a little busy, but the important aspect is it shows each of the positions held and are now holding and the realized and unrealized gains so far. All the picks so far are have produced gains except for LZ. Since we are planning on holding this position, then over time the option should expire worthless and we would pocket the premium.

It may be a long 3 months to hold the current positions of MRH, IVR and CODI until the next ex-dividend date. MRH is still rated a StrongBuy by Sabrient and CODI at Hold. IVR has been upgraded to Hold from Sell and has been maintaining stable prices after the ex-dividend date along with finishing their public offering of 10 million shares for a net proceed of $214 million. RSY recommends further holding of these positions. And now for a look at the current holdings:

Compass Diversified's Unchanged Q4 Dividend