Thursday, June 30, 2011

RSY XXXX: Sell 1/2 Total, Buy FNLC

Although, just recently I put my eye on Pulaski Financial Corp. (PULB), I like what I see. One very positive signal to start with is that insider buying is greater than selling with 17 transactions of insiders buying to one selling according to Yahoo Finance (at PULB Insider Transactions), and number of shares is nearly 5 buying to one selling. On forensic accounting scores, PULB scores acceptable with a near "conservative" rating. They did have one issue with a late filing in May 2010, but since that time no major issues have arisen. Sabrient Systems has this to say on the SmartStock Reports:
Sabrient Analysis
PULB is rated a Strong Buy for its outstanding profile as a value stock, combined
with strong growth attributes.
• Value: A Sabrient Value Score of 89.4 indicates that PULB's stock price does not
fully reflect recent and projected earnings results. This implies that the stock holds considerable potential for price gain together with reduced downside risk.
• Growth: A Sabrient Growth Score of 77.8 suggests the stock has good potential as
a growth stock.
Another fine GARP (Growth At a Reasonable Price) stock that should be well suited for long-term value investors. In addition to our all important value score and good growth potentials, PULB also shows outstanding Balance Sheet Score (measure of comapany's liquidity and debt issues) of 92.6 and Fundamental Score (broad measure of a company's financial health) of 90.5 (out of 100 scores).

The next question becomes how many shares will enhance the RSY portfolio for the long-run. This is a good time to look at our portfolio and compare the percentage holdings of each position as well as sectors. The table below shows the current holdings of the RSY and their respective percentages of the total portfolio which includes the cash on hand.

RSY recently added FNLC which is another regional bank like PULB. Since RSY has over 8% in financial sectors, and PULB is a micro-cap stock, RSY recommends a purchase of 400 shares of PULB at a limit price of $7.19. Good-til-close is recommended but if it does not trade by the close of July 5th then close the order as the ex-dividend date is July 6th.

The table also shows a concentration of stocks in energy with over 18% of the portfolio. TOT is still rated a buy by Sabrient. Since the next ex-dividend date is in November and we just got $1.61 per share on June 17th, RSY recommends a sell order of the last lot purchased of TOT for a small gain and hold the other half for now. RSY recommends a sell of 100 shares of TOT at a limit price of $57.51 (GTC).

Labels: ,

Tuesday, June 21, 2011


Last month, I was Questioning the QE Monetary Transmission Mechanism, and used MyStockFinder tool to find a selection of GARP regional bank stocks. Today, I want to look at one in particular, First Bancorp, Inc.(FNLC).

FNLC shows plenty of attributes we look for in a value, dividend portfolio. Some of the most appealing are: good insider buying by directors, a near perfect forensic accounting score, and most importantly a good dividend yield of nearly 5 1/2. Sabrient Systems states the following about its buy rating of FNLC:
FNLC's exceptional value profile earns it a Buy rating.
• Value: With a Sabrient Value Score of 84.6, FNLC is one of the more desirable stocks with regard to valuation. At its current price, the stock is a superior candidate for value-minded investors who seek high potential gains with low downside risk.

In addition to the good Value Score, it boast above average Earnings and Balance Sheet Scores and an exceptional Fundamental Score of 81.7. The Sabrient Fundamental Score is the broad measure of a company's financial health, including its balance sheet, cash flow, revenue, and earnings quality.
"We continue to post good earnings and our capital ratios remain strong," stated Daniel R. Daigneault, the Company's President & Chief Executive Officer. "Many of our shareholders invest in The First Bancorp because of our generous dividend, and good earnings and strong capital are the two major factors enabling us to maintain the ability to pay dividends at this level."

Certainly music to our ears as they declared a dividend for July 1st ex-dividend date of 19 1/2 cents per share.

RSY recommends a buy order of 400 shares at a limit price of $14.41 (GTC-close before end of month).

Labels: ,

Paul Krugman, Taylor Rules (Wonkish)

My last post discussed Taylor rules and how Paul Krugman gets it wrong in thinking that the European Central Bank (ECB) is raising its rates (tightening) when "only Germany even arguably needs it". Aside from Finland and arguably France, the "core" countries seem to need monetary restraint before the economy overheats next year. This conclusion was based on the NAIRU and standardized unemployment rates being below what is the normal range or close to full employment, and the gap between potential output and real output is quickly closing as shown in the output gaps. This post will continue its wonkish discussion of the Taylor rule and use some actual numbers for the core Eurozone countries as labeled by Fernanda Nechio of the San Franciso Fed.

The Taylor Rule formula used below is from the paper Taylor Rules by Athanasios Orphanides (pdf, page 7):
i = 2 + π + 1/2*(π - 2) + 1/2*(q - qe)
where i is the nominal target rate for short-term interest rates, π is the rate of inflation, q is output, and qe is desired level of output. The expression (q - qe) becomes simply the output gap. Both series data are derived from the OECD Economic Outlook using Table 10. Output gaps and Table 18. Consumer prices indices. Core inflation would have been preferable as Krugman points out, but since Taylor used headline inflation anyway and using an average for the year should prevent as much volatility in food and fuels to affect the outputs. Also the factors used above may not be the best for this situation or in technical terms it may be a misspecified model.
(Click to enlarge charts)

It is worth noting that raising rates now seems appropriate according to the graph with a target around 2 1/2% which is significantly higher than it is now at close to 1%. The Taylor rules index drops off for all countries since the inflation rates drop across all countries shown for 2012. As we saw last time, this drop is not due to the output gap dropping.

The results are fairly robust for other Taylor factors like the one suggested for the US with 1.5 for inflation gap and .5 for output gap. These results for 2012 are very similar to the one above with around 2.5% average for the 7 core countries (equally weighted). During this year the Taylor rates are suggesting even higher for the core with almost a 5% rate.

‘Structural Rigidity’ or a Flexible Economy?
Before addressing the issues brought forth concerning structural rigidity in the Eurozone and the US, this would be a good time to review the theory of structural rigidity. The theory of a "flexible economy" is most attributed to Tony Killick who works for the Overseas Development Institute (ODI) and wrote the book entitled "The Flexible Economy: The Causes and Consequences of the Adaptability of National Economies". His definition of a flexible economy is:
Broadly expressed, we can define a flexible economy as one in which individuals, organizations and institutions efficiently adjust their goals and resources to changing constraints and opportunities.

Structural rigidity is simply the presence of impediments to a flexible economy, whether this be social, economic or political constraints on people to adjust their goals and resources. So the goal is to have a flexible economy, as much as is possible.

Historically, economic models assumed capital was the biggest constraint on an economy and with no regards to labor inputs. Now that unemployment is the greatest concern for the growth of the economy then it has become natural to think in terms of labor markets being inflexible and structurally rigid. That has been loudly rejected by leftest economists such as Paul Krugman. Overall, they might be right, but macro views may hide the individual sectors or job classifications that could use more workers. This is especially true since the labor markets are marked by more heterogeneity, which is more and more division of labor with increasing specialization in each job category.

It is also important to emphasize that the resources, Killick is talking about, are not merely labor, but all the inputs to creating goods and services. As noted in previous posts, energy and natural resources could be one of the constraints for the present economy. It is the one area that is expanding employment even given the slow permit processing by the present administration. One recent example of this structural rigidity is discussed at The EPA and Mining Jobs.

Structural Rigidity: Eurozone, US
The divergence of core and peripheral countries observed in the last post shows the structural rigidity of the Eurozone. Some of this is obviously attributed to language barriers and social customs. But whatever the cause, this makes monetary policy all the more likely to not fit the needs of all constituent countries, but not like Paul Krugman states that it only helps one possibly. This divergence in needs from the central bank and European Council could be a negative signal going forward for investors. With overheating economies with inflation of the core and stagnant, slow growth in the peripheral countries, this spells out weakness in the Eurozone going forward.

Their losses are not necessarily our gains just as the tragedies in Japan have not helped the US or Europe. The US does not have many of the structural rigidity problems that the Eurozone has, but it is far from being at an optimally flexible economy. Anecdotally housing appears to be one constraint preventing labor from moving either to another city or state, and this is a continuation of the historical trend toward less labor migration. One factor that helps the US out is the large pool of immigrant workers. Immigrant workers through both documented and undocumented routes will congregate in locations and jobs that in most demand. Whether it was in New Orleans construction or IT firms in the Silicon Valley, immigrants went where the jobs were first and foremost.

Not that other countries don't have byzantine rules for hiring and firing workers, but it is worth considering what would be the cost and benefits from less restrictions in labor markets. Some of the costs of these rules and regulations along with all other business regulatory costs are demonstrated by the difficulty in starting small businesses.

Warren Meyer discusses Where Have All The Small Businesses Gone? Warren does a good job showing examples of how raising the fixed costs of businesses leads to less competition which is marked by increasing monopoly market power for the firms that do survive. Monopoly market power is also enhanced by the licensing process. This is one of the most pervasive methods of raising fixed costs while not necessarily raising social benefits.

Is a Bad Housing Market Reducing Worker Mobility? - The Curious Capitalist -

The Tax Foundation - New Podcast on the State of California's Business Climate with Joseph Vranich

Japanese Central Planners at Work, Arnold Kling | EconLog | Library of Economics and Liberty

Political Calculations: The Unintended Consequences of High Payroll Taxes

Unemployment Rate Unlikely to Fall Below 8% - The Curious Capitalist -

RealClearMarkets - California's Plan to Electrocute the Automobile Industry

Labels: ,

Sunday, June 19, 2011

Economic Divergence of the Eurozone & Paul Krugman wrong on One Size Fits One

As usual, Paul Krugman is at it again with a simplistic macroeconomic view of the economy to justify his hell bent desire to increase Fiscal and Monetary expansion at any costs at his blog post entitled One Size Fits One. He brings out plenty of good points about Taylor rules (rules that help the central bank to maintain a stable economy based on the output gap and inflation). Let me jump right to his conclusions.
...In short, the ECB has no business raising rates.

What is true, however, is that the rule might still point to a rate rise for Germany.

So the point is that while the ECB could suffer from a one-size-fits-all problem, the fact is that it isn’t even doing that; it’s tightening when only Germany even arguably needs it.
He links to an economic letter from the San Franciso Fed entitled Monetary Policy When One Size Does Not Fit All (pdf). He seems to be basing his conclusion on the following graph from the letter showing unemployment gap and core inflation.
Click to enlarge charts

So he is right that Germany is the one that is significantly below "full employment" or more technically the Non-Accelerating Inflation Rate of Unemployment (NAIRU), but all the "core" European countries (Austria, Belgium, France, Finland, Germany, Italy and the Netherlands) are close to NAIRU or even marginally below it. Using the NAIRU standardizes the "coefficients" across countries and thus Krugman has it wrong when he states a need for different coefficients on the two sides of the Atlantic.

Also more importantly, this is a static analysis of the core and peripheral countries. Since the lag time for the effects from any change in the central bank policy to the general economy takes about 18 months, the analysis clearly should be on forward looking gap rates. The next graph of standardised unemployment is from the European Central Bank as part of its Statistical Data Warehouse.

The chart above shows that for the core countries unemployment rates have been declining since late 2009, and are for the most part are below their individual median rates over the periods. For example, Germany has the lowest unemployment rate since 1992 with a downward trend since 2006. From the graph it is also worth noting the significant differences in unemployment rates between countries over the long-term basis as well as short term trends. These differences of standardized unemployment rates and also NAIRU among the countries (under the same monetary union) shows that there is much structural rigidity between the countries still. The Fed letter concludes with the following that provides a few reasons for these differences.
Nevertheless, the tensions over monetary policy in a union of many separate countries are likely to be greater than tensions in a single country. The United States can rely on its relatively high labor mobility and on fiscal policy to counter economic weakness, for example, options that may not be fully available to the euro area’s heavily indebted peripheral countries.

Output Gaps and Taylor Rules
Krugman might have a point that the Taylor rules should use output gap as opposed to unemployment gap used in the letter. The two graphs below show the output gaps for the core and peripheral Eurozone respectively along with the US output gap in both. The data comes from the OECD Economic Outlook in table 10. Output Gaps which measures deviations of actual GDP from potential GDP as a per cent of potential GDP. It includes forward looking estimates for 2011 and 2012, which is helpful for considering medium-length effects from monetary policy. There is a divergence between the core and peripheral countries with the core as a group quickly reducing the gap to zero or in the case of Germany surpassing the break even point in 2012. Given the expected growth in output as compared to potential GDP, it does not seem overly early to consider raising interest rates in the core countries. On the other hand, the peripheral countries show weakness in growth and have a much longer path to eventual full employment of resources.

The graphs also show that the US has done much better than the peripheral countries but compared to the core countries it is a lager of the group around the level of France with even Finland making up the gap at a very fast rate. So while it is possible to say they are "similar" in appearance in growth, as Krugman implies, the US will be a lager in getting to break even output gap. This trend for the US does imply that within the next few years the output gap will be significantly reduced to zero. Unemployment will still be above NAIRU at that time, but the Fed may be required to start unwinding the extra monetary tools like quantitative easing if output gap is zero or above.

Based on the data above, it showed that Paul Krugman missed the mark on unemployment gaps with respect to the use of the Taylor Rules. The data from the output gap also confirms that soon, if not right now, might be a time that the EMU (European Monetary Union) will need to raise interest rates. This is at least in regards to the core countries. Structural rigidity is causing most of this divergence. If labor was completely mobile then standardized unemployment rates would converge and stay stable between regions (nations of the European Union).

The letter from the Fed provides one more graph that is important in discussions about which country benefits and which country gets hurt in any monetary policy going forward. Since the economic weights of various countries determine the amount of contributions to the central bank and thus political weight, you would not expect perfect balance between the various interests. But a reasonable compromise would represent conditions where the target rates lied between the core and peripheral Taylor rules rates. The graph below shows that since the lines all crossed in 2008 that the target rates used were in between the Taylor rules indicator of the core countries above and the Taylor rules indicator of the peripheral countries below. It could be argued that the rate used should have been lowered to like near zero in the US and Japan, but overall it seems to be a good compromise.

Given the data we looked at regarding output gap, I think it is upon Krugman to provide a Taylor rule or some other rule to determine what the target rates should be for the EMU going forward.

The data above, and thus implications of what the EMU may do in the future, bodes negative for investors looking for gains in the European region. The core is basically heating up and inflation may take hold especially with a lot of power in labor unions. On the other hand, the peripheral countries could suffer economic stagnation from too high of rates along with austerity measures. In an alternative universe, the problem would be easily solved by all the unemployed in Spain, Portugal, and Greece would pack up their bags, learn German quickly and get jobs in the hot sectors of Germany including high technology areas. Also capital would flow from the center/core to the peripheral. In other words, no structural rigidity.

Where Have All The Small Businesses Gone?

standardised unemployment

Labels: , , ,

Thursday, June 16, 2011


Despite a respectable showing for Sabrient's key value measure, IVR is rated a Sell. It appeared among Sabrient's shorting filters as a stock with characteristics that are being avoided by the current market.

RSY recommends selling off the remaining half of the initial position of 400 shares (based on a portfolio of $100,000). Sell 200 shares of IVR at a limit price of $20.81 (GTC). This is a most opportune time to unload as the last ex-dividend date was on June 15th with record date of tomorrow. This will net us a small capital gain from our original purchase on August 23rd, 2010 but a huge dividend of $3.94 per share.

Below is an update of the portfolio transactions since inception. Since last update, we have added capital gains of $225 from selling EGAS and $207 in dividends.

Home Bias - Fama/French Forum

Political Calculations: The Return of Order in the Stock Market?

More Signs Wall Street Is Preparing For Debt Ceiling-Related Problems | Capital Gains and Games

S&P 500 Historic and Expected Quarterly Dividends per Share, 2009Q1 through 2012Q2, as of 14 June 2011


Sunday, June 05, 2011

Macro View: ISM May Rose Flowers or Thorns?

At some time the negative news surprises are going to be supplying the bears with all the nutrients they need to roar back to life. Over the past week, David Brown noted that the markets were thinking “What? Me worry?” over the triple whammy of bad news from housing, business conditions and consumer confidence. Obviously these three segments are most important for the economy to get back on the right tract and unemployment to decrease from present high levels. This could be a harbinger of a vicious circle forming through negative outlooks spreading throughout the economy. The next day Scott Martindale noted the bearish indicators were showing signs of trouble where he stated that Financials are a drag.

While the VIX (a measure of market volatility) has remained subdued, some of the negative news this week has been: Case-Shiller home prices are contracting; consumer confidence was significantly below expectations; ADP employment report was reported as a measely 38,000; ISM manufacturing report confirmed the downdraft reported by the Chicago PMI with a drop of nearly 7%; motor vehicle sales was below expectations; Factory Orders were down; and to top it off, the unemployment rate rose slightly to 9.1%. The SPY showed weakness this month with a drop of around 2 1/4% on June first, marginally lower on the second and nearly a 1% drop on Friday. One bit of good news was that the Non-manufacturing ISM report was above expectations with an increase of 1.8 to 54.6%.

The WSJ's World-Wide Factory Activity by country shows that most countries have turned to slowing rates of growth with a general convergence toward the mid-50s range. The two outliers are Spain and Greece that are contracting at a faster significant pace -- as expected.

As noted above, the ISM manufacturing headline index dropped 6.9 to 53.5% which was below MarketWatch consensus of 57.1 and Thompson Reuters of 57.5% with a range of 55 to 59.5%. While the manufacturing was a surprise to the downside which was below the consensus range, the non-manufacturing index was a surprise to the upside at 54.6% versus the consensus from MarketWatch and TR both at 54 and a TR consensus range of 52 to 55%.

Jobs, Jobs, Jobs
The manufacturing employment index has continued its downward trend since February 2011 with a high of 64.5 and a most recent drop of 4.5 to 58.2%. This drop below the 60 mark might signify slower employment growth in reports like the ADP employment report for manufacturing. Since manufacturing has less share of total employment than the services sectors, the non-manufacturing employment index has been of more interest to us. The graph below shows the non-manufacturing employment index since December 2009. Worth noting is that the drop from April was reversed and May just about reached the trend line as it did this March. (Click on charts for clearer images.)

Prices and Commodities
Mish noted that the Manufacturing ISM plunged along with backlog of orders and new orders with the later barely above contraction. He also notes that all the indexes dropped in the table by ISM, but not all indexes are bad news when they drop, especially prices. Both price indexes went down with the manufacturing dropping a sizable amount of 9 to 76.5% and non-manufacturing declining slightly to 69.6 by .5%. This trend might be a good sign, but it seems to accompany soft economic growth indicators, which is not necessarily good news overall.

More troubling is the number of commodity prices rising along with commodities that have risen for consecutive months. The two graphs below show the number of multi-month commodities with price increases and total number of commodities with rising prices since November 2010 for the manufacturing and non-manufacturing sectors respectively.

While both categories for manufacturing decreased in May, non-manufacturing continued the upward trend with both hitting new highs. Mish concludes about the price pressures and I agree with:
Either commodity prices plunge, or manufacturers get hit in a price and profit squeeze with falling customer demand.

Which will happen? I think both.

Using the ISM Cycle as an Investment Guide
Hat tip to Cullen Roche with the above linked titled article that uses the ISM manufacturing index as an investment strategy developed by Goldman Sachs. A partial explanation for the strategy is available at "Weekly Kickstart" (premium pdf report at: And we are seeing that the manufacturing index has continued its decline since this February's peak with a sharp decline in May. If this trend continues it will certainly mean contraction in the coming months, and possible signs of a "double-dip" recession.

Mr. Roche links to an article about headline non-manufacturing sector declining in April to confirm the reversal of the faster growth rates, but the May report for the non-manufacturing sectors actually reversed course and increased the rate of growth. GS specifically states the manufacturing ISM reports are the basis for the strategy, and if this is a proxy for growth of the economy then the manufacturing is more strongly correlated with GDP growth. This correlation is confirmed from the statements from the ISM reports, reports from Martin Evans from the National Bureau of Economic Research in a paper entitled "Where Are We Now? Real-Time Estimates of the Macroeconomy", and my own regressions done on the data. I would expect that this correlation with manufacturing and GDP growth would become weaker in the future as the manufacturing portion of the economy continues to decline. Just as the US no longer sees any correlations between agricultural production and GDP, but in India the monsoons and weather patterns are highly correlated with economic growth.

The GS investment strategy using ISM data is summed up by the following graph. If the manufacturing index continues its downward spiral then the length of this lag has been shorter than the median of 11 months with only 5 months. As they say, "Every cycle is unique and return distributions are wide." Caution should be practiced at trying any new strategy, but it does add to the plethora of business cycle investing strategies.

ISM: 57.1%
Non-Manufacturing: 54.0%

World-Wide Factory Activity, by Country - Real Time Economics - WSJ

ISM - Media Release: May 2011 Manufacturing ISM Report On Business®

Econoday Report: ISM Mfg Index June 1, 2011

ISM - Media Release: May 2011 Non-Manufacturing ISM Report On Business®

Econoday Report: ISM Non-Mfg Index June 3, 2011

Calculated Risk: ISM Non-Manufacturing Index indicates slightly faster expansion in May

The Capital Spectator: The New Decline In The Inflation Forecast

Chicago PMI Tanks in May - Seeking Alpha

Calculated Risk: ISM Manufacturing index declines to 53.5 in May

David Smith's Manufacturing growth weakens

American government debt: Mining the safe harbour | The Economist

Mish's Global Economic Trend Analysis: Case-Shiller Nominal and Real Housing Declines Since Peak; Home Prices Best in 25 Years, Better Prices Still Coming

The Capital Spectator: Two More Warning Signs For The Economy

Calculated Risk: Chicago PMI shows sharply slower growth, Manufacturing Activity Expands in Texas

Chicago Business Barometer Shows Weakening Recovery - Real Time Economics - WSJ

The Unkillable Yield Curve Fallacy (Wonkish)

Inflation and Debt (Wonkish)

Inflation Notes

Calculated Risk: Arizona Lands sells for 8 percent of peak price

Misc. Links:
Using the ISM Cycle as an Investment Guide - Seeking Alpha

U.S. Manufacturing Trade (Wonkish){PK}

Supercore! (Wonkish) Two questions about inflation: {PK}

Questions for Minimum Wage Supporters, Bryan Caplan | EconLog | Library of Economics and Liberty

Mish's Global Economic Trend Analysis: Retail Sales Plunge in Italy, Dip Elsewhere in Euro-Zone

Worthwhile Canadian Initiative: Subsidies on Interest Income to increase Aggregate Demand

Bad News In Preliminary Jobs Data

Calculated Risk: ADP: Private Employment increased by 38,000 in May

Why do Depressions Occur?, Arnold Kling | EconLog | Library of Economics and Liberty

Calculated Risk: Employment Summary, Part Time Workers, and Unemployed over 26 Weeks

GOP, Democrats Point Fingers Over Rising Unemployment Rate - Washington Wire - WSJ

Nearly 1 in 3 Unemployed Out of Work More Than a Year - Real Time Economics - WSJ

Video: Weak Jobs Report for May - Real Time Economics - WSJ

Job numbers disapoint and the unemployment rates rises: Is it Time for more stimulus? - The Curious Capitalist -

The Capital Spectator: Job Creation Slows Sharply In May

Labels: ,

Wednesday, June 01, 2011

More political misapplication of demand and supply analysis--almost

More political misapplication of demand and supply analysis
I suppose the idea is that expectations of low prices will cause suppliers to sell more now at high prices to avoid losing out when prices actually fall. The ECON 101 analysis is impeccable. Yet, new supplies won't do much to bring down prices (0% to 3%). The mistake is shifting the demand and supply curves too much.

At least you are recognizing the effects of expectations -- and I assume taking into account the discount rate. But even ANWR is supposedly only reduce oil prices by 3% WORLD WIDE, we are still talking about an inelastic demand curve as noted here: Environmental Economics: Is the own-price demand elasticity for gasoline increasing?

If Newt is for "all-out", then do you think we can increase oil production another 1 million from off-shore drilling? Just doing what the Cubans are doing is one thing we could do: Oil Updates: Cuba Discovery. And increasing on-shore continental drilling another million per day. Before long, we might have something there considering inelastic demand curves in the future as well as supply curves...

"Shale Boom in Texas Could Increase U.S. Oil Output"