Monday, July 25, 2011

RSY: DLX, Optional Options

Deluxe Corporation (DLX)-- Sabrient rates DLX a Strong Buy for its solid value profile, which makes it one of the better value stocks in today's market, despite modest growth and momentum scores. The RSY portfolio loves growth at a reasonable price (GARP) stocks but value is more important versus growth rates. Weakness in the projected earnings growth gives it a low Earnings Score from Sabrient. But with a Sabrient Fundamental Score of 98.3 (which measures a company's financial health, including its balance sheet, cash flow, revenue, and earnings quality), Deluxe is significantly higher than the average of its industry group of 57.0.

According to SmartConsensus, DLX and its 5 other peers in the Commercial Printing Services industry all received a hold rating from them. Not a lot of excitement there. DLX's accounting practices are with-in an acceptable range and risk is average. As a solid value stock it should outperform the market over the longer-term and with its dividend yield of over 4%, it pays to hold this one. The middle of August should be its next ex-dividend date.

NakedValue noted that DLX was an Under-the-Radar Low P/E Dividend Paying Stock. That was the good part but then it described the earmarks of a maturing industry with margins increasing but sales decreasing. Like most companies in maturing industries, endeavors into the on-line services is one of their goals. Deluxe recently purchased Banker's Dashboard which give banks daily access to their financial position through on-line tools.

The PE ratio (TTM) is just 8.42 and forward looking it is expected to decline slightly. For a more complete analysis of Deluxe's cash flow check out Why Deluxe's Earnings Are Outstanding.

RSY recommends a buy of 200 shares of DLX at a limit price of $24.09 (GTC). This will be the first buy into the Consumer/Non-Cyclical sector and since this will be less than 5% of portfolio (based on a portfolio of $100,000), RSY also suggests to sell two put contracts of DLX of the Oct 22 '11 at $22.50 at a limit price of $1.25 (GTC).

Juice up Returns with Options.
Let us see if we can juice up the returns with some covered calls on our long positions. RSY presently holds a covered call of Foot Locker Jan '12 at $22.50 which is working out so far. Since RSY diversified across caps including some micro-cap and small-cap stocks, not all long positions have options available or have such shallow trading that it might not be worth the trouble such as BRKL. RSY recommends the following to consider:
1. Alliance Resource Partners (ARLP) Mar 17 '12 $80 Call, 1 option contract at limit price of $5.
2. Compass Diversified Holdings (CODI) Feb 18 '12 $17.50 Call, 2 option contracts at limit price of $0.50.
3. TOTAL S.A. (TOT) Feb 18 '12 $60 Call, 1 option contract at limit price of $2.40.


Checks and Services for Small Business, Banks, and Credit Unions - Deluxe Corp

Deluxe Corp, a small-cap value company in the consumer services sector, is expected to significantly outperform the market over the next six months with average risk.

The Advantage of Monthly Dividends Over Quarterly Dividends - Seeking Alpha

Smaller unit helps Deluxe post 4% sales gain - Seeking Alpha

Deluxe Corporation (NYSE:DLX)
Industry: Commercial Printing Services
Market Cap: $ 1,269.5mm (Mid Cap)

Average (48)
P/E (Trailing 12 mo.) 8.42x
EPS (Trailing 12 mo.) 2.946
Next Earnings Date 7/28/11
Market Cap 1.3 B
Shares Outstanding 51.4 M
Beta 2.0
Dividend Yield 4.08%
Declared Dividend 0.250
Ex-Dividend Date 5/19/11
Dividend Payable Date 6/6/11

(2) A non-binding resolution on executive compensation (or "say-on-pay vote"):

For: 34,792,130

Against: 1,690,330

Abstain: 129,725

Broker non-vote: 5,872,797

(3) A non-binding, advisory vote on the frequency with which we should conduct

future say-on-pay votes:

One year: 30,143,352

Two years: 308,412

Three years: 6,029,103

Abstain: 131,318

Broker non-vote: 5,872,797

Based on a determination of our Board of Directors in light of these

shareholder voting results, the Company has decided to conduct say-on-pay votes

every one year, until such time as our shareholders are next asked for an

advisory vote on the frequency of conducting future say-on-pay votes.

SmartConsensus Peer Ratings Detail:
6 holds; 90days ago: 3,3,1; 1 year ago: 2,2,1.

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Friday, July 15, 2011

Phony Debt Limit Discussions about Default

Politicians and pundits alike often invoke the constraints that individuals and collective groups (e.g., unions, churches, corporations, i.e. "persons") have in regards to how the Federal Government should manage its affairs. That is clearly not the case as the whole is greater than the sum of its parts. One important aspect is the central governments (especially larger countries) have the ability to take on more risk than any single person. This is evident for example when the business cycle heads south, the central government can "stimulate" consumption and investments or collectively called absorption through monetary and fiscal measures. Since it has virtually unlimited funds to draw on, it can alter the state of the economy at any given time.

Another aspect of its ability to take on risks is in investments. When it invests in a wide range of public goods, it has more leeway to invest in long-term projects because of the low cost of borrowing, like in basic research and development. Since it has a broader and deeper range of projects, it is less reliant on any particular project failing or succeeding. The one problem is when a project fails but leaves behind a constituency that is rent-seeking. And without prudence, it can go badly off track like Zimbabwe.

While Fiscal and Monetary policies are not applicable to family budgets or "persons", the debt issues can be translated to a person's budget constraints. No matter what instigates the debt ceiling, persons do not suddenly starve or throw granny out on the street, but reassess their income and spending streams. They also set out to prioritize the bills and consumption streams. Assuming a family with a good credit score, they may choose to pay the "debt holders" first and foremost to continue their lines of credit. Secondly, paring down only the most essential consumption goods to maintain a healthy family. The remainder (like Starbuck's) is eliminated on the short-term.

Next, think about delaying or postponing certain payments. Like if the water/gas/electricity is normally paid on the 5th but is not late until the 20th then delay it two weeks. Sell off some assets that are not being used now, like the old bike or some gold from that place called Fort Knox. Even if the Treasury states no fire sale of gold to delay debt ceiling, the Federal Reserve could swap out the assets like they did for quantitative easing. They simply swap out one asset (gold) for another one (money). After the cash flow improves then reverse the transaction.

Next try to improve receipts by encouraging and cashing income checks as fast as possible. Take on more work and make sure your cousin Vinny pays you back promptly. If you are the government, you improve cash flow operations. Why not have the IRS do a weekend/month sale? Discount for deadbeats on late and interest payments with a $1000 reduction if paid by September 1st. Better yet, why not a telethon? They even have a site dedicated to paying down the debt at It is often stated that some people think their tax rates are too low, and this seems a perfect time to donate more. All we need is a good "pitch (wo)man" to get market penetration, and there is not a better spokesman than the current President.

Of course the central government is not like individuals. It has the power to "print money" and I am not referring to the Feds ability to increase money supply. An individual can write checks, but that would be slightly different than the government's ability to create actual new money. Its technical term is seigniorage . I would simply define it as the ability to sell a product less than its marginal costs, like any profit seeking business. Not only could the Treasury issue more coins and dollars, it could open the demand for $1000 bills. Certainly that would increase the M1 component of the money supply and thus through seigniorage create a surplus cash flow. Heck it might even increase the velocity of money and thus solve our lack of demand! Supply siders unit!

This discussion is not to say that the Federal Government will not have to eventually raise the debt ceiling. Any person will eventually have to balance their budget and consume less than their income stream. But it is logical to question when someone states that if we don't raise it by a certain date that it means default immediately.

3 ways Obama could bypass Congress -
Section 4 requires the president not to put the validity of the public debt into question. If the debt ceiling is not raised in time, there will not be enough incoming revenues to pay for all of the government's bills as they come due. Therefore he has a constitutional obligation to prioritize incoming revenues to pay the public debt: interest on government bonds and any other "vested" obligations.

Misc. Links:
Moronic Monday: Still No Deal? - Seeking Alpha

Sen. Tom Coburn to unveil plan to slash federal spending by at least $9 trillion |
Sen. Coburn to announce $9 trillion deficit-reduction plan | Tulsa World

Will a debt ceiling deal save America’s AAA credit rating? — Marginal Revolution

Obama Tries to Win Battle for a Debt Deal — and Public Opinion - Washington Wire - WSJ

Governors Demand Quick Debt Agreement - Washington Wire - WSJ

Sovereign debt: A few things to remember about debt | The Economist

Debt Ceiling Thoughts - Credit Slips

Smoke and mirrors

The horrifying AAA debt-issuance chart | Felix Salmon

The Horrifying AAA Debt-Issuance Chart - Seeking Alpha

A Strong 30-Year Bond Auction in the Face of Default - Seeking Alpha


Wednesday, July 06, 2011

RSY: This Bank (BRKL) Even Washes Your Clothes...Maybe a Window or Two?

Well, maybe not directly, but they certainly are a facilitator of financing for the coin laundry, convenience store, and dry cleaning industries. Eastern Funding LLC is a division of Brookline Bank (NASDAQ: BRKL) which Powers the Laundry Business. Drycleaning and Laundry Services have suffered from the Great Recession like most other industries, but provides long term growth that should be resistant to demographic and structural economic changes. The first graph below shows the slump since 2008 in revenue per firm, and the second graph shows the projected market forecasts up to 2015.

Sabrient rates BRKL as a Strong Buy despite its modest scores for value, growth and momentum. BRKL exhibits a combination of core attributes that are in favor with today's market. For Rock Solid Yields (RSY) investors, we also are interested in Earnings Score, Balance Sheet Score and Fundamental Score which are below industry average for Earnings Score but above average in the industry and S&P 600 for the other two scores.

While this might not be the most exciting stock out there, it should provide stable earnings for the foreseeable future. The forensic accounting score is above average and mergers and acquisitions appear to be the only flag of significance going forward including the merger with Bancorp Rhode Island, Inc. by the end of 2011. Overall, BRKL should match the market over the next six months with less than average risk. A combination we look for in the RSY portfolio holdings. It also provides a dividend yield of over 3 1/2%.

The one issue we have is that we recently added a couple of regional banks to our portfolio with FNLC and PULB. Along with our two long-term holdings of NGPC and GAIN, we are sitting on over 11% of portfolio in the financial sector presently (based on $100,000 portfolio). The latest ex-dividend dates for FNLC and PULB were the first and sixth of this month and thus a good time to unload a portion of either or both. We can be patient on selling these as there is no pressing need now so both orders will be Good-Til-Canceled (GTC). RSY recommends a limit sell order of 200 shares of PULB (1/2 long position) at $7.49 (GTC), and 200 shares of FNLC (1/2 long position) at $14.89 (GTC).

RSY recommends a buy limit order of 400 shares of BRKL at $9.29 (GTC).

StockScouter Stock Rating System - Brookline Bancorp Inc (BRKL) - MSN Money
Brookline Bancorp Inc, a small-cap growth company in the finance sector, is expected to match the market over the next six months with less than average risk.

The Love of Building
Another $20 plus million spent on building and renovations for a foot print in Boston. Will Perrault next change the franchise name to New Clarendon Bank?
Millions in shareholders equity again gone. Perrault's real design is to be
among Boston's elite banking community on our buck, then bolt for bigger and better.
The Brkl BD's have all lost their minds in this grow to sell mentality in questionable areas of growth.

What's next ? Oh yes, the purchase of a Boston down town parking garage.. for Perraults business car of course.

Eastern Funding Powers the Laundry Business

Audit Integrity AGR:
Average (66)

Econbrowser: Will a Tax Repatration Holiday Spur Investment?

CARPE DIEM: Bastiat's One-Hand Solution to Job Losses

S&P 500 sector pie chart

Tuesday, July 05, 2011

A Macro View: ISM Reports-Inflation Tamed June P. II

The last Macro View post was wonkish in regards to how the headline ISM indexes are calculated. While Mish was discovering some of the nuances of the reports, we also explored the inventory index in depth and showed that on a month-over-month basis it is fairly random with no discernible trend. One month it added to the headline index and the next it was just as likely to be negative as positive from the last index number.

The PMI index showed strength in the 5 core categories which reversed the trend and reversed the very bad showing in May when all the categories were negative and very significant. This led to the PMI handily beating the consensus of 52 and above the consensus range reported by Econoday of 51 to 55 with a PMI index of 55.3%.

But unfortunately the non-manufacturing index (NMI) did not provide as much positive news about the direction of the economy. The NMI dropped 1.3 to 53.3% which was below the consensus of MarketWatch and Econoday by 0.7 at 54% but was within the consensus range of 51.2 to 55%. In contrast to the positive 5 core indexes of the PMI, the NMI was negative across the board except for employment that squeezed out a positive 0.1 increase to 54.1%. It continues its trend upward but 0.1 is probably just a statistical anomaly. The underlying percentages also show that weakness with those reporting increase in employment went down from 28 to 27% while those reporting lower employment rose from 9 to 12 last month.

The chart below shows the employment trend in the non-manufacturing sectors showing the trend line since December 2009 when the down trend was reversed to the upside. The slope of the line has been going down but the significance of the trend has been improving.

The Bend in the Road for Inflation or Not?
Overall concerns about inflation has been subdued in this last report. Both manufacturing and non-manufacturing price indexes dropped significantly by 8.5 and 8.7% respectively while still maintaining above 60 for non-manufacturing at 60.9 and high 60s for manufacturing at 68%.

I have been monitoring the commodities reported as being up in price and a category called multi-month commodities since the uptrend started around October 2010. Below is two charts of the two categories for manufacturing and then non-manufacturing.

The manufacturing chart is fairly straight forward that the trend has reversed since April of this year for both multi-month and all commodities. But until this months drop off there did not appear any reversal of the large number of commodities that respondents were reporting as up in price. The percentage of multi-month commodities to all the commodities has trended up recently to last month's 75%. A few of the commodities with long term higher prices are: Fuel at 18 months; #2 Diesel Fuel at 12; Cotton Products at 10; and #1 Diesel Fuel at 9.

Hopefully, overall sentiment is captured by a respondent from Retail Trade stating that, "Commodities coming down in price, which should help stabilize inflation."
The manufacturing report showed a strong reversal in the downward trend with all sub-indexes being the positive and not insignificant. Non-manufacturing was a disappointment with weakness across the board with only employment being the outlier at an insignificant gain. Going forward, inflation does not seem to be taking hold in the wholesale/input levels. Hopefully that reversal of the trend will hold especially for fuels.

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

Mish's Global Economic Trend Analysis: Services ISM "Unimpressive"

Calculated Risk: ISM Non-Manufacturing Index indicates slower expansion in June

David Smith's Decent service sector growth

Misc Links:
The Department of Food Subsidies - Victor Davis Hanson - Townhall Conservative

The Capital Spectator: Early Economic Indicators For June Are Moderately Encouraging


Gallup Job Creation Index Continues Steady March Upwards «  Modeled Behavior

The German Recovery «  Modeled Behavior

Employment during the economic recovery

The ongoing German recovery — Marginal Revolution

Calculated Risk: MBA: Mortgage Purchase Application activity increases

Skills Shortage Has Australia Tapping U.K., Irish Workers - Real Time Economics - WSJ

Film School Bubble

Political Calculations: Surprising Impotence

Macro View: Inventory Restocking Not the Problem in PMI

Every month the ISM releases two reports based surveys of purchasing and supply executives in both the manufacturing and non-manufacturing sectors of the economy. Every month, I try to provide another angle to view the reports. This month's prospective is provided by Mike Shedlock (Mish) with his post entitled Manufacturing ISM Weaker Than it Looks; Digging Into the Numbers; Inventory Restocking Accounts for Much of the Rise. The part that is most important in the discussion here is his conclusion under "Addendum - Reply from ISM."
Since it is equal weighted of five components [New Orders, Production, Employment, Supplier Deliveries, and Inventories], the effect of inventories is 5.4 divide by five, or 1.08 (1.1) of the overall 1.8 rise as noted by Goldman Sachs.

Mish is correct that over 60% (technically 1.08/1.76= 61.4%) of the rise is attributed to the predominant increase in the inventory index. But the division by 5 is only correct analysis if all the numbers are of the same sign. And in this case, they all increased, meaning faster rates of growth for each of the factors. Below is the exact formula and index numbers to calculate the difference between consecutive months:

ΔPMI = 0.2*ΔNewOrd + 0.2*ΔProd + 0.2*ΔEmp + 0.2*ΔSupDel + 0.2*ΔInv

1.76 = 0.2*0.6+0.2*0.5+0.2*1.7+0.2*0.6+0.2*5.4

The fact that they all increased shows that reversal is broad across all indexes although not significant in most. As compared to May, this is very welcome news as all components of the PMI were down. Below is the same equation with the May numbers.

-6.88 = 0.2*-10.7+0.2*-9.8+0.2*-4.5+0.2*-4.5+0.2*-4.9 (Reported as -6.9%)

The Macro View has dealt more with the indexes of Production, Employment, and New Orders. They represent: the heart of the issue of economic growth with production; the continuing jobs recovery going forward in employment; and a forward look at production and growth of the economy with new orders. I have also been concerned about the price indexes as this could be a signifier of structural rigidity and portent for inflation, and exports indexes as this could be an exogenous stimulus to the economy.

One problem with using the inventory indexes is that it does not differentiate between planned investments and unplanned investments through inventory changes. A planned increase in inventory levels can signify greater real economic investment and not a potential slowdown in aggregate consumption. All macroeconomic textbooks, I have read, break down investments into the subcategory of inventory investments. The following equation and discussion is derived from Macroeconomics: Theories and Policies second edition by Richard Froyen.

ΔINV(t) = λ(γSexp-INV(t-1)) + λ(Sexp-Sact)

The equation states that changes in the inventory levels are derived from expected sales level (Sexp) times a proportional factor (γ) plus the difference between expected sales with actual sales (Sact). The proportional factor is to adjust inventories to the desired level in a gradual process and not instant adjustment. Since sales in the aggregate is a function of aggregate income, then inventory levels tend to be procyclical to general economic cycles with a lag. As aggregate income increases then general sales levels increase and businesses then increase inventory investments, and conversely as incomes decrease and sales follow then businesses tend to decrease inventory investments.

Putting on the Neo-Keynesian hat, would point out that a central government can possibly counter this effect on the economy. Fiscally it can increase its own investment levels and increase aggregate spending (sales) on the short run. Monetary policy can also counter the effects of the business inventory cycle. Quoting from Macroeconomics:
Higher interest rates would increase the carrying cost of inventories and therefore reduce inventory investment. Monetary policy, by changing the interest rate, could then potentially eliminate the cyclical volatility of inventory investment and thereby lessen the overall cyclical variation in GNP [GDP].

Volatility of the Inventory Index
Since we can not differentiate between planned and unplanned inventory investments, the volatility of the index becomes even more important in determining how much attention we pay to any individual monthly report. Below is a graph showing the changes in the inventory index from the previous month, the percentage differences from respondents reporting higher inventories than those reporting lower inventories (Differences in net), and the PMI index minus 50 to scale it to the other numbers and show the differences between the break even point (zero).

This graph tells that monthly differences in the inventory index appear to be a stochastic variable with no discernible pattern or trend. Inventory levels can be a lagging indicator as restocking occurs. Mish agrees with ZeroHedge on this theory as stated, "If anything, an increase in inventories is a negative for future activity." Or it can be a leading indicator as general business climate has improved; marked by a small but significant increase in 10 year bond rates as noted by Paul Krugman at Interest Rates: A Dowist Perspective.

Even if it was restocking last month, the graph shows that "restocking" is occurring regularly. From February to May of this year, the PMI has been declining but inventory has swung wildly up and down as much as 5 percentage points in each direction.

Overall the ISM manufacturing report is robust as the 5 indexes that make up the PMI reversed direction and increased at a faster rate of growth. May's report was the downer and hopefully June's report signifies that was just a slow patch in the economic recovery. It would have been better if the new orders index was stronger than the weak 51.6% and production was above the mid-50s range, but growth is growth at anything above 50%. Thus we should not lament the gyrations of the inventory index but look at the total picture of the reports.

Mish could have also found out the information about weighting of the indexes from the ISM website at Frequently Asked Questions. The two breakdowns for manufacturing and non-manufacturing indexes are:
Q: How is the PMI calculated, and what does it mean?
A: The PMI is a composite index based on the seasonally adjusted diffusion indexes for the following five indicators at equal weights:
New Orders 20%
Production 20%
Employment 20%
Supplier Deliveries 20%
Inventories 20%
Q: Which index in the Non-Manufacturing Report On Business® is a composite index or equivalent to the PMI?
A: Beginning in January 2008, ISM began calculating a composite index for the Non-Manufacturing sector. The new Non-Manufacturing Index, NMI, consists of:
Business Activity 25%
New Orders 25%
Employment 25%
Supplier Deliveries 25%

Note that inventory is the one index not included in the NMI. The obvious answer is that services industries hold less inventory, but I suspect that it has more to do with reliability as an indicator of business activity and the subsequent lack of being statistically significant at least for the services industries.

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

Econoday Report: ISM Mfg Index July 1, 2011

Market Watch:
ISM: 52%
Non-Manufacturing: 54%

ISM Survey Beats Expectations - Seeking Alpha

ISM Manufacturing Index: The Panic Over a Slowdown Is Overblown - Seeking Alpha

Upside Surprise for ISM Manufacturing Index - Seeking Alpha

Calculated Risk: ISM Manufacturing index increases in June/This was above expectations of 51.7%.

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

Misc. Links:
Political Calculations: 2011: The Number of Pages in the U.S. Tax Code

China PMI on the Verge of Contraction - Seeking Alpha

Mish's Global Economic Trend Analysis: China PMI Lowest Since February 2009, on Verge of Contraction; 18-Month Low in Europe; US ISM Unexpectedly Rises; US an Outlier?

I.M.F. Offers a Different Take on U.S. Growth -
IMF Forecasts Slow U.S. Growth, Warns on Debt - Real Time Economics - WSJ
Another Reason for China to Go Slow on Yuan Revaluation - Real Time Economics - WSJ

Political Calculations: Chinese, U.S. Economies Both Decelerating

Trade Picture Looking Good - Seeking Alpha

Jobless Claims: Much Ado About Nothing - Seeking Alpha

ISM Manufacturing: Mean Reversion Overshoot? - Seeking Alpha

Bernanke on Why QE2 Didn't Hurt the Economy - and Why He's Wrong - Seeking Alpha

Misc. Links:
CARPE DIEM: A New Age of Energy Abundance in the U.S.

Mish's Global Economic Trend Analysis: Rosenberg Says 99% Chance of Another Recession by 2012
S&P 500 Historic and Expected Quarterly Dividends per Share, 2009Q1 through 2012Q2, as of 14 June 2011

Making Hiring Cheaper -

Radical Republican plan could cause double-dip recession

Environmental and Urban Economics: Challenges for Macroeconomists

Calculated Risk: Retail Sales declined 0.2% in May

Nevertheless, the global economy is strong
IMF Survey: Global Growth Hits Soft Patch, Expected to Rebound

IMF sees global growth, but red flags abound - The Globe and Mail

IMF warns of global economic crisis - Americas - Al Jazeera English

Calculated Risk: Construction Spending declined in May