Ronald Rutherford's  Instablog

After hours of trying to find another stock for RSY, I had to conclude that Hatteras Financial Corp {HTS} was not good enough to add to RSY. But there are some transactions that need to be done shortly.

Kronos Worldwide {KRO} no longer has the qualities that qualify it for the RSY portfolio. Its overall value compared to others has declined and its momentum indicators are weak. And to top it off, accounting practices are weak compared to others. The recent drop-off in price makes it harder to exit at a good price point, but as of tomorrow we will acquire its latest dividend payout of 15 cents per share. RSY recommends a total sell of 400 shares at a limit price of $15.61 and adjust it if it is weak tomorrow morning.

Optional Options

There are two options expiring over the next two months being: TAL Jul 20 '13 $35 Call and WU Aug 17 '13 $15 Call.
We can wait longer for WU as the stock price difference is less than a dollar but the option is $1.70, thus wait for the time value to decrease over time. For TAL, RSY recommends a buy to cover of 4 options {all} at a limit price of $6.50, which is a premium of $0.16 over price difference.

Here are a few more options that the current holdings might benefit from.

1 option at $3.95 of ARLP Dec 21 '13 $75 Call

6 options at $1.00 of STM Jan 18 '14 $10 Call

6 options at $0.95 of WCRX Oct 19 '13 $20 Call

Disclosure: I am long WU, KRO, HTS, TAL, ARLP, WCRX.

This article explores some data related to betas of stocks in the S&P 500. The betas are derived from Yahoo's data closing prices over at least the last 60 market days. Instead of data over the last 5 years assuming monthly returns (as others seem to be using), the analysis below is looking at short-term data and changes over one month. Betas for individual stocks can vary broadly over the long term (such as 5 years) and thus will not recognize either convergence or divergence from correlation with the market. Thus any investor relying on outdated data may be greatly disappointed by changes in the betas in their portfolio by either experiencing higher volatility or lower than expected returns compared to the market.

The two graphs below shows the rolling betas for MSFT and SBUX based on monthly returns over 1998 to 2003. Each monthly beta is calculated from the previous 24 months. Thus SBUX went from a beta statistically the equivalent of 1 and then drop to nearly no correlation with market movements at a beta of nearly 0.3.

TICKER	NAME	beta	Std_Error
(S)	Sprint Nextel Corporation	-0.4877068477	0.3303151153
(CNAF)	Commercial National Financial	-0.4027969918	0.2071742794
(LARK)	Landmark Bancorp, Inc.	-0.1056887708	0.2743567648
(DELL)	Dell Inc.	-0.0085974985	0.1460150802
(HNZ)	H.J. Heinz Company	0.0675427983	0.0201133292
(WMT)	Wal-Mart Stores, Inc.	0.2076575322	0.1379532429
(HUM)	Humana Inc	0.2190943119	0.3314447711
(LIFE)	Life Technologies Corp.	0.3009069715	0.3024882011
(DTE)	DTE Energy Company	0.3575477301	0.1162566893
(VZ)	Verizon Communications Inc.	0.3602964547	0.1649149178
(NGPC)	NGP Capital Resources Com	0.3762632023	0.2330343513
(TGT)	Target Corporation	0.3912563636	0.1687907318
(MCD)	McDonald's Corporation	0.3946398107	0.1254790994
(SWY)	Safeway Inc.	0.4208148931	0.5122297288
(KSS)	Kohl's Corporation	0.4309336384	0.2454407501
(PRGO)	Perrigo Company	0.4335721026	0.1407391171
(ED)	Consolidated Edison, Inc.	0.4339126006	0.1027138289
(JCP)	J.C. Penney Company, Inc.	0.4391550507	0.7556687073
(LO)	Lorillard Inc.	0.4420005301	0.190241873
(NLY)	Annaly Capital Management	0.4452958678	0.1709794296

The above table shows the lowest betas including negative ones along with the standard errors of the betas derived from the linear regressions. This shows that while there a few negative betas, none are significantly different than zero. Specifically, that means that the true beta could easily be with-in the range of zero. While that would negate the positive aspects of negative betas, it does provide stocks that are not reacting to the market forces and thus can reduce market risks. But conversely it does reduce idiosyncratic risks of the individual stocks.

The next table shows the highest beta stocks in the sample. A portfolio composed of those stocks would basically be a multiplier of 2 times the market. This is great for up markets but down markets drive the portfolio 2 times the market loss. Other investors might find value in shorting such stocks as it would take less percentage of the portfolio for the same level of hedging.

TICKER	NAME	beta	Std_Error
(TSO)	Tesoro Corporation	2.4531115321	0.3495856337
(PHM)	PulteGroup, Inc.	2.4438357859	0.3159469641
(GNW)	Genworth Financial, Inc.	2.395835959	0.294622434
(VMC)	Vulcan Materials Company	2.3777750591	0.2604397751
(MU)	Micron Technology, Inc.	2.2820217495	0.3501231721
(TXT)	Textron Inc.	2.187683664	0.3112272632
(MAS)	Masco Corporation	2.1863935603	0.2813784391
(LYB)	LyondellBasell Industries NV	2.148103208	0.2493911153
(MS)	Morgan Stanley	2.1458662521	0.2325657375
(LNC)	Lincoln National Corporation	2.1334180647	0.2057739005
(PXD)	Pioneer Natural Resources	2.1164534686	0.2540573279
(EMN)	Eastman Chemical Company	2.11247894	0.2653843697
(IP)	International Paper Company	2.1004101017	0.2437184687
(FLR)	Fluor Corporation (NEW)	2.0836355613	0.2346553502
(TAN)	GUGGENHEIM SOLAR ETF	2.0782098748	0.4796943311
(LEN)	Lennar Corporation	2.0692987457	0.2919392501
(HIG)	Hartford Financial Services	2.043250359	0.1927730644
(JDSU)	JDS Uniphase Corp	2.0274793661	0.343474719
(PSX)	Phillips 66	2.0012931438	0.2662966576
(STM)	STMicroelectronics	1.9931547449	0.3343185738

The next two tables show the biggest percentage gains and declines in betas respectively. The two time periods have at least 60 market days before May 18th and April 18 for each stock. The tables also include the latest values for beta and the standard errors for the betas. As stated earlier, betas can and do change over time, thus it behooves investors to keep a watch on the betas of stocks in their portfolios.

Lists like the ones above could be used to discover stocks that balance market risks or even create portfolios like the single index model or risk budgeting for efficient portfolios. If any of the information and data was useful or interesting, I would love to hear from you. I hope that everyone that finds the information interesting to express what they like or what areas could be expanded and improved upon.

Disclosure: I am long NLY, WU, STM, NGPC, LARK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long NLY, WU, STM, NGPC, LARK as part of the Rock Solid Yields Portfolio.

This post is a continuation of discussions on Social Security with the last one at Paul Krugman Wrong Again. There, I discussed the Old-Age and Survivors Insurance Trust Fund {Social Security} and what the report from 1945 said about projections going out to the year 2000. Along the way we saw that Paul Krugman skimmed over the material to confirm that they had a very good prediction on percentage of population 65 and over to population aged 20 to 64, but failed to notice that they assumed less percentage receiving benefits in the older category. This goes to the heart of the Social Security's Demographic Challenge. The following graphically shows the ratio of "covered workers" (i.e. payroll tax payers) to beneficiaries.

From the last post, we saw that up to a third of people over 65 were not expected to receive benefits, and adding in the fact that over a quarter of new "reward" recipients is based on disability, then it seems clear that the ratio above would not be nearly as hard on younger taxpayers without these two factors added to their burden.

In this post, I want to further explore his main points from Paul Krugman's blog post at Live Long And Prosper.

This is a really terrible idea, for at least three reasons.
1. The retirement age has already been increased to 66, and is scheduled to rise to 67. So any further increase would mean pushing retirement back to unprecedented ages. Yes, a lot of people live to 70; how many of them are really able, easily, to work that late into life?
2. While life expectancy is rising, life expectancy at age 65 — which is what is relevant here — isn’t rising nearly as fast.
3. Finally, disparities in life expectancy have been rising sharply, with much smaller gains for disadvantaged socioeconomic groups and/or those with less education than the average. Yet these are precisely the people who depend most on Social Security.

According to Krugman, the really terrible idea was to raise the age for the full Social Security benefits to kick in. He does raise some important issues with regards to what is just and fair, but to claim that something is "unprecedented" does not indicate that it is not the most logical thing to do. There are many unprecedented facts that make these unprecedented actions necessary. Longevity is now unprecedented as more people born today can expect to live longer including to retirement age and then beyond. Thus the pool of beneficiaries is unprecedented now and will only get more dramatic as the baby boomers retire. In fact, the demographic chart of the US is quite unique in that a group of cohorts are larger than the groups of older as well as younger cohorts. The chart below shows that bulge from the web site AGE DISTRIBUTION. It is easy to see the two largest bands are in the range 35 to 44.


Here Are "Just The Facts", Obama (Paul Krugman)
Let us now look at some the graphs that are provided by Social Security Administration at Fast Facts: Figures About Social Security, 2010.

New Benefit Awards, 2009
Benefits were awarded to about 5.7 million persons; of those, 48% were retired workers and 17% were disabled workers. The remaining 35% were survivors or the spouses and children of retired or disabled workers. These awards represent not only new entrants to the benefit rolls but also persons already on the rolls who become entitled to a different benefit, particularly conversions of disabled-worker benefits to retired-worker benefits at full retirement age.

The table that accompanies the above passage and pie chart gives the total percent of new recipients as 57% for retired workers and dependents. Thus 43% fall under the other two categories of disabled workers and survivors of deceased workers. Also new awards for disabled recipients are growing at a faster rate than simply retiring recipients at a rate of 2.6% vs. 1.9% respectively as the growth trends are shown below.

Looking at the facts in the Supplemental Security Income (SSI) program is even more lopsided with respect to retired vs. the other categories. On top of this, benefits for non-retiring recipients is actually higher that retiring recipients.



Are Social Security taxes regressive?
The Economist magazine brings up some important points about the progressivity of payroll taxes. The first being the obvious fact that payroll taxes are taxed on the first $106,800 per year and afterwards are not taxed, thus the percentage of payroll taxes to income decreases. The second point being based on marginal utility from the last dollar earned. This takes some value judgments of what the value of various cohort groups are. But once this theory is used then how would any tax policy be anything other than regressive? How high of tax rate would it have to be on the top 400 American earners to the bottom one percent so that both marginal utilities would equalize? But more importantly, for our discussion here, is whether the tax and benefit structures are fair and equitable. In this regards the Economist provides some important points.

But the folks who claim the payroll tax is regressive do not take into account that it is not so much a tax, but a contribution to a forced saving/social-insurance scheme. Over 12% of payroll taxes fund Social Security (this includes old age and disability). The amount of payroll taxes paid during your working years determines your benefit. The benefit formula for Social Security is highly progressive. The lower your average earnings the higher a benefit you get relative to your contribution.

The Economist goes on to summarize two studies from the National Bureau of Economic Research. The first showing that the actual return on investments from payroll taxes for "low earners earn a 5.19% internal rate of return on their contributions to Social Security, while high earners get just 0.54%." The second points out that the rates look more progressive when factoring in disability benefits and survivorship benefits, and they also question the assumptions that the poor get less benefits because they die earlier and start work earlier. Reasons for shorter life expectancy should also be evaluated for factors attributed to less disposable income along with occupations that they participate in and those that are "lifestyle choices". For example, the trend that higher income social groups have reduced consumption of cigarettes while lower income groups have been slower at reducing consumption where even higher taxes and costs have not diminished this trend as significantly.

Policies that Redistribute Income
It is quite difficult to give a summary of all the aspects of redistribution but some aspects are shown through the calculations of expected benefits by Social Security Online at Your Retirement Benefit: How It Is Figured. The first and second steps are to record the yearly taxed income over the taxable income history of a group of cohorts by age and adjust the earnings based on the Indexing Factors which are derived from the Average Wage Indexing Series. The link to indexing factors produces a vector of indexes for each year of workers born including future dates based on expected growth of averages wages. Simply add 62 to the year born to determine which is the year of "eligibility". This indexing factor gives more weight to earnings early in the working career than later. Although maybe small in the grand picture, it does provide more return on dollars invested for entering the work force earlier.

The third step is to pick the top 35 adjusted income years and add them up. This results in individuals that work more than 35 years pay into the system with no additional benefits in SS. It is difficult to know ahead of time which years will be more beneficial for the calculations. So starting early, maybe not be such a great advantage since more years working with no more benefits. This does seem to open up the possibility of the program being changed to make eligibility not strictly on age but by number of years paid into the system above a minimum threshold in income. Most pension systems work this way, so why not the biggest pension plan out there? So somewhere between 40 to 45 years working seems reasonable. Take for example the minimum for this program is 45, then the person that starts working at 17 retires in 62, while the person that finishes schooling at age 28 retires at 73.

The fourth step is to divide the total adjusted income by 420 which is number of months in 35 years, which results in the average monthly wage adjusted income. Step five is the key to how the whole system provides more returns for dollar invested than high income earners. The first $761 is multiplied by 90% and then has further kinks in the benefits per dollar taxed at 32% for between $761 and $4,586, and another kink above $4,586 with a multiplier of 15%. Thus for example to get the most return on the payroll tax a worker would need to earn $9,132 but since indexing the worker needed to earn just over $618 in 1951. Step 6 is just to add up the individual calculations on benefits and step 7 to reduce this amount by 25% which is the expected SS benefits.

What does this all mean?
Those that have the greatest needs from Social Security look to be getting more benefits over time from the disability and survivorship benefits allotments. This then calls into question whether raising the age of full retirement benefits for Social Security will help that much, or whether it just limits the growth in the secondary aspects. Those factors could be such things as dependents not getting stipends as early in both Social Security and SSI, increased number of years of work over the 35 years for maximum benefits under SS, and delayment in receiving health benefits.

If the system was suppose to be designed as to be a non-discriminatory benefits package then providing two ways to become eligible seems reasonable. One based on age that may need to be adjusted based on life expectancy like it currently is designed, and the second way is through longevity in the work force like pensions.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: No specific positions mentioned.This was meant as continuation of the post {not published/instablog} at SA: seekingalpha.com/instablog/772484-ronald...