I thought that I would add a few comments about this weeks Barron's Roundtable:
1. I am not as sanguine as Bill Gross about bank preferred stocks. I also make a distinction between the bank's regular preferred and Trust Preferred issues. Gross says that Hank Paulson decided that 5% is a "decent compensation" for the government's purchase of bank preferred and so he sees value in preferred issues affording 11%+ yields. I would not assume that Paulson viewed the 5% as decent compensation. Instead, the more likely explanations in my view are (1) the 5% was just a gift from Hank or (2) it was the most the government could charge to achieve its primary objective of restoring the banks to financial health. I would seriously doubt that 5% is just compensation for the government's risk.
2. I would agree with Gross' assessment that there is some risk of a fall into a worldwide mini-depression, and he rates that possibility at 5 to 10%. That might be the only scenario where it would make sense to own treasuries at the current prices, where the yield is producing now a negative real rate of return before taxes.
3. If Bill wants to venture into AIG bonds, then I am not inclined to join him. I have dabbled in a few short maturity senior bonds of AIG subsidiaries. I just hope, sometimes in a prayer, that International Lease Finance pays me in full in May and August of this year, with an Am Gen Finance note due in 9/09 (just checked to verify the dates which may have been incorrectly stated earlier).
4. I agree with Bill's comments about TIP, except that you are not getting the inflation protection for free, but close to free. I also discuss in these posts several other issues relating to the TIP.
5. I do not have a problem with MacAllaster's recommendations on the life insurance companies. I have simply elected to buy their senior bonds and preferred stock for now. I put Aegon and ING in the life insurance category, even though ING also has a significant banking operation. My investments include short term senior bonds issues by Hartford and Prudential; a long term senior bond of PRU in TC form, JZH and one from Phoenix Insurance (PFX); METPRA, AEB, IND, and INZ. Most of these positions were discussed in these posts as I started to acquire them and as I made partial reductions in PFX and INZ. My entire common stock position is currently 30 shares of LNC bought around 6. I am however always looking at the common shares for the reasons mentioned by MacAllaster. I may buy more of AEB on any pull back to below 7 but I am otherwise not likely to add to my existing life insurance bond or bond like positions. I am full on the life insurance bonds and bond like investments now.
6. As you would expect, Zulauf predicts a couple of anemic rallies. The S & P 500 "could" then fall to 400 to 600 in 2010-2011. So he is predicting maybe 10% upside from the current levels and about 50% downside. I wanted to keep those numbers in my blog so I can find them and discuss Zulauf's prescience at the end of 2011. Of course, he is another one of Barron's favorite prophets of doom and gloom, just imagine the worst possible scenario and then read what he has to say. Was there much if any difference? He is a bull on gold expecting a double in two or three years, with a possible near term pull back. Many who believe the end is near are gold bugs. Zulauf also suggests buying five year investment grade corporate bonds in less risky industries and blend that with intermediate term government bonds. I have bought some investment grade corporate bonds with maturities of less than 5 years as well as the ETF LQD which has about 101 investment grade corporates. LQD is broader than what Zulauf is recommending
iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD): Holdings It does have a good mix with an effective duration of 7.16 years and an expense ratio of .15%.iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD): Overview It has rallied over 10 percent since my purchase. I have been considering selling it but not yet. Also, my municipal bond exposure is tight in the 5 to 7 year maturity range.
Zulauf recommends buying gold on a dip. My physical gold position is a constant allocation in U.S. eagles residing in my lock box along with the silver walking liberty dollars, both bought directly from the U.S. Mint, with no purchases for at least a decade and no sales ever. I did not lump it in my allocation percentages discussed in a prior post since all hard assets were excluded from those calculations. VANGUARD ASSET ALLOCATION: IS VANGUARD PROUD? MORE ON VXD If Zulauf is right about a triple in gold's price from current levels, I will probably be selling some under that scenario. In the meantime, I am likely to add two metal ETFs (platinum and one other) sometime in the first six months of 2009, as I increase my exposure to physical commodities in my usually glacier pace. So, I do not entirely discount Zulauf's worldview, and I understand what he is saying. I am not, however, a perma bear, and I rarely reach the state of pervasive pessimism endemic to many of these panelists year after year after year. I simply do not accept his dire forecasts as the most probable outcome. If I did I would not buy any stocks other than gold miners and a few oil producers. I have been considering for some time adding GDX, discussed in the Roundtable but I have the same problem with gold miners expressed by Zulauf. Their productions costs are increasing, and they do not seem to make that much money even when gold is at $800 an ounce. But, if he is correct about gold accelerating to $2000 per ounce or more, then that concern will be a consideration only in how far the mining stocks lag behind the increase in the gold price. The gold miners would be driven up in price under that scenario regardless of their many negative cost and profit characteristics. Also one of my significant mutual fund positions is the Permanent Portfolio that maintains a significant allocation in physical gold and silver, along with treasury bills and Swiss Francs. The Permanent Portfolio Family of Funds
I just periodically add to that one without thinking about it much since it is sort of one of disaster type hedges. (PRPFX:PRPFX - Mutual Fund Quote for Permanent Portfolio - MSN Money)
7. I would agree generally with Abby's opinion that investors need to stick with senior bonds in the priority ladder. I do not agree with her recommendations to buy bonds from Bank of America or its common stock. Unfortunately, I am currently stuck in both. After this interview, more bad news came out about Bank of America and she now says that the common shareholders are not a top priority. That is a nice understatement. I would say the common shareholders at BAC have zero priority with Ken Lewis and the government. I suppose when you get to the point of needing 45 billion in government money and the government assuming responsibility for toxic waste on your balance sheet, a shareholder is probably lucky to have any value left at all in his shares. And, I am not so sure about the preferred shareholders future either although they seem to be okay for today at least. Ken says that he was just being a patriot when saving America from financial Armageddon by taking on Merrill and all of its smelly assets, a real life Captain America. NYTimes.com No, I do not think that he was being Captain America, a patriot extraordinaire, but just being Ken and doing what Ken always wants to do. Some of us remember that BAC has been interested in acquiring Merrill for some time. I heard at one time Ken had offered $90 a share and got turned down. Ken is a serial acquirer, a believer that bigger and bigger somehow means better, and eventually he was bound to eat something that would cause indigestion. Bank of America shareholders are now back to where they were in January 1991, the last time events almost caused major bank failures. In case anyone is counting, that is almost 30 years of value destruction by Ken and the boys at BAC. (in the above linked NYT article, a Moody's representative leaps to the defense of Ken basically saying who could have known?)
8. I do own shares in Duke Energy recommended by Abby. I am also reinvesting the dividends. Like her, I do not expect much earnings growth in 2009. I would agree with her that the main reason for owning Duke is the 6% or so dividend at the current price. I have been snatching up some utility stocks recently since a 6%+ yield looks good at a 15% tax rate compared to the falling money market yields now at less than 2% taxed at the highest marginal rates. LQD AND POMPROGRESS ENERGYSPECTRA ENERGY: BUY OF SE/Now own both common and a bond via JBIDUKE ENERGY (DUK) & Redux on Floating Rate Preferred IssuesThe U.S. treasury funds are yielding nothing now. I will likely nibble again on her recommendation- Applied Material-late in 2009 or early 2010 or just limit myself to acquiring a few shares via the Semiconductor Holder SMH at some point. I have no position in SMH now. I do not remember buying an odd lot of AMAT during the 2008 4th quarter, but I see it in my account. Sometimes, it is almost as if some stranger does some of the trading in my account. Another scary incident of an old man's memory lapses.
I did notice in one of those posts mentioning that I was disappointed in Duke's last earnings report and would not add to my position. My position is currently 100 shares plus reinvested dividends, and I may add 50 now if I can buy at lower than 14.5. So I have changed my mind from never to maybe. Actually, I never mean never when I say never.
I thought that I would change the picture back to the 55 Chevy whose story was recounted in this prior post Left Brain & Right Brain Decision Making/ Ex Interest on 1/12 for some TCs/Chevron warning Since the car was new at the time of this picture, and I am in the picture, that sort of dates me. So I am not quite as old as I pretend to me at times and still quite handsome for an old man. That is Big E holding Sam and me, and Joe put his shorts on just for the picture. I have said that Joe was still wearing then the same clothes that he was brought home from the hospital in. Sam was a bit tipsy I think. The recipient of the Chevy in a few years is not in this picture.
DISCLAIMER:
I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.
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