Monday, January 26, 2009

SL Green Realty/TXN, AXP, GE, BAC/ HOME PRICES & INCOME

I have a ridiculously small common stock position in S L Green Realty and I also own 100 shares of one of its cumulative preferred issues.  I have a positive view of its earnings release for the 4th quarter.SL Green Realty Corp. Reports Fourth Quarter 2008 and Full Year FFO of $1.30 Per Share and $6.19 Per Share: Financial News - Yahoo! Finance

About 84% of SLG's portfolio is in Manhattan, however, and Citigroup generates over 13% of SLG's revenue according to a UBS report using data from last September.  Yahoo! Finance
The problems with the large financial firms create problems for landlords in Manhattan like SLG, and indigestion for the shareholders of REITS with large real estate holdings there. But, with increased risks sometimes comes opportunities.  The cumulative preferred issues are selling at less than 1/2 of par value, which doubles the yield of the coupon for SLGPRC (coupon: 7.625%) and SLGPRD (coupon: 7.875%) at today's close.  
Links to the SLG's equity preferred stocks' prospectuses:
 I do not view the coupon to be important.  It is simply a question as to which one of these two preferred stocks provide the greatest yield at the time a purchase is made based on the price actually paid.  Both are cumulative, equity preferred issues with the same priority and from the same issuer with a $25 par value and no maturity.  The only difference is yield based on cost of purchase. 

The common shares peaked at over 150 in 2007 and have since returned to its late 1990s levels. SLG Stock Quote - Sl Green Rlty Corp Stock Quote - SLG Quote - SLG Stock Price
The common shareholders have suffered a recent dividend cut. WSJ.com 

For a stock like Caterpillar or Deere, solely as a risk reduction technique, I will consider buying during an economic downturn provided I clearly see a ray of sunshine in the economy, which is not perceptible to me now. Or, if CAT's share price is smashed to smithereens  in a similar fashion as Alcoa has been, reduced to levels last seen in over a decade, which has not happened for CAT yet,  I may take a nibble.   That would require a price of around 16 on CAT.  So, even without a glimpse of sunshine, I would consider buying in the 16 to 20 range.  Someone with more money than me could justify taking a risk on it now, possibly,  but I need to choose my battles more carefully, attuned to the downside risks of economically sensitive companies. I will simply wait and re-evaluate a possible entry into CAT every quarter based on whether or not I perceive firm evidence of an economic recovery.

I noted that GE paid its quarterly dividend today, and my dividend bought shares at $12.67.  S & P reaffirmed GE's AAA rating for now, so there was not a debt downgrade based on the last quarter's earnings.Yahoo! Finance 
The author of this article summarizes some research that claims the market is placing a zero valuation on GE Capital.breakingviews | GE

 Goldman Sachs had some negative comments about the big banks.  It reduced USB to a sell and reinstated Citigroup as a sell.  BAC was reduced from a buy to neutral (a buy?).  Yahoo! Finance

Texas Instruments is going to cut 12% of its workforce after reporting that 4th quarter revenue fell to 2.49 billion from 3.56 billion a year ago.TI reports financial results for 4Q08 and 2008: Financial News - Yahoo! Finance  The company reported earnings at $.08 or $.21 before a restructuring charge. TXN forecasts anywhere from a 11 cent loss to a 3 cent profit for the 1st quarter of 2009.

American Express reported earnings of $.21 from continuing operations versus 71 cents a year ago with revenues declining to $6.5 billion from  7.364 billionWSJ.com. CNBC.com
R.O.E. fell to 21.7% from 37.3%.  I do not own AXP and I am not yet tempted to sample their shares.  But I am starting to feel a small measure of temptation after AXP stock price returned to 1996 levels.  The 1987 level is not far off looking at the long term chart at Yahoo Finance with around 12.5 hit in 1987.  But this is going to be a tough year for credit card companies. 


VMware (VMW) reported better than expected earnings but revenues of 475 million fell below estimates of 491 million.  MarketWatch
The company predicted slower growth in the 1st quarter and declined to make a full year forecast.  WSJ.com

While existing new home sales rose 6.5% in December, the median sales price has fallen 15.3% from a year ago, to the lowest price since March 2003. NYTimes.com   My view is that easy credit distorted prices and now prices are falling to an equilibrium point justified by  existing incomes.
Of course a large number of existing home sales are sales of foreclosed homes (45% of the sales in December were "distressed" WSJ.com).  The U.S. home price to income ratio fluctuated between 3 to 3.5 between 1975 to around 2002 and then made a parabolic move to as high as 4.6 while at the same time U.S. household debt as a % of disposable income rose to 120% from the 60s in the 1980s.

Thain is saying that BAC had daily access to Merrill's profit and losses, their positions and their marks.  MarketWatch   He is also claiming that the "vast majority" of losses in Merrill's 4th quarter came from legacy assets that were on Merrill's book when he was hired by that company.   I would still view Thain as worthy of that Commode on Legs piece due to his efforts to convince Ken to pay 50 billion for worthless paper, as originally valued. 

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