Thursday, February 26, 2009

BUY 50 BDNPRC at $9.25/Buy 50 BCF at $6.6/Home Sales/Kudlow's Creation of His Own Reality/LQD & Correction in Bond Prices/

Yesterday, the market rallied into positive territory after the treasury announced a plan to provide more funds to the banks through the purchase of convertible preferred stock, with the conversion price set at 10% below the price on 2/9/09.


After thinking about this plan for about thirty minutes, the market turned to despair again. On 2/09/09, BAC closed at $6.89 ; C at 3.95; and WFC at 19.06. So the treasury picked a recent good day for the banks' stock prices, but the 10% discount would mean the bank would have to be desperate to take advantage of this offer. Some may view the discount as a negative for banks. I simply view it as an attempt to balance the banks' need for more cash with the interests of the American public to earn a return on their investments.

It looks like the government will soon own 40% of Citigroup. WSJ.com

Citigroup is easily the most desperate of the big banks.

Gannett slashed its dividend by 90% to 4 cents from 40 cents. MarketWatch

I was expecting at a minimum a 50% haircut, but the reduction to 4 cents is more than I expected. This reduction is however consistent with the way corporate America is treating their stakeholders now. The reasonable expectation now is that 4 cents may be all that a GCI shareholder can expect for the foreseeable future. And, never again will Gannett's shareholders see 40 cents a quarter again, 40 cents a year if their lucky. I wonder if management is taking a similar percentage cut in their pay. I would be more willing to accept the dividend cuts as long as management announced at the same time a huge pay cut for themselves which never seems to accompany the announcement slashing the dividend. It is time to just vote against everyone running for the Board at the annual meetings as well as any proposal relating to the grant of options to management that is not a reduction in pay or potential pay.

The equally hapless Textron (TXT), maybe not as hapless as Gannett, also cut its dividend from 23 to 2 cents. Hearst-Argyle (HTV), struggling to stay over a buck, eliminated its dividend after reporting a huge loss.Reuters  Baytex (BTE) , one of the canadian energy trusts which is not owned, reduced its monthly distribution from 18 to 12 Canadian cents.

Macquarie Infrastructure (MIC), which used to be a source of income for investors, suspended its dividends and otherwise continued its dismal performance. I did not see anything in its release about pay cuts for management. Macquarie Infrastructure Company Reports Fourth Quarter and Full Year 2008 Results: Financial News - Yahoo! Finance

On the bright side, Westar (WR), an electric utility, raised its dividend by a penny to 30 cents. Finance Waste Management increased its payout by two cents to $.29. I just want to make a note of those companies who are not giving the shaft to their shareholders by eliminating or resorting to a nominal dividend like Gannett.

A Hilliard Lyons analyst claims that GE is trading below the asset value of its industrial businesses. Stocks To Watch Today : General Electric: Trading Below Industrial Assets' Value

I now view a significant dividend cut by GE as very likely. The only question is how quickly will it recover back to the current dividend level after making the cut, and my current guess is three years.

I think that Bob Dylan may be a better economist than Larry Kudlow who is incapable of learning much of anything from events. Events will never change the opinion of an ideologue. I am not suggesting that Dylan has the same training as Kudlow in economics. But poets do seem to see things more clearly than virtually all economists. To paraphrase a lyric from "Like a Rolling Stone", when you got nothing left, you got nothing else to lose, so there is only 7270 more points to lose in the DJIA before we no longer have to worry about how far down it will go. In fact, I may start reading some poetry myself to improve my abilities as an investor of course. Reading philosophy was probably my best training to being a self-reliant individual investor. The last thing that I would do would be to read an economic textbook.

I was listening to Kudlow and his fellow traveler Rick Santelli yesterday on CNBC. Both were blaming the stock market fall on Obama, as you would expect, rather than the events that took place before Obama became President. Ideologues will always create their own reality to conform to their ideology.

Existing home sales fell 5.3% in January, the lowest monthly decline since July 1997. Without adjusting for seasonal factors, sales fell 7.6%. The median price fell 14.8% from a year ago, down to $170,300 from $199,800. As bad as that sounds, it is actually worse since about 45% of those sales are foreclosed homes or other distressed sales. NYTimes.com

Foreclosures is a main factor driving home prices down. Some economists claim that foreclosures do not have any impact on prices. If there is any good news from a report like this, it is simply that the nation is getting closer to the point where price is in line with income, and the inventory of homes for sale did decline which is good. I am looking hard for silver linings in the parade of ugly news.

With the massive number of companies cutting common stock dividends, and a continued downdraft in earnings likely, I have decided to shift my allocation in my retirement accounts to 60 % bonds & cumulative preferred stocks and 40% stock, trying to emphasize in the stock portfolio companies less likely to cut dividends, allowing one exception-GE. I am also permitting myself the right to engage in some speculation by buying small caps like the recent buy and sale of ISIS in a retirement account. I previously explained why I classify equity preferred as a bond in my asset allocation. I am going to add electric utility common stock to my bond category just for purposes of determining asset allocation percentages in my retirement accounts.

It is harder for a company to defer a cumulative dividend, and ultimately it does not save the company any money as it does by cutting or eliminating the common dividend, since the cumulative dividend still has to be paid at some point short of bankruptcy (theoretically, it could be deferred indefinitely as long as no common dividend was paid which could start a riot with the common shareholders). 

Many cumulative preferred dividends also require interest on the deferred dividend at the same rate as the coupon. Senior bonds are higher up the priority chain of course, and a failure to make a senior bond interest payment is generally a default event that could lead to bankruptcy, voluntarily or involuntarily. 

At the height of the credit bubble, some bonds were issued that allowed payment in kind rather than cash interest and had far more liberal provisions in favor of the borrower, so each prospectus has to be looked at individually for a lender to know their rights upon default. Just as an example of what happens when an interest payment is missed on a senior bond, see p. 154 of the prospectus for PFX. /www.sec.gov Optional deferral is allowed in virtually all equity and trust preferred issues that I know about. It is generally only when you get to the senior bond level that consequences for non-payment tilt against the borrower.

LQD, recently sold, is pulling back significantly from my recent sales price due to two factors, a rise in interest rates impacting both corporates and treasuries and an increase spread over treasuries due to increasing concerns about the economy.

A high yield bond ETF, HYG, had a good rally from around 65 in mid December 2008 to around 79 at the end of the year as there was a whiff of optimism about a recovery in 2009. As that belief has waned, and concern about default rates gained the upper hand, the price has fallen from 79 to a few cents below 70 in trading yesterday. While high yield bonds are tempting, I am still avoiding an investment in a high yield ETF for now and I am far more likely to buy back LQD rather than initiate a position in HYG due to concerns about the relative default rates in 2009 between investment grade securities and junk rated issues.

I decided to wait on buying 50 of DKR. With anxiety increasing by the day, I am more likely to wait for downdrafts in better quality bonds but I will reconsider DKR if it falls to below 6 again.

DuPont has worked its way down to a 1991 price. This would be another one ripe for a dividend cut sometime in 2009. I at least succeeded in completely avoiding the meltdown in Dow Chemical, and I have started to judge my successes by the number of catastrophes that I have managed to avoid.

Sometimes it may seem like that I have lost confidence, and that would be an incorrect assessment. I still believe, for anyone with money left in places other than the cookie jar, the reward for correctly timing a re-entry into this market will be huge. But, an incorrectly time entry could lead one to raid that cookie jar for sustenance in the golden years.



A. BOUGHT 50 BDNPRC AT $9.25: I bought back 50 shares in a Brandywine Realty cumulative preferred issue at 9.25 late yesterday, BDNPRC. The yield at that price is a tad over 20%.   The position was sold at a profit recently at around 14.75. Sold BDNPRC/ 

I have mentioned that I am trading these REIT cumulative issues hoping to make a profit on them as a class or category of investment rather than being concerned about profit or losses from individual issues. Recently, I have taken some hits in the ones currently owned but the trading has been profitable primarily due to the volatility of this asset class both up and down. Last week was just brutal for the REITs and real estate funds. TheStreet.com

BDNPRC is a typical REIT cumulative preferred with a $25 par value, no maturity, and a coupon at 7.5%.
This is the link to the prospectus:PROSPECTUS 
BMO Capital Markets recently upgraded BDN to overweight.

Considering the circumstances, and relatively speaking, the last earnings report was okay

This is a link to the last earnings call transcript. Seeking Alpha

The company did cut its common stock dividend last year but it still has one which is all that is important to the preferred stock shareholder. As long as there is a cash dividend paid on the common shares, the preferred dividend has to be paid in full. I can start to worry when the common dividend has been eliminated as is the case with BEE.

In my main account, I used the proceeds from the LNC sold yesterday to buy shares in the closed end investment company Blackrock Real Asset, BCF, at $6.6, increasing by just a tad my exposure to commodity stocks.

I would have to say that I am against Obama's plan to fund a new health care spending. While it is not as bad as I expected, I was not heartened by the statement that the 600 or so billion was just a down payment on the total cost. WSJ.com
Some people incorrectly label me as a liberal but I am in reality a True Conservative. Random Observations: Sarah, Vietnam, Unemployment and Disney

The new deficit projection for the current fiscal year is 1.75 trillion. Yahoo! Finance
I think that I will hold on to my positions in TBT and PST for the foreseeable future and look for opportunities to add to them as hedges for my corporate bonds.

GM showed today that it is a basket case capable of losing money by the boatloads.Yahoo! Finance

Orders for durable goods plunged more than expected in January with a 5.2% decline. This is the 6th straight month of declines which is the most ever. Yahoo! Finance

New home sales fell 10.2% in January, to a record low, with sales down 48.2% from a year ago. MarketWatch
New jobless claims jumped to 667,000, more than expected, and continuing claims rose to
5.1 million. I wonder if those commentators at newsbusters are still complaining that the liberal and mainstream news media is blowing everything out of proportion. NEWSBUSTERS: A CONSTANT SOURCE OF COMEDY
J P Morgan will be cutting 12 thousand jobs relating to its Washington Mutual acquisition.

Under the circumstances, and relatively speaking, the results reported this morning by HRPT Properties was okay. HRPT Properties Trust Announces Results for the Periods Ended December 31, 2008: Financial News - Yahoo! Finance MarketWatchI recently bought one of its cumulative preferred issues.

In the midst of the gloom and doom, toil and trouble, the Tennessee Legislature is discussing one of the most important issues to it, expanding the places people can carry their firearms to include state parks and bars. Why state parks? Well, there was one instance where a bear attacked a girl and, if anyone had been packing, they could have shot that bear. NewsChannel 5.com I kid you not. When you have reached brain dead status, any argument will do. Perhaps, the more ridiculous argument even sounds better. Of course, this argument assumes that at that moment, one of the bystanders on vacation in a state park would be a registered gun owner, who was at that time carrying his concealed weapon on his person, and the odds of that happening would be negligible. Most likely, by encouraging the carrying of firearms into state parks, a dispute between gun owners will result in one of them getting killed. This may make some people sad but not anyone in the GOP tribe. The bill would also make the database of gun permits beyond the scope of public scrutiny. www.tennessean.com | The Tennessean

I am just thankful that the legislature is delaying a push to allow firearms to be taken into the airport which is one of the primary goals in Georgia. TO The Tennessee Legislature: Please Move to Another State But, I am going to wait for a shootout by a bunch of drunks before commenting further about the legislation likely to be passed in 2009. Personally, I rely on a pristine and genuine Louisville slugger signed by Frank Robinson. I prefer wood over the metal.

After slowing to a crawl in early 2008, I am now virtually motionless in my stock investing. As a result, I will most likely slow down the posting of my blogs.


DISCLAIMER:
I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. 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.

No comments:

Post a Comment