The recent downward spiral in gold and silver prices is a fairly typical response to a parabolic move up. The quick and steep decline last week also indicates to me that hedge funds were largely responsible for driving gold recently above $1,900. I made my first sale of gold and silver coins at that time. See Snapshots at Recent Gold and Silver Sales. I did not sell much, since the primary reason for owning this stuff is to have an insurance policy for Financial Armageddon, or at least one involving a collapse of the major currencies including the USD.
The Barrons' technical analyst maintains that the recent gold price decline is just a correction in an ongoing bull market. Marc Faber, who has close to 25% of his portfolio in gold, believes that the price is close to bottoming in the $1500 per ounce area, but could fall to $1,000 to $1,200 if the $1,500 level does not hold. CNBC No one really has a clue.
Gold and silver continued to tumble yesterday. MarketWatch The CME raised margin requirements for gold by 21% and silver by 16% after the market closed last Friday.
Many investors probably do not realize that GLD and SLV are organized as Grantor Trusts. (page 36 spdrgold/GLD .pdf and at page 32 of SLV /silver.pdf). GLD is in effect a Trust Certificate representing an undivided interest in and ownership of that Grantor Trust which owns the gold. The gold is held in London. USA "GLD" - Frequently Asked Questions - SPDR Gold Shares I have never bought, up to this point in time, either GLD or SLV.
I am content to own the bullion and to store the metal in bank safety deposit boxes. When I am finished selling my junk silver coins, I may reinvest the proceeds in SLV when and if the price falls to below $10. A more likely scenario would simply to buy more rolls of American Silver Eagles, the one ounce silver dollar coin produced by our government's mint. I am partial to the design. My last purchases were made when silver was selling at less than $7 per ounce. (see snapshot at Sold Some Junk Silver Coins Yesterday, rolls (20 one ounce silver dollars) bought at $140 each).
Another possibility for me is to buy an exchange traded fund for platinum or a mixed precious metal fund. I am going to avoid the precious metal Exchange Traded Notes offered by UBS and Barclays. An ETN is an unsecured senior note. iPath ETNs (ETNs offered by Barclays); ETRACS, Exchange Traded Notes (ETNs) - UBS Investment Bank (ETNs offered by UBS).
An owner of that kind of security is subject to the credit risk of the issuer on top of the potential principal loss due to fluctuations in the metal price. I try to avoid piling on unnecessary risks when buying a security.
If I decide to gain exposure to the metal with an exchange traded security, I would prefer the grantor trust security compared to the ETN. Besides GLD and SLV, there are a number of offerings by outfit called ETF Securities that are in the grantor trust form of ownership. ETF Securities I have elected for now to monitor for a potential small purchase two of their offerings: Physical Platinum-PPLT Precious Metal Basket-GLTR This is a link to that sponsor's FAQ's for ETPs. I have no interest in adding to my gold bullion position.
Many would view truth telling to be a conservative value. Unfortunately, self proclaimed conservative politicians are more than liberal with their factual assertions about just about everything. This is a link to an article at FactCheck.org that examines the falsehoods spoken by the GOP candidates at the recent Fox news debate.
The Shiller P/E10 for the European market is 11.9, as of last week, moving closer to the bottom of 10.3 times hit in February 2009.
MFA Financial (MFA), a Mortgage REIT, declared its regularly quarterly dividend of $.25 per share. MFA Financial Inc., MFA Stock Quote I own only 100 shares in the ROTH IRA. If the FED is successful with Operation Twist, bringing mortgage rates down further, this will lead to more refinancings which will have an adverse impact on mortgage REITs' spreads. (see generally, Barrons and 8/29/11 Post Stocks & Politics)
PIMCO is forecasting negative 1 to 2% growth in Europe over the next 12 months. Bloomberg
In an intelligent and well informed article, Mark Kiesel of PIMCO provides a number of factual reasons supporting higher than normal cash balances and a wait and see approach by investors. PIMCO
A WSJ column points out that investors are losing faith in the mantra "stocks for the long term". The article contains a chart of the DJIA since 2000. A more appropriate time period would be October 1997 to the present. As noted many times in this blog, stocks experience prolonged periods of going nowhere. The Roller Coaster Ride of the Long Term Secular Bear Market Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets (March 2009); 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 2009). Those periods include 1900-1921; October 1929 to 1950; 1966 to August 1982; and October 1997 to present. Given an individuals limited life span and even narrower period of significant wealth accumulation, a buy and hold approach advocated by Professor Siegel and most financial advisors is not a viable strategy, once the investor has identified the onset of one of these long term bear cycles. The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets
The DJIA fluctuated between 50 to 100 from 1900 to around 1921. The DJIA hit 63.9 in 1921, Dow Jones Industrial Average (1920 - 1940 Daily), below where it was in 1905. Dow Jones Industrial Average (1900 - 1920 Daily) and near a closing high for 1901.
I am raising the risk rating on my two 2013 Eastman Kodak bonds to 9. Personal Risk Ratings For Junk Bonds Yesterday, Kodak announced that it was drawing $160 million from its credit facility. SEC Filing Kodak has been burning cash in its operations. Both the EK bonds and common stock tanked in response to this development. The best hope for receiving par value for the 2013 bonds is probably some positive development relating to EK's image patents, either through a victory in EK's ITC case against Apple and RIMM which causes those companies to settle EK's claims for a huge amount or the sale of those patents raising a similar or larger amount (e.g. 2+ billion dollars). I would not count on EK surviving until 2014 without such a development which is a change from my prior opinion. An article in today's WSJ goes into more details about EK's problems.
The rally yesterday afternoon appeared to be triggered by a CNBC report that Europe was considering a very detailed TARP like bailout plan. I will believe it when such a plan actually comes into being.
J P Morgan claimed yesterday that Apple has significantly cut back on its component orders for its IPAD. Bloomberg (see also: MSN Money)
I have been moving into and out of double short stock ETFs as a hedge. I managed to sell one late last Thursday and bought another at yesterday's close. LB, our acting Head Trader here at HQ, claims that these purchases are not rule violations (last ¶ 8/31/11 post), even though other staff members distinctly remember one of LB's stinking rules that permitted such purchases only when the VIX was under 20. Trading and Asset Allocation in Stable and Unstable VIX Pattern More on VIX AND ASSET ALLOCATION LB responded that a recent rule modification permitted such purchases in small amounts, even though the VIX is well over 30, which modification passed by unanimous vote (1-0) after giving appropriate notice.
Besides LB could not help but note that the rest of staff, just a bunch of worthless nitwits and dunderheads, whose only purpose is to create noise and other distractions that the LB has to overcome, and messes for the LB to clean up, do not understand the Stock Stud's trading rulebook for an Unstable Vix Pattern within the context of a long term secular bear market anyhow.
1. Bought 100 MSPRA at $16.6 on Monday (see Disclaimer): I had a number of trades yesterday. Due to time constraints, it will take at least two more posts to describe them. Today, I will just mention MSPRA, a floating rate equity preferred stock issued by Morgan Stanley.
MSPRA pays non-cumulative qualified dividends at the greater of 4% or .7% above the 3 month LIBOR rate on a $25 par value. www.sec.gov Given the Fed's Jihad against the savings class, the minimum rate is likely to be the applicable rate for at least two more years. That realistic forecast about the future is one reason MSPRA has been sliding in price since hitting $21.46. MS.PA Stock Charts The other main reason is the Morgan Stanley's perceived credit risk in the current economic climate. Those kind of assessments are frequently based on emotion and fear even though there will often be some factual basis underlying those concerns. Some of those concerns are reflected in the huge decline in the common stock price. The common hit $30.99 last February. After a good rally in yesterday's trading, the MS common closed at $14.61. MS Stock Charts
I have no idea whether MS will survive based on certainty. I am certain that the placement on my hand on a blazing red stove burner will produce a burn. I do not have that kind of certainty when evaluating MS's prospects or its ability to survive.
I do believe that it is likely, as in more probable than not, that MS will survive. I also believe that MS would not survive for very long if it had to eliminate its common stock dividend and non-cumulative equity preferred dividends in order "to preserve capital."
MS kept current on the MSPRA dividend during the Near Depression period. For an investment bank like MS or GS, it would not be advisable to take any action which would send their customers running. As with other non-cumulative equity preferred stocks, the only way to eliminate the MSPRA dividend would be to eliminate the common stock dividend also. MS is currently paying a common stock dividend. So far investment banks, the more likely scenario is that everyone gets paid until a bankruptcy filing and then everyone gets stiffed, which is what happened with Lehman which had a floating rate non-cumulative equity preferred stock that is now worthless of course. I did manage to get out of that piece of garbage at a profit:
Those snapshots capture my entire trading history in that security which became worthless after Lehman filed for bankruptcy in September 2009. I may not be so fortunate next time. The OG got spooked with Lehmann in December 2007, and I do not now recall what caused the OG to become nervous. The memory of what happened to Lehman is still with investors and will impact the pricing of similar securities issued by MS and GS for a long time. The fear of a security going to zero is a powerful one.
Fortunately, for MSPRA, I realized gains from trading this security in 2009-2010:
The largest gain originated from the 100 share purchase made in 2009: Bought 100 MSPRA at $12.88 May 2009 Sold 100 MSPRA at 18.5 July 2010 I also had a small trade in my ROTH IRA this year:
Sold 50 MSPRA at 21.03 in Roth IRA March 2011.
Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Floaters: Links in One Post
Assuming MS survives and continues to pay the MSPRA dividend, this security has some value in my portfolio. It can provide some benefits in both deflation and inflation scenarios. The LIBOR float could prove beneficial in a period of rising inflation, when central banks are not artificially keeping short rates low. The more normal scenario would be for short rates to rise as inflation increases. A zero federal funds rate with inflation running at 3% is not normal.
At a total cost of $16.6 and at the 4% rate, the yield would be approximately 6%. This would be the minimum yield at my cost, assuming MS continues to pay the dividend. Unlike the Synthetic Floaters, traded on the stock exchanges, MSPRA has no cap on the dividend. If the 3 month LIBOR rate is 20%, and MS has not called the security, then the dividend yield would rise to over 31%, at the $16.6 cost, on an annualized basis. In more normal times, a five percent LIBOR is not that unusual, and the yield would be 8.58% with the same assumptions at that rate. Unfortunately, it is not likely that the 3 month LIBOR rate will rise sufficiently to trigger the float provision anytime soon, or within the next two years.
LIBOR Rates History (Historical)
This kind of security issued by a financial institution is subject to volatility and a strong downside bias in times of market stress, particularly those times as now where the solvency and viability of financial institutions are being questioned by so many investors. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities August 2011.
MSPRA closed at $8.25 on 3/6/09.
The Barrons' technical analyst maintains that the recent gold price decline is just a correction in an ongoing bull market. Marc Faber, who has close to 25% of his portfolio in gold, believes that the price is close to bottoming in the $1500 per ounce area, but could fall to $1,000 to $1,200 if the $1,500 level does not hold. CNBC No one really has a clue.
Gold and silver continued to tumble yesterday. MarketWatch The CME raised margin requirements for gold by 21% and silver by 16% after the market closed last Friday.
Many investors probably do not realize that GLD and SLV are organized as Grantor Trusts. (page 36 spdrgold/GLD .pdf and at page 32 of SLV /silver.pdf). GLD is in effect a Trust Certificate representing an undivided interest in and ownership of that Grantor Trust which owns the gold. The gold is held in London. USA "GLD" - Frequently Asked Questions - SPDR Gold Shares I have never bought, up to this point in time, either GLD or SLV.
I am content to own the bullion and to store the metal in bank safety deposit boxes. When I am finished selling my junk silver coins, I may reinvest the proceeds in SLV when and if the price falls to below $10. A more likely scenario would simply to buy more rolls of American Silver Eagles, the one ounce silver dollar coin produced by our government's mint. I am partial to the design. My last purchases were made when silver was selling at less than $7 per ounce. (see snapshot at Sold Some Junk Silver Coins Yesterday, rolls (20 one ounce silver dollars) bought at $140 each).
Another possibility for me is to buy an exchange traded fund for platinum or a mixed precious metal fund. I am going to avoid the precious metal Exchange Traded Notes offered by UBS and Barclays. An ETN is an unsecured senior note. iPath ETNs (ETNs offered by Barclays); ETRACS, Exchange Traded Notes (ETNs) - UBS Investment Bank (ETNs offered by UBS).
An owner of that kind of security is subject to the credit risk of the issuer on top of the potential principal loss due to fluctuations in the metal price. I try to avoid piling on unnecessary risks when buying a security.
If I decide to gain exposure to the metal with an exchange traded security, I would prefer the grantor trust security compared to the ETN. Besides GLD and SLV, there are a number of offerings by outfit called ETF Securities that are in the grantor trust form of ownership. ETF Securities I have elected for now to monitor for a potential small purchase two of their offerings: Physical Platinum-PPLT Precious Metal Basket-GLTR This is a link to that sponsor's FAQ's for ETPs. I have no interest in adding to my gold bullion position.
Many would view truth telling to be a conservative value. Unfortunately, self proclaimed conservative politicians are more than liberal with their factual assertions about just about everything. This is a link to an article at FactCheck.org that examines the falsehoods spoken by the GOP candidates at the recent Fox news debate.
The Shiller P/E10 for the European market is 11.9, as of last week, moving closer to the bottom of 10.3 times hit in February 2009.
MFA Financial (MFA), a Mortgage REIT, declared its regularly quarterly dividend of $.25 per share. MFA Financial Inc., MFA Stock Quote I own only 100 shares in the ROTH IRA. If the FED is successful with Operation Twist, bringing mortgage rates down further, this will lead to more refinancings which will have an adverse impact on mortgage REITs' spreads. (see generally, Barrons and 8/29/11 Post Stocks & Politics)
PIMCO is forecasting negative 1 to 2% growth in Europe over the next 12 months. Bloomberg
In an intelligent and well informed article, Mark Kiesel of PIMCO provides a number of factual reasons supporting higher than normal cash balances and a wait and see approach by investors. PIMCO
A WSJ column points out that investors are losing faith in the mantra "stocks for the long term". The article contains a chart of the DJIA since 2000. A more appropriate time period would be October 1997 to the present. As noted many times in this blog, stocks experience prolonged periods of going nowhere. The Roller Coaster Ride of the Long Term Secular Bear Market Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets (March 2009); 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? (September 2009). Those periods include 1900-1921; October 1929 to 1950; 1966 to August 1982; and October 1997 to present. Given an individuals limited life span and even narrower period of significant wealth accumulation, a buy and hold approach advocated by Professor Siegel and most financial advisors is not a viable strategy, once the investor has identified the onset of one of these long term bear cycles. The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets
The DJIA fluctuated between 50 to 100 from 1900 to around 1921. The DJIA hit 63.9 in 1921, Dow Jones Industrial Average (1920 - 1940 Daily), below where it was in 1905. Dow Jones Industrial Average (1900 - 1920 Daily) and near a closing high for 1901.
I am raising the risk rating on my two 2013 Eastman Kodak bonds to 9. Personal Risk Ratings For Junk Bonds Yesterday, Kodak announced that it was drawing $160 million from its credit facility. SEC Filing Kodak has been burning cash in its operations. Both the EK bonds and common stock tanked in response to this development. The best hope for receiving par value for the 2013 bonds is probably some positive development relating to EK's image patents, either through a victory in EK's ITC case against Apple and RIMM which causes those companies to settle EK's claims for a huge amount or the sale of those patents raising a similar or larger amount (e.g. 2+ billion dollars). I would not count on EK surviving until 2014 without such a development which is a change from my prior opinion. An article in today's WSJ goes into more details about EK's problems.
The rally yesterday afternoon appeared to be triggered by a CNBC report that Europe was considering a very detailed TARP like bailout plan. I will believe it when such a plan actually comes into being.
J P Morgan claimed yesterday that Apple has significantly cut back on its component orders for its IPAD. Bloomberg (see also: MSN Money)
I have been moving into and out of double short stock ETFs as a hedge. I managed to sell one late last Thursday and bought another at yesterday's close. LB, our acting Head Trader here at HQ, claims that these purchases are not rule violations (last ¶ 8/31/11 post), even though other staff members distinctly remember one of LB's stinking rules that permitted such purchases only when the VIX was under 20. Trading and Asset Allocation in Stable and Unstable VIX Pattern More on VIX AND ASSET ALLOCATION LB responded that a recent rule modification permitted such purchases in small amounts, even though the VIX is well over 30, which modification passed by unanimous vote (1-0) after giving appropriate notice.
Besides LB could not help but note that the rest of staff, just a bunch of worthless nitwits and dunderheads, whose only purpose is to create noise and other distractions that the LB has to overcome, and messes for the LB to clean up, do not understand the Stock Stud's trading rulebook for an Unstable Vix Pattern within the context of a long term secular bear market anyhow.
1. Bought 100 MSPRA at $16.6 on Monday (see Disclaimer): I had a number of trades yesterday. Due to time constraints, it will take at least two more posts to describe them. Today, I will just mention MSPRA, a floating rate equity preferred stock issued by Morgan Stanley.
MSPRA pays non-cumulative qualified dividends at the greater of 4% or .7% above the 3 month LIBOR rate on a $25 par value. www.sec.gov Given the Fed's Jihad against the savings class, the minimum rate is likely to be the applicable rate for at least two more years. That realistic forecast about the future is one reason MSPRA has been sliding in price since hitting $21.46. MS.PA Stock Charts The other main reason is the Morgan Stanley's perceived credit risk in the current economic climate. Those kind of assessments are frequently based on emotion and fear even though there will often be some factual basis underlying those concerns. Some of those concerns are reflected in the huge decline in the common stock price. The common hit $30.99 last February. After a good rally in yesterday's trading, the MS common closed at $14.61. MS Stock Charts
I have no idea whether MS will survive based on certainty. I am certain that the placement on my hand on a blazing red stove burner will produce a burn. I do not have that kind of certainty when evaluating MS's prospects or its ability to survive.
I do believe that it is likely, as in more probable than not, that MS will survive. I also believe that MS would not survive for very long if it had to eliminate its common stock dividend and non-cumulative equity preferred dividends in order "to preserve capital."
MS kept current on the MSPRA dividend during the Near Depression period. For an investment bank like MS or GS, it would not be advisable to take any action which would send their customers running. As with other non-cumulative equity preferred stocks, the only way to eliminate the MSPRA dividend would be to eliminate the common stock dividend also. MS is currently paying a common stock dividend. So far investment banks, the more likely scenario is that everyone gets paid until a bankruptcy filing and then everyone gets stiffed, which is what happened with Lehman which had a floating rate non-cumulative equity preferred stock that is now worthless of course. I did manage to get out of that piece of garbage at a profit:
 |
| 2006 Lehman Floating Rate Preferred Realized Gain |
 |
| 2007 Lehman Floating Rate Preferred Realized Gain $91.96 |
Fortunately, for MSPRA, I realized gains from trading this security in 2009-2010:
 |
| 2010 Realized Gain MSPRA (2 trades) +$962.97 |
 |
| 2011 Roth IRA Realized Gain 50 Shares MSPRA $58.47 |
Sold 50 MSPRA at 21.03 in Roth IRA March 2011.
Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Floaters: Links in One Post
Assuming MS survives and continues to pay the MSPRA dividend, this security has some value in my portfolio. It can provide some benefits in both deflation and inflation scenarios. The LIBOR float could prove beneficial in a period of rising inflation, when central banks are not artificially keeping short rates low. The more normal scenario would be for short rates to rise as inflation increases. A zero federal funds rate with inflation running at 3% is not normal.
At a total cost of $16.6 and at the 4% rate, the yield would be approximately 6%. This would be the minimum yield at my cost, assuming MS continues to pay the dividend. Unlike the Synthetic Floaters, traded on the stock exchanges, MSPRA has no cap on the dividend. If the 3 month LIBOR rate is 20%, and MS has not called the security, then the dividend yield would rise to over 31%, at the $16.6 cost, on an annualized basis. In more normal times, a five percent LIBOR is not that unusual, and the yield would be 8.58% with the same assumptions at that rate. Unfortunately, it is not likely that the 3 month LIBOR rate will rise sufficiently to trigger the float provision anytime soon, or within the next two years.
LIBOR Rates History (Historical)
This kind of security issued by a financial institution is subject to volatility and a strong downside bias in times of market stress, particularly those times as now where the solvency and viability of financial institutions are being questioned by so many investors. Item # 1 Fear and Enhanced Volatility in Certain Classes of Income Securities August 2011.
MSPRA closed at $8.25 on 3/6/09.
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