Thursday, December 25, 2008

Boatloads of High Yield/HIgh Risk Opportunities/VIX ARTICLE BARRONS/ Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent?

Judging from the recent price action of the senior bond that I just bought issued by Phoenix Insurance, I was starting to think that the quarterly interest payment was going to be skipped with the company declaring bankruptcy on Christmas day. PHOENIX SENIOR BOND: PFX /AIG /A RISK OF PREFERRED STOCKS (LEHPRG REMEMBERED)  This did not happen and the WSJ dividend page shows the declaration of the regular interest payment, with an ex date of 12/29. Dividends - Markets Data Center - 

At my cost of 6.06, the yield is close to 31% annually plus the spread between cost and par value at maturity in 2032, which if paid in full would bring the total return yield to around 45% annually. All that needs to happen is for Phoenix to remain solvent. Two of the Aon TCs that I own, KVW and KTN, also go ex on Monday.    

I noted several more going ex on Monday that I currently own including Lexington Realty Preferred (LXPPRD), Winstream (WIN), First Industrial (FR) Sinclair Broadcasting (SBGI), ING Global Equity (IGD), Harvest Energy (HTE),  the Entergy Louisiana first mortgage bond (EHL) and several others.  

I try to keep track of my cash flow from dividends and interest as a predicate to tailor my common stock purchases when the new money arrives in my main account.  As I have mentioned, my entire cash flow in that account is now quickly being invested in common stocks.   

I mention these securities only to highlight a point.  The ones mentioned are all high yielding, particularly in the current low interest rate environment.   I have only discussed some of them like EHL, LXPRD,  and FR.  

For someone willing to take on risk, and capable of assessing the degree of risk after performing lengthy research, the last few months have been a rare opportunity.  The yields being offered on hundreds of securities are exceptionally high by historical standards and are enticing to me when treasury bills are near zero and the money market alternative is around two per cent.

After performing research, my final decision before buying is trying to adjust my total dollar commitment after reaching a judgment on the potential risk first and then the possible reward. (looking at the downside risk always comes first)  Normally, the prices paid for these securities by me recently, or over the past several weeks, would suggest an abnormally high degree of risk, with the market anticipating a highly probable and imminent cut or even an elimination of the dividend and even a bankruptcy filing within a year for some of the issues.  

A reduction in the dividend may certainly happen with some of the high yielding issues that I own.   Each one has to be considered separately with an attempt made to judge the range of possibilities.   It is all about possibilities and probabilities, rarely- if ever-does certainty enter the equation.   The first mortgage bond issued by Entergy on its assets in Louisiana does not have a double digit yield like the Lexington preferred stock but it is safer than that REIT preferred.  A yield of over 8% based on my purchase price for EHL still looks good to me now.

Winstream has a lower yield than Sinclair but is less likely to cut its dividend than Sinclair. Harvest Energy, a canadian energy trust, currently yields over 30%, but I expect a dividend cut sometime in the first half of 2009.

It would have more upside potential than Winstream if natural gas prices enter a new bull phase and refining margins improve (HTE owns a refinery in Canada).  Morningstar has one of the few reports available on Harvest Energy.   Except for EHL, a good part of the increase in yield is a direct result of the worst bear market in my lifetime which has also impacted severely at times TCs like KTN.   

Most investors understand that a rise in the yield is often caused just by a fall in the price, and prices for many securities have fallen 50% or more this year, to lows last seen in a decade or more. I noticed in the list of securities going ex dividend on Monday numerous examples of very rich dividends.  Some are from companies that I would not buy. Others are from issuers that I have been considering buying, sometimes for several months, but do not presently own. Something hangs me up on each one of them.  One of those is a senior bond from Forest City, FCY, where my attention has been focused on the ability of the company to pay the bond's interest FCE/A. The prospectus link: / 

I have been unable to decide yet whether this senior bond yielding close to 20% is worth the risk. I am still working on it.  Some would say it is a better buy than the Phoenix bond which yields a lot more and sells at a larger discount to par value, but I am not so sure about that.  It is debatable and a good argument could sway me either way.  I know that Marty Whitman has liked Forest City for some time. TAVFX - Fund Top 25 holdings, Fund top twenty-five holdings - MSN Money But some of these real estate moguls scare me some with their large debt loads and grand ambitions. Those ambitions have a tendency to pop during any downturn, let alone a major one like now. The market in commercial real estate has already started a major down move.  I think that some of the real estate moguls even count their debt as part of their net worth as if debt was an asset rather than a liability.  FCY goes ex on 1/13 and it is listed in the dividend declaration section. 

I do not expect to succeed with all of the purchases made in this high yield/high risk category but I do not remember a time being so richly compensated for taking the risk as I have been during the past few months. The senior bonds that I bought which were issued by higher tier investment grade companies were a gift, with many providing annualized returns over 15% for over twenty years (current yield + annualized amortization of the spread)  assuming continued solvency of course. The rare opportunity was so important that I have changed the way that I will manage this position in my asset allocation.  It occurred to me that the maturity dates and my life expectancy were very close to one another. Thus,  I want to keep them until maturity or the company takes them away in an early call, and I will now try to hedge the position with the double short on the long treasury which is something that I did not even consider doing until recently. It is best to remain flexible and fluid in my dynamic asset allocation method.  

A article by Michael Kahn in Barron's suggests ways to use the VIX as a short term trading vehicle.

Part of this discussion has to do with the failure of the VIX to forecast the major decline after the Lehman failure.

Normally, as the article points, a rise to 35 could be used as a contrarian indicator and a buy signal.  

In my VIX model, I refer to this as signaling a buy of SSO in the SSO/SDS swing trade. This contrarian indicator failed when the VIX shot up to the 70s and 80s in October and December. This is why I modified my VIX model to liquidate the SSO part of the swing trade on a rise in the VIX to above 40. Personally, even though I developed this model, I have yet to buy SSO in a bear market at the peak of volatility which was previously 35 but no more.  

Kahn suggests that another model, using a 10 day moving average for the VIX, may be a better short term indicator.  I personally have no interest in trading short term using the VIX, other than the minor trades involving SDS/SSO in what I call a swing trade during an unstable VIX period. My main use of the VIX is as one indicator to use in making longer term asset allocation decisions.  In that model, a move back into stocks from cash is not predicated on the VIX moving to 35 but moving to below 20 and staying there for at least 3 months. Trading and Asset Allocation in Stable and Unstable VIX Pattern So the move to the 70s from 35 was not relevant for this longer term asset allocation model and all of this discussion engaged in by technicians is irrelevant to me on this subject, though I do read it.       

A prominent private Swiss bank, UBP,  steered 700 million of its clients' money to Madoff and is claiming it did all that was necessary.  What exactly was this due diligence?  The bank claims it talked to Bernie and saw some order tickets. Does anyone want to send this bank some order tickets, make up some investment strategy that delivers 12% every year since the founding of the first stock exchange and ask them for say a mere 500 mil.   One interesting point to me at least is whether the clients of UBP can sue them in the United States, since UBP is based in Switzerland and their clients are probably Europeans. Another issue is what law would be applied to judge the bank's liability.  Bob Pisani wrote an article saying that 15% of the hedge funds are self-administered with no independent accounting, record keeping or back office. 

I am unable to understand why anyone would give money to an advisor that generates their own statements with no independent record keeping.  

I am still wondering why the news media calls someone favoring the invasion of Iraq a conservative. This would include virtually all media outlets.  It seems to me there is a carefully thought out position and then there is the W position. If I was going to put a label on it, it would be making a distinction between incompetent versus competent decision making. In competent decision making involving going to war, you would look at the intelligence with a jaundiced and skeptical eye given the magnitude and consequences of such a decision (not a consideration for Pearl Harbor but certainly for IRAQ).

For example, you would realize that some false information would originate from sources that wanted to entangle the U.S. in a war to remove Saddam for ulterior motives.

You would not dismiss the opinions of our leading experts on the uranium enrichment using aluminum tubes and go with Joe at the CIA for example.

You would personally review the Niger forged documents which would clearly indicate on their face their unreliability. You would personally assess why anyone was placing reliance on the ramblings of a former alcoholic taxi driver known as Curveball.  You would study the religious factions in Iraq in depth even if it meant postponing a vacation to Crawford or cutting 30 minutes out of your daily, several hour exercise routine.

You would give thoughtful consideration to the likelihood that every religious fanatic in the Muslim world would try to find their way into Iraq to cause trouble, the difficulty in securing the borders and the number of troops necessary to secure population centers and the borders after the invasion, and countless other details and  issues.

This would be neither a liberal or conservative approach but what I would simply just call the competent approach.  Different issues and points would be considered in connection with our involvement in a war like Vietnam or other conflicts.  In a way, there is a competent process both for selecting stocks and for making a decision to go to war.  

Then you have the approach actually undertaken by W & Cheney or Cheney and W which is my preferred way to reference the duo, and their True Believers, (and LBJ for Vietnam) that pretty much discards and disregards every single consideration of the competent approach and instead substitutes forming an opinion first and then finding whatever supports that opinion, no matter how unreliable it might be, or the support could even be nothing more than another opinion from a True Believer ideologue that justifies the pre-ordained opinion which is the preferable approach for the incompetent.

How does anyone identify W's approach as emblematic of conservatism or liberalism or any ism other than an evangelical approach to complicated life and death issues.

To me, when someone mentions the invasion of Iraq and the subsequent occupation, the word conservative does not pop into my mind as defining those decisions.  Incompetent zealotry similar to what I would expect from any ideologue is the apropos phrase that comes to mind.  It is just a different kind of mush than you hear from some "liberal" opponents but it is still mush.

 I can always count on Charles Gibson to give a puff interview with a Cheney or a Bush, and his recent interview with W certainly fits that description.  I really do miss Tim Russert.

One of the problems is the absence of real journalism and I would not consider Gibson a serious journalist. He just let W blame others about giving him bad intelligence, without challenging questions, as if W was an innocent bystander in the decision to go to war.

Bush is even suggesting now that he might have altered his decision if George Tenet had just given him the straight dope (which is directly contrary to what both he and Cheney said earlier - Transcript: Bush Talks With Brit - Brit Hume | Special ReportCheney: Iraq war right, WMD or not - Meet the Press, online at MSNBC- ).

Both Cheney and Bush clearly said in the above  linked transcripts that they would have invaded IRAQ knowing that there was no WMD. Yes, there is no doubt in my mind that they were then telling the truth about their decision making process.  WMDs did not matter.

There is no doubt in my mind that W and Cheney wanted to invade Iraq to remove Saddam, who was a destabilizing force in the region, and that is all that mattered to them. The stories told to the public to generate war fever were just that-stories. And it is certainly easy to generate a war fever in this country.  If they wanted to justify the invasion to the American public in an honest way, they could have given their true reasons, which may have included their suspicions about WMD with an honest appraisal of the evidence or lack thereof which they never did, as well as the long term national security issues relating to a continuation of Saddam's regime or one of his sons, and then lay out the potential problems and costs in an honest and complete manner (as opposed to underestimating the potential costs and problems and getting rid of a general for example who said more troops were needed and it would cost more than the public was being told).

This would be a proper debate to have in a Democracy about the decision to go to war. If this was done, and the representatives elected to vote for the war, then so be it.  An honest debate is not one that this nation is ever likely to have in situations similar to Vietnam or Iraq, because honesty and facts are not a necessary ingredients to generating war fever in the majority. Of course, the press including the NYT failed miserably in their mission to expose the true state of affairs. 

Since I view myself as a conservative, I do not understand why others call W's approach to war decisions the conservative one. It is more of a distinction between competent and incompetent, intelligent and stupid, informed and uninformed, ideological and non-ideological, and a lot of other terms that I could mention before I would even think of conservative and liberal.  But those who wish to call themselves conservative, aided by all media outlets who generously afford them that description, will continue saying such and such person is a conservative because he supported W's decisions relating to Iraq. 

I read Thomas Sowell' column today in the Tennessean where he claimed a reader of the "mainstream" media would be unlikely to find out that Governor Rod Blagojevich was a Democrat while they are quick to report that Senator Stevens of Alaska, recently convicted of corruption, is a Republican. A copy of the article can be found in the National Review.  Obama Teen Beat by Thomas Sowell on National Review Online

 This is typical for Mr. Sowell who will simply warp or create information to fit his worldview.  He is part of the mainstream right ring media that demonstrate their bias with every breath they take and with virtually every word written or uttered by them.  

It is difficult to find an article in what Mr. Sowell calls the mainstream media that does not mention Blagojevich's party affiliation and I do not know anyone who is ignorant of it. I tried for about a half an hour to find one and came up empty. I suppose the Washington Post, Los Angeles Times, and NYT are part of his description of mainstream media.  This is a small example of articles that I saw in the Mainstream media that identified the governor's party affiliation.

I did find some articles that did not mention Stevens was a Republican however.

So why would Sowell make such a comment. 

Inventing and assigning a bias to others is part of his DNA, as well as the DNA of other chip on the shoulder, self-described and appointed, "conservative intellectuals". Sowell also blames Ivy League educated nitwits  for mismanaging the Vietnam War. I already know about the best and brightest from reading a book by a real intellectual-David Haberstam-several years ago.  The Best and the Brightest - Wikipedia, the free encyclopediaDavid Halberstam - Wikipedia

For Sowell, it is not a question about the wisdom of American involvement in Vietnam in the first place, the costs in human lives and in dollars, the relationship of the conflict to the furtherance of the nation's security interests (does it matter now that Vietnam is a communist country, or is it even communist now?), or any other sensible, rational and reasonable criteria.

If you read Haberstam's book, it was a failure to consider all of the sensible criteria that led to the Ivy League whiz kids digging a deeper hole for the country in Vietnam when advising Kennedy and then Johnson.

Instead, for Sowell,  the mismanagement is simply not escalating an ill-advised conflict further and turning it into a deeper conflagration.  His real point is similar to one made earlier by Bush,  that the United States needed to stay longer than a decade in Vietnam, fighting an endless war in a jungle to support a corrupt government in South Vietnam, and to sacrifice another 50000 young men or more until victory was achieved. And to what end I would ask? Myths of '68 by Thomas Sowell on National Review Online

It is sad that Mr. Sowell is considered one of the leading lights of conservative thought.  But Sowell, Coulter, and Limbaugh are the brains of the new conservative movement. 

  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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