Wednesday, December 31, 2008


The WSJ had another negative article on the prospects for REITs.   

I thought that the chart contained in the article was interesting, which compared the S & P 500 to DJ All REIT Index using a common base line of 100 starting in 1990.  

The REIT index is back now to where it started in 1990. During the last 20 years, an investor in REITs would have received generous dividends, and that is part of problem in investing in these companies.  

To maintain their tax status, most of the earnings have to paid out in dividends to their shareholders.   

Marty Whitman, who is a great value investor, and others correctly identify that dividend requirement as a negative long term consideration. Whitman has always favored real estate companies like Forest City that are not organized as REITs.  

The REIT status can certainly be a problem in a major downturn precipitated by a credit crisis since the REITs are in need of constant refinancing. 

But, as I have said, it is not like there are many if any major real estate companies who will use retained cash to build up equity in existing projects, or cautiously use their excess cash position to expand. No, maybe you know some that are like that but all I see are a bunch of wild and crazy guys who will use cash in good times to expand their developments and the total amount of debt used to fuel an expansion of their holdings until they eventually immolate themselves. 

As the article in the WSJ points out, some REITS, who are heavily leveraged and have to refinance sizable debts coming due now or in the next year or so, may not make it. The next year may be a Darwinian struggle for survival. But I am not convinced yet that the solution is to invest in a real estate company like Forest City Enterprises which is not organized as a REIT.   

Forest City is in a dicey situation with its debt load and development pipeline, and its shareholders have not received generous dividends over the years like the REIT shareholders. Instead, while many REITs have cut back on their common share dividends, Forest City has eliminated its very small dividend to preserve cash.     

I am certainly monitoring Forest City for a possible common stock purchase.  I took a very small position recently in Tejon Ranch (TRC). I am also monitoring St. Joe (JOE).  

For now, due to the risks, I am limiting my exposure to real estate as a category to underweight and then concentrating it in cumulative preferred stocks within that underweight position. I sold my positions in JOE and FCE/A at much higher prices than prevalent now.  I would most likely take a nibble at JOE sometime next year before considering a buy of Forest City.  My nibble on a Forest City senior debt issue yielding almost 20% was a highly questionable decision for this old gambler.   

Another point that I would make in response to all the negativity about REITS originates from a story told to me by my grandfather many years ago.  During the Great Depression, many folks who still had work had a lot of trouble making their car payments. 

A representative from the lender would come by and want all of the late payments.  The borrower would say something like here are my keys. The lender would just stare at him and then say something like how much can you pay.  Eventually, it would get worked out because you see the lender did not really want the car back.  What exactly would they do with another repossessed car anyway?  I was thinking of that story this morning when I was trying to figure out how General Growth Properties was staying out of bankruptcy court.  At least for now, the lenders must not want those keys back. 

I will not be at HQ this afternoon so I went ahead and made my buy for today. I bought 50 shares of Federated Investors (FII) with a market order filled at 17.32.

I was considering a nibble on either Janus or Federated this morning, and I decided to go with Federated for several reasons. FII has a much smaller debt load than Janus. I find myself looking at debt and maturity schedules as my first consideration these days.   FII has only 166.3 million in debt with close to 60 million in cash as of 9/30/08. FII: Balance Sheet for FEDERATED INV INC 

Janus on the other hand had 1.1 billion but it does have a lot of cash. JNS: Balance Sheet for JANUS CAP GP CMN STK - Yahoo! Finance  My second consideration was the dividend.  The dividend yield on FII shares is close to 6% at the current level.  Janus would pay me just .6%. JNS: Summary for JANUS CAP GP CMN STK - Yahoo! Finance   

I want the comfort provided by dividends now. The third consideration was the respective earnings estimates for next year. Janus is heavily dependent on the equity market. 

Stock mutual fund companies are suffering a double whammy now. Individuals are withdrawing money and the value of assets under management has also fallen due to the precipitous drop in the markets, with both of those factors leading to lower revenues for investment companies charging management fees based on the amount of assets under management.  The estimate for Janus shows a drop from $.89 to $.53 in 2009. JNS: Analyst Estimates

While this may be way to pessimistic with a stock market recovery next year, it may still be too optimistic to predict a significant recovery. The estimate for Federated shows a smaller decline from $2.17 to $2.12. FII: Analyst Estimates 

Part of the reason for the smaller decline predicted for FII is due to their heavy involvement in money market funds that generate close to 50% of its revenues. After reading some reports this morning including ones from Morningstar, Value Line, and S & P, I elected to go with Federated which is one that I previously owned and sold for a profit around 37 in February 2007.  I also considered T. Rowe Price (ROWE),  a better company than FII, but it has not been beaten up as much as FII which was a critical point for me.   

While earnings growth at FII is dependent on a return of stability and growth in the stock market, it is not entirely dependent on investors' return to the stock market given its large exposure to money market funds which is where a lot of investors are seeking shelter now.  It's earnings are not highly correlated with the economy in my view. The dividend appears safe to me at less than 50% of projected profits.

I mentioned the other day that I would do a stop loss on the TC containing the senior bond from Hertz maturing in 2012 (DKR).  This would be a mental stop loss. If the target was hit on the downside, I would check out the news on Hertz, and look at the pricing of all of the Hertz bonds.  I would also pay a lot of attention to the amount of volume on the down move. A small amount of volume may not be that meaningful in the total context.  I would also try to make a judgment on whether the down move had to do more with a temporary supply/ demand in the shares rather than to a rapid and ominous deterioration in Hertz's operations. I would review any recent analyst reports and earning's releases.  

I would then make the decision on whether to take my medicine.  My preference is to try and hang on for as long as I can justify it in a rational manner hoping for the pay day in June 2012.  I also view each interest payment received as lowering my mental stop loss point.  I have received one semi annual payment to date, and now I have a mental stop loss of around 4 on DKR.  QUERY: 10%+ SHORT BONDS maturing in less than 5 years

I am seeing some serious up movement in my floaters.  I would reiterate that they do have some negative characteristics which I have discussed in these posts.  I liked them a lot when I could buy METPRA at 7 or AEB at 5.5.  They are important in my asset allocation as one of the few securities that provide protection in both deflation and inflation scenarios.  

So they have a home in the bond side of my portfolio.  It is not a permanent home. I own both METPRA and AEB in both taxable and retirement accounts. If I continue to see upward movement, I will manage risk in a retirement account by taking a profit by reducing rather than by eliminating a position even in an favored asset class. 

I am sure that some may not approve of my gambler's approach to the stock market.  But I have to go with who I am, and work with what I come to the table with, in the best way that I can manage. The best gamblers are after all managers of their chips, allocators of their capital, and risk takers following often complex rules some of which are tied to evaluations of human behavior. 

I am not exactly sure why FCZ has gone from around 7 to 11 the past few days, even after going ex dividend during that brief period. The GMAC news on receiving TARP funds is not exactly applicable to Ford Motor Credit, is it?  Here I am talking against a position that I just about swore a few days ago that I would not take. I just sold 100 with a market order filled at 10.99 and I will keep the other 100.  Sometimes success can result from inspirations resulting from what most would call moments of temporary insanity, or maybe it is just dumb luck, most likely the latter.  

Before I leave today, I need to figure out a few more tax losses. I am still positive for the year and it is just impossible to justify having some short term gains left at the end of a year like 2008.  

  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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