Saturday, January 24, 2009

More on GE/Merrill Lynch Bonuses/Barron's Roundtable/More on AEB-Buy $5.5/add of TGB in IRA/tax law changes: property taxes

I usually do not bet on the outcome of chess matches. The above picture depicts a clash between a left brain to the left and a right brain to the right, as usual. If there was a songwriting contest, my wager would be on the loser of this match.   

The WSJ pointed out that the earnings just reported by GE were of low quality, including  a large tax benefit. The WSJ suggested that GE cut its dividend to appease the ratings agencies. A debt downgrade from its revered AAA status would be a major blow, and would raise GE's finance costs. I for one no longer believe GE is a AAA anyway, more like an A or a BBB+. But I no longer view the U.S. Government as AAA either.

Whatever, I bought some GE shares Friday recognizing the poor quality of earnings, a possible downgrade, and potential cut in the dividend that the market must believe will be cut notwithstanding protestations to the contrary by management. ADD TO LOSING GE POSITION GE/ Added to Spectra Energy /retail sales & more retail bankruptciesMaguire Properties/WAG/Goodyear Tire TC xkk/GETime to Sober UPNotable News 11 18 08: MDT, AA, C, GS, GE, HD, HPQ, METPRA; Wall Street Bonuses

It would be hard to rationalize driving GE's price down to where the dividend of a AAA rated company yields over 10% when treasuries are being bought hand over fist for virtually no yield unless you believed a dividend cut was in the bag with 100% certainty.  On the importance of holding the dividend, see this article:MarketWatch

Nicoloas Heymann, the analyst covering GE for Sterne Agee, says that he expects GE to lose its AAA rating later this year and it may be forced to cut the dividend.  NYT

Heymann may be right but a price of 12 on GE shares already has a lot of bad news baked into the cake. It is as if the current price assumes no good news will ever come along in our lifetime with a future expectation of no economic recovery-ever. And that would have to be with close to 100% certainty. Maybe, it is just me, but this is more than just being pessimistic.  

The brains at Merrill, so deserving of an expedited and early bonus before the closing of the BAC merger, managed to lose another 5 billion betting the wrong way on mortgages under Thain's reign. Thain  reportedly asked for a mere 30 to 40 million dollar bonus. NYT I would readily admit, without equivocation, to be devoid of much talent as an interior decorator, but I would have charged the Clark Kent of Wall Street no more than the cost of a plane ticket to N.Y. and a ticket to a Broadway play to decorate his office. It is beyond my comprehension paying anyone over 800 thousand plus expenses to decorate an office. Thain's driver was paid $230,000.  I read that Michelle Obama hired Thain's interior decorator, Michael S. Smith, to do some decorating at her new quarters at the bargain basement price of $100,000 paid by the taxpayers.

Thomas Montag, one of the wizards hired by Thain, had a guaranteed 2008 bonus of 39.4 million. He was in charge of the unit that had the brunt of the 15+ billion in losses for the 4th quarter at Merrill according to the

Unnamed sources from Bank of America have been talking to the NYT and the WSJ providing their version of what Ken knew and when he knew it. They are clearly trying to shift the blame to Thain. NYT But, even if Bank of America had no clue until December 8th, conveniently after the shareholder vote on the 5th, then what kind of due diligence was performed before submitting the merger to a vote?  You can not have your cake and eat it too. 

Regarding Barron's Roundtable this week, I agree with Scott Black on Oracle. Barron's Roundtable --

Black also mentions StealthGas which was one of the small caps that I was considering buying.Buy of 50 Shares of GPX: Limit at 4 filled-investing only cash flow

That company operates a fleet of LNG tankers. Day rates are coming down as you would expect.  I previously sold this one at a much higher price and have yet to make a decision whether to buy it back. A dividend cut is certainly a possibility. My reluctance originates from my negative opinion of shippers in general as investments during an economic downturn, let alone a severe one. I have nothing to add to Black's discussion of GASS or ORCL

I have no objection to Faber saying that the next Ponzi scheme to go bust will be the U.S. government. He also pointed out a statistic that I am fond of, the Japanese market is now where it was in 1981. Nikkei Hits 26 Year Low: A Long Term Hold?IR WARNING/the Japanese Experience with Deflation/Debasement of the U.S. Currency If the U.S. went back to where it was in 1990, the S & P 500 would be at 300. As I have said, if I really want to get depressed over the weekend, then Barron's will always move me decisively in that direction. 

I do not have a problem with any of Faber's commodity stock recommendations, except that I will finish adding to my positions in the Tech titans, previously identified,  before buying shares in RIO, FCX and BHP. I have started a nibble on Alcoa and have come close to buying the other 50 shares. Buy of PGN/Was there really a Black Swan Event?/ Alcoa Notable News 10 31 2008I have been considering adding a small position in the Indian Icici Bank (IBN).

I recognize that any additional buy in Alcoa, or an initiation of a position in another commodity stock, will have to probably be at least a three year hold.  More negative news is on the way. The only reason for buying now is that it will be impossible for me to pick a bottom in these stocks and the prices have already been decimated for many. Alcoa has already been crushed to smithereens.

Part of the reasoning for adding position to the commodity names soon has to do with inflation expectations resulting from the debasement of the U.S. currency and the overall massive monetary and fiscal stimulus. If you believe in deflation continuing for some time, then buying commodity stocks would be a mistake.  My main participation now is through two closed end funds, both very small positions -GCS and BCF.  

As readers of this post already know, I have added the TBT, the ultra short 20 year Treasury ETF, which Faber recommends as the short of the century. There is a lot of debate now about long treasuries.  I am not going to be buying any 20 year treasuries hoping the yield falls to 1%. I am using TBT to hedge my long corporate bond portfolio which was bought opportunistically in the 4th quarter of 2008. I am not involved in TBT as a bet or an investment or a gamble.

TBT vs. PST: Hedging Corporate Bond Positions

Lastly, I agree with him that buying Intel, Cisco, Oracle and Microsoft will beat 10 year treasuries over the next ten years.  It is time for me, as I have said in prior posts, to take some risks by adding these tech titans.  I recognize that I need to speed it up some. I am not sure about his inclusion of Yahoo in that list.  Then he says that those stocks could double or even triple "before going to zero". I did not need that last comment to bolster my confidence in continuing  to add to my nascent positions in those names.   I am not what anyone would call a tech investor although I have made money in them. I generally get criticized when I compare them to homebuilders and other cyclical companies. I do not view them as some kind of perpetual ATM money machine. They have to be traded. A more than five year hold on any of them would be unique for me. 
I have no interest in any of Gabelli's picks. 

I noticed that the preferred stock issues from Aegon and ING took a good hit last week.  I own AEB, the floating rate perpetual preferred of Aegon, and two ING perpetual preferred issues, IND and INZ.

In many posts, I have discussed the many negative features of perpetual equity preferred stocks. These two Dutch companies have also eliminated their common dividends as a condition to receiving aid from the Dutch government during the 4th quarter of 2008. I am playing with the house's money on INZ and the shares held by me were bought at around 7.  I will hold for the dividend.

I own AEB, with my last buy at 5.5 and some more around 8, because it fills a niche in my bond portfolio, as one of those securities that provide a measure of inflation and deflation protection at the same time. I will add 50 shares below 7 in a retirement account. Why in a retirement account? Because if Aegon does voluntarily defer the dividend, I do not want to pay taxes on a dividend that is not received! Moreover, if one of these companies actually defer a cumulative dividend, I would not exactly be brimming with confidence of ever getting paid.

I am confident that even a deferral of a cumulative dividend will cause a nose dive in the value of the preferred stock. AEB fell to close to $3 with a $25 par value during a market meltdown last quarter. So why take the chance at all? Aegon may be in some distress but it is not certain to me, based on what I know sitting here in the SUV Capital, that it will defer payment on its preferred stock. The market is pricing AEB as if a deferral is virtually certain, maybe a 80% or greater probability of a deferral. At a price of 7 the guarantee of 4%, the operative rate now with 3 month LIBOR around 1%, results in a 14.2% yield. At a price of 5, the guaranteed yield jumps to 20%. At 3, the yield is 33.3%. If you believe as do many of the panelists in Baron's Roundtable that the current debasement of the U.S. currency, flooding the world with trillions of new printed money by the world's governments, and the hundreds of billions in fiscal stimulus will cause inflation to spike, then another reason to hold it is for its inflation protection.

Inflation should cause short rates to rise. AEB is a floater. It floats at the greater of 4% or .875% above 3 month Libor.  If Libor rose to 5% and stayed there for the period required in the prospectus to trigger the higher rate, the rate on AEB would then be 5.875% which is really 20.96% at a $7 cost. I do not invest much in these types of securities because I have a negative view of the entire class of equity perpetual preferred stocks. Given the enhanced risk when a common stock dividend is eliminated, for that is the only real legal protection a preferred shareholder has, then I will tread carefully and just pick my spots. The link to the AEB prospectus:


Some but not all of the links to previous posts on AEB and perpetual preferred issues in general:

A link to my discussion of the Dutch financial aid package for Aegon is discussed at Notable News 10 28 2008

A discussion of the aid package for ING can be found at ING Receives 13 Billion from Dutch Government 

And it is always important to keep in mind that these issues have no maturity date, and rank just above common stock in priority and below all debt issues as to their claim on assets in the event of a bankruptcy. The main protection on deferral is payment of a dividend on a junior security and both ING and Aegon have stopped paying  common dividends at least for now.

I started the laborious process of preparing my tax return for 2008. I happened to notice a tax change for 2008 that will help us old folks who do not itemize deductions.  

Prior to 2008, a taxpayer who used the standard deduction could not deduct any of the property taxes paid on their residence. For both 2008 and 2009, there is a limited deduction of up $500 for single taxpayers and $1000 for married couples who elect to use the standard deduction. 2008 Property Tax Deduction for Taxpayers Who Don't Itemize - TurboTax® Customer Care & Support   How Federal Tax Law Changes Will Affect Your 2008 Tax Return - TurboTax® Customer Care & Support

We do not have an income tax in Tennessee and the property taxes are low. An owner of a home in my county and city might owe a total of 2 grand per $400,000 in valuation (there is a 6% tax on dividends and interest over the the applicable standard deduction amount).

I have previously bought and sold a small copper company, Taseko Mines (TGB) in my main account at a profit, and no longer have a position in that account. I had bought a 100 in a regular IRA and sold 50 at over 5 somewhere for about a $100 profit.  When copper fell in price so did my remaining 50 TGB shares, so I included those shares in one of my partial ROTH conversions after it fell to around 1.  I just bought back the 50 shares sold in the IRA at around 6 last year at 80 cents a share.

Earnings for the 12 months ending 9/30/2008 were $.31 a share but the average price realized on copper sales was $3.42 a pound. Copper is now hovering under $1.5.  So Taseko has taken a hit. It also sold during that same year 661,000 pounds of molybdenum at an average price of $33.04 per pound. So TGB is being hurt badly by the cooper price now. It traded at over 5 as late as June 2008 before commodity prices across the board got smashed due to the economic slowdown. It does not really matter what happens to my 100 shares. I will just wait and see if can creep back to 4 to 5 during the next recovery. 

  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. 


  1. Amazing how this reflect my thoughts. I just increase my GE holdings with a purchase of 100 @ 12.5 and increase my TGB (Taseko) with a purchase of 4000 @ .58

    The work here is patience. One or Two years of patience. But these seem like sure BIG winners.

  2. Patience is the operative word on General Electric but one year of patience may be optimistic. Two may be more like it with three possible. For many of my buys now, I am taking a long view of three to five years. This will be true for the purchases of Intel, Cisco, Microsoft, and other Tech Titans. I have the same view of General Electric. I remember 1982 and GE was yielding about 8%, before the start of the long term secular bull market in August 1982, when most stock investors had lost faith in the market. After all, the DJIA was then below where it had been in the late 1960s. I knew someone who bought a couple of hundred shares of GE in early 1982 and kept it for almost 25 years. She ended up with something like 5000 shares and a 30% or so dividend yield based on the original cost. Don't hold me to those figures but they are close. When the economic recovery starts and it will start, GE will recover. Now, GE may start its recovery from 8 or 10 or 12 and who knows the answer to when and where it bottoms. Maybe it will not start to recover this year or even in 2010. All that I can say about buying now is that I believe the odds are in my favor with a 3 to 5 year perspective. And, I have the ability to hold onto these positions for as long as I need to hold in order to make it pay. Strong hands and an even stronger stomach are necessary ingredients now for individual investors. Keeping the dividend as is will give me a head start on my goal for GE. I will buy more if it continues to float down. Unlike institutional investors, I am not concerned with where it may be six months or a year from now and how it might impact my quarter or a year end bonus.

    During a bull market, I may have 50 small cap names. I got rid of them in 2007. I look at them as a group rather than by focusing on the success or failure of any one or two names. I expect some failures so I try to focus on the group's return. TGB is one of many small caps that I have started to add. TGB is a little thin on cash at less than 30 million and is facing, most likely, a few tough quarters. I would anticipate several quarters of losses, as is the market judging from the last six months of price action. Success or failure will depend on how long economic stagnation continues, which can not be known now. If a recovery starts as the Fed expects in the later half of 2009, and cooper starts a bottoming process (hopefully it has started the bottoming process at the current level), and starts to turn back up late in 2009, then I suspect Taseko to recover. I am not confident one way or the other so I limit my exposure to an issue like this one, usually no more than 300 shares at one time. My risks in small caps is spread over many names in a variety of industries. I prefer names like SNTA, or the large small cap Corrections Corporation (CXW), or an ISIS or even some micro cap names that I have just added. For this small cap, I found that I had to go to TGB's web site to gather more complete information about its financials.