Wednesday, January 21, 2009

Notable News: C, BLK, USB, PNC, UTX, British Pound/MORE ON TIP PRICING

There was a story today in the WSJ about how the British pound continues to decline against the U.S. dollar because of fears about the British banking sector and the pumping of vast sums of money into the British economy by the Bank of England.  I thought about that one for a few moments.  The very same events are occurring in the U.S. on steroids.   

It is conceivable that I may include a bank preferred in my short term trade book.  They are going to be volatile as shown in the trading over the past few days. After Citigroup declared its one cent common share dividend, it also declared its regular dividend on its preferred CPRP.Dividends - Markets Data Center -  If that one cent common share dividend goes, the Citigroup preferred dividends are most likely toast in my opinion.  On the bright side, if the dividend on a non-cumulative preferred stock is eliminated, then at least the owner does not have to pay taxes on income not received which is the case for a deferred cumulative preferred dividend according to their prospectuses.   This will be small consolation when the security falls to a buck however.  

This is a quote from the prospectus for CPRP that summarizes the protection afforded by the declaration of a common share dividend for the preferred shareholder: 

"Subject to certain exceptions, so long as any share of Preferred Stock remains outstanding, unless as to a dividend payment date full dividends on all outstanding shares of the Preferred Stock have been declared and paid or declared and a sum sufficient for the payment of those dividends has been set aside for the dividend period then ending, Citigroup and its subsidiaries will not, during the next succeeding dividend period that commences on such dividend payment date, declare or pay any dividend on, make any distributions relating to, or redeem, purchase, acquire or make a liquidation payment relating to, any of Citigroup’s junior stock (as defined in “Description of the Preferred Stock —Dividends” on page S-7), or make any guarantee payment with respect thereto."

This quote comes from page S-1 of the prospectus for the 8.125% non-cumulative preferred stock series AA. 424B2


Even a short term swing trade in a bank preferred will have to be with small amounts of money given the heightened risk. I remember a Forbes columnist recommending a Fannie preferred issue shortly before it eliminated its dividend.  That issue is now hovering just above $1.

The lower than expected earnings from Blackrock (BLK) demonstrates some of the earnings problems for asset management companies.  Investors have been withdrawing money and the market has taken a toll on the value of assets under management, with both factors leading to lower fees.  Blackrock was also hit by significantly lower performance fees earned from its hedge funds. Yahoo! Finance

Relatively speaking, compared to the other bank earnings reports that I have read over the past week, the slightly worse than expected earnings from U.S. bank looked good in comparison.Yahoo! Finance  I believe that I did own USB and sold it prior to 2008.  It would be one that I would look at carefully within a year or so for a possible re-entry.  The stock is down in early trading today. USB: Summary for U.S. Bancorp (DE) - Yahoo! Finance

PNC jumped this morning after it said that it would not need additional capital beyond the 7.6 billion already received from TARP.

If that turns out to be the case, it will be one factor distinguishing the good banks from the not so good ones. 

UTX is another company formerly owned that I would be interested in buying back at some point, so I read a story on its earnings release this morning.  Considering the state of the world's economy, it appears that UTX is holding up about as well as I could expect.  I see that the analysts are quibbling about whether certain items need to be included or excluded in the consensus estimate, such as negative foreign exchange rates. MarketWatch  This has no relevance to me.  I just look at how well the company is doing in a difficult environment, with a slight drop in revenues, and what it is doing to weather the storm.

One of the negative points that I made about TIP is that it will be adversely impacted when comparable non-inflation treasuries take a hit.  The TIP may not have much of a premium to non-inflation protected securities but the yield on both may be out of line (i.e. what happens to a TIP if the comparable treasury moves from a 2% to a 5% yield?).Few Tidbits from the Weekend Financial Papers: Inverse ETFs/ better off with Dem or GOP Pres?/ TIP pricing   The ETF TLT (20 year treasury) is down 2.16% in early trading and the TIP is down 1% and the 7 to 10 year treasury ETF has fallen .63% in early trading.   IEF: Summary for ISHARES BARCLAYS 7-1 - Yahoo! FinanceTLT: Summary for ISHARES BARCLAYS 20 - Yahoo! Finance

This is just my opinion but I believe TIP can go down when the comparable treasuries rise in yield since the basic yield of both securities may be too low. Thus, I just look at TIP at the current prices being more favorable to own than the comparable treasuries without any inflation protection.  If I had to choose one over the other I would pick TIP.  This does not mean that either will be good investments at the current prices when and if treasuries as an asset class start to fall in price and rise in yield.

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