Thursday, January 29, 2009

RYN vs. IP/Morgan & Madoff/Asset Managers/ Dell & Textron Doldrums/Option Arm Mortgages Were Not Black Swans

I thought that I would add a picture after posting. This picture depicts a left brain doing his best imitation of what he understands to be the persona of a dominant right brainer including the spaced out look. 

This is a link to an interesting article that J P Morgan may have sniffed out some problems with Madoff shortly before the "alleged" Ponzi scheme was exposed by Bernie's admission to his two sons.  The bank sold a product to European investors that allowed them to leverage their exposure to a Fairfield fund, one of Bernie's reliable feeder funds.   The Morgan note basically created a return 3 times the return of this Fairfield fund.  To protect itself, Morgan invested 250 million of its own money in the fund but then managed to pull its money out just before the blowup.  

Obama's characterized the  18.4 billion in Wall Street bonuses paid in 2008 as shameful  and irresponsible.  With many of those institutions  teetering on the precipice of insolvency-being propped up and kept afloat by the federal government, and further taking into full account that Wall Street is responsible for the worst financial crisis since the Great Depression, who could disagree with Obama other than Jim Cramer? I know that those who received those bonuses believe that they are well deserved but they are just about the only ones who believe it. 

This is a good analysis of how Rep. Cantor, House GOP Whip,  misused the CBO analysis of the stimulus package. PolitiFact 
There is a fair amount of misrepresentation occurring about the CBO analysis. This is a summary found at U.S. News & World Report.  US News and World Report
When you add the tax part of the stimulus to the spending proposals, a majority of the money would enter into the economy by 2010. The recent CDO reports calculates that 64% would enter the economy by 2010.  I would just suggest that this number needs to move up to at least 75%.   The most recent CDO report can be accessed at the above linked article in U.S. News.  It is probably too much for the reactionaries to actually read the report that they comment on in such an authoritative fashion.  There are those who much prefer to misrepresent what the CDO says so I do not pay much attention to what Sean, Rush and their ilk say about it.  I just read it for myself. 

The powerful reactionary forces in American society feed off misinformation and misrepresentation.   

Unlike my representative Marsha Blackburn, who would have done nothing meaningful in September 2008 or now to avert a financial meltdown, I have been convinced that the world was on the precipice of a second Great Depression in September 2008.  If a free fall into an economic calamity of epic proportions would teach  Marsha and and her soulmates in the GOP a valuable lesson, then the Great Depression II would at least have some benefit.  But the problem is that she and her fellow travelers would learn nothing from it,  and everyone would pay the price for their lack of understanding.  Even today, as she said in September, Marsha says there is no hurry to do anything. | The Tennessean
Marsha is now, and will always be, brain dead.    I view myself as a conservative.  Marsha says she is a conservative.  So how can this be?  Admittedly, I am not the kind of conservative that Marsha thinks of when she incorrectly labels herself as a conservative.   Suffice it to say, there is an incentive for the reactionary forces in our society, who have nothing in common with true conservative values, to pass themselves off as conservative. 

It is hard to be optimistic about the prospects of asset managers like T. Rowe Price in 2009. Investors have been pulling their money out of stock mutual funds and the asset values that fees are based upon have taken a huge hit due to the stock market crash.T. Rowe Price profit plummets - MarketWatch MarketBeat : T. Rowe Sees Outflows, Both From Funds and Its Shares  Many investors have given up on stocks altogether and liquidated all of their mutual funds to buy fixed income annuities.  It is hard to have and to keep the faith.  I am just adverse to buying one of the asset managers during the first half of this year, making a small exception for Federated based on its primary reliance on money market and bond funds. 

Dell, like Pfizer, is another stock that I gave up on year's ago.  I have no interest in it now.   MarketWatch   At a much lower price, say 7 to 8, I will just look at Dell again for a possible nibble. 

International Paper ( IP) is continuing its imitation of GM by losing 452 million in the 4th quarter, mostly on goodwill impairments. International Paper reports big loss on asset write-down - MarketWatch   Yahoo! FinanceThe stock is trading near $10 a share reaching new decade lows by the week.   The current price has fallen to levels prevalent in 1986.  I have never owned it.  Personally, I would have kept the timber and sold most of the paper operations. Rayonier, a REIT owned and sold before 2008, owns timber and has some operations, including real estate sales and making performance fibers, and it had a better report than IP. Rayonier Reports Solid 2008 Results: Financial News - Yahoo! Finance  I am just monitoring RYN at the present.  RYN did predict a down year for 2009 but said it expected its cash flow to exceed its 2 buck a share annual dividend for 2009. 

I do not own shares in Duke Realty (DRE), an industrial REIT similar to First Industrial, but I do monitor its earnings releases since I am considering adding one of its cumulative preferred issues.  Duke Realty Corporation Reports Fourth Quarter Results: Financial News - Yahoo! Finance  The common dividend has already been reduced which will save 150 million in cash and the development program has been cut back.  Like office and industrial REITs, severe headwinds are likely in 2009.    The company also revealed that it bought some of its own preferred stock in the fourth quarter which is a good move in my opinion, since it has a positive impact on fixed-charge ratios.  I would assume most of those buys were at less than 1/2 of par value and reduced the amount of dividends payable in connection with its preferred issues.   The Board declared its regular preferred dividends which is set forth in the above linked earnings release.   
There are several Duke Realty preferred issues to choose from and I have just linked the ones scheduled to pay their dividends in February.  I do not yet have a position, and I am currently trying to compare the prospects of Duke Realty and First Industrial.  I can capture a lot more yield with FR's cumulative preferred than with Duke Realty.
This is a link to DREPRL prospectus:
This is a link to DREPRJ prospectus:
This is a link to DREPRK prospectus:

Textron hit a low last seen in 1992 after a dismal report. Its Cessna unit had 23 cancellations and an unprecedented number of deferrals. MarketWatch
Cessana announced 2000 more job cutsYahoo! Finance  The company guided 2009 revenues and earnings below consensus. Textron Reports Fourth Quarter and Full-Year Financial Results: Financial News - Yahoo! Finance  The company has experienced problems with it finance unit and has taken steps to exit all non-captive financing. A number of charges were taken in the 4th quarter to reflect that exit.   I have no position in TXT, but I am monitoring it for a possible nibble sometime this year.   Textron took a big hit today and has been smashed after reaching a 52 week of 65.52 in the spring of 2008. TXT: Summary for TEXTRON INC - Yahoo! Finance

One benefit to having a few decades of age and experience is that I have developed a powerful respect for the power of a bear in a china shop.  I also remember the late 1970s and early 1980s, and how that period demolished the values of long bonds.  I do not assume that inflation is dead, nor do I believe that the long term secular bull market in bonds will continue for much longer.  While I do agree that all of the stops need to pulled out by the government and the Federal Reserve to avoid slipping into the Great Depression II, it is not hard to see that the repercussions of their unprecedented actions will likely be inflationary provided they work.  If they do not work, then there will be other things more serious to worry about in the coming months.  Being heavily in debt or just being a saver with short term instruments like T Bills or a savings account are not advantageous positions in a deflationary spiral but the saver will at least survive to fight another day.  

Barclays has added a short term international government bond fund to its ETF lineup.  Yahoo! Finance  The symbol is BWZ. BWZ: Summary for SPDR BARCLAY TSY BD - Yahoo! Finance  This kind of instrument is coming pretty close to a currency play against the U.S. dollar. This is a link to the site:
SPDR Barclays Capital Short Term International Treasury Bond ETF The expense ratio is .35%. This site is very unfriendly to safari browser users. 

Another Brentwood financial advisor was accused of fraud. | | The Tennessean

Japanese industrial output fell 9.6% in December compared to November. MarketWatch  The countries that are particularly tied to providing products to the American consumer are sliding deeper into a recession.  This is truly a global problem which is accelerating. 

I do have a higher opinion of Chubb than other insurers.  It reported a decent quarter after the close.  MarketWatch I do not have a position in CB. 

I see that Blagojevich was impeached, maybe he could move to Tennessee and run as a Democrat of course for a State Senate seat.  

Option arms are soaring in defaults.  According this WSJ article, about 750 million in Option Arms were made between 2004 to 2007 and are concentrated in the hyper-inflated, now deflating California and Florida markets.   This mortgage product allowed the borrower to decide how much to pay every month, including an option that permitted payment of less monthly interest than otherwise due.  So less interest and no principal payment was a payment option, and then the monthly short payment would be added to the amount due on the loan.  This is called negative amortization. Then to insure a disaster, peddle the loan primarily in California and Florida to mostly upper income folks living way beyond their means, where houses have risen in a parabolic manner far in excess of income growth.  Then when the whole thing comes tumbling down, just say who knew, or this is a black swan event that could not have been forecasted, or that the originators of the mortgage could say that they were brought down by the worse housing market since the 1930s, or a borrower could claim that he was taken advantage of by an unscrupulous mortgage lender. Poppycock!  Option arms had to fail.  They could not have succeeded.  There was no black swan event. This was a predictable meltdown. Options Arms were just one facet of a clearly crazed easy credit cycle.  This is not a matter of looking in retrospect but what could have easily been modeled at the time by risk analysts doing their job rather than appeasing their masters. 

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