Thursday, January 15, 2009

Stuck In Indecision/JPM debt downgrade/PWE dividend cut/Bond vs. Common Stock Yields

Moody's did lower the credit rating of J P Morgan a notch, noting the possibility of a common stock dividend cut, but also asserted that Morgan was in better shape than its major U.S. competitors.  MarketWatch
This article suggests that JP Morgan is better managed than the other big banks.MarketWatch

Penn West, as expected, reduced its monthly dividend to .23 cents Canadian from .34.  Yahoo! Finance   With continued weakness in the Canadian dollar versus the U.S. dollar, the amount actually received has become lower as the exchange rate results in less U.S dollars from a dividend payable in Canadian dollars.   

I looked at DryShips, one of Cramer's recent recommendationsW's News conference: Reflective or disingenuous?/Pickens on Oil/TECH TITAN VALUATIONS/LLTC /cramer, and decided not to buy any at the current time.  I will place it on my small cap monitor list. It certainly has recovery potential once a worldwide recovery takes hold. DRYS: Profile for DryShips Inc. - Yahoo! Finance  At one time, I owned Diana Shipping (DSX), but this is not the kind of position to hold when you start to fear an economic downturn which was my most major concern in early 2007 when I started to shed my common stock positions in a major way.  

For some seasoned companies now, there is not much difference in the yield from a senior long bond and the dividend yield provided by owning the common stock.  In fact, the dividend yield from owning AT & T is more than many of its long term senior bonds and several companies are similarly situated where the common stock dividend yield is higher than even their long term senior bonds.  I just checked the yield for the AT & T long bond contained in the TC JZE and JZJ at the FINRA site.  While this information from FINRA may not tell a true story due to how it collects the information, it does show this long bond yielding less than the AT & T common dividend now. FINRA - Investor Information - Market Data - Bonds - Bond Detail   For an individual investor, buying in a taxable account, the common stock dividend still has an advantage under the tax rules compared to interest even though it bears the brunt of the risk of being cut or even eliminated, which is not much of an option for the issuer of a senior bond unless bankruptcy is the only remaining viable choice.  Still, it has caused me to wonder whether I should buy a Verizon or AT & T common stock in a taxable account and move one or more of their bonds from the taxable account to one of the  retirement accounts.  Could do that as part of my Roth IRA contribution for 2009?  I think that I will ask that question. 

I did not realize that my Macy's senior bond had gone ex interest until I saw the interest payment in my account this morning. DKQ Stock Quote - Saturns May Dept Stores Co Stock Quote - DKQ Quote - DKQ Stock Price   I discussed making this buy in an earlier post. TRUST CERTIFICATE MACY'S BOND DKQ   I am barely interested in holding this one and so I entered today a GTC  limit order above the market,  and will use the proceeds upon a fill to upgrade to a higher quality senior debt issue even at a significantly lower yield.  If the GTC above the current market does not fill, that is okay since I am in no hurry to sell it.  I am looking at DKQ much the same way as I did JZV.   I probably should have held onto the PJL, which contained a Verizon bond, sold at 21.83 in October 2008 on a day that I became temporarily unhinged.  PJL TRUST CERTIFICATE & The Volatility Indexes VIX and VXN
In another later transaction on PJL I sold fifty in a regular IRA at 23.2 on 11/3.  I had bought it at a favorable price and had placed it an IRA account.  That was two good decisions  in retrospect followed by one not so good one.    Now, I could buy those shares back at close to the same price but the prior sale was just before the semi annual ex interest date in late November.  PJL Stock Quote - Preferred Plus Tr Stock Quote - PJL Quote - PJL Stock Price
But I am going to wait for another day and hopefully a better price.

I did notice while rummaging around the FINRA site, looking at my watchlists, that there was some apparent mispricing of a senior bond that I do not own, where the TC has a 1% higher coupon than the underlying bond and sells at a 10% discount to par whereas the underlying bond is selling at close to a 10% premium. I will monitor that one.  Possibly, I will place a small GTC limit order to see if I catch a downdraft which occurs with some frequency in this niche area of TCs that I have been known to dabble. 

As you would expect, the VIX is shooting up again, now well over 50, after spending only a brief period below 40.  I view this latest spike to be a negative and it is one factor causing major hesitation in even investing my cash flow.  Microsoft is currently at a level last seen in 1998, with the exception of a couple of days around November 20th when the market tanked to close to 7500 on the DJIA (on 11/20/08, DJIA closed at 7552.29 after hitting an intra-day low of 7464.51).  It is so easy to be negative about the future now.  This is what Meyer Rothschild meant when he said "Buy when there is blood flowing in the streets!", except Meyer was not talking about blood in the figurative sense but the sentiment is the same no doubt. 

One of the many dire Bush legacies is the number of job losses. The job losses in 2008 were the worst in any year since 1945.

So, what have I decided to do today.  I am going to do some housework, that is what I am going to do until about 2:45 and then just see how bad it has become before making a decision. As far I can tell, it pays just to wait and see. 

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