Thursday, January 15, 2009

What to Do When There is No Let UP in Bad News/JPM/ECB Rate Cut & the Dollar/BAC & AIG sub Bonds

The European Central Bank cut its benchmark rate by 1/2%, as expected, to 2%, the lowest rate in its ten year history. Reuters
The lowering of the benchmark rates closer to zero by the foreign central banks is one factor keeping the dollar from falling now in my opinion. 

The economic meltdown seems to me to be in the stage where it is feeding on itself.   

J P Morgan did earn a small profit.  Possibly, it is possible to have some confidence in Dimon and the others bankers at Morgan. Yahoo! Finance   I have a position in a TC, PYV, that contains a junior debt issue from Morgan. Buys of a First Mortgage Bond EMO and a JPM TC PYV I may have erred earlier in saying that I do not own any  bank Trust Preferred issues since PYV would qualify in that category.   SOLD 1/2 POSITION DKR/GE FUNK/ I DO NOT OWN ANY BANK TRUST PREFERRED issues/CURRENCY INTEREST RATE DIFFERENTIALS/FOREST CITY   I am still comfortable holding J P Morgan junior debt.  I am less comfortable with Wells Fargo.  For all others, I will need a major spike down in price juicing the yield to buy given the current risks. 

This is a link to a very interesting article about the future of the dollar as the world's reserve currency, plus some discussion of events that contributed to the current financial crisis that I had not previously considered. The Great Debate » Debate Archive » Global imbalances and the Triffin dilemma | The Great Debate |

3.16 million  foreclosure filings were made in 2008, up 81% from 2007, and triple the rate in 2006. MarketWatch

One of the interesting legal questions that Obama will face soon is whether to continue Bush's policy that allows the indefinite imprisonment without charges of a legal alien resident arrested in the U.S. on terrorism charges. 

It is conceivable, assuming that I have an extended period of temporary insanity, that I might buy 50 shares of Citigroup south of $2.  It is truly amazing that this institution, once the largest in the U.S., has so quickly succumbed to fighting for its life, struggling now at a mere 25 billion market cap.   C: Summary for CITIGROUP INC - Yahoo! Finance

I believe that I may have been up around 8% after the first few days of this year and I said in jest that it would be best to just sell everything, take that trip around the world, and come back in six months or so. Buy of PGN/Was there really a Black Swan Event?/ Alcoa That would have been probably the best alternative at that time. 

The only investment category working now, which is the same one as last year, is bonds.  So, I need to decide whether to add more to that category with my cash flow, or buy common stocks, or do nothing and just allow it to accumulate.  I have been adding some common stocks, primarily ones with good dividends like SE, PGN,  KFT, FII, and PWE.  I have also made recently some small adds in non-dividend paying small caps like USPH and SNTA, and one mid cap in CXW, finding in each of those names something to like even assuming a continuation and acceleration of the worst financial crisis in my life.   If I decide to go with common stocks, and taking into consideration the new information that I have about an accelerating deterioration in the financial system, do I buy some small caps that do not pay dividends or go with a large cap dividend payor like AT & T which just cracked 25?  There may always be hope, but there are also choices and one alternative is to do nothing, allowing the cash flow to accumulate.  

Idaho is considering privatizing one of its prisons to say money.  Yahoo! Finance This may be part of an ongoing trend which could benefit Corrections Corporation.   CXW is also in the permit process to build a new prison in Nevada. Yahoo! Finance

I do own some senior debt of BAC, maturing within the next four years.  The cost to insure BAC's debt rose to 210 basis points today. MarketWatch   One-half of that position was an original debt issue from LaSalle acquired by BAC after my purchase.  I am now at my maximum senior debt position in one issuer with these two positions.    While I am not concerned enough to sell these two bonds, I certainly would not lend new money to BAC now.    I do believe that the recent news about BAC makes BACPRE, a very small position for me, a more undesirable and risky investment since it is a traditional preferred issue which is not even cumulative. Bank of America Corporation

One of my more speculative short term bond buys were two issues of International Lease Finance, an AIG subsidiary, maturing in May and in August of this year.   The discount has been narrowing to par over the the past several months, with the May maturity now at around 92 whereas it was lower than 70 a few months ago.  The most speculative short term bond which was bought was issued by  another American International Group subsidiary, American General Finance, maturing in December 2009, a far more riskier proposition.   This is not the American General life insurance company but the separate consumer finance company which does not look so hot now.  SECURITIES AND EXCHANGE COMMISSION  Both American General companies are subsidiaries of AIG, but the insurance sub is in much better shape than the consumer finance company.  Bill Gross said he was buying bonds from these  two AIG subs, which I had already done, but I was very relunctant to do it and keeping most of it short as in 2009 maturities.  One of the issues mentioned by Gross in his Forbes  interview was a senior bond issued by American General Finance maturing in March 2011 which was then priced to "yield to worst" at 39.9%.  Needless to say, that would be a highly speculative one.    When I do something like this, nibble at an American General Finance senior bond,  I view it as the most extreme speculative side of my personality, recognizing the risk and potential of a loss.   Hopefully, even in a bankruptcy, something may be recovered by the senior debt holders.  I regret doing any buys of American General Finance, however, even though it may turn out okay in the end.    In retrospect, I would not do it again, and I would just let Bill stick his neck out and find another home for my money. But, for those who read these posts, seeing this True Conservative venturing into the wild west with small amounts of cash would not be surprising but never with more than I could afford to lose without missing a beat. 

I mentioned in a post from yesterday that the average Joe would soon be able to gorge himself on GE stock at less than 14, which looks a lot better than Uncle Warren's warrants at $22.5, assuming one wants a position in the common stock.  Buffett was just receiving those warrants as a kicker to the 10% preferred issue. 

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