Wednesday, February 11, 2009

Buy of 50 AT & T/More on KTV/ Peter Kraus Bonus At Merrill

I made a temporary dip into my cash allocation late today to buy 50 shares of AT & T at 24.43. I will reimburse the amount used for that purchase by the cash flow due mid month.  At that price, the dividend yield is rich at about 6.7% at that price. I recognize that in the current environment few common stock dividends are secure from the chopping block. But the yield at that price is too enticing to pass up for an old man who has started to think that Frank Sinatra was cool. 

I may add another 50 KTV to round the lot up to 100 provided I can catch it below 19.5. There are several Wells Fargo trust preferred issues besides WSF including WCO, FWF, WPK, BWF, JWF, and GWF. The prospectuses can be found at the SEC using the search term Wells Fargo Capital. Then it is just a question of matching the correct symbol with the right prospectus. I have not looked at them in at least a couple of years.  

There is some variation in yields and the maturity dates need to be checked. One appears at first glance to be more out of whack in terms of yield than the others. That one is WCO which Marketwatch shows as yielding 11% at close to its par price of $25.  This can not be accurate on a yearly basis since the coupon is just 8.625%.  Final Prospectus Supplement  Moreover, the maturity date is too far out for me on WCO and on most of these issues with WCO maturing in 2068. 

I try to keep the maturity at the outermost limit to 30 years. Maturities in excess of 40 years is common in many bank Trust Preferred issues and this by itself will limit the available pool that I will buy before considering other factors like yield and credit worthiness of the issuer. I probably picked WSF a couple of years ago since it had a more reasonable maturity date from my perspective. I am not going to be able to capture the spread between my cost and par value for a bond maturing in 2068, by holding it until maturity. Capturing the spread between cost and par by buying at a discount to par value is an important component of my return.  

If I can get my average cost on KTV down to $20, by buying the next 50 at 19.5-whenever I can, then I would have a $500 spread between cost and par value to be captured at maturity in 2026.  For ease of calculation I am going to round that to 17 years which is a realistic period for someone my age if I wanted to hold it to maturity. Amortizing  $500 over 17 years to arrive at an annual figure gives me $29.40 per year or an additional 1.455% annually, admittedly not much, but it does bring my potential return to around 11.5% annually. Of course, the time to buy this issue was when investors were worried that Wachovia was going poof and it traded down to $5 on 9/29/08. I did not see that but I knew when it was trading at around 10 and passed on it due to my conservative nature and fear of a FDIC seizure which would most likely destroy the value of all bank preferred issues of the seized bank.  It is my understanding that uninsured deposits have priority after a FDIC seizure over either equity or trust preferred so you can figure out the likely outcome with that information under circumstances requiring a FDIC seizure. 

The coupon yield of 10% at my cost of $20.5 for KTV would provide me with the historical rate of returns from stocks before inflation without the volatility in return, assuming all interest payments are made when due.   

After inflation and reinvestment of dividends, the total return was 6.8% for stocks to 2002  for the prior 200 year period.Stock Market: The Concise Encyclopedia of Economics | Library of Economics and Liberty I do understand that the term average has many different meanings.  You could do a simple average or arithmetic mean or a geometric mean which is also called the Compound Annual Growth Rate, both without reinvesting dividend and unadjusted for inflation.  Since the year of my birth, the simple average return for the S & P average through 2008 was 7.71% and the CAGR would come to 6.3%. CAGR of the Stock Market: Annualized Returns of the S&P 500  Another calculation could include dividend reinvestment and I saw a figure of 10.27% from January 2026 to February 2008, and that may be south of 10% now. Stock Market Annual Returns -  So, I am going to call it 10% before inflation and with reinvestment and 6.8% after inflation which is close enough for an old man trying to figure out whether a junior bond maturing in 17 years that pays 10% is a good investment under his circumstances. There is a certain amount of comfort in a 10% yield from a company like Wells Fargo.  

In a year that Merrill lost money, and would have gone under without the acquisition of Bank of America, bonuses were accelerated and more than one million was paid to 696 executives.   

149 of the wizards received 3 million or more and 53 were paid more than 5 million. Cuomo Cites Big Bonuses for Many at Merrill - 

Four executives received 121 million and 14 received a combined 249 million. Cuomo Blasts Merrill Over Bonuses -

One gentleman, Peter Kraus, who was hired in mid September of 2008 was rewarded by Mr. Thain with a 24.9 million dollar bonus for his three months of wizardry.  

These individuals believe that a bonus is an entitlement unconnected to performance.

I heard a caller to Cramer's show blame the doom and gloom of the "mainstream" media for the current financial crisis.  So the NYT, WP and Katie are the primary culprits behind the severity of this downturn. Cramer just kowtowed to the caller. There are millions of people in the U.S. who would just as soon as eliminate a free press so everyone could receive what those individuals view as the unbiased and unfiltered version of the news as given by the likes of Ann Coulter, Sean Hannity and Rush Limbaugh. I frequently discuss this subject but tonight I would approach it from a different angle. If a person's financial advisor even uses the term "mainstream media" in earnest and as an expression of their beliefs, I would just find another advisor because that one is most likely not a deep thinker. 

I would have to say that the plunge in Great Plains today was deserved by the company. Shares traded this morning down to $14.53 which was the lowest price since 1989 which is clearly unacceptable. 

After some reflection the dividend cut was more than necessary even if you accept the downbeat forecast as likely to be the most probable result. I have to judge management at GXP based on the results that I am seeing from other electric utilities from around the country and by every metric GXP comes up short.  I heard Cramer say that he was disappointed in GXP since he had recommended the stock.  

I saw where Terex had an awful quarter and terrible guidance for 2009.  

The company also warned that it may breach its credit covenants. I do not own Terex but really bad news always has a tendency to cause me to take a look. I am constantly looking for a gem or two in a trash pile. But, even if my interest is perked tomorrow when TEX falls below 10, it would be too early in the cycle to pull the trigger at least for me, proud to be a conservative old fogey. 

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  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. 

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