Friday, February 27, 2009

GDP Down 6.2%/ Citigroup & Insolvency/ Another Problem: Deferral of BEE Preferred Dividends /

The 2008 4th quarter GDP was revised down, as expected, but the downward revision was worse than the consensus estimate.  The plunge in GDP was revised to a fall of 6.2%.    The current quarter is likely to be similar, though the current forecasts call for a drop of 4.8% annualized.  The last time the economy shrank more than 4% in two consecutive quarters is 1947. MarketWatch

The S & P 500 will close the month below 815.  This will mean at a minimum a continuation of the prohibition on buying common stocks in the taxable accounts until April 1st. 

Citigroup will plunge again this morning after the announcement of its new deal with the government to try to save it.  Yahoo! Finance
The terms will be dilutive but there is a bright side.  Without the government's involvement, the common and preferred shareholders would be holding worthless paper.  Pandit says that this new deal should end concerns about nationalization.MarketWatch  Citigroup is already a ward of the State so I am not sure what Mr. Pandit is talking about in the press release.  The initial conversion of the government's preferred shares would be into a super preferred share class that would be senior to other debt.  The payout on other preferred shares will be suspended which of course means the common share dividend of a penny a quarter is now gone.  The conversion price  will be $3.25.  If the common shareholders do not approve the deal, then the preferred shareholders who had agreed to the swap could buy common shares at a penny a share so the common shareholders are being forced to agree to it.  As I read it, the entities other than the U.S. government who bought preferred shares in the prior bailouts, totaling 27.5 billion including the Government of Singapore, would have their preferred dividends suspended as an incentive to agree to the conversion of their stakes to common shares.  The government will match that conversion dollar for dollar up to 25 billion of its preferred shares.  Any of the government's existing preferred shares which are not exchanged will be converted into Trust Preferred securities yielding 8%. The deferral of all preferred dividends may have been legally necessary in order to defer the dividends payable to the Saudi Prince, the Singapore government and others who participated in earlier privately arranged transactions, which gives them an incentive to do the conversion.     This entire arrangement proves to me that Citigroup is in fact a zombie.   You have to remember everything the government has already done to prop Citi up and that was obviously not sufficient.   I was correct in my assessment that the Citi preferred issues were not worth the gamble among the bank preferred issues. ING Loss/New York Post Cartoon Sets a New Bar for the Tennessee GOP/CR, GRT, VRNM/ Bank Preferred Issues
  I am surprised that those issues are holding up today but it does not matter to me since I do not own any of them and will not even do a nibble.  This sort of event, elimination of dividends on equity preferred, will have a negative impact on the entire preferred share market.  As I understand it, the public equity preferred holders may be eligible to participate in the conversion and it is unclear to me about the trust preferred shareholders. 
When it rains it pours as the saying goes.  Strategic Hotels suspended payment of its preferred dividends.  I had previously discussed that this company could do that given the fact that it had already eliminated its common stock dividend. Take A Short Term Profit vs. Hold as a Part of an Asset Allocation Plan/ J P Morgan: Extreme Negativity on GE/ Liesman and Lewis/Buys: GRT & GIVN The price yesterday already reflected a likely deferral of the cumulative preferred dividends.BEE-PA: Summary for STRATEGIC HOTELS A - Yahoo! Finance   The common shares have been trading under a buck for few weeks. A further drop is likely in the preferred shares, possibly stabilizing in the $2 area, and the only thing that I intend to do now is wait and see with my 100 shares, maybe I will get paid down the road but not likely in 2009.  I will wait until the middle of 2010 to make a decision on what to with my 100 shares.   Strategic Hotels & Resorts Reports Fourth Quarter and Full Year 2008 Results: Financial News - Yahoo! Finance
 It is my understanding that the accrual of an unpaid preferred dividend is a taxable event for the holder of that security which is bad of course.  But the preferred shareholder has to be paid before the common shareholder receives a dividend, which in this case may be never.  Whenever a REIT eliminates its common and defers its preferred dividends, it is skating on thin ice as to solvency,  as I discussed in connection with MaGuire Properties (MPG).   I would not buy a REIT preferred in a taxable account that has deferred its dividend and probably would not take a gamble in a retirement account unless I had  (1) some confidence in survivability, (2) several dividends had accrued since the original deferral and had not yet paid, and  (3) the cost was nominal say less than $200 for 100 shares.  BEE is about a year away from having to address those considerations now. Most likely, my investment in BEEPRA will be a $500 or so loss after netting the dividend payment received last quarter.  The management of this company made a big mistake in its expansion plans which caused a huge write off. BEEPRA: STRATEGIC HOTELS PREFERRED A I did not see in its earning release any comments about reducing their pay some. In all the years that I have traded REIT preferreds this is the first time that I have been caught in a deferral. 

Westar (WR) missed its earnings estimate by 2 cents but guided 2009 in line with estimates.Westar Energy Announces 2008 Results: Financial News - Yahoo! Finance

The five firms that had SNTA as a buy downgraded it this morning as you would expect. Quotes for SNTA - Yahoo! Finance
It is trading close to the value of its cash on hand.   Yahoo! Finance
 I went ahead and took my medicine wiping out the gains so carefully nurtured in this security. The reason is more psychological than anything else, just put it in the category of out of sight out of mind. 


  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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