Wednesday, March 11, 2009

Buy of HNZ at 31.67/Tax Advantages of Equity Preferred Dividends/PNX & State Farm/Foreclosure Acceleration/Disney Downgrade by Pali/Cap & Trade/NADX

Yesterday was most likely a bear market rally. My left brain is gradually reigning in the free wheeling right brain side, and hopes to restore control before the end of this week. My trading model does not even support a single stock buy at this time, yet I have bought about 10 so far this week.

The number of foreclosures in February reached the highest level yet at 121,756. The number of pre-foreclosure filing hit a record in February at 207,703. MarketWatch Sometimes, to understand the depth of the problem, an article focusing on one neighborhood is useful. The NYT recently had an in depth story about a neighborhood in Cleveland that goes into detail about the number of factors leading to an acceleration of foreclosures. NYT One result was vandalism in the foreclosed homes, where anything that could be stolen was forcefully removed from the walls leaving gaping holes. Windows would be boarded up and the home would be left to rot. Other homeowners in the neighborhood, at least those under water with their mortgages, would see little reason for even trying to hang onto to their homes and would just walk away. After reading that article and others like it, I realized that the mortgages on these homes were close to a total loss for the banks that owned the loans. In addition to losing the value of the mortgage, the bank might also be stuck with a demolition bill of around $8,000 plus the costs of foreclosure. Detroit is another example where foreclosed homes might be changing hands now, sometimes for $1000 or less. ABC News:

A majority of the foreclosures are just concentrated in a few counties in the U.S.
Thirty five counties accounted for a majority.

I suspect that most of the foreclosures happening now are beyond all hope of remediation even under the generous terms contained in Obama's foreclosure mitigation plan. Of all of the proposals made by Obama so far, I hear the most complaints about this plan. It does rile the responsible people who never assumed more than they could handle in mortgage payments that someone could be rewarded by the government to the tune of $1,000 per year for five years just by making payments on time in a modified mortgage benefiting them under this plan. ABC News

This is an understandable reaction. I believe that the incentive to pay the modified mortgage on time is given due to the high number of defaults that are happening even after a loan modification.

I know that none of these bailouts will help me directly. But, I also agree with Buffet when he made this analogy. Two people are in a boat that has a leak that requires both of them to bale water to survive, one of the two is a responsible home owner and the other is not, would you as the responsible owner refuse to bail the water out of the boat just because you were upset with the other person in it. His example was a Bernie Madoff investor in the same boat as Bernie, would you bale even if the other guy obliterated your entire net worth? TRANSCRIPT Legendary investor Warren Buffett says economy fell off a cliff - News-

I watched an analyst on CNBC discuss his reasons for downgrading Disney after it suffered a 38% decline over the past three months. Seeking AlphaThe reasons for the decline and the probable decline in Disney's theme park business are well known. I recently took a small position in DIS after it fell to below its book value per share. Any buyer of common stocks now has to have a long term perspective, meaning five years, or a very short term trading mentality. I have both. For a position like Disney, I would sell it only if the stock gained 20% or so quickly, and fast moves are the norm now. Otherwise, I would be content to hold it and possibly add to the position on weakness.

China had a 25.7% decline in merchandise exports in February, compared to a year earlier, and this followed a sharp decline of 17.5% in January. Japan, another export driven economy, had a 46% decline in exports in January.

When bankers defend their loan practices after receiving federal bailout money, and claim to have issued millions in loans, a distinction needs to be made between extending a matured loan and granting a new loan. Little new loan growth is occurring now.

I have mentioned many times some of the disadvantages of equity preferred securities including a lack of a maturity date and the fact that an owner of such a security has a junior position to all debt and is senior only to common stock holders. One of the major advantages for a wealthy U.S. owner, in a high tax bracket, is that the dividends paid by non-REITS are currently subject to a maximum tax of 15%, since they are considered qualified dividends. Morningstar Advisor Admittedly, this will soon change under the Democrats, but it might last until 2011. The above referenced article from Morningstar may be available to non-subscribers and is worth a read for anyone considering an investment in this area. I do know that every dividend paid by an equity preferred that I have owned since the 15% rate came into being in 2003 has been classified as qualified whereas the debt preferred or so called Trust Preferred are classified as interest subject to the taxpayer's highest marginal tax rate. I do lose that benefit by placing some of the equity preferred stocks in a retirement account but that is due to another tax issue involving the possible tax implications of a deferral.

This article discusses the impact of Obama's cap and trade plan on electric utility stocks. Seeking Alpha Fortunately, the regressive tax embodied in the cap and trade proposal may not have the votes for passage. - NYT  Grist

I would predict that, if Barbara Boxer pulls off the stunt that she is contemplating, the Democrats will have a lot of explaining to do in key battleground states in the 2012 Presidential election, and in the 2010 congressional elections. I would also predict Obama will lose Ohio in the next election with the passage of the cap and trade plan. Most voters probably have no idea yet about how this plan is a major tax increase for the middle class, a fact that Republicans are most likely to remind them incessantly during the next election cycle. In fact, if Obama's cap and trade proposal passes, the GOP would be well advised to just pound the message over and over again in political advertising during the next two election cycles, and then pound it over and over some more, about how much this plan increased an average families utility bill. The Democrats will find a way to immolate themselves. To help that process along, maybe the GOP should let the Democrats have their way on cap and trade in a Machiavellian type political maneuver. Barbara Boxer does not comprehend that the U.S. is not populated by surfer dudes.

Today was a big day for many of my owned securities going ex dividend. These include KO, KSA, KCC, XKK, MJH, FRPRJ, FRPRK, EBI, & OLA. I have recently changed the distribution option on most of the closed end funds including EBI and OLA to pay dividends in cash. I grew weary of investing in additional shares at ever lower prices and decided to invest the cash in other securities.

While it is just my personal opinion, National Dentex is just the kind of company that would be better off as a private company, and it could easily be digested by a private equity firm as a turnaround situation. The first order of business would be to install new management. I am a little curious about the delay in releasing its 4th quarter results. I noticed a news story a week or so ago that a firm called GeoDigm had received a 100 million commitment from private equity to use in its efforts to consolidate the dental lab industry. Reuters NADX is hovering around a 10 million market cap.

I thought that I would continue with my buying of consumer staples by starting a position in Heinz (HNZ) at 31.67. This was done a few minutes ago. This company is one likely to continue paying its dividend, at least based on reasonably foreseeable events, and it just declared its regular quarterly dividend of 41.5 cents. I am going to give kudoes to any company maintaining or increasing its dividend during the troubles. The dividend yield at my cost is around 5.4%. I am a fan of its ketchup and Ore-Ida potato line of products. It also owns some frozen dinner lines like Weight Watchers. S & P has it rated 4 stars with a $40 target. After the last earnings release, Barclay's lowered its target to $35 from $42.The last quarter had stagnant revenue growth before adjusting for currency exchange. Morningstar has it rated 5 stars. One of the recent problems is the strong dollar. Heinz did recently reiterate its fiscal 2009 at $2.87 to $2.91. Note on Heinz and BAC Trust Preferred Pricing Credit Suisse recently lowered its targe to $37 and suggested an entry point in the low 30s. Heinz/ KR, PG, Pru/No Quick Fix To This Financial Quagmire/ Barron's ran a favorable article on Heinz when it was about $5 higher and I decided to pass on it at that time, electing to do more research and just to wait and see.

Pakistan As a Haven for the Taliban/No on NCV/Heinz/More on Ariad
The chart reveals a long standing channel pattern starting around September 1996 where the stock meanders between 30 to 50. I do not expect much price appreciation and would be very pleased for a return to the mid point in that channel in two or three years. I view Heinz as a solid company likely to pay me a good tax advantage dividend, higher than a money market, and afford me the luxury of waiting until I am able to realize at some point in the future a long term capital gain on the shares. This is also the kind of stock that I want to put in a taxable account, whereas I am more likely to place a bond or a bank Trust Preferred in a retirement account.

Moody's lowered the ratings of Phoenix insurance company.

State Farm, a major distributor of Phoenix's annuity products, suspended the distribution arrangement pending an evaluation. State Farm represented 27% of Phoenix's annuity sales. Phoenix continues to claim it is okay.

This may be the result of State Farm's concern about Phoenix's financial position. The common stock of PNX is hovering around 30 cents which in itself is a powerful statement about the likely survival of PNX.

I do not have a position in the commons stock but still own 100 shares of its senior debt (PFX) after disposing of my position in an IRA. The recent news confirms my decision to unload the position in the IRA. The only decision now is whether to average down on the position still in the taxable account by 50 shares or to try another trade in the IRA with 50 rather than 100 this time to the heightened risk since the last trade. The current yield at around a 3 handle is 50% which indicates a street consensus of an extremely high possibility of a default.

Schapiro says that uptick rule may be reinstated.

The reversal of Chris Cox's abomination, of allowing short sellers to short on downticks, is way overdue.

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. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. 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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