Friday, March 13, 2009

Buy of UL/GRT/China Lectures U.S./Return of Capital Adjustments & Long Term Capital Gains/FASB/Google & Skype/

The Chinese Premier is expressing concern that the U.S. responses to the current crisis will damage China's huge holdings of U.S. treasuries.  NYT

When I read his comments, I thought of a father lecturing his profligate child about being responsible with their money. And, I did not feel that his comments were out of line. 

Effective after the market closes for today, the left brain informed the right brain that any further efforts to buy stocks outside of the Roth in violation of the trading rules will me met with a fork delivered to the hand typing a buy order. The right brain has no absolutely no frame of reference for understanding either rules or forks,  and responded to the warning by buying shares in Unilever (UL) at $18.22 in a taxable account. I generally like to put dividend paying foreign stocks in a capital account since that permits recovery of income taxes deducted from each payment. UL has a high dividend yield of over 6% at its current price. It makes no difference to me anymore whether I buy UN or UL after the shareholders voted in 2006 for a 1 to 1 equivalence in the two share classes. 
Glimcher (GRT) did declare it regular dividends on its cumulative preferred stocks, GRTPRF and GRTPRG. I own both of them, with GRTPRF being the last purchase at $2.9. These are both viewed as highly speculative positions. At the current dividend yield, however, it will not take too many quarterly payments before I recoup my investment at $2.9 per share. GRTPRF: A WALK ON THE WILD SIDE/ KTN add Glimcher also reduced its common dividend to 10 cents per share. I also recently bought a lottery ticket in the common by buying 50 shares at a buck and change.    

This is the AP synopsis of Jon Stewart's interview with Cramer.USATODAY

The following discussion will be a little nerdy. One of my chores during the next few weeks will be too make adjustment to my tax cost basis for securities that paid dividends to the extent such payments constitute a return of capital. On the bright side, the part of a dividend classified as a return of capital is not treated as taxable income in the year received which is good. The downside is the cost basis has to be reduced by the amount of the dividend so classified.

Normally, making notes and keeping record of these reductions might take thirty minutes. For my 2008 tax year, however, it is going to take at least three times as long. There was just a boatload of dividends that have been classified as returns of capital from last year. Almost all of them are from closed end funds and REITS that paid out more than they earned in dividends, stock sales and interest for the funds or from operations for the REITs.  This is what happens in a bad year.

On the bright side, it is possible to turn an ordinary dividend into a long term capital gain taxed at a lower rate as the end result of this process by simply holding the security with the adjusted cost basis until it can be sold for a long term capital gain. The return of capital amount is then taxed upon such sale but at a lower rate. This is not intended to cover all of the angles but more can be found at these sites:

When I start seeing a return of capital distribution, I am not surprised by a dividend reduction. One of the closed end funds that I own, EBI, just reduced its monthly distribution to 8.5 cents from 14 cents. This is a balanced fund investing in international stocks and bonds. So while I am not happy about the dividend reduction, I understand why. 

While I almost up to a 100 shares of Alcoa after yesterday's purchase, I would add that I do not expect Alcoa to maintain its dividend for the reasons discussed in this article.

GE had some company yesterday. Fitch downgraded Berkshire Hathaway's senior debt from AAA to AA+ MarketWatch

As mentioned yesterday, Ken Lewis said that BAC could make 50 billion in 2009 before taxes, credit losses and write-downs. USATODAY

He also apparently said the crisis is far from over. New Mexico Business Weekly:

Dick Parsons, Citigroup's Chairman, said that Citi will not need any more government money.

I would certainly hope so.  Citigroup needs to grow up and  be weaned from mama. 

GM said it will not need 2 billion to make it through March.

Google is preparing to offer a service similar to Skype

The story in the WSJ about FASB revising its mark to market rules does not appear as favorable to the banks as the stories that appeared yesterday which helped to ignite the rally.

ING Bank sold 2 billion in five year notes. The Dutch government is giving a guarantee on the notes. Reuters

One small issue that I face frequently is what to do with a security that I just bought which makes a move like JWF has done since the last purchase at 9 and change on 3/9. Buys of JWF KSA DIS and NYX/SOLD Entire Position in TFI/ Just a Day of Ignoring My Own Rules I reduced my risk in the position by selling half of it after it made a good move and prior to the ex dividend date which occurred today. SOLD 1/2 JWF ON SPIKE/ Buy of 50 NADX at $1.27 

I could have sold it at over 15 this morning and elected not to do it. Generally, I would probably harvest a move from 9 to 15 in less than a week, with a dividend in between. But there is also a strong argument for keeping a security that would pay me a 15% interest rate annually in quarterly installments for the next 25 years plus another 7% annually at maturity assuming par value is paid in 2034 (all figures based on my cost at 9 and change). Since I have already harvested some gains in it, and my exposure to Wells Fargo is limited solely to a small amount of junior bonds (50 JWF and 100 KTV), I decided to hang onto JWF.  

Another Trust Preferred recently added, MJH, a bond from BAC, requires a different analysis. I already have exposure to its common stock, another junior bond (5 bonds) and a non-cumulative floating rate preferred, BACPRE. That dollar exposure -in and of itself -may cause me to jettison MJH at some point soon, or make an adjustment to another part of the overall exposure to BAC. I have to give consideration to my total exposure, bonds and all forms of stock, to a particular company, particularly when the company is a bank. MJH just went ex dividend and rose almost 25% in price even after going ex. I am not going to sell it today since my yield on that one is really high and just too good to give up even at the current price of 10 and change. Buy of 50 MJH at $7.51/ Pop in My Animal Spirits Balloon/Japan/ Zulauf/CNBC/Meet the Press

What I might do is what for an opportunity to unload all or part of my larger short term BAC bond position. I did manage to unload another 5 bonds at near par but the other short bonds that I  held have since fallen well under par. Those will not be sold anywhere near their current distressed price given the short maturity and Ken Lewis' upbeat comments this week which give me a measure of comfort. 

One thing that has happened as a result of my recent experiences with bank Trust Preferred stocks is that my hostility toward them has eased somewhat, so much so that I now have a stable of them that I am actively monitoring for potential purchases. I would have to say that some of my largest gains this year have come in that category of investments. 
  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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