Wednesday, March 4, 2009

Sold GE Capital Bond/Stocks for the Long Run?/End to Irrational Exuberance for Now/CRAMER & Obama/Buy of 50 JWF in IRA

The S & P 500 index finished below 700 for the first time since 1996. 

 There are many financial gurus who discuss the advantages of stocks in a retirement portfolio and holding for the long term.  When I read Jeremy Siegel's  book, "Stocks for the Long Run", several years ago, he made a convincing case for buy and hold, but only on the surface.  Then, I thought about the advice that he was giving for someone nearing retirement or in retirement.  Sure, if you could live long enough to recover from one of the periodic stock market meltdowns, his advice would make sense.  For someone in their 60s, time does not permit the luxury of waiting ten years for a recovery in stock prices to the pre-bear market level, at least when you have to live off your investments.  One thing is certain about bear markets, they will come and only vary by the degree of their nastiness. 

For someone in their twenties or thirties, the best time to start investing would be in a major bear market, like here and now. And, this decline should be teaching the young investor a valuable lesson about buy and hold.   There are periods when buy and hold would make sense and then there are without question periods where it is a guaranteed losing strategy.   Recognition of when these periods come and go will be difficult to ascertain in the early stages, which is one reason why I have attempted to develop tools to assist me in my asset allocation.  The VIX asset allocation tool is just my latest timing indicator for moving money into and out of stocks.  A period of irrational exuberance would itself be a cause to shift funds out of stocks.  This would just be when the normal ranges for traditional valuation criteria have been substantially exceeded by the market averages.  This has occurred two times in my life, once in the late 1960s when I started to invest and in the late 1990s where the lessons learned earlier proved to be invaluable.   Those criteria would include price to book, price to earnings, and price to sales.  Greenspan may have been early with his 1996 speech, but Professor Schiller was a few months late with his book Irrational Exuberance.   The normal valuation criteria had  already been thrown out the window by the time Schiller's book hit the market.  In any event, the end of the era for exuberance about stocks is already upon us. 

The main lesson taught by the last century is that a static asset allocation using traditional theories is not going to work over an entire lifetime, assuming a normal lifespan of seven or eight decades.   Stocks may work for a decade or more than cease to work for a similar or even longer time frame.  

In today's market, there has been a near total breakdown in traditional asset allocation theory, which postulates that the holding of non-correlated asset classes will protect a portfolio from market declines in one or two asset classes.  Virtually all asset classes have been smashed during the past six months so almost all categories of investments used in traditional asset allocation are correlated with one another but only to the downside.  Maybe one asset class goes down 60% and another 40% but that is a distinction without a difference. Even investment grade corporate bonds have suffered meltdowns when treasuries have spiked in price.   Many non-treasury bond funds suffered 25+% losses in 2008.  Stocks fell of course around the world in all sectors and categories.    

When I first read Siegel's book,  I thought that his Siegel's advice depended on the age of the reader.   Keynes said that in the long run we are all dead and that piece of sage advice needs to be taken to heart for us older folks.TIME 100: John Maynard Keynes While I am still young enough to recover from the current meltdown, assuming I do not go all in prematurely,  I can not make the same statement about the next one, and there will be another bear market after this one expires.  One of the statistics that I have always kept in mind is that it took until 1955 to return to the levels before the crash in 1929.  I also lived through the stagflation period of the 1970s which was a fifteen year period of flat returns for the market beginning to end.   When looking at it from a historical perspective, and taking my age into account, Siegel's advice never seemed to be prudent for me.

 I am also startled by the sheer magnitude of companies cutting and eliminating their dividends now, and this will have an impact on my future planning.  I am simply not going to depend on dividends as a reliable source of income in the future.   A few years ago, this line of reasoning about the ebb and flow of the stock market, led me to increase my bond investments.  Actually, increase is not an appropriate word.  I have gone from zero about three years ago to a sizable position now.  Another way to reduce risk is just to eliminate debt which I have done.    The shift to bonds has also caused me to start thinking about how to hedge the bond portfolio from inflation, the staggering of bond maturities, how to weight along the duration curve, priority and types of bonds,  and deferral rights, all for the first time in my life.   I realized early last year that a long term, senior corporate bonds, investment grade quality, maturing in over twenty years, actually had a place in my portfolio, like the ones issued by Verizon and AT & T which were purchased last quarter.  While the long term bonds made inflation and credit risk more acute,  they also provided a fixed income stream for the likely remaining years of my life, similar to an annuity, and some are questioning the viability of some companies that issued annuities.   The life insurance companies have certainly suffered some downgrades by A M Best recently and seem to be scrambling for survival to me.  

Individual bonds do carry a greater default risk than a mutual fund containing a larger diversity of issues.   But unlike the bond mutual fund shares, I can hold an individual bond to maturity and be paid par value.Vanguard − Municipal bonds: Mutual funds vs. individual bond portfolios  Bond vs. Bond Funds | Advantages of BondsMy shares in the Loomis Sayles Retail Bond fund may never return during my lifetime to my original purchase price.   

GE traded below $7 a share yesterday.  Deja vu 1992 all over again. We have already seen how a few individuals in a financial unit can bring down a 200+ billion dollar insurance company.  Why is GE's share price falling into a black hole?  I suspect that it is more than just a concern about the industrial part of the business facing a severe downturn. Instead, the most palpable fear, which may or may not be grounded in reality, is that GE Capital may not only be worthless but may swallow the entire company just like the AIG Financial Products Unit did with AIG.   I have no idea whether or not GE is in any danger.  The recent quotes on credit default insurance suggests that there are problems.  Reuters

A writer at the asked rhetorically whether anyone believes Ken Lewis when he claims Bank of America is fine. I would not believe Ken Lewis if he said he was Ken Lewis.  

 The market may be writing an obituary for Gannett. The stock fell 24% yesterday to $2.22. I sort of hope that Mark Twain's line is appropriate to describe the market's burial of GCI, when he said that the rumors of his death had been greatly exaggerated.

Individual investors are throwing in the towel. TrimTabs estimates that investors pulled 33 billion out of stock funds in February and 231 billion last year.  S  There will be large segments of the population who will just give up on stocks altogether. | The Tennessean

The electric utilities have had several bad days in a row.  As a result of the fall in price, several of them are yielding more than 7% based on yesterday's closing prices, including POM and PGN.   I suspect that it has to do with Obama's cap and trade proposals on emissions,  which was criticized by Duke's president.  Obama has caused carnage in certain sectors of the stock market, most recently in health care, student loan companies and electric utilities.  

Jim Cramer is a Rush Limbaugh want-to-me.  I can not help but think of the Boss Hogg of the GOP and Cramer in the same thought.  Cramer went off on the same rant yesterday, as he did on Monday, blaming Obama's plans for the current market meltdown.  Opinions are a dime a dozen and I am always interested in what stands behind an opinion being voiced with such vociferousness and certainty.  His proof is that the market went down at the same time Obama introduced his budget. So, if two things happen at the same time, then one causes the other in Cramer's worldview or is he just letting his mouth run amok with his ideology.  Now, if I said that the existence of  Bush's tax cuts, and the failure to repeal the same, was the cause of the market's meltdown from 14,000 to 8000 during the waning months of the Bush administration, that might sound absurd  to Cramer or just about anyone.  It certainly sounded ridiculous to me as I wrote it.   The mere fact that two events occur at about the same time does not establish cause and effect.  At the same time that Obama introduced his budget, we had more events occur relating to the meltdown of the world's financial institutions and the deepening of the global recession.  This would include two major events during the past two weeks involving Citigroup and AIG, still in need of bailouts to stay afloat after massive government infusions and assistance.  The treasury secretary did not help matters by failing to give details surrounding a plan to buy toxic assets weighing down the financial institutions, like some ball and chain tied around their ankles in quicksand,  and causing the market to question their solvency.    Why?  He did not have any details yet.  He had not work out the details since he just became Treasury Secretary.  When listening to the Cramer's bombastic bloviations, just think for a minute what has actually happened in the real world.  Think about the failures and near failures of some of the largest financial institutions in world,  including the largest savings and loan in Washington Mutual, the largest insurance company-AIG, several of the largest investment banks including Bear Stearns, Lehman Brothers, & Merrill Lynch, the seizure of Fannie and Freddie that were clearly insolvent, the near failure of Wachovia, the zombie status of Citigroup, and the near zombie status of Bank of America, and then the accelerating worldwide economic downturn. If anyone gives an ounce of credence to Cramer, then they are living in the same universe as him, where  you can create your own reality.  Cramer is not looking at the same world that I see. 

I do believe that the market is signaling that neither the Bush administration throughout 2008, and the Obama administration since his inauguration in January 2009, have come up with an effective solution for the problems in our financial institutions.  Those who would never give the Obama administration a chance, and want him to fail, will criticize everything that is done and will not credit him with any successes that may ensue from plans and programs already adopted, like the stimulus bill, or subsequent plans, including uses of the TARP funds and the new TALF program.  MarketWatch  He is damned by those people no matter what happens. If success does not come this week or later this month, then those individuals who despise Obama will blame him for every actual or perceived adverse development that comes along, including every down day in the market like Cramer is doing now.   I am not talking about individuals who are open minded here,  but individuals whose most dominant personality trait is an overwhelming ideology that colors and distorts all of their perceptions. I call them the True Believers.  All societies have them by the droves. In Afghanistan, for example, they would be called the Taliban. I know that Bush and Paulson failed to deal effectively with the crisis.  I withheld judgment until I could see whether their actions worked or merely delayed the meltdown.   I am going to withhold judgment on Obama's efforts probably for the next six months, when I will allow myself to start formulating a judgment based on the then available evidence.  If I judge him to be unsuccessful, then there is no ideology preventing me from coming to that conclusion, and I will just say so.   

The tax increases proposed in the budget, which of course is not a law, take effect in fiscal 2011, which I believe starts in September 2010. Political Punch: Obama's Budget: Almost $1 Trillion in New Taxes Over Next 10 yrs, Starting 2011  Cramer would have a lot of appeal to those who wrote comments to the ABC story linked above.  He must be channeling their anger and kowtowing to their prejudices. Those comments are just fascinating to me. See also,

 I sold yesterday a GE Capital note near par value, at 98, which matures in almost 3 years.   This was five bonds. I may put 1/5th of the proceeds in a longer dated GE bond that almost yields 10% now.    I have another partial Roth conversion that will probably take place today.

I am going to ease my restrictions in the retirement accounts to allow for the purchase of junior investment grade bonds and senior junk bonds, primarily to stay busy and secondarily to try and take advantage of some opportunities-hopefully they turn out to be opportunities.  I am going to continue excluding equity preferred stocks and common stocks, but will allow some purchases of debt preferred or Trust Preferred in my retirement accounts only.   I added in my retirement account yesterday 50 shares of JWF, a Trust Preferred issue of Wells Fargo at 10.51.    
JWF is a junior debt security which is sometimes called a Trust Preferred.  It would be senior in priority to equity preferred and to common stock.  While I am very reluctant to add bank debt preferred issues, I am more comfortable buying those issued by Wells Fargo and J P Morgan, at least for now, than from Citigroup or Bank of America.  I will not touch a Citi Trust Preferred under any circumstances.  I may add a very small position in a BAC junior debt issue only when I can secure a 25% yield which almost came to pass yesterday.   I recently sold a significant position in BAC debt maturing in a few years. 

JWF is cumulative with the typical deferral provisions found in many bank Trust Preferred prospectuses. The link to the prospectus is as follows:
The coupon is 5.625% with a $25 par value.  Maturity is okay for a TP which is on 4/8/2034.  Interest is paid quarterly with the next ex date in a few days. The yield at my price is about 13.3%. JWF Stock Quote - Wells Fargo Cap Ix Stock Quote - JWF Quote - JWF Stock Price   Any purchaser of a bank preferred issue now has to be aware of what happens, in the event of a FDIC seizure, to the value of even junior debt securities.  If that happened to Wells Fargo, it would most likely mean a zero value for JWF.  With risk comes opportunity and the only question is whether the risk and opportunity are in a reasonable relation to one another.  Based on what I know at this moment in time, I believe that Wells will survive which presents an opportunity to buy its debt at a deep discount.  Credit risk certainly exists for WFC but it is not acute. I bought the security in a retirement account in case interest is deferred.  A deferred payment earns interest at the coupon amount.   If Wells survives until 2034 and pays par value, this will produce a gain in excess of 100% or about 5.5% annually based on my cost on top of the 13.3% current yield.    

I mentioned in an earlier post defending my sale of PFX in an IRA that I manage my retirement accounts much tighter than my taxable accounts.  DEFENSE OF PFX SALE IN IRA 
Most likely, I will never need any of the funds in those retirement accounts.  My concern is more that any loss incurred in a retirement account is just gone.  A loss in a taxable account still has value, in that it can offset gains and reduce my tax bill.  I will take speculative positions in the retirement account but I will be very inclined to take profits quickly in speculative securities.

Three years ago I would not have considered a junior bond issued by Wells Fargo to be speculative.  Unfortunately, it is now.  I also know from experience that I am not going to earn 13% year after year for the next 25 years in the stock market.  In fact, I would have to say that is an impossibility.  It is not however impossible for Wells Fargo to survive until 2034 in which case my return would be 18% annually for 25 years.  So it does not matter if this security floats down in price or up in price.  It only matters to me that WFC survives.  If it survives and avoids a FDIC seizure, then I could even tolerate a deferral since ultimately I would still be paid with interest on the deferred payments and the deferrals can not extend beyond the maturity date.  

I do not think Wells Fargo has cut its common dividend yet.  I suspect that it will which is another reason to go with the cumulative preferred issues.  U.S. Bancorp  reduced its dividend this morning by 88% to 5 cents a share.   Reuters Banks will never be viewed by me as a reliable source of common stock dividends-three strikes and your out.  Financials: 3 Strikes and Your Out/CISCO/Regulations and Conservatism

GP Strategies, one of my 50 share small cap positions, released a disappointing report this morning.  Yahoo! Finance
Still, when you look at the share price and compare it with the earnings and revenues, it is still a hold for me.  The company took a goodwill impairment charge connected with its Sandy Training & Marketing segment.  The main concern with this company is the part of its business with GM.  I will look later at the 10-q to see where its receivables stand with GM. 


  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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