Thursday, April 2, 2009

FASB Gives Leeway/Buy of 50 UCBH: Lottery Ticket/Winstream/Low Dividend Yields=Low Earnings Growth/Dividends=Most of Stocks Historical Returns

Robert Arnott was reported to have made the claim that $100 invested in the stock market in 1800 would have been worth 500 million in 2004 and 25 million adjusted for inflation.  But, if dividends were not reinvested, the value would fall to just $1,500.  Hussman Funds Dividends provide the bulk of the returns from stocks over the long term. - Magazine Article   Arnott presented a paper in April 2003, titled "Dividends and the Three Dwarfs", that found that dividends provided fully 5% of the total 7.9% annualized return from equities over a two hundred year period.  Inflation accounted for 1.4%.  Real dividend growth accounted for .8%.  And, to the surprise of many, rising valuations was the smallest dwarf with just a .6% contribution.  This is summarized at page 36 of Swenson's book that I am reading which may be available with this link. Unconventional Success: A ... - Google Book Search

Arnott has further pointed out that a period of low dividend yields, as now, preceded periods of slow earnings growth. Robert Arnott & Clifford Asness  In this type of scenario, where the dividend started at a low point and then there were a record number of dividend cuts, I would generally expect bonds to outperform stocks, provided inflation does not become a problem.  This is confirmed by Arnott's research into historical results. Stocks Vs. Bonds, Part 2: Putting Your Money to Work | On the Level | Financial Articles & Investing News |  This last link was an article written in 2000, and it was prescient. It is becoming increasingly difficult to find stocks that have somewhat decent and reliable dividends.  This is why I have recently gravitated toward consumer staple and utility stocks, both electric and phone.   RB realized early last month that certain stocks were actually increasing dividends and selling at depressed prices which juiced their dividend yield.  When one accepts the importance of dividends as the key component of stocks' total return, then it was easy to go with the companies that had maintained or increased their dividends during the current meltdown, but whose prices had sunk along with the overall market.    

S & P has been keeping records of dividend cuts by S & P 500 companies since 1955.  The first quarter of 2009 was the worst on record for shareholders having their dividends cuts.  MarketWatch
There were 61 dividend cuts in the 1st quarter denying shareholders a record 42 billion.   

One purchase which I did not previously mention was a buy of Winstream (WIN) shares at $6.36 on 3/3.  This was solely for the dividend.  Winstream is primarily a rural telephone company.  I would not view its dividend as reliable as those of AT & T and Verizon.   I would have to say it is more reliable than a General Electric or a Bank of America since WIN has not cut it yet.  At my purchase price the yield was  15.7% and it just went ex dividend. WIN Stock Quote - Windstream Corp Stock Quote - WIN Quote - WIN Stock Price
The Barclay's report from 3/4 has WIN rated overweight with a 10 target. S & P gives it 5 stars with a $11 target.  Morningstar has it rated 4 stars and VL has it 3/3.  The dividend appears to me to be covered by current cash flow, though it exceeds net income. Free cash flow was around $1.75 in 2008. S & P estimates a free cash flow to dividend payout of 60% in 2009.  That was an important consideration for me when I made my purchase.  The company may be a beneficiary of some of the 7 billion in stimulus money intended to extend broadband internet access.  I do not see earnings growth in the next couple of years, nor would I expect a dividend raise in the foreseeable future. Of the analysts' reports that I read, none of them expect a dividend cut either.

I am within about 6 grand of completing the redeployment of capital raised from selling short term bonds and the ETF TFI into stocks.   LB is always a skeptic, viewing just about everything with a jaundiced eye, and may start to retrench soon with his lost opportunity trading strategy in a secular bear market.   RB wanted to go all in 4 weeks ago and LB told it to shut up, LB has to think some more.

FASB did allow banks to use some leeway in valuing hard to price assets by allowing to mark based on an orderly sale rather than a distressed one. FASB Issues Proposals to Improve Guidance on Fair Value Measurements and ImpairmentsFASB: Summary of Statement 157 Yahoo! Finance MarketWatch
DKF, the TC containing the Goodrich senior bond, went ex interest on 3/30 and will pay it on 4/15. DKF Stock Quote - Saturns Goodrich Corp Ser 20 Stock Quote - DKF Quote - DKF Stock Price This was a recent add in my bond portfolio in an IRA on 3/12 at 20.  Buys of DKF, AA and a Lottery Ticket in 50 shares of RF/Heinz & its Boston Market Line/ 
If I could buy another senior bond of an equal or better quality that would generate a current yield of 10% which I do not already own in a full position, I would consider selling DKF for the profit on the shares and one 6 month interest payment.  I do not have that alternative right now. 

The TIP went ex interest yesterday for the first time in several months.  It sort of goes into hibernation during the winter months and then resumes its monthly payments around spring time. iShares Barclays TIPS Bond Fund (TIP): Distribution History
LQD, another ETF bond holding, also went ex interest and it pays every month.  iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD): Distribution History
The other two bond ETFs that I own, WIP and BWX, also go ex interest on the first day of each month.  I sold out of my position in TFI last month with a good gain, and eliminated BND and BSV last year. 

I keep harping on stock dividends because I am not willing to postulate that the future will be  materially different from the past in the relationship of dividends to total stock returns. The years may vary, here and there, but the big picture is still what matters.    The dividend return in the past has been the main component of stock returns.  Low dividends have equated in the past with slow earnings growth.  American companies have slashed their dividends over the past nine months and they were already low.  The only reason that they are not absurdly low now is that the currently depressed prices of stocks makes the current yield look better, like putting makeup on a pig or Rush Limbaugh in a thong.   As the share price goes down the yield goes up.   What is the S & P 500 index dividend yield going to look like with another 20% increase to over 950?

Yesterday the Fed bought 6 billion of 3 to 4 year treasuries.  -  On Thursday the Fed is targeting maturities in the 9/2013 to 2/2016 range.  Next Monday the target maturities are longer, 8/2019 to 2/2026. 

Joseph Stiglitz, winner of a nobel prize in economics, which must mean that he is pretty smart, is hyper critical of Obama's private/public partnership to buy the banks' toxic assets, and he makes some good points.   Seeking Alpha

Ken Lewis says that it will take some time for BAC to pay the government back. He said it will take several quarters before BAC has an opportunity to pay some of it back. -
This sounds to be me significantly more pessimistic and cautious about the future than his recent interview with the L.A. Times - Los Angeles Times

This article from the Chief Economist of MKM Partners, Michael Darda, suggests that housing prices may have bottomed.  The author makes some of the same points made by me in prior posts, the steep declines in housing prices along with the fall in mortgage rates have brought house prices back in line to incomes.  The soon to be former Merrill Lynch economist, David Rosenberg, believes that housing will continue its decline relying on the same Case-Schiller data as MKM Partners.   Tech Ticker, Yahoo! Finance
Mr. Rosenberg believes that housing prices will continue to fall 3% per quarter until the inventory overhang falls below an eight months' supply.  He also relies on the deflationary impact of 10% unemployment and a 10% savings rate to justify his prediction that the current rally will falter and the S & P 500 will later sink to new lows, meaning for this economist a 475 to 650 range "for an extended period of time".   As you would expect with this dismal view, he expects the 10 year treasury to hit or break below 2%.  My money is with the view of MKM Partners which is more consistent with the views that I have expressed in prior posts about the alignment of housing prices with income levels and lower mortgage rates.  But I am always mindful of the contrary view because I am contrary by nature. 

Factory orders rose in March for the first time in seven months.  - MarketWatch

For the 12 months in March conservative allocation funds, which are weighted in bonds,  fell 19% with a 53% spread between the best and worst.  Part of the problem has to do with the failures of many bond managers to come close to returns equal to the total bond market index.
So, in essence, investors are paying a lot more to managers to produce significantly poorer returns than a passive index.  

LB reviewed the FASB statement.  Remembering that he has never applied a FASB statement to anything, and has never taken a course in accounting, LB did cut RB loose to buy some bank lottery tickets but limited the foray to extremely small amounts.   The first one bought today is 50 shares of UCBH Holdings (UCBH) at $1.64.  This one was a profitable trade at much higher prices a couple of years ago.  LB allowed it since it was financed with the house's money.  I do not believe the bank will return to profitability this year.  It recently announced a revision to its released 4th quarter earnings report to increase its loan losses, alway a very bad thing.   Yahoo! Finance  Maybe I should call that an extremely bad thing.  Whatever, the bank is heavily exposed to commercial real estate in California, another bad thing.  The bright side is that California has a tendency to spiral down and then spiral up.  This bank serves the Chinese community, and it has offices in Hong Kong & China. UCBH: Profile for UCBH Holdings, Inc. - Yahoo! Finance S & P has it rated hold with a $2 target.   Prior to the release of UCBH's March revision to its 4th quarter earnings, Barclays had an equal weight and a $6 target. When buying this kind of lottery ticket, where the expenditure is less than $100 and the outlook is far from positive, I recognize that the holding period may need to go well into 2010 before a decision can be made about what to do with it.   


  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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