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 readers of these posts 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. It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments NOT A RESEARCH SERVICE/Add of PWE Last Week 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. Opinions are subject to change and they certainly evolve over time as information is assessed and analyzed for compatibility with prior opinions, the only process for a serious investor, and a topic of frequent discussion in this post. Everyone is responsible for their own investment decisions, and no one should ever make any decision unless they are willing to accept full personal responsibility for it.
Saturday, June 27, 2009
IS GDP About to Accelerate in the 3rd and 4th Quarters?/Lantus & Sanofi: Cancer Risk/SEC's Incompetence/OSM/ Added RJA
1. Investment Grade Bond Yields and Dividend Yields from Some Issuer: I mentioned in a post from a few days ago that the rally in investment grade corporate bonds over the past several weeks had reduced the bond yields to below the common stock dividend yield for both AT & T and Verizon, except for the longest dated debt where the yields were fairly close. (item # 2:Bought PFK in IRA/Bank of America/ Verizon & AT & T/Jim Rogers/Added 30 GE with cash flow) Michael Santoli made the same point in his column this week in Barron's about AT & T. Barrons.com He also mentioned that Merck recently issued some ten years bonds to yield a tad over 5% while its common stock is yielding more. For high income U.S. taxpayers, the dividend is taxed as a qualified dividend, whereas the bond's interest will be taxed at the highest marginal tax rate (or that is how I would view any investment income which is not taxed at the 15% capped rate).
One reason for this phenomenon is the widespread eliminations or reductions in common share dividends by many blue chip companies, including virtually all of the banks and other financial institutions and other large companies most notably General Electric. So, it is not surprising that investors have lost confidence in the safety of a dividend income stream. With a senior bond, reducing, deferring or eliminating the interest payments are not options available to the issuer outside of a bankruptcy court. When you hear the word deferral mentioned in connection with a bond, then you know that it is a junior bond, and those instruments generally allow the issuer to defer payments as long as no payments are made to holders of more junior securities such as common and equity preferred stock. While that concern is justified for those companies that have cut shareholder payments while keeping management pay at the same levels, or even providing more compensation to reward failures, I would at least question that assumption as applied to the companies that have not only maintained their dividends during this crisis but also raised them. Maybe those companies deserve the benefit of the doubt now.
I do not have a position in Merck. But I would not buy one of its 10 year bond yielding 5%. If I had to buy that bond or the common stock, I would pick the stock.
2. J. P. Morgan Estimates 3rd Quarter GDP at 2.5%: I also noticed in Barron's that J P Morgan's chief economist raised his forecast for 3rd Quarter GDP to 2.5% from 1%. Barrons.com This economist predicts a powerful turn in the industrial cycle starting in that quarter. The firm's market strategist urges purchase of cyclical stocks during this sideways to down spell. Barclays Capital also raised its forecast for GDP in the 3rd quarter to 2.5%, and further raised its 4th quarter estimate to 3.5% from 3%. Forbes.com These are not 2010 estimates, but for 2009. Maybe that needs to sink in some.
I have mentioned that the most likely surprise about the economy is not a further slide into the abyss but the strength and timing of the recovery which could catch the Fed flat footed with way too much monetary stimulus. Will this happen? Who knows about the future, but a 2.5% GDP growth in the 3rd quarter followed by 3.5% in the 4th would be consistent with the thesis of a more rapid recovery than currently anticipated by the Fed and investors in general.
3. Nocera's Column about the SEC Enforcement Division: Incompetence and abusive use of power can be a dangerous combination. It is already well documented that the SEC ignored repeatedly warnings about Bernie Madoff, a colossal failure by the enforcement division at the SEC that cost Madoff's innocent victims billions of dollars. It was not only a refusal to listen to the warnings given by Markopolos. SEC EnforcementWeekend Reading Recommendations on Financial articles The SEC also ignored much earlier warnings. NYTimes And, then you have the situation where the person who raises a red flag about a company is given the third decree by a SEC lawyer who later goes to work for the firm that is the subject of the inquiry. NYTimes And then you have the situation of what is clearly an abuse of governmental power by the SEC, as described in Nocera's column , where the SEC uses the brunt power of the government to ruin individuals where the SEC enforcement division did not even have a decent circumstantial case against them. NYTimes.com And notwithstanding all of the examples of incompetence and abuses, the SEC enforcement chief, Linda Thomsen, goes before Congress and touts how effective her division has been. Banks: Forget About Long Term Holds/Simulus as Transformational/More Discussion on Black Swan and Taleb's book/Bankruptcy of Ideas in the GOP
4. Sanofi and Lantus: Analysts were falling all over themselves late last week to downgrade Sanofi based on a yet to be published study that allegedly connected use of the drug Lantus with increased cancer risk. I am always cautious around people prone to hyper-ventilating. Since I own 50 shares of SNY, I looked at the issue more over the weekend, and I would admit an inability to see any conclusive proof of such a link. Health The studies are summarized at the Diabetologia Journal web site: Diabetologia homepage
Part of the problem in drawing any firm conclusion has to do with ruling out other factors at work. Those patients taking Lantus were generally older, overweight, with high blood pressure. WSJ.com But there is enough disclosed in the studies to cause concern about this drug's long term safety. The German study did show a statistically significant link between use of Lantus and increased cancer risk.
5. Governor Sanford: Hypocrisy is common among those who take on the mantle of preacher politicians. At least the Democrat philanderers are less likely to give us sermons. But politicians are salesman and many are inclined to accept their sales pitches without nary a question. I found it interesting that Sanford's wife found out above his affair with the woman from Argentina (Maria Chapur) several months ago. Jenny Sanford apparently told him to end it.Yah And then he goes to see his mistress anyway with some cover story about going a camping trip NYTimes.com
The largest S.C. newspaper knew about the story last December and did nothing. csmonitor.com
It is interesting to me that the politician detested by the "social conservatives" is the Beanpole, who is by all accounts a faithful husband, much in love with his wife, and a good parent for his two children. So walking the walk, as opposed to just talking the talk, is not good enough for the pillars of virtue. A Newt Gingrich, who was castigating Clinton for the Monica Lewinsky matter, is held up as a beacon by those self-proclaimed "social conservatives" even though he was cheating on his own wife at the time he was lambasting Bill. FOX Governor Sanford and Senator Ensign called on Clinton to resign after his affair became public. Los Angeles Times Having said all of that, it is hard to get the imagined picture of Bill and Monica together in the Oval Office out of my head, possibly I should not have read the relevant passages from the Starr Report. The Starr Report
6. Added 100 RJA: I mentioned in a post from yesterday about Jim Rogers recommending exposure to agriculture. Bought 100 PFK/Hertz/Sallie Mae Upgrade/Sanofi-Lantus Diabetes Drug/Rogers-Agriculture/ I already own 300 RJI and 200 RJZ, and I added 100 RJA at $7.35 just to give more weight to agriculture than I have already in RJI. This is a link to the web sponsor's page: ELEMENTS ETN Products
7. OSM a Double in the Price of the Shares Alone in Less than 8 Years, Plus Monthly Interest Payments: Assuming SLM survives to pay the $25 par value of its exchange traded bond, OSM, in March 2017, the investor purchasing OSM now at $12.5 would double their money in less than eight years just on the shares. If I bought a bond a par value now, and wanted to know how much interest would I need to double my investment in 8 years, before tax, the answer is 9.05% (use the second calculator: Compound Interest)
Maybe I am missing something. Maybe I am just an old fogey. But a 9% annualized return looks good to me. And, this bond pays monthly interest. While it is impossible to predict inflation, and the actual numbers over the next eight years will probably be all over the place, I assumed a 2.5% average rate which would give me an annualized average return of over 9% from the interest payments based on a purchase of OSM at less than $12.(item # 3:Late Afternoon Buys and Sells 6 9 2009 Investment Grade Corporate Bond Spreads/ CPI FLOATER: OSMCPI FLoaters PFK AND OSM/ Warnings by Chip Companies/FDXSo, I am curious, why are people scoffing at a potential 18% or so annualized return for the next eight years? I own 200 shares of OSM.
OSM closed at $12.4 last Friday. OSM: Summary for SLM CPI LKD NT
I understand the doubts about SLM, and have shared many of them myself. There are certainly risks to the main payday for owning this security, which is being paid par value in March 2017. But a number of analysts are starting to become comfortable with the firm's potential even if the government ceases to support its student loans. And a lot of what they are saying makes sense to me. Bought 100 PFK/Hertz/Sallie Mae Upgrade/Sanofi-Lantus Diabetes Drug/Rogers-Agriculture/
I may add another 50 shares to my position, probably in the ROTH.