1. More on CIT's Problems: The saying-in for a dime, in for a dollar (or in for a penny, in for a pound) is apropos of the game of chicken CIT is playing with the government now. The U.S. has already sunk 2.3 billion into this troubled lender, by buying preferred stock a few months ago. Maybe the FEDs need to be a little less loosey goosey with taxpayer money. ("taxpayer money" is a euphemism in this blog, it refers to money borrowed from the Chinese that politicians have somehow confused with taxpayer money) Now, the FDIC is reluctant to include CIT in the program which would allow CIT to sell debt with government guarantees reportedly due to concerns about the quality of CIT's loans. (the so called TLGP program)
The WSJ reported in its weekend edition that CIT had hired bankruptcy counsel, and its ability to pay off maturing debt is certainly in question without access to that federal guarantee. If a bankruptcy petition is filed, the government most likely will lose most if not all of its preferred stock investment as CIT's senior and secured debt holders salvage whatever they can to recover the 68 billion in loans outstanding. This can not be lost on the federal government, bankruptcy is not a good option when the taxpayers have already sunk 2.3 billion into CIT to buy junior securities whose value would be decimated by such a filing. Personally, I do not not care much about what happens to my 2 bonds. And maybe I will not be repaid in full when they come due this December and next March. (item # 5: /CIT Bonds/ ) CIT probably deserves to fail, and its leadership sacked including the former financial wizard from Merrill Lynch, Jeffrey Peek, who became CEO in 2003 and then led CIT into disastrous forays into subprime lending and student loans. He is still Chairman and CEO, so once again failure on a colossal scale is rewarded rather than punished. But it might may more sense now, with 2.3 billion already sunk into CIT, to try and salvage it by guaranteeing some debt and working out some asset sales.
When the music stops, and people just lose confidence, the game ends. Just as it ended for Lehman and Bear Stearnes. Maybe Uncle Sam needs to pay attention, since some now believe, not entirely without reason, that floating a couple trillion in new debt every year is nothing more than a giant ponzi scheme and some day the music may stop for more than just an ineptly managed financial institution.
The latest quarterly report stated that CIT would need 10 billion in financing for the year ending 3/2010 (page 7: www.sec.gov)
Of that amount 2.9 billion was repaid in April 2009 on its bank borrowings (p. 60).
CIT listed about 3.13 billion in equity preferred and 2.098 billion in junior debt. That debt is junior to my 2 bonds. Secured borrowings are listed at 18.561 billion. A lot of the senior debt, which is what I own, has to be constantly refinanced, with about 33.621 billion in senior debt as of 3/31/09. Total loans from CIT to its customers, net of allowance for loan losses is stated to be 49.542 billion. Operating lease equipment is stated at 13.175 billion. So there is some there there. The next payment on the bank lines of credit that CIT had to draw down is due 4/13/2010 at 2.1 billion.
2. Did Jeremy Siegel Cherry Pick 19th Century Stock Data to Bolster His Stocks for the Long Run Thesis?: I am critical of Jeremy Siegel's thesis of stocks for the long run, particularly as it pertains to individuals who often face significant situational risks. Based on just my experience, there have been prolonged periods where stocks have failed as an asset class. Those periods include the current long term secular bear market, where the averages have returned to levels from 12 years ago, and the period encompassing my first experience as a Stock Jock from the late 1960s to 1982.
Louise Yamada has pointed out that long term secular bear markets can take 15 years to work out the problems which brought them into being, and 15 years is an awful long period for an individual. Louise Yamada/ When you are living it, day by day, minute by minute, it seems like an eternity. I also thought that anyone relying on data from the 19th century to prove a point was stretching it, and I would have disregarded that entire century when attempting to assess the long term benefits of stocks compared to bonds. I did not until this weekend, however, question Siegel's data from the 19th Century. Facts are facts, or are they?
There was a serious charge in the WSJ on Saturday, in a column written by Jason Zweig, that basically accuses Siegel of manipulating the information from the 19th Century to support his thesis, a cardinal sin from my perspective. I really do not care for anyone manipulating information to prove or to justify a belief. After pointing out how Siegel cherry picked the data, by ignoring companies that failed, whose prices were too "erratic" or not typical, Zweig concludes that another emperor of the late bull market is shown to be wearing no clothes. If what Zweig is saying is accurate, then Siegel is discredited in my opinion. But I have not bought into his thesis anyway.
Zweig points out that long term treasury bonds have now outperform stocks for the last 5, 10, 15, 20 and 25 years. That is something that I already know. This may continue for a few more months or years. However, given the low yields now of the 20 or 30 year treasury, far lower than the yields from the early 1980s, it is difficult to foresee that one of those bonds bought now will outperform an index fund based on the total U.S. stock market over the next ten years. So, as I have explained in more depth in prior postsTo Professor Siegel: Time for a Re-Think, I would go with stocks over bonds over the next ten years, but I would remain flexible. If stocks doubled over the next four or six years, and the long bond went to a 8% yield, then I would need to adjust that opinion.
Barry Ritholz wrote a column summarizing Zweig's column for those who would like to read more about the data problems in Siegel's analysis and who are not subscribers to the WSJ.
Maybe we just need to look at data starting after WWI, around 1920, and then try to draw conclusions from all the data, not just the data which proves a belief. So, compare the treasury bond and stocks for thirty year rolling periods starting in 1920 rather than 1802 or whatever.
3. Andrew Bary's Column on Berkshire Hathaway: Andrew Bary wrote a positive column in this week's Barrons about Berkshire's stock. I did not need the column to entice me to buy shares in the baby Berkshire shares, worth 1/30th of the A shares, having recently acquired 2 shares on my way to my normal 5 share holding. I was going to buy share # 3 when the price fell below $2700. BRK-b fell $25.79 last Friday to close at $2745.
I am aware that the current price is just 1.2 times book value which is historically low for BRK. I would point out, however, that the book value fell 6% last quarter and 9.6% last year. (see page 4: berkshirehathaway.com/2008ar.pdf)
I am comfortable with the most of the operating companies owned by Berkshire and all of the major stock investments. I am not concerned that some of the investments, like American Express or Conoco, have taken hits recently. The opportunistic investments in Goldman Sachs and General Electric preferred shares yielding 10%, with stock warrants thrown into the mix, demonstrated that Berkshire has the financial heft to take advantage of the current market turmoil. While the GE stock warrant kicker may not be worth much, at $22.50 a share expiring in 2013 (see p.7 /www.berkshirehathaway.com/qtrly/1stqtr09.pdf), the GS warrants are probably worth around one billion at Goldman's current price. GEICO, which may be worth 15 billion, gathered almost 500,000 new customers in the first 4 months of 2009.
4. How Old is Senator Ensign? After hearing that Senator John Ensign's parents gave as a "gift" 96 grand to his paramour's family, subsequent to learning of the affair, not as hush money or anything unseemly of course, I had to ask myself whether their boy Johnny had grown up yet, or was he more like an immature 16 year old as opposed to one of the leading lights of the GOP at age 51. Then you have the story of Senator Tom Coburn making him write a letter ending the extra marital relationship, having Ensign delivered to a FedEx office to mail it soon after writing it, and then Ensign goes to see her again in a secret Vegas rendezvous. And, this was one of the GOP's leaders, possibly a future GOP Presidential candidate? Well he does sort of look strong-willed and presidential on TV, and maybe that is all that is important in America today anyway.
5. U.S. Treasury Money Funds: For a money market fund investing solely in U.S. treasuries the current yields are either zero or close to zero. The Vanguard fund has a current seven day yield of .04% with 6.4 billion in assets. The Admiral Vanguard Treasury, with 20.8 billion, has a .11% yield. Barron's Online - Weekly Mutual Funds - Taxable Money Market Funds - V I ran the calculation on how long it will take for money to double at .04%, before taxes and inflation, and it is a long time, deep into the next century. The T. Rowe Price U.S. Treasury money market fund is paying "0". Barron's Online - Weekly Mutual Funds - Taxable Money Market Funds - T
I did not need to run a calculation on how long it will take a zero interest rate to double. I may be a little slower than I use to be but I still have a few functioning brain cells. Fidelity is in between T. Rowe and Vanguard, leaning more toward T. Rowe's yield, paying out .1%. Barron's Online - Weekly Mutual Funds - Taxable Money Market Funds - F And, there will be no shortage of "investors" buying T Bills on Monday at rates barely above zero. Bloomberg.com: Government Bonds
Maybe those investors are taking Will Rogers adage, the one about being more concerned about the return of his money rather than the return on his money, a little too far. When you see "government" in the name of the money fund, then you are no longer dealing with a pure treasury security fund. Those funds may have a lot of what passes for government debt but is not really, such as securities issued by GSEs.
