Monday, December 12, 2011

Sold 100 IFO at $11.22/GE Dividend Hike/China Fund (CHN)/FNFG-Destruction of Shareholder Value/Bought 50 CBLPRD at 23/

Virtually all of 27 European leaders agreed to negotiate a new agreement that would have stricter budget and debt rules for the eurozone countries. The sanctions for non-compliance with budget rules would be semi-automatic. Once the European Commission finds that a country has violated the budget rules, the offending nation would have to secure a weighted majority of nations to prevent sanctions from being enforced. There would be some kind of adoption of balanced budget rules in each nation's laws. The changes will be in the form of inter-governmental agreements that will take months to work out and to approve. I would simply refer to the forgoing as a non-binding agreement to work toward a binding agreement. The muted reaction to by the market to this agreement suggests that many view it as insufficient to deal with the problems.  I suspect that no one will really knows the last act in this ongoing drama. It does appear that the European budgetary problems are about to made worse by a recession.

Moody's downgraded the debt of Societe Generale, BNP Paribas and Credit Agricole last Friday.

A successful investor will always search for accurate and material information. Any piece of material information believed to be true has to be challenged for accuracy before acting upon it.  It can be extremely difficult to make good decisions even with accurate information since there are so many variables that are unknown, unknowable or at best estimates. Anyone who routinely makes investment decisions based on inaccurate information is doing nothing more than rolling the dice. I am never surprised about the sheer volume of inaccurate information possessed by individual investors who are absolutely certain of its accuracy. 

Jim Cramer said that First Niagara overreached with its acquisitions of HSBC branches. Seeking Alpha I would not regard that as a debatable point. FNFG recently slashed its quarterly dividend by 50% to 8 cents per share, due to that $1 billion acquisition. In addition the bank issued a large amount of common stock, equity preferred and subordinated debt to finance the purchase of branches in declining population areas. And, I would not expect a dividend increase from the reduced level in 2012. 

My current estimate is that it will take five to seven years to restore the dividend to 16 cents per quarter, more likely longer than 7 years than less than 5.

In addition to the large dilutive  common share offering to finance this boneheaded acquisition, FNFG sold $300 million of subordinated notes maturing in 2021 bearing a 7.25% coupon (SEC Filing) and $350 million of equity preferred stock. Both of those securities have a higher claim on earnings than the common stock and will restrain increases in the common stock dividend for several years in my judgment. The terms of the equity preferred stock offering are clearly disadvantageous to the common stockholders. The fixed coupon of that issue is 8.625% until 2/15/2017 when it turns into a floater paying a 7.375% spread over 3 month LIBOR.  Pricing Term Sheet

For the current owners of FNFG common stock, bought in the $12 to $15 range, the cost of the HSBC branches will never be worth the cost.  It will likely take a long time, adjusted for inflation, just to recover the lost income from the dividend slash and the loss in the share price.

There was nothing materially wrong with my decision to buy FNFG's shares initially. Instead, my decision proved to be an error based on a subsequent and unforeseeable poor decision made by the Board and the CEO.  However, I recognized early on that the decision to acquire HSBC branches was indefensible and could have sold my position close to $12 range in early August. My mistake was not following through on a sound judgment reached with accurate information. {In my defense, I did not know then that the Board would slash the dividend by 50%. If I knew that the Board would cut the dividend in half back in August, I would have of course dumped the shares without a moment's hesitation.} As I just said, even with accurate information and the exercise of good judgment based on known information, the decision making process has a tendency to err from time to time.  Keeping shares in FNFG is just one example.  

I would prefer owning the new FNFG equity preferred, purchased at par value or less, than the common stock at the current price. That is simply one way to summarize the value destruction to the common shareholders. Anyone owning the common stock will need to express their disapproval at election time for the Board. First Niagara: Just Another Incompetent Bank Board of Directors First Niagara Dividend Slash Without rational dispute, the Board and their 3+ million per year CEO have already destroyed shareholder value for no justifiable reason, solely due to their bad judgment and apparent desire to become an even bigger fish in a small pond being drained. 

Keeye Bruyette downgraded FNFG last Friday to market perform after the stock has already suffered a substantial price decline.

Any NewAlliance shareholder that took 1.1 FNFG shares earlier this year were fragged by FNFG.  Without the acquisition by FNFG, those NAL shares would in my opinion be trading in the $11 to $13 range. 

GE (own 497+) hiked its quarterly dividend by two cents. GE Board of Directors Authorizes Increase in Quarterly Dividend The new quarterly rate will be 17 cents per share. The next ex date is 12/22/11. I am reinvesting the dividend.

The China Fund, a CEF, declared a large year end distribution. When I saw this information, I elected to change my distribution option to reinvestment.  The total aggregate dividend will be $2.9964 per share, payable 12/29/11 to shareholders of record on 12/23. The ex dividend date will be 12/21/11. Of the total amount, $2.8222 will be a long term capital gain distribution. 

1. Sold 100 IFO at $11.22 Last Thursday (see Disclaimer): IFO is a Citigroup Funding "principal protected" senior unsecured note. I recently increased my exposure to Citigroup by adding to my position in another "principal protected" senior note, MTY, and said then that I would sell another to bring my overall exposure to Citigroup  back to my comfort level. Item # 1 Bought 100 MTY at $10.03 I am now back down to eight $1000 par value Citigroup "principal protected" unsecured senior notes. 

I suspect that most of my profit in IFO was harvested with this sale, but will not know for sure until that note matures in late 2012. Item # 1 Bought 100 IFO at $9.35 

2011 Roth IRA 100 Shares IFO Realized Gain +204.98 

IFO is one of the more unusual "principal protected notes".  Generally, with a caveat not likely to come into play, this note will pay the greater of 12% or the percentage gain in the S & P 500 on 12/2/12 from a starting value of 1,106.24 on a $10 par value. So basically I sold a year ahead of the maturity date capturing the 12% and left the possible higher coupon on the table.

2. Bought 50 CBLPRD at $23 on Friday (see Disclaimer): CBLPRD is a fixed coupon cumulative equity preferred stock issued by CBL & Associates Properties, a REIT that owns malls. The coupon is 7.375% on a $25 par value. Prospectus The yield at a total cost of $23 is around 8%. 

I have bought and sold both the common and preferred stocks of this company. I also currently own 50 shares of CBLPRC viewed as functionally equivalent to CBLPRD. The CBLPRD had a slight yield advantage when I made my limit order purchase last Friday. Both preferred stocks go ex dividend for their quarterly distributions on 12/14: CBL.PD CBL.PC

CBL Profile page at Reuters.

CBL Key Developments page at Reuters

CBL-9.30.2011-SEC Form 10-Q

CBL- September 2011 - Press Release for 2011 Third Quarter earnings.

I view REIT preferred stocks as having more disadvantages to them than advantages. While equity preferred strocks are part of the firm's equity capital, the owners of those securities have no equity interest in the business. All of the beneficial characteristics of equity ownership are lacking in them, leaving only the undesirable attributes including a low priority in the capital structure and the perpetual nature of the security.

Equity preferred stocks are senior only to common stocks and will be junior in priority to all debt. The owners of these securities have only their dividends, which can legally be taken away provided no dividends are paid on the common shares. Their bond attributes are more dominant than the equity characteristics, but these securities lack the priority of bonds or a bond's maturity date, the time certain when the company has to pay back the obligation.  For those reasons and others, I regard equity preferred stocks as a disfavored asset class and will lump them together with my bonds rather than stocks for purposes of determining asset allocation percentages.

REIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantages  This post also contains snapshots of my trades. 

When bought near their par value, REIT preferred stocks have little in the way of upside potential while having considerable downside price risk.

Anyone who questions that observation needs to look at the prices prevailing during the Near Depression period. This is a snapshot of a CBLPRC purchase made in October 2008:

CBLPRC Bought at $10 per share October 2008 

With any purchase now, the intent is to generate only some cash flow and to hopefully sell the security at a $1 or greater profit.   


  1. "Any piece of material information believed to be true has to be challenged for accuracy before acting upon it."

    In investing and any other field of endeavor where facts can be significant, which may mean every other field of endeavor. And not only in matters which are to be acted upon: The same is true of other beliefs related to facts, if they are at all important.

    I'm not sure, though, how your remark relates specifically to anything else in today's posting. I also don't know why you're picking on individual investors; I have the impression that investing is one of those strange fields where the average amateur is more informed and acts more intelligently than the average professional. My own results since I've started investing, so far, have certainly been much better than those of the average fund manager (whatever "the average fund manager" may mean), not to speak of the geniuses who were investing for the financial giants on the giants' own accounts for the last few years, and I'm no whiz kid.

    "I am never surprised about the sheer volume of inaccurate information possessed by individual investors who are absolutely certain of its accuracy."

    I'm not sure about investing, but the general contempt for accuracy is not only egregious now, but it is also getting worse with time. And I doubt that we can blame it all on the World Wide Web.

    I'm sure that the blogger knows this, but I'll say it to give anyone else who might by chance see it something to think about:

    Any time any purported information reaches you, you have to look at your source, your source's source, and so on, until you reach the ultimate tortoise. Each of these sources may be lying or mistaken. When a footnote in A's book says that B said something in B's book, that still does not mean that B said it, only that A says that B said it.

    And when you reach a point when you can't figure out who the source is, that also has to be taken into account.

  2. David: The remark relates to the difficulties inherent in investing and more specifically to my discussion about FNFG. It is entirely possible, for example, to have sufficient accurate information to form an opinion exercising good judgment, yet some other factor interferes with acting upon that opinion.

    Those extraneous factors can take a multitude of forms. Sometimes, it may an unwillingness to take a loss. Possibly, it may be a lack of confidence in the opinion. Another example would be my decision to sell Apple at around $16 after the introduction of the first IPOD after buying it a few dollars lower in a retirement account. My analysis was good but the decision to sell was made based on a trading mentality on harvesting the profit and more importantly the lack of a dividend which was a critical consideration in my management of retirement accounts, devoted almost entirely to bonds and bond like investments.

    The academic studies do not support your conclusions about individual investors. Though, individual investors as a group make considerably more effort to gather accurate information than many voters who are susceptible to political ads designed to manipulate them with false or misleading information or who have formed beliefs and opinions based on clearly erroneous or incomplete information.

    It is just easier for the vast majority of people to form an opinion and to hold onto its truth without ever having to challenge it with new information. I have not really seen in my lifetime any material change in that observation.

    I share your lack of confidence in money mangers. And, it is entirely possible for individuals to outperform those managers provided a sufficient effort is made to make informed decisions. I will outperform most years. The exception will be a year like 1999 when the market goes up a lot and I am sitting mostly in cash based on my analysis of value.

    Sometimes those opinions may lead the individual to move into cash and the outperformance is due mainly to that factor. There are a few mutual fund managers that will move heavily into cash but most will stay near fully invested. That alone will cause unsatisfactory results during long term bear markets where allocations have to be shifted up and down to produce decent returns.

  3. 2 thoughts for today:
    November 1998 S&P= 1248, so should anyone claiming they outperform most money managers be logically believed?

    Will Poland pay 30% of their current GDP as their "new and improved" IMF contribution to bailing out Greece, et al?

  4. The market's action today suggests that many investors have doubts about the Europeans solving their problems. There are a lot of pieces still to fall into place.

    I do not believe that most individual investors will outperform the market. During a long term bear market for stocks, the only way to outperform the S & P 500 is to move one's stock allocation up and down with the waves and to emphasize cash and bonds. Cash has to become an important component of asset allocation during such periods.

    During the current long term bear market, which I start in October 1997, the stock mutual fund will likely produce a negative real rate of return after inflation. Many of them will not even be able to produce a positive rate of return without adjusting for inflation. As I mentioned in the foregoing comment, that is partly due to being fully invested in stocks when stocks are going nowhere over an extended period of time. Other factors include transaction costs, fund expenses, and poor security selection.

    I posted a snapshot of my returns in my main taxable account for 1, 3 and 5 years in a 10/3/2011 post. I outperformed the S & P 500 by moving my allocations up and down a lot, still I was hit by the meltdown occurring after the Lehman failure but nowhere near as much as the S & P 500 due to a large allocation of cash raised in 2007.

    During a long term bull market, it would probably be best for most individuals to go with broad based stock ETFs, possibly moving some out when P/Es rise to a 20+ or so level and then moving what was sold back into the market after a correction. The likelihood of individuals outperforming with individual selections during such periods are not very high and most will fall short.

    I know a number of individuals who sold shortly after the Lehman failure, at the worst possible time, and never bought into the rally starting in March 2009. The more sophisticated individual investors, which I would view to be in a distinct minority, were buying a lot in March 2009.

  5. I believe you are as close an example of someone beating the odds in the market, but 99% of us can't move in and out and absorb all those transaction fees, nor have the time. There's 80%+ correlation in all markets due to hot money hedgefund HFTs, so it matters not what you buy. A dividend stock means nothing, in fact being the most liquid, they are first to fall. I also notice some of your junk bonds have gone to zero, so trading those is hairy too. I just don't see anything I can trust now, many are callable anytime and the offer is at par.

  6. Thanks for reminding me of my junk bonds. I have not had any go to zero, yet, but two $1000 par value bonds are approaching that level. It remains to be seen whether or not my 1 General Maritime bond will be a total loss. I doubt that my 1 AMR bond will be worth zero, but close enough.

    Some of my slightly more serious problems in that part of my portfolio have more to do with other depreciations from my purchase prices that are not yet bankrupt. I mentioned the other problematic ones in a recent post and they include AGY, Travelport, and Eastman Kodak.

    Even with the failure of those companies, the strategy may work out due to the large spread in yields from the junk bonds compared to what I could have received with investment grade bonds of a similar maturity. So far, the problems have not leaked into junk bonds bought in the TC form of ownership.

    The retirement accounts have had a much better return than the main taxable account over the periods shown in my earlier snapshot of that large account which show substantial outperformance compared to the S & P 500. One reason is that those accounts largely avoided the meltdown during 2008 and early 2009 by being in bonds.

    Since I am sitting on a large cash allocation now, my outperformance this year will largely hinge on whether or not the market rallies strongly into year end.

    I checked my performance numbers, provided by Fidelity, through October 31st, the last available, after reading your comments. The traditional IRA, which has not done as well as the Roth IRA, is up 100.6% over the past three years through 10/31/11 and the main taxable account is up 73.32% over that same three year period. The cumulative beat over 5 years for that account is 41%. Those are the only two accounts held at Fidelity which provides me with that kind of data.