LQD AND POM

I have been most unhappy with the performance of Loomis Sayles Retail Bond fund this year.  In a year where an old man working alone in a home here in the SUV capital of the world, with no access or assistance from anyone, dumb or bright, informed or born with oatmeal mush in their brains turning to limestone with age, I have had a positive year with my individual bond investments and realized profits earlier in the year selling some ETFs like BND and BSV. Loomis Sayles has lost me almost 30% in a year when the individual investor needed help and balance from bond investments.  So I have fired Loomis Sayles and I am just waiting for an opportunity to give them back my shares. 

In preparation of my capital raising, I decided to buy LQD, which is the low cost ETF for investment grade corporate bonds after it fell a little today, just above 90. I was waiting for the spread between its price and NAV to narrow, and I started waiting when I could have bought it at 87. This ETF has an expense ratio of 0.15% and owns about 101 investment grade bonds with a weighted average maturity of 11.87 years. The overall quality of the companies is good, including such stalwarts as Pepisco, IBM, Wal-Mart. Proctor & Gamble, Johnson & Johnson, etc. iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD): Overview  I temporarily drained my cash allocation to support this purchase and I intend to replenish the cash by selling the Loomis mutual fund early next year.  

I really do hope that the VIX continues to fall. Even with the last 4 days of a more than welcome rally in the market,   the VIX has fallen from about 81 on 11/20 to 55 today and that is significant but it is still in dangerous territory.  I will not be comfortable with any rally until the rally starts from the mid 30s which is where we were before Lehman's demise and the rally takes it to the low to mid 20s. But the rally over the past 4 days is the best one we have had since the start of phase 2 of this bear  

Feeling a tad better today, I added 100 of Pepco Holdings (POM) at 17.33, an electric utility serving in the Washington, D.C area and surrounding counties in Virginia and Maryland, plus southern New Jersey and parts of Delaware. POM: Summary for PEPCO HOLDINGS INC - Yahoo! Finance The dividend yield is about 6.2% at that price and it is a dividend taxed at the 15% rate rather than the higher marginal rate for interest income. That starts to look appealing with money market rates falling.  

I reviewed the S & P 500 report, Morningstar report and one from Barclays. Barclays and S & P have it rated as a buy. I am familiar with this company and I only became interested in buying shares after it fell below 20.  PEPCO just did a common stock offering at 16.6 which required a discount from the prior day's close of 17.57. The last earnings report was slightly disappointing. The U.S. government is a major customer with governments accounting for about 20% of revenue. I would agree with the S & P analyst that the stock has been oversold at the current level.  I would likely hold this one well into next year, hoping to sell it over 22 after collecting a few dividends so my goal is a modest one. 

If you think that this guy from Marketwatch has it right, then the best course will be hide under the covers with your cash for the next several decades.  

I am always more optimistic but forever cautious and wary of the power and destructive capacity of the bear. 

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. 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.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.    

BEEPRA/ VIX/BOUGHT LXPPRD/ More on VIX AND ASSET ALLOCATION

I did read the transcript of the Strategic Hotel's earnings call and I did notice that management affirmed its intent to pay the preferred dividend after eliminating the common stock dividend.  This intent is subject to change  Seeking Alpha (see page 7) I actually do read these transcripts even if my only involvement is owning a preferred stock or a bond.  I am always interested in a companies ability to pay the preferred dividend or the interest on the bond.  The only way to make that judgment is to review the balance sheet, the relevant financial ratios and debt maturities, types of debt, its operations and earnings.  I am not concerned with BEE's earnings growth or even when it will be able to reinstate its common dividend.  I am only concerned with one thing, its ability to pay me my preferred dividend and it is skating on thin ice now as I already knew.

Every day this week, when the market has rallied, the CBOE volatility index for the S & P 500 has declined.  We are still in an unstable range at the current 57.30 and this is still within bear market territory.  I would not declare an end of this bear market until the VIX fell under 20 and stayed below 20 for at least 3 months. We are experiencing a better bear market rally than the previous one day wonders which means to me that more people are starting to believe a bottom was put in last week.  I will find it a bit encouraging if the S & P 500 can close the month at the current level of 864.  

For those who know me, this will not come as a surprise.  I said in a post last night that I was going to buy a preferred stock of Lexington Realty when it fell to 6 or below. Lexington Realty Preferred: LXPPRD  What I am about to say has happened to me earlier last month. I forgot that I had a limit order to buy 50 in place at 6.60 which was filled yesterday when the motivated seller drove the price down from about 7 to 6 late in the day.  I had forgotten about it until I looked at my account this morning.  But I look on the bright side and I am surprised that I remember as much as I do given my advanced age.

To get a quote on the VIX, you can enter ^VIX and yahoo finance or VIX at marketwatch. VIX Stock Quote - Cboe Volatility Index Stock Quote - VIX Quote - VIX Stock Price  The brokers have different ways to obtain quotes.  Fidelity for example requires you to enter .VIX.  I monitor the volatility indexes all day and can tell you have each major average is doing based on my reading of these indexes. 

I have said that a durable volatility reading for VIX at below 20 is a necessary condition for a bull market.  There were some gyrations in the VIX between 1997 to 2000 that indicate to me that we were in the death phase of a major bull market that took an unusually long time to die, probably due to the enthusiasm generated by technology in the later part of the last decade and the involvement of individuals pushing prices to levels that made no sense.  The VIX jumped out of a stable bull pattern in 1997, hitting 35 in October 1997 during a financial crisis. This would signal to me now a forced reduction in my allocation to stocks which would have appeared to me premature judging from events over the next two years.  In retrospect, it would have been the right decision.

For me, when I receive this first warning signal in what is still an ongoing bull market, I will reduce my stock allocation by 10% when the VIX falls back to the 16 to 20 range, as the bulls and bears engage a fierce tug of war.  This happened in February 1998 with the S & P 500 at 1050, well above where it is now. It was at 914 in October 1997. So, while the future may not give you this kind of opportunity to pare at higher levels, it has in the past.  The VIX returned to over 40 by August 1998, which would be the second trigger for a forced reduction in stocks, which for me would be another 10% when the VIX returned to below 20 (when a younger man, I would try to wait for below 18). This did not occur until August 2000 when the VIX  hit 16.84 and the S & P 500 was at 1518.

Why so long between the trigger and the forced reduction?  I postulate that it was due to people becoming crazy in 1999.  The VIX was in the mid 20s during 1999, when the Nasdaq was going parabolic, which says to me that the move was not being confirmed by the VIX and was phony.  Now, I have a confirmation of a bear market coming, at least two whipsaw patterns moving from below 20 to over 30 or 35, or even 50 and back down to below 20. Any period below 20 is of short duration which makes it totally distinct from a stable bull market pattern.

Now, I look for just one thing to re-commit the cash raised. A return to below 20 in the VIX for at least 3 months.  This happened in January 2004.  You would miss a few months of rally. Phase two of the bull move began in March 2005 with the VIX falling to a stable range of 10 to 15. The first forced reduction would be triggered by the move in the VIX to 30 on August 2007 which for me triggers a forced reduction, no matter what I think about it, in stocks when the VIX returned to 16 to 20.  This would be in October 2007 when the Dow was over 14,000.   The second and final trigger happened in just a few days, unlike the 1997 to 2000 period where insanity started to rule the roost,   when the VIX spiked from below 20 back to over 30 by November 12, 2007. The fall to below 20 was soon thereafter, around 12/21/2007 and was brief.

As I have become older, I may shift my allocations quicker and by larger amounts.  So I might bail now by 20% on the first move out of the stable bull range to close to 30, rather than over 30, and do another 10 to 20% reduction on the second trigger.  My asset allocation model tied to the reading of all the volatility indicators would have also worked in the early 1990s.  The first readings from the CBOE VIX, which starts in 1990, show an ongoing unstable VIX whipsaw pattern, suggesting an ongoing bear market which is resolved in favor of a bull market when the VIX stays below 20 for 3 months in August 1991 when the S & P 500 index was at 395.  So I am back in at that point.  The model has me in until 2/98 when I am required to do a reduction when the S & P is at 1050.  I would also be buying now SSO when we enter a stable bull phase 2 pattern which happened in May 1994 and the S & P 500 index was at 456.

A venturesome investor might put that on when the VIX falls into a stable pattern initially,  and this can be adjusted for risk tolerance.  Being somewhat conservative, I would wait for phase two and sell it on the first significant spike over 20 without a moments thought. This would have happened during the summer of 1997 when the VIX started to warn of a potential problem by moving out of the stable bull pattern and starting to trade in the mid 20s.  A more venturesome and fearless investor would put SSO on earlier than me and take it off later.  But I would suggest the wild and crazy ones need to sell it after the first trigger point is reached with a spike of the VIX above 30 and a return to below 20, waiting for the VIX to fall before selling. The fall in the VIX to below 20 would happen under my theory only if the market had gone back up after being jolted down by some major event. The rise in the VIX is associated with major events which talking heads may dismiss but the VIX does not so lightly. Then, the swing trade could start for the fearless as I discussed earlier, the swing trade for the unstable bear market VIX pattern.

For the most recent bear market, spikes in the VIX coincided with the bad news on mortgages. The first spike was timed by the first major news stories coming out in February 2007.  On 2/23/2007, the VIX was around 10.   On 2/27/07, it shot out of the stable  bull market 2 pattern with gusto and rose to over 18. The news was starting to pour out in 2/2007 about the subprime fiasco which market participants tried to put aside for several months as "containable" but it just kept coming back showing just how serious it was going to be, with the bad news accelerating in August 2007. The VIX warning in August was unmistakable. The VIX model is based on a theory and the theory does not permit any thought in this situation except on the degree of forced reductions and what to sell. No matter what anyone was saying, no matter what the political and business leaders were claiming, the model said sell in October 2007.

As with any model based on theory, it will have to be changed as circumstances change. And it always has to be tailored for the individual's willingness to accept risk and their particular financial position.   Someone who is  already very nervous about stocks to begin with could go 100% into cash at the first sign of trouble, and that would have been great in October 2007 to say the least, whereas someone else would modify the forced reductions in other ways, by increasing the reductions in higher or lower amounts according to the individual's preference. I did 10% and 10% and I will change that for the next one since it was not enough for this bear to say the least at my current age. As I grow older, I am naturally increasing my exposure to bonds. 

More Bad News and TIP Pricing

It would be difficult to be surprised now by bad news.  Any reader of the financial news would already be numb to it.  The current quarter will not show a ray of sunshine.  All the news will be bad.  I am to the point that a 4% fall in GDP for this quarter would be good news.  The government reported today durable goods order plunged by 6.2% in October. Yahoo! Finance Consumer spending fell by 1% in October, the worse fall since 9/2001.Yahoo! Finance   While these numbers were worse than the estimates, October was basically already known to be a bad month.  Hopefully, the economy will halt its slide during the first half of 2009 and return to normal trend growth in 2010.  

The announcement yesterday of a 800 billion program by the government to buy mortgages and consumer loans will relieve the credit crunch over time.  Forbes.comBut you need to step back and look at the overall cost of these bailouts.  One estimate is that it will cost the government over 8 trillion dollars.   CNBC.comDo we  have 8 trillion?  I do not think that it will end up costing this much since some of the money will be repaid and the government may actually make money on some of the programs.  In my view, we are already broke using the same accounting standards applied by corporations so even a 1 trillion dollar cost aggravates an already serious condition.  The money will be either borrowed or created.  While the problem is certainly deflation now, it is hard for me to envision coming out of this crisis with clear sailing ahead.  With all of this money creation, and its stimulus effect that it will ultimately have, I would anticipate a return of inflation as a serious problem in a couple of years.  The U.S. debt, already a serious problem, will become more so.  The issues that the nation faces in funding its promises to the retiring baby boom generation, including me among the hoards of millions, will become even more serious and problematic.  All we are doing now is kicking the can a few feet down the road.  The more serious problems will become even more evident in a few years.  But, possibly the least appreciated issue is that the current crisis is a continuation of certain trends that have accelerated in this country during my lifetime, a belief in entitlement, a lack of responsibility and accountability, an attitude that is okay to cut taxes and increase spending, the national debt at 12 trillion is no big problem, that the government is responsible even liable for the mistakes of individuals, that financial engineering is more important than manufacturing stuff, that the financial titans deserve to be among the most highly compensated "talent" in the U.S,  and the increasing wealth disparity.   This brings me to a discussion of the pricing today of treasury inflation protected securities.

I touched on this topic earlier.  TREASURY INFLATION PROTECTED BONDS (TIP)As deflation concerns have accelerated over the past few weeks, the price of the TIP has continued to fall as regular treasury securities have risen.  In short, the market has punished the TIP for inflation protection.  If we enter an era of deflation, the price of the TIP ETF will continue to fall since the principal of the bond is adjusted for both increases and decreases in inflation,  so with negative inflation the amount of the bond would actually be reduced which is not good.  Reuters  Before this year,  the spread of a 10 year treasury compared to an equivalent treasury inflation bond was over 2%.  Now, they are virtually equivalent, which simply means that nothing is being paid for the inflation protection component of the inflation protected bond.   

I am in no hurry to add to my TIP position.  But I do agree with the article in this week's Forbes about inflation risk down the road caused by this year's events. Forbes.com  So I will be adding shares in TIP in small increments over the next year or so.

Lexington Realty Preferred: LXPPRD

I discussed briefly Lexington Realty in a post earlier today.  I was watching the price action and a seller emerged late in the day, knocking the price of the $25 par value cumulative preferred D down to $6.  The coupon is 7.55%.  As I have stated, there are a lot of motivated sellers for both the common and preferred REIT issues particularly from leveraged closed end funds that are imploding.  Many of those funds focus on REITS while some combine REITS with other higher yielding securities such as utilities.  Many of those funds are trading at or below a dollar as the fall in prices causes a cascade in selling due to the high leverage.  These funds own both common and preferred stocks.  

While Lexington just cut its common dividend, it had to declare it regular preferred dividends and the quarterly payment on LXPPRD is .4719Yahoo! Financeor $1.8876 per year, giving it a yield of 31.46% at the 6 price.  After researching the company, reading reports from Barclays, S & P, and recent earnings releases and transcripts, I decided to buy 50 only at 6 or below.  While the preferred dividend does have more protection than the common, both are highly problematic investments in the event of a bankruptcy. Both are subordinate to senior debt and of course secured debt. Lexington has a lot of debt, 2.5 billion, and has to refinance almost 266.7 million coming due next year.    Lexington Realty Trust Reports Third Quarter 2008 Results: Financial News - Yahoo! Finance  Based on my limited review, however, the company appears to be well managed.  But, as leases for rental property come up for renewal in the current economic environment, it is going to be tough sledding.  Lexington focuses on single tenant properties with long term net leases, which place the burden on the tenant to pay real estate taxes, utilities, insurance and ordinary repairs.  Almost 70% of properties are offices.  Another REIT, Vornado, owns about 15% of Lexington and just added to its stake by buying 8 million common shares.  Insider Trades - VORNADO REALTY LP - Yahoo! Finance

It would be an under statement to say that REITS are under severe distress.  Selling pressure has been relentless this year.  I have no idea when it will stop or where the bottom will ultimately prove to be.  If one of these firms bankrupts, there is not likely to be much for a preferred shareholder, especially for those REITs that have mortgages on their properties. If there are unsecured properties, and many do have them, and if the secured loans are non-recourse to the company, then there could be more for a preferred shareholder in the event of a bankruptcy.   I have mentioned that I do not like the lack of maturities for these issues although I did have one called a couple of years ago at par when the REIT could refinance at lower rates.  My interest now is due to the yields generated mostly by the deep discounts to par value.  The coupon is always applied to the par value to determine the dividend payments.  A 75% discount to par value and a 7.55% coupon will jack  the yield into the clouds.  I do like the cumulative feature of the dividends which provides some protection short of a bankruptcy.  Another protection is that the preferred dividend can not be eliminated as long as the REIT pays a common dividend.   To maintain its tax status, a REIT has to pay out 90% of its income. Thus, if there is income, there will have to be a common dividend.  If there is a common dividend paid in cash, then the preferred dividend has to be paid in full.  A reduction in a common dividend actually improves the situation of the preferred shareholder in that the REIT is keeping more money, making it that much more likely the preferred dividend is paid.  But once the common dividend can be eliminated, due to losses, the preferred shareholder is certainly vulnerable to a postponement of his dividend.  It is not forgiven but postponed.  Most do not pay interest on the postponed dividend, some do, but that also creates a tax headache in that taxes are paid on interest that is not paid, similar to what happens with a treasury inflation protected bond or a zero coupon taxable bond. These REIT preferreds that I am buying are high risk and I am limiting my exposure to small amounts for each one bought.  I have already sold several this year at a profit and collected numerous dividends already. My current positions, all extremely risky and recently added, include BEEPRA, BDNPRC, SLGPRD, CBLPRC, GRTPRF, FRPRJ AND FRPRK, all of these are cumulative and all are still paying common dividends except for BEE.   I believe that, in aggregate, that I am ahead this year for this kind of security considering profits realized on positions already sold and netting that with unrealized losses on the positions currently held.   My hope is simply that these REITS stay solvent and pay the dividends, and any gain on the security is just gravy.  If I break even on security sales for these preferred issues as a class, and just net the dividends, I will be most pleased.  I would be more than happy and content just to receive  the 30% annualized dividend yield for LXPPRD for example and just sell it for a wash or a small profit.  But I sort of expect now that one or two may recover over the next year or so back up to where they started the year, near par value, while one and possibly two may have more suffering in store for them.   I will probably end up with preferred stocks in about 10 different REITS.  I am likely to continue adding to my collection as I conduct more research into those companies outside my normal monitoring spectrum such as Lexington and Strategic Hotels (BEE). 

The link to the filed prospectus for LXPPRD:  

http://www.sec.gov/Archives/edgar/data/910108/000095012307001842/y30156b2e424b2.txt

Industrial REITS; WB, TARP & LNC/PNX SENIOR BOND (PFX)

Wachovia downgraded several industrial REITs from market perform to underperform.  Most of these REITs have already been decimated, including ProLogis (PLD) and Liberty Property (LRY). The firm reduced Duke Realty (DRE) to market perform from outperform.  My only position in this area is First Industrial which is apparently not in this analyst's coverage universe.  Reuters  I would think that all of the points made in this report are already well known.  It would not surprise me to see someone with a lot of spare money swooping in to buy one of them within the next year or so given the already depressed prices.

Speaking of Wachovia, that failed bank is continuing the great American tradition of rewarding top executives with tens of millions of dollars, possibly as much as 98 million.    Yahoo! Finance   Wells Fargo has predicted it will take 74 billion in losses on the Wachovia assets after the mergerDeal Journal - WSJ.com : 

As I understand it, this would be on top of the tens of billions already lost by Wachovia.   MarketWatchI wish someone would reward me every time that I err and let me keep all of the benefits from my correct decisions while assuming most if not all of my losses. Sounds like a good deal for me. 

The sharp rise in Lincoln National today was due to Paulson saying he had not ruled out giving life insurance companies TARP funds and he acknowledged that several had qualified to receive those funds by becoming bank holding companies.  TheStreet.comOne of the reasons for the substantial decline in life insurance stocks was the fear of earnings dilution from having to sell stock to recapitalize after suffering significant investment losses.  This fear recedes some in the event TARP funds are received which is not yet a done deal. One thing is for certain. The prices for  life insurance companies stocks, as well as their senior bonds, have plummeted in recent weeks, including such well known names as Lincoln, Prudential (PRU), Hartford (HIG) and MET Life (MET) as well as lesser known companies such as Sun Life (SLF) and Phoenix (PNX). 

 I will just briefly mention that I have bought a senior bond from Phoenix (PNX common stock symbol), with a 7.45% coupon and a $25 par value that is now trading at around 7, for an effective yield of almost 26%.  The symbol for the bond is PFX.  Dividends are paid quarterly and maturity is in 2032.  PFX Stock Quote - Phoenix Cos Inc New Stock Quote - PFX Quote - PFX Stock Price I view this as higher risk than the Pru bond bought yesterday but not as risky as some of these REIT preferred shares that I have been buying lately, like GRTPRF, or some of the junk bonds like PIS and DKR.  The prospectus can be found at this link:

http://www.sec.gov/Archives/edgar/data/1129633/000095012301509495/y55049b1e424b1.txt

The price of this security floats up and down a great deal, having traded between $4.5 and $24.25 within the past 52 weeks and was near 16 on 11/10/08.  This company is into selling variable annuities which is the source of the concern. PYahoo! Finance

SEE A M BEST RATING OF THIS SENIOR BOND:  Yahoo! Finance

I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional ornery 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.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.    

Home Prices/Lexington Realty (LXP) & LXPPRD/GXP/PWE/AAV

Home prices, the achilles heal of the economy, fell a record 17.4% for the year ending in September 2008 in the 20 major cities tracked by the Case-Schiller home price index. MarketWatch Phoenix had the largest decline at 31.9%.  Other cities include Miami, down 28.4%; San Franciso down 29.5%; and Los Angeles down 27.6%.  In cities that did not experience a parabolic rise in home prices, like Charlotte and Dallas, the declines were far more modest, less than 5%. Nashville is not in the index but I suspect the fall is close to Charlotte.  There is a lesson to learn from this fiasco.  If you are in a home market where the price is going up at a 20% compound rate, the general idea is to sit tight in what you have or to sell (and buy only in a community like Nashville which never goes parabolic) and most importantly do not buy into it, wait if you can for prices to correct.  Prices can not rise at 20% compounded for more than a few years without a serious correction for the simple reason that incomes are not rising anywhere near that rate. You may have very isolated pockets that can maintain that growth rate longer than others, due to unique factors like ocean front property or exclusive properties for the rich and famous, but eventually reality has to set in and the sobering reality is ability to pay.  The decline in prices may even accelerate due to increasing joblessness and the failure to come to grips with loan modifications to avert the avalanche of foreclosures.  Lenders will just have to eat some of the principal associated with mortgages tied to excessive valuations created by the bubble, before the bleeding can stop.   

Lexington Realty just became the latest REIT to cut the common stock dividend.   Yahoo! Finance It of course had to maintain its preferred stock dividends since it still plans to pay a common dividend.  I have been looking at one of its preferred issues, LXPPRD, that is currently selling at around 7, with a $25 par value and a 7.55% coupon, currently yielding about 27% at that $7 price.  LXPPRD Stock Quote - Lexington Rlty Tr Stock Quote - LXPPRD Quote - LXPPRD Stock Price It is cumulative.  I realize the risk with these issues and do not expect all of them to work out.  Nonetheless, the yields are tempting and I am attempting to evaluate them separately and on their on merits to improve my likelihood of avoiding too many blow ups.  I have not decided yet on this one but 50 shares would be my limit for it.   

Great Plains Energy (GXP), one of my positions, went ex dividend today and I am reinvesting dividends on that one.  I also had a couple of Canadian Energy Trusts go ex dividend today, which pay monthly distributions and are recent adds, but have not yet been discussed, PWE and

 AAVPWE Stock Quote - Penn West Energy Trust Stock Quote - PWE Quote - PWE Stock Price

AAV Stock Quote - Advantage Energy Income Fund Stock Quote - AAV Quote - AAV Stock Price  I did discuss another one PVX and the same problems mentioned in that post are equally applicable to PWE and AAV.  The later two have been impacted adversely by the fall in gas and oil prices, even with some collars in place. INZ AND PVX  As mentioned in that post, these companies can pay high dividends because they do not have to pay Canadian taxes at the federal level and can thus distribute more income to shareholders, but this will cease in 2011 when Canada will start to tax them as regular corporations. The fall in energy prices is another negative issue.  The fall in the Canadian dollar over the past several months, (see chart of FXC), results -in and of itself- in lower dividends to a U.S. holder and Canada taxes the distribution by requiring the company to withhold 15%.  Some of the Canadian Energy Trusts have already lowered their dividends to reflect the fall in prices, including PVX and ERF.  However, these stocks are starting to interest me after being smashed over the past several weeks.   Last earnings report for PWE: Penn West announces its results for the third quarter ended September 30, 2008: Financial News - Yahoo! Finance

My max for AAV is 100 shares which I already have and 150 for PWE and I am at 70 so far.  I do not intend to add to PWE for the remainder of the year or until I see some kind of stabilization to energy prices. 

Paulson NBR Interview, Zuckerman editorial, LNC INZ, DKR, XFL AND DD

The NYT had a review of the book Alex and Me that I just finished about the African Grey Parrot whose obituary in a British paper read that he was smarter than the average U.S. President.  NYTimes.com

Those with a short memory span, which must include just about everyone based on my casual observations, may not remember Paulson's assurance last week that he had stabilized the American financial system.  Thank God for that, right! This is what he said in an interview:  "I believe the banking system has been stabilized. No one is asking themselves anymore, is there some major institution that might fail, and that we would not be able to do anything about it. So I think that is a positive."Los Angeles Times NPR

A few days later he is negotiating to save the American financial system from an implosion caused by the failure of Citigroup.  Does this sound like someone who has anything under control or does he appear to be one of those chickens suffering from attention deficit syndrome and running around with its head cut off.

I thought the editorial written by Mort Zuckerman in US NEWS was an excellent summary of how financial institutions in the United States created the meltdown of the worlds' economies. US News and World Report  I share the view that the primary cause was an overall lack of accountability, with financial rewards given to those who created financial transactions like mortgage originations, regardless of the underlying merit of the transaction or the borrowers ability to pay, and then passed on the risk of default to investors around the world in securitized packages.   The ratings agencies facilitated and enabled this process by rating these toxic pools  as AAA.  Nobody would get paid unless the transactions got done.  While the ratings agencies could have contained this process, the only way to avoid it in the future may be to require the originators of loans to keep a certain percentage of them by class (ALT-A, subprime, etc) on their own books and then they would be allowed to syndicate the rest.   I would think that it would be some time, however, before any kind of loan will be syndicated easily.  The treasury is planning a new facility to loan money to investors to buy syndicated consumer loans such as car, credit card and student loans.WSJ.com

 One reason that REITs have been hammered is that they are in constant need of debt refinancings and rollovers, and the assumption being made is that credit will not be available when the next maturity comes due.  Part of that problem has to with the issues discussed by Zuckerman in his editorial.  The banks, once dominated by incredibly lax lending standards, are now afraid to take any risk.  The old adage that a banker will give you an umbrella when the sun is shining and want it back when it is raining is well grounded in reality. So, two years ago, all you needed was a pulse to get a loan, now an income generating property may not be sufficient.   It is hard for me to figure out why Glimcher (GRT) fell under a buck last Friday unless the correct assumption is that credit will not be made available to it even if the loan is secured by a first mortgage on real estate generating positive cash flow. But I am just looking at the situation from a distance and do not profess to know all of the fine points and particulars of every situation.  Someone like Zuckerman, who is a founder and Chairman of Boston Properties (BXP) speaks with more insight and knowledge as to how lenders are currently treating credit worthy borrowers. BXP: Profile for BOSTON PPTYS INC - Yahoo! Finance Mortimer Zuckerman - Wikipedia, the free encyclopediaI understand him to be saying that anyone wanting credit is being treated badly now.   Everything that I have read is consistent, the large financial institutions receiving bailout funds from TARP are tightening credit and making fewer loans.   

Morningstar has put the life insurance companies including Lincoln National under review over concerns that they may need to raise capital to strengthen their balance sheets.  LNC did say it had no "current"  plans to raise capital by issuing stock, MarketWatch 

If the equity market does not stabilize, and the life insurance companies are denied TARP funds, then I suspect a dilutive stock issuance at very depressed prices may have to be made. I also mentioned earlier that it did not help that Goldman Sachs reduced LNC and other life insurance companies other than Met Life to sell from neutral  Reuters  

This was a new analyst who took over from someone who had rated these companies as neutral.

INZ and IND, two perpetual preferreds that I own, both issued by ING, will go ex dividend tomorrow. Dividends - Markets Data Center - WSJ.comING PREFERRED SHARES ARE RALLYING/ RULES of 72/114/144 

At the current prices, the yield is over 16%.  

I have not seen an announcement of an ex interest date for the Hertz TC that I own, DKR, but I did note an SEC filing saying the next payment date on the semi-annual interest payment is December 1st. Unassociated Document  (a requirement set forth in the prospectus: http://www.sec.gov/Archives/edgar/data/1071246/000090342304000164/sat_2003-8.txt)

The only way that this could be done is for the ex interest date to be at least 3 business days earlier.  I do know that a companion to this Hertz TC,  HJA, went ex interest last Friday (this is the B series and DKR is the A serieshttp://www.sec.gov/Archives/edgar/data/1071246/000090342304000155/sat_2003-15.txt).  So, if anyone was wondering, I suspect DKR went ex interest last Friday which would be consistent with the daily chart and will pay the semi-annual interest payment into my account next Monday, 12/1/2008.  

An analyst downgraded Dupont to underperform yesterday lowering his 2009 estimate from $2.97 to $2.19, based on Detroit's woes.  Yahoo! Finance  

 I would simply point out that, even after the last two days of rallies, DuPont is still selling at about the same price as in 1993, so a lot of disappointments are already baked into the current price.  Part of the reason for the downgrade is that Dupont scheduled a conference call next week to discuss 2009.  Dupont is the leading provider of paint to the auto industry. 

XFL, the TC containing a senior Verizon bond that I own, goes ex interest today.  I sold my PJL position at a profit, another TC containing the same bond.  

Trust Certificates PJL and XFL: Verizon Bond

PJL TRUST CERTIFICATE & The Volatility Indexes VIX and VXN

GRTPRF: A WALK ON THE WILD SIDE/ KTN add

I discussed the possibility of buying a cumulative preferred issue from Glimcher Realty (GRT) and I elected to buy a few shares with a market order late  this afternoon at 2.90. This REIT owns malls; and, judging from the price action recently, investors seem to think it is toast. I am not so sure. This cumulative preferred has a $25 par value and a 8.75% coupon, payable quarterly. I do not need too many quarterly payments to recover my $2.9 cost. Who knows? It is worth a very small gamble for me when the yield at my cost is 75%.

The company has way too much debt and is not exactly in a favored business, leasing space to retailers. Nonetheless, it does not appear hopeless to me-or beyond all hope beyond a reasonable doubt. GRT did refinance its debt coming due in 2008 which is more than GGP has been able to do to date. I have previously discussed this REIT. MARKET OBSERVATIONS: LNC, M, GE, C, GRT, GRTPRF AND LEVERAGED CLOSED END FUNDS Needless to say, a total loss would not have any impact in me.  I am just seeing if I can find a gem or two in the garbage being thrown out by the street.  If it works out, having a 75% annualized return seems worth a small risk of capital.  The dividend is cumulative and has to be paid as long as GRT pays a common dividend which it very well may cut again having trimmed it earlier this year. I also read the S & P report on GRT. Nonetheless, this is an extremely speculative buy, more speculative than the extremely speculative Hertz senior bond that I bought a few weeks ago in TC form, DKR.   

I also bought more of an AON junior subordinated bond in a TC, KTN, when it fell below 14 today. It has a $25 par value and a 8.205% coupon which give me an effective yield of over 14%. At a 14 cost, the yield is about 14.73% plus the spread between cost and par value at maturity on 1/1/2027.  I have already discussed this one at length in an earlier post. 

TRUST CERTIFICATE AON BOND KTN

TRUST CERTIFICATE AON BOND KTN ORDER FILLED

The prospectus can be found at the sec web site. SEC 

(One feature about this bond that I may have not mentioned is that it has an enhancement feature in the event of a downgrade. AON has to pay $. 50 per certificate in the event its debt is downgraded. This is explained in the prospectus.  I simply do not know if this has ever happened and whether the payment has already been made.  If no payment has yet to be made, then this is some protection for a debt downgrade. It is investment grade. The CUSIP for the underlying bond is 037388AE5.  I believe this junior debt issue is rated BBB- by S & P and   BAA3 by Moody's.)

I am likely to trade these AON TCs, and this one will be sold if I can do it in the 17 to 21 range which I have already done this year before we entered phase 2 of this bear.

I have discussed also the dangers of long bonds and the issues unique to TCs on many occasions. Trust Certificates: Issues with Long Term Corporate Bonds

I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional ornery 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 for financial news. 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.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.    

TRUST CERTIFICATE JZH: PRUDENTIAL SENIOR BOND

I have not talked about the TC containing a senior bond from Prudential (PRU).  This TC (JZH) has a $25 par value and a 6% coupon.  The underlying securities have a smaller coupon at 5.75%. I just bought 50 at $9.75 which gives me an effective yield of 15.38% based on my cost.  

The underlying bond matures on 7/15/2033 with interest payable in January and July.  Fitch has it rated an A.  This is a pretty steep discount for an investment grade bond.  I believe that the CUSIP for the underlying bond in this TC is 74432QAC9. The bond has not had any significant trades recently that I could find. The prospectus can be found at the SEC under LEHMAN ABS. sec.gov I am already familiar with this company since I own a short term note maturing in 2012 but it is a small one so I felt comfortable adding a position in a Pru long bond at a tempting interest rate. 

In addition to the coupon which gives me 15.38% annualized, I would receive the difference between $25 and $9.75 in 25 years and a quick calculation is that would add 6.25% per year bringing a potential total return to over 20% annualized for 25 years.  That calculation needs to be checked. (if I bought 100 at 9.75, that would mean a profit of $1525 at maturity divided by 25=$61 per year amortized divided by cost of 975= 6.25%). So I think that I am right about that total return figure which of course assumes all interest payments are made and the payment of par value at maturity.  The reason for the fall in price of this TC has to do with the market's perception of life insurance companies which is currently extremely negative.

I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional ornery 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.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.    

Time to Fire my Head Trader: He Bought LNC

Basically, I told myself no more common stock buys until the VIX returns to at least the 30 level preferably to below 20 for at least 3 months.  I can not follow my own orders and maybe I am just bored. Or maybe I need to fire my Head Trader, who is really a teenage version of myself.  I read the the 11-20-08 report from Barclays on Lincoln National, and I was encouraged enough by it to buy another 30 shares at 6.45, averaging down my previous purchase from earlier this month.   Late Friday Buys: LNC and GXP  I said in that earlier November post that I would average down by buying 30 at 14 and 40 in the 10 to 12 range.  I just did the 30 at less than half of what I indicated earlier and may just round it off to a round lot of 100 by buying the other 40 at less than 5.  These kind of buys are tepid and could not even be characterized as baby steps.   Lincoln and other life insurance companies are seeking TARP funds. Yahoo! Finance All of the companies in this industry, particularly those heavy into variable annuities, have been smashed since the market entered into phase 2 of a nasty bear market after the Lehman failure. I recognize that all of these companies would be allowed to fail unlike Citigroup or AIG.  I just believe that the upside for LNC over the next decade from the current price is too large to ignore, which is why I made an exception for it today.  

   I am not a financial advisor but an individual investor trying to navigate my way through a mind field. In these posts, I am acting as an unpaid financial journalist and an occasional ornery 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.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.    

Citigroup Bailout: Where is the Outrage?

The government's bailout for Citigroup announced this morning was more extensive than the stories last night suggested, with the taxpayers now on the hook of tens of billions of potential losses and the shareholders getting the shaft too.  It is clear now that Citigroup was near collapse, notwithstanding its protestations of financial health and solvency.

The FDIC is involved in the bailout which says a lot. While the stock market may rally today on this news, it only highlights to me the lack of competence at our major financial institutions and their total lack of credibility.  I seriously doubt that I will ever trust anything said in the future by senior management at any major American financial institution and will certainly not invest money in any of them.  (I will hold my Bank of America shares until I come close to breaking even on them)  If the banks can blow up this easily, destroying a decade of appreciation in their stocks, in pursuit of greed by a few senior managers striving for ever larger bonuses and compensation, then it just becomes way too difficult for an individual investor to figure out.  The only thing that can be said with confidence is that none of them are suitable as a long term investment by an individual, but the stocks of these large financial institutions are at best a temporary investments  for traders.  You know, I never invested in AIG but I always tried to keep informed about its business.  But no matter how much I read, I did not know about the reckless actions of a small unit in London that was underwriting credit default swaps and the overall lack of risk control over that unit. 

In this latest bailout, the government will guarantee up to 306 billion in Citi assets.  This needs to sink in some.  Citi would absorb up to 29 billion in losses in addition to pre-existing reserves from those assets. After that, the U.S. would absorb 90% of the losses and Citi would be assigned 10%. The government's share of the losses would be absorbed by the Tarp fund and by the FDIC.  Citi will issue 7 billion in preferred stock to the government, divided between TARP and the FDIC, which will pay 8% (for what is apparently a loss guarantee on the 306 billion in crap).  Citi will receive yet another 20 billion from TARP for preferred shares yielding 8% on top of the 25 billion already received that bought preferred shares yielding 5%.  WSJ.com    Yahoo! FinanceNYTimes.comThe common shareholders can not receive more than $.01 a share per quarter in dividends for the next 3 years. The government will also receive warrants to purchase common stock at the strike price of $10.61 exercisable within 10 years.  Citi keeps the income from the assets guaranteed by the government.   This deal is better for the common shareholders than what would have happened to them with no deal.   Now, I do not wish to belabor the point, but what about the few people responsible for buying the crap that brought Citi down?  Are they going to have to pay back a nickel of their compensation, well into millions of dollars per year, that was generated by taking extreme risks with leverage and why would the Board of Directors stay in place that authorized this  activity?  With these kind of deals for the titans of finance, it will be difficult for the next Democrat Congress and the Beanpole to resist the entreaties of the automakers for money.  While I certainly believe they are not worthy, I would have to say that the UAW and the American auto companies are at least more deserving of help than the titans of finance who always find a way to land on the feet with hundreds of millions of dollars no matter how much havoc they cause to everyone else. 

Where is the outrage?  This goes way beyond disgusting.  At a minimum, I would hope that every individual shareholder would at least vote against the Board members for however long they remain.

Corporate Bonds, Citigroup & Robert Rubin, DKR

ADDED 5/15/09:  For any reader coming from a Google Search involving Hertz Bonds, I gathered my discussions together in a later Post, which can always be in the Gateway Posts near the top of my blog and by going to this link:

 Hertz Bond Information in One Post

******************************Original Post:

The corporate bond market has not been a refuge from the deflation in asset values. As in the Great Depression, all asset classes other than U.S. treasuries have fallen sharply with commercial real estate bonds, rated AAA, trading at 60 cents on the dollar, down from over 90 cents a few weeks ago. The spread over treasuries for these securities have risen to 15% according to the WSJ. WSJ.com Corporate debt has not been as cheap as it is now even during the Great Depression compared to treasuries. Yields on high yield bonds have reached 25% and 8.2% for investment grade bonds.  

This article in the WSJ does not mention that Vanguard's Total Bond index fund is now positive for the year. Part of this out performance is due to including GSE and treasury debt in the index fund. There is an ETF for the Vanguard Total Bond index fund and it can be researched at the Vanguard web site. I have owned it (BND) and sold it earlier in the year. I am reluctant to buy it now due to its significant exposure to Fannie and Freddie debt, and I simply do not know what will happen when the conservatorship for these GSEs ends at the end of next year. I looked at the semi-annual report for BND and it had 70% of its assets in GSE and treasury debt.

However, most of that was in Freddie and Fannie debt, with only 22.7% of assets in U.S. treasuries. I would now prefer to avoid that ETF due to its exposure to the GSEs and buy SHY, an ETF for 1 to 3 year U.S. treasuries, a lesser amount in IEI, an ETF for 3 to 7 year treasuries, and to use LQD for corporate debt. All of these ETFs are low cost and Ishares is the sponsor. iShares ETFs for US investors - Exchange Traded Funds

I have not bought IEI. I am also using TIP, for U.S. Treasury inflation protected, and BWX for international treasury bonds. I am reluctant to add to my positions in U.S. treasuries since I believe that they represent merely the latest example in a long list of bubbles. I am no longer buying any mutual fund that invests in bonds and my experience with Loomis Sayles explains why.

In contrast to a low cost index fund for bonds, one highly touted bond fund, Loomis Sayles Retail Bond, LSBRX, is down over 29% year to date, a pathetic performance in an admittedly difficult market for corporate debt (this fund is still recommended by Morningstar and Kiplinger TKiplinger.com.Yahoo! Finance) Pathetic is way too kind to describe this year's performance of the Loomis Sayles retail bond funds.

In a rush to treasuries, the yield on the 3 month treasury has fallen to the absurd level of .015% and 2.05% for a five year note.

This is similar to the kind of yields from these instruments that were prevalent during the Great Depression.

Some investment grade bonds traded as Trust Certificates have risen recently to yields in excess of 15% as discounts to their par values have widened. I am going to limit myself to the TCs containing investment grade bonds since the non-investment grade bonds may just be too risky to buy for the next year. Two non-investment grade bonds that I own in TC form are DKR and PIS. Since I own DKR, I did review the earnings report from Hertz which showed a significant adverse impact from the slowdown.

The week earnings report from Hertz eventually sent the common stock to a buck and change by the end of last week and also impacted the value of the senior bond which is the underlying security in DKR. My position is small at 100 shares and I still plan to hold onto as a speculative bond position.

HERTZ BONDS

TRUST CERTIFICATE HERTZ BOND DKR

HERTZ BONDS: Fitch

In addition to my previous extensive discussion on this TC, a failure of one or more of the U.S. auto makers would certainly be negative for Hertz as well as an acceleration of the downturn which will impact -severely -every heavily indebted company dependent on consumer & business spending. Many will not survive to be put in bluntly and the car rental companies fall into this at risk category.

Robin Rubin, the former investment banker, alleged wise sage, Obama advisor, former Goldman Sachs whiz bang, and Clinton's Treasury Secretary, got skewered in a Sunday New York Time's article about the downfall of Citigroup.  NYTimes.com

According the NYT, it was Rubin who pushed the bank to take on more risk by leveraging up to buy the toxic waste known as CDOs. As with the other financial institutions that have already failed, there was no meaningful risk management and an unbelievable lack of understanding about the risks assumed by what used to be one of the largest financial institutions in the world. After reading this article, you will understand why no one has any confidence left. Two of the individuals who brought Citi down, according to this article, made 20 and 30 million a year. Its chief executive did not even know the amount of the mortgage related assets owned by the bank, 43 billion, until he was told at a meeting in September 2007. What were these people really worth, including Rubin? Why did the CEO first learn about a 43 billion money pit when it was too late to do anything other than twist in the wind? How does someone who does not understand financial instruments like a CDO become head of one of the largest banks in the world? In each case of a financial firms meltdown, the number of people responsible could be counted with the fingers of one hand.

 In every case, these individuals were richly compensated for their incompetence, greed, arrogance and overall lack of knowledge, receiving tens of millions and even hundreds of millions of dollars. Part of their job appeared to be to undermine risk controls. Their penalty has not, and will probably never be, to return one cent of their ill-gotten gains, or to spend time in jail, but simply to find another job to ply their wares. How many people know the name of Thomas Maheras or Randolph Barker of Citigroup? Maybe if you rode the shares down from 55 to 3 you need to read about them in this NYT's article. The article also highlights that Prince, the former CEO, did not have a clue. If you ask me, the issue is not whether Maheras, Barker, Prince and Rubin were overpaid? The answer to that questions is of course they were. The real issue is to assign a value to them below what they were actually paid. I would say, and this is open to debate, that this fearsome foursome had a negative value of about 40 billion as sort of a bare minimum figure.

When you read all of the articles the NYT has written under the subject "The Reckoning" The New York Timesit is impossible to have any confidence, not even a smidgen, in any of the senior managers of our major financial institutions.  It is just really embarrassing that they are American.  

The WSJ and the NYT are both reporting tonight that the U.S. is engaged in yet another salvage deal, trying to save Citigroup before its failure causes a worldwide meltdown. The plan appears to be to create a bad bank out of this bad bank to hold the bad assets, like 50 billion of the trash and have the U.S. assume losses above a certain level.WSJ.com Citigroup NYTimes.com My first suggestion is to first take it out of the hide of the Citi employees who were paid tens of millions each year to create this latest fiasco. I would hope Rubin would be fired along with any senior manager that came close to being responsible for this mess. The NYT article points out the culpability of the Board of Directors who should likewise be removed. Will any of that happen, probably not. Only those who did not receive anything will be punished. The people that caused the near collapse will keep their compensation for destroying the bank, the Board who authorized the leverage and risk taking will still be in charge, Rubin who facilitated the problems will remain, and the taxpayers will pick up the bill. 

SAVIOR FOR THE DAY: TIM GEITHNER

Soon after NBC announced that Obama would nominate Tim Geithner as the new treasury secretary to replace Don Corleone, the market responded as if Jesus himself had arrived to save us all. Geithner is the Head of the Federal Reserve in New York. Clinton, Geithner, Richardson tapped for key Obama posts - MarketWatch The market erased its losses and subsequently climbed almost 500 points. I am just glad it was not another investment banker. These moves up and down are consistent with my reading of the VIX and do not change my current posture.

I did mention the other day that I would whittle down further my short term gains for the year by selling some securities that I have recently bought, when I was still trying to catch the falling the knife, and I sold the 50 shares of Teco Energy at a few cents shy of the closing high, for less than $100 loss after adjusting for the recent dividend. See, Notable News 10 22 2008 & END OF DAY TRADES (IR, INTC, TE AND EHL)

I will continue to do some tax loss selling on big up days and I do anticipate at least one and maybe more days like today before the end of the year.

Selling by individuals has picked up in the TC market, sending some of them back to levels that interest me. These are bonds and I am in the market to buy bonds. I placed a limit order today to buy one that I have talked about but it was not filled. The preferred stocks of REITS are acting as if most of them are going under sometime next year. The fall in stock prices seem to be forecasting that none of them will be able to secure financing even for properties that have no mortgages on them. This is certainly true for all of the mall REITS with the industrial and hotel REITs not far behind in being mauled. I am going to stick with my small positions in CBL and FR. I am prohibited from adding common stocks now, but I view preferred stocks to be more like a bond than equity so that is a loophole in my deep freeze/cocoon/hibernation state.

Citigroup Looks Like it is toast

Citigroup apparently is loved by a Saudi Prince and no other. The market cap of this once great institution is now below the 25 billion that it received from Hank. While I did not predict what would later happen to Lehman, Fannie, Freddie  and the others at the beginning of this year,  I did see enough early on to know that I did not even want to take a nibble.  The price action in Citi indicates a company in dire distress.  Shortly before 2 this afternoon, it had already traded over 775 million shares and is currently down over 31% to 3.23.  Banking is a confidence game and the gig is up.  There is no confidence left, and certainly no love for Citi.  I supposed the more adventuresome individual may go into the market near the close and buy 50 shares of Citigroup, yelling at the top of your lungs I am a master of the universe and a little crazy too.   It may work but I would have to say that Citigroup is giving off all the signals of a bank on the ropes with a Priest on the way to give it last rites.  I would also think that if everyone just shut their eyes and kept saying over and over again there is a Santa Claus, this will all just go away.  Citi may have enough capital to survive or it may not, who really knows?    I certainly have no idea about how bad Citi's plight really is but I do remember Bear Stearn's saying it had a book value of $60 per share before it had next to nothing and the regulator of Fannie & Freddie  saying they had enough capital shortly before they were seized by the government.  

If this continues, S & P is on track for its worst year ever.  204 members of the S & P 500 are less than 4 billion in capitalization which is the minimum level for inclusion in the index.   Tech Ticker, Yahoo! Finance

GOLDMAN SACH'S FORECAST/ALEX THE PARROT

I mentioned earlier that I have bought 10 books to read to read while the market finds its footing and my buying having been placed in deep freeze.  After reading the Goldman forecast for the economy, I may need to buy another 90 books to get me through this down period,  and that may not be enough even though I am a slow reader.  Goldman says the economy will shrink by 5% this quarter, and by lesser amounts in the first half of 2009. Yahoo! Finance  

Goldman further sees profits dropping 25% in 2009, the largest fall off since 1938.   Unemployment is expected to hit 9% in the 4th quarter of 2009, and my prediction is only different in that I expect that number to be hit sooner.  Goldman does not expect trend growth to resume in 2010 with unemployment continuing to tick up.   I am more optimistic about 2010.  However, the current action in the market suggests that the length of the current recession will exceed even the pessimistic forecasts a few weeks ago.

The turning point was the failure of Lehman Brothers, looking at it in hindsight.  The VIX soon spiked to levels never before seen thereafter. Paulson gave a  speech yesterday explaining how brilliant he has been during this crisis. Paulson Defends Moves, Questions Wall Street Pay - WSJ.com You have to remember that it was Paulson who went before Congress in 2000 and requested the lifting of the SEC Rule which restricted investment bank leverage to no more than 12 to 1. Hank Paulson-Savior! When that restraint was lifted in 2004, it took only three years for the investment banks to strangle themselves with 33 to 1 or even higher leverage.  Looking at Paulson's haphazard performance over the past months, and knowing that he was the former head of Goldman Sachs which I guess means that he must be the best and brightest of the Wall Street Titans, it is no wonder that these people have wrecked the world's financial system. allvoices.com  Maybe our next Treasury Secretary should come from somewhere other than an investment bank.  Really, did Rubin put his finger in the dike at Citigroup?  How many of these Wall Street brains appear to have a clue?

My first book to read is "Alex and Me", an entertaining portrait of an African Grey Parrot named ALEX that appears to me to have reached a greater state of wisdom in his 3 decades or so of life than W and Hank ever will.  I am an animal lover and have always believed that many animals do not receive an appropriate recognition of their learning ability, problem solving abilities and overall intelligence. Alex learned a great deal and could speak.  Here is a link to two videoa on youtube about this true bird brain who just passed away:YouTube - Alex The Talking Parrot

YouTube - Alex, the talking research African Grey parrot passes away.  

The CBOE volatility index was not in existence during the crash of 1987.  I have reviewed some work by someone who tried to re-create it for the period prior to 1990.  In that effort, I noticed that volatility was meandering in the 10 to 20 range prior to 1987, with its first spike up to 30 in January 1987. Just before the crash in October, it spiked again to over 40.  This article from seekingalpha has the details.    Seeking Alpha  I do not know the author of this study but he seems to have thought some about volatility and asset allocation models.   My variation is that my models just say stay away and don't come back until the VIX falls to below 20 and stays below 20 for at least 3 months. All models are just theories used to explain and/or predict what is observable and have to be adapted to reflect changes in observable events.  My models are changing just as a result of the unprecedented spike in VIX to 80, with 50 to 60 now being the low end of the range when 50 would have been a new event prior to October 6, 2008.  The CBOE VIX index chart goes back to 1990.  

Notable NEWS: C, DK, NYT/Further Discussion of Volatility and Asset Allocation

Delek experienced an explosion and fire at it refinery in Tyler, Texas, injuring at least 6 people.  I intend to hold onto my 100 shares for at least 11 months before selling for a loss.  I may now sell for a gain at any time.

To further highlight the difficulties in the newspaper business, the New York Times slashed its dividend from $.23 to $.06. 

I thought that the story in the WSJ that Citigroup was considering auctioning itself in parts to be an act of desperation.  MarketWatch Really, who would consider doing that in this kind of market with prices depressed for just about everything other than U.S. treasuries unless the end was near?.

To further my discussion about the VIX, several people have noted that a prolonged period of a low and stable VIX will often breed complacency, which in itself will cause increased speculation and risk taking that may ultimately germinate the seeds necessary for the blooming of the next bear market.  See, generally, Seeking Alpha The more dangerous phase of complacency and speculation will likely be indicated by a long VIX pattern in the 10 to 15 range, which is what I call the second phase of a stable bull  market pattern.  Emerging markets might take off big time during this phase.  I have circulated to some a fifty page book that describes some of these theories and models in boring and excruciating detail.  Some have said it makes for good bedtime reading. I am not going into that kind of detail in this blog.  But I did want to include an excerpt from my prior discussion of the DJIA volatility index, VXD .^VXD: Summary for CBOE DJIA VOLATILITY INDEX 

"One of the main differences noted between the VXD and the VIX is that the VXD shows a longer and more stable bull 2 pattern in the 10 to 15 range, which suggests that the components of the DJIA were considered to be safer than the S & P 500 stocks by the market participants, as shown by the lower volatility numbers.  The VXD shows a very stable bull pattern from the commencement of the chart until July 27, 2007 when the VXD suddenly closed above 20 at 22.42 from 16 a couple of days earlier.  This kind of variation should provide an investor with a serious wake up call. The VXD is the most stable of all of the  volatility charts. A variation from 16 to 22.42 would at a minimum require constant monitoring for the next several days even if there was no confirmation from any other indicator like the VIX. Between late-July to mid-August 2007, the VXD stayed above 20 and started to rise to a range bound mid-20 range by mid-August. For 2 ½ years the VXD did not have a close above 20 and now it was closing in the mid- 20s everyday. This was the most profound warning of any volatility index because it had already shown itself to be the most stable. A warning of this kind from RVX would mean little since it could range up to this level even in a bull market. The VIX would be unstable in this range but it would not be flashing a warning with red bells and whistles at 23 or 24. This pattern for the VXD is considered serious enough to constitute a clear warning to change one’s asset allocation. So, even without the VIX reading which was confirming trouble ahead, this spike in VXD from almost 10 to 25 in a few days would also start the clock counting on a forced reduction in stocks as soon as the VXD returned to a lower reading in the 16 to 18 range which it soon did as shown in a bar chart from late September to early October 2007, when the Dow ultimately surpassed 14,000 (bar chart from book not included here) 

Please focus first on the huge variation in VXD chart between the high and low on September 18, 2007. This is just a mind bender for the VXD. The high was 26.62 and the low was 13.17 and the close was 18.53. If you did not hear the message before, then this one was hard to overlook. This would give you plenty of time to reduce the stock exposure at higher levels in the late September or early October 2007. The next unmistakable warning would come in just a few days as the VXD quickly fell out of the 15 to 20 range and back into its unstable range as shown in the bar chart  for November. By November, every volatility indicator is signaling big trouble."   

The volatility indexes for the Russell 2000 and the Nasdaq require a separate analysis. 

While my volatility models did provide warnings about the bear market starting in October 2007, as well as the prior bear market, and it required a forced stock reduction in early October 2007 when the VIX fell from over 30 in August to less than 18, it did not and could not predict the severity of the bear market that was to come. While the VIX has given warnings during what I call the Transition Phase from bull to bear, to enable a change in asset allocation at the highest plateau of prices, there is no guarantee that it will do so again. There was nothing in the model, for example, that forecasted a spike in the VIX starting in early October 2008 way above its prior highs during the last bear market. I have been trying to put a label on what that means and my working theory, and this is all theory, is set forth in my last post.