Continued from Part 1
If I sound a little bitter and agree- I really am- because of all these "experts" millions of naive americans invested in O&G stocks right at the top of the "supercycle" only to see 70% of their wealth evaporate... Same thing with China, agriculture and all the other "fad themes" out there... I can't tell you how many hate e-mails I received about my article trashing the Chinese bubble back in the fall or Mosaic/Potash fiasco back in July... I wish I was wrong but as "always" it's the retail investors who suffered greatly...
Let's not spend any more time recounting all of the other immediate "dangers" and "threats" to our existence mentioned during the last few years by the media. I think it's time to step back and recognize that these "screaming experts" themselves actually represent the bigger danger to our relatively stable existence than anything else out there! It's because of these "talking head" fools and spineless politicians we have forced ourselves into believing that "renting" a house/apartment instead of buying somehow subjects people to the incredible pain and suffering, or that owning a house is an absolutely "irreplaceable part of a true American dream".
How about the "expert opinions" about the "absolutely necessary" interest rate cuts last summer and the desire to avoid a recession at any cost by injecting unnecessary monetary stimulus even if it meant creating a new asset bubble in commodities that made current recession much worse than it should have been?... But while as a citizen I might be angry and disappointed with the dangerous, greedy, "lemming like" behavior of the mainstream media, as an investor I have to step back and realize- this media "induced" fear was and still is, a huge contributor to all of the severe valuation dislocations out there and is one of the reasons why I, as a money manager, am able to outperform the indices in both up and down markets...
The reality is always much simpler than we are led to believe - recession was and still is unavoidable and is now finally here; some of the heavily indebted companies should and will fail- it's a normal "creative destruction" process and cannot be avoided; unemployment will rise, spending will fall and our tax rates are most definitely going higher regardless of who becomes president; gas prices should and will go lower and interest rates will have to eventually move higher once again despite Helicopter Ben's best efforts to prevent it and finally the important one- stock prices will rise long before the economy starts to recover!...
It is also very clear from the most recent turmoil that our economy is still the most vibrant, flexible and productive one in the world and thus we as a nation will do just fine in the long run. Yes, it is true, that we might have to once again learn how to actually produce tangible goods instead of worthless financial securities, but in the fields of IT and biotech/healthcare US companies will continue leading the way and should be able to actually expand the lead as the "unproductive" human capital in the form of all the quantitative PhDs from Wall Street slowly makes its way into the productive research field...
I now hope only that instead of relying purely on the historical data and fancy formulas to produce and distribute drugs and software, this time they will actually test them on themselves first, instead of feeding it straight to the poor public and then asking the FDA to inject "some additional liquidity" by reducing the acceptable "mortality rates" when it becomes clear that most patients are choking to death when reading the "fine print"...
Anyway, enough rambling- the point I trying to make is simple- don't' listen to the "media"- DOW is not going to zero, and neither MSFT nor GOOG are going out of business any time soon. Remember, this media driven "irrational fear" has given us an opportunity to buy into preferred shares of financial companies out there over the last few weeks at a 50% discount in some cases. These securites were not only paying double digit dividend yields but were also considerably safer than virtually any common stock out there. And now I see a similar dislocation in shares of some of the closed end funds out there selling at multiyear high discounts to their underlying asset value... Just go to the ETFconnect.com and search for closed end funds- discounts are simply unreasonable...
And while stock market could easily decline another 10% if "experts" scare everyone off, but buying AAPL, IBM and Co at a 20%+ discount in some of these ETFs while also receiving double digit dividend yield from sales of covered calls does not sound too bad, unless, of course, you are so scared about the "upcoming crash" that you are actually thinking of pulling your money out of equities today :) just when the smart money crowd (not hedge funds but Warren Buffet...) is actually putting their cash to work...
You can find the list here: sort by a discount
Stay safe out there and instead of feeling discouraged stay focused on making your money back by betting against the media...
P.S. I am now 35% invested and buying 4-5% more on each 200 point dip...
skepticalcapitalist@gmail.com
Archive Comments (5)
Vad wrote: "opportunity to buy preferred shares of financial companies at a 50% discount in some cases. These securities have not only been paying double-digit dividend yields but are also considerably safer than virtually any common stock. (Those dividends could still be cut, of course, and buying individual stocks remains risky.)"
Vad, Can preferred dividends really be cut, as in the percentage lowered? I realize that they can actually withhold the dividend, but didn't know it could be reduced.
Here is something from quantumonline that I found slightly disturbing and wondered if the prospectus of any of the financial preferreds that I hold could allow for the same thing. The quote is:
"REPORTS MIGHT NOT BE FILED - Some prospectuses say that the security can be liquidated if reports aren't filed. I never took that danger too seriously until some Verizon securities were liquidated for that reason. Not called at $25, liquidated for less. In the Verizon cases, securities issued just months before at $25 were liquidated for a lot less, because the market price had dropped. "
Have you heard of this? That's a little scary considering how large the discounts are right now on some of these securities!
Unfortunately, right now, I bought quite a few preferreds in the $21-25 dollar range in companies like C, JPM, MS, USB, PSA, RBS, & MER in the past year and a half. I was trying to cut my risk by reducing my common stock exposure and was shocked when the preferreds dropped so precipitously. I still have hopes that they all will continue to meet the dividend and eventually return to what I paid for them. Is that unrealistic? The early liquidation clause scares me if any of these possess that.
The one real dog that I bought was GJW, which is Ambac Financial, which is so low that I think this company is probably going down. Bought it strictly because of the high investment grade rating from the ratings agencies, which shows me that they are pretty much worthless, and after the fact with their ratings changes. Not reliable predictors.
I decided the preferreds had gotten so beaten down that I sold some stock late last week in VTI, VEU, AND VB and put the proceeds in PFF so that I didn't have to try and pick any individual preferreds. Also I went ahead and enrolled it in DRIP, which is not an option on individual preferreds. What do you think of PFF as a short/intermediate term strategy? It started out at $50, I believe, and I bought at about $28, which is a 44% drop from the original issue of PFF.
Thanks for any input. labczar
Posted by labczar October 21, 2008 4:24 PM
Here is the thing about preferreds- u have to look at them not based on pure yield or discount to nominal value but rather a combination of both...
1. I try to avoid floating rates and prefer high coupon fixed ones...They always get called first because of higher cost
2. Your return will come from two sources:
- coupon
- elimination of discount to par
Because of the fact that my return objectives are high double digits I never buy close to par... I also have a list of relative yield I would be willing to accept on each large banks and try to pick up shares only on high volume down days...
For example the last preff shares I bought where that of DB (DUA, DXB, DTK)... they were yielding into double and sold for about half of the par- it was almost a no-brainer with a 20%+ Yield +Par...
I think that WFC's preffs are still too expensive and C is too cheap... Now I am watching USB to see if I could pick up some shares on weakness...
I don't care about the suddent liquidation issue- there are many different risks out there and that one is low on my list because of the legal remedies available in that case... Bankruptcy, however, is a more serious concern for some of the names you mentioned...
Posted by dishwasher October 21, 2008 10:45 PM
By the way, none of the above should be considered a solicitation or recommendation :)
Posted by dishwasher October 21, 2008 10:46 PM
It just seems crazy to me to think of a C being a big risk on a preferred security. Does it to you? Yet, If you buy a C at $15 and all this mess blows over and it goes back to par, that's a 66.7% gain on top of the 6.5% yield, give or take a little! I keep thinking, what am I missing here? With interest rates destined to drop or stay low through the recession, at some point don't the yields look so attractive that the price starts to head back toward par?
With all this bail-out stuff, I just had to buy some c-w to add to my position the other day at $15.25 to make me not feel so bad about the original issue shares I bought at par 2 years ago! Seems like if Citigroup is that big a risk, then where is this all headed, besides to hell in a hand basket?
I even feel a little safer on the MS and MER I own now and at least they are over the $15 mark again. RBS? But, with the PFF etf paying about 11% dividend at the price I bought it and being able to spread my risk and reinvest the dividends monthly, that just looked too attractive to pass up for me, not being someone who trades often and can spend a lot of research time. Also, if it went back to near it's issue level or even within a couple of dollars of that, it could gain 70% from where i bought it! Might be too optomistic, but who can say it won't? Of course, there is always the risk that they own some company (ies) that go belly up!
Acknowledge that anything you say in reply is not investment advice or a recommendation to buy or sell any particular security.
labczar
Posted by labczar October 22, 2008 12:54 AM
I do own some Citi prefs, but think that while they are not likely to go out of business it is also unlikely that some of the lower coupon prefs will recover back to $25 nominal value any time soon either, because of the recession pressure on earnings....
Posted by dishwasher October 22, 2008 9:31 AM