I feel like a harbinger of doom these days, but it nearly impossible to be optimistic when economic data and government policy could drive a clown to suicide. Let's recap the latest dispiriting news.
The Kommisar's In Town: Senator Bernie Sanders of Vermont and Representative Bart Stupak of Michigan are pressuring the CFTC to limit the size of commodity bets for commodities with "finite supply" (specifically oil, gasoline and natural gas) for certain market participants (this includes index funds and ETFs. The dynamic duo blame speculators for the recent rise in energy prices.
No kidding guys? Last year, I wrote that speculators were responsible for the dramatic spike of oil prices. I suggested that oil was being used as a dollar hedge. Oil is denominated in dollars. I one believes that the dollar will weaken, a possible strategy is going long oil futures (directly or indirectly via funds or derivatives). In spite of the criticism from market "experts", I and like-minded people were proven correct that speculation was responsible for rising oil prices. It all unraveled when the markets realized that decoupling was a foolish pipe-dream and that the dollar remains the world's reserve currency. However, even though I agree with Mr. Sanders and Mr. Stupak that speculators are largely responsible for the recent spike in oil prices, I do not think that it is the government's responsibility to manage the investment or speculation positions of private investors. That is socalistic government overreach. Fears of this kind of overreach in the financial sector is hampering the recovery by keeping investors on the sidelines or has them seeking other opportunities. I say: invest far from the government (sorry C, AIG GM and Chrysler).
Speaking of our aforementioned wards of the state. The price of AIG common stock continues to drop as the acknowledgement of exposure to European banks, government involvement and a recent reverse stock split (often considered the final act of a dying firm) has investors rattled. The market is not being kind to C as the threat of more off balance sheet toxic assets, mega share dilution (5.5B shares becoming approximately 23B shares) and poor earnings continue to push C stock lower. Investors may want to reconsider exchanging C preferreds for common and just get out of Dodge.
I have been of the opinion that investors should sell their C preferreds and move on to better opportunities. When CprP and CprM were trading in the $21 to $22 area investors were given a gift. However, amateur investors and misguided financial advisers foolishly believed that the preferreds had to trade at exchange parity with C common and that the price of C common was fundamentally correct. Neither assumption was true.
If one owns CprP, CprM or CprI, one needs to sell or convert as C will permanently wipe out their dividends and delist them This wil render them worthless. CprG, CprF and other preferreds near the top of the waterfall schedule, although not being wiped out, should continue to lose value as the arbitrage fades. This has already happened with CprG and CprF, but hasn't caught up with CprU, CprW and CprE. When the exchange is over, these preferreds should trade at yield levels similar to those found with preferreds farther down the waterfall schedule. That means the 9.00% yields found with U,W, and E will become 11.00% (or higher) yields resulting in sharp drops in prices. Get out now!
Home Sweet Home: Mortgage and home-equity delinquencies continue to rise. Bloomberg News reported:
Late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported. Delinquencies on home-equity loans climbed to 3.52 percent of all accounts in the quarter from 3.03 percent in the fourth and late payments on home-equity lines of credit climbed to a record 1.89 percent, the group said. An index of eight types of loans rose for a fourth straight quarter, to 3.23 percent from3.22 percent in October through December, the group said.
Housing is not poised to recover. Even when it does recover it is not returning to bubble levels for years. This will impair homeowners, banks and homebuilders for some time. The consumer could be on the sidelines for quite awhile longer. As consumers are responsible for about 70% of U.S. economic activity, recovery will move at a glacial pace. One pundit on CNBC suggested that the way to housing recovery may be to permit home prices to fall to levels at which consumers could afford them and obtain financing. What a novel idea, one which was suggested by yours truly in March 2008. However, the current administration is determined to plan the economy and its recovery. As Americans are all victims of capitalism, the system must change. Never mind that Americans largely did this to themselves. I don't recall roving bands of brigands forcing people to purchase homes the could not afford using mortgage vehicles which they could never pay.
I still say that fixed income investors should ladder or barbell with emphasis on the two to five year area on the curve. CDs and callable agencies should be used on the short end of the curve and non-TARP banks, telecom and utility companies should make up the seven to ten year area of one's portfolio. There is not much point in extending far out on the curve. This includes preferred securities.
No comments:
Post a Comment