October 31, 2009: Fixed Rate Capital Securities: An Interesting Alternative For Income Oriented Investors

In the early 1990s, a product called a fixed rate capital security(FRCS) was introduced to meet the needs of income-oriented investors and provide a cost efficient source of capital for issuers.

These securities combine the features of corporate debt securities and preferred stock:generous yields compared with other investment vehicles, regular income disbursement, predictable investment time frames, liquidity and investment grade quality(in almost every case).

Like corporate debt securities, fixed rate capital securities rank senior to common and preferred shares and have a stated maturity date. Like preferred stock, they have a $25.00 liquidation value (generally) and trade on a major securities exchange.

Unlike preferred stock, fixed rate capital securities offer no tax benefit to corporate investors, carry a "call" risk, the possibility of deferred payments and an "extension" risk which may allow the issuer to extend the time frame for redemption.

Factors that affect the price of fixed rate capital securities include: interest rate risks (inflation, deflation, etc.), credit risk of the issuer, purchasing power risk due to inflation of devaluing of the dollar and price risk. Investors should also be aware of peculiar characteristics of the security they are purchasing, if any.

I prefer to purchase securities with a modest (2-4 year) maturity and also trade at a discount from their $25.00 liquidation price. Assessing the company's prospects to make payments and eventually redeem the security should rank at the top of any investor's benchmarks to purchase.

Here are a few securities, some having all of the characteristics above, you may want to explore:

MetLife (METpfB): $21.75, 7.47% yield, call date 9/15/2010
Gabelli Equity Trust (GAB pf): $25.00. 6.20% yield, call date 11/10/2011
PPL 6.85% Senior Notes (PLV): $24.70, 6.93% yield, call date 07/01/2012
National Bank of Greece (NBGpA): $24.69, 9.19% yield, call date 06/06/2013
General Electric Credit (GEG): $23.85, 6.34% yield, call date 02/06/2012
Deutsche Bank Cap. Funding Trust X (DCE): $22.63, 8.12% yield, call date 12/15/2012
Deutcshe Bank Cap. Funding Trust IX (DTT): $20.96, 7.90% yield, call date 8/20/2012
Comcast 6.625% Notes (CCS): $22.95, 7.22% yield, call date 05/15/2012
Barclays Bank (BCSpA): $21.44, 8.28% yield, call date 12/15/2012
Archer Daniels Midland (ADMpA): $42.68, yield 7.32%, call date 06/01/2011 ($50)
Alabama Power 5.875 Senior Note (ALM): $25.03, yield 5.87%, call date 04/01/2012
National City (PNCpA): $21.19, yield 7.82%, call date 11/15/2011

The author owns ADMpfA, GEG and PNCpfA.

October 25, 2009: Homes Without Equity, Here We Go Again

John Burns Real Estate Consulting has released some unhealthy statistics regarding new home purchases from January through mid-October,2009. 59% of sales have been dependent upon government financing programs such as FHA, VA and USDA that allow purchases to be financed at 96.5%-100% loan LTV (loan to value). The highest use of FHA financing was in Northern California (68%), while southern Florida builders reported the highest percentage of cash purchases - a good thing(22%).

Two hundred and sixty-two home building industry executives from public and private companies responding to the survey also provided the following statistics, as of early October.

Average net sales per community dropped from 17% nationally, returning to levels last seen this past June and July. While homes were overall much more affordable with low conventional mortgage rates and the federal tax credit continuing to support new home sales,home builders still reported declines in traffic and sales rates in September and early October, seasonally adjusted.

In addition, major banks reinforced by pronouncements from the US Treasury are reporting that foreclosures are expected to bounce upwards again in 2010. As some markets are already 2/3 dominated by foreclosures and short sales, this is not good news for the home building industry.

Extending and/or expanding the home purchase credit due to expire November 30th may bring another stream of buyers back to the market, but if they have questionable budgeting habits and are likely to default, is this really a solution?

With recession unemployment hitting record numbers, the ability to make payments on a home, whatever the initial credit and promotional discounts, will be problematic for many.

Current economic conditions and the continued lack of buying within one's means remain front and center to the home industry problems. Eventually, this situation becomes everyone's "problem".

October 19, 2009: Islamic Debt - The Satan Is In The Details

The Financial Times had an interesting article buried in the back pages of the second section today regarding Islamic debt defaults.

It seems as though two prominent Middle Eastern investment companies - Kuwait's Investment Dar and Saudi Arabia's Saad Group - are at the cusp of a legal battle that will largely determine the $1,000b Islamic-style bond industry. This bond industry is one of the fastest growing niches of international finance. The deal is simply this: invest in Islamic operations that can technically comply with Islamic law against interest while providing a product that creates a guaranteed or floating interest rate that is, well, not an interest rate. A product such as this is called a sukuk.

Sukuks avoid the Islamic ban on interest by allowing investors to make a steady profit from the income of an underlying asset such as rental income by placing the income in a special purpose vehicle for the duration of the "bond", rather than receive, technically again, a fixed interest rate on a specific non-maturing date.

Lawyers and bankers are now trying to determine what interest these sukuk bondholders have in a bankrupt company. In short, does a sukuk have a claim on the assets of a company which issued the "bonds".

Herein lies the problem. Experts say that the issue of claim may not be clear cut. The defaulted companies claim that "asset-based" is not the same as "asset-backed". It appears that more than a few Islamic bonds are asset-based, not asset-backed. With sukuks being structured to adhere to Islamic principles, a concern is that courts anywhere in the world may rule against the bondholders if the issue is merely asset-based.

Muslim clerics, who have to approve all Islamic products (for a fee, such as an underwriter) often disagree on how closely Islamic bonds act like other bond instruments, and what happens in case of a default.

"If someone has purchased a sukuk assuming that they automatically have recourse to the (company) assets, they might be unpleasantly surprised", stated former sharia scholar Muddassir Siddiqui, now head of Islamic finance at DentonWildeSapte."At the core of this confusion lies the subtle -some would say fictitious- distinction between 'beneficial right' and 'legal right' to the asset."

The outcome of the two legal wranglings will have a dramatic impact upon future sukuk issues. At the least, the Islamic sukuk investor will have to read fine print on so-called guaranteed Islamic bonds to see if they are as such.

Perhaps, like any investment that tries to split too many hairs to avoid offending the law or, worse yet, God, if it looks too good to be true, it is.

October 12, 2009: CRACKER BARREL OLD COUNTRY STORE - Y'ALL LOOK AT THIS ONE, HONEY

Ordinarily, I examine only three things about a restaurant: the cleanliness rating, the menu (including the specials of the day, which are usually to be avoided from bitter experience), and the price. I haven't eaten at a Cracker Barrel for some time. Per chance, I was driving the family by a Cracker Barrel around brunch time Sunday after church and we agreed to eat there.

I was very impressed by the clean, friendly atmosphere at Cracker Barrel. The menu was refreshed a bit from what I remembered, especially the non-breakfast items. Prices were well within the reach of a family on a budget and the staff was not overly attentive (you know, the "Is everything all right?" every thirty seconds). The gift shop was generating sales and the merchandise did not appear stale and dusty as I recalled on a previous visit many months before. And the food was substantial, properly plated and served quickly.

But this is not supposed to be a restaurant review.

Cracker Barrel (CBRL) is trading at $36.00/share and has a 2.23% yield. The stock goes ex-dividend October 14th. The 52-week price range is $10.67-36.00. CBRL is trading at a 52 week high for two reasons: several analyst upgrades, likely a result of a successful investor's conference in September, and a management team that appears to "get it" with the country casual dining experience, providing exceptional value for the money in a tough economic environment.

CBRL has a ROE of 52%, a net margin of 2.8% with revenues of $2.37b. It's market cap is $755m with five year earnings forecasted around 11%/yr. Institutions own a big chunck of the common stock.

Looking at the company and the sector, I think that lower commodity and utility costs will probably benefit CBRL's margins. This restaurant chain actually has an under priced menu compared with peers so there appears to be room to nudge up the entree prices and still retain a wide customer base. The astute management team is also likely to continue to massage both menu and service. Debt will likely be reduced from ongoing sale-leaseback transactions, the proceeds perhaps going towards a share buyback or dividend increase. New IT systems are being introduced system-wide to ultimately lower labor and food costs.

Yes, there is risk in any restaurant stock. Fuel prices may spike which will hurt both customer traffic, store operating expenses and the cost of procuring foodstuffs. The government may stifle the sector with higher taxes, minimum wage hikes and insurance expectations. And, specifically, Cracker Barrel management must continue to be mindful of never again experiencing widely reported racial slights that cost the company dearly a few years ago.

In total, CRBL is an investment worth exploring, perhaps on a modest pullback in share price. If all cylinders are hitting,this tasty company will earn you more than grits.

The author does not presently own a position in this stock.

October 6, 2009: E*TRADE BONDS TO THE INDIVIDUAL INVESTOR

I am familiar with the platforms of several online brokerage firms. Trading stocks on every service is generally easy and prompt. However when it comes to bonds, there is definitely a difference. Trying to research and invest in bonds on most of the sites I tested ranged from mediocre to downright awful.

E*Trade was the most comfortable bond service platform I used.

First, E*Trade maintains a large selection of bonds and other fixed-income securities that can be purchased for as little as $1.00 per bond ($10.00 minimum/$250.00 maximum). What E*Trade doesn't have online directly they will procure for the investor promptly and at a satisfactory price. If you want to sell a bond, I found the process to be user-friendly and on target with prices.

Second, their online research tools are easy to manipulate and comprehensive. When I called the bond desk, I was not faced with what seemed like a high school GED candidate - which was my impression from some other brokerages online. Plus, they acted quickly upon my phone inquiry without the usual waiting period which at one brokerage took almost an entire Symphony's worth of time.

Third, the investor will find E*Trade's bond fund selector an easy tool to work with. Locating practically any fund complete with excellent start-up data is at most four clicks of the mouse away.

Finally, for those who need to have their hand held, professional assistance is available.

All in all, E*Trade has their bond system operating to provide excellent service to the investor.