I am retired and take educated guesses on all things financial.

August 29, 2010

August 30, 2010: October Suprise? Cuba Opens (A Little) For Business.

The planets are aligned for the entry of companies into Cuba. Yes, one of the worst places on earth to do business may well be open for business soon, and on terms to entice investment. True, this has been stated in previous years, but "this time it's different".

Think China and Richard Nixon's surprise detente that opened the communist giant to relations and profitable trade with the United States. The first inkling of a thaw was the arrival of a U.S. table tennis team, followed by an easing of student and professional travel, then a secret visit by Secretary of State Henry Kissinger followed by the big splash - Nixon, himself.

Now, Cuba. Last week, in a barely noticed news release, Cuba will allow foreigners to lease government-owned land on the island (which is almost the entire nation) for up to ninety-nine years. What are the initial plans for the land? Golf courses ringed by luxury resorts, according to Robin Connors, CEO of Leisure Canada. "We see the times are changing, so to speak", remarked Robin. In addition to the private long term leasing of land, the Castro Brothers also ruled last week that private agricultural operations can exist and prosper. Old commodities of sugar and tobacco may be significantly supplanted by 21st century product. This opens the way for organic and other specialty crop commodity operations to exist and thrive. Make no mistake, these are landmark decisions for Cuba as they move towards a Socialist/Capitalist blend, perhaps to preserve a ruling class.

The icing on the cake is President Obama's progressive agenda towards Cuba. Recently, he proposed the loosening student and professional travel to Cuba. He eliminated several layers of the half century-old embargo. Nothing much came of that move because it was not reciprocated by Cuba. That is changing now. All that is needed is a meeting between Secretary of State Hillary Clinton and her counterpart in Havana to precede a presidential visit to match the China connection of 1973. While Nixon wanted China as a foil to the Soviet Union, Obama wants Cuba as a non-belligerent and dependent trading partner to foil growing Russian and Chinese influence in the Americas - something Raul Castro may find interesting as he competes with Venezuelan El Presidente Hugo Chavez for hemispheric prestige and influence. Raul may also be tired of Mr. Chavex claiming to be the heir to The Revolution. Cuba needs to propel and enhance their stagnant and, in many respects, third world economy into the upcoming decade to insure against civil unrest and, perhaps a regime change. Cigars, sugar and rent-a-doctor schemes won't do the trick.

The United States is presently Cuba's largest food supplier and fifth largest import partner with the present rules in place. This decade, America has done over $2b of business with Cuba, not counting donations from Cuban exiles (millions of dollars more). Counting all humanitarian aid, the U.S. ranks right behind China and ahead of Venezuela in total dollar volume as the Castro Brother's business partner.

What in Cuba looks profitable for companies in the near future?
Land-based tourism,telecommunications, organic and specialty commodity agriculture, fossil fuels and minerals.

Here are a few companies that have an active interest or may have an interest in Cuba (they have something to trade for franchise grants) and vice versa:

Vodaphone (VOD)
Statoil ASA (STO)
Petrobas (PBR)
Freeport McMoran (FCX)
Sherrit International (SHER.PK)
Repsol (REP)
Leisure Canada- Toronto Stock Exchange (LCN)
HJ Heinz (HNZ)
JM Smucker (JSM)
Monsanto (MON)
PetSmart (PETM)
Hain Celestial Group (HAIN)
Marriott (MAR)

Participation in the Cuban economy will not necessarily translate into a significant bottom line growth story for many of the above. All will be interesting to follow along the journey when it commences.

Companies that do business within Cuba will negotiate with the strong hand of the Cuban government. A lion's share of State profits from taxes and joint ventures will go into the socialist till to perpetuate opulence for a relative few, and perhaps marginally raise the standard of living for the many. That hasn't stopped the globalisation effort of companies elsewhere in the world - it is business as usual.

August 23, 2010

August 24, 2010: Preferred Stock Picking Gets A Lift From Schwab

Recently, with little fanfare, Charles Schwab introduced a preferred stock screen device on it's research platform that allows investors to screen by current yield, S&P credit ratings, sector and company names for approximately five hundred securities. Indeed, the basics are there for the investor seeking to spice up income within a portfolio.

I set the screen for yields of greater than 6% and an S&P rating of "A" for all ten sectors Schwab provided. Here is what showed up (all were rated A-):

Ameriprise Financial 7.75 Sr. Notes (AMPpA)
Barclays Bank 6.625% Series 2 ADS (BCSpR)
Barclays Bank 7.75% Series 4 (BCSpC)
BNY Capital IV 6.875% (BKpE)
Harris Preferred Capital "A" 7.735% (HBCpR)
HSBC Holdings 6.2% Exch (HBCpA)
HSBC USA $2.8575 cumulative (HBApZ)
HSBC USA 6.50% (HBApH)
Prudential 6.5% (PUKpA)
Prudential 6.75% (PUKpR)
Santander 6.5% (STDpC)
Santander 6.8% (STDpA)
Wachovia Capital Trust IV 6.375% (WBpB)
Wachovia Capital Trust IX 6.375% (WBpC)
Wachovia Capital Trust X 7.85% (WBpD)
Wachovia Pref Fdg 7.25% (WNApR)
Wells Fargo 7.5% Convertible Pref. (WFCpL)
Wells Fargo 8% (WFCpJ)
Wells Fargo Capital Trust IV (WSF)

For less experienced investors the screen tool could induce one to become too smart by half. Although the call price is listed on the screen, there is no date of the call listed and the information tag on the right side of each security line provides only the most elementary of data. Many of the preferred securities are priced over their call, and other qualities unique to each preferred are not referenced. This could well create an "oops" result and unexpected losses of capital.

That said, the screening tool is a useful first step for users of the Schwab online brokerage.

August 15, 2010

August 16, 2010: High Yields/Moderate Risk/Excellent Theme

I read an article today written for the "old media" by financial observer Malcom Berko. I enjoy Berko's work, as he rarely hedges an opinion and takes to task those company managements that do not consistently serve the interests of their owners (shareholders). He has been lurking about the investment forest long enough to identify the dangers within.

Searching for a high yield investment that carries a solid theme, a rather obscure sector of the market was brought to my attention - business development companies. Business development companies are similar in some respects to a REIT in that they must pass on 90% of their income to shareholders. In addition BDC's may not place more than 5% of assets in one company, can't own more than 10% of the voting stock and can't invest more than 25% of their assets in companies that are considered to be in the same industry. This provides a modicum of diversification.

The current allure is that with loans being hard to come by for small companies, more appear to be opting for funding through companies in the business development area. BDC's are making good loans when banks can't, or won't.BDC's generally loan to companies where they can exert influence over the direction of the enterprise, earning consultant fees and/or gaining representation on the board of directors to protect their loan quality.

Here are three recommendations from Mr. Berko. I have looked into the companies and agree with the threesome.

Ares Capital (ARCC),trading at $14.26/share with a $2.7b cap and a 9.82% yield.

PennantPark Investment(PNNT),trading at $10.05/share with a $318m cap and 10.35% yield.

Apollo (AINV) trading at $9.20/share with a $1.8b cap and a 12.17% yield.

As with many securities, if a full blown double dip recession occurs, all bets are off. Investors should know that brokerage ratings on these stocks are all over the map.

August 08, 2010

August 9, 2010: July Housing Data Continues Downward Trend

The July Credit Suisse First Boston Monthly Real Estate Survey was released this weekend and data points to the housing market in a continued decline. CSFB states that "prices remain under pressure, with weak demand and rising inventory" that indicates "further declines are likely." I prefer the CSFB Survey because of it's boots on the ground approach to detailed data collection across fifty major real estate markets nationwide. The predictive accuracy of the report over the long haul has been exemplary.

Illustrating buyer traffic since April, 2008 puts the present situation in perspective. With a score of "50" being average (1=worst 100=best), here is the situation in which we now find ourselves:

04/08: 33.1
05/08: 31.5
06/08: 29.0
07/08: 27.4
08/08: 25.9
09/08: 24.0
10/08: 19.6
11/08: 19.8
12/08: 25.3
01/09: 36.5
02/09: 36.0
03/09: 39.5
04/09: 48.4
05/09: 45.4
06/09: 43.1
07/09: 43.4
08/09: 44.5
09/09: 44.8
10/09: 43.5
11/09: 43.0
12/09: 41.1
01/10: 43.5
02/10: 41.4
03/10: 43.1
04/10: 48.7
05/10: 31.5
06/10: 19.1
07/10: 16.9

The report highlights the downturn after the artificial tax credit. A score of even average has not been reached in any month listed above. Survey consultants in summation declared that potential buyers "lack confidence, motivation and urgency as they confront lingering economic and employment concerns".

CSFB reports that home prices suffered nationwide, as all but two of the top twenty markets (Ft. Meyers and the New York City area)fell. The greatest declines occurred in Chicago, Phoenix, Florida ex-Ft. Meyers and Texas. Home builders have written down over $34b in land impairment charges over the past four years, and lower prices "likely continue to limit construction activity even further."

An interesting takeaway is that although some investors and primary home buyers have made successful deals in the residential market since the real estate bubble was pricked, it appears as though many others may have bought too early, and thus suffer from the effects of still another downturn in price. I suspect that government-inspired incentives are on the way to artificially prop up demand through no down payment loans (already coming into the picture) and other least through this election cycle.