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

January 24, 2011

January 25, 2011: WIN (Whip Inflation Now) With Inflation Protected Preferreds

As investors struggle selecting appropriate income streams for their portfolios, I believe that consideration should be dedicated to the under followed and under appreciated realm of inflation-protected preferred stock.

First,a basic explanation of preferred stocks:

A preferred stock is somewhat of a hybrid security instrument, with characteristics of both stocks and bonds. The investor is promised a stated and enticing yield (or terms as per the Prospectus) in lieu of not capturing a company's growth (as with common stock) and without the same guarantees of interest and certainty of principle as bonds.In some instances, the issuer of the preferred security can defer dividend payments at their discretion. Like bonds, preferred securities usually are blessed with a rating from a recognized rating agency.

There are three dominant types of preferred securities:

Fixed-Rate Preferred Stock is the most common type of preferred stock. If dividends are deferred for "cumulative" preferred shares, the funds accumulate and must be paid to the investor unless bankruptcy occurs.

Non-Cumulative Preferred Stock is less desirable than the cumulative preferred shares. The company does not only may defer dividends, but may escape paying them altogether. In trade-off, yields on these type of shares are usually higher than on traditional preferred securities.

Trust-Preferred Stock is a hybrid preferred security essentially constructed to exploit a loophole in the U.S. tax code. Issued beginning in 2000, these shares are created by an issuing company (or a brokerage house)which places bonds issued by that company into a trust. The trust creates preferred shares that are bought by investors. This process provides certain tax advantages to the issuer. For investors,trust preferred stock is considered safer than other preferred's because dividends are paid, essentially, from interest paid to the trust by underlying bonds.Trust-preferred's generally have a certain fixed maturity date schedule.

Preferred stock issues may be treated differently for tax purposes, have a call price and feature many other qualities which are peculiar to the security. The investor absolutely MUST understand the qualities of a preferred security prior to investment. As many preferred stocks are thinly traded, the investor should always buy with a limit order. Selling some thinly traded issues could be problematic in a market free-fall.

There are approximately thirty investment-grade preferred securities with inflation protection characteristics in the market. Many of these securities offer a more handsome payout than TIPs.Buying below the call price could result in a modest capital gain if the security is redeemed. Here are a few favorites:

MetLife Preferred Series A (METpfA): $23.57/share, currently yields 4.29%. Inflation protection is 4.00% plus 1.00% over the three month LIBOR rate. Call price is $25.00 after 9/15/2010. Rated BBB-.

Prudential Financial Inflation-Linked Notes (PFK): $25.98/share, currently yielding 3.44% (interest paid monthly). Inflation protection is 2.40% plus the current U.S. Consumer Price Index (CPI). Matures 4/10/2018. Rated A-.

Tennessee Valley Authority Series A (TVE): $24.75/share, currently yielding 4.55%. Inflation protection is 0.84% plus the thirty year constant maturity rate (CMT). Not redeemable, matures 5/1/29. Rated AAA.

U.S. Bancorp Funding Trust IV (UBSpfD):$22.11/share, currently yielding 4.06%. Inflation protection is 3.50% floor or .60% plus the three-month LIBOR rate, whichever is higher.$25.00 call price after 4/15/2011. Rated BBB+.

Note: The few ETF's (such as PFF)featuring preferred stocks that are popular with retail investors do not make my recommended list at this time, because more than a few portfolio selections are trading over their call price. When inflation kicks up, that spells trouble.

January 11, 2011

January 11, 2011:December Housing Traffic Up. Why?

Credit Suisse has issued their time-tested monthly housing survey which covers over fifty major real estate markets in the United States. Credit Suisse compiles survey results from boots on the ground brokers who know their markets well. With this survey, after all data is put into the hopper, a score of 50 is historically average, with scores below 50 worse and over 50 better. The CS survey is my favorite housing tool. It is accurate, predictive and free of twisted jargon.

For December, 2010, home buyer traffic was modestly higher which was still at a very weak level, but better than the previous few months.Brokers reported that buyers were brought into the market by combination of negotiating a good deal and a fear that mortgage rates would continue to tick upwards (inflation tremors). On the downside, continued high stipulations for conventional mortgages have left even more buyers without a source to borrow funds. Overall, the traffic index increased to 29.1 in December from 22.1 in November. Home prices were up marginally to 23.0 in December from 21.6 in November. Credit Suisse does not believe that there will be any meaningful price increase for homes in the Spring, due to continued weak demand and a new wave of foreclosures slated to hit the markets, Credit Suisse also states the recent court mortgage documentation issue is apt to be resolved quickly.

Importantly, no markets showed abysmal traffic in December. Markets with the greatest improvement included Atlanta (to 33.0 from 19.0), Austin (to 39 from 23), Denver (to 35from 12), Houston (to 41 from 26), New York (to 33 from 18) and Seattle (to 41 from 23).

The CS home index pertaining to buyer traffic,home price,buyer incentives, home listings and the time to sell a home remain well below average except for home listings (to 51.2 in December from 41.3 in November).

For investors interested in home builder stocks, an interesting part of the survey had brokers nationwide rank twelve prominent home builders in order of preference (quality, price, value). From worst to best:

12. KB Home (KBH) (5%)
11. Beazer Homes (BZH) 2%
10. Hovanian Ent. (HOV) 5%
9. MDC Holdings (MDC) 8%
8. NVR, Inc. (NVR) 10%
7. Ryland Group (RYL) 10%
6. Meritage Homes (MTH) 13%
5. Standard Pacific (SPF) 16%
4. Lennar Corp (LEN) 17%
3. D.R. Horton (DHI) 22%
2. Pulte Home (PHM) 26%
1. Toll Brothers (TOL) 29%

January 04, 2011

January 5, 2011: Cuba Drills Deep, Losers And Winners

Well, well. In early March, Cuba will commence with deep water drilling under contract with Repsol (YPF)and Statoil ASA (STO), using an older rig that was recently rehabbed by the Chinese. Reports indicate that it has fewer safety features than the BP's infamous Deepwater Horizon. The site is located a scant sixty miles southeast of Key West, Florida.

How can this be? Thank President Jimmy Carter, who etched a 1977 agreement essentially splitting the Straits of Florida 50/50 between the US and Cuba. Expect scores of deep water wells around Cuba's multi-billion barrel oil pool over the next few years. Eight companies are presently working to quickly expand Cuba's fossil fuel capacity, including Brazil's Petrobas (PBR) and Sherritt International (SHERF.PK).Venezuela,India and China oil interests have diminished Sherritt's originally large role, thanks to providing Cuba with goodies necessary to keep the Cuban economy afloat. Spain has done likewise, based upon my observations as a legal visitor to Havana indicate.Many foodstuffs in the state-run groceries were Spanish and Brazilian in origin.

Winners in the deep water projects are the above-named companies and government-owned oil production companies, Hugo Chavez (he is already being thanked with billboards in and around Havana) and the Castro Brothers, for whom the oil revenue comes in the nick of time to avoid further economic distress.

Losers will be the unprotected, rich fishing areas and beaches of coastal North Carolina, which is where oil spilled from the first deep water drilling projects will almost certainly have a profound impact. Ironically, a modern Wilmington, NC container port that would have provided that economically depressed area with thousands of jobs and an enhanced Coast Guard environmental presence to contain oil spills has been effectively shut down by Democratic Congressman Michael McIntyre, environmental extremists and an organization called NoPort. So much for unintended consequences. Additional losers will be American deep water drilling companies that are not able to extract oil in and about Florida, which may be drawn into some Cuban deep water wells, all American coastal areas adjacent to the Gulf of Mexico (Cuba is planning wells from east of Havana to the western tip of the island near the Yucatan Peninsula), and the Cuban people who will see small benefits at the market but a further entrenchment of the communist regime.

Investors are likely to see opportunities in developing the woeful Cuban infrastructure with companies such as Halliburton (HAL) and interior mineral extraction by companies such as Freeport-McMoran (FCX). Certainly, the situation warrants investor interest, with many companies bidding to partner with the Cuban leadership to tackle problems on an island with one foot in the 1950s and the other foot implanted in the groin of the U.S. as the money from oil rolls in.