Monday, March 09, 2009

Update: Wonker Weathers the Depression, cont'd.

WARNING: Long entry, but if you like detail, it's here, by subject head.

I suddenly realized last night that--as I busily try to survive a paid of Wonker family layoffs, the destruction of our 401(k) portfolios, and the threat of the erosion of value vis-a-vis our real estate holdings--I hadn't updated our legion of avid fans on the progress (or lack thereof) we've made in dealing with this Depression on a personal level. (Yes, Depression, let's tell the truth here.)

So let me catch you up as quickly as possible, without throwing Germanic sentences at you. Like the first one above.

After battling our portfolios back to about -20% since the carnage began in earnest late last summer, the second wave of stock average crunching attacked us again in February and, thus far, through much of this month. We're probably down about 30% now.

That said, if I don't worry about the actual value of our various holdings and focus on the yields I've been buying, portfolio 1--the only one we have that's not in various retirement vehicles--is now generating roughly 9% per annum in yield. The portfolio is a mix of equities and bonds or bond-like instruments, and the yields are probably, by and large, safe and protected, although you always have to qualify such statements in this market.

I'm going to give you some details now, but please observe the usual common sense, informal disclaimer here. I was once a registered representative-financial advisor but am not currently one. But in any event, if you have any sense, please realize that nothing here should be construed as a recommendation to buy or sell, that if you do what I do you could lose all your money (as I could mine), etc., etc. In other words, use your noggin and understand that no one, including myself, is infallible in a mess like this. (If I were infallible, I'd be UP 30%.)

As indicated, portfolio 1 is generating roughly 9% per annum in yield. I've gradually gotten more conservative in here regarding what I buy or sell. I haven't hedged with options, as the options for many of these vehicles either don't exist or don't have enough premium value to warrant the hedging. So this stuff is what it is.

First and foremost, I've switched to a higher percentage of fixed income type stuff. It's been badly underpriced in my estimation, and as a result, may eventually provide stock-like capital gains when eventually sold or maturing.

BONDS (Corporate)

National City: Bond holdings include one sort of leftover of my late Dad's old bank, National City. The bank has now been swallowed by PNC, due to its inability to get TARP money from the Feds, but its bonds still live on under its name. I bought some early-maturing bonds at a deep discount, with an annual yield (coupon) of 6.25% but at a price that gives me a yield-to-maturity of about 10%. To my surprise and delight, the bonds bounced up to par value (1000 per bond, full value at redemption) right after the company's takeover by PNC, so I'm now sporting a 20% capital gain here. Best yet, I figure I'll just hold 'em to maturity and collect the remaining interest until they mature in 2010. And they're likely to, since the Fed gave plenty of TARP money to PNC to effect the takeover.

BONDS (Municipal)

Ohio Tobacco Bonds: Remaining two straight bond holdings are rather odd: Ohio tobacco revenue bonds with long maturities--i.e., probably maturing after my inevitable death. Bought 'em at a deep discount, but they've sunk about 20% apiece. But I can afford to be patient. The coupon yields are 6 and 6.25% respectively. The yields to maturity (if they ever mature) are in the 11% neighborhood. And these suckers are TAX FREE. Like the tobacco revenue bonds of many states, the Ohio bonds were issued so the greedy legislatures could pre-fund their tobacco graft revenue from the multi-state tobacco extorion settlement and start spending it right away.

Problem with tobacco bonds is, however, that the states are now happily raising tobacco taxes to finance their shortfalls, and Obamanation is making nasty noises about raising Federal tobacco taxes as well. Both idiotic actions could kill the Golden Goose by causing further erosion in tobacco product purchases.

However, Ohio and at least one other state realized this would more than likely happen--that the tobacco revenue actually funding the bonds might erode faster than they thought, making the bonds difficult to repay. So they incorporated a sinking fund, and will actually start redeeming these guys at par value, on a random basis, starting circa 2017. So in spite of their lousy BBB rating, these tobacco bonds are safer than most.

And oh, yeah, here's the best part. That big 6-6.25% coupon is FEDERAL TAX FREE! So I figure I can afford to sit in my negative position in these bonds indefinitely and am not terribly worried they'll default.

Muni Bond Closed-End Mutual Fund. We have another "set" of bonds as well, but they're in a different type of investment, a Blackstone Municipal Bond Closed-End Mutual Fund. Blackstone has a huge number of these funds, some general munis, some keyed to specific states' bonds. The advantage of owning muni bonds of your own state is that they are both Federal tax free and STATE TAX FREE. So while my Ohio bonds above escape Fed tax, my home state of VA gets to tax the yield. But the Blackstone Virginia Bond Closed-End Mutual Fund I own invests in a collection of Virginia bonds that's double tax free. Current yield (which fluctuates a bit, since this is a fund) is roughly 6.45% TOTALLY TAX FREE. Gotta love it.


Oil and Gas Revenue. A bond-like investment I hold in this account is a Kinder Morgan "Trust," actually a sort of REIT (Real Estate Investment Trust) that must disburse most of its income to shareholders ("partners") each year to retain a tax advantaged status. (I won't get into the details of this stuff, but the yield I get IS taxable.) Yield on this, which can fluctuate, is currently roughly 10% due to a massive recent price drop. But I continue to hold as I think the yield is stable. While natural gas prices have tanked, oil is firming, and revenue should be stable for the coming year.

Telephone Company, aka Telco. An investment I picked up some time ago, which took a brutal downturn not long after, is the common stock of rural telephone carrier Century Telephone (CTL). Its dividend yield is nearly 12% and should be safe for at least another year as its earnings are stable. The reason for the surprisingly huge initial price drop last year, right after I bought, was Century's pending purchase of semi-rival rural carrier Embarq. Century intends to maintain the dividend after the merger completes (allegedly the end of this month) and the stock price should stabilize after that while the value, of course, will be greater.

The large price drop was largely due to the actions of arbitrageurs (check the link, complicated to explain) who drove Embarq up and CTL down. Oddly enough, I traded Embarq at the same time for a nice gain, but had no clue traders would smack CTL so badly in the meantime. Acquirers, in fact, usually go down at least a bit after they announce a takeover (while the target company goes up), but this move was unexpectedly volatile.

Anyhow, I choke when I see the paper loss, but delight every time I get a dividend. And dividends an interest out of this account are paying at least a portion of the Wonker family expenses.

Preferred Stocks: What's left? Preferred shares of JP Morgan (JPM-I) and Public Storage of America (PSA-M), the former yielding nearly 15% taxable and the latter yielding nearly 12% taxable. Both are senior to the common stock in the event of economic destruction, but I expect they're safe even though the JPM took a real beating last week due to more bad news on the banks.

Reason I figure JPM is safe in the end, even from nationalization, is that they've remained strong and have, frankly, played serious patty-cake with the Fed and Treasury to suck in bad assets and players to help solve the current financial mess. Although this entirely Socialist Democrat-led government can turn on you (most Wall Streeters idiotically contributed to Obama rather than McCain to make sure they kept getting invited to the best parties--and have paid dearly for it already), the govies are so deep into it with JPM that I think they and their wily leader, Jamie Dimon, are probably going to be okay. BTW, common dividends are getting cut, but prefereds should be safe and level as they are senior to the common.

PSA should likewise be okay. They are actually a REIT controlling a huge number of storage facilities both in the US and abroad. Now, if you think about it, as millions of families are thrown out of their homes, where will they go? To apartments, smaller homes, etc., with the lowest rents possible as they try to recover. They will have excess stuff they need to store somewhere. Where? PSA facilities, that's where. It seems a little unsettling to bet on this company. It provides a useful service in the best of times as people move up or relocate. But it's clearly a downside play as well for the most part. So why not?

Closed-End Stock Fund. Final holding is the Zweig Total Return Fund (ZTR) which is another closed-end fund whose goal is income and preservation of capital. It's not very highly rated for total return and I'm a bit down in it. But the shares are cheap, the yield historically has been a stable 10% taxable, and like the Blackstone fund above, the income arrives monthly, not quarterly (as in most stocks) or semi-annually, as in most bonds. So I can pull some of this every month to support my currently subdued spending habits.


That's it for now. This is not the totality of the shrinking Wonker family empire. But it's the unsheltered part--which, oddly, is partly sheltered anyway by the munis.

If you want to take a shot at any of these, be my guest, although I'm not making recommendations, since your situation is undoubtedly different from mine. But BTW, you can currently pick up CTL and JPM-I a hell of a lot cheaper than I did right now, FWIW.

I'll provide additional updates. But right now the market is opening, and I need to get back involved in the horror show before the shorts and the hedgies help themselves to more of my dwindling, but not entirely ineffective, capital holdings. Or, come to think of it, before the Obama administration does.

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