Traderbill's Financial Markets Weblog

…coyote ugly? CNBC is amazing as this morning the ’squawkers’ were talking about the selloff on the Bernanke testimony…it more or less drifted down during his rather dovish testimony after a good opening of up about 50 on the Dow. No, the cause of the real selloff was more worries on AMBAC which fell 52% yesterday and MBIA (-31%). AMBAC cut its dividend and said goodbye (nicely compensated no doubt) to it’s CEO due to bigger than expected writedowns. A loss of their AAA/Aaa rating effectively puts them out of business. So? If they lose that rating even more bonds will be downgraded…and insured muni’s would face a selloff as holders (mainly corporations with debt covenants) are required to hold only Aaa rated paper. Of course, this opens the door for Warren Buffett to scoop any or all of these insurers cheaply (Berkshire Hathaway rallied all day yesterday and closed +2.9% on the day), but overall insurance companies fared poorly with the sector declining by 2.6%… almost as bad as Banks -2.9% but nowhere near the damage to brokers who fell 5.5%.

On the government supported enterprises (GSE’s), Fannie Mae and Freddie Mac, both had just gotten above their 40 day moving averages after bottoming in November and then sinking again since the beginning of the year. TB still feels they are best to avoid. Yesterday, two friends called into question TB’s criticism of the preferred stock issued by both, with one stating that the call protection on the Freddie as well as the coupon were better…which is true but TB could not find the prospectus on Bloomberg while he did find the one for Fannie Mae. Is call protection relevant on a quasi-governmental corporation(s), or is a higher coupon relevant if there is a risk to the coupon even if they have the resources to pay the dividend yet are under the control of OFHEO who can override any of their wishes. Also, these two companies have earned the ire of Congress not once but twice or more so don’t expect too much sympathy from them. TB’s other concern is that neither has a cumulative dividend so that it is possible to have those 8.375% and 8.25% coupons reduced or eliminated in some cases and the five and three year call protection respectively become a burden. After the first call date, they are continuously callable after that they pay the greater of 3 mo LIBOR plus over 400 basis points or 7.875%/7.75% respectively. IF TB could be assured that the dividends will be paid (actually if they pay just 2 of the four quarterly dividends you are doing fine…except if you know preferreds you know they are not a bond and that despite now trading at a 4% premium to the $25 par, they could fall sharply. TB is not saying they are a bad investment…merely that they are more speculative than they appear. The FNMA preferreds let them retain the right to issue more that could be senior to this issue…since TB doesn’t have the prospectus on the FHLMC he cannot attest to these issues but would fully expect them to be almost identical boilerplate as the terms appear. Dilution of stocks, both common and preferred, is not being fully considered by the analysts…in fact it is being largely ignored… why is that?

Utilities are not bonds, preferred stock is not a bond, and common stock dividends are not guaranteed as we can easily see of late. Even Aaa investment grade corporates are not the same as Treasury bonds in an uneasy market. Furthermore bonds have covenants for protection…of course we have even diluted this with ‘covenant lite’ bonds detrimental to long term investors…but who cares if you are a hedge fund who merely wants to trade them?

TB went to San Francisco yesterday for a nice lunch with an old (long time, not age) friend at Sam’s. It is so nice to see that some things never change…despite Sam’s having been sold…it is the same as when Herb Caen used to go there…sans no more John as maitre d’, first replaced by a young lad…and now, sacre bleu!…a woman!…and there are more women dining there than before…some change is good.

On the way in on BART he grabbed a handful of his reading, one of which was Merrill’s David Rosenberg who gets no respect…TB can identify with that! But Rosie has been right on this…perhaps it is his Canadian background that makes him sound bearish even when he is bullish…by our terms. He has many of the thoughts of TB…concern over CDS, credit cards and auto loans, and also pointed out an article on USA Today once again bringing up the demographics of the housing market with more and more babyboomers retiring and less demand (or resources to buy these homes since they are intent on spending their money before their kids can get their hands on it). This is a reversal of a trend since 1990 that is just beginning to tick up. He also points to the fact that far too many investors remain bullish on stocks (and bearish on bonds) as indicative that the bottom is not in…he thinks we are only about half way there. We used to talk about ‘reversion to the mean’ on stocks but that has been dissed… well it is coming back now and in spades. He also ran a ratio of the long term trend in real estate assets to non farm payrolls and whereas since 1965 it has been a long term trend that is roughly about the same as the growth rate…it is now off the charts suggesting that real estate prices could fall 25-30% more nationally.

Get a grip and keep your finger off the trigger…instead look for stocks that will benefit going forward – and money managers, mutual funds, and ETF’s that can deliver. Note TB did not mention hedge funds because a major portion of their returns was due to massive leverage…think risk/reward!