Countrywide: How many days are left?

Countrywide Financial (CFC) came out today denying rumors that the firm had filed for bankruptcy protection. The stock dived 25% on the reports causing a halt in trading for a period of time.

At this point many analysts believe that either bankruptcy or selling the firm for pennies on the dollar is inevitable. The only question is “How many days are left?”

Another concern that has been raised in Congress is the recent large-scale borrowing of Countrywide from federal bank sources; in many reports cited at $50 billion or more. Apparently this level of funding was not enough to bail out CFC, increasing the likelihood that taxpayers will end up holding the bag.

Countrywide Denies Bankruptcy Rumors
http://biz.yahoo.com/ap/080108/countrywide_financial.html?.v=7

Once again – I will urge depositors to withdraw their funds above the FDIC limit from this institution. The risk of losing your money is increasing rapidly for those who bank at Countrywide. Note that this concern does not impact households where Countrywide simply holds their mortgage, so there is no need to re-finance your loan due to the financial troubles at CFC.

Bear Stearns CEO Expected to Step Down

The Wall Street Journal states that Bear Stearns CEO James Cayne is expected to resign, but remain as chairman. To many pundits watching the situation at Bear Stearns, it was just a matter of time until this step was taken. Cayne has been under intense scrutiny since a series of articles appeared showing that he was playing golf and bridge while a major crisis sunk two hedge funds at his firm. The subprime credit crisis caused Bear Stearns to write off billions of dollars of bad debt while its stock price dived nearly 50 percent. An earlier summary (Is Your Investment Bank Executive a Doper) provides some more details.

WSJ: Bear CEO Expected to Step Down

Free Independent Investor eBook

Over the weekend, I have had the pleasure of reading the free Independent Investor eBook from Elliott Wave International. I would urge everyone to check out this resource.

The Independent Investor eBook is a solid thought-provoking overview of the psychology driving the broader market. Referencing events over periods of time, it provides some solid insights to the crowd reaction which propels the indexes. At times bending traditional financial axioms, the book takes a look at economics from a behavioral and cycle perspective.

Even for those not focused on socionomics, the Independent Investor provides some solid insights which will help with your investing. It is provided at no cost in PDF format from Elliott Wave International and can be found here.

Will Actively Managed ETFs Fly

The traditional province of ETFs are passively managed funds which match indexes with low fees. A new breed of actively-managed ETFs are rising. Many folks have questioned whether these ETFs are actually any different from closed-end funds which also trade on the exchanges. Another concern will be if actively-managed ETFs can meet regulatory requirements.

The ETF market exploded due to investors seeking low-fee vehicles which matched indexes; will the firms proposing these actively-managed units be able to exceed market performance while keeping fees low. Do actively-managed ETFs really serve the investor? A recent article from TheSteet.com explores this in more detail - A Push Is On for Actively Managed ETFs.

Generating Yield – Muni Bond and REITs

Many investors focus on traditional yield-generating instruments such as muni-bonds and REITs when seeking income. Both of these investments have taken significant hits in the recent market turmoil and there is increasing concern over their expected performance in 2008. The underlying economic conditions that have caused their recent dismal performance during the past year have not changed, and investors should be aware of the risks facing these income vehicles.

At first glance the beaten-down municipal bond sector appears to be a solid alternative for income seekers. Proponents such as analysts from Nuveen have talked up the muni market recently stating that there should be a solid recovery into 2008. Others doubt this sunny outlook.

Due to their tax-exempt status, muni bonds usually have lower yields than comparable U.S. Treasuries. However due to the price dive in the muni sector, the yields are now in the same region. The typical triple-A rated 10-year muni bond is yielding 3.9%, while comparable 10-year Treasuries are yielding 4.2%. That means an investor in the 33% federal tax bracket would have to earn more than 5.8% in a taxable bond to beat the muni. Similarly with 30-year bonds, the muni (4.7%) and Treasury yields (4.6%) are virtually the same. To outperform the 4.7% muni, an investor would have to get more than 7% in a taxable bond.

Does this make muni-bonds a good income oriented investment for 2008 – not necessarily. The muni market is fraught with risk and the pricing is merely a reflection of the deteriorating situation. Traditionally muni bonds are thought of as safe because communities can normally increase taxes to cover payments, and local governments tend not to go bankrupt. These simple truths may no longer hold water in some instances, nor have they held true in the past; one example is New York City's fiscal problems of the 1970s and another is Orange County’s (CA) earlier bankruptcy situation.

The issues facing munis were discussed earlier in “ The Muni Bond dilemma". In summary, there are several notable risks facing munis which include:

• The pension payment crisis unfolding in many states and communities.
• Increasing budget shortfalls for basic infrastructure projects.
• Reduced tax collection due to foreclosures.
• Rejection of tax increases by voters in communities facing economic stress.
• Probable insolvency of bond insurance firms (ACA Capital, MBIA, Ambac Financial)
• Falling revenue from community projects.
• Impending court rulings about state tax interest deductibility.
• Community investment fund losses (see Will State SIV Funds bankrupt local communities?).
• An increasing number of bond downgrades from rating agencies.

For those investors evaluating new municipal bond investments, the focus should be on quality and the general financial strength of the backing community. Avoid bonds from areas with high levels of foreclosures, projects with single sources of revenue (theaters, stadiums, etc.), and those insured by agencies on the edge of failure.

REITs are in no better shape. The average apartment REIT was down 27% during 2007. Despite the expectation that many people will move from owning homes to renting, apartment REITs are normally the worst performers during a recession.

Many other REIT segments have not fared much better. The outlook for the coming year shows no improvement. Hotel REITs such as Sunstone Hotel Investors Inc. (SHO) have recently endured down-grades and sunk to new lows. Office and Industrial REITs have demonstrated slowing growth expectations; capitalization leaders such as Boston Properties Inc. (BXP) are down over 24% over the past year. Retail property owners are down over 20%, the Simon Property Group Inc. (SPG) hit new lows recently. While the drop in price makes the valuation on some REITs appear attractive, there is an increasing risk that the dividend payouts may be cut.

One bright spot is Health Care REITs. This REIT sector has more upbeat outlook than others even in the face of a slowing economy. There is a growing demand for health care office space and the lending credit crunch has not slowed build-out. An article from December outlined some of the leaders - Sector Glance: Health Care REITs Rise.

Another sub-sector of REITs that normally holds up in down markets is apartments for college students. The growing demand for college housing is likely not to be impacted by the economic cycle. One REIT focused on this segment is Education Realty Trust (EDR) with a 7.60% yield.

In summary, Muni-Bonds and REITs have numerous headwinds looking forward into 2008. Other yield oriented investments in the energy and natural resource sectors may offer better performance with lower economic risk (see In Search of Yield) Investors should carefully evaluate the potential risks before allocating money to Muni and REIT investments over the upcoming months.

Disclosure: The author does not have a position in any of the income equities mentioned in this article. The information provided does not constitute a solicitation to buy, or an offer to sell securities.

In Search of Yield

Risk free yield is shrinking, as many investors have been finding out when recently logging into their on-line bank accounts. The interest rate on many “high yield” bank accounts has shrunk to near 4%. Leaders such ING Direct (4.10%), EmigrantDirect (4.65%), and HSBC Direct (4.25%) have reduced rates over the past months. While these rates are not dreadful for FDIC insured deposits, the yields are significantly down from the 5% region before the Fed started to drop the short term rates.

The situation at your neighborhood brick & mortar bank is even bleaker, many money market funds are back to yielding below 1%. Heaping further injury on banking customers, most local corner institutions have been busy increasing fees for every imaginable service. This combination has left many investors seeking opportunities for better yield.

The current environment is a challenging time for income seekers to be focused on yield, investors must navigate the turmoil of bond downgrades, shrinking dividends, falling interest rates, falling real estate, and a financial sector immersed in the subprime fallout. Fortunately a few solid income opportunities are available in less utilized instruments such as Master Limited Partnerships (MLPs), Trust Preferred Securities (TruPS), and Canadian Royalty Trusts. Many of these opportunities are directly associated with the natural resources sector which is hot. Energy and commodities are likely to see growth over the upcoming years.

As always there is no such thing as a free lunch, attempting to increase yield will amplify your portfolio risk. The theory is to select high-grade investments that have minimal risk relative to the generated income. The best policy to decrease overall risk is to select different instruments across various sectors. This minimizes the risk relative to sector performance, individual company credit rating, and taxation changes.

Another key consideration is taxation. Most of these yield focused investments are taxed as your standard tax rate rather then the 15% dividend rate. If possible it is usually preferred to place income generating securities in a tax sheltered account such as an IRA.

Many of MLP and TruPS securities are unloved on Wall Street and out of the mainstream. The majority are under-valued relative to their yield. These securities trade like stocks so as the price goes down the effective yield increases. Most are currently trading below their issue value as most investors are not informed about their income potential.

Master Limited Partnerships (MLPs)

Master Limited Partnerships (MLPs) offer investors yields up to 9%. MLPs, which are primarily focused in the oil and gas sector, must pay out most or all of their cash flow in distributions. Typically MLP investors pay regular income tax rates on 20% of their cash distributions; for many partnership products taxes on the remaining 80% or so are usually deferred until the investor sells.

Many income-oriented investment advisors recommend energy-focused MLPs such as Enterprise Products Partners (EPD – 6.1% Yield) and Kinder Morgan Energy Partners (KMP – 6.5% Yield). These instruments offer solid yields with possible share appreciation. Additionally both have demonstrated strong insider buying.

One excellent resource for researching income focused investments is quantumonline.com (QOL). The site is free to those that register. QOL is “unbiased information on preferred stocks and other exchange-traded income investments.” The site allows you to research MLPs, TruPS, Royal Income Trusts, and many other instruments. Solid information is provided about taxation, distributions, and limitations of the various yield-focused securities.

Trust Preferred Securities (TruPS)

Trust Preferred Securities (TruPS) are sometimes called “bonds for the masses” These instruments normally trade at a face value of around $25 instead of the $1,000 price tag needed to purchase a bond. TruPS come from many different issuers; most are originated from well-know companies such as General Motors, Citi Corp, and American Airlines. Most TruPS are taxable at your standard income rate, a number are only taxed at the 15% dividend yield rate. A list of the TruPS taxed at the 15% dividend rate can be found at the QOL site.

Some investment advisors consider these preferred securities to be the worst of both worlds. From an equity perspective they do not rise as quickly as the common stocks of the companies, and from a debt-market angle TruPS are considered riskier than bonds. Other advisors view TruPS as a valuable addition to an income-oriented portfolio.

The majority of available TruPS are from financial sector firms. Naturally with the current sector turmoil investors should avoid this sector except for banks that have limited sub-prime exposure such as US Bancorp (USB). US Bancorp offers a preferred security yielding 6.9% and listed under USBH (or USB-PH in Yahoo).

With many sectors beaten down in the last months, many industries are offering excellent yields on preferred stock. It is best to avoid the financials and focus on preferred securities from major manufacturers (GM, Ford, etc), utilities (DTE, Duke), and conglomerates (General Electric). These are all companies that will likely survive any recession and continue paying their preferred payments for many years into the future.

General Motors (GM) has a good number of preferred offerings that are now yielding over 11%. These can be found listed as BGM, RGM, GMW, XGM, GMS, and HGM on the NYSE. While the auto industry certainly has faced challenges which have battered the credit ratings of most manufacturers over the past years, it is unlikely that GM will stop paying dividends on these preferred securities.

A comprehensive table of preferred securities can be found at the WSJ online site.

Canadian Royalty Trusts

Another income investment to consider is Canadian Royalty Trusts. Most of these instruments are focused on the natural resource industry. The yield on many is above 9%. However the taxation situation is difficult to sort out; investors must deal with a tax withholding situation in Canada and unclear requirements about the U.S. taxation rate. Due to the taxation situation, it is best to avoid putting Canadian Royalty Trusts in an IRA or other qualified plan. Investors should see their tax advisor before diving into these instruments.

One leading Canadian Royalty Trust is Canadian Oil Sands Trust Units (COS-UN.TO) which recently raised its quarterly distribution by 38% at the end of October. Another prominent trust is Provident Energy Trust (PVX) which is listed on the NYSE and is yielding 14.4%.

One summary of leading Canadian Royalty Trusts can be found at DividendDetective. QOL also provides a solid summary of the Canadian Royalty Trusts listed in the U.S. market.

Summary – Understand the Risks before jumping in

Keep in mind that income-focused securities are only appropriate for a portion of most investors’ portfolios. The key focus is normally to replace the income-oriented component of the portfolio with higher yielding instruments. Recognize that a capital depreciation risk exists when buying preferred equities; their price can go down just like common stock.

Certainly these investments offer better yields than CDs and money market funds. Interest rates on most traded equity-based instruments are above 6%, some have eye-popping yields of over 14%. An investor should evaluate the credit rating of the issuers prior to jumping in, while diversifying across multiple vehicles to control risk. When utilized properly MLPs, TruPS, and Canadian Royalty Trusts can boost income yields within a portfolio significantly above standard bank interest rates – without causing a loss of sleep over the safety of the principle.


Disclosure: The author does not have a position in any of the income equities mentioned in this article. The information provided does not constitute a solicitation to buy, or an offer to sell securities.

Venezuela Introduces New Currency in Plan to Halt Inflation

Venezuela endures the highest inflation rate in South America. The official inflation rate is over 20%, the unofficial rate is over 100% when taking in account the underground economy and realistic exchange rate to other currencies.

The middle class is pressed as more wealth is transferred to social programs with no associated economic benefit. Businesses are under increasing pressure as the government continues to seize resources, placing productive employment in jeopardy. Business growth has declined rather then risen over the last 12 months, while inflationary pressure strains the Venezuelan economy.

While the government has pushed the new currency as the “strong bolivar”; most of the nation has dubbed it the “weak bolivar”. It is generally helpful to lob off three zeros on currency note from a mass psychological perspective, after all who wants to pay 2000 of a currency unit for a loaf of bread. However attempting to sell a new currency as a cure for inflation and a stimulant for economic growth is far-fetched, if not absurd. Sloganeering with "A strong economy, a strong bolivar, a strong country" will not alter reality that the currency change is nothing more than window dressing.

For the government, Chavez's introduction of a new currency is merely an attempt to conceal the extent of the inflationary problem from the people of Venezuela, a traditional national problem that is difficult to hide. Unfortunately this solution will not really resolve the issue, and the second half of 2008 is likely to see stagflation in the local economy as Chavez continues to push fiscally-irresponsible social policies.

One immediate concern will be if the chill spreads like the flu to other economies in the region. The Latin American countries are interlinked in both trade and stock market performance. Surprising many pundits the Latin American market (as seen by the ILF ETF) has continued to have a hot run despite the rising regional risk.
http://finance.yahoo.com/q/bc?s=ILF&t=2y&l=on&z=m&q=l&c=


Venezuela Introduces New Currency
Venezuela Launches New Currency As Chavez's Government Seeks to Stem Inflation
http://biz.yahoo.com/ap/080101/venezuela_new_currency.html

New Poll: Tech Sector

A new poll has been posted - "How will the Tech Sector perform in the 1st Quarter of 2008?" Come voice your convictions at the top left side of the blog.

The earlier poll for December "Will the market go up or down before Jan 1st?" showed an nearly even split between bulls and bears. The market actually went up between late November when the poll was posted and the end of the year. What will 2008 hold for us?

Happy New Year from HingeFire

I want to wish everyone a happy and healthy 2008!

The "Screening to Win" series about technical indicators has recently been presented in the HingeFire blog. With the recent addition of the Bollinger Band summary the series is complete.

The articles detail how to use technical indicators to enhance your investing. Hopefully these summaries will provide traditional fundamental investors with some solid insight on how to incorporate technical indicators to improve their returns. An index of the articles is provided below:

Screening to Win: Moving Averages

Screening to Win: RSI (Relative Strength Index)

Screening to Win: Fast and Slow Stochastic

Screening to Win: MACD (Moving Average Convergence / Divergence)

Screening to Win: MFI (Money Flow Index)

Screening to Win: Williams %R

Screening to Win: Bollinger Bands

A Few Days left to Win an iPod

For HingeFire screener users, there are just a couple days left to qualify for the iPod before the drawing. A drawing to win an iPod will be held on Janurary 5th for those who complete the user survey. One of the benefits of being a HingeFire user is that you get to drive the future development directions for the product. Please take the survey found at: http://www.hingefire.com/user-survey.html

The survey only takes about 20 minutes and all users who take the survey are added to a drawing for an iPod! We look forward to your feedback!