We did our hypothetical buys at the close today of the stocks mentioned last week and will track these separately in a Yahoo account.
PWE -- 750 shares at 26.
CMO -- 1500 shares at 13.19.
JSM -- 1100 shares at 17.51.
KSK -- 1400 shares at 14.70.
PEP -- 273.7 shares at 75.90. (The fractional total is so the total starting portfolio value comes to just under $100,000.)
Disclosure: I am long all of these stocks.
Pepsico is always compared to Coca-Cola, but it's really more diverse -- Frito-Pepsi would be a more accurate name, and you'd need to add Quaker, Gatorade and some other brands to get a real expanation of what this company sells.
This stock pick doesn't look much like the first four -- it's a common stock with no special tax treatment, you
can trade it readily, everyone's heard of it. But hey, everyone needs a safe holding. Look at this chart for the last 30 years. If the economy collapsed, the stock market shut down, livestock took over lower Manhattan and you couldn't trade for five years, you'd still probably be make money holding Pepsico.
Penn West Energy Trust is a Canadian oil royalty trust, meaning it pays out its income in dividends. Recent changes in Canadian tax laws have hammered Canroys. Penn West won't be able to keep that juicy 15 percent dividend forever due to the tax changes next year, but it's managed conservatively (even if oil prices come down to $60 a barrel, the company says the pre-tax payout is solid) and many analysts think it's undervalued at the current price of $26.22.
Penn West Energy Trust operates as an open-ended, unincorporated investment trust in Canada. The trust, through its subsidiaries, engages in acquiring, developing, exploiting, and holding interests in petroleum and natural gas properties and assets. Its oil and gas properties are located in the western Canadian Sedimentary Basin and within the provinces of British Columbia, Alberta, Saskatchewan, and Manitoba. As of December 31, 2006, it had proved plus probable gross reserves of 482,560 million barrels of oil equivalent; and had working interests in 20,480 oil and gas wells. Penn West Energy Trust was founded in 1979 and is headquartered in Calgary, Canada.
Unlike my first two picks, Capstead Mortgage has done well in 2007. It should -- it's almost a pure play on the spread between short- and long-term interest rates. Under our economic outlook discussed in an earlier post, the Fed will be almost forced to continue to cut to keep the financial system from major dislocations. That will reduce CMO's cost of funding its government-guaranteed mortgages, boost its spread and inevitably, the dividend (as a REIT, it must pay out most of its income). Since there's scarcely a chance that the Fed will raise rates, the only real risk for the next few months is headline risk -- if people get too scared of ARMs, CMO will go down with the rest of the financials, even though the actual credit risk is low.
Capstead Mortgage Corporation operates as a real estate investment trust (REIT) in the United States. It primarily invests in real estate-related assets, which include residential adjustable-rate mortgage securities issued and guaranteed by government-sponsored entities. Capstead Mortgage has elected to be treated as a REIT for federal income tax purposes and would not be subject to federal income tax, if it distributes at least 90% of its REIT taxable income to its shareholders. The company was founded in 1985 and is headquartered in Dallas, Texas. (From Yahoo)
This is a structured product offering senior debt of the Ford Motor Co., packaging it so it's available in $25-par shares instead of hard-to-trade bonds. KSK regularly trades under the value of the underlying bonds, and at the current depressed price of $14.57 yields 12.7 percent. Yes, Ford has had its problems for decades, but it has a good CEO from Boeing with a plan, a health care deal with the UAW and even some hot models like the small Escape SUV. Unless you think it's going to go broke, how can this not be a good deal? Even if it doesn't get back toward par, you're making over 12 percent.
SECURITY DESCRIPTION (from Quantum): Structured Products Corp., 7.4% CorTS (Corporate-Backed Trust Securities) Certificates, principal amount $25 per certificate, issued by CorTS Trust for Ford Debentures, the Trust. The underlying securities are the 7.4% Debentures due 11/01/2046 issued by Ford Motor Co. (NYSE: F). The CorTS certificates will pay 7.4% ($1.85) per annum interest semiannually on 5/1 & 11/1 to holders of record on the day immediately prior to the payment date. The CorTS are redeemable on or after 2/28/2006 under the call warrants at $25 per share plus accrued and unpaid interest.
For our model portfolio for 2008, we intend to buy $20,000 at the close Dec. 31 of JSM which is SENIOR debt of Sallie Mae (SLM). SLM has gotten whacked lately on a failed merger, fallout from the credit crisis being expected to raise student-loan defaults, ill-tempered comments and by the CEO, and most recently, common dilution to offset an ill-timed put sale
But the senior debt, yielding over 8 percent, looks solid and there should be some capital gains in here too as it moves back toward the par price of $25.
SECURITY DESCRIPTION from Quantum: SLM Corp., 6% Senior Notes due 12/15/2043, issued in $25 denominations, redeemable at the issuer's option on or after 12/15/2008 at $25 per share plus accrued and unpaid interest, maturing 12/15/2043, distributions of 6.00% ($1.50) per annum are paid quarterly on 3/15, 6/15, 9/15 & 12/15 to holders of record on the 15th calendar day prior to the payment date.
As we prepare to pick our five stocks for next year, it's good to start with a view of where the economy is going. In general, most analysts think the U.S. will skirt a recession but that there is a lot of pain yet to be felt in the homebuilding and financial sectors.
If the Goldman Sachs analysis of $400 billion in financial writeoffs is correct, there's a lot of pain to come. But thus far, institutions have been able to avoid bankruptcy by getting new capital, as Countrywide did from Bank of America and Citigroup did from the United Arab Emirates.
Those kinds of bailouts come with a cost to stockholders -- their investments are diluted by the convertibility of the investments into common shares. Hence, we'll be looking higher up the capital ladder for financial investments, to busted preferreds that are going to be nursed back to health.
Market's been poor lately, obviously, but today was a little different in that winners like Google did the worst (a smaller-cap example from my portfolio is Steel Dynamics). This indicates that the decline is near an end.
Probably what's going on is that institutional investors who have made their numbers for the year and selling and going home before they lose more.
I got this from a post by doggydoggy world on an IV stock board I frequent -- what a clear explanation!
These CDOs were just silly attempts to circumvent mathematics. Think about it, you put a billion dollars worth of mortgages into a pool and issue 800m of AAA tranches and 200m of CCC. Securitizing didn't really change the overall risk profile, it just redistributed risk away from the 800m and concentrated it in the 200m. Fair enough.
Now let's drop a little acid, and take the 200m of CCC from five different MBS pools and make a billion dollar CDO. Once again we'll issue 800m of AAA and 200m of CCC. Hey, it worked before! (If something seems awry you clearly didn't drop enough acid).
The MBS merely redistributed risk, but the CDO actually ERASED risk! Now that's something Wall Street can sell. CDO every mortgage security in the US and 4/5ths of the risk disappears. Do it again (with CDO-squareds) and get risk down to 1/25th of the original level. Then again with CDO-cubeds. By the time you reach the sixth power all risk in the entire US mortgage market is concentrated in a single 200m CCC tranche. It's magic!
Wall Street knew this was a scam, of course. The running joke was the debt of the entire free world was supported by a single low grade CDO tranche sold to a guy in a mud hut in Tonga. Ha ha.
Here's a media joke I told as the MC of the Friends of the Stanford Daily banquet on Saturday night after Stanford's glorious Big Game victory. The joke comes from reddit.com's joke section, but I changed it a little to improve the parallel structure. However, I made a mistake in phrasing. See if you can figure out what my mistake was:
Napoleon, Hannibal and Alexander the Great were hanging out in heaven, or wherever it is that generals go, and talking about modern technology. Hannibal said, "If I'd had tanks instead of those elephants, I could have conquered all of Italy." Alexander said, "Well, if I had cargo planes so my troops didn't get so homesick, I would have conquered all of India." Napoleon said, "Mon dieu, that's nothing. If I'd have had Fox News, no one would ever have known that I DIDN'T conquer Russia."
