October 26, 2008
Everybody’s Business
You Don’t Always Know When the Sky Will Fall
By BEN STEIN
NOW, as the great Phil Rizzuto used to say, for “some high hops and short stops” — only not in sports, but in finance and life.
First, I get a certain amount of mail asking why I was unable to spot the stock market crash in advance, sell short and become rich. And why was I unable to foretell the future, so my readers could avoid losses and make money?
Well, I am just a person. I don’t have any magical powers to foresee the future. In this case, I did not foresee the catastrophic mistake, as I view it, by Treasury Secretary Henry M. Paulson Jr. to allow Lehman Brothers to fail. That failure left a gaping hole in the financial services industry, and blew away confidence that the Feds knew what they were doing.
Months ago, one of the greatest of American economists, Anna Jacobson Schwartz, who was co-author with the late Milton Friedman of “A Monetary History of the United States,” accurately said that American banks did not face a liquidity crisis, but that they might soon urgently face a solvency crisis. In other words, banks would have ample reserves to lend but might lack assurances that they could meet all their financial obligations if those loans went bad. She was right. In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.
(By the way, it’s a disgrace that Mrs. Schwartz, a mainstay of economic insight since before World War II — as well as my late mother’s college roommate at Barnard — has not been a Nobel laureate. That hints at a dismal sexism in the dismal science.)
The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn’t.
After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks. But that didn’t happen, the stock market fell apart, credit went icy cold and the wheels started to come off the economy. This also took me by surprise.
The failure of government to limit the loss possibilities from credit-default swaps has also been a mystery to me. And credit-default swaps themselves are something of a mystery. They are derivative instruments that supposedly insure a bond or similar entity against default. In fact, they are a wager about the possibility of default of anything, and the potential payouts for the wagers that have been made are many times larger than the value of all the subprime mortgage bonds that ever were.
The need for the government to take action seemed so clear — and still seems so clear that I cannot believe a day passes without its happening. But the days pass, nothing happens, and I am proved wrong again. And I lose some of my life savings and it hurts.
Now let me move to another point: all of the recent misery, including the stock market’s plunge, the disasters at Fannie Mae and Freddie Mac, the loss of retirement savings. These did not happen out of the blue. The catastrophe of giving bonds ratings far higher than they deserved did not happen by chance. And endlessly rosy reports from banks and investment banks about their health did not result from a butterfly flapping its wings in China.
Human beings did these things. The harm to the American people and to the world has been substantial. There has been real pain here. Why is it taking so long to find out who did what and whether laws were broken? That’s what prosecutors are for.
And, closer to home, a talented makeup artist who works with me almost daily in my TV appearances asked what happened to people in a recession. (She is young.) I said that fear and insomnia happened to most people but that a few million would actually lose their jobs and millions more would lose income.
“What do they do?” she asked, looking worried.
“They find other work or live off their savings,” I said. “They certainly cut back on their spending.”
“What if they don’t have any savings?” she asked. “I don’t have any savings,” she said. “No one I know except you has any savings.” She looked extremely worried.
This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It’s the difference between life and death, terror and calm. So start saving right now, and don’t stop until you die.
FINALLY, I’ll turn to the oil companies. When crude was skyrocketing, the beautiful people wanted to beat Exxon Mobil, Chevron and BP into a pulp. Many people assumed that oil barons controlled prices, made “obscene” profits and made life difficult for ordinary citizens. But the price of oil has fallen by more than half from just a few months ago. Gasoline prices are at levels no one thought we would ever see again. Very expensive projects that the oil companies commenced, like extracting oil from tar sands in Canada, may now be major money losers.
What do you say, folks? Let’s acknowledge that we were a bit hasty. The oil companies are just corks bobbing up and down on the ocean of worldwide demand and supply, exactly as the oil companies said they were. They are not going to be starving, but they are clearly not the invincible demons that their enemies said they were. Now that we see how vulnerable they are, is there any reason to hit them with a surtax?
Will we ever learn that they are just dust in the wind, like the rest of us? Probably not.
Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.
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What the Ratings Mean (Moody's, Standard & Poors)
BOND RATINGS – What the Grades Mean
When considering a potential investment, investors should compare the credit qualities of available corporate bond issues before they invest. The two most recognized rating agencies that assign credit ratings to corporate bond issuers are Moody's Investors Service (“Moody’s”) and Standard & Poor's Corporation (“S&P”).
In determining the creditworthiness of an issuer, Moody's and S&P focus on a company's overall financial condition as well as that of the industry in which the issuer operates. A rating represents the opinions of the rating agency at a particular point in time. Ratings on individual issues are continuously revised to reflect any industry or company developments, and these ratings changes can have a distinct effect on an issue's market price. Moody's and S&P classify corporate bond issues as either "investment grade" or "below investment grade”, briefly summarized below:
Investment grade bonds are generally more appropriate for conservative clients. These bonds typically provide the highest degree of principal and interest payment protection, and they are generally the least likely to default.
Below investment grade bonds may be suitable for more aggressive clients willing to accept greater degrees of credit risk in exchange for significantly higher yields.
Investment Grade Moody's S&P
Highest Grade: Aaa AAA
Moody's These bonds are judged to be of the best quality. They carry the smallest degree of risk. Interest payments are protected by an exceptionally stable margin and principal is secure.
S&P The issuer’s capacity to meet its financial obligation on the bond is extremely strong.
High Grade: Aa1, Aa2, Aa3 AA+, AA, AA-
Moody's These bonds are judged to be of high quality by all standards. Margins of protection may not be as large as in Aaa securities.
S&P The issuer’s capacity to meet its financial obligation on the bond is very strong.
Upper Medium Grade: A1, A2, A3 A+, A, A-
Moody's These bonds possess many favorable investment attributes. Factors giving security to principal and interest are considered adequate.
S&P Although these bonds are somewhat more susceptible to the adverse effects of changing economic conditions, the issuer’s capacity to meet its financial obligations is strong.
Medium Grade: Baa1, Baa2, Baa3 BBB+, BBB, BBB-
Moody's The bonds lack outstanding investment characteristics and have speculative characteristics as well.
S&P Adverse economic conditions are more likely to lead to a weakened capacity of the issuer to meet its financial commitment.
Below Investment Grade Moody's S&P
Speculative Grades: Ba1, Ba2, Ba3 BB+, BB, BB-
Moody's The future of these bonds cannot be considered as well-assured. B1, B2, B3 B+, B, B-
S&P These bonds face exposure to adverse business or economic conditions which could lead to an issuer’s inadequate capacity to meet its financial commitment.
Highly Speculative Grades: Caa1, Caa2, Caa3 CCC+, CCC, CCC-
Moody's These bonds are of poor standing. Such issues may be in default, or there may be elements of danger with respect to principal or interest. Ca CC
S&P These bonds are vulnerable to nonpayment, and are dependent upon favorable economic conditions for the issuer to meet its financial commitment. C C
Default
S&P These bonds are in payment default. D
When considering a potential investment, investors should compare the credit qualities of available corporate bond issues before they invest. The two most recognized rating agencies that assign credit ratings to corporate bond issuers are Moody's Investors Service (“Moody’s”) and Standard & Poor's Corporation (“S&P”).
In determining the creditworthiness of an issuer, Moody's and S&P focus on a company's overall financial condition as well as that of the industry in which the issuer operates. A rating represents the opinions of the rating agency at a particular point in time. Ratings on individual issues are continuously revised to reflect any industry or company developments, and these ratings changes can have a distinct effect on an issue's market price. Moody's and S&P classify corporate bond issues as either "investment grade" or "below investment grade”, briefly summarized below:
Investment grade bonds are generally more appropriate for conservative clients. These bonds typically provide the highest degree of principal and interest payment protection, and they are generally the least likely to default.
Below investment grade bonds may be suitable for more aggressive clients willing to accept greater degrees of credit risk in exchange for significantly higher yields.
Investment Grade Moody's S&P
Highest Grade: Aaa AAA
Moody's These bonds are judged to be of the best quality. They carry the smallest degree of risk. Interest payments are protected by an exceptionally stable margin and principal is secure.
S&P The issuer’s capacity to meet its financial obligation on the bond is extremely strong.
High Grade: Aa1, Aa2, Aa3 AA+, AA, AA-
Moody's These bonds are judged to be of high quality by all standards. Margins of protection may not be as large as in Aaa securities.
S&P The issuer’s capacity to meet its financial obligation on the bond is very strong.
Upper Medium Grade: A1, A2, A3 A+, A, A-
Moody's These bonds possess many favorable investment attributes. Factors giving security to principal and interest are considered adequate.
S&P Although these bonds are somewhat more susceptible to the adverse effects of changing economic conditions, the issuer’s capacity to meet its financial obligations is strong.
Medium Grade: Baa1, Baa2, Baa3 BBB+, BBB, BBB-
Moody's The bonds lack outstanding investment characteristics and have speculative characteristics as well.
S&P Adverse economic conditions are more likely to lead to a weakened capacity of the issuer to meet its financial commitment.
Below Investment Grade Moody's S&P
Speculative Grades: Ba1, Ba2, Ba3 BB+, BB, BB-
Moody's The future of these bonds cannot be considered as well-assured. B1, B2, B3 B+, B, B-
S&P These bonds face exposure to adverse business or economic conditions which could lead to an issuer’s inadequate capacity to meet its financial commitment.
Highly Speculative Grades: Caa1, Caa2, Caa3 CCC+, CCC, CCC-
Moody's These bonds are of poor standing. Such issues may be in default, or there may be elements of danger with respect to principal or interest. Ca CC
S&P These bonds are vulnerable to nonpayment, and are dependent upon favorable economic conditions for the issuer to meet its financial commitment. C C
Default
S&P These bonds are in payment default. D
Business Week on The Weakest Links ( Vulnerable Companies as of October 15)
BusinessWeek Investing October 22, 2008, 4:53PM EST text size: TT
S&P's List of Companies Vulnerable to Default
Data as of Oct. 15, 2008.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
B-/CreditWatch Negative
Automotive
Ford Motor Co.
116,914
U.S.
Automotive
General Motors Corp.
81,178
U.S.
CP&ES
Pliant Corp.
543
U.S.
Consumer products
Cott Corp.
275
Canada
Consumer products
MEGA Brands Inc.
267
Canada
Forest
AMH Holdings Inc.
611
U.S.
Forest
WII Components Inc.
120
U.S.
Health care
Chem Rx Corp.
117
U.S.
Media and entertainment
Advanstar Inc.
775
U.S.
Media and entertainment
Endurance Business Media Inc.
160
U.S.
Media and entertainment
Fontainebleau Las Vegas Holdings LLC
1,725
U.S.
Media and entertainment
Jobson Medical Information LLC
132
U.S.
Media and entertainment
NextMedia Operating Inc.
340
U.S.
Media and entertainment
Panavision Inc.
430
U.S.
Oil and gas EP
Agri International Resources Pte. Ltd.
150
Singapore
Oil and gas EP
Frontier Drilling A.S.A
265
Norway
Oil and gas EP
VeraSun Energy Corp.
660
U.S.
Transportation
JetBlue Airways Corp.
425
U.S.
Transportation
US Airways Group Inc.
1,744
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
B-/Outlook Negative
Automotive
Accuride Corp.
825
U.S.
Automotive
Hilite International Inc.
164
U.S.
Automotive
Keystone Automotive Operations Inc.
375
U.S.
Automotive
Mark IV Industries Inc.
988
U.S.
Automotive
TI Automotive Ltd.
657
U.K.
Bank
CentroCredit Bank JSC
0
Russia
Bank
Nadra Bank
0
Ukraine
Brokerage Investment Company
Veles Capital LLC
0
Russia
Capital goods
Baxi Holdings Ltd.
173
U.K.
CP&ES
Arclin Canada Ltd.
460
Canada
CP&ES
Exopack Holding Corp.
220
U.S.
CP&ES
Synagro Technologies Inc.
440
U.S.
CP&ES
United Site Services Inc.
265
U.S.
Consumer products
Broder Bros. Co.
225
U.S.
Consumer products
Dole Food Co. Inc.
2,080
U.S.
Consumer products
Fage Dairy Industry S.A.
177
Greece
Consumer products
IT Holding SpA
252
Italy
Consumer products
JFC Group Co. Ltd. (CJSC)
0
Russia
Consumer products
Rafaella Apparel Group Inc.
172
U.S.
Consumer products
Targus Group International Inc.
273
U.S.
Consumer products
Wilton Products Inc.
700
U.S.
Consumer products
WP Evenflo Holdings Inc.
165
U.S.
Finance companies
DriveTime Automotive Group, Inc.
270
U.S.
Forest
AbitibiBowater Inc.
6,488
Canada
Forest
Advance Agro Public Co. Ltd.
250
Thailand
Forest
Builders FirstSource Inc.
275
U.S.
Forest
Caraustar Industries Inc.
229
U.S.
Forest
Grant Forest Products Inc.
0
Canada
Forest
Industrias Unidas S.A. de C.V.
0
Mexico
Forest
Jacuzzi Brands Corp.
320
U.S.
Forest
Mandra Forestry Finance Ltd.
195
British Virgin Islands
Forest
M-real Corp.
1,619
Finland
Forest
NTK Holdings Inc.
1,776
U.S.
Forest
United Subcontractors Inc.
360
U.S.
Health care
CCS Medical
424
U.S.
Health care
Cohr Holdings Inc.
140
U.S.
Health care
InSight Health Services Corp.
315
U.S.
Health care
Spheris Inc.
125
U.S.
Health care
TLC Vision Corp.
85
U.S.
High technology
Consona ERP Inc.
185
U.S.
High technology
NXP B.V.
11,771
Netherlands
High technology
Palm Inc.
400
U.S.
Home/RE
Hovnanian Enterprises Inc.
2,655
U.S.
Home/RE
Neo-China Land Group (Holdings) Ltd.
400
China
Home/RE
Standard Pacific Corp.
1,154
U.S.
Home/RE
William Lyon Homes
550
U.S.
Insurance
Arrowhead General Insurance Agency Inc.
170
U.S.
Insurance
USI Holdings Corp.
950
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
B-/Outlook Negative (continued)
Media and entertainment
Downstream Development Authority
197
U.S.
Media and entertainment
Education Media & Publishing Group Ltd.
6,650
Ireland
Media and entertainment
Gateway Casinos & Entertainment Inc.
947
Canada
Media and entertainment
Gray Television Inc.
925
U.S.
Media and entertainment
Little Traverse Bay Bands of Odawa Indians
120
U.S.
Media and entertainment
Motorsport Aftermarket Group Inc.
160
U.S.
Media and entertainment
MTR Gaming Group Inc.
255
U.S.
Media and entertainment
Realogy Corp.
6,295
U.S.
Media and entertainment
Spanish Broadcasting System Inc.
400
U.S.
Media and entertainment
Station Casinos Inc.
2,550
U.S.
Media and entertainment
Tribune Co.
13,577
U.S.
Media and entertainment
Trump Entertainment Resorts Holdings L.P.
1,250
U.S.
Media and entertainment
Univision Communications Inc.
10,200
U.S.
Media and entertainment
Workflow Management Inc.
415
U.S.
Metals, mining, and steel
Bemax Resources Ltd.
175
Australia
Metals, mining, and steel
G Steel Public Co. Ltd.
170
Thailand
Metals, mining, and steel
USEC Inc.
650
U.S.
Oil and gas EP
Dune Energy Inc.
300
U.S.
Retail/restaurants
A.T.U Auto-Teile-Unger
204
Germany
Retail/restaurants
BCBG Max Azria Group, Inc.
200
U.S.
Retail/restaurants
BI-LO LLC
0
U.S.
Retail/restaurants
Claire's Stores Inc.
2,385
U.S.
Retail/restaurants
Eddie Bauer Holdings Inc.
225
U.S.
Retail/restaurants
El Pollo Loco Inc.
225
U.S.
Retail/restaurants
Guitar Center Holdings Inc.
1,427
U.S.
Retail/restaurants
Krispy Kreme Doughnuts Inc.
110
U.S.
Retail/restaurants
MAPCO Express Inc.
296
U.S.
Retail/restaurants
Mastro's Restaurants LLC
100
U.S.
Retail/restaurants
Mothers Work Inc.
90
U.S.
Retail/restaurants
Perkins & Marie Callender's Inc.
322
U.S.
Retail/restaurants
Sagittarius Restaurants LLC
295
U.S.
Savings and loans
Downey Financial Corp.
200
U.S.
Telecommunications
Bite Finance International B.V.
408
Lithuania
Telecommunications
Charter Communications Inc.
22,408
U.S.
Telecommunications
Securus Technologies Inc.
194
U.S.
Telecommunications
U.S. TelePacific Holdings Corp.
199
U.S.
Transportation
AMR Corp.
4,071
U.S.
Transportation
Swift Corp.
4,275
U.S.
Transportation
Titan Petrochemicals Group Ltd.
400
Hong Kong
Transportation
Trailer Bridge Inc.
85
U.S.
Transportation
UAL Corp.
3,390
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
CCC+/CreditWatch Negative
Capital goods
Electrical Components International Inc.
305
U.S.
CP&ES
Polymer Holdings LLC
585
U.S.
Forest
Building Materials Holding Corp.
350
U.S.
Forest
Chesapeake Corp.
335
U.S.
Media and entertainment
Barrington Broadcasting LLC
398
U.S.
Media and entertainment
Cambium Learning Inc.
128
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
CCC+/Outlook Negative
Automotive
Chrysler LLC (Chrysler Holding LLC)
9,000
U.S.
Automotive
Lazy Days' R.V. Center Inc.
125
U.S.
Automotive
Metaldyne Corp.
860
U.S.
Capital goods
Euramax International Inc.
667
U.S.
CP&ES
Constar International Inc.
395
U.S.
CP&ES
Foamex L.P.
600
U.S.
CP&ES
Georgia Gulf Corp.
1,600
U.S.
CP&ES
Millennium Inorganic Chemicals
0
U.S.
Consumer products
KIK Custom Products Inc.
645
Canada
Finance companies
Checksmart Financial Co.
195
U.S.
Finance companies
DaimlerChrysler Financial Services Americas LLC
6,000
U.S.
Forest
Treofan Holdings GmbH
231
Germany
Forest
White Birch Paper Co.
550
U.S.
Health care
LifeCare Holdings Inc.
402
U.S.
Home/RE
Stanley-Martin Communities LLC
133
U.S.
Media and entertainment
Affinity Group Holding Inc.
436
U.S.
Media and entertainment
Alpha Media Group Inc.
160
U.S.
Media and entertainment
American Media Operations Inc.
1,005
U.S.
Media and entertainment
CommerceConnect Media Holdings Inc.
0
U.S.
Media and entertainment
Freedom Communications Inc.
650
U.S.
Media and entertainment
GateHouse Media Operating Inc.
1,195
U.S.
Media and entertainment
Head N.V.
152
Netherlands
Media and entertainment
ION Media Networks Inc.
867
U.S.
Media and entertainment
Morris Publishing Group LLC (Morris Communications
475
U.S.
Media and entertainment
Muzak Holdings LLC
375
U.S.
Media and entertainment
Six Flags Inc.
3,140
U.S.
Media and entertainment
Triple Crown Media LLC (Triple Crown Media Inc.)
120
U.S.
Metals, mining, and steel
Indalex Holding Corp.
270
U.S.
Retail/restaurants
Loehmann's Holdings Inc.
110
U.S.
Retail/restaurants
Oriental Trading Co. Inc.
590
U.S.
Retail/restaurants
Sbarro Inc.
333
U.S.
Sovereign
Islamic Republic of Pakistan
5,952
Pakistan
Telecommunications
Hawaiian Telcom Communications Inc.
985
U.S.
Utility
Cheniere Energy Inc.
2,177
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
CCC/CreditWatch Negative
Media and entertainment
Alliance Film Holdings Inc
351
Canada
Media and entertainment
Mount Airy #1 LLC
455
U.S.
CCC/Outlook Negative
CP&ES
Tegrant Corp.
290
U.S.
Consumer products
Airborne Health Inc.
160
U.S.
Consumer products
Best Brands Corp.
245
U.S.
Consumer products
Human Touch LLC.
100
U.S.
Consumer products
Merisant Worldwide Inc.
546
U.S.
Consumer products
True Temper Sports Inc.
235
U.S.
Consumer products
Waterford Wedgwood PLC
226
Ireland
Finance companies
Geneva Finance Ltd.
0
New Zealand
Health care
InterDent Inc.
80
U.S.
Health care
Rotech Healthcare Inc.
287
U.S.
Home/RE
Rhodes Co.'s LLC (The)
393
U.S.
Media and entertainment
Black Gaming LLC
573
U.S.
Media and entertainment
MediaNews Group Inc.
1,047
U.S.
Media and entertainment
Progressive Gaming International Corp.
0
U.S.
Media and entertainment
Young Broadcasting Inc.
990
U.S.
Oil and gas EP
Petrol AD
136
Bulgaria
Retail/restaurants
Finlay Enterprises Inc.
200
U.S.
Retail/restaurants
Uno Restaurant Holdings Corp.
142
U.S.
Transportation
Atlantic Express Transportation Corp.
185
U.S.
Utility
November 2005 Land Investors, LLC
232
U.S.
CCC-/Outlook Negative
Financial institutions
Transtel Intermedia, S.A.
170
Colombia
High technology
ASAT Holdings Ltd.
150
Hong Kong
Home/RE
Fleetwood Enterprises Inc.
100
U.S.
Insurance
Conseco Senior Health Insurance Co. (Conseco Inc.)
0
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
CC/CreditWatch Negative
Forest
Masonite International Inc.
1,175
Canada
Health care
Angiotech Pharmaceuticals Inc.
575
Canada
Insurance
Penn Treaty Network America Insurance Co.
0
U.S.
CC/Outlook Negative
Consumer products
EuroFresh Inc.
214
U.S.
Telecommunications
P.T. Mobile-8 Telecom Tbk
100
Indonesia
S&P's List of Companies Vulnerable to Default
Data as of Oct. 15, 2008.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
B-/CreditWatch Negative
Automotive
Ford Motor Co.
116,914
U.S.
Automotive
General Motors Corp.
81,178
U.S.
CP&ES
Pliant Corp.
543
U.S.
Consumer products
Cott Corp.
275
Canada
Consumer products
MEGA Brands Inc.
267
Canada
Forest
AMH Holdings Inc.
611
U.S.
Forest
WII Components Inc.
120
U.S.
Health care
Chem Rx Corp.
117
U.S.
Media and entertainment
Advanstar Inc.
775
U.S.
Media and entertainment
Endurance Business Media Inc.
160
U.S.
Media and entertainment
Fontainebleau Las Vegas Holdings LLC
1,725
U.S.
Media and entertainment
Jobson Medical Information LLC
132
U.S.
Media and entertainment
NextMedia Operating Inc.
340
U.S.
Media and entertainment
Panavision Inc.
430
U.S.
Oil and gas EP
Agri International Resources Pte. Ltd.
150
Singapore
Oil and gas EP
Frontier Drilling A.S.A
265
Norway
Oil and gas EP
VeraSun Energy Corp.
660
U.S.
Transportation
JetBlue Airways Corp.
425
U.S.
Transportation
US Airways Group Inc.
1,744
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
B-/Outlook Negative
Automotive
Accuride Corp.
825
U.S.
Automotive
Hilite International Inc.
164
U.S.
Automotive
Keystone Automotive Operations Inc.
375
U.S.
Automotive
Mark IV Industries Inc.
988
U.S.
Automotive
TI Automotive Ltd.
657
U.K.
Bank
CentroCredit Bank JSC
0
Russia
Bank
Nadra Bank
0
Ukraine
Brokerage Investment Company
Veles Capital LLC
0
Russia
Capital goods
Baxi Holdings Ltd.
173
U.K.
CP&ES
Arclin Canada Ltd.
460
Canada
CP&ES
Exopack Holding Corp.
220
U.S.
CP&ES
Synagro Technologies Inc.
440
U.S.
CP&ES
United Site Services Inc.
265
U.S.
Consumer products
Broder Bros. Co.
225
U.S.
Consumer products
Dole Food Co. Inc.
2,080
U.S.
Consumer products
Fage Dairy Industry S.A.
177
Greece
Consumer products
IT Holding SpA
252
Italy
Consumer products
JFC Group Co. Ltd. (CJSC)
0
Russia
Consumer products
Rafaella Apparel Group Inc.
172
U.S.
Consumer products
Targus Group International Inc.
273
U.S.
Consumer products
Wilton Products Inc.
700
U.S.
Consumer products
WP Evenflo Holdings Inc.
165
U.S.
Finance companies
DriveTime Automotive Group, Inc.
270
U.S.
Forest
AbitibiBowater Inc.
6,488
Canada
Forest
Advance Agro Public Co. Ltd.
250
Thailand
Forest
Builders FirstSource Inc.
275
U.S.
Forest
Caraustar Industries Inc.
229
U.S.
Forest
Grant Forest Products Inc.
0
Canada
Forest
Industrias Unidas S.A. de C.V.
0
Mexico
Forest
Jacuzzi Brands Corp.
320
U.S.
Forest
Mandra Forestry Finance Ltd.
195
British Virgin Islands
Forest
M-real Corp.
1,619
Finland
Forest
NTK Holdings Inc.
1,776
U.S.
Forest
United Subcontractors Inc.
360
U.S.
Health care
CCS Medical
424
U.S.
Health care
Cohr Holdings Inc.
140
U.S.
Health care
InSight Health Services Corp.
315
U.S.
Health care
Spheris Inc.
125
U.S.
Health care
TLC Vision Corp.
85
U.S.
High technology
Consona ERP Inc.
185
U.S.
High technology
NXP B.V.
11,771
Netherlands
High technology
Palm Inc.
400
U.S.
Home/RE
Hovnanian Enterprises Inc.
2,655
U.S.
Home/RE
Neo-China Land Group (Holdings) Ltd.
400
China
Home/RE
Standard Pacific Corp.
1,154
U.S.
Home/RE
William Lyon Homes
550
U.S.
Insurance
Arrowhead General Insurance Agency Inc.
170
U.S.
Insurance
USI Holdings Corp.
950
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
B-/Outlook Negative (continued)
Media and entertainment
Downstream Development Authority
197
U.S.
Media and entertainment
Education Media & Publishing Group Ltd.
6,650
Ireland
Media and entertainment
Gateway Casinos & Entertainment Inc.
947
Canada
Media and entertainment
Gray Television Inc.
925
U.S.
Media and entertainment
Little Traverse Bay Bands of Odawa Indians
120
U.S.
Media and entertainment
Motorsport Aftermarket Group Inc.
160
U.S.
Media and entertainment
MTR Gaming Group Inc.
255
U.S.
Media and entertainment
Realogy Corp.
6,295
U.S.
Media and entertainment
Spanish Broadcasting System Inc.
400
U.S.
Media and entertainment
Station Casinos Inc.
2,550
U.S.
Media and entertainment
Tribune Co.
13,577
U.S.
Media and entertainment
Trump Entertainment Resorts Holdings L.P.
1,250
U.S.
Media and entertainment
Univision Communications Inc.
10,200
U.S.
Media and entertainment
Workflow Management Inc.
415
U.S.
Metals, mining, and steel
Bemax Resources Ltd.
175
Australia
Metals, mining, and steel
G Steel Public Co. Ltd.
170
Thailand
Metals, mining, and steel
USEC Inc.
650
U.S.
Oil and gas EP
Dune Energy Inc.
300
U.S.
Retail/restaurants
A.T.U Auto-Teile-Unger
204
Germany
Retail/restaurants
BCBG Max Azria Group, Inc.
200
U.S.
Retail/restaurants
BI-LO LLC
0
U.S.
Retail/restaurants
Claire's Stores Inc.
2,385
U.S.
Retail/restaurants
Eddie Bauer Holdings Inc.
225
U.S.
Retail/restaurants
El Pollo Loco Inc.
225
U.S.
Retail/restaurants
Guitar Center Holdings Inc.
1,427
U.S.
Retail/restaurants
Krispy Kreme Doughnuts Inc.
110
U.S.
Retail/restaurants
MAPCO Express Inc.
296
U.S.
Retail/restaurants
Mastro's Restaurants LLC
100
U.S.
Retail/restaurants
Mothers Work Inc.
90
U.S.
Retail/restaurants
Perkins & Marie Callender's Inc.
322
U.S.
Retail/restaurants
Sagittarius Restaurants LLC
295
U.S.
Savings and loans
Downey Financial Corp.
200
U.S.
Telecommunications
Bite Finance International B.V.
408
Lithuania
Telecommunications
Charter Communications Inc.
22,408
U.S.
Telecommunications
Securus Technologies Inc.
194
U.S.
Telecommunications
U.S. TelePacific Holdings Corp.
199
U.S.
Transportation
AMR Corp.
4,071
U.S.
Transportation
Swift Corp.
4,275
U.S.
Transportation
Titan Petrochemicals Group Ltd.
400
Hong Kong
Transportation
Trailer Bridge Inc.
85
U.S.
Transportation
UAL Corp.
3,390
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
CCC+/CreditWatch Negative
Capital goods
Electrical Components International Inc.
305
U.S.
CP&ES
Polymer Holdings LLC
585
U.S.
Forest
Building Materials Holding Corp.
350
U.S.
Forest
Chesapeake Corp.
335
U.S.
Media and entertainment
Barrington Broadcasting LLC
398
U.S.
Media and entertainment
Cambium Learning Inc.
128
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
CCC+/Outlook Negative
Automotive
Chrysler LLC (Chrysler Holding LLC)
9,000
U.S.
Automotive
Lazy Days' R.V. Center Inc.
125
U.S.
Automotive
Metaldyne Corp.
860
U.S.
Capital goods
Euramax International Inc.
667
U.S.
CP&ES
Constar International Inc.
395
U.S.
CP&ES
Foamex L.P.
600
U.S.
CP&ES
Georgia Gulf Corp.
1,600
U.S.
CP&ES
Millennium Inorganic Chemicals
0
U.S.
Consumer products
KIK Custom Products Inc.
645
Canada
Finance companies
Checksmart Financial Co.
195
U.S.
Finance companies
DaimlerChrysler Financial Services Americas LLC
6,000
U.S.
Forest
Treofan Holdings GmbH
231
Germany
Forest
White Birch Paper Co.
550
U.S.
Health care
LifeCare Holdings Inc.
402
U.S.
Home/RE
Stanley-Martin Communities LLC
133
U.S.
Media and entertainment
Affinity Group Holding Inc.
436
U.S.
Media and entertainment
Alpha Media Group Inc.
160
U.S.
Media and entertainment
American Media Operations Inc.
1,005
U.S.
Media and entertainment
CommerceConnect Media Holdings Inc.
0
U.S.
Media and entertainment
Freedom Communications Inc.
650
U.S.
Media and entertainment
GateHouse Media Operating Inc.
1,195
U.S.
Media and entertainment
Head N.V.
152
Netherlands
Media and entertainment
ION Media Networks Inc.
867
U.S.
Media and entertainment
Morris Publishing Group LLC (Morris Communications
475
U.S.
Media and entertainment
Muzak Holdings LLC
375
U.S.
Media and entertainment
Six Flags Inc.
3,140
U.S.
Media and entertainment
Triple Crown Media LLC (Triple Crown Media Inc.)
120
U.S.
Metals, mining, and steel
Indalex Holding Corp.
270
U.S.
Retail/restaurants
Loehmann's Holdings Inc.
110
U.S.
Retail/restaurants
Oriental Trading Co. Inc.
590
U.S.
Retail/restaurants
Sbarro Inc.
333
U.S.
Sovereign
Islamic Republic of Pakistan
5,952
Pakistan
Telecommunications
Hawaiian Telcom Communications Inc.
985
U.S.
Utility
Cheniere Energy Inc.
2,177
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
CCC/CreditWatch Negative
Media and entertainment
Alliance Film Holdings Inc
351
Canada
Media and entertainment
Mount Airy #1 LLC
455
U.S.
CCC/Outlook Negative
CP&ES
Tegrant Corp.
290
U.S.
Consumer products
Airborne Health Inc.
160
U.S.
Consumer products
Best Brands Corp.
245
U.S.
Consumer products
Human Touch LLC.
100
U.S.
Consumer products
Merisant Worldwide Inc.
546
U.S.
Consumer products
True Temper Sports Inc.
235
U.S.
Consumer products
Waterford Wedgwood PLC
226
Ireland
Finance companies
Geneva Finance Ltd.
0
New Zealand
Health care
InterDent Inc.
80
U.S.
Health care
Rotech Healthcare Inc.
287
U.S.
Home/RE
Rhodes Co.'s LLC (The)
393
U.S.
Media and entertainment
Black Gaming LLC
573
U.S.
Media and entertainment
MediaNews Group Inc.
1,047
U.S.
Media and entertainment
Progressive Gaming International Corp.
0
U.S.
Media and entertainment
Young Broadcasting Inc.
990
U.S.
Oil and gas EP
Petrol AD
136
Bulgaria
Retail/restaurants
Finlay Enterprises Inc.
200
U.S.
Retail/restaurants
Uno Restaurant Holdings Corp.
142
U.S.
Transportation
Atlantic Express Transportation Corp.
185
U.S.
Utility
November 2005 Land Investors, LLC
232
U.S.
CCC-/Outlook Negative
Financial institutions
Transtel Intermedia, S.A.
170
Colombia
High technology
ASAT Holdings Ltd.
150
Hong Kong
Home/RE
Fleetwood Enterprises Inc.
100
U.S.
Insurance
Conseco Senior Health Insurance Co. (Conseco Inc.)
0
U.S.
Rating Combination And Subsector Issuer Debt (US$ Mil) Country
CC/CreditWatch Negative
Forest
Masonite International Inc.
1,175
Canada
Health care
Angiotech Pharmaceuticals Inc.
575
Canada
Insurance
Penn Treaty Network America Insurance Co.
0
U.S.
CC/Outlook Negative
Consumer products
EuroFresh Inc.
214
U.S.
Telecommunications
P.T. Mobile-8 Telecom Tbk
100
Indonesia
The Yields are Staggering - Tax Free Muni Bonds (Barrons)
Monday, October 20, 2008
The Yields Are Staggering
By ANDREW BARY
Many munis are battered -- but hardly broken. Patience will pay.
THE CREDIT MARKET'S WOES are benefitting one group: buyers of municipal bonds, who have seen prices plunge and yields soar. Munis, some of which offer long-term tax-free yields topping 6%, have almost never looked so attractive, relative to U.S. Treasuries.
"The market is way undervalued," says Laura Milner, a portfolio manager at SCM Advisors in San Francisco. "It's more the result of liquidity than credit problems. You don't have to stretch in terms of credit quality to get high yields." She favors state general-obligation bonds and revenue bonds for essential services, like water and sewers.
THE MARKET HAS BEEN HURT by selling pressure from hedge funds, issuers of structured notes and mutual funds, which have been experiencing redemptions. Buyers have been scarce, with retail investors now the main source of demand. The problem is that individuals can absorb only so much supply. There also is concern that the weakening economy will lead to gaping budget deficits at state and local governments, hurting the credit quality of municipal debt. Investors can take comfort, however, in the fact that munis historically have had much better credit performance than corporate bonds. Even during the Great Depression, no state defaulted on its general-obligation bonds, and overall muni default rates remained very low.
Just last week, 30-year bonds backed by the triple-A-rated Texas Permanent School Fund (PSF), one of the premier muni guarantors, were sold at a yield of 6.25%. Double-A-rated New York City issued $500 million of general-obligation bonds at a top yield of 6.40%. Top-grade 10-year debt recently has been yielding 5% or more.
Lars Leetaru for Barron's
"The yields are staggering," says Jim Evans, who heads the muni investment group at M.D. Sass in New York. Evans points to the top yield on the Texas PSF bonds and to recent secondary-market offerings in which 20-year pre-refunded California GOs traded at a yield of 5.85%. Pre-refunded bonds probably are the safest bonds in the muni market because they're secured by U.S. Treasuries. Long-term debt from other top issuers, like Harvard University, yields nearly 6%
A 6% muni yield is equivalent to a 10% taxable yield for residents of high income-tax states like California, New Jersey and New York. This assumes that residents buy in-state bonds. Tax-equivalent yields for out-of-state bonds are around 9%. The allure of munis could grow if presidential front-runner Barack Obama wins the election because he has vowed to raise taxes on Americans making more than $250,000 a year. Some analysts expect Obama to seek to lift the maximum income-tax rate to 40% from the current 35%, which now applies to married couples earning over $357,700 a year.
The 5.9% yield on 30-year, AAA-rated munis now is roughly 135% of the 4.3% yield on the 30-year Treasury. That's by far the highest ratio in the past 20 years, exceeding the prior peak of 115% set early this year. Long-term municipals historically have yielded slightly less than Treasuries because of the tax benefits.
Despite weak demand for long-term issues, California just sold $5 billion of short-term revenue-anticipation notes maturing in 2009, including $3.8 billion of eight-month notes at a 4.25% yield. That yield is very attractive, relative to the 1% rate on Treasury bills. The interest is tax-free to California residents, who face a punishing state income-tax rate of 9.3% for couples earnings over $93,000 annually and 10.3% for income above $1 million.
Muni issuance has slowed dramatically this month as state and local governments have heeded the advice of investment bankers to wait for a more receptive market. If demand picks up -- and high yields could create demand -- supply might be easily absorbed, and market conditions could improve quickly, as they did after a sell-off in February and March.
Investors have plenty of ways to play the muni market, including individual bonds, open-end mutual funds, closed-end funds and relatively new exchange-traded funds like the iShares S&P National Muni Bond (MUB). Well-run open-end funds include the $19 billlion Vanguard Intermediate-Term Tax-Exempt (VWITX) and the Bernstein Diversified Municipal (SNDPX), which have held up well this year, as well as Legg Mason Partners Managed Municipals (SMMOX), co-run by veteran Joe Deane, one of the best managers in the business.
CLOSED-END MUNI FUNDS BECKON because they came under extreme selling pressure early this month, with many finishing Friday, Oct. 10, at record discounts of 30% or more to their net asset values, way above the typical level of no more than 10% or 15%. Exchange-traded closed-ends rallied sharply last Monday, and their discounts now generally are below 20%.
The accompanying table lists a few closed-end funds now trading at double-digit discounts and yielding more than 7%. The high closed-end yields reflect the discounts and leverage. Many funds buy $3 of bonds using $2 of investor funds and $1 of borrowings. The leverage results in higher volatility than is common at open-end funds; year-to-date total returns of many closed-ends were a negative 20% or worse at mid-week, according to Morningstar, versus declines of around 10% for many long-term open-end funds. The losses to closed-end investors have been even greater than 20% because market prices often slip more than NAVs, on which the reported performance data are based. There's a risk that some closed-ends will reduce leverage, diminishing their yields.
PROBABLY THE HARDEST-HIT big municipal fund this year is the $5.9 billion Oppenheimer Rochester National Municipals (ORNAX), which was off 37% through Thursday, by far the worst showing among the 50 largest open-end muni funds.
The aggressive fund aims to generate high yields through ownership of low-rated or unrated munis. It buys gamier securities like land-development bonds, tobacco bonds backed by state revenues from the 1998 mass settlement with major cigarette companies, airport-revenue bonds and "inverse floaters," whose yields move in the opposite direction of short-term rates. With muni short rates elevated, prices of inverse floaters have come under pressure.
Prices of bonds in the Rochester portfolio have fallen sharply as investors favor high-grade munis with ratings of AA and higher. "I've been doing this since the late 1970s, and this is by far the worst I've seen it. It's an ugly market out there," says Ron Fielding, senior portfolio manager of the fund. Because of recent investor redemptions, Oppenheimer's Rochester has been forced to sell bonds in an illiquid market.
Fielding says the good news is that the credit quality of both the Oppenheimer Rochester National Municipals fund and the larger $9 billion New York-oriented Rochester Fund Municipals (RMUNX) is strong with minimal defaults. The main near-term risk is that the funds will need to sell more bonds to meet additional redemptions. The national fund's current yield now stands at 10%.
Reflecting the investor preference for high-grade munis, the yield gap between triple-A and triple-B munis has widened to a near-record two percentage points.
Even among highly rated bonds, investors are showing a preference for general-obligation bonds and revenue bonds from well-regarded issuers like the Los Angeles Department of Water and Power and the Port Authority of New York and New Jersey.
The Bottom Line:
Municipal bonds are trading at unusually low prices and rare yields. They've almost never looked as attractive when compared with U.S. Treasury securities.A BLOCK OF BONDS issued by Goldman Sachs for construction of its new headquarters in lower Manhattan traded recently at a yield of about 7.75%. Those New York Liberty 5¼s of 2035 are backed by Goldman and have double-A credit ratings.
With the municipal-bond market roiled by liquidity problems, investors now can get 5% on intermediate-term debt and 6% on long-term issues. That seems awfully attractive with inflation likely waning and the presidential front-runner vowing to boost taxes on anyone making $250,000 or more a year.
--------------------------------------------------------------------------------
E-mail comments: mail@barrons.com
URL for this article:
http://online.barrons.com/article/SB122429125462346821.html
Related Articles from Barrons.com
Sharing the Wealth Oct. 18, 2008
Current Yield Oct. 18, 2008
Munis Fail to Get a Bailout Boost Oct. 15, 2008
After a Record Tumble, Is Junk a Bargain? Oct. 12, 2008
Related News from WSJ Digital Network
Vanguard's Values Oct. 15, 2008 marketwatch.com
Port in the Storm: Insurers' Catastrophe Bonds Oct. 14, 2008 wsj.com
Munis thrive in troubled market Oct. 07, 2008 marketwatch.com
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.
The Yields Are Staggering
By ANDREW BARY
Many munis are battered -- but hardly broken. Patience will pay.
THE CREDIT MARKET'S WOES are benefitting one group: buyers of municipal bonds, who have seen prices plunge and yields soar. Munis, some of which offer long-term tax-free yields topping 6%, have almost never looked so attractive, relative to U.S. Treasuries.
"The market is way undervalued," says Laura Milner, a portfolio manager at SCM Advisors in San Francisco. "It's more the result of liquidity than credit problems. You don't have to stretch in terms of credit quality to get high yields." She favors state general-obligation bonds and revenue bonds for essential services, like water and sewers.
THE MARKET HAS BEEN HURT by selling pressure from hedge funds, issuers of structured notes and mutual funds, which have been experiencing redemptions. Buyers have been scarce, with retail investors now the main source of demand. The problem is that individuals can absorb only so much supply. There also is concern that the weakening economy will lead to gaping budget deficits at state and local governments, hurting the credit quality of municipal debt. Investors can take comfort, however, in the fact that munis historically have had much better credit performance than corporate bonds. Even during the Great Depression, no state defaulted on its general-obligation bonds, and overall muni default rates remained very low.
Just last week, 30-year bonds backed by the triple-A-rated Texas Permanent School Fund (PSF), one of the premier muni guarantors, were sold at a yield of 6.25%. Double-A-rated New York City issued $500 million of general-obligation bonds at a top yield of 6.40%. Top-grade 10-year debt recently has been yielding 5% or more.
Lars Leetaru for Barron's
"The yields are staggering," says Jim Evans, who heads the muni investment group at M.D. Sass in New York. Evans points to the top yield on the Texas PSF bonds and to recent secondary-market offerings in which 20-year pre-refunded California GOs traded at a yield of 5.85%. Pre-refunded bonds probably are the safest bonds in the muni market because they're secured by U.S. Treasuries. Long-term debt from other top issuers, like Harvard University, yields nearly 6%
A 6% muni yield is equivalent to a 10% taxable yield for residents of high income-tax states like California, New Jersey and New York. This assumes that residents buy in-state bonds. Tax-equivalent yields for out-of-state bonds are around 9%. The allure of munis could grow if presidential front-runner Barack Obama wins the election because he has vowed to raise taxes on Americans making more than $250,000 a year. Some analysts expect Obama to seek to lift the maximum income-tax rate to 40% from the current 35%, which now applies to married couples earning over $357,700 a year.
The 5.9% yield on 30-year, AAA-rated munis now is roughly 135% of the 4.3% yield on the 30-year Treasury. That's by far the highest ratio in the past 20 years, exceeding the prior peak of 115% set early this year. Long-term municipals historically have yielded slightly less than Treasuries because of the tax benefits.
Despite weak demand for long-term issues, California just sold $5 billion of short-term revenue-anticipation notes maturing in 2009, including $3.8 billion of eight-month notes at a 4.25% yield. That yield is very attractive, relative to the 1% rate on Treasury bills. The interest is tax-free to California residents, who face a punishing state income-tax rate of 9.3% for couples earnings over $93,000 annually and 10.3% for income above $1 million.
Muni issuance has slowed dramatically this month as state and local governments have heeded the advice of investment bankers to wait for a more receptive market. If demand picks up -- and high yields could create demand -- supply might be easily absorbed, and market conditions could improve quickly, as they did after a sell-off in February and March.
Investors have plenty of ways to play the muni market, including individual bonds, open-end mutual funds, closed-end funds and relatively new exchange-traded funds like the iShares S&P National Muni Bond (MUB). Well-run open-end funds include the $19 billlion Vanguard Intermediate-Term Tax-Exempt (VWITX) and the Bernstein Diversified Municipal (SNDPX), which have held up well this year, as well as Legg Mason Partners Managed Municipals (SMMOX), co-run by veteran Joe Deane, one of the best managers in the business.
CLOSED-END MUNI FUNDS BECKON because they came under extreme selling pressure early this month, with many finishing Friday, Oct. 10, at record discounts of 30% or more to their net asset values, way above the typical level of no more than 10% or 15%. Exchange-traded closed-ends rallied sharply last Monday, and their discounts now generally are below 20%.
The accompanying table lists a few closed-end funds now trading at double-digit discounts and yielding more than 7%. The high closed-end yields reflect the discounts and leverage. Many funds buy $3 of bonds using $2 of investor funds and $1 of borrowings. The leverage results in higher volatility than is common at open-end funds; year-to-date total returns of many closed-ends were a negative 20% or worse at mid-week, according to Morningstar, versus declines of around 10% for many long-term open-end funds. The losses to closed-end investors have been even greater than 20% because market prices often slip more than NAVs, on which the reported performance data are based. There's a risk that some closed-ends will reduce leverage, diminishing their yields.
PROBABLY THE HARDEST-HIT big municipal fund this year is the $5.9 billion Oppenheimer Rochester National Municipals (ORNAX), which was off 37% through Thursday, by far the worst showing among the 50 largest open-end muni funds.
The aggressive fund aims to generate high yields through ownership of low-rated or unrated munis. It buys gamier securities like land-development bonds, tobacco bonds backed by state revenues from the 1998 mass settlement with major cigarette companies, airport-revenue bonds and "inverse floaters," whose yields move in the opposite direction of short-term rates. With muni short rates elevated, prices of inverse floaters have come under pressure.
Prices of bonds in the Rochester portfolio have fallen sharply as investors favor high-grade munis with ratings of AA and higher. "I've been doing this since the late 1970s, and this is by far the worst I've seen it. It's an ugly market out there," says Ron Fielding, senior portfolio manager of the fund. Because of recent investor redemptions, Oppenheimer's Rochester has been forced to sell bonds in an illiquid market.
Fielding says the good news is that the credit quality of both the Oppenheimer Rochester National Municipals fund and the larger $9 billion New York-oriented Rochester Fund Municipals (RMUNX) is strong with minimal defaults. The main near-term risk is that the funds will need to sell more bonds to meet additional redemptions. The national fund's current yield now stands at 10%.
Reflecting the investor preference for high-grade munis, the yield gap between triple-A and triple-B munis has widened to a near-record two percentage points.
Even among highly rated bonds, investors are showing a preference for general-obligation bonds and revenue bonds from well-regarded issuers like the Los Angeles Department of Water and Power and the Port Authority of New York and New Jersey.
The Bottom Line:
Municipal bonds are trading at unusually low prices and rare yields. They've almost never looked as attractive when compared with U.S. Treasury securities.A BLOCK OF BONDS issued by Goldman Sachs for construction of its new headquarters in lower Manhattan traded recently at a yield of about 7.75%. Those New York Liberty 5¼s of 2035 are backed by Goldman and have double-A credit ratings.
With the municipal-bond market roiled by liquidity problems, investors now can get 5% on intermediate-term debt and 6% on long-term issues. That seems awfully attractive with inflation likely waning and the presidential front-runner vowing to boost taxes on anyone making $250,000 or more a year.
--------------------------------------------------------------------------------
E-mail comments: mail@barrons.com
URL for this article:
http://online.barrons.com/article/SB122429125462346821.html
Related Articles from Barrons.com
Sharing the Wealth Oct. 18, 2008
Current Yield Oct. 18, 2008
Munis Fail to Get a Bailout Boost Oct. 15, 2008
After a Record Tumble, Is Junk a Bargain? Oct. 12, 2008
Related News from WSJ Digital Network
Vanguard's Values Oct. 15, 2008 marketwatch.com
Port in the Storm: Insurers' Catastrophe Bonds Oct. 14, 2008 wsj.com
Munis thrive in troubled market Oct. 07, 2008 marketwatch.com
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.
Fannie Mae Lawsuit (from WSJ)
OCTOBER 18, 2008 Fannie Suit Vexes Regulator, May Pay Shareholders
By APARAJITA SAHA-BUBNAArticle
Comments
more in Politics & Campaign »NEW YORK -- Fannie Mae shareholders, battered by the federal takeover of the mortgage finance giant, may yet have checks coming their way.
A class-action lawsuit alleging securities fraud by the company could yield a hefty payment to shareholders. That suit, now in U.S. District Court in Washington, puts the regulator running the company in an awkward position.
A similar securities-fraud case against Freddie Mac was settled in April 2006 for $410 million. At the time, the settlement was the eighth-largest in a securities-fraud case in U.S. history.
But since the Fannie suit was filed, the government in early September seized control of Fannie and Freddie, citing the risk that growing losses on mortgage defaults would wipe out their capital. The government's control of Fannie puts taxpayers potentially on the hook for hundreds of millions of dollars in damages stemming from the lawsuit.
Moreover, Exhibit A in the suit is a highly critical report about Fannie, written a few years ago by the regulator that now runs the company. A vigorous defense on Fannie's part would require rebutting the agency's own report. An acknowledgment of the report's veracity could mean admitting wrongdoing and an even bigger payout. "The regulator is between a rock and a hard place," said Tom Ajamie, a securities lawyer at Ajamie LLP in Houston. Mr. Ajamie isn't involved with the Fannie case.
The Federal Housing Finance Agency, Fannie and Freddie's regulator, is the new, more powerful incarnation of the companies' former overseer, the Office of Federal Housing Enterprise Oversight. James Lockhart, who oversaw Ofheo, is the director of the new agency.
The regulator grabbed control of the two companies -- the main providers of funding for U.S. home mortgages -- under a legal process known as conservatorship last month. Under the takeover, in which the government can buy nearly 80% of both companies at a nominal price, shareholders have suffered crushing losses. Fannie and Freddie shares have lost more than 95% of their value this year.
Former Ohio Attorney General Jim Petro filed a class-action securities-fraud lawsuit against Fannie and its top executives in November 2004, accusing the company of manipulating its accounting to artificially inflate its stock price. The lawsuit is filed on behalf of the Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio and other investors who bought or sold Fannie shares from April 2001 through December 2004. This period may be extended to investors who bought or sold Fannie shares to September 2005 or even February 2006.
On average, affected Freddie shareholders got back about $1.20 per share minus litigation-related expenses. While any Fannie award is likely to be different in size than the Freddie award, it is noteworthy that the $1.20 award now exceeds the current stock price of Fannie, which early Friday afternoon was trading at $1, up 1%.
A so-called status conference, or a progress report, on the Fannie case is being held Oct. 20.
The regulator's 340-page report found Fannie's board and management responsible for a corporate culture that allowed managers to manipulate accounting in order to alter earnings and trigger millions of dollars in bonuses. Former executives have denied that they sought to inflate their bonuses through improper accounting.
"The image of Fannie Mae as one of the lowest-risk and 'best-in-class' institutions was a facade," Mr. Lockhart said in a statement related to the report in May 2006. "Our examination found an environment where the ends justified the means."
The regulator's predicament may work to the advantage of shareholders, securities lawyer Mr. Ajamie said. "The report so strongly describes the misbehavior and supports the case. It's hard to get a better piece of evidence than this," he said. "A settlement would be the best resolution."
Write to Aparajita Saha-Bubna at Aparajita.Saha-Bubna@dowjones.com
By APARAJITA SAHA-BUBNAArticle
Comments
more in Politics & Campaign »NEW YORK -- Fannie Mae shareholders, battered by the federal takeover of the mortgage finance giant, may yet have checks coming their way.
A class-action lawsuit alleging securities fraud by the company could yield a hefty payment to shareholders. That suit, now in U.S. District Court in Washington, puts the regulator running the company in an awkward position.
A similar securities-fraud case against Freddie Mac was settled in April 2006 for $410 million. At the time, the settlement was the eighth-largest in a securities-fraud case in U.S. history.
But since the Fannie suit was filed, the government in early September seized control of Fannie and Freddie, citing the risk that growing losses on mortgage defaults would wipe out their capital. The government's control of Fannie puts taxpayers potentially on the hook for hundreds of millions of dollars in damages stemming from the lawsuit.
Moreover, Exhibit A in the suit is a highly critical report about Fannie, written a few years ago by the regulator that now runs the company. A vigorous defense on Fannie's part would require rebutting the agency's own report. An acknowledgment of the report's veracity could mean admitting wrongdoing and an even bigger payout. "The regulator is between a rock and a hard place," said Tom Ajamie, a securities lawyer at Ajamie LLP in Houston. Mr. Ajamie isn't involved with the Fannie case.
The Federal Housing Finance Agency, Fannie and Freddie's regulator, is the new, more powerful incarnation of the companies' former overseer, the Office of Federal Housing Enterprise Oversight. James Lockhart, who oversaw Ofheo, is the director of the new agency.
The regulator grabbed control of the two companies -- the main providers of funding for U.S. home mortgages -- under a legal process known as conservatorship last month. Under the takeover, in which the government can buy nearly 80% of both companies at a nominal price, shareholders have suffered crushing losses. Fannie and Freddie shares have lost more than 95% of their value this year.
Former Ohio Attorney General Jim Petro filed a class-action securities-fraud lawsuit against Fannie and its top executives in November 2004, accusing the company of manipulating its accounting to artificially inflate its stock price. The lawsuit is filed on behalf of the Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio and other investors who bought or sold Fannie shares from April 2001 through December 2004. This period may be extended to investors who bought or sold Fannie shares to September 2005 or even February 2006.
On average, affected Freddie shareholders got back about $1.20 per share minus litigation-related expenses. While any Fannie award is likely to be different in size than the Freddie award, it is noteworthy that the $1.20 award now exceeds the current stock price of Fannie, which early Friday afternoon was trading at $1, up 1%.
A so-called status conference, or a progress report, on the Fannie case is being held Oct. 20.
The regulator's 340-page report found Fannie's board and management responsible for a corporate culture that allowed managers to manipulate accounting in order to alter earnings and trigger millions of dollars in bonuses. Former executives have denied that they sought to inflate their bonuses through improper accounting.
"The image of Fannie Mae as one of the lowest-risk and 'best-in-class' institutions was a facade," Mr. Lockhart said in a statement related to the report in May 2006. "Our examination found an environment where the ends justified the means."
The regulator's predicament may work to the advantage of shareholders, securities lawyer Mr. Ajamie said. "The report so strongly describes the misbehavior and supports the case. It's hard to get a better piece of evidence than this," he said. "A settlement would be the best resolution."
Write to Aparajita Saha-Bubna at Aparajita.Saha-Bubna@dowjones.com
The Lehman Legacy (from Financial Times)
The Lehman legacy: catalyst of the crisis
By Aline van Duyn, Deborah Brewster and Gillian Tett
Published: October 12 2008 19:26 | Last updated: October 12 2008 19:26
On September 15, Catherine Naud checked her Washington Mutual bank account before she began a 10-day road trip across Utah, Arizona and several other states. On her return to New York, Ms Naud, a scientist at Columbia University, logged on to her bank’s website. “I got a message that I was now a JPMorgan customer, that Washington Mutual no longer existed,” she says. “I was shocked.”
It is a reaction many other policymakers and investors would now echo – not just in relation to last month’s demise of WaMu, the largest US savings and loans association, but also to the wider financial crisis that is convulsing the global economy. After all, when the credit turmoil began just over a year ago, many bankers and policymakers maintained it would be over in a matter of months, since the losses could be easily “contained”.
While this view proved over-optimistic, a few months ago it did seem as if the worst of the financial panic might be ebbing away. More specifically, when Bear Stearns, a large US stockbroker, imploded back in March, some thought that might be the biggest upheaval the crisis would bring – not least because the markets rallied after Bear was acquired by JPMorgan Chase.
Instead, the sense of panic has escalated in the past few weeks, creating a fresh wave of bank failures. Consequently, as global leaders scramble to introduce emergency measures – including the prospect of governments taking direct stakes in banks – the question many non-bankers such as Ms Naud might ask is: why has all this become necessary? What has caused the resurgence in financial panic, in a manner that has apparently left global leaders so scared?
The catalyst arguably came four weeks ago on Monday, just as Ms Naud was setting off on her holiday. In the early hours of September 15, Lehman Brothers, the 158-year-old Wall Street institution, filed for bankruptcy. Despite round-the-clock talks with banks and investors over the preceding weekend, US financial authorities decided not to step in to prevent the collapse. “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers,” Hank Paulson, Treasury secretary, said the day after Lehman’s demise.
Six months earlier, the Federal Reserve and the Treasury had stepped in to prevent the rival Bear Stearns from filing for bankruptcy. After that, officials came to take the view that dealers and investors had become well aware Wall Street banks were no safe bet. These hopes were misplaced. The Lehman bankruptcy set in train a series of damaging events in an unexpected quarter: the $3,500bn (£2,055bn, €2,590bn) US money market fund industry, used by banks and companies across the world for their short-term financing needs.
The day after the bankruptcy, the $62bn Reserve Primary Fund, the country’s oldest money market fund, posted this sombre statement on its website: “The value of the debt securities issued by Lehman Brothers Holdings (face value $785m) and held by the Primary Fund has been valued at zero effective as of 4pm New York time today.”
THE TRANSATLANTIC TUSSLE
“Horrendous.” The terse description by Christine Lagarde, French finance minister, of the decision to let Lehman fail is one echoed by many other European policy makers and investors.
A crucial question still baffling observers is why the US allowed the collapse. Did officials not foresee the consequences? Or were they just determined to make a policy point – or unable to prevent it?
In Europe some blame the decision on ideology, claiming that Hank Paulson, US Treasury secretary, refused to offer aid to avoid accusations of moral hazard. Others wonder if officials were overwhelmed by the speed of events.
US officials dismiss claims of ideology or complacency; they insist that the Federal Reserve was keenly aware that the broker’s collapse could spark chain reactions. However, Washington effectively ran out of options because events were moving so fast – and its hands were tied by a pernicious combination of UK and US laws.
This legal saga started on the Thursday before Lehman failed, when it became clear it was close to collapse. At that stage, the Fed believed that it could legally only extend support if this was either secured against quality assets, or if it was part of a deal to help a willing buyer.
In the subsequent case of AIG, the Fed decided that the insurer had plenty of good assets. But with Lehman, the Fed was horrified at the size of the hole in the bank’s books. The Fed and the Treasury decided they had no legal mandate to risk extending a loan without a buyer (a situation which, crucially, no longer applies since the $700bn bail-out package).
Bank of America initially expressed interest in Lehman – but when it saw the books it demanded so much support that officials balked. Focus turned to Barclays which, it was thought, could do a deal without support. And even though the UK bank later asked for aid, its request was modest enough that many US officials thought a deal could be done – until Sunday.
What changed all this was a transatlantic tussle. The Barclays deal could only work if Lehman’s trading positions were guaranteed when markets opened on Monday. Other Wall Street banks were unwilling to do this. While Barclays appeared willing to offer some pledge, it became clear that UK listing rules prevented it from offering this without getting shareholder approval – an impossible task at such short notice.
In desperation Mr Paulson, called his British counterpart, Alistair Darling, and other UK policymakers. But London refused to waive the rules. Some US officials suspect that British regulators were reluctant to let Barclays proceed; UK officials argue that tearing up listing rules would have created more confusion and fear. Since Lehman was American, they argued that the onus was on Washington to be creative, most notably by providing a temporary government guarantee.
Either way, these discussions took place at such a late stage that by Sunday afternoon Washington felt it had no choice but to let Lehman go.
This pushed the value of the assets in the fund to below their $1 per share face value. In other words, the fund had “broken the buck” – an event greatly feared by regulators and fund managers since the start of the credit crisis more than a year before. “Lehman’s bankruptcy was so significant because it led a fund to break the buck,” says Deborah Cunningham, chief investment officer at Federated Investors, one of the biggest money market investors. “Lehman would probably not have had more of an effect on markets than any other bank collapse if it had not been for this tag-on effect in the money markets.”
Money market funds’ popularity rested on their reputation for being almost as secure as bank deposits. Marketers of the funds had long emphasised that only one small fund had ever “broken the buck”, and that was 14 years before. The fear was that once one fund showed that investors could lose their principal, the damage to the industry would be severe.
These concerns proved well founded. As word of the Reserve Fund’s predicament spread, investors fled. By that weekend, more than $200bn had been pulled from money market funds, by both retail and institutional investors. When other short-term funds, such as prime funds, are included, the amount that was taken out of short-term investments quickly reached $400bn.
That shift brought the funds under heavy pressure to sell into an illiquid market, simply to ensure they had enough cash to pay investors withdrawing their money. For banks, heavily reliant on these investors for their funding needs, it created a spiral of liquidity crises. “It was the straw that broke the camel’s back,” says Joe Lynagh, a portfolio manager at T. Rowe Price, an investment company.
To assure retail investors, the Fed quickly lined up a liquidity facility for money market funds, allowing them to sell short-term debt backed by assets. However, that was not enough. Last week, the Fed started buying commercial paper in an attempt to break the impasse, but it was too late for some banks faced with billions of dollars of short-term funding needs and nowhere to raise the money.
“The impact of the investor pullback is borne most heavily by banks that are predominantly reliant on wholesale funding, a group that includes many European banks,” says Alex Roever, analyst at JPMorgan. “This investor pullback from the secured dollar bank commercial paper market is a contributing factor in the recent wave of liquidity issues at European banks.”
Should this have been foreseen? There were plenty of market indicators suggesting Lehman could default – mainly the soaring cost of insuring in the credit derivatives market against that eventuality. Yet most investors holding cash bonds did not appear to be mentally or practically prepared for a default.
“Prior to Lehman, there was an almost unshakable faith that the senior creditors and counterparties of large, systemically important financial institutions would not face the risk of outright default,” notes Neil McLeish, analyst at Morgan Stanley. “This confidence was built up ever since the failure of Continental Illinois (at the time the seventh largest US bank) in 1984, a failure in which bondholders were [fully paid out].”
For months, regulators including the Bank of England as well as the Fed had been putting pressure on banks to prepare for a default by a big market participant. The risk of a bank collapsing under the weight of overvalued and illiquid mortgage backed securities and a funding crisis had been demonstrated by the fate of Bear Stearns.
With Wall Street’s big broker-dealers involved in millions of derivatives trades, which feature in contracts from basic hedges on oil prices to complex structured debt securities, regulators were worried that the unravelling of such trades could be the downfall of the financial system.
Yet it now seems that, with all the emphasis on limiting the fallout on markets such as derivatives, a more straightforward consequence of a bankruptcy was overlooked: the pain it imposes on creditors.
First, Lehman hurt its bondholders. Lehman was a very large borrower, with around $130bn in debt outstanding. The expected losses on these bonds spiralled swiftly. In early September, they were trading at 95 cents on the dollar but by the Monday after bankruptcy had fallen to around 40 cents – and last week to 10 cents. Its short-term debt – as the Primary Reserve Fund found – was essentially worthless.
Second, investors such as hedge funds, which had money or assets held at Lehman, were hurt, too. Hedge funds that were using Lehman as a prime broker found that their collateral was frozen as its complicated bankruptcy process got under way – which in turn effectively left many of these funds frozen as well.
“A lot of people did not understand the implications of Lehman’s default,” says a chief executive of a large hedge fund. “Whether it is a misimpression or bad assumptions, the fact is, as a hedge fund with balances at Lehman, you lost access to those balances when it went bankrupt. Hedge funds have joined the list of unsecured creditors and many were not prepared for this.”
To make matters worse, the fragmented legal infrastructure in Europe, combined with differences in bankruptcy laws with the US, left even expert lawyers uncertain about exactly how a bankruptcy might proceed. Many experts predict it could take years to unwind Lehman, the world’s biggest ever corporate bankruptcy case.
Hedge funds, like money market funds, have therefore shied away from an exposure to bank debt. “People are rightly a lot more conservative in their assumptions about credit risk,” says Ms Cunningham.
“After the failure of Lehman Brothers ... institutional investors have said that they would prefer to stay home,” says Bill Gross of Pimco, the bond fund manager. “Instead of risking their money [it] goes into that figurative mattress.”
Getting the money out of the mattress and back as a source of financing for banks is one of the biggest tasks now facing politicians. “With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system,” the International Monetary Fund said last week, warning that a failure to do so would be “costly for the real economy”.
Policymakers will on Monday be watching the markets closely in the hope that the weekend meetings on both sides of the Atlantic aimed at tackling the crisis will start to restore confidence in the global financial system.
But with so many professional investors having run for the exits, the key now is also to ensure people like Ms Naud do not become so worried that they take their money out of their newly renamed banks and place it under a rather more literal mattress.
Copyright The Financial Times Limited 2008
"FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms
© Copyright The Financial Times Ltd 2008.
By Aline van Duyn, Deborah Brewster and Gillian Tett
Published: October 12 2008 19:26 | Last updated: October 12 2008 19:26
On September 15, Catherine Naud checked her Washington Mutual bank account before she began a 10-day road trip across Utah, Arizona and several other states. On her return to New York, Ms Naud, a scientist at Columbia University, logged on to her bank’s website. “I got a message that I was now a JPMorgan customer, that Washington Mutual no longer existed,” she says. “I was shocked.”
It is a reaction many other policymakers and investors would now echo – not just in relation to last month’s demise of WaMu, the largest US savings and loans association, but also to the wider financial crisis that is convulsing the global economy. After all, when the credit turmoil began just over a year ago, many bankers and policymakers maintained it would be over in a matter of months, since the losses could be easily “contained”.
While this view proved over-optimistic, a few months ago it did seem as if the worst of the financial panic might be ebbing away. More specifically, when Bear Stearns, a large US stockbroker, imploded back in March, some thought that might be the biggest upheaval the crisis would bring – not least because the markets rallied after Bear was acquired by JPMorgan Chase.
Instead, the sense of panic has escalated in the past few weeks, creating a fresh wave of bank failures. Consequently, as global leaders scramble to introduce emergency measures – including the prospect of governments taking direct stakes in banks – the question many non-bankers such as Ms Naud might ask is: why has all this become necessary? What has caused the resurgence in financial panic, in a manner that has apparently left global leaders so scared?
The catalyst arguably came four weeks ago on Monday, just as Ms Naud was setting off on her holiday. In the early hours of September 15, Lehman Brothers, the 158-year-old Wall Street institution, filed for bankruptcy. Despite round-the-clock talks with banks and investors over the preceding weekend, US financial authorities decided not to step in to prevent the collapse. “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers,” Hank Paulson, Treasury secretary, said the day after Lehman’s demise.
Six months earlier, the Federal Reserve and the Treasury had stepped in to prevent the rival Bear Stearns from filing for bankruptcy. After that, officials came to take the view that dealers and investors had become well aware Wall Street banks were no safe bet. These hopes were misplaced. The Lehman bankruptcy set in train a series of damaging events in an unexpected quarter: the $3,500bn (£2,055bn, €2,590bn) US money market fund industry, used by banks and companies across the world for their short-term financing needs.
The day after the bankruptcy, the $62bn Reserve Primary Fund, the country’s oldest money market fund, posted this sombre statement on its website: “The value of the debt securities issued by Lehman Brothers Holdings (face value $785m) and held by the Primary Fund has been valued at zero effective as of 4pm New York time today.”
THE TRANSATLANTIC TUSSLE
“Horrendous.” The terse description by Christine Lagarde, French finance minister, of the decision to let Lehman fail is one echoed by many other European policy makers and investors.
A crucial question still baffling observers is why the US allowed the collapse. Did officials not foresee the consequences? Or were they just determined to make a policy point – or unable to prevent it?
In Europe some blame the decision on ideology, claiming that Hank Paulson, US Treasury secretary, refused to offer aid to avoid accusations of moral hazard. Others wonder if officials were overwhelmed by the speed of events.
US officials dismiss claims of ideology or complacency; they insist that the Federal Reserve was keenly aware that the broker’s collapse could spark chain reactions. However, Washington effectively ran out of options because events were moving so fast – and its hands were tied by a pernicious combination of UK and US laws.
This legal saga started on the Thursday before Lehman failed, when it became clear it was close to collapse. At that stage, the Fed believed that it could legally only extend support if this was either secured against quality assets, or if it was part of a deal to help a willing buyer.
In the subsequent case of AIG, the Fed decided that the insurer had plenty of good assets. But with Lehman, the Fed was horrified at the size of the hole in the bank’s books. The Fed and the Treasury decided they had no legal mandate to risk extending a loan without a buyer (a situation which, crucially, no longer applies since the $700bn bail-out package).
Bank of America initially expressed interest in Lehman – but when it saw the books it demanded so much support that officials balked. Focus turned to Barclays which, it was thought, could do a deal without support. And even though the UK bank later asked for aid, its request was modest enough that many US officials thought a deal could be done – until Sunday.
What changed all this was a transatlantic tussle. The Barclays deal could only work if Lehman’s trading positions were guaranteed when markets opened on Monday. Other Wall Street banks were unwilling to do this. While Barclays appeared willing to offer some pledge, it became clear that UK listing rules prevented it from offering this without getting shareholder approval – an impossible task at such short notice.
In desperation Mr Paulson, called his British counterpart, Alistair Darling, and other UK policymakers. But London refused to waive the rules. Some US officials suspect that British regulators were reluctant to let Barclays proceed; UK officials argue that tearing up listing rules would have created more confusion and fear. Since Lehman was American, they argued that the onus was on Washington to be creative, most notably by providing a temporary government guarantee.
Either way, these discussions took place at such a late stage that by Sunday afternoon Washington felt it had no choice but to let Lehman go.
This pushed the value of the assets in the fund to below their $1 per share face value. In other words, the fund had “broken the buck” – an event greatly feared by regulators and fund managers since the start of the credit crisis more than a year before. “Lehman’s bankruptcy was so significant because it led a fund to break the buck,” says Deborah Cunningham, chief investment officer at Federated Investors, one of the biggest money market investors. “Lehman would probably not have had more of an effect on markets than any other bank collapse if it had not been for this tag-on effect in the money markets.”
Money market funds’ popularity rested on their reputation for being almost as secure as bank deposits. Marketers of the funds had long emphasised that only one small fund had ever “broken the buck”, and that was 14 years before. The fear was that once one fund showed that investors could lose their principal, the damage to the industry would be severe.
These concerns proved well founded. As word of the Reserve Fund’s predicament spread, investors fled. By that weekend, more than $200bn had been pulled from money market funds, by both retail and institutional investors. When other short-term funds, such as prime funds, are included, the amount that was taken out of short-term investments quickly reached $400bn.
That shift brought the funds under heavy pressure to sell into an illiquid market, simply to ensure they had enough cash to pay investors withdrawing their money. For banks, heavily reliant on these investors for their funding needs, it created a spiral of liquidity crises. “It was the straw that broke the camel’s back,” says Joe Lynagh, a portfolio manager at T. Rowe Price, an investment company.
To assure retail investors, the Fed quickly lined up a liquidity facility for money market funds, allowing them to sell short-term debt backed by assets. However, that was not enough. Last week, the Fed started buying commercial paper in an attempt to break the impasse, but it was too late for some banks faced with billions of dollars of short-term funding needs and nowhere to raise the money.
“The impact of the investor pullback is borne most heavily by banks that are predominantly reliant on wholesale funding, a group that includes many European banks,” says Alex Roever, analyst at JPMorgan. “This investor pullback from the secured dollar bank commercial paper market is a contributing factor in the recent wave of liquidity issues at European banks.”
Should this have been foreseen? There were plenty of market indicators suggesting Lehman could default – mainly the soaring cost of insuring in the credit derivatives market against that eventuality. Yet most investors holding cash bonds did not appear to be mentally or practically prepared for a default.
“Prior to Lehman, there was an almost unshakable faith that the senior creditors and counterparties of large, systemically important financial institutions would not face the risk of outright default,” notes Neil McLeish, analyst at Morgan Stanley. “This confidence was built up ever since the failure of Continental Illinois (at the time the seventh largest US bank) in 1984, a failure in which bondholders were [fully paid out].”
For months, regulators including the Bank of England as well as the Fed had been putting pressure on banks to prepare for a default by a big market participant. The risk of a bank collapsing under the weight of overvalued and illiquid mortgage backed securities and a funding crisis had been demonstrated by the fate of Bear Stearns.
With Wall Street’s big broker-dealers involved in millions of derivatives trades, which feature in contracts from basic hedges on oil prices to complex structured debt securities, regulators were worried that the unravelling of such trades could be the downfall of the financial system.
Yet it now seems that, with all the emphasis on limiting the fallout on markets such as derivatives, a more straightforward consequence of a bankruptcy was overlooked: the pain it imposes on creditors.
First, Lehman hurt its bondholders. Lehman was a very large borrower, with around $130bn in debt outstanding. The expected losses on these bonds spiralled swiftly. In early September, they were trading at 95 cents on the dollar but by the Monday after bankruptcy had fallen to around 40 cents – and last week to 10 cents. Its short-term debt – as the Primary Reserve Fund found – was essentially worthless.
Second, investors such as hedge funds, which had money or assets held at Lehman, were hurt, too. Hedge funds that were using Lehman as a prime broker found that their collateral was frozen as its complicated bankruptcy process got under way – which in turn effectively left many of these funds frozen as well.
“A lot of people did not understand the implications of Lehman’s default,” says a chief executive of a large hedge fund. “Whether it is a misimpression or bad assumptions, the fact is, as a hedge fund with balances at Lehman, you lost access to those balances when it went bankrupt. Hedge funds have joined the list of unsecured creditors and many were not prepared for this.”
To make matters worse, the fragmented legal infrastructure in Europe, combined with differences in bankruptcy laws with the US, left even expert lawyers uncertain about exactly how a bankruptcy might proceed. Many experts predict it could take years to unwind Lehman, the world’s biggest ever corporate bankruptcy case.
Hedge funds, like money market funds, have therefore shied away from an exposure to bank debt. “People are rightly a lot more conservative in their assumptions about credit risk,” says Ms Cunningham.
“After the failure of Lehman Brothers ... institutional investors have said that they would prefer to stay home,” says Bill Gross of Pimco, the bond fund manager. “Instead of risking their money [it] goes into that figurative mattress.”
Getting the money out of the mattress and back as a source of financing for banks is one of the biggest tasks now facing politicians. “With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system,” the International Monetary Fund said last week, warning that a failure to do so would be “costly for the real economy”.
Policymakers will on Monday be watching the markets closely in the hope that the weekend meetings on both sides of the Atlantic aimed at tackling the crisis will start to restore confidence in the global financial system.
But with so many professional investors having run for the exits, the key now is also to ensure people like Ms Naud do not become so worried that they take their money out of their newly renamed banks and place it under a rather more literal mattress.
Copyright The Financial Times Limited 2008
"FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms
© Copyright The Financial Times Ltd 2008.
Big Dividends from MLPs - Barrons
How to Energize Your Portfolio
By DIMITRA DEFROTIS
Master limited partnerships look inexpensive. And with their double-digit yields, why worry if they don't bounce back right away?
IT MAY TAKE YEARS for the shotgun marriage of Washington and Wall Street to pay off for taxpayers, who are footing the wedding bill. But some partnerships -- master limited partnerships -- are offering double-digit returns today.
MLPs, as they're called, typically invest in energy assets, such as oil fields and natural-gas processors. Most of their profits are passed along to their investors as juicy tax-deferred distributions, and the yields for many now hover near 11%. That rich payout reflects the double whammy that has hit the group -- the recent drubbing of the overall market and the sharp selloff in energy names that had preceded it, as oil prices receded from record levels.
Through Thursday, the Alerian Capital index of MLPs was down 44% this year. The good news is that as MLP prices fall, payouts rise, offering a glorious security blanket in this credit morass. And Citigroup thinks its list of 36 MLPs could produce 12-month total returns of 84%.
INVESTORS DO NEED A selective eye. Some MLPs have sold off because they're highly leveraged, while others have slid because they're directly affected by volatility in commodity prices -- which has been substantial lately. But pipeline owners, flush with income from recurring transport fees, have been unfairly dumped with their brethren.
Says Seth Glickenhaus, chief investment officer at Glickenhaus & Co., a New York money-management firm: "MLPs are getting to levels that are very, very interesting. I think their cash flows are going to continue, and at these prices you are getting very nice yields."
Where could MLPs go from here? "They have lost more than half their value in many cases, and I would say they could go up 25% easily," Glickenhaus ventures.
There has been negative sentiment about MLPs this year as hedge funds unwound energy positions. In addition, Lehman Brothers, which filed for bankruptcy in mid-September, was a lender and adviser to a handful of MLPs. As Lehman and others shed assets, lowering their value, arbitrage plays including MLPs suffered.
Glickenhaus likes three pipeline partnerships: Enterprise Products Partners (ticker: EPD), Energy Transfer Partners (ETP) and Boardwalk Pipeline Partners (BWP). Citigroup thinks the pipeline group can generate total returns of nearly 63% in the next 12 months.
Boardwalk, of Owensboro, Ky. -- which has the lowest ratio of long-term debt to capital among Glickenhaus' picks (38%) -- owns natural-gas storage fields and operates two gas pipelines in the Southeastern U.S.
At its recent quote around 16, Boardwalk looks reasonably priced, at an enterprise value (debt plus equity) of 11 times earnings before interest, taxes, depreciation and amortization -- near the Alerian index's average.
Robust Profit PipelinesBoardwalk's shares have fallen by 48% over the past 12 months; its yield is near 11%. Citigroup expects Boardwalk to produce total returns exceeding 41% over the next year. The partnership's relatively low ratio of long-term debt to capital should serve it well in the current economic environment.
Another outfit with fee-based cash flow, El Paso Pipeline (EPB), offers a 9% yield and should produce 10% compound annual growth in distributions over the next five years, according to Wachovia Capital Markets research. El Paso Pipeline's debt level is reasonable at 54%, and Wachovia thinks the stock is worth almost double its recent price near 13.
One big plus: General partner El Paso Corp. (EP) recently dropped $971 million in pipeline assets into the partnership. A Wachovia report praised the deal, financed via a private debt placement and issuance of new units, saying it "reaffirms EPB's commitment to the MLP business model, and gives management credibility in delivering...to EPB unitholders."
For individual investors averse to filing the tax forms required annually of MLP owners, another option is owning the MLP general partner, says Timothy Call, chief investment officer at the Capital Management Corp., a Richmond, Va., investment-advisory firm. Call thinks that demand for U.S. natural-gas pipelines will increase, boosting returns for interstate operators like those controlled by OneOk Partners (OKS). But Call prefers shares of its general partner, OneOk (OKE), the Tulsa, Okla., natural-gas utility with a large stake in OneOk Partners.
THE BIGGER FISH, OneOk, buys, transports, stores and distributes natural gas. It yields 6.4%, which isn't too shabby, and its shares recently fell to a 52-week low near 26. Despite the gloom in the financial markets, analysts' 2009 earnings estimates are $3.49 a share, giving the stock a price/earnings ratio of just below eight times expected profits.
The Bottom Line
With many MLPs down 40% in the past 12 months, yields have jumped to about 10%. Citigroup sees the average partnership producing a total return of 84% over the next year.Another option: exchange-traded MLP funds. Two trade at a discount to their net asset value. The BearLinx Alerian MLP Select Index (BSR) has a 10% yield. The other, the MLP & Strategic Equity Fund (MTP), which holds a basket of energy MLPs and dabbles in forward contracts, yields near 14%.
Of course, even if the stock market stabilizes, sentiment against MLPs could stay negative if oil and gas prices waver.
But the partnerships mentioned here look inexpensive, generate steady income and offer upside potential even amid fluctuations in oil and natural-gas prices. And the idea of being paid while waiting for the stock to rise should energize some investors.
--------------------------------------------------------------------------------
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URL for this article:
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CONTINUED
By DIMITRA DEFROTIS
Master limited partnerships look inexpensive. And with their double-digit yields, why worry if they don't bounce back right away?
IT MAY TAKE YEARS for the shotgun marriage of Washington and Wall Street to pay off for taxpayers, who are footing the wedding bill. But some partnerships -- master limited partnerships -- are offering double-digit returns today.
MLPs, as they're called, typically invest in energy assets, such as oil fields and natural-gas processors. Most of their profits are passed along to their investors as juicy tax-deferred distributions, and the yields for many now hover near 11%. That rich payout reflects the double whammy that has hit the group -- the recent drubbing of the overall market and the sharp selloff in energy names that had preceded it, as oil prices receded from record levels.
Through Thursday, the Alerian Capital index of MLPs was down 44% this year. The good news is that as MLP prices fall, payouts rise, offering a glorious security blanket in this credit morass. And Citigroup thinks its list of 36 MLPs could produce 12-month total returns of 84%.
INVESTORS DO NEED A selective eye. Some MLPs have sold off because they're highly leveraged, while others have slid because they're directly affected by volatility in commodity prices -- which has been substantial lately. But pipeline owners, flush with income from recurring transport fees, have been unfairly dumped with their brethren.
Says Seth Glickenhaus, chief investment officer at Glickenhaus & Co., a New York money-management firm: "MLPs are getting to levels that are very, very interesting. I think their cash flows are going to continue, and at these prices you are getting very nice yields."
Where could MLPs go from here? "They have lost more than half their value in many cases, and I would say they could go up 25% easily," Glickenhaus ventures.
There has been negative sentiment about MLPs this year as hedge funds unwound energy positions. In addition, Lehman Brothers, which filed for bankruptcy in mid-September, was a lender and adviser to a handful of MLPs. As Lehman and others shed assets, lowering their value, arbitrage plays including MLPs suffered.
Glickenhaus likes three pipeline partnerships: Enterprise Products Partners (ticker: EPD), Energy Transfer Partners (ETP) and Boardwalk Pipeline Partners (BWP). Citigroup thinks the pipeline group can generate total returns of nearly 63% in the next 12 months.
Boardwalk, of Owensboro, Ky. -- which has the lowest ratio of long-term debt to capital among Glickenhaus' picks (38%) -- owns natural-gas storage fields and operates two gas pipelines in the Southeastern U.S.
At its recent quote around 16, Boardwalk looks reasonably priced, at an enterprise value (debt plus equity) of 11 times earnings before interest, taxes, depreciation and amortization -- near the Alerian index's average.
Robust Profit PipelinesBoardwalk's shares have fallen by 48% over the past 12 months; its yield is near 11%. Citigroup expects Boardwalk to produce total returns exceeding 41% over the next year. The partnership's relatively low ratio of long-term debt to capital should serve it well in the current economic environment.
Another outfit with fee-based cash flow, El Paso Pipeline (EPB), offers a 9% yield and should produce 10% compound annual growth in distributions over the next five years, according to Wachovia Capital Markets research. El Paso Pipeline's debt level is reasonable at 54%, and Wachovia thinks the stock is worth almost double its recent price near 13.
One big plus: General partner El Paso Corp. (EP) recently dropped $971 million in pipeline assets into the partnership. A Wachovia report praised the deal, financed via a private debt placement and issuance of new units, saying it "reaffirms EPB's commitment to the MLP business model, and gives management credibility in delivering...to EPB unitholders."
For individual investors averse to filing the tax forms required annually of MLP owners, another option is owning the MLP general partner, says Timothy Call, chief investment officer at the Capital Management Corp., a Richmond, Va., investment-advisory firm. Call thinks that demand for U.S. natural-gas pipelines will increase, boosting returns for interstate operators like those controlled by OneOk Partners (OKS). But Call prefers shares of its general partner, OneOk (OKE), the Tulsa, Okla., natural-gas utility with a large stake in OneOk Partners.
THE BIGGER FISH, OneOk, buys, transports, stores and distributes natural gas. It yields 6.4%, which isn't too shabby, and its shares recently fell to a 52-week low near 26. Despite the gloom in the financial markets, analysts' 2009 earnings estimates are $3.49 a share, giving the stock a price/earnings ratio of just below eight times expected profits.
The Bottom Line
With many MLPs down 40% in the past 12 months, yields have jumped to about 10%. Citigroup sees the average partnership producing a total return of 84% over the next year.Another option: exchange-traded MLP funds. Two trade at a discount to their net asset value. The BearLinx Alerian MLP Select Index (BSR) has a 10% yield. The other, the MLP & Strategic Equity Fund (MTP), which holds a basket of energy MLPs and dabbles in forward contracts, yields near 14%.
Of course, even if the stock market stabilizes, sentiment against MLPs could stay negative if oil and gas prices waver.
But the partnerships mentioned here look inexpensive, generate steady income and offer upside potential even amid fluctuations in oil and natural-gas prices. And the idea of being paid while waiting for the stock to rise should energize some investors.
--------------------------------------------------------------------------------
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URL for this article:
http://online.barrons.com/article/SB122369274272225483.html
CONTINUED
Good Companies on Sale - From Barrons
Monday, October 13, 2008
America For Sale: Price Reduced
By ANDREW BARY
Got cash? This could end up being one of history's quintessential buying opportunities. The case for ExxonMobil, Deere, Microsoft -- and more.
AT THE DEPTHS OF THE 1973-74 BEAR MARKET -- the worst of the post-war period -- when the Dow Jones industrial average was approaching its low of 577, Warren Buffett told Forbes magazine that he felt like "an oversexed guy in a whorehouse. This is the time to start investing."
Buffett's words may have been indelicate -- Forbes ended up changing the world "whorehouse" to "harem" when the interview ran -- but the CEO of Berkshire Hathaway was on the mark because that era produced some of the best bargains of the past 50 years.
Investors willing to show a little patience can find discounts on everything from real estate to stocks, bonds and commodities.
The stock market now is suffering a comparable decline to that historic '73-74 loss, with the Dow Jones Industrial Average, at 8,451, having fallen 40% from its October 2007 peak and 36% this year. The peak-to-trough drop in '73-'74 was 45%. The opportunities now could be equally attractive with some market indexes nearing, their 2002 lows and most major stocks valued at less than 10 times estimated 2008 earnings. A bullish Buffett has been buying lately, although his purchases haven't directly involved common stocks. He got equity warrants along with his attractive preferred-stock investments in General Electric and Goldman Sachs. Berkshire also has bought more stock this year in Wells Fargo, Buffett's favorite bank.
"There are extraordinary opportunities on many fronts for investors, from real estate to stocks and bonds and commodities," says Jim Paulsen, chief investment strategist at Wells Capital Management. "Assets are being given away. They may not do well in the next several months, but looking ahead two or three years, investors may see some of the best opportunities of their lives."
The crisis in the credit markets has highlighted the value of a strong balance sheet, an underappreciated quality during the bull run ending in 2007. Investors who once clamored for CEOs to take on debt to buy back stock now are quizzing corporations about debt maturities in the coming months because of refinancing fears.
This is a time when cash is king, enabling well-endowed companies to bypass the credit markets and potentially pick up bargain acquisitions in coming months.
We've highlighted more than a dozen cash-rich companies, ranging from ExxonMobil , which boasts Corporate America's biggest cash hoard at $30 billion, to smaller outfits like Barry Diller's IAC/InterActiveCorp and KBR , an engineering and construction company, whose cash accounts for over half their market values.
With such broad and deep losses throughout the stock market, a case can be made for virtually every major sector, including drugs, financials, consumer staples, technology and energy. (On the opposite page you'll find a chart with 25 candidates for your portfolio.)
INDUSTRIAL COMPANIES RANGING from United Technologies to Deere and Caterpillar also have suffered. They have strong market positions, good balance sheets and with the recent market setback, their stocks trade for less than 10 times estimated 2008 profits. Obviously, profits of industrial companies could be hit next year by the global economic slowdown and reduced credit, but all these companies have been through cycles before and should have the staying power to get through them.
Looking at some of the cash-rich giants, Exxon sits on $30 billion of net cash, or $6 a share. At 62, the stock trades for just seven times projected 2008 earnings market value, although it's likely that '09 profits will fall due to the drop in oil and natural gas prices. It's possible that Exxon may shift some of its cash from an aggressive share buyback program to an acquisition because some aggressive independent energy outfits like Chesapeake face trouble because of debt-financed acquisition binges.
Table: Everything Must GoMicrosoft CEO Steve Ballmer has been criticized for indecisiveness, but he was smart to walk away from the company's $47 billion offer to buy Yahoo !, whose shares are down to 12 from over 30 in the spring. Microsoft offers a nice package of a great balance sheet with $23 billion in cash, another $6 billion of equity investments, a monopoly software business and the lowest P/E in its history at just over 10 with the stock around 22. Microsoft's earnings could fall below its projection of about $2.15 a share in its fiscal year ending in June 2009, but a miss arguably is reflected already in the stock.
After being blasted by investors for conservatism for holding too much cash, tech leaders now are lauded by Wall Street. Apple and Dell have cash equal to more than 25% of their market values. Yahoo!, whose shares now trade around 12, has about $2 a share in cash and another $3 a share in investments, including a stake in Yahoo Japan. That could limit further downside in the stock. Depressed Motorola could get support from its cash position, which equals 30% of its market value. The same is true for Electronic Arts .
Loews , the conglomerate controlled by the Tisch family, has seen its shares battered recently because of sharp declines in CNA Financial and Diamond Offshore, in which it owns big stakes. Loews, at 26, is down from 40 recently. The good news is that Loews sits on about $3.5 billion of net cash, or $8 a share. The company's total net asset value, including positions in public companies, private investments and cash, is about $40 a share. Investors now can buy Loews at a big discount from its NAV and get a management team led by CEO Jim Tisch that's done a good job making acquisitions and delivering for shareholders.
The CEO of IAC/InterActive, Barry Diller, doesn't have a big Street following anymore because of a poor record with acquisitions like Lending Tree. The recent break-up of the company has failed to deliver for shareholders and Diller's vehicle, the new IAC/Interactive, is languishing near 15. The company has $10 a share in cash and Diller vows to be judicious in dealmaking. Barclays Capital analyst Douglas Anmuth wrote in a recent note that IAC/InterActive is "too cheap to ignore" and set a price target of 21.
The little-known Nam Tai Electronics , a Chinese contract maker of consumer electronics and other goods, is a favorite of Irving Kahn, the 102-year-old chairman of Kahn Brothers, a New York investment firm. Kahn pointed out Friday that Nam Tai's cash position equals its share price of around $6 a share. He likes Nam Tai's management and notes the company is solidly profitable. Kahn, who has been profiled in Barron's, is one of the few professional investors who not only remembers the 1929 market crash but who sold short prior to that famed downturn. He thinks stocks generally look attractive but he'd avoid those "that had a bubble in them."
Jeff Gendell, the chief of Tontine Associates, recently gave plug for KBR in an investor letter. Gendell noted that KBR, whose shares trade around 15, has $10 a share in cash and should earn $1.70 a share this year.
Industrial stocks have been pummeled lately as investors worry about a domestic recession and a downturn in formerly strong overseas markets. The result is that P/E ratios are at their lowest levels in years. Caterpillar trades at 45, just seven times this year's estimated earnings, while United Technologies fetches less than 10 times earnings at its current price of 47. Deere, the world's leading maker of farm equipment, has dropped to 38 from a spring high of 94 as grain prices have collapsed. It now trades for eight times '08 earnings. In a recent note, Citigroup analyst David Raso set a price target of 65 on Deere and 72 for Cat.
Terex , a maker of aerial work platforms and construction and mining equipment, has plunged, losing nearly half its value in the past month. At 19, it trades for just three times estimated 2008 earnings. Next year is apt to be weaker, but the valuation is awfully low for a well-managed company that Barron's favorably profiled this year with the stock at 55.
Paccar , the maker of highly regarded Peterbilt and Kenworth trucks, is down almost 50% this year to 28 and now trades for eight times estimated '08 earnings. Paccar has a great balance sheet with about $6 a share in net cash. One of the risks with Paccar and makers of construction and farm equipment is their finance subsidiaries. Paccar had $9 billion of finance receivables at the end of the second quarter and analysts worry about a recession's impact and declining truck values. Equipment makers also could get squeezed as their finance subsidiaries raise loan rates to reflect higher funding costs.
There was renewed concern last week on Wall Street about whether Ford Motor and General Motors may be forced to file for bankruptcy. GM said Friday it has no such intentions, although its debt now trades as if it were in bankruptcy. The company's NYSE-listed 6.25% convertible debt (GPM) finished Friday at $5, which is 20% of its face value of $25. These bonds, which have a current yield of 31%, look like a much better bet than GM's common shares, which ended the week at $5.
The Bottom Line
Look for companies with strong balance sheets that allow them to bypass the seized capital markets and give them the opportunity to make their own bargain-basement acquisitions.Buffett's Berkshire, meantime, fell sharply last week, as its class A shares dropped over $25,000, or 18%, to $113,100. Berkshire's equity portfolio, which stood at $69 billion on June 30, is falling in value, although it's ahead of the major averages this year. Berkshire has written, or sold, long-dated put options on some $40 billion of equity indexes, including the S&P 500. Those put sales, which amount to a bullish market bet, are deep in the red, although Berkshire doesn't have to post collateral against any paper losses. We estimate those puts could have cost Berkshire as much as $2 billion in the third quarter and several billion more dollars this quarter, with the S&P down over 20%. Berkshire ultimately may score with these puts if they expire worthless at maturity between 2019 and 2027. But the normally savvy Buffett made a mistake investing in financial derivatives, about which he has long warned. Berkshire had no comment.
The brutal market sell-off has stung even famed investors like Buffett, but patient investors stand to benefit, particularly if they choose well-capitalized companies with strong market positions whose stocks now trade at very depressed values.
The Bottom Line
Look for companies with strong balance sheets that allow them to bypass the seized capital markets and give them the opportunity to make their own bargain-basement acquisitions.
--------------------------------------------------------------------------------
E-mail comments to mail@barrons.com
URL for this article:
http://online.barrons.com/article/SB122369310004425503.html
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.
Close
America For Sale: Price Reduced
By ANDREW BARY
Got cash? This could end up being one of history's quintessential buying opportunities. The case for ExxonMobil, Deere, Microsoft -- and more.
AT THE DEPTHS OF THE 1973-74 BEAR MARKET -- the worst of the post-war period -- when the Dow Jones industrial average was approaching its low of 577, Warren Buffett told Forbes magazine that he felt like "an oversexed guy in a whorehouse. This is the time to start investing."
Buffett's words may have been indelicate -- Forbes ended up changing the world "whorehouse" to "harem" when the interview ran -- but the CEO of Berkshire Hathaway was on the mark because that era produced some of the best bargains of the past 50 years.
Investors willing to show a little patience can find discounts on everything from real estate to stocks, bonds and commodities.
The stock market now is suffering a comparable decline to that historic '73-74 loss, with the Dow Jones Industrial Average, at 8,451, having fallen 40% from its October 2007 peak and 36% this year. The peak-to-trough drop in '73-'74 was 45%. The opportunities now could be equally attractive with some market indexes nearing, their 2002 lows and most major stocks valued at less than 10 times estimated 2008 earnings. A bullish Buffett has been buying lately, although his purchases haven't directly involved common stocks. He got equity warrants along with his attractive preferred-stock investments in General Electric and Goldman Sachs. Berkshire also has bought more stock this year in Wells Fargo, Buffett's favorite bank.
"There are extraordinary opportunities on many fronts for investors, from real estate to stocks and bonds and commodities," says Jim Paulsen, chief investment strategist at Wells Capital Management. "Assets are being given away. They may not do well in the next several months, but looking ahead two or three years, investors may see some of the best opportunities of their lives."
The crisis in the credit markets has highlighted the value of a strong balance sheet, an underappreciated quality during the bull run ending in 2007. Investors who once clamored for CEOs to take on debt to buy back stock now are quizzing corporations about debt maturities in the coming months because of refinancing fears.
This is a time when cash is king, enabling well-endowed companies to bypass the credit markets and potentially pick up bargain acquisitions in coming months.
We've highlighted more than a dozen cash-rich companies, ranging from ExxonMobil , which boasts Corporate America's biggest cash hoard at $30 billion, to smaller outfits like Barry Diller's IAC/InterActiveCorp and KBR , an engineering and construction company, whose cash accounts for over half their market values.
With such broad and deep losses throughout the stock market, a case can be made for virtually every major sector, including drugs, financials, consumer staples, technology and energy. (On the opposite page you'll find a chart with 25 candidates for your portfolio.)
INDUSTRIAL COMPANIES RANGING from United Technologies to Deere and Caterpillar also have suffered. They have strong market positions, good balance sheets and with the recent market setback, their stocks trade for less than 10 times estimated 2008 profits. Obviously, profits of industrial companies could be hit next year by the global economic slowdown and reduced credit, but all these companies have been through cycles before and should have the staying power to get through them.
Looking at some of the cash-rich giants, Exxon sits on $30 billion of net cash, or $6 a share. At 62, the stock trades for just seven times projected 2008 earnings market value, although it's likely that '09 profits will fall due to the drop in oil and natural gas prices. It's possible that Exxon may shift some of its cash from an aggressive share buyback program to an acquisition because some aggressive independent energy outfits like Chesapeake face trouble because of debt-financed acquisition binges.
Table: Everything Must GoMicrosoft CEO Steve Ballmer has been criticized for indecisiveness, but he was smart to walk away from the company's $47 billion offer to buy Yahoo !, whose shares are down to 12 from over 30 in the spring. Microsoft offers a nice package of a great balance sheet with $23 billion in cash, another $6 billion of equity investments, a monopoly software business and the lowest P/E in its history at just over 10 with the stock around 22. Microsoft's earnings could fall below its projection of about $2.15 a share in its fiscal year ending in June 2009, but a miss arguably is reflected already in the stock.
After being blasted by investors for conservatism for holding too much cash, tech leaders now are lauded by Wall Street. Apple and Dell have cash equal to more than 25% of their market values. Yahoo!, whose shares now trade around 12, has about $2 a share in cash and another $3 a share in investments, including a stake in Yahoo Japan. That could limit further downside in the stock. Depressed Motorola could get support from its cash position, which equals 30% of its market value. The same is true for Electronic Arts .
Loews , the conglomerate controlled by the Tisch family, has seen its shares battered recently because of sharp declines in CNA Financial and Diamond Offshore, in which it owns big stakes. Loews, at 26, is down from 40 recently. The good news is that Loews sits on about $3.5 billion of net cash, or $8 a share. The company's total net asset value, including positions in public companies, private investments and cash, is about $40 a share. Investors now can buy Loews at a big discount from its NAV and get a management team led by CEO Jim Tisch that's done a good job making acquisitions and delivering for shareholders.
The CEO of IAC/InterActive, Barry Diller, doesn't have a big Street following anymore because of a poor record with acquisitions like Lending Tree. The recent break-up of the company has failed to deliver for shareholders and Diller's vehicle, the new IAC/Interactive, is languishing near 15. The company has $10 a share in cash and Diller vows to be judicious in dealmaking. Barclays Capital analyst Douglas Anmuth wrote in a recent note that IAC/InterActive is "too cheap to ignore" and set a price target of 21.
The little-known Nam Tai Electronics , a Chinese contract maker of consumer electronics and other goods, is a favorite of Irving Kahn, the 102-year-old chairman of Kahn Brothers, a New York investment firm. Kahn pointed out Friday that Nam Tai's cash position equals its share price of around $6 a share. He likes Nam Tai's management and notes the company is solidly profitable. Kahn, who has been profiled in Barron's, is one of the few professional investors who not only remembers the 1929 market crash but who sold short prior to that famed downturn. He thinks stocks generally look attractive but he'd avoid those "that had a bubble in them."
Jeff Gendell, the chief of Tontine Associates, recently gave plug for KBR in an investor letter. Gendell noted that KBR, whose shares trade around 15, has $10 a share in cash and should earn $1.70 a share this year.
Industrial stocks have been pummeled lately as investors worry about a domestic recession and a downturn in formerly strong overseas markets. The result is that P/E ratios are at their lowest levels in years. Caterpillar trades at 45, just seven times this year's estimated earnings, while United Technologies fetches less than 10 times earnings at its current price of 47. Deere, the world's leading maker of farm equipment, has dropped to 38 from a spring high of 94 as grain prices have collapsed. It now trades for eight times '08 earnings. In a recent note, Citigroup analyst David Raso set a price target of 65 on Deere and 72 for Cat.
Terex , a maker of aerial work platforms and construction and mining equipment, has plunged, losing nearly half its value in the past month. At 19, it trades for just three times estimated 2008 earnings. Next year is apt to be weaker, but the valuation is awfully low for a well-managed company that Barron's favorably profiled this year with the stock at 55.
Paccar , the maker of highly regarded Peterbilt and Kenworth trucks, is down almost 50% this year to 28 and now trades for eight times estimated '08 earnings. Paccar has a great balance sheet with about $6 a share in net cash. One of the risks with Paccar and makers of construction and farm equipment is their finance subsidiaries. Paccar had $9 billion of finance receivables at the end of the second quarter and analysts worry about a recession's impact and declining truck values. Equipment makers also could get squeezed as their finance subsidiaries raise loan rates to reflect higher funding costs.
There was renewed concern last week on Wall Street about whether Ford Motor and General Motors may be forced to file for bankruptcy. GM said Friday it has no such intentions, although its debt now trades as if it were in bankruptcy. The company's NYSE-listed 6.25% convertible debt (GPM) finished Friday at $5, which is 20% of its face value of $25. These bonds, which have a current yield of 31%, look like a much better bet than GM's common shares, which ended the week at $5.
The Bottom Line
Look for companies with strong balance sheets that allow them to bypass the seized capital markets and give them the opportunity to make their own bargain-basement acquisitions.Buffett's Berkshire, meantime, fell sharply last week, as its class A shares dropped over $25,000, or 18%, to $113,100. Berkshire's equity portfolio, which stood at $69 billion on June 30, is falling in value, although it's ahead of the major averages this year. Berkshire has written, or sold, long-dated put options on some $40 billion of equity indexes, including the S&P 500. Those put sales, which amount to a bullish market bet, are deep in the red, although Berkshire doesn't have to post collateral against any paper losses. We estimate those puts could have cost Berkshire as much as $2 billion in the third quarter and several billion more dollars this quarter, with the S&P down over 20%. Berkshire ultimately may score with these puts if they expire worthless at maturity between 2019 and 2027. But the normally savvy Buffett made a mistake investing in financial derivatives, about which he has long warned. Berkshire had no comment.
The brutal market sell-off has stung even famed investors like Buffett, but patient investors stand to benefit, particularly if they choose well-capitalized companies with strong market positions whose stocks now trade at very depressed values.
The Bottom Line
Look for companies with strong balance sheets that allow them to bypass the seized capital markets and give them the opportunity to make their own bargain-basement acquisitions.
--------------------------------------------------------------------------------
E-mail comments to mail@barrons.com
URL for this article:
http://online.barrons.com/article/SB122369310004425503.html
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.
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Opportunities in Preferred Stocks (from WSJ)
Saturday, October 4, 2008
Safe Harbor in Preferred Stocks?
Warren Buffett has seized on the financial crisis to start buying preferred stocks by the armload, and individuals may be tempted to follow suit.
You can see why. True, ordinary investors can't get the kind of sweetheart deals available to the Oracle of Omaha. But even publicly traded preferreds now offer dividend yields well into double digits.
Coming at a time when the yield on safe Treasury bonds is on the floor, this can be especially appealing.
"There are a tremendous number of opportunities in preferreds," says John Miller, chief investment officer of Nuveen Asset Management in Chicago. "The asset class has been heavily beaten up -- the events of September really contributed to that."
You can find preferred stocks from highly rated blue-chips like J.P. Morgan Chase & Co., Wells Fargo & Co. and General Electric Co. that have fallen so far they are yielding 10% or better. Mr. Buffett just bought some GE preferred stock, and is a longtime investor in Wells Fargo common stock. The market has been ever more severe with banks perceived to be under heavier pressure such as National City Corp. and Capital One Financial Corp. In many cases you can find yields over 20%.
Of course, no investment comes without risk, and these are no exception. Preferred stocks are a peculiar hybrid. They rank above the common equity, but below bonds. They tend to pay a fixed dividend in perpetuity. Most are issued by financial institutions, which explains some of the current distress.
Warren Buffett is buying up preferred stocks, which carry risks as well as fixed rewards.
Any private investors looking to buy individual preferreds had better bring a helmet and a pickax: The field is complex, requires a lot of digging and can be treacherous to the unwary. Many preferreds come with their own set of clauses and rules, offering extra profits or perhaps extra risks. You need to do your homework.
At the best, you may find you have locked in an annual yield of, say, 10%, with not too much risk and the potential for gains if the company's fortunes improve.
On the other hand, you may find you are taking pretty much the same gamble as the buyers of the common stock, with far less upside. If a company's fortunes improve, the sky is the limit for the common stock. For the preferreds, the payouts are fixed.
Nonetheless, the recent selloff raises the strong suspicion that there is value among preferred stocks now.
There are broadly based funds that will do your mining for you. Nuveen Preferred Securities Fund, an open-ended fund, has a yield of nearly 10%. The iShares U.S. Preferred Stock Index Fund, an exchange-traded fund that simply tracks the entire asset class, yields 8.7%.
And a number of investment firms, including Nuveen, BlackRock Inc., and John Hancock, a division of Manulife Financial Corp., offer closed-end funds that invest in preferred stock as well. Closed-ends themselves have been going through a massive selloff because of the financial crisis, and many now sell for well below net asset value.
Write to Brett Arends at brett.arends@wsj.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Safe Harbor in Preferred Stocks?
Warren Buffett has seized on the financial crisis to start buying preferred stocks by the armload, and individuals may be tempted to follow suit.
You can see why. True, ordinary investors can't get the kind of sweetheart deals available to the Oracle of Omaha. But even publicly traded preferreds now offer dividend yields well into double digits.
Coming at a time when the yield on safe Treasury bonds is on the floor, this can be especially appealing.
"There are a tremendous number of opportunities in preferreds," says John Miller, chief investment officer of Nuveen Asset Management in Chicago. "The asset class has been heavily beaten up -- the events of September really contributed to that."
You can find preferred stocks from highly rated blue-chips like J.P. Morgan Chase & Co., Wells Fargo & Co. and General Electric Co. that have fallen so far they are yielding 10% or better. Mr. Buffett just bought some GE preferred stock, and is a longtime investor in Wells Fargo common stock. The market has been ever more severe with banks perceived to be under heavier pressure such as National City Corp. and Capital One Financial Corp. In many cases you can find yields over 20%.
Of course, no investment comes without risk, and these are no exception. Preferred stocks are a peculiar hybrid. They rank above the common equity, but below bonds. They tend to pay a fixed dividend in perpetuity. Most are issued by financial institutions, which explains some of the current distress.
Warren Buffett is buying up preferred stocks, which carry risks as well as fixed rewards.
Any private investors looking to buy individual preferreds had better bring a helmet and a pickax: The field is complex, requires a lot of digging and can be treacherous to the unwary. Many preferreds come with their own set of clauses and rules, offering extra profits or perhaps extra risks. You need to do your homework.
At the best, you may find you have locked in an annual yield of, say, 10%, with not too much risk and the potential for gains if the company's fortunes improve.
On the other hand, you may find you are taking pretty much the same gamble as the buyers of the common stock, with far less upside. If a company's fortunes improve, the sky is the limit for the common stock. For the preferreds, the payouts are fixed.
Nonetheless, the recent selloff raises the strong suspicion that there is value among preferred stocks now.
There are broadly based funds that will do your mining for you. Nuveen Preferred Securities Fund, an open-ended fund, has a yield of nearly 10%. The iShares U.S. Preferred Stock Index Fund, an exchange-traded fund that simply tracks the entire asset class, yields 8.7%.
And a number of investment firms, including Nuveen, BlackRock Inc., and John Hancock, a division of Manulife Financial Corp., offer closed-end funds that invest in preferred stock as well. Closed-ends themselves have been going through a massive selloff because of the financial crisis, and many now sell for well below net asset value.
Write to Brett Arends at brett.arends@wsj.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Information for AIG Policy Holders (from www.aigag.com)
Q. American International Group, Inc.’s (AIG) CEO announced a plan for the company’s future, which includes the sale of the AIG American General insurers.
Why did AIG make the decision to sell its domestic life insurance business?A. Quite simply, because the domestic life insurance business is valuable. The proceeds from a sale of these assets can be used toward paying off the two-year $85 billion secured credit facility issued by the Federal Reserve Bank in September 2008 to help AIG with its short-term liquidity needs.
Q. What does a sale mean for policyholders?
A. First and foremost, we want to assure you that your policies are safe and secure. The insurance policies written by one of our insurers are the direct obligations of that underwriting company -- not AIG or any prospective buyer. The sale of an insurer does not change its obligations to its policyholders.
Our commitment to customer service remains the same, and we continue to strive to exceed your expectations in everything we do. Our customer service centers are available to assist you with questions or policy maintenance issues.
Q. Can you tell me more about how policies are protected?
A. Insurance is a highly regulated industry. All insurance companies doing business in the United States are regulated by state law, and required to maintain enough capital and surplus to satisfy their obligations to their policyholders. The type and quantity of investments in which insurance companies may invest surplus capital is also limited by state law. Although various companies owned by AIG are part of a larger insurance holding company system – including AIG American General insurers – each company is individually responsible for the liabilities associated with the business that it sells. In addition, each insurer is individually regulated by its state of domicile for compliance and financial solvency independent of its parent or affiliates. This includes ongoing financial reporting to the regulator and undergoing periodic financial examination.
In accordance with state insurance requirements and investment guidelines, an insurer’s general account is primarily invested in high-quality investment grade fixed income securities (bonds). The investment objective of the general account is to optimize yield, adjusting for credit risk, liquidity and liability characteristics.
State insurance regulations are substantial and are designed to preserve and enhance the solvency of the general account and to assure that the contractual obligations to our policyholders are fulfilled. These regulations, along with the conservative investment requirements, help to safeguard policyholders.
It is important to note that the guarantees related to individual AIG American General insurers life policies and annuity contracts are backed by the general account of the respective issuing companies. These general accounts support only the obligations of AIG American General life insurance companies and are not obligated to support any other AIG businesses.
If you would like to see what the state insurance regulators and the National Association of Insurance Commissioners have to say on this matter, please go to www.aigag.com and click on the main banner for more information.
For more detailed information on specific insurer ratings visit www.AIGAG.com/ratings.
Q. Someone has approached
me about surrendering my
AIG American General insurer policy or annuity contract.
What should I do?
A. Please be sure you have all the facts before making a decision. Visit www.aigag.com for more information.
Q. Who are AIG American General’s re-insurers?
A. AIG American General companies utilize many re-insurers. The major companies are Swiss Re, RGA Reinsurance, Transamerica Reinsurance, Munich Re, and Gen Re.
Q. Are policies insured under
the FDIC?
A. No. The FDIC insures bank accounts – checking, savings, trust, certificates of deposit (CDs), IRA retirement accounts held at the bank and also money market deposit accounts. All of these bank accounts generally are insured by the FDIC up to the legal limit of $100,000.
The FDIC does not insure products such as mutual funds, annuities, life insurance policies, stocks and bonds.
AIG American General, www.aigag.com, is the marketing name for the insurance companies and affiliates of American International Group, Inc. (AIG), which comprise AIG’s Domestic Life Insurance Operations. Information regarding American International Group, Inc. (“AIG”) or AIG American General presented in this brochure is for informational purposes only and represents combined statistical information of the member companies of AIG or AIG American General. Neither AIG nor AIG American General underwrites any insurance policy described within this brochure. The licensed insurance company underwriting the product is solely responsible for its own financial condition and its contractual obligations.
Why did AIG make the decision to sell its domestic life insurance business?A. Quite simply, because the domestic life insurance business is valuable. The proceeds from a sale of these assets can be used toward paying off the two-year $85 billion secured credit facility issued by the Federal Reserve Bank in September 2008 to help AIG with its short-term liquidity needs.
Q. What does a sale mean for policyholders?
A. First and foremost, we want to assure you that your policies are safe and secure. The insurance policies written by one of our insurers are the direct obligations of that underwriting company -- not AIG or any prospective buyer. The sale of an insurer does not change its obligations to its policyholders.
Our commitment to customer service remains the same, and we continue to strive to exceed your expectations in everything we do. Our customer service centers are available to assist you with questions or policy maintenance issues.
Q. Can you tell me more about how policies are protected?
A. Insurance is a highly regulated industry. All insurance companies doing business in the United States are regulated by state law, and required to maintain enough capital and surplus to satisfy their obligations to their policyholders. The type and quantity of investments in which insurance companies may invest surplus capital is also limited by state law. Although various companies owned by AIG are part of a larger insurance holding company system – including AIG American General insurers – each company is individually responsible for the liabilities associated with the business that it sells. In addition, each insurer is individually regulated by its state of domicile for compliance and financial solvency independent of its parent or affiliates. This includes ongoing financial reporting to the regulator and undergoing periodic financial examination.
In accordance with state insurance requirements and investment guidelines, an insurer’s general account is primarily invested in high-quality investment grade fixed income securities (bonds). The investment objective of the general account is to optimize yield, adjusting for credit risk, liquidity and liability characteristics.
State insurance regulations are substantial and are designed to preserve and enhance the solvency of the general account and to assure that the contractual obligations to our policyholders are fulfilled. These regulations, along with the conservative investment requirements, help to safeguard policyholders.
It is important to note that the guarantees related to individual AIG American General insurers life policies and annuity contracts are backed by the general account of the respective issuing companies. These general accounts support only the obligations of AIG American General life insurance companies and are not obligated to support any other AIG businesses.
If you would like to see what the state insurance regulators and the National Association of Insurance Commissioners have to say on this matter, please go to www.aigag.com and click on the main banner for more information.
For more detailed information on specific insurer ratings visit www.AIGAG.com/ratings.
Q. Someone has approached
me about surrendering my
AIG American General insurer policy or annuity contract.
What should I do?
A. Please be sure you have all the facts before making a decision. Visit www.aigag.com for more information.
Q. Who are AIG American General’s re-insurers?
A. AIG American General companies utilize many re-insurers. The major companies are Swiss Re, RGA Reinsurance, Transamerica Reinsurance, Munich Re, and Gen Re.
Q. Are policies insured under
the FDIC?
A. No. The FDIC insures bank accounts – checking, savings, trust, certificates of deposit (CDs), IRA retirement accounts held at the bank and also money market deposit accounts. All of these bank accounts generally are insured by the FDIC up to the legal limit of $100,000.
The FDIC does not insure products such as mutual funds, annuities, life insurance policies, stocks and bonds.
AIG American General, www.aigag.com, is the marketing name for the insurance companies and affiliates of American International Group, Inc. (AIG), which comprise AIG’s Domestic Life Insurance Operations. Information regarding American International Group, Inc. (“AIG”) or AIG American General presented in this brochure is for informational purposes only and represents combined statistical information of the member companies of AIG or AIG American General. Neither AIG nor AIG American General underwrites any insurance policy described within this brochure. The licensed insurance company underwriting the product is solely responsible for its own financial condition and its contractual obligations.
Business Week on Getting Out Now
Investing October 2, 2008, 5:00PM EST
Why You Shouldn't Bail on Stocks Now
Today's bunker mentality has the stock market looking cheaper relative to Treasury bonds than it has since 1978
by Roben Farzad and Tara Kalwarski
To many panicky investors, it feels like financial Armageddon. But decades worth of investing precedent suggest otherwise. And investors who bail on stocks now might come to regret it.
Make no mistake: The freeze in the credit markets is frightening. "People don't have any experience with this kind of thing happening," says Martin Barnes, managing editor of Bank Credit Analyst. "People can't look back at previous episodes and take comfort and say, 'I've been here before.'" And so, almost by default, we are given to extreme bearishness—invoking the Great Depression and Japan's lost decade is all the rage. "Sure, these things are possible," says Barnes. "But not likely."
Sept. 29's 778-point drop on the Dow doesn't even rank among the top 10 in percentage terms—it was 7%, compared with 22.6% in 1987. Yet the very system that rewarded risk taking for years is now holed up in the closet under a security blanket. Hedge fund traders, banks, individual investors, small businesses—you name it—have been piling into ultrasafe short-term Treasuries, which now yield close to 0%.
We've felt the sky was falling before. Recall that one-day panic on Oct. 19, 1987, or the savings and loan crisis of the early 1990s, or the Asian meltdown in 1997, when Koreans lined up on the streets of Seoul to donate jewelry to shore up their currency. The markets took big hits in all of those cases, but ultimately bounced back. By the beginning of 1989, for example, the Dow had returned to its pre-crash levels.
The smart money knows that banking crises are par for the course. According to the International Monetary Fund, the past quarter century has seen at least 124 banking crises around the world. "It is important to recognize that this isn't the first time the U.S. financial system has experienced—and survived—a financial crisis," says Eric Bjorgen of Minneapolis-based Leuthold Group, an investment research firm.
BARGAIN INTERNATIONAL STOCKS
The time to panic, if there ever was one, was a year ago, when stocks were hitting their highs—not now, when they are hitting their lows. Today's extreme bunker mentality has the stock market looking cheaper relative to Treasury bonds than it has since 1978.
That's precisely the environment in which savvy, patient investors make their fortunes. Case in point: legendary cheapskate Marty Whitman of Third Avenue Funds, an octogenarian who lives for volatile times like these. "Right now is a time when deep value investors excel," he says. "People like myself got rich in '74 and '87, unlike those who tried to pick bottoms." The common stocks of companies that need access to capital markets are "toast," he says. "The common stocks of companies that can finance themselves have never been more attractive."
Whitman says that many international shares in particular have never looked so cheap: "There are unbelievable bargains. It's terrific for us." Stocks he thinks are especially cheap include Hong Kong-based real estate investment holding companies, including Cheung Kong Holdings, Hang Lung Group, Henderson Land Development, and Wharf Holdings.
Even Rob Arnott, chairman of investment advisory firm Research Affiliates and a bear long before it became fashionable, says the current panic "is creating some really spectacular opportunities for those who are nimble and weren't overly aggressive." The reaction in financial-services stocks is overdone, he says. "We have an anti-bubble—when a sector of the market falls to levels that no plausible scenario would justify." Arnott also sees "great bargains" in convertible bonds and says the debt of "many emerging markets is more creditworthy than U.S. Treasuries". The broad U.S. stock market, however, has a chance of falling further as consumers begin tightening purse strings, he says. Arnott thinks investors should lower their long-term expectations of stock returns to about 6%.
Of course, bargain-hunting always sounds great in theory. But people have shown time and again a predilection to sell low—just as they tend to buy high. Princeton economics professor Burton Malkiel, author of the best-seller A Random Walk Down Wall Street, notes how much hot money piled into equity funds in early 2000, just as the market was about to peak. Then, as stocks were nearing the bottom in the third quarter of 2002, that money fled in droves. The timing couldn't have been worse. "One of the things we know about individual decisions in markets is that people generally do the wrong thing," he says. "I know money is coming out now. I don't know whether this is the bottom. But taking money out now, when things look horrible, is almost always the wrong thing to do."
Why You Shouldn't Bail on Stocks Now
Today's bunker mentality has the stock market looking cheaper relative to Treasury bonds than it has since 1978
by Roben Farzad and Tara Kalwarski
To many panicky investors, it feels like financial Armageddon. But decades worth of investing precedent suggest otherwise. And investors who bail on stocks now might come to regret it.
Make no mistake: The freeze in the credit markets is frightening. "People don't have any experience with this kind of thing happening," says Martin Barnes, managing editor of Bank Credit Analyst. "People can't look back at previous episodes and take comfort and say, 'I've been here before.'" And so, almost by default, we are given to extreme bearishness—invoking the Great Depression and Japan's lost decade is all the rage. "Sure, these things are possible," says Barnes. "But not likely."
Sept. 29's 778-point drop on the Dow doesn't even rank among the top 10 in percentage terms—it was 7%, compared with 22.6% in 1987. Yet the very system that rewarded risk taking for years is now holed up in the closet under a security blanket. Hedge fund traders, banks, individual investors, small businesses—you name it—have been piling into ultrasafe short-term Treasuries, which now yield close to 0%.
We've felt the sky was falling before. Recall that one-day panic on Oct. 19, 1987, or the savings and loan crisis of the early 1990s, or the Asian meltdown in 1997, when Koreans lined up on the streets of Seoul to donate jewelry to shore up their currency. The markets took big hits in all of those cases, but ultimately bounced back. By the beginning of 1989, for example, the Dow had returned to its pre-crash levels.
The smart money knows that banking crises are par for the course. According to the International Monetary Fund, the past quarter century has seen at least 124 banking crises around the world. "It is important to recognize that this isn't the first time the U.S. financial system has experienced—and survived—a financial crisis," says Eric Bjorgen of Minneapolis-based Leuthold Group, an investment research firm.
BARGAIN INTERNATIONAL STOCKS
The time to panic, if there ever was one, was a year ago, when stocks were hitting their highs—not now, when they are hitting their lows. Today's extreme bunker mentality has the stock market looking cheaper relative to Treasury bonds than it has since 1978.
That's precisely the environment in which savvy, patient investors make their fortunes. Case in point: legendary cheapskate Marty Whitman of Third Avenue Funds, an octogenarian who lives for volatile times like these. "Right now is a time when deep value investors excel," he says. "People like myself got rich in '74 and '87, unlike those who tried to pick bottoms." The common stocks of companies that need access to capital markets are "toast," he says. "The common stocks of companies that can finance themselves have never been more attractive."
Whitman says that many international shares in particular have never looked so cheap: "There are unbelievable bargains. It's terrific for us." Stocks he thinks are especially cheap include Hong Kong-based real estate investment holding companies, including Cheung Kong Holdings, Hang Lung Group, Henderson Land Development, and Wharf Holdings.
Even Rob Arnott, chairman of investment advisory firm Research Affiliates and a bear long before it became fashionable, says the current panic "is creating some really spectacular opportunities for those who are nimble and weren't overly aggressive." The reaction in financial-services stocks is overdone, he says. "We have an anti-bubble—when a sector of the market falls to levels that no plausible scenario would justify." Arnott also sees "great bargains" in convertible bonds and says the debt of "many emerging markets is more creditworthy than U.S. Treasuries". The broad U.S. stock market, however, has a chance of falling further as consumers begin tightening purse strings, he says. Arnott thinks investors should lower their long-term expectations of stock returns to about 6%.
Of course, bargain-hunting always sounds great in theory. But people have shown time and again a predilection to sell low—just as they tend to buy high. Princeton economics professor Burton Malkiel, author of the best-seller A Random Walk Down Wall Street, notes how much hot money piled into equity funds in early 2000, just as the market was about to peak. Then, as stocks were nearing the bottom in the third quarter of 2002, that money fled in droves. The timing couldn't have been worse. "One of the things we know about individual decisions in markets is that people generally do the wrong thing," he says. "I know money is coming out now. I don't know whether this is the bottom. But taking money out now, when things look horrible, is almost always the wrong thing to do."
A Good TIme to Be Careful - some tips from Motley Fool
Why You Should Fear the Future
http://www.fool.com/investing/value/2008/10/03/why-you-should-fear-the-future.aspx
Richard Gibbons
October 3, 2008
Remember when everyone was quoting Baron Rothschild, saying, "Buy when blood is in the streets"? Well, this is it. We're in the Wall Street equivalent of Kill Bill meets Jurassic Park. It looks like it's all over but the spurting.
Warren Buffett knows how to play this game. He's buying, and he says that in five or 10 years, "we'll look back on this period and we'll see that you could have made some extraordinary buys."
But when the market drops 9% in a day, it's hard to react logically, like Buffett -- and not, say, curl up into a quivering, sniffling ball. Here are five ways to help you achieve your goal.
1. Be afraid -- be very afraid
Instead of looking at how much you can make by buying a stock, examine all the ways that you can lose. Bruce Berkowitz, who manages the Fairholme Fund, swears by this strategy. He tries to think of every possible scenario that can kill a company -- and if he can't find any, then he'll buy.
Even ridiculously paranoid scenarios deserve consideration. A year ago, it was inconceivable that a handful of the nation's biggest banks would go out of business and that credit markets would essentially freeze. But just because it was inconceivable, that doesn't mean it couldn't happen -- and it did.
In this environment, where no one is lending, you should be especially paranoid about debt covenants and maturing debt. Even if a company is profitable, a large debt maturity that it can't roll over could drive it into bankruptcy. With economic conditions as they are, companies are making moves they wouldn't have considered if the market were better, like General Motors (NYSE: GM) drawing down its credit lines and issuing equity to pay off debt.
2. Avoid black boxes
Be suspicious of companies you don't understand or whose financials are opaque. In fact, unless you understand the business model, don't buy it at all.
Sure, Buffett has invested in Goldman Sachs (NYSE: GS), and it will probably turn out like many other Buffett investments. But unless you fully understand Goldman's investment portfolio -- which seems almost impossible right now -- it's difficult to be confident that the business is rock-solid.
The same sort of reasoning applies to retail banks such as Citigroup (NYSE: C) and bond insurers such as Ambac (NYSE: ABK). If you can't assess the risk, you can't be confident in the investment -- especially when blood is flowing like water.
3. Invest only money that you don't need soon
Assume that the near-term market will remain volatile -- even after it smoothes out. That approach will prevent you from investing money you need in the near term, and thus protect you from losses you can't sustain.
Think of it this way: Suppose that you do find one of Buffett's extraordinary buys and are brave enough to pick it up. Then you're set, right? Well, not entirely. You can still lose if you're forced to sell. Remember, Buffett isn't saying these stocks will become 10-baggers tomorrow, or even next year. He's talking about five or 10 years.
So when you buy, don't buy with money you'll need soon, and definitely don't use margin. If you're forced to sell at a bad time because of a margin call, then you could lose money even if you've successfully identified a stock that goes on to become a 10-bagger.
For instance, immediately after the 9/11 tragedy, you could have bought Boyd (NYSE: BYD) at a cheap $5 per share. But a few days later, it traded at $3.50. If a margin call forced you to sell at that price, then you would have missed the stock rising above $50 over the subsequent five years. Ouch.
4. Ease in
And all of that means you should be suspicious of how your chosen investments will perform initially. When the market's this volatile, don't put all of your money into a stock all at once. Instead, put a portion in when you see an attractive opportunity, but save some cash to buy more if it falls.
Some people buy in thirds on the way down so that they have two chances to average down without becoming overexposed to the stock. I recommend buying enough that you'll be happy when your stock goes up, but little enough that you'll also be happy if it falls significantly and you can buy more. I originally purchased Legg Mason (NYSE: LM) in the mid-$60s. The descent hasn't been fun, but it's easier to handle knowing that I can buy shares at an even lower price now. And I have.
5. Buy at a discount
Of course, the whole reason you're trying to buy when there is blood on the streets is that that's when stocks are trading at big discounts to their fair value. Those discounts can propel your portfolio to extraordinary returns -- the bigger the discount, the bigger the potential return. Plus, a good understanding of a stock's intrinsic value can give you the confidence to hold in today's volatile market.
But make sure you're buying shares that are actually cheap. Many companies are trading at prices far lower than they were a year ago -- but that doesn't mean they're cheap. Fannie Mae (NYSE: FNM) had fallen a lot by mid-August, but it was still expensive.
The Foolish bottom line
There's blood in the streets, so if you can handle the volatility, it really is a great time to invest -- but invest suspiciously and fearfully. It will do your portfolio good if you do.
http://www.fool.com/investing/value/2008/10/03/why-you-should-fear-the-future.aspx
Richard Gibbons
October 3, 2008
Remember when everyone was quoting Baron Rothschild, saying, "Buy when blood is in the streets"? Well, this is it. We're in the Wall Street equivalent of Kill Bill meets Jurassic Park. It looks like it's all over but the spurting.
Warren Buffett knows how to play this game. He's buying, and he says that in five or 10 years, "we'll look back on this period and we'll see that you could have made some extraordinary buys."
But when the market drops 9% in a day, it's hard to react logically, like Buffett -- and not, say, curl up into a quivering, sniffling ball. Here are five ways to help you achieve your goal.
1. Be afraid -- be very afraid
Instead of looking at how much you can make by buying a stock, examine all the ways that you can lose. Bruce Berkowitz, who manages the Fairholme Fund, swears by this strategy. He tries to think of every possible scenario that can kill a company -- and if he can't find any, then he'll buy.
Even ridiculously paranoid scenarios deserve consideration. A year ago, it was inconceivable that a handful of the nation's biggest banks would go out of business and that credit markets would essentially freeze. But just because it was inconceivable, that doesn't mean it couldn't happen -- and it did.
In this environment, where no one is lending, you should be especially paranoid about debt covenants and maturing debt. Even if a company is profitable, a large debt maturity that it can't roll over could drive it into bankruptcy. With economic conditions as they are, companies are making moves they wouldn't have considered if the market were better, like General Motors (NYSE: GM) drawing down its credit lines and issuing equity to pay off debt.
2. Avoid black boxes
Be suspicious of companies you don't understand or whose financials are opaque. In fact, unless you understand the business model, don't buy it at all.
Sure, Buffett has invested in Goldman Sachs (NYSE: GS), and it will probably turn out like many other Buffett investments. But unless you fully understand Goldman's investment portfolio -- which seems almost impossible right now -- it's difficult to be confident that the business is rock-solid.
The same sort of reasoning applies to retail banks such as Citigroup (NYSE: C) and bond insurers such as Ambac (NYSE: ABK). If you can't assess the risk, you can't be confident in the investment -- especially when blood is flowing like water.
3. Invest only money that you don't need soon
Assume that the near-term market will remain volatile -- even after it smoothes out. That approach will prevent you from investing money you need in the near term, and thus protect you from losses you can't sustain.
Think of it this way: Suppose that you do find one of Buffett's extraordinary buys and are brave enough to pick it up. Then you're set, right? Well, not entirely. You can still lose if you're forced to sell. Remember, Buffett isn't saying these stocks will become 10-baggers tomorrow, or even next year. He's talking about five or 10 years.
So when you buy, don't buy with money you'll need soon, and definitely don't use margin. If you're forced to sell at a bad time because of a margin call, then you could lose money even if you've successfully identified a stock that goes on to become a 10-bagger.
For instance, immediately after the 9/11 tragedy, you could have bought Boyd (NYSE: BYD) at a cheap $5 per share. But a few days later, it traded at $3.50. If a margin call forced you to sell at that price, then you would have missed the stock rising above $50 over the subsequent five years. Ouch.
4. Ease in
And all of that means you should be suspicious of how your chosen investments will perform initially. When the market's this volatile, don't put all of your money into a stock all at once. Instead, put a portion in when you see an attractive opportunity, but save some cash to buy more if it falls.
Some people buy in thirds on the way down so that they have two chances to average down without becoming overexposed to the stock. I recommend buying enough that you'll be happy when your stock goes up, but little enough that you'll also be happy if it falls significantly and you can buy more. I originally purchased Legg Mason (NYSE: LM) in the mid-$60s. The descent hasn't been fun, but it's easier to handle knowing that I can buy shares at an even lower price now. And I have.
5. Buy at a discount
Of course, the whole reason you're trying to buy when there is blood on the streets is that that's when stocks are trading at big discounts to their fair value. Those discounts can propel your portfolio to extraordinary returns -- the bigger the discount, the bigger the potential return. Plus, a good understanding of a stock's intrinsic value can give you the confidence to hold in today's volatile market.
But make sure you're buying shares that are actually cheap. Many companies are trading at prices far lower than they were a year ago -- but that doesn't mean they're cheap. Fannie Mae (NYSE: FNM) had fallen a lot by mid-August, but it was still expensive.
The Foolish bottom line
There's blood in the streets, so if you can handle the volatility, it really is a great time to invest -- but invest suspiciously and fearfully. It will do your portfolio good if you do.
Life Insurance - Secure Your Family's Future (from Florida's CFO)
LIFE INSURANCE: COVERAGE CAN SECURE YOUR FAMILY'S FUTURE
The National Association of Insurance Commissioners (NAIC) suggests that you review your life insurance policies to determine if your coverage is still appropriate for your situation.
The Basics
Life insurance helps secure your family’s financial future in the event of the death of you and/or your spouse. It also helps ensure that the estate that you’ve worked to build will be allocated to the beneficiaries you have chosen.
When purchasing life insurance, consider the financial responsibilities that your family will immediately inherit such as a mortgage or car loan. In addition, you’ll want to consider long-term goals such as your spouse’s retirement or your children’s education. If you decide that you need more coverage, determine whether you need term life insurance or a cash value policy.
Term insurance generally has lower premiums in the early years, but does not build up a cash value you can access. Cash value policies come in the form of whole life, universal life or variable life insurance. It’s important to know which type of policy you own, and how the benefits are paid if something happens to you and/or your spouse.
If you have questions about your current coverage, or about the type of policy to best fit your situation, contact your life insurance agent or the Florida Department of Financial Services at http://www.MyFloridaCFO.com/.
Stop. Call. Confirm.
Before consulting an agent or purchasing a life insurance policy, make sure the agent and company are licensed to sell insurance in your state. To check, call your the Florida Department of Financial Services 1-877-MY-FL-CFO (877-693-5236) or visit http://www.MyFloridaCFO.com/.
What to Review
As your life situation changes through the years, so do your insurance needs. A regular review of your life insurance coverage is important. To begin your review, read your policy carefully. Look for answers to these questions:
· Do premiums or benefits vary from year to year?
· How much do the benefits build up in the policy?
· What part of the premiums or benefits is not guaranteed?
· What is the effect of interest on money paid and received at different times on the policy?
· In what situations and through what procedures can cash values be accessed?
· Can the policy be converted into another form of insurance or annuity?
When reviewing your policy, make sure the benefit covers your current needs. Changes — such as a birth, divorce, remarriage or even a new mortgage or job — are indicators that you might need to make changes to your life insurance policy.
In the case of the birth of a child or a new marriage, you might want to increase your death benefit. Check with your agent to see if your insurance company requires a physical exam before increasing your coverage levels.
Alternatively, your life changes might allow you to lower your life insurance coverage and premiums. The mortgage might be paid, you might have retired or your children might have completed college. At this stage of life, your life insurance company might be able to offer “conversion privileges” from your current term life insurance policy to a new whole life insurance policy. You might also be able to expand your death benefits so they can be used while you are still living. Ask your insurance agent or company about these options.
Beneficiaries
One of the most important decisions to make regarding life insurance is to whom to leave your benefits. That’s why it’s important to review your beneficiaries every few years.
There are two types of beneficiaries for your life insurance policy. Primary beneficiaries receive a portion or the whole policy benefit if they outlive you. Contingent beneficiaries (also referred to as secondary beneficiaries) receive proceeds if a primary beneficiary dies before you. If you name more than one beneficiary in either category, you should include the percentages of the death benefit proceeds that you would like each individual to receive, or stipulate “equal shares” to each.
You can name your spouse, domestic partner, children, grandchildren, relatives, friends, charities, businesses, trusts or your estate as your beneficiary. Naming individuals rather than an estate allows those individuals to receive the proceeds immediately and, generally, without taxation. As part of your estate, however, proceeds typically will go through probate with the rest of your assets and might be subject to estate taxes. Your will does not affect the distribution of your life insurance proceeds unless the sum goes to your estate to be divided according to the will. Check with your insurance agent, tax advisor or family lawyer if you have questions about how the life insurance benefit will be paid following your death.
Tips for naming beneficiaries:
· Spouse: You should use the individual’s legal name, as in “John Wayne Johnson,” rather than “husband.” In case of a second marriage, “husband” could be interpreted either as the husband when you bought the policy or the current husband. When reviewing your policy, think about who will be in the best position to make financial and other important family decisions upon your death.
· Children: You should qualify a specific class of individuals, such as “my children,” by the use of either “per stirpes” (according to the family tree or branch) or “per capita” (per head). A designation of “my children per stirpes” means that if your two sons have two children each, and your oldest son dies before you do, his children will each receive his share of your benefits. A designation of “my children per capita” means that the living son, in the case above, would receive the full amount and your oldest son’s family would receive none of the benefit.
· Minor Children: Most insurance companies will not pay life insurance proceeds to minors. If any of your children are minors, one of your options is to designate a trust as the beneficiary, with an individual or institution to use the funds for the welfare of your children. You will need to set up your trust(s) carefully, with your family attorney or tax advisor’s assistance. Another option is to designate two individuals whom you trust as beneficiaries, who will make joint decisions about the care and welfare of your children. As your children mature, you should update your beneficiaries accordingly.
If you are the owner of your life insurance policy, in most cases you can change beneficiaries at any time by completing a formal, written notification to your insurance company. During a regular review of your life insurance policy, take into consideration changes in your life, relationships and family — such as births, adoptions, marriages, remarriages, divorces and deaths — when updating your beneficiaries. Your family attorney, tax advisor or insurance agent can help you use specific wording to avoid unintended consequences.
Locating the Company that Services Your Life Insurance Policy
It’s possible the company that issued your life insurance policy has changed its name, merged with another company or sold your policy to another insurance company. You should have been notified of this change at the time it happened. For this reason, it’s important to make sure your mailing address is always current on your policy. However, if you did not receive an updated policy, you will need to locate the life insurer that services and pays claims on your policy.
You will need this information to search for the new company information:
· Make sure you have the entire legal name of the insurance company. This should be listed on the policy or binder.
· Check to see if there is a mailing address and phone number on the policy or binder.
· Determine in what state the policy was purchased and when the policy was purchased.
Once you have this information, contact the state insurance department in which the insurance company was located at the time the policy was issued. Many times, the state insurance department will be able to track name changes and/or mergers that impacted the insurance company.
To find contact information for your state insurance department, visit www.naic.org/state_web_map.htm.
You can also use the Life Insurance Company Location System, https://external-apps.naic.org/orphanedpolicy/. Using the information you have gathered, answer five questions and the system will provide a list of suggested state insurance department contacts that might be able to assist with your search.
More Information
To learn more about your insurance needs throughout your life, go to www.InsureUonline.org.
Get more information about life insurance by downloading the NAIC’s free “Life Insurance Buyer’s Guide” at www.naic.org/consumer_home.htm.
The National Association of Insurance Commissioners (NAIC) suggests that you review your life insurance policies to determine if your coverage is still appropriate for your situation.
The Basics
Life insurance helps secure your family’s financial future in the event of the death of you and/or your spouse. It also helps ensure that the estate that you’ve worked to build will be allocated to the beneficiaries you have chosen.
When purchasing life insurance, consider the financial responsibilities that your family will immediately inherit such as a mortgage or car loan. In addition, you’ll want to consider long-term goals such as your spouse’s retirement or your children’s education. If you decide that you need more coverage, determine whether you need term life insurance or a cash value policy.
Term insurance generally has lower premiums in the early years, but does not build up a cash value you can access. Cash value policies come in the form of whole life, universal life or variable life insurance. It’s important to know which type of policy you own, and how the benefits are paid if something happens to you and/or your spouse.
If you have questions about your current coverage, or about the type of policy to best fit your situation, contact your life insurance agent or the Florida Department of Financial Services at http://www.MyFloridaCFO.com/.
Stop. Call. Confirm.
Before consulting an agent or purchasing a life insurance policy, make sure the agent and company are licensed to sell insurance in your state. To check, call your the Florida Department of Financial Services 1-877-MY-FL-CFO (877-693-5236) or visit http://www.MyFloridaCFO.com/.
What to Review
As your life situation changes through the years, so do your insurance needs. A regular review of your life insurance coverage is important. To begin your review, read your policy carefully. Look for answers to these questions:
· Do premiums or benefits vary from year to year?
· How much do the benefits build up in the policy?
· What part of the premiums or benefits is not guaranteed?
· What is the effect of interest on money paid and received at different times on the policy?
· In what situations and through what procedures can cash values be accessed?
· Can the policy be converted into another form of insurance or annuity?
When reviewing your policy, make sure the benefit covers your current needs. Changes — such as a birth, divorce, remarriage or even a new mortgage or job — are indicators that you might need to make changes to your life insurance policy.
In the case of the birth of a child or a new marriage, you might want to increase your death benefit. Check with your agent to see if your insurance company requires a physical exam before increasing your coverage levels.
Alternatively, your life changes might allow you to lower your life insurance coverage and premiums. The mortgage might be paid, you might have retired or your children might have completed college. At this stage of life, your life insurance company might be able to offer “conversion privileges” from your current term life insurance policy to a new whole life insurance policy. You might also be able to expand your death benefits so they can be used while you are still living. Ask your insurance agent or company about these options.
Beneficiaries
One of the most important decisions to make regarding life insurance is to whom to leave your benefits. That’s why it’s important to review your beneficiaries every few years.
There are two types of beneficiaries for your life insurance policy. Primary beneficiaries receive a portion or the whole policy benefit if they outlive you. Contingent beneficiaries (also referred to as secondary beneficiaries) receive proceeds if a primary beneficiary dies before you. If you name more than one beneficiary in either category, you should include the percentages of the death benefit proceeds that you would like each individual to receive, or stipulate “equal shares” to each.
You can name your spouse, domestic partner, children, grandchildren, relatives, friends, charities, businesses, trusts or your estate as your beneficiary. Naming individuals rather than an estate allows those individuals to receive the proceeds immediately and, generally, without taxation. As part of your estate, however, proceeds typically will go through probate with the rest of your assets and might be subject to estate taxes. Your will does not affect the distribution of your life insurance proceeds unless the sum goes to your estate to be divided according to the will. Check with your insurance agent, tax advisor or family lawyer if you have questions about how the life insurance benefit will be paid following your death.
Tips for naming beneficiaries:
· Spouse: You should use the individual’s legal name, as in “John Wayne Johnson,” rather than “husband.” In case of a second marriage, “husband” could be interpreted either as the husband when you bought the policy or the current husband. When reviewing your policy, think about who will be in the best position to make financial and other important family decisions upon your death.
· Children: You should qualify a specific class of individuals, such as “my children,” by the use of either “per stirpes” (according to the family tree or branch) or “per capita” (per head). A designation of “my children per stirpes” means that if your two sons have two children each, and your oldest son dies before you do, his children will each receive his share of your benefits. A designation of “my children per capita” means that the living son, in the case above, would receive the full amount and your oldest son’s family would receive none of the benefit.
· Minor Children: Most insurance companies will not pay life insurance proceeds to minors. If any of your children are minors, one of your options is to designate a trust as the beneficiary, with an individual or institution to use the funds for the welfare of your children. You will need to set up your trust(s) carefully, with your family attorney or tax advisor’s assistance. Another option is to designate two individuals whom you trust as beneficiaries, who will make joint decisions about the care and welfare of your children. As your children mature, you should update your beneficiaries accordingly.
If you are the owner of your life insurance policy, in most cases you can change beneficiaries at any time by completing a formal, written notification to your insurance company. During a regular review of your life insurance policy, take into consideration changes in your life, relationships and family — such as births, adoptions, marriages, remarriages, divorces and deaths — when updating your beneficiaries. Your family attorney, tax advisor or insurance agent can help you use specific wording to avoid unintended consequences.
Locating the Company that Services Your Life Insurance Policy
It’s possible the company that issued your life insurance policy has changed its name, merged with another company or sold your policy to another insurance company. You should have been notified of this change at the time it happened. For this reason, it’s important to make sure your mailing address is always current on your policy. However, if you did not receive an updated policy, you will need to locate the life insurer that services and pays claims on your policy.
You will need this information to search for the new company information:
· Make sure you have the entire legal name of the insurance company. This should be listed on the policy or binder.
· Check to see if there is a mailing address and phone number on the policy or binder.
· Determine in what state the policy was purchased and when the policy was purchased.
Once you have this information, contact the state insurance department in which the insurance company was located at the time the policy was issued. Many times, the state insurance department will be able to track name changes and/or mergers that impacted the insurance company.
To find contact information for your state insurance department, visit www.naic.org/state_web_map.htm.
You can also use the Life Insurance Company Location System, https://external-apps.naic.org/orphanedpolicy/. Using the information you have gathered, answer five questions and the system will provide a list of suggested state insurance department contacts that might be able to assist with your search.
More Information
To learn more about your insurance needs throughout your life, go to www.InsureUonline.org.
Get more information about life insurance by downloading the NAIC’s free “Life Insurance Buyer’s Guide” at www.naic.org/consumer_home.htm.
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