Monday, December 15, 2008

Sell all of it now before it is all gone!

Some experts are suggesting that you should sell your stocks in the rallies as they come and move all of your money to cash. As of December 9, cash as measured by the 90-day T-Bill was paying zero return and if you had to pay, a fee to buy these T-Bills you would actually have a negative return. A report on Friday the 11th showed that over 500 Treasury-only money market funds were yielding around one-half of one basis point. An additional 45 Treasury-only money market funds had an income of zero. If you sell everything now you may be selling income that, you might never be able to replace in your lifetime.

Let us use an example. My most recent post was called the “Nine Brothers” and it dealt with the purchase of an 8.20% coupon preferred valued at $20 per share with a current yield of 10.25%. This “Nine Brother” preferred was not redeemable until 2045. That means that this “Nine Brother” was going to be paying $2.05 in annual dividends for 37 years.

Let us also say that you, like me, bought that preferred at $25. It is now worth $20. Therefore, on a capital basis you and I who bought the initial position at 8.20% yield, would be down 20% but we are still getting the $2.05 per year in dividends. If we sold this preferred and bought 90 day T-bill both of us will be earning ZERO.

Is there risk, as one reader asked me, that the “Nine Brothers” will go out of business or cannot make the dividend payment? Let me put it to you this way. If the nine largest banks in the United States go belly-up, we have serious problems and our money will not be worth anything. In addition, the Government positions in many cases are junior to other preferred holders. As we have seen recently a great many things we thought could never happen have happened I would never say never but based on what I see at the moment they aren't going out of business.

The point of this Blog is to try to make you stop and think about what you might do out of emotion rather than logic. If I sell the income, how will I live? Ask yourself, "What adjustment will you have to make in your plans if you earn no return or cash/flow on the bulk of your money? How will you have retirement income? You will have to start out by selling assets to produce income.

If your assets produce no cash/flow can you afford to retire? Will you have to work the rest of you life just to make ends meet? I realize these are very scary thoughts. Nevertheless, think about this: the recent CNBC wealth survey across all adult ages and income levels were asked, “Do you feel safe with your money in a FDIC insured banking intuition?” The result of that question was 38% of the time people said no they do not think their money is safe.

Before you throw the baby out with the bath water, you should look at all of your investments as objectively as you can. Separate your investments into to two sections. In one section, list all the investments that pay you a dividend or interest. Look at each investment and try to make a determination as to the ability of the company to continue to make these payments. Look at research reports from brokers and rating services to get the most information you can on the ability of the company to make the payments. Look at the company competitors and see how their stock or bonds are doing relative to yours. If the stock price is much lower than the competitor price then your stock might be a candidate for sale. If you find something that you think has too much risk of the income not being paid then sell it.

As to the other list, these are the ones where you have the most exposure. If you are not getting anything from the stock, (dividends) then you have to have the share price go up in value to make money. Again, look at all the research you can find on the company and then look at how it is doing against its competitors. If the stock has held up well then it probably is a keeper, on the other hand if it is off more that the competitors and the research you have done is not favorable then it is probably is a sale candidate.

When you make a sale try to move the proceeds from the sale from the non-income side to the income side of your ledger. Look at the income investments you already own and if you are keeping them now might be a great time to add to the position from what you have sold. If you have growth stocks, ETF's or index fund that you are keeping you can use some of the cash to expand positions. Before you make any buy decisions look at the balance between cash stocks and bonds, your asset allocation, you might want to re balance your risk profile while you are selling and buying.

Dan Perkins

1 comment:

Anonymous said...

Several of the Nine Brothers have high yielding preferred stocks which are non-cumulative. For example Bank of American has a couple yielding 12% or more. What are your thoughts vs. cumulative preferred stocks yielding much less?