Can You Hear the Bell Signaling a Bottom?

It is a market cliché that “they don’t ring a bell to signal the top.” Or the bottom. But this panic selling of AAA securities like ROYAL DUTCH SHELL (RDS.B,) bringing that stock to less than 5 times earnings and a more than 8% yield, might suggest otherwise. An even better example may be the preferred stocks of many banks, natural gas companies, metals and mining firms, apartment rental behemoths, and health care corporations which I expect to still be in existence when it comes time to redeem these shares.

Can I foretell the absolute bottom of the market? Of course not. And neither can anyone else. Anyone who says they can read a chart and tell you, within a hundred or two hundred points, where the bottom (or top, for we shall see them again!) is a liar or one lucky guesser. (Even a stopped clock is right twice a day. And the Perma-Bears who lost you so much money a year ago are finally crowing about being “right.”)

I’ll take this a step further – and encourage you to insist that every guru du jour does the same: I can’t tell, with any reasonable accuracy, what one hormone-jumbled teenager will say or do in any given situation. How could I – or anyone else – possibly know what 100 million panicked “investors,” all acting like scared teenagers, do on any given day?

What I can do is study what constitutes over-valuation and what constitutes under-valuation and stair-step out when I suspect the former and back in when I suspect the latter. I don’t sell – or buy – all at once but try to spread, in this case, purchases over what I believe will be a bottoming area. And I can do one more thing – I can avoid panicking when the great majority are selling everything and anything at any price so they can hide their greatly reduced dollars under the mattress. Here’s what I’m doing instead.

Many of our clients and subscribers have good cash positions. When I realized we were not going to get even the wisp of a “honeymoon rally” granted by most new Presidents, I sold a good chunk of each portfolio and went to cash. So – should we now take that cash and do nothing with it? I say no. I have identified some wonderful opportunities as a result of the current decline. Here’s just one example. US BANCORP (USB) took just $6.6 billion in TARP money. (“Just!” Look how we now think of such things...) Yet USB’s preferred shares have been panic-sold along with those of the rash and reckless banks.”

Today, I purchased shares of the US BANCORP CAPITAL VI TRUST PREFERREDS (USB pr E.) These preferred shares were issued at $25. If US BANCORP is still in business then, they will be redeemed on March 9, 2035 at $25. If they are acquired in the interim (By whom? All the big banks are Walking Dead!) whoever acquires them will assume this liability to redeem at par. We paid exactly half of that, or $12.50, today. The preferred pays $1.44 a share. At $25, that means it paid a 5.75% yield. At $12.50, however, that same $1.44 equals an 11.5% payout.

Assuming US BANCORP continues as a going concern, we just locked in a guaranteed 11.5% per annum return in a bear market and a guaranteed 100% capital gain if any of us live to 2035. This for an A+ S&P-rated preferred. And that’s the worst case! If the market recovers to, say, 12,000 in the next 3 to 5 years – and I am personally confident it will – it is likely that buyers interested in both capital gains and income will bid these preferred shares back to – who knows? – $15? $18? $21? I’m OK with getting 11.5% and “only” selling for a 50% gain at $18.75.

I am willing to sell something which is down 30% or 40% -- to take my lumps -- in order to exchange it for this type of preferred share that is down 50%. (Down only because of guilt by association. Like the fact that it’s a bank. All banks are not evil. All bankers are not stupid.)

As I’ve written before, we will still use banks as our primary monthly cash flow location of choice, as we do with our bank checking accounts. It’s a bit less convenient to run to WESTERN UNION (WU) for a money order every time we want to pay a bill. I can think of dozens of A-rated banks. I do business with one of them. I’d even consider, at these depressed prices, the common stocks of a few banks that have graced the pages of Investors Edge in the past, like SVB FINANCIAL (SIVB) (which was called SILICON VALLEY BANCSHARES when first added to our model portfolios and BANKOH (BANK OF HAWAII, (BOH).)

I can’t promise that stocks like RDS.B and USB pr E won’t decline further, in which case I’ll wish I had waited to get the “exact” bottom. That’s simply human nature. Nor can I “know” that I’ll have the time to acquire the kind of sizable positions in these that I’d like to build -- this market is so oversold now that it could rally to 7500 tomorrow and to 9500 before it reaches serious overbought territory. All I can do is make certain, as I upgrade my portfolios, that I won’t go down one iota in quality and that I will attempt to increase our current income and appreciation potential with every trade. This strategy beats holding 100% cash. Yes, cash provides protection against further decline. But at these levels, I’d rather lock in current income and appreciation potential in quality firms with the idea of making a fair return rather than cowering in the corner.

FULL DISCLOSURE: Long RDS.B, USBprE, and a whole bunch of other depressed preferred stocks!

Comments

[BOBO101:]

Good rational well reasearched article.

It presumes a multi year investing plan, and an optimistic view that things cant get worse. Most important, it asks us to disregard that every successful investor is standing on a 3 legged stool held up by (1) a disciplined plan, (2)careful fundimental and/or technical analysis, and (3) market psycology(sp).

Never ever forget about the last leg, then read the article out yesterday that argues if we believe all banks are insolvent then they are or will be regardless of how disciplined our plan is and how well we research individual trades. If you don't believe that then just look at C's chart for the last week. The biggest investing mistake I have made for the last year is to "underestimate how bad it can get" aka Warren Buffet.

Mar 03 05:41 AM

[henarl:]

Sounds more like a whimper than a bell to me.

Mar 03 04:16 PM

[Larylar:]

The author of this article is the CEO of Stanford Wealth Management, is this not the same Stanford that just got busted by the SEC for fraud? I'm having a hard time researching if they are connected. Either way, I normally love his articles, but I recently went a few articles back and almost everyone of his stock picks have been horrible wrong. In October he said he was buying a basket of infrastructure stocks for the short term: 2-6 months. 5 months later those stocks are down an average of 60% vs. 30% for the S&P in the same time frame. The pick of depressed preferred stocks sound good in principal, but I don't know...

Mar 03 05:23 PM

[Joseph L. S...:]

An excellent question re Stanford Financial Group (Antigua) vs Stanford University (which is suing THAT Stanford ["Sir" Allen Stanford] for trying to wrap himself in their flag) versus Stanford Wealth Management of Lake Tahoe (that would be us.) Also an eminently fair comment re infrastructure.

As to the former, "Sir" Allen Stanford bought his title in Antigua. The only reason anyone might call me "Sir" is because I spent 36 years in uniformed military service. Forbes says Sir Allen is worth $2.2 billion. Inexplicably, Forbes missed me on their last list of billionaires. For the record, I am worth somewhat south of that figure. "Sir" Allen owns a cricket team. I once played cricket on Barbados because I picked up some hitch-hikers going to a game in a jungle clearing, wanted to learn what cricket was all about, and could afford the case of Red Stripe to celebrate -- finally! -- the end of the game. "Sir" Allen claims to be related to Leland Stanford, benefactor of Stanford University. I come from good peasant stock, workers and farmers one and all. I will never be burdened with inherited wealth. "Sir" Allen runs a business whose own employees tried for years to get the SEC to investigate shenanigans there -- and the SEC never went near him!. (SEC: Can you spell P-O-N-Z-I?) On the other hand, the NYSE, NASD, FINRA, the Defense Investigative Service, CIA, DIA and everyone else has checked, graded, stamped, fingerprinted, researched and subjected me to the most intrusive and banal questioning into every aspect of my life. The price you pay to get a security clearance and stay squeaky-clean in this business!

As for my infrastructure, mea culpa. I was early in my call for the certainty of inflation and the necessity for infrastructure improvements in this country. One could have hoped that the "shovel-ready" projects promised in the stimulus plan would actually have come to fruition before every road, bridge and water main in the country self-destructed. Alas, I over-estimated the willingness of Recognizing they weren't really serious about rebuilding the economy (I mean, how mnany bridge PACs are there?) I sold all those infrastructure stocks shortly after buying them ( as documented in our client letter.). As John Maynard Keynes once said to a critic claiming he changed his position on the value of monetary policy, "When the facts change, I change my mind. What do you do, Sir?" Our clients and subscribers are now about 80% in solid income (like the preferreds I've written about above,) in gold, and in cash. Since I can't imagine there would be too many people who delve into the comments on one article of the tens of thousands on SA, I am willing to prove that by sending a current copy of our client letter. Send a note to inquire@stanfordwealth... with "Prove it" on the subject line and I'll send a pdf of our most recent to you personally.

Finally, let me say that one of the reasons I think SA is tops is because they do publish ripostes to articles, which keeps the hot-air types from pontificating or obfuscating their real track record. We're kind of proud of ours, so we enjoy the Socratic give-and-take that occurs here. When I say "Thank you" for your comments, I mean it.

Mar 03 06:22 PM

[Joseph L. S...:]

Um. Line 5 of paragraph 3 above should read "Alas, I over-estimated the willingness of politicians to work for the common good at least once in a lifetime. Recognizing they (politicians) weren't really serious about rebuilding the economy..." above.

Type in haste, repent at leisure...

JS

Mar 03 06:26 PM

[thatguy57z:]

Well the way I see the market is give it a few more week or so and it will be at six even, and down from there.

Take your money and run and buy a gun.

Mar 03 09:55 PM

[Stockmajor:]

I appreciate Mr. Shaefer's article. His logic is sound. Even if we do go further south before this market recovers, I believe his strategy will pay well down the road.

Mar 04 02:10 AM

[User 369530:]

Joseph:

Nice article. Karen Finerman (sic?) on Fast Money has been saying the same thing re bank preferreds and doesn't understand why they are so cheap. I like her, a good value investor I think. Question to you - how do you get information about these preferreds, issue price coupons etc? Not much on Yahoo and my TDAmeritrade account didn't have much either. If you wanted to do a quick screen, where? Neither place had links to SEC documents for these guys.

Thanks for any further info, Mark



On Mar 03 06:22 PM Joseph L Shaefer wrote:

> An excellent question re Stanford Financial Group (Antigua) vs Stanford
> University (which is suing THAT Stanford ["Sir" Allen Stanford] for
> trying to wrap himself in their flag) versus Stanford Wealth Management
> of Lake Tahoe (that would be us.) Also an eminently fair comment
> re infrastructure.
>
> As to the former, "Sir" Allen Stanford bought his title in Antigua.
> The only reason anyone might call me "Sir" is because I spent 36
> years in uniformed military service. Forbes says Sir Allen is worth
> $2.2 billion. Inexplicably, Forbes missed me on their last list of
> billionaires. For the record, I am worth somewhat south of that figure.
> "Sir" Allen owns a cricket team. I once played cricket on Barbados
> because I picked up some hitch-hikers going to a game in a jungle
> clearing, wanted to learn what cricket was all about, and could afford
> the case of Red Stripe to celebrate -- finally! -- the end of the
> game. "Sir" Allen claims to be related to Leland Stanford, benefactor
> of Stanford University. I come from good peasant stock, workers and
> farmers one and all. I will never be burdened with inherited wealth.
> "Sir" Allen runs a business whose own employees tried for years to
> get the SEC to investigate shenanigans there -- and the SEC never
> went near him!. (SEC: Can you spell P-O-N-Z-I?) On the other hand,
> the NYSE, NASD, FINRA, the Defense Investigative Service, CIA, DIA
> and everyone else has checked, graded, stamped, fingerprinted, researched
> and subjected me to the most intrusive and banal questioning into
> every aspect of my life. The price you pay to get a security clearance
> and stay squeaky-clean in this business!
>
> As for my infrastructure, mea culpa. I was early in my call for the
> certainty of inflation and the necessity for infrastructure improvements
> in this country. One could have hoped that the "shovel-ready" projects
> promised in the stimulus plan would actually have come to fruition
> before every road, bridge and water main in the country self-destructed.
> Alas, I over-estimated the willingness of Recognizing they weren't
> really serious about rebuilding the economy (I mean, how mnany bridge
> PACs are there?) I sold all those infrastructure stocks shortly after
> buying them ( as documented in our client letter.). As John Maynard
> Keynes once said to a critic claiming he changed his position on
> the value of monetary policy, "When the facts change, I change my
> mind. What do you do, Sir?" Our clients and subscribers are now about
> 80% in solid income (like the preferreds I've written about above,)
> in gold, and in cash. Since I can't imagine there would be too many
> people who delve into the comments on one article of the tens of
> thousands on SA, I am willing to prove that by sending a current
> copy of our client letter. Send a note to inquire@stanfordwealth...
> with "Prove it" on the subject line and I'll send a pdf of our most
> recent to you personally.
>
> Finally, let me say that one of the reasons I think SA is tops is
> because they do publish ripostes to articles, which keeps the hot-air
> types from pontificating or obfuscating their real track record.
> We're kind of proud of ours, so we enjoy the Socratic give-and-take
> that occurs here. When I say "Thank you" for your comments, I mean
> it.

Mar 04 12:50 PM

[Joseph L. S...:]

Hi, Mark --
The SA system wouldn't allow me to reply to you directly so I'll do it here, as part of our forum. The most comprehensive yet common-sensical site I've found for preferred issues of all sorts is quantumonline.com. It's exhaustive in its coverage but still as user-friendly as something so arcane can be. Hope it helps and if ever there is something I may be able to add, you're welcome to contact me directly. I like the challenge of finding stocks along the less-traveled byways!
JS

Mar 04 07:01 PM

[Joseph L. S...:]

You may be right, sir. But I have never made serious money betting against the resiliency of the American citizenry. I called the "bell" on the blow-off day of 3 March, while the market was in the pit of despair. Today's reversal may be only a temporary aberration. But if it continues, having bought at the bottom -- for this cycle -- will hold us in good stead!


On Mar 03 09:55 PM thatguy57z wrote:

> Well the way I see the market is give it a few more week or so and
> it will be at six even, and down from there.
>
> Take your money and run and buy a gun.

Mar 04 07:08 PM

[sheeple123jump:]

YOU MADE A REALLY FINE CALL.congrats.

Jul 02 09:31 PM