Timmy’s diversion and a half dividend equals three Warrens

Vincent Farrell, Jr. is Chief Investment Officer of Scotsman Capital Management LLC., a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.


Tim Geithner is off to a bad start. His tax dodge is not a hanging offense in most people’s book (Jim Cramer would strongly disagree). So to create a diversion on the scale of Round One of a trade war with China is overkill. It is a time honored tactic to stir up trouble somewhere else to take the spotlight off oneself. When the Argentine Generals fell out of favor with the people in 1982, they invaded the Falkland Islands figuring a short war would work to rally the populace and divert attention. The fact Maggie Thatcher got mad and spanked the generals didn’t figure in their calculus.

Geithner’s publically going after the largest owner of Treasury bonds is just plain dumb. Whether China is manipulating its currency is not the point. “Praise in public and criticize in private” is apparently something Tim is unaware of. And, Chinese officials must think our Gods are crazy. From the land of subprime, Lehman, Fannie, Freddie, AIG, Citi, and John Thain’s $65,000 commode comes financial criticism? Calm down Tim. We need professionalism more than ever. What created the Great Depression was a tightening of money (we are thankfully doing the opposite now) and the Smoot Hawley tariff which led to world trade contracting by two thirds in five years. Let’s negotiate privately and not get stuck in public positions that make compromise impossible.

The reality of President Obama taking office seems to have gotten the bond market’s attention. Seeking to hit the ground running the new President is pushing ahead with his stimulus program and TARP II- whatever form it’s going to take- with admirable speed. The bond market is going to have a lot of financing coming at it and the 10 year bond moved about 40 basis points to a 2.6% yield. Mortgage rates correspondingly rose. 30 year fixed rates moved to 5.12% from 4.96% the week before. Libor moved up a bit as well. This might well spur Bernanke into the long bond market with an open ended bid to keep rates low. The Fed meets this week and all eyes will be on the statement that comes out of the meeting.

Even with the rise in yields last week it was apparent that the bond market is open for business. Citi sold $12 billion of government backed bonds and junk rated companies were able to place more than $1 billion in new debt showing that there is some appetite along the risk spectrum.

The big earnings news last week belonged to GE. While per share earnings met expectations, the market was discouraged that it took a tax credit to do so. Jeff Immelt insisted that the $1.24 per share dividend could be paid and the company could still keep its AAA bond rating. The market clearly disagrees. GE sold off sharply after the earnings announcement and Friday’s close of $12 offers a 10% plus yield- if you believe the dividend is secure. We all made a huge fuss when Warren Buffet invested $3 billion in a GE preferred stock. The annual common dividend is over $13 billion and for my money GE will defend its AAA before it pays the dividend. Halving the dividend equals three Warren Buffets and the common would still yield 5%.


Vincent Farrell
Chief Investment Officer
Soleil Securities Corporation
January 26, 2009

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