Hedge Fund Manager's Notebook: The Power of Dividends

by: John Thomas August 26, 2008    

John Thomas

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1) Crude pops $6 and natural gas leaps 42 cents to $8.25 as hurricane Gustav turns towards the oil and gas producing facilities in the Gulf of Mexico. One mathematical model has a category four hurricane hitting New Orleans in 3-4 days.

2) The S&P case-Shiller home price index for June fell 15.4% in June YOY. San Francisco came in at -23.7% YOY. Even though homebuilders have cut back construction dramatically, foreclosures keep dumping more properties on the market, driving prices down.

3) The ten year return on the S&P 500 has been a meager 3%. Add in dividends and it rises to 23%.

4) The top 1% of taxpayers in the US earn 20% of the income but pay 40% of the taxes. Obama plans to raise the capital gains tax from 15% back to the Reagan level of 28%.

5) Since gas prices spiked people are driving less and driving slower, causing the accident rate to drop precipitously. Highway deaths are now running at an annualized rate of 33,000, the lowest since 1961. Car insurance rates will fall. US crude consumption has declined by one million barrels/day in the past year which is equivalent to 42% of our yearly imports from the Persian Gulf.

6) Natural gas [NG] hit my short term target of $7.75, down 42% from its $13.50 high two months ago. If you think this is an unusual move just look at a six year chart for NG. It is the third such move. Welcome to the natural gas market where the ante is a pair of balls of steel. Stand aside for now. Storage is now above the five year moving average. If there are no more hurricanes after Gustav this season and crude visits the eighties, you could see NG break below $7. Worse, the crude/NG ratio is now at an all time high of 14.7.

7) The commercial real estate debt market will be pushed closer to the brink on September 1. That is when an interest payment is due to Deutsch Bank on a $225 million loan to Riverton, a 1,232 apartment complex in Harlem. The owners used aggressive financing to overpay for a complex in 2005 where 93% of the units were subject to New York rent control. With market values now half of what they paid the owners may find it expedient just to default and walk away from the project. The move could trigger a panic in the market for the securities backing similarly leveraged commercial deals, shut the window on new developments, and open the next chapter of the credit crisis. Terms have already dramatically tightened. In the past year commercial loan to value has dropped from 95% to 65%, spreads have widened from 75 basis points over Treasuries to 300 bp, and the volume of deals fallen from $3 billion in 2007 to only $1.5 billion so far this year.

Full disclosure: no long or short positions in any stocks mentioned.

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This article has 8 comments:

  •  
    Aug 26 06:48 PM
    Nat Gas has me concerned, but I am playing the seasonal game, storms in the Gulf and then winter North American. I think NG will be the fuel of choice simply because the children are wrong about Petrol. It is short, and will be again in six months. And, yes commercial real estate is on the burner, the sector is going south next.
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  •  
    Aug 26 08:45 PM
    your articles rock, keep them coming
    Reply | Link to Comment
  •  
    Aug 26 09:25 PM
    "Reagan" level of taxes?

    The House was controlled by DEMOCRATS under the leadership of Tip O'Neill back then en.wikipedia.org/wiki/...

    If it weren't for Reagan standing up to the Dems, taxes would have been a lot higher.
    Reply | Link to Comment
  •  
    Aug 26 11:55 PM
    A panic over a $225m default? I doubt it. Any loss there would be small relative to previous write-offs and credit to marginal borrowers is already effectively nonexistent. Aside from a small hit to DB I see little impact from such a potential default. Yes, there could be more room for squeezing in CRE but not much room and in any case this just isn't enough money to make a difference. To put it in perspective, it's less than 0.1% of the amount banks have already written down, and that's if it's a total loss which it wouldn't be.
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  •  
    Aug 27 10:23 AM
    well you can see the state of affairs when $225mil doesnt matter too much.
    Reply | Link to Comment
  •  
    Aug 27 06:26 PM
    other than item #3, there's no mention of dividends; this piece is mistitled.
    Reply | Link to Comment
  •  
    Aug 27 06:52 PM
    agree. Was hoping to see alot more about dividends. The market has a bunch of quality companies with 5%+ divys now such as BMY and VZ.
    Reply | Link to Comment
  •  
    Aug 28 02:39 AM
    oldtdr and stone fox capital, we (Seeking Alpha) chose the title, not the author. He sends notes every day, and we try to highlight the key topic or topics he mentions. But by their nature, the notes are brief.

    Do you have any suggestions for alternative titles?
    Reply | Link to Comment
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