American Financial Stupidity Dear Mr. Berko: I am 66 and have a doctorate, so supposedly I'm a smart guy, even though a financial planner took my wife and me to the cleaners two years ago. One of my colleagues invested a large amount of U.S. dollars in Iraqi currency, insisting …Read more. When Will Rates Rise Dear Mr. Berko: Do you have any idea when the Federal Reserve will begin raising interest rates? — TW, Punta Gorda, Fla. Dear TW: I will get to your question, but first I want to address a request from a recent letter writer. He wrote: "Some …Read more. Wages and Profits and Layoffs Dear Readers: Dozens of readers have asked about the Hostess bankruptcy and what I think the effects of automation (robots) will be on the future job market for their kids. I fondly remember Hostess, the maker of Twinkies. Our high school had an …Read more. Very Speculative High-Yield Issues Dear Mr. Berko: We met when you spoke in Oklahoma City in 2001. You told me to buy 50 shares of Apple at $22. I did! Now, after two splits, I have 700 shares, and that good luck seemed to follow in my business. I am 54 and have been a self-employed …Read more.more articles
Don't Trust Him
Dear Mr. Berko: We bought 25 shares of Lucent Technologies Capital Trust, a 7.75 percent cumulative convertible preferred trust, at $542 a share, which you recommended last August. You said that it was very speculative but that the 14 percent yield was worth it if I could "afford the risk." The $13,550 investment represented 1.2 percent of our portfolio, and we were comfortable with the risk.
We found a new broker last October (he talks about running for Congress), and he didn't like Lucent Technologies. He said the interest payment was doubtful, so we sold it at $566, making a tidy $500 profit. With the proceeds, we bought 2,000 shares of Gabelli Utility Trust at $7.71, yielding 7.8 percent, and reinvested the dividends, which we couldn't do with Lucent. He said Gabelli was safer and had less risk. But it's down to $6.70, and we have a $2,400 loss. Lucent Technologies now trades at $881, and we're sorry we sold it to buy Gabelli Utility. Why is Lucent Technologies doing so well when its parent company, Alcatel-Lucent, is doing so poorly, and why is Gabelli doing so poorly when its generous dividend seems so stable? My broker says Gabelli has no debt, zero leverage and no interest costs. What's wrong here? — TL, Cincinnati
Dear TL: Lucent Technologies (LUTHP-$881) was the mighty and prestigious research arm of American Telephone & Telegraph before the Justice Department dissolved the AT&T monopoly in the mid-1980s, thinking that increased competition would lower telephone rates. Today's telephone costs are higher than ever, and the average family (excluding those millions with free government cell service) pays more than $120 a month for cellphone contracts. Alcatel-Lucent, now LUTHP's parent, is a French company with $20 billion in revenues that sells communications and network technology around the globe. Alcatel-Lucent (ALU-$1.66) has three problems: 1) It's a French company, which is not good. 2) Its earnings are not dependable, and therefore 3) some believe that its survival is in doubt.
Gabelli Utility Trust (GUT-$6.70) is a closed-end fund trading at a whopping 24 percent premium to net asset value. Few professionals would recommend a CEF at this dangerously high premium. So it's safe to assume this goof was born on one of those days when the Lord's Parts Department was suffering severe brain shortages and resultantly has a room temperature IQ. He shouldn't be allowed to reproduce. He's dangerous to your wealth and, therefore, eminently qualified to be a member of Congress. And contrary to his analysis, GUT's portfolio is 31 percent leveraged, to the tune of $51 million. But this leverage doesn't represent borrowed funds, because this money derives from GUT's auction market preferred stocks. Every 60 or 90 days, these AMPS mature. So GUT must refinance $51 million at prevailing (auction) rates every few months, and those rates may be higher or lower than previous rates. Recently, these rates have been trending higher, and higher interest costs reduce GUT's payout.
When your brain-dead meathead reviews a financial statement, he should know that preferred stock isn't carried as a debt (though it functions as a debt) and that preferreds pay dividends that are higher than bond interest. And though the GUT common stock dividend has been a steady nickel a month, the dividend slowly will begin its decline like the stock price, which five years ago was more than $10 a share.
A huge 24 percent premium, a declining dividend and rising interest costs suggest GUT must move slowly lower. Meanwhile, GUT's 1.92 percent annual management fee is obscene. Gabelli should be ashamed of himself.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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