Archive for March, 2009


Common Stock Vs Preferred Stock

Filed Under: Glossary by Bill — 1 Comment
March 8, 2009

Recently the US government converted its preferred shares which it acquired as part of the TARP fund (which was to pay a 5% dividend for the first 5 years and 9% dividend after the initial 5 years) to common stock.  If Citigroup held the shares for 10 years it would have paid out 17.5 billion in dividend payments.  However, before the first dividend payment they paid $3.25 per share for a common stock conversion.  This share dilution dropped the value of common stock below $1 before setting just over $1 by the end of this week (03-06-09).  C stock will have to rise by 18.64% per year for 10 years to break even with the preferred stock deal.  My hunch is this wasn’t a good investment for the share holders or the US citizens (tax payers.)

So you might be asking just what is the difference between preferred stock and common stock?

Common Stock

Common stock is the baseline proof of ownership in a  corporation.  When you are a common stock shareholder you have a right to vote, assets in a liquidation, and dividend payments as approved by the shareholders.  You also have the right (preemptive rights) to purchase new shares that are being released before the public in order to maintain your percent ownership.

Preferred Stock

Preferred stock is another form of ownership in the company.  The payout terms are prearranged – fixed dividend schedule etc.  Another perk is that you get paid before common stock holders in both dividend and asset liquidation.  This includes previously missed dividend payments.  You must be caught up in your agreed payments before the the common stock holders get any dividend payments.  The disadvantage is no voting right and virtually no capital appreciation over the long run.

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Squash the Gold Bug

Filed Under: Fundamental by Bill — 5 Comments
March 1, 2009

If you listen to the radio, watch television, or read finance blogs someone has tried to sell you on gold.  Everything from coins to gold bullion bars they say you need it.  They say it’s a safety net in troubled times, and it has never been worth 0, or it’s tripled in value since 2000 compare that to your stock market portfolio.  I just wanted to evaluate the investment in gold help you decide for yourself if it’s worth it.

Let’s start with what is gold.  It’s a chunk of metal mined from the earth that has some chemical resistance properties, good clean electrical conductivity, and found it’s way into peoples’ hearts as jewelry.  On it’s own it has no ability to make money, it’s only worth what the market say it is like any other commodity. 

Over the long haul gold has pretty much only adjusted with inflation.  Just over the last 40years has it increased in value at an average rate of approximately 9%.  When the money supply used to be linked to gold or nations long ago used to use gold as the unit of currency saving gold in tough economic times would have been a good idea just like saving money is.  However, now our no currency is linked to gold so it’s price is only measured by it’s need for production.  As I see it as the economy gets worse less jewelry will be purchased, as well as high end electronics and goods using gold as a conductor or protective layer.  This should drive the price of gold down not up.  The only other thing holding the price of gold up is the speculators which I suspect will have a similar end as the oil speculators.  That’s why they’re is so many commercials on TV trying to offload this overpriced gold on the average person.  The gold miners are loving this.  With prices this high it just might be worth it to sell scrap gold you own.

Perhaps some of the increase in gold could be due to the increased extraction cost – higher labor and fuel and what not.  However, in a free market the value of something can’t be changed by its cost – the demand will simply change.  Something that society has found worth a 3-4% increase per year for hundreds of years can’t simply now be worth 9% increase per year.  This is another bubble like real estate is now or stocks in the late 90s.

I wouldn’t be surprised to see gold fall back $250 per ounce over the next couple of years.  I understand the need to want to put your money somewhere safe – but unlike stocks or bonds which are cash producing assets – gold actually costs money just to hold.  There is security and storage fees with holding gold plus the verification that it is truly what you think it is.  The value of the gold has to increase enough just to overcome these costs.

My vote is if you’re scared and wanting to find an inflation fighter pick a big blue chip stock that is producing something boring that is needed even in tough times, like food or toothpase, that pays a decent dividend.  There’s some stocks out there paying 5 or 6% dividends that would rather take a beating then have to cut it.

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