"Market Monitor"- Richard Lehmann, President of Income Securities Advisors
Friday, August 08, 2008PAUL KANGAS: My guest "Market Monitor" this week is Richard Lehmann, president of Income Securities Advisors, based in Miami Lakes, Florida. Richard, welcome back to NIGHTLY BUSINESS REPORT.
RICHARD LEHMANN, PRESIDENT, INCOME SECURITIES ADVISORS: Thank you Paul.
KANGAS: Your specialty is fixed income but in this low interest rate environment, are you having difficulty in finding high yielding but safe securities?
LEHMANN: Actually, not. It's a surprise, because there's so much risk aversion these days that anything that isn't triple-A, people discount in this marketplace.
KANGAS: They're yielding despite their triple-A rating, yielding high?
LEHMANN: That's right. We're going to see that some examples that you give today.
KANGAS: OK. Now I understand you believe there will be a lot of bond defaults occurring in the not too distant future. Elaborate on the reason for this.
LEHMANN: Bond defaults is a cyclical thing. It tends to come in waves. We had one in '91. We had another one in 2001 and we're over due for this one now. The reason for it is that basically it's banks that cause these waves because they tend to contract credit during hard economic times and in this particular instance because of the fact that they are under pressure themselves to clean up their books and get some of the bad loans off and consequently, we're seeing -- we're predicting that we're going to see a 10-12 percent default rate among the low investor grade category.
KANGAS: And the overall impact on the financial community, serious?
LEHMANN: The impact on the financial community won't be there because of the fact that these securities have already been rated as if they were going to default, mainly in the B-minus and triple-C category. That's where most of these defaults will come. And when it does come, about half of them will go down.
KANGAS: So this is sort of clear the air, so to speak?
LEHMANN: Yeah.
KANGAS: During your last visit with us in March of 2007, you gave our viewers four "buy" recommendations of high yielding securities. Let's see how they have done since then. We see Enerplus Resources (ENR) down only 1.9 percent. All that time it's been yielding how much, roughly?
LEHMANN: 12 percent.
KANGAS: And the same for Penn West Energy Trust (PWT) which is actually up on a principal basis 2.2 percent, not bad.
LEHMANN: That's right. The price movements here is not what you're looking for. You are looking - you're buying these for the interest.
KANGAS: OK. You had two others that were kind of clinkers, unfortunately. And (INAUDIBLE) from Ford and General Motors, we know what happened to those two corporations. Are you still with these?
LEHMANN: Yeah, I am, despite the fact that they -- they're trading down as if they were bankrupt already.
KANGAS: Would you buy them at these depressed levels?
LEHMANN: I would buy them, yes. I think that both these companies are going to survive. I think if need be the Federal government would give them a loan guarantee to get through this crisis and change in models because there's so much union support for it.
KANGAS: Now they're yielding how much at these depressed prices?
LEHMANN: We're talking about 17-18 percent.
KANGAS: My goodness. That usually denotes extremely high risk.
LEHMANN: Again, part of that is because the issues from these companies are so many and so large.
KANGAS: How about some new recommendations, Richard?
LEHMANN: OK. I think as a general category, there's a lot of good paper out now with these banks that have had to issue preferred shares to boost their capital. First one is Citibank.
KANGAS: Citigroup (C-M) in this case?
LEHMANN: Or Citigroup which is yielding an extraordinary 9 percent, an A-rated company. And of course Citigroup is not something that would ever fail.
KANGAS: Looks like it did there for awhile looking at that chart.
LEHMANN: The price there was more attractive. In effect so erratic is it shows how sensitive this market is.
KANGAS: We have time for another choice.
LEHMANN: Yeah. The Royal Bank of Scotland (RBS-S) which is yielding slightly less. It's also A-rated. But it's eligible for the 15 percent tax treatment, which is a real plus for somebody that's in the high tax bracket.
KANGAS: That's a good point, 15 percent max tax.
LEHMANN: On 8 percent.
KANGAS: That's right. Do you personally own any of these securities or have other disclosures to make?
LEHMANN: I have clients who own these securities. But I myself don't.
KANGAS: OK. All right. Richard, I want to thank you very much for being with us again and sharing your insights.
LEHMANN: Thank you, Paul.
KANGAS: My guest, Richard Lehmann of Income Securities Advisors.
