Monday, February 23, 2009

ING Preferred Stocks/Professor Schiller/GM Bankruptcy/


Added October 27, 2009: The most recent discussions on ING's settlement with the European Commission, and how it will effect the hybrid owners (preferred stocks), are in two posts from October, with the first linked one below providing more details:
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At mid-afternoon the S & P 500 is teetering near its low on 11/20/08 of 752.44. I would suspect that a failure to hold above that level might lead to more selling later today or this week.

A complete listing of ING perpetual preferred stocks can be found at this link.  Debt securities ING Groep N.V. | ING (ING changes that link periodically). Links to the prospectuses can also be found at the site (free site, registration required).  The Dutch government claimed on Friday that ING did not need anymore capital. Business Feed Article There was a concern last week that ING would defer its payments on its "hybrid perpetual bonds" (i.e. preferred stock IND,INZ, IGK). ReutersING recently issued 5 billion dollars in Dutch government guaranteed bonds maturing in 5 years and paying 3.375%. Tribune I did add to my position in INZ last Friday bringing my position in my main account up to 100 shares with 50 shares in a retirement account. I will trade 1/2 of the position in the main account, as before, in the event of a pop in price.
The price action last week in ING preferred issues show how the mere fear of a deferral in a cumulative preferred dividend can send the price spiraling downward. I would add that a deferral of a cumulative preferred dividend by one of these large financial institutions would only be consistent with a dire financial condition, in my opinion. The commons stock of ING is down over 10% so far today to below $5, a key level for many institutional owners. Aegon (AEG) is trading at below $4. It does not matter which side of the pond the financial institution has a headquarters, all of them are considered guilty until proven innocent and the lack of confidence in any of them is palpable. Since my exposure is still small to the ING and Aegon preferred issues, however, I am open to increasing my exposure by about $1,000 in total to both of them, given my current assessment of the risk/rewards balance in them. The reward is payment of a dividend approaching 25% and the downside is seizure by government and a zero share price. ( Some of the ING preferred issues with a lower coupon are already trading below 5 like ISG, so those are inching closer to zero already)

GE is trading below $9 which is very disconcerting to me. This concern is not due to the fact that I own shares but the loud and clear message the fall of GE says about the depths of our current problems. The current price is around the late 1994 level adjusted for splits. The swoon today may be connected to the negative comments about GE Capital made by Deutsche Bank analyst Nigel Coe.

The statement from the government that it will provide a "temporary capital buffer" for those banks failing the stress test is somewhat helpful. MarketWatch No "systemically important" financial institution will be allowed to fail, which is another helpful comment by the government. Yahoo! Finance The banks should seek private capital before receiving the "buffer". The stress tests begin this week.

I now believe that bankruptcy is the only viable option for GM, and Chrysler needs to be allowed to fail without government support in Chapter 11. If the UAW and the bond holders really get serious about making concessions necessary to make GM viable, then the bankruptcy option can be avoided for now. Nothing has yet to happen, or come close to happening, that would make GM a viable company in my opinion.
But I do not see the Democrats allowing either one of them to fail, even though both deserve to fail. But there are a lot of companies being kept alive that deserve to fail in a moral and equitable sense, including many of the large financial institutions.

Professor Schiller, author of Irrational Exuberance, is not ready to invest in stocks yet. Yahoo! Finance He is waiting for the cyclically adjusted P/E ratio for the market to fall to below 10. Tech Ticker, Yahoo! Finance
This would require a substantial drop from current levels or a long period where earnings rise and the index remains about the same. The nobel winning economist Paul Krugman appears to be very concerned that the stimulus will not be enough to jump start the economy and that consequently the U.S. will end up in a deflationary cycle similar to what Japan has experienced.;_ylt=Aui1rlJ.zTCQx1hBaAeCyOi7YWsA
Some of the same points were made by Rober Albertson in a recent interview in Barron's, particularly on how an increase in the savings rate could impact growth in the years ahead.
Some of what Krugman is saying is also consistent with Ray Dalio's predictions.
All of these arguments, if they prove to be accurate predictions of the future, would suggest staying out of the stock market for the indefinite future and to own treasuries. I view these dire forecasts to be plausible but not the most likely outcome. Nonetheless, my trading model is preventing me from buying any common stock now anyway and I do not want to own treasuries at the current yield levels.

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