I left out a factor in my top twelve causes to the current economic meltdown. Life Insurance Companies in the Toilet/ TOP TWELVE CAUSES OF THE NOT SO GREAT DEPRESSION/POM And, since this is still a work in progress, I need to combine two factors into one. I mentioned that the failure to regulate derivatives was #11 and a lack of regulation over credit default swaps was #12. The credit default swap is a form of derivative so I will just add those two into one cause. The cause omitted from the prior post was the Federal Reserve keeping interest rates abnormally low, which provided the fuel for the housing bubble, a point discussed in several prior posts. Although a bubble does not have to occur with abnormally low interest rates, it does create a condition for one to flourish and to gain momentum.
I have also decided to elevate the 2004 SEC rule change to number #1. Excessive leverage was the key to the meltdown, since it only takes 3% or so of a firm's assets to go bad to destroy it at close to 40 to 1 debt to equity. It only took less than 3 years for the investment banks to implode on the increased leverage permitted by the 2004 rule change.
When I mention GOP ideology, I am referring to a core belief of the GOP that was the origin of the cause and those core beliefs were accepted and furthered in many cases-not all- by a select group of Clinton Democrats (See, e.g., Wild West Capitalism & Brooksley Born)
1. SEC 2004 RULE CHANGE ALLOWING INVESTMENT BANKS TO INCREASE LEVERAGE (GOP IDEOLOGY SUPPORTED BY CLINTON DEMOCRATS)
2. AIG FINANCIAL PRODUCTS LONDON UNIT
3. MOODY'S AND S & P RATING TOXIC TRASH AAA (LACK OF REGULATION OVER & GOP IDEOLOGY)
4. LACK OF MEANINGFUL REGULATION OVER MORTGAGE ORIGINATIONS (GOP IDEOLOGY)
5. CATCH ALL CATEGORY OF PSYCHOLOGICAL AND MORAL FACTORS: LACK OF ETHICS, FRAUD, MOB PSYCHOLOGY, WILD WEST CAPITALIST MENTALITY (GOP IDEOLOGY) , FAITH IN NERDS WITH MODELS, GREED & STUPIDITY
6. ALAN GREENSPAN KEEPING INTEREST RATES ABNORMALLY LOW FOR TOO LONG
7. CHUCK PRINCE AND THE TOP BRASS AT CITIGROUP
8. STAN O'NEAL AND THE TOP BRASS AT MERRILL LYNCH
9 SPECULATORS IN THE REAL ESTATE MARKET
10. FANNIE AND FREDDIE (PLUS CONGRESS, BARNEY FRANK AND LIBERAL DEMOCRATS, & THE COMMUNITY REINVESTMENT ACT)
11. (TIE) DICK FULD AND THE TOP BRASS AT LEHMAN BROTHERS/ BEAR STEARNS/ COUNTRYWIDE/KEN LEWIS/ROBERT RUBIN/LARRY SUMMERS
In my traditional IRA I decided to take a chance on Apollo Investment (AINV) by buying 50 shares at $2.35. This is a BDC, or Business Development Company, that has been hit very hard during this downturn. I have invested in another BDC which has turned south on me called Hercules Technology. HTGC A BDC has to pay out most of its net income to its shareholders (at least 90%). AINV makes loans primarily to private companies. Many of these loans have soured recently, which has caused write-downs and a dividend cut.
Over one- half of these loans are subordinated junior debt which is very risky in the current climate. Moreover, like a REIT, the requirement to pay out income to maintain its tax status leaves these companies in need of securing additional capital. They frequently have issued additional shares at the most inconvenient times. This has been done even if the sale was at a price below the then current NAV of the outstanding loans. As a result of the deteriorating economy and loan losses, AINV recently cut its quarterly dividend to 26 from 52 cents.
Needless to say, the market does not expect the reduced dividend to hold since the dividend yield at $1.04 annually would produce a 44% yield at my price of $2.35. It does go ex in a few days. Based on its last earnings release, the company claims to have a net asset value of $9.87 per share as of 12/31/2008.
The NAV has been declining as loan losses accelerated over the past year. A credit facility matures in 2011. This is a speculative position. The reason for putting it in the regular IRA is that it will be included in a Roth conversion in the event it continue to fall. Otherwise, if it rises it will just be sold. S & P has a hold rating and a $7 target. VL has it rated a 4 on timeliness with a lot speculative upside potential. Morningstar has it as 3 stars with extreme uncertainty and I would agree with the assessment of an extremely uncertain future for AINV. A lot will depend on how quickly the economy will recover and how much longer AINV's borrowers can survive which is just unknowable to me. I do not like going into a recession with most of the loans as subordinated junior debt rather than senior & secured debt which is just very poor management.
A constant source of incomprehensible price movements are the equity preferred issues of Aegon and ING. If a stock could take drugs, then that might explain ISF, for example, a recent IRA add that went ex dividend a few days ago, up almost 70% today. It rose a lot after going ex dividend, and then plummeted. Now, at least until the drugs wear off, they are moving up. What kind of drugs would have to be ingested by these equity preferred stocks to cause this kind of movement? Well, I am no expert on such matters but, based on what I have seen on TV, I suspect these stocks have ingested a very large cocktail of methamphetamine, LSD, and crack cocaine. In reality, the movement is caused by severe mood swings about the survivability of these two Dutch companies.
I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.