Thursday, March 12, 2009

Buy of AEH in IRA/Aegon Statement of Intent to Pay Preferred Dividends/GE Loses AAA/

One of my local indicators of a possible potential turn in the economy has turned positive. Almost two years ago, a developer bought one of the largest tracts of undeveloped land in Brentwood, a normally strong housing market, and proceeded to install sewers and underground electricity, to pave the new subdivisions roads, to build a large and expensive entrance, and to place  expensive street lamps throughout the developed and vacant parcel. And, then after he finished about a year ago, nothing happened, not one stake was put into the ground. Now, lots are being staked for a new homes "starting" at $500,000.  It is a sign of life where there had been none.  This indicator was discussed in these prior posts. TOO Early To Celebrate? Real Estate Morass in Brentwood ASSET ALLOCATION/ CORPORATE BONDS & CURRENCIES/ JOBS   

The clawback lawsuits by the Madoff bankruptcy trustee may soon begin. The bankruptcy code permits the trustee to go after transfers made 90 days before the filing of a bankruptcy petition.  New York state law allow the trustee to go after investors who withdrew money from Madoff's investment management operation up to 6 years before the bankruptcy petition.  This is going to be one big mess.  Now that Bernie has plead guilty, maybe everyone can stop using the word "alleged" Ponzi scheme. 

The WSJ had a negative article about the life insurance industry, a frequent topic of my posts.  The DJ Life Insurance index is down 82% since it peaked in 2007.  

GE's long term credit rating was cut by S & P from AAA to AA+. This is not a surprise. 

Retail sales, excluding autos, rose in February.  January sales were revised upward. NYT 

Aegon said it had about 2.9 billion euros of excess capital above the level necessary to maintain its existing AA rating. MarketWatch

The company expects impairments to run at elevated levels throughout 2009. Aegon owns Transamerica in the U.S. Reuters

Importantly for me, as a owner of AEB and AEV, two of Aegon's perpetual preferred securities, the company made the following statement: "Aegon has paid all coupons on all of its Perpetual Capital Securities in the past and has the intention to continue to do so in the future. Coupon payments on Perpetual Capital Securities are not automatically linked to dividend payments on shares" The last statement is technically accurate. The firm may continue to pay preferred dividends after eliminating its common dividend.  But, as I have kept emphasizing, the elimination of the common dividends removes a legal obstacle to the deferral of the preferred dividend. A statement of future intention on paying preferred dividends, while encouraging, is of course not equivalent to a guarantee.  But, I have always maintained that a deferral of a preferred dividend sends a powerful signal to the market and to the firm's customers and potential customers of profound weakness, and needs to be avoided if at all possible.

If you knew that a life insurance company had deferred paying preferred dividends to preserve cash, would you buy an annuity or a life insurance policy from them?  I would not even consider it.  But the statement from Aegon was sufficient for me to finish my purchases of its preferred securities, and I mean that I am done, with a purchase in the regular IRA of AEH at $4.63. And that takes me down to $29 left in that account.  I have done two partial Roth conversions out of the regular IRA so I have used the market meltdown to my advantage by doing 5 partial conversions over the past five months. The prospectus for AEH can be found at:

The yield at my cost is about 35%. AEH Stock Quote

Even though it has a tax advantaged dividend, I placed it in the regular IRA for the two usual reasons: (1) it will be included in the next Roth conversion if it goes down which reflects my view that there is still a lot of risk in the Aegon preferred issues and (2) due to my opinion of the enhanced risk, the possibility of a deferral certainly exists and I really do not want to pay taxes on a deferred dividend that may never be paid.  I believe that the dividends paid in connection with AEH are qualified dividends.  I have not confirmed it since I have never owned it before today.  I believe that it is an equity preferred. I have confirmed that the dividends paid in connection with my ownership of AEB, which was the only Aegon preferred owned in a taxable account before 2009,  were classified by my broker in my 1099 as qualified dividends as were my dividends received in connection with IND and INZ. But since I own both AEV and AEH in my regular IRA retirement account, this classification does not matter to me now. 

This is the kind of statistic that always fascinates me, Freddie Mac lost 265 million a day.

  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. 

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