Thursday, April 30, 2009

RB's Coup D'Etat on 3/3/MET/NYX?/Copper Prices, Sanofi Upgrade/CB/

April was another good month. With one a little better in May, I may successfully work my way back to October 2007, but I still do not care much for running this hard uphill to get back to my start position. The Nasdaq was up 12.3% for the month with the S & P gaining 9.4%.

A temporary compromise was reached late today. LB would give RB a kudo on the vision thing or whatever moved it to buy stock in early March. In return, RB agreed to refrain from calling LB a tyrant for the remainder of the week. Instead, RB will use the phrase "Our Great Leader" to describe LB.

J P Morgan did upgrade the French pharmaceutical company, Sanofi, to overweight today. The stock went ex dividend a fews days ago. I also believe that Nestle just went ex dividend, based on the data provided at Marketwatch. NSRGY Stock Price I own both Nestle and Sanofi, both recent additions.

The July price for Copper is currently over $2. When I last mentioned the price in connection with the small lottery ticket purchase of Taseko Mines, it was hovering at the $1.5 level. An improving price for cooper is viewed as a positive sign for an economic recovery. More on GE/Merrill Lynch Bonuses/Barron's Roundtable/More on AEB/add of TGB in IRA/tax law changes: property taxes

The only good reason for keeping EHL, a first mortgage bond issued by the electric utility Entergy Louisiana, a subsidiary of ETR, is that I might be wrong about inflation. This bond is now selling at over par, and I could have sold it today easily for a price in excess of its par value after brokerage commissions. This bond now looks good to me only if I am wrong about inflation. In a deflation or nominal inflation scenario, the real after inflation adjusted return of a 7.4% coupon looks good. It will get whacked in a period of worrisome inflation. This will be one of the first long bonds to go once I actually start to see inflation creeping back. Notable News 10 22 2008 & END OF DAY TRADES (IR, INTC, TE AND EHL)
I am certain that I can not predict the future, and certainly can not do it with a high level of certainty. So, sometimes it is best to lay the foundation for alternative scenarios.

I read an article in Barron's online that Sandler O'Neill raised Chubb (CB) to a buy but kept its $46 price target. I would just add a comment. Telling me now that a financial company sells at some percentage above or below book value is meaningless to me. What exactly was the book value of Lehman or Bear Stearns before they collapsed? I am however inclined to add a starter position in Chubb at below $40. Sold Part of IR/Sold FRPRJ: Transfer of Risk to IRA/Bought PJL/FBI Interrogator Comments on Torture/ GR, WBS, CB & MSFT
I am more inclined to do because I currently have no exposure to property and casualty companies now with any type of security. Chubb closed down 3.54% today to $38.95.
The MetLife results for the first quarter were ugly. Yahoo! Finance
My position is limited to its floating rate preferred issue, METPRA, and this report would not cause me to exit that position. The company had operating earnings of 20 cents a share, which was below the 34 cent per share consensus estimate. Met had a net loss of 574 million or 71 cents a share due to investment losses in its investment portfolio. The Company said that it had ample liquidity and a "strong excess cash position" MET has not applied for TARP funds. METPRA is an equity preferred issue that pays quarterly dividends, and the next ex date should be in June.

NYSE Euronext, a position added in early March, reported better than expected earnings of 40 cents on a GAAP basis, 43 cents Non-GAAP, down from 87 cents a year ago. Yahoo! Finance The results were reported before the market opened today, and LB was not impressed. The shares rose almost 3% to $23.17. RB bought them at $14.76 on 3/6 apparently some kind of contest with Cramer which seemed silly to LB at the time. Buys of JWF KSA DIS and NYX/SOLD Entire Position in TFI/ Just a Day of Ignoring My Own Rules

When RB bought Disney at $15.49, it was selling then at below book value. Subsequently, J P Morgan downgraded DIS to neutral and lowered its target to $21. March Unemployment at 8.5%/ Sold Adobe/Allscripts/ USO and Contango/CXW DIS BMY/ I was critical of that downgrade in the above linked post. That downgrade was bad enough but I really took more exception to the downgrade of DIS by the analyst at Pali who downgraded it to sell on March 11. He was featured on Fast Money to give his spin. Buy of HNZ at 31.67/Tax Advantages of Equity Preferred Dividends/Foreclosure Acceleration/Disney Downgrade by Pali/Cap & Trade/NADX Disney rose 89 cents today to $21.9 and closed March 11 at $16.59Yahoo! Finance Maybe the guy from Pali should send me an email, the address is on my profile page, and let me know whether I should sell those shares bought at $15.49 on 3/6/09 at $22 tomorrow. Why would you recommend selling a stock of Disney's quality after it had plunged to a price prevalent in 1994 and 2002, and even below its book value?WALT DISNEY-DISNEY C Share Price Chart | DIS - Yahoo! Finance

LB has cut RB loose with a chunk of change representing the accumulated cash flow from dividends and interest since invocation of the 815 rule as specified in this post from late February that reeks of LB's caution. Time to Hunker Down This is why RB had to do the coup d' etat on 3/3 and don't believe a word on that subject from LB. You can see for yourself that LB was scared witless. RB was ready to roll, always ready, and saved the day once again.

FAF-PJS/LB Would Rather Listen To Alex the Parrot rather than RB/

Nothing could be further from the true state of affairs here at the trading desk.  This is after all a democracy.  RB can vote on any decision made with the total number of votes given to it by LB, sort of like the same degree of power possessed by the Republicans in Congress now. Besides, it is like listening to a parrot when the debate starts on the number of shares to buy, with RB saying "Buy a 1000" of this or "Buy a 1000" of that.  Maybe if RB was an intelligent parrot like Alex whose brilliance was chronicled in the book "Alex and Me", LB would give RB more votes to cast in the decision-making democratic process here at HQ, though short of majority of course.   

In fact, LB was so impressed with Alex the Parrot that he suggested that the Harvard scientist train a new one to take over as CEO of Citigroup, since Alex is unfortunately unable to serve in that capacity after his unexpected I did mention that there might be other parrot candidates for our financial leaders who would be far less of a bird brain.  

I do not own common shares in the title insurance company First American (FAF), but I do have a 200 share position in PJS, a Trust Certificate containing one of its senior bonds. More discussion on Bonds: Purchases and Sell Decisions/BAC/AIG's International Lease Finance
First American beat the consensus earnings forecast by 12 cents. Earnings were 38 cents a share on a 17% decline in revenues year over year Yahoo! Finance   This is fine from my perspective as a bond holder.

The market has certainly made a huge move off its low. I look at the charts everyday provided by Doug Short, who has a Ph.D in English from Duke. Bear Markets Since 1950  The move from the low is now at 29.1% in the S & P 500 before today.  Based on charts of the prior bear markets, this does appear to be a decisive break in the downtrend.  LB says it is too early to call the end of the long term secular bear market that started, according to it, in 2000.  Some consideration is being given to putting on a hedge soon.   I do not know anything about Short other than I like his 

It looks like the bondholders of both Chrysler and GM are not going to rollover and be nice for Obama.  The bankruptcy proceedings could become contentious and longer than expected.  Chrysler filed for bankruptcy and the government will be providing up to 8 billion in financing to keep Chrysler afloat during the bankruptcy proceeding.  Without that aid, it would have to be a liquidation bankruptcy. 

RB is content today knowing that tomorrow it will be cut loose to invest the cash flow generated which has been accumulating due to what LB calls the "the S & P 500 815  exception to the exception allowing the investment of cash flow into common stocks in an unstable VIX pattern"  That rule criteria has a name, and it is not "stinking rule"

FCY: Forest City Senior Bond & Discussion of Process Use to Make a Purchase Decision/

******************************************Original Post:

Some observers have noted that LB is cautious and LB is always looking for the bogeyman around the corner.  All LB can do in its defense is to explain its reasons for calling the caution police.

Sometimes the caution arises, at least in part, from having inadequate information on some critical factor.  I know that I do not know something that I need to know in order to make an intelligent decision.   An example of that quandary came from a purchase in the 4th quarter of 2008 of just $500 of a a senior bond issued by Forest City Enterprises (common: FCE-E), a non-REIT real estate company.  The symbol is FCY for the exchange traded bond. One benefit of buying an exchange traded bond is that I have no problem buying just a small amount when my discomfort level is high but I do not want to completely ignore it either. When looking at a bond purchase, I always want to know as much as I can about the debt more senior to the instrument that I may buy.  The junior debt holders would be more of nuisance.  For a senior bond, secured debt is more senior and has priority in the event of a bankruptcy.  While some real estate companies have small amounts of secured debt compared to senior debt, others have far more secured debt. Forest City has a ton of secured debt.  FORM 10-K What I am trying to determine is how much of a claim does my security have on the property after the secured debt receives its just due.  To make that determination, I want to first know whether the secured debt is recourse or non-recourse to the corporation.  That is, if the creditor seizes the property, and the value has sunk below the current mortgage balance, can the creditor secured a deficiency judgment against the company?  I would hope the answer to that question is no when buying a senior debt security.  This became an issue recently for  a North Carolina mall owned by Glimcher Realty, which I discussed in posts last year.  For a senior debt holder, the best case is that the secured debt is non-recourse.  The next step is to try and determine how many properties have no secured debt attached to them, and how much are those properties worth compared to the outstanding balance of the senior debt.  This is where my analysis of FCY broke down, since I could not arrive at a firm judgment based on the information available to me.  I had some level of comfort just buying the senior note at a huge discount to its $25 par value.  I may have been aware then that Marty Whitman was taking a position in FCY, or other senior Forest debt, but he does not share his information about property values with me.  So, along with many negative factors, some of which are discussed in the earlier blog, I bought only 50 shares of this exchange traded bond at slightly less than $10.   FCY: Odd lot limit order filledRB was given 3 votes on that decision, as to the number of shares to buy, but lost the vote count 4 to 3. FCY: Forest City Enterprises Senior Bond (FCY)/FCZ
RB wanted to buy 100 which was down from the usual 1000 share order advocated by it.
Many of these problems are just some of the negative factors inherent in being a lone individual investor trying to find his own way, without a bevy of research analysts, MIT pets, and access to a boatload of expensive boutique research.   

PG/Does the AP own Information & the Right To Control the Writing about Information/

LB wants to add a clarification to a prior comment. Sometimes, when writing this blog in a stream of consciousness, RB manages to interject itself.   So, as an example, RB says there was a coup d'etat at the trading desk on 3/3 when it started to buy stocks in violation of those "stinking rules".   There was no coup d'etat as RB has asserted many times.  Instead, LB thought that cutting RB loose with a few restraints and a fixed bankroll would just shut it up, buying LB a few weeks of relative peace and quiet,  though admittedly any long term solution is just wishful thinking by LB- but it continues to search the medical literature for one .   Bought GJR/ Walgreens/Did Right Brain Call the Bottom? Most investors may not be as finely tuned to this endless brain chatter, and LB would prefer being in that position. LB is firmly in control now. All of those rules have names and none of them start with the word "stinking".   An LB wants all to know that it has no intention of reading that book bought by RB a few weeks ago, titled "A Whole New Mind:  Why Right-Brainers Will Rule the Future".  Just a bunch of nonsense according to LB.   Order will be restored, chaos does not exist. Think without emotion is LB's motto. 

Proctor & Gamble,  a recent add by RB during its frolic and detour, reported earning of  84 cents versus 82 cents in the year ago quarter.  Yahoo! Finance 
PG noted that earnings would have increased double digits excluding the negative effect of foreign exchange. Net sales were down 8% due to a 9% adverse impact of foreign exchange due to the strength in the dollar.  Operating margin improved 30 basis points and P & G recently raised its dividend by 10%.  PG stated that it was comfortable with analyst estimates of $4.22 for the year.  Keeping in mind that we are in a worldwide recession and a U.S. multinational takes an earnings hit when the dollar is strong, I thought the results were okay but there is a sell-off underway in the shares this morning.     LB likes stocks like PG due to their stability, financial strength and dividends, and is always looking for an opportunity to buy them at depressed prices.  So there is some disagreement with Cramer on whether or not to purchase consumer staple stocks now. Cramer looks for a quick bang for the buck while LB is thinking along the lines of a good entry point for a longer term hold. Buy 50 LXPPRD, Bought PG/ Lexington Realty/Outrage at AIG/
In the last post, I mentioned that I do not expect much near term earnings growth.

When writing a story about an earnings report, I am looking at the earning's release of the company in a separate window on my computer as I type.

My father told me that Obama was going to give him $500 under the stimulus plan.  Yahoo! FinanceI have read stories about salaried workers receiving a tax cut with less withholding from their paychecks.  LB was wondering what happened to its stimulus tax cut.   Must have gotten lost in the mail.   One comment that I have made about Big E is worth repeating, the Masters of Disaster needed to work for him during their summer vacations from school.   Value of Real Labor/Buy of UNG 
In that last linked post, I discussed my effort to receive a 25 cent per hour raise.  You also have to remember the kind of work being done.  I was in excellent shape back then, but I was worn out at the end of each day.  Has anyone batter boarded a new home in 95 degree heat, with the ground baked by the sun to the point of being rock like, and the sledge hammer just makes a thump on the wooden stake, driving it more up in the air than back into the ground. (in home construction, it refers to the vertical placement of stakes into the ground to outline the contours of the house, used by those who subsequently lay the foundation)  

I noticed in that last linked story from AP that the Associated Press apparently believes that it has a copyright on information, saying that any dissemination of information contained in its story must have the written permission of the AP.     The information that I derive for this blog comes from original source material, and like most bloggers make no money from writing it.  I sometimes may link an AP or Reuters story at Yahoo Finance in the event someone wants to read more about it.  I have read numerous stories about the tax cuts under the stimulus plan for example before reading the last linked story from the AP.  Contrary to AP's assertions, it does not own information or have control over the right of others to write about information. Maybe the AP needs to tell the Federal Reserve that the AP owns the information contained in the monetary policy release from yesterday which is the source of my information: FRB: Press Release--FOMC statement--April 29, 2009
The link to the Fed web page:FRB: About the Fed  
I will also go this page for data:FRB: Statistics and Historical Data
Was my discussion of the Federal Reserve statement a "rewrite" of an AP story?  Fed Is Less Gloomy: Measure Time Period of Quantitative Easing in Months not Years/BMY/CBG/SYNTHETIC FLOATERS I was looking at the Fed statement and other original source material when I wrote the post. Several posts contain references to data about historical interest rates which can be found on that last linked page at the Fed web sit under "Interest Rates".  When I write this blog on my large screen IMAC, I frequently have several windows open containing the original source material.  This is obvious from reading this blog which contains thousands of links to original source information.

None of the original source material is hard to find for anyone willing to look.  The AP stories are duplicated, usually with more relevant material, by Reuters and other news organizations like the NYT, Washington Post, and the WSJ.  I just find the breath of the AP statement at the end of its news stories to be an insult to the First Amendment and a total misunderstanding of the relevant provisions of the Copyright Act in my opinion and all other non-frivolous ones that I know about.   

When I am discussing a story from the New York Times or the Washington Post, such as the excellent series of articles under "The Reckoning" heading by the NYT, I have to discuss the article to make my point about it.  Those news organizations at least do original reporting. 

Industrial production rose in Japan in March by 1.6%. 

An investor can sign up for free email alerts from many governmental agencies about information releases.  The Commerce Department said this morning that personal income fell .03% in March.   BEA : News Release: Personal Income and Outlays, March 2009

Wednesday, April 29, 2009

Last Mention of FeedJit Widget

I thought that I would mention one last time the presence of the FEEDJIT widget that I installed a few days ago. Feedjit Widget Added to Blog yesterday/Pakistan as a Failed State with Nuclear Weapons/Meban Faber Mention in Barron's/ It is fascinating to me that with no effort whatsoever to promote the blog I am picking up readers from around the world.   I have used the FeedJit widget solely to write blogs on topics that may be of interest to readers judging by the posts that are being read.  Three blogs have been written for that reason since the widget was installed over the weekend. 
 If anyone does not want the information to show up, then click options in the FeedJit area and then click exclude my browser.  I am using the free version of this widget.  You will need to keep the cookie created for as long as you want it to ignore your visit. 

Fleet Capital Trust Prospectuses LINK /Searching SEC Edgar Site for Trust Preferred Prospectuses

Update 7/27/09: I added 100 shares of FBFPRN in July 2009: Bought 100 FBFPRN/ Sold CXW/ (see Disclaimer)

*************original post:

The prospectus links to the Fleet Capital Trust Preferred issues that I briefly mentioned in a prior post per a request received are as follows:

Fleet Capital Trust VIII, FBFPRM:

Fleet Capital Trust IX, FBFPRN:

Generally speaking for a question like maturity date, deferral rights, and other common questions, the prospectus will provide the answer and a bank Trust Preferred can be found at the SEC edgar web site by entering the name of the bank (sometimes part of the name) and then the phrase "Capital" or "Capital Trust" if that does not work. So for Fleet Trust Preferred, you would enter as the search term "Fleet Capital Trust" EDGAR Company Search If you wanted to look at one issued by KeyCorp, then enter the term KeyCorp Capital. I have all of these stored on my computer, including those that I do not own, probably about 98% of those stored prospectuses are for TPs not currently owned. For Citigroup, enter "citigroup capital". I don't think that works for BAC as I remember.

The prior discussion involved functional equivalence to BAC Trust Preferred issues.

Fed Is Less Gloomy: Measure Time Period of Quantitative Easing in Months not Years/BMY/CBG/SYNTHETIC FLOATERS

Added 5/31/09:  This is a link to a newer post discussing the impact of quantitative easing on the U.S. dollar and interest rates:Will Quantitative Easing Hurt the Dollar/More On Managing the Risk of Lost Opportunity

***********************original post:

There was a major struggle for control over the keyboard after the Fed's announcement today. For four weeks, LB has had to listen to the incessant rant "All In",  "Go All In", from RB even after LB was so considerate to bankroll RB's buying binge in early March.  New phrases, and unpleasant versions of prior ones, started to ring out  from RB like "Send that old Geezer to the Old Folks home where It can listen to Frank Sinatra all day long and develop those stinking rules."  It became so bad by late afternoon that LB had to call a physician to determine the feasibility of injecting  a cup or maybe a quart of Valium intravenously just in the right lobe leaving LB alert to further the operations here at the trading desk in a practical, responsible, logical and reasonable manner.   LB was told by the Doc that this was the first time anyone had made such a request, and the Doc was unaware of any clinical studies supporting LB's solution to its noise problem.

The Fed was less gloomy in its announcement today. The Fed announced that it would continue buying Treasuries and mortgage-backed securities in its quantitative easing, having purchased 74 billion of the 300 billion planned by September .  The Fed noted that household spending has showed signs of stabilizing and business inventories had been cut.  The Fed views inflation as a remote risk.  It anticipates economic weakness to persist "for a time".  Okay, that was pretty good.  It tells me that the quantitative easing needs to be measured in months not years.  It may even end by October, though I am not making a prediction.  It is hard for me to agree with their inflation forecast unless the time period is less than a year. 

I have been transitioning my synthetic floaters to the retirement account as previously discussed and I just put a stop to it.  The one with the Proctor & Gamble underlying bond (GJR) was sold in the taxable account at a small profit and bought in the regular IRA after the recent fund raise in that account.  Bought GJR/ Walgreens/Did Right Brain Call the Bottom? I have decided to keep the few remaining synthetic floaters in the taxable account, including PYV and GJN, until I am ready to look at the tax issue again later in the year after I man up to do it again.   The synthetic floaters have a unique provision about tax rules applicable to them that is caused by the swap agreement which creates the floater.    Any new synthetic floaters will be bought in the retirement accounts.  GJN was already transitioned with a purchase in the Roth, so it is now owned in both accounts.   BUY 50 GJN/Japan Sinks Deeper into the Mire/CBG Upgrades/Law Enforcement On Vacation for Mortgage Fraud/New Home Sales Up
One of the reasons that I decided to man up and face the tax issue again is that I screwed up the transition of GJT, the synthetic floater tied to an Allstate bond that I sold for a profit but then the security jumped on me almost a couple of bucks before it could be replaced in the Roth.  So I lost it for now.     BOUGHT VEU AND GJT/ MIKE MAYO BEARISH ON BANKS: A SURPRISE?/
So rather than screwing up another one, I just put a halt to it. These are thinly traded securities, with frequent large bid/ask spreads, and the ones without a guarantee look good only at a low price.  GJT, for example, had a $25 par value and was bought at $8.35.   When short rates rise, these will start to look better than they do now.  I interpret the Fed announcement as a signal that the quantitative easing will likely end in months and short rates will then start to rise so I want to keep the  floaters that I now have irrespective of the host account.   Floaters tied to a percentage over short rates will rise in yield when the Fed abandons its easing, and I have done several calculations in these posts to show how purchasing at a deep discount to par value increases the potential yield when the short rates return to 3% to 3.5%.   I view the floaters tied to the 3 month LIBOR rate to be better than the ones tied to the 3 month treasury, with both at the same percentage. That is why I have a high opinion of the METPRA floater which pays the greater of 4% or 1% over 3 month Libor with no cap.  

I read the updated S & P report on Bristol Myers and agreed with their assessment.  S & P downgraded BMY to hold after the recent earnings announcement and the FDA decision to extend the review of Onglyza.  BMY needs to get that drug and some others approved before the patent expires on Plavix.  I also saw that Goldman Sachs downgraded BMY from buy to neutral. LB nixed any further buying of BMY and will keep the very small position currently owned primarily for the dividend and the lack of seriously bad news yet.

C B Richard Ellis, a lottery ticket purchase, reported a net loss of 3 cents on a Non-GAAP basis. This was below the expectation of a 2 cent profit. In the current context of a recession, I view that miss as irrelevant. Revenues fell 27% to 890 million from 1.2 billion in the year ago quarter.   Yahoo! Finance
I expect nothing but negative revenue and earnings comparisons for at least two more quarters, that is not the issue.   My purchase was based on the price and a view that the sun will shine again.Duality of Long Term Risks/Stocks Under $5: Per Se Lottery Tickets/
That last purchase of CBG was made in the Roth at $2.39 and replaced a similar sized lottery ticket purchase in National Dentex that had spiked from 1 to 4.  SOLD NADX IN IRA/BOUGHT Kraft & NESTLE/ Bought Lottery Ticket in CBG at 2.39/ Drags: TALF, AXP and GE
(RB wants to say something now. The picture in that last link was at a time when it still had the power to make a few decisions and the look shows it.)  I still own 50 of NADX after selling 50.  These really are lottery tickets masquerading as stock certificates.   

Under the circumstances and relatively speaking, Brandywine Realty had an okay report.  I own the cumulative preferred, BDNPRC.  It beat by 3 cents on FFO and beat on the revenues, and maintained guidance for the year. They also appear to be getting their finances in better shape.    Yahoo! Finance 
I still have a security blanket on that one since BDN is still paying a common dividend.   

A correction to an earlier post (Tracking News on Security Positions/Novartis and Flu Vaccines/VIX Asset Allocation Models), the correct name of the company mentioned in this Yahoo article (Yahoo! Finance) relating to recommendations by a columnist at RealMoney is not Prospect Energy but Prospect Capital (PSEC).  The symbol is correct in the article but the name is given incorrectly. I own 150 shares of this BDC. PSEC: Summary for Prospect Capital Corporation - Yahoo! Finance  I believe that I am under water on that one some but the dividend will offset the unrealized stock loss unless the stock falls more. BUY 50 GJN/Japan Sinks Deeper into the Mire/CBG Upgrades/Law Enforcement On Vacation for Mortgage Fraud/New Home Sales Up

Pictures will Expose the Dominant LB/UCBH/ GDP 1st Quarter/Bloomberg Story on Results of Bank Stress Test/CBR/Pakistan Comes to Grip with Reality

RB wanted to do a photo essay to teach others how to expose the LB's.  These photos were taken in 1961, 1969 and 1992.  The ones from 1961 and 1969 expose the same person as an LB.  If you see any pictures like this in your photo album, then beware of the tyrant that wants to squash the RB, which is after all the side of the brain that makes all of the real money anyway.  LB just keeps the losses to a minimum and provides structure and order to what is ultimately nothing more than chaos.  LB likes to use the photo taken in 1969 as the profile picture of this blog to prove its dominance, to show who is really in charge, and to put RB in its proper place as nothing more than a constant nuisance and noise maker.

Bloomberg ran a story this morning that at least 6 of the 19 financial institutions subjected to the Fed's stress test will need more capital.  According to Bloomberg, the Fed is putting pressure on them to convert the government's equity preferred into common stock.   Bloomberg.comThis would be a negative development for existing shareholders for any bank required to do it.  I am not surprised by Morgan Stanley identifying Regions Financial and KeyCorp as two banks in need of a capital infusion.  Reports from yesterday claim that BAC failed the test which is also not surprising. BAC & the Stress Test/BMY/AVY/BAC Preferred Apparently, the Fed is allowing the banks to present an appeal.

The preliminary GDP report was worse than expected at 6.1%     For those looking for the bright side, inventories also plummeted by a record 103.7 billion.  BEA: News Release: Gross Domestic Product  It is for the best that those inventories are being worked down rapidly.

I started to read the UCBH earnings call transcript and stopped at page 3.  Seeking Alpha 
Thomas Wu, the President and CEO, said the bank observed indications of credit weakness in the condominium market in San Diego and Los Angeles in the 4th quarter.  Wow!  If they had sent me an email, I could have told them that much from information gleamed from sitting at my computer in Tennessee.  LB nixed this one for now.  Maybe it will read the rest of the transcript to see if there is any light at all.   

Today, I am going to try and make an assessment as to whether the fall in Bristol Myers is an an overreaction to the Dendreon news about Provenge, or whether some other news is causing the fall today. Dendreon's Provenge: A Behind-the-Scenes Look | Biotech | Financial Articles & Investing News | 
There was some news from 4/23 about the FDA extending the deadline for the review of BMY's new diabetes drug, Onglyza, to July 30th from April 30th.  

Ciber, a lottery ticket purchase, continues to disappoint.Yahoo! Finance
LB has nixed any adds on that one, but has not yet seen anything yet to sell the shares currently owned at a small loss.  Those are two separate decisions for LB. 

I was glad to see Pakistan has started to stand up some to the Taliban.  CBS News
It seems apparent to me that the Taliban want to extend their control beyond the tribal territories to seizing control of the entire country over time. 

Newsweek Interview with Ali Soufan: CIA Interrogator Identified by Name/SNY/UCBH

Newsweek interviewed Ali Soufan, the FBI agent who got Abu Zubaydah to talk without using torture, and it is worth a read. The most important new piece of information is that Newsweek identifies the name of the CIA contractor who took over after the FBI was pulled out by their Director over concerns about the use of "enhanced" interrogation techniques.  He is identified by Newsweek as James Mitchell, a former Air Force psychologist who had worked in the U.S. military's Survival, Evasion, Resistance and Escape training for special forces, which was designed to teach those soldiers how to cope with torture techniques used by the Chinese Communists during the Korean War.   Soufan said the CIA contractor admitted to him that he had never actually interrogated anybody.   Ultimately, Cheney is relying on the credibility of Mr. Mitchell for his assertions justifying the use of torture.  For me, judging credibility is primarily an exercise that I would attempt to accomplish face to face, with the probing nature of cross examination, assessing demeanor and body language, and comparing prior inconsistent statements.  My favorite interrogation technique was to put on my happy face, make the witness comfortable and talkative, like sitting around the kitchen table shooting the bull after a good dinner.  Just let them talk their way into inconsistencies with a nudge here and there.  Soufan appears to me to be the real deal for an interrogator of Al Queda prisoners. 

At first glance, based just on what I read about Mitchell so far, I am not inclined to put as much faith in his reliability as Dick Cheney.  But Cheney reaches his judgment using a different process than me, more like forming an opinion first and then accepting as true whatever information conforms to the opinion or pre-existing worldview.  Thus, he would keep repeating an assertion about some matter that allegedly justified the Iraq invasion even after it has been proven to be untrue.  More articles about Mitchell are linked below:

The total value in ING preferred positions is not material for me.  I have used the discussion of INZ primarily as an illustration of trading techniques and the amount of information needed to make intelligent decisions about this type of security.  I do not think that I have discussed at all the transactions involving IND which would be just duplicative of the points made in connection with INZ.  At the present, I am content just to hold what I own. 

 Sanofi-Aventis (SNY), a recently added position, released a good earnings report this morning. Yahoo! Finance  Earnings were up 9.8% on a constant currency basis and 16.8% on a reported basis.  This is a French drug company.  BOUGHT SNY/ SOLD 1/2 JZV: Risk Management/CEO Compensation/ING Finalizes Deal With Dutch Government/American General Finance/   It is interesting to me at least that two of the three drug companies that I own now are foreign, Novartis and Sanofi

This is hardly worth a note but I will mention it anyway.  I am going to wait and read the UCBH earnings call transcript before deciding to add another 50 even though the amount of money is irrelevant.  This is more of an indication on how LB treats money decisions, as distinguished from any meaning being attached to a $60 investment.   Some of the lottery ticket purchases have worked out extremely well, such as GRTPRF and CBG so far, and the UCBH lottery ticket of 50 shares is a tad under water.  Lottery ticket means something equivalent to buying a powerball lottery ticket except the purchase is a stock certificate. 

VIX Asset Allocation Models

ADDED: For those who land on this post from a google search, this topic is discussed in more detail in other posts which are linked in this Gateway Post:USING THE VIX MODEL AS A TIMING INDICATOR FOR LONGER TERM STOCK ALLOCATIONS

These recent posts may also be of some interest:
A practical application of the model to the S & P 500 in 2007 is discussed in this post:VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern
****************************Original Post:

I noticed from my FeedJit widget some interest from Germany about my discussions on using the movement in VIX as a factor in asset allocation decisions. VIX is the CBOE volatility index for the S & P 500. My discussions on this topic are scattered throughout this blog, and I may have time later to bring them into a one post summary.  The question is whether I want to do it or not. This would be a far more extensive exercise than  the recent posts on ING preferred stocks and the TC containing a Hertz bond.  

For now, I would just summarize a few key points.  The model was first developed as an outgrowth of my concern, which increased in intensity during 2007, about the impact of an improvident extension and expansion of credit in the U.S.  The first real time test of the model came in August 2007 when the first warning signal was flashed by the VIX moving decisively out of the stable bull market range between 10 and 20.  The model worked, though the model does not tell an investor how much to change the asset allocation which is up to each individual investor based on their unique characteristics, risk tolerance and needs . I divided the bull market pattern into two phases. Phase 1 is movement within a range of 15 to 20 in the VIX, and Phase 2 is a range bound 10 to 15.  The model gave two signals in 2007 to reduce stock exposure, and I followed it to a degree, probably saving myself a six figure sum.   

After developing the VIX model, I started working on one for the DJIA and Russell 2000.  The one for the DJIA showed a somewhat less volatile and more stable index than the S & P 500, but otherwise confirmed my observations about the VIX.  The symbol for the CBOE DJIA volatility index is VXD ( or ^VXD at Yahoo Finance).   I then backtested both models with all of the data that I had from the CBOE and found that it would have worked during the 1990s.  It does not work perfectly, but the past has shown so far that it provides a general direction for cyclical bull and bear markets.     The models on the Russell 2000 and Nasdaq Indexes had to be adjusted since the first observations of those volatility indexes revealed overall less stability than the VIX.  Based on my initial observations of the CBOE volatility indexes for both the Nasdaq and Russell 2000 indexes, I concluded that the model needs to be adjusted based on each index due to inherent differences in the stability of the indexes.  The new indexes for gold and oil will ultimately require even more extensive adjustments which I can not make due to the lack of sufficient historical data.GOLD OIL and EURO CBOE VOLATILITY INDEXES. The symbol for Nasdaq is VXN (^VXN at Yahoo Finance) and  RVX  for the Russell 2000 (^RVX).

Some of the links discussing why these models may work and a general discussion of how they would be applied are as follows:

There is volatility data on the S & P 100 that goes back to 1986 which would have caused under the model an asset allocation change in 1987 before the crash in October.  Trading and Asset Allocation in Stable and Unstable VIX Pattern 
A forced reduction in the stock allocation, with the amount up to each investor under the model, would have occurred at anytime during the period between  July 7, 1987 to August 10, 1987 caused by a break in the stable bull pattern in April.  

A certain amount of skepticism is needed with any trading model, and LB views them as a guide rather than a hard and fast rule.  They are also in need of constant revision based on observed current information which may require an adjustment or even an abandonment of the model altogether.   The models have so far been adjusted to permit certain kinds of trading activity during an unstable VIX pattern that the initial model prohibited.  RB calls all of the models "stinking models" and ignored all of them after its coup d'etat on 3/3/09.  LB is back in control now so the model is being followed after a three week buying binge by RB.  The model now permits buying common stocks only with cash flow from interest and dividends, reinvestment of dividends to buy more shares, and using the proceeds of one sale to buy another.  Further, as an exception to those exceptions, cash flow can not be used now until the S & P 500 closes a month above 815 which it will probably do on 4/30.  

I may come back to this topic at some point later.  While the VIX has been moving down, which is a good sign, it is still in an unstable pattern as characterized by the model. 

I suspect that Novartis (NVS), a recent buy, rose yesterday due to its likely involvement in developing a vaccine for the new swine flu strain.  BusinessWeek Personally, I would not buy NVS for that reason.  Novartis is one of the 3 drug manufacturers that make flu vaccines.  More confirmed swine flu cases were reported yesterday, and the experts have given up on what they refer to as containment.  As of this morning, there were no confirmed deaths in the U.S.  Yahoo! Finance

Yesterday, I talked about the junk rated bond from Hertz.  This article from a RealMoney contributor currently available on Yahoo Finance without a subscription discusses a few other bonds including FCY which I own.FCY: Odd lot limit order filled  FCY: Forest City Enterprises Senior Bond (FCY)/FCZIt is treated like the Hertz bond by LB.  I also own Prospect Energy mentioned by this columnist.  I was aware of the CBS bond maturing in 2056 but will not buy it due to the maturity date. I was not aware of the GAP bond maturing in 2039 so I will look into it.   Yahoo! Finance  Some people call bonds traded on the stock market as exchange traded bonds.  Buying them is easier than making a purchase for a similar security in the bond market, and an investor can buy just a few share if so desired.  I could never go into the bond market and buy $500 worth of a bond.  My orders for 5 $1000 bonds are mostly ignored. 

One research technique that I use is to have several portfolios at Yahoo Finance.  I subscribe to their real time quote service but that is not really necessary.  Each portfolio can have up to 200 securities in it, so I have two to cover my existing holdings.  This gives me real time information on all positions, and the Marketracker service which gives me flashing green and red lights as bid, ask, and transaction prices change .  More importantly for me, it aggregates the news for all of them in one place, which can be done for free by anyone.   So, as an example, I noticed today that a few of my holdings will report earnings so I am now alerted to do some reading later today.   I then have several watch portfolios, divided into types of securities (Bonds, ETFs, Closed End Funds, and Stocks).  Within the stock category, there is a further division into small, mid cap and large cap.  Then there are a few unique type of categories.  For those who know me, I take investing seriously, and I will generally start working on it at least two hours before the market opens.

Tuesday, April 28, 2009

ING Hybrids: Links in one Post

I started owning ING's common stock before purchasing my first shares in in one of its hybrids. 

Consequently, I was already familiar with the firm. I do not recall the specific date or even the month, but I sold my common shares of ING Group at over $30 a share. 

I do recall that the sell was generated solely out of my concern about all financial companies rather than something specific about ING. 

I was aware of the hybrids at that time, but had little interest in them due to their prices which were close to par value. 

 I vaguely remember trading the hybrid INZ at a profit before October 2008. 

My interest in them started to gather steam after the meltdown in virtually all financial preferred stocks after the Lehman bankruptcy and the annihilation of the Fannie and Freddie equity preferred stock owners. I believe that the first mention in these posts, which started in October 2008, was a buy of INZ at around $10 sometime in October and those shares were quickly sold at a profit and the trading strategy became apparent. Sell on the pops and buy on the dips, splitting the orders into pieces, and monitor closely.

After the meltdown started in earnest with the Lehman Brothers failure, the pricing of every financial preferred within my sphere of knowledge, and I know about quite a few, became extremely volatile with a strong downside bias. The ING hybrids were certainly no exception to that phenomenon. With this kind of volatility, there is opportunity but at an enhanced risk. 

 In February and early March of this year, these issues underwent a cataclysmic fall, and the common stock price fell to $3.02, down from around $40 just last April. An enhanced risk is still with us, though the price swings have become less subject to wild emotional swings over the past few weeks.

All of the ING hybrids that I monitor are taxed as equity preferred issues, to the best of my knowledge, which has relevance to a U.S. taxpayer.

During the 4th quarter of 2008, I owned both INZ and IND in a taxable account and my 2008 1099 listed those dividends as qualified dividends. 

I own ISF in a retirement account. I have not received a 1099 covering any of the others. On ING's balance sheet however, these securities are listed as "subordinated loans": ( page: F-4920-F) I compared the list on that page of the annual report with the list provided by ING of these perpetual hybrid securities:  Debt securities ING Groep N.V. | ING  (Note: ING KEEPS Changing this Link. If that link does not work, the information can be found by going to ING's main web site, click investor relations, and then look under ING debt securities)

This is how ING explains these strange creatures in its SEC filing: "Subordinated loans consist of perpetual subordinated bonds issued by ING Groep N.V. These bonds have been issued to raise hybrid capital for ING Verzekeringen N.V. and Tier-1 capital for ING Bank N.V. Under IFRS-EU these bonds are classified as liabilities. They are considered capital for regulatory purposes."

So these securities are like equity preferred for "regulatory purposes" and like "subordinated bonds" on the balance sheet, see page F-3. This is the reason that these securities are called hybrids.  

As with the REIT cumulative preferred stocks, the ING hybrids have no maturity date which is a significant negative. Unlike the U.S. bank equity preferred stocks, they have cumulative features so that skipped payments accrue, and the accrual is with interest under certain circumstances. ING has the option to pay deferred interest in common shares. The investor just has to read this kind of material in the prospectus for themselves. I am not aware of any deferral ever taking place.

Links to the prospectuses can also be found at (free site, registration required).

Some of the prospectus links:







The prospectuses are available at the ING web site in PDF format which is the only place I could find IND. Debt securities ING Groep N.V. | ING 

Some of my posts on ING and/or one or more of its preferred stocks include the following:

Possibly the post that contains the most expression of concern was this one from 3/10/09:

ISF was bought on a day that seemed to me at the time to be the height of the fear at $4.6. BUY OF ISF

It then proceeded to collapse more in early March falling to an intra-day low of $2.6 on March 9th which provoked the post expressing concern but still noting that it appeared to me to be more of a reflection on the human psyche. The dividend yield at the $2.6 price was around 61.5%. It closed today at $9.8 down 30 cents which equates to a yield of over 16%. I see from one of the linked posts above that the last buy of INZ was at $6.52, also of recent vintage, and the shares in the regular IRA have a cost maybe a buck higher than that. INZ closed at $10.9 today. The volatility, risk and opportunity is obvious.

A list of the ING equity preferred issues traded in the U.S. can be found at its web site: Hybrid Securities - ING

The danger in investing in any of these securities is apparent. First, ING has eliminated the common share dividend, the security blanket for a preferred shareholder. Second, ING has been hit hard by the credit crisis. In some of the above linked posts I have discussed the Dutch government's first effort to stabilize this large financial institution. The latest round is discussed in these posts:

I have successfully reduced my risk by trading the positions at a profit, so that I now hold the lowest cost shares using FIFO accounting which is my custom for securities viewed as having an enhanced risk to them. An individual investor has to become knowledgeable about these risks in my opinion in order to make an intelligent decision whether or not to buy, how much capital to expose given the balance of risk/reward, and the method to be used to manage the risk. That judgment can not be made for you.

When I have functionally equivalent securities from the same issuer with no maturity, the only issue of any importance to me at the trading desk, when I have already made a decision to buy, is which one gives me the highest yield at the time of purchase. If there is not much difference, then an issue like bid/ask spread may come into play. Oddly, there seems to be a significant difference in the yield on many occasions. Sometimes I might not spot it but I try to make that evaluation most of the time, sometimes forgetting to do it as a result of old age infirmities.

I will add links to this post as they become available. I will color the new ones composed after this post green and any older ones as blue.

Total= $2,117.96