Wednesday, May 13, 2009

More Comments about Siegel/ING Preferred Stocks & Volatility

I would anticipate that the recent bout of negative news will cause many investors to conclude that the market may have rallied too far, too soon.  The Commerce Department reported that retail sales fell a seasonally adjusted .4% in April.   The decline from April of last year is now at 10.1%.   Economic

This is a handy bookmark to a government site on economic indicators:Economic

Foreclosures continue to move higher, though the rise in April was less than 1% above March. 

Intel got fined by 1.45 billion by the European regulators for competing aggressively with AMD.    MarketWatch

I would add a comment to my earlier post about Professor Siegel's thesis.  In 1981, it was harder to buy treasuries than it is today.  I can now establish an account with the treasury and electronically submit non-competitive offers for treasury securities for any auction.  This just means that I would receive the average price of the competitive bids submitted by the large institutional investors, and there is not much difference between the high and low bid particularly when you are investing 10 grand.  Also, I have always been frugal and would not be willing then or now to pay a broker to do anything.  Commissions were really high back then for full service brokers.  But, I also came to the table in 1981 with some mental baggage that restrained any purchases of 20 year bonds even at  9 or 10% which would have been an excellent choice.  I was young, and viewed bonds as some kind of old man's disease.  After I started to listen to Frank Sinatra sing, I had an epiphany of sorts, realizing that a bond actually does have some favorable attributes to it.  For the ones I now own, I do receive a fixed rate of return for my investment based on the bond's coupon and my total cost, plus I have the potential for earning more at maturity by buying at a discount to par value.  That later point has not been lost on this old codger and all of my bond investments have been made at a discount to par value.  This juices my current yield over and above the coupon rate and gives me a second way to earn money.  The problem is that I can not secure an acceptable yield in U.S. Treasuries so I have had to take on more credit risk by buying corporate bonds.  This shift in thinking happened about two years ago, at the tender age of 55, when it dawned on me that I was no longer a young stud.  This started a quest to become creative in bond investing, though I am still a neophyte at it compared to my long tenure as an investor in stocks.   This lead me to explore alternative ways to own bonds and to take advantage of bond like investments such as preferred stocks. 

The ING preferred stocks are proving again today just how volatile they are, easily spooked about any negative news about the recovery in the world's economy.  But I am not going to discuss them today to rehash old news.    ING Preferred Stocks: Links in one Post 
The question that I was asking myself this morning is what do I do with the ING Preferred issue ISF that I bought at $4.6 on 2/24/2009.  Masters of the Universe=Masters of Disaster/AIG & Financial Black Holes/M, CBR,TGT/BUY OF ISF
My yield based on that cost is about 34% until ING decides to call this security with no maturity date.  If the dividend is deferred, it still accumulates.  The only way to lose it short of a call by ING at a $25 par value, which would be fine with me, is for ING to go bankrupt.  That is the argument for just keeping it. On the other hand, as of yesterday, it was trading at $13.77.  Now, I am not going to do the calculation but that looks like a 300% gain.  I do not get many of those in a couple of months.  I decided to keep it just because I like the idea of receiving 34% annually in perpetuity until the security is called or ING goes bankrupt.  The return could have actually been larger if I had waited to buy for a few more days, as this security fell to an intra-day of low $2.6  on 3/9.  These securities have come too far too fast, and today they are showing again volatility can work both ways. 

Added 9:33 A.M 5/13/09:  ING did report a loss this morning due primarily to asset impairment charges.      ING 1Q underlying net loss narrows to EUR -305 million - Yahoo! Finance          
 See also,  Yahoo! Finance 
Each investor has to make their own judgment whether this kind of news will impact the payment of the preferred dividend.  As I have said many times, the risk of deferral is always enhanced when the common share dividend is eliminated, as ING has already done.  But, nothing in the release today would cause me to sell my existing positions, that were acquired after a six month process of harvesting gains in these securities and lowering my cost basis using FIFO accounting to the point that I ended up with my lowest cost shares with the highest yields based on my current cost. 

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