Friday, October 16, 2009

Added 50 AEF at $18.38/SOLD GEP/ING News/IBM GE BAC & Google Earnings/

1. ING (own hybrids only): ING completed its auction process for its Asian private banking operations and agreed to sell that asset to Singapore's Oversea- Chinese banking for 1.45 billion. This price equaled 5.8% of the assets under management which exceeded the 2.3% of assets that Julius Baer agreed to pay for the ING's Swiss asset management business. I currently intend to sell 100 of the 200 shares of IND before the end of the year, provided the price holds up. I decided to substitute an Aegon hybrid for IND, and so yesterday I added to my holdings of AEF.

2. Added 50 AEF at $18.38 (see disclaimer): This purchase was an average up, with my last buy at $16.82 in the Roth on 9/18. Sold 50 ISF at $14.65 and Bought 50 AEF at $16.82 AEF is a hybrid, part equity and part bond. The equity like characteristic is its perpetual nature and its inclusion on the equity side of the ledge for determining capital for regulatory purposes. It is a subordinated junior bond however. The coupon is 7.25%. Aegon has the right to call it on or after 12/15/2012. Aegon has no obligation to ever call this security for redemption, however. Payments are classified as dividends for a U.S. taxpayer rather than interest. Quantum classifies this hybrid, along with the other Aegon hybrids as paying qualified dividends. Preferreds eligible for the 15% Tax Rate Table - If a payment is deferred, interest is earned on the dividend payment at the coupon rate. Although Aegon is not currently paying a common stock dividend, a matter of concern to its hybrid owners, I have advanced several arguments for triggers of the Mandatory Payment Events and I would just refer anyone interested in that topic to those posts:

At a total cost of $18.38, the yield on AEF would be about 9.79%. I did check the other Aegon hybrids before placing this order, and AEF was affording me with the highest yield at the time I decided to buy an Aegon hybrid yesterday. AEV was selling at a price to yield 9.8%, but I have a mental block on buying that one after having sold AEV shares at $7.05 which were bought at $5.7, needless to say a mistake . Give the AIG Masters of Disaster my New Medal of Chutzpah/Sold AEV in Risk Reduction Move

I am returning to the Aegon hybrids since it is becoming extremely difficult to buy bonds now that compensate me sufficiently to take on the risk assumed in buying them.

The WSJ had an article yesterday noting that a record 223 billion had poured into taxable bond funds so far this year. That is going to end badly for them. If an investor buys a ten year treasury yielding 3.3%, at least the investor has the option to hold until maturity to receive his original principal back. An investor buying a bond fund yielding 3.3% may not recover the full amount of their principal back, for the mutual fund has no maturity and does not provide any promise to pay the investor's original principal back. And, what happens to the value of those low yielding bonds contained in that mutual fund when interest rates start to rise again?

Most of my recent buys have been floaters, whose yields will rise when interest rates start to move back up. I am making a few exceptions for fixed coupon bonds, such as the Aegon hybrids, and a few others like the senior bond from Ameriprise recently purchased which yields close to 8%. I want at least 8% on a fixed coupon bond before I am willing to assume the interest rate risk. But that well is just about dry.

3. IBM & GOOGLE EARNINGS: I was impressed with the earnings reports from both IBM and GOOG. IBM had diluted earnings of $2.4, free cash flow of 3.4 billion up 1.3 billion year-to year, reduced its debt by 4 billion and increased its cash balance to 11.5 billion. The revenue number was, however, disappointing to me, up just 1% sequentially and down 5% adjusted for currency from the year ago quarter. IBM reported that it signed service contracts during the quarter totaling 11.8 billion, a 7% decrease, which may concern some investors, but IBM also noted that it signed 1 billion in contracts during the first two days of October, apparently disclosing that tidbit to take some sting out of the lower service contract number. Another issue was that revenues declined in Europe, down 6% adjusted for currency.

IBM raised its guidance for the year some to at least $9.85 per share from $9.7. The consensus estimate was for earnings of $2.38 during the third quarter on revenues of 23.86 billion. IBM beat the earnings consensus by 2 cents but was light on the revenues at 23.6 billion.

Google reported earnings of $5.89, excluding special items, much better than the forecast of $5.42. Google said in its press release "there is a lot of uncertainty about the pace of economic recovery, we believe the worst of the recession is behind us and now feel confident about investing heavily in our future.”

4. Cramer on JNJ & Yum Brands: Last night on his show, Cramer was claiming that the recent earnings from both JNJ and YUM were worse than they looked once he drilled down into the reports. He put both companies in his sell block. I had not looked at YUM but I had already expressed dissatisfaction with the JNJ report. JNJ EARNINGS JNJ reported better than expected numbers as a result of a lower tax rate and cutting R & D expense. JNJ is notably suffering a decline in revenue in its pharmaceutical business due to generic competition for its drugs Risperdal and Topamax, and that is hardly news to anyone familiar with the company. I was not surprised by the decline in pharmaceutical sales, but by the 4.4% decline in consumer sales based primarily on a double digit decline in baby care products. As I said in an earlier post, the results were unimpressive, and I do not own the stock, though would consider adding a 100 shares at lower levels.

5. Floaters and CMT (Constant Maturity Treasury): Some of the floaters that I have discussed pay a spread over what is referred to as CMT for a 3 month treasury bill, a 20 treasury bond or a 30 year. This is a link to the Federal Reserve web page that contains links to this kind of data: FRB: Federal Reserve Statistical Release H.15 - Historical Data

6. GE (own stock and bond): I would view GE's 3rd quarter report as a disappointment. While EPS of $.22 beat the consensus estimate by 2 cents, it represented a 51% decline from a year ago. Also, earnings benefited by a 484 million tax credit that increased earnings from continuing operations from 1.975 billion to 2.459 billion. Revenue declined 20% to 37.8 billion, with all five operating units showing declines. The revenue figure missed the consensus estimate by about 1.7 billion. GE Capital did earn 263 million, down 87% from a year ago. The CEO, Jeff Immelt, call the results "solid". I would use many words with a much different meaning. I am, however, smarting from Immelt calling the reduced dividend of 10 cents per quarter competitive after GE made a massive cut in it, representing the first dividend reduction in 71 years and the share price had fallen 80%. Corporations Can Not Be Counted on for Dividends in Retirement/ Nocera on AIG Financial Products Unit/More on GE/Citi Preferred A lot of dividends might look competitive after a 80% drop in price. On the positive side, GE's total backlog of industrial equipment orders totaled 174 billion, and apparently that is a record number.

7. Bank of America (own common, preferred and bond): In some ways, I thought the BAC earnings report was even more pathetic than the one from Citigroup, since BAC has Merrill Lynch and investment banking had very favorable conditions in the 3rd quarter. BAC reported a diluted loss per share of 26 cents, five cents greater than the consensus forecast of a 21 cent loss. Some of the loss, however, was connected to a 402 million payment to the government for canceling the asset guarantee deal which was never used by BAC, and one of those funky accounting entries, involving a 2.6 billion dollar writedown "from improvement in company's credit spreads". I suspect that later writedown is connected to FASB 159. The bank added 2.1 billion to its reserves for credit losses.

8. Capacity Utilization: This figure rose in September, due primarily to a rise in auto production, to 70.5% from an upwardly revised 69.9% in August. Industrial Production and Capacity Utilization

9. VIX: The VIX did close yesterday at 21.72 since 8/8/08. While the movement in the VIX toward stability is positive, with stability defined as continuous movement below 20, the current pattern is still consistent with the Unstable VIX Pattern:

Vix Asset Allocation Model Explained Simply With as Few Words as Possible

10 SOLD 110 GEP AT $23.91 Today (SEE DISCLAIMER): GEP is a $25 step up bond from GE Capital. I bought some shares at less than $21 on 5/18 and averaged up on 7/18 at $21.75: Bought More GEP Exchange Traded Bonds:. This one goes ex interest in a few days. I have received one quarterly dividend payment already and decided that I would whether have the $300 profit on the shares than more dividends since the security has closed the gap on par value. I plan to plow those proceeds into another bond that has a higher yield. I would add that the first step up on GEP occurs on 1/28/2010 to 5.5% from 4.5%.

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