1. ING Partly Paying Back Dutch State: ING has a reached an accommodation with the European Commission. It will separate its insurance and banking operations. ING to separate banking and insurance operations - ING It will then sell or divest its insurance operation within four years. It will also sell its U.S. banking operation, ING Direct, before the end of 2013. ING made it clear in its press release that the divestment of ING Direct in the U.S. was a precondition to securing EC approval of the restructuring plan. ING will launch a common share rights offering for 7.5 billion Euros to pay back one-half of the funds owed to the Dutch state (original amount plus accrued interest and the premium) ING also agreed to settle the EC investigation of its guarantee deal with the Dutch state by paying an additional 1.3 billion Euros to the government for that guarantee, partly financed with the proceeds from the rights issue. The guarantee deal was linked primarily to Alt-A mortgages from the U.S. (called Liar Loans) acquired by ING Direct and ING Americas. I would agree with the comment by an analyst quoted in Bloomberg that this settlement is not favorable to ING common shareholders, though it is a very good deal for the Dutch state and taxpayers. I do not own the common stock, but I do own three hybrids, IND, IGK and INZ. I would view this deal with the EC as a positive for the hybrid owners over the short and intermediate terms by removing the deferral issue. At a minimum, there are two mandatory payment events raised by these transactions, the payment of interest on the Junior Securities owned by the Dutch state and the purchase of those securities. Over the longer term for the hybrid owners, there will be less of ING backing the payments to the hybrid owners.
ING also reported preliminary results for the third quarter, estimating a profit of 750 million Euros, excluding items and divestments.
Some of my prior discussions on mandatory payment events involving the ING hybrids include the following:
2. The Fraudsters Are Back-Of Course They Never Left: A report by the Treasury Inspector General for Tax Administration has found widespread fraud in claims for the first time home buyer tax credit. So far, the auditors have found 19,350 taxpayers claiming a credit who have yet to buy a house. Another 70000 taxpayers claimed almost 500 million even though there was evidence of prior home ownership, such as claiming on prior tax returns a mortgage interest deduction. About 600 people claiming the tax deduction were less than eighteen years old with the youngest being a four year old girl. /www.ustreas.gov/tigta/auditreports .pdf There was almost no serious effort to charge those committing fraud in their mortgage applications during the housing bubble. The IRS, unlike the somnolent FBI who made at best token efforts to investigate the widespread fraud leading up to the near collapse of the financial system, has pledged to go after the criminals. The FBI depended on the mortgage bankers association to forward leads about possible criminal activity. FBI Receives a Generous Grade of F- for Investigating Mortgage Fraud Adding Failures of Law Enforcement to my Top 12 Causes for the Near Depresssion. Recently, the prison population in the U.S. exceeded 1 in 100 adults in the population for the first time. ADD of Corrections Corp of America (CXW) with cash flow Maybe we need to move closer to 1 in 75.
Sixty minutes ran a story about the massive fraud prevalent in the medicare system. CBS News The estimated take by the fraudsters is sixty billion a year. Very little has been done or will be done. Politicians only make occasional perfunctory claims about addressing fraud and waste. The problem is ultimately due to a failure of law enforcement and the politicians unwillingness to devote the resources needed to investigate and prosecute the fraudsters. Maybe we need to take it to 1 in 50.
3. Bonds versus Stocks: A column in the NYT pointed out that the S & P 500 has loss .2% annualized over the ten year period ending in September. Long term corporate bond had an annualized gain of 7.8% over that same period. Bonds have outperformed stocks over the past twenty years too. Prior to the rally in stocks off the March lows, the twenty year treasury bond had outperformed stocks since around 1968. I previously noted a study that showed the 20 year treasury bond outperformed the S & P 500 from 1968 through February 2009: Duality of Long Term Risks Also, as Barton Biggs recently pointed out in a column in Newsweek, the purchasing power of stocks has been cut almost in half during the past ten years when there has been no nominal gain in the averages, so the average investor is actually much worse off than indicated by just the non-inflation adjusted numbers. And to highlight more misery, individuals were investing during the period when the Nasdaq was approaching 5000 and during the most recent period when the DJIA moved from 10,000 to 14,000, so that makes it even worse.
Since my formative years as an investor occurred in the 1970s, part of another extended period where stocks failed as an asset class, I sort of expect fifteen good years, give or take a few, to be followed by about 15 years of going nowhere, at least for the buy and hold investor. LONG TERM SECULAR BULL PATTERN 1950 TO 1966/ Long Term Secular Bear Pattern from The Great Depression 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? more on 1982 or 1974/ Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets This framework has- so far -saved me a lot of money and has provided invaluable assistance in asset allocation decisions.
I do believe that we will, at some point between now and a few years from now, enter into a long term secular bear market for bonds. The last prolonged bear period for bonds started after World War II, according to Roger Gibson, and lasted until around 1982. Asset Allocation: Balancing ... - Google Books During that period, inflation increased at a 4.7% compounded rate. Even if I am wrong about a return of inflation, it is hard to conceive how bonds can continue to fall in yield, and rise in price, much from the current levels. This would suggest that at best the bond buyer now will receive the coupon payments with insignificant or no price appreciation. I would anticipate that it would be easy for stocks to surpass an annualized return over the next 10 years exceeding a 10 year treasury yielding 3.3%. To Professor Siegel: Time for a Re-Think
When the next bull cycle in stocks starts to come to an end, a great deal of attention needs to be focused on what asset classes will likely succeed during the long term bear cycle in stocks. The first consideration has to be whether or not to increase the weighting in bonds, regardless of age or tolerance for risk. But this is not a given. It would have been a mistake in the late 1960s to go into bonds as a reaction to the nifty-fifty froth in the stock market back then. The decision on whether to re-allocate to bonds has to made based on an evaluation of whether inflation has become a systemic problem. A judgment could have been made no later than the late 1960s that the inflation risk was too high for bonds. This chart from the Minneapolis Federal Reserve Bank has the inflation numbers since 1913. Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis The kind of inflation numbers seen starting tin 1966 through 1982 are not friendly to the fixed coupon bond owner. I view the period from the mid-1960s to 1982 as marking the simultaneous failure of both major asset classes.
Other asset classes would need to be individually evaluated at that time too. Instability & Volatility in Asset Correlations Emerging Market Currencies and Bonds as Non-Correlated Asset Classes Total Bond Market Index (BND) and IEF as Non-Correlated Assets to Stocks
Treasury Inflation Protected Securities as a Non-Correlated Asset Examples of Dynamic Asset Allocation over the Past Two Years More on International Bonds as a Non-correlated Asset Government bonds from developed foreign countries may end up being a correlated asset with U.S. bonds during the next long term bear market for bonds, for much the same reasons. But this is not to say that all types of bonds would fail. It is possible that inflation protected bonds and floating rate bonds will hold up during a long period of high inflation, though that is not certain.
4. GDP Report on Thursday: I am going to key off this report. If it is lame, say less than 2%, I will sell at least one stock ETF bought earlier in the year, and will possibly buy one of the double short ETFs. A number between 2 to 3.5% would translate into business as usual here at HQ. A number higher than 3.5% will produce some stock buys. Ultimately, the sustainability of an economic recovery, sufficient to sustain another long term secular bull market, will depend on the growth of consumer demand in emerging markets. It may be too early for this to happen with any kind of longevity.
5. Verizon (own common and bonds): Excluding items, Verizon earned 60 cents per share in the third quarter, a penny above expectations, on revenue of 27.265 billion slightly better than expectations. VZ added 1.2 million wireless net customers during the quarter bringing the total to 89 million. VZ added a less than expected 191,000 television customers. And it added 198,000 net new FIOS internet customers.