Wednesday, November 11, 2009

Bought 100 Yahoo at Open/Bought 50 ETF PIQ at $19.81/Added 50 ABWPRA at $19.42/ING EARNINGS REPORT

The LB thanked Headknocker for showing confidence in the mind numbing analytical and rational framework that the LB brings to trading here at HQ. Unfortunately, The Old Geezer has created another mess that has to be cleaned up. While OG was sent back to the Old Folks home before selling every stock owned by the Headknocker, the OG has unfortunately increased the capital in money market funds to clearly excessive levels with no plan for deploying those funds currently earning nothing. Plans and focus are not exactly in the OG's repertoire. LB's trading rules for an Unstable Vix Pattern in a long term secular bear market does require a 30% allocation to cash, but the OG has significantly increased in the past two weeks that allocation with its anxiety driven selling, the LB purred. And, to prove that it will keep a commitment, and is generous to a fault with the RB, LB opened the trading day by allowing the RB to make the first transaction in this new era of cooperation at HQ, and will even allow the RB to explain its rationale for the purchase.

1. Bought 100 shares of Yahoo at $15.95 (see Disclaimer): The RB thought that the bald guy, Oscar Schafer, made a good case for buying Yahoo. And, the RB is not saying that just because Headknocker lacks an abundance of hair. Actually, RB just like blondes. And isn't Carol Bartz more pleasing to look at than Jerry Yang? RB wants to watch more FOX news particularly those comedy shows with the blondes. On the downside, the RB does not like the color purple but understands that the cool guys who founded Yahoo wanted to show non-conformity by choosing that ugly color. The RB wants to wake everyone up to watch Jenna Lee on the Fox Business channel at 4 a.m. The RB is the real star here at HQ, who after all saved the day with a coup d'etat at the trading desk in March 2009-the RB of course, as the LB was shivering under the sheets calling for its mama. Did Right Brain Call the Bottom? RB's Coup D'Etat on 3/3 Bought Nestle Late Today/

That's enough gibberish, the LB ordered the RB to shut up before it embarrasses Headknocker even more than it already has. The LB will impose logic and order, chaos only appears to exist.

Carol at least appears to be on the right path, which is a big change for Yahoo. Carol told an audience in Singapore that she intended to triple Yahoo's operating margin to 15 to 20% in the next three years, and to expand Yahoo's business in emerging markets. Reuters

LB notes that the RB is responsible for this buy, and even the way that it was done. RB placed a limit order to buy at $16.05 before the market opened which became a market order when the opening price was $15.95.

2. Provident Energy Trust (owned): This Canadian Energy trust reported third quarter results that were adversely impacted by weak natural gas prices. PVX did confirm a monthly distribution of 6 Canadian cents for November. Consolidated funds from operations fell to 21 cents in the third quarter from 55 cents in the year ago quarter, due to weak commodity prices, declines in oil and gas production and a lower demand for natural gas liquids. PVX issued downside guidance for 2009 adjusted EBITDA for its midstream operations and downside guidance for oil and gas production. PVX is a weak hold. My last buy was at $5.39 last October: INZ AND PVX I did refer to it as hapless not long ago, and maybe that is somewhat unfair. PVX/Ideologues Rarely See What is in Front of Them/
I have not bought any Canadian energy trusts this year. As explained in several posts, I am waiting to see how these companies are configured after the tax change in 2011. Canadian Energy Trusts/ TOP TWELVE CAUSES OF THE NOT SO GREAT DEPRESSION

3. Roubini On the Creation of the Next Monster Asset Bubble: In Robert Samuelson's Newsweek column there is a good summary of Nouriel Roubini's arguments that the FED and other central banks are fueling a new massive asset bubble with cheap money. Samuelson makes a few good arguments in response but does not dismiss the warning as invalid.

4. Macy's (own senior bond only): Macy's, Inc. reported a loss in the third quarter of 8 cents, or 3 cents excluding items, on a 3.9% revenue decline to 5.277 billion. The retailer expects a decline in same store sales for the 4th quarter in the range of 1 to 2 percent. The company increased its guidance for the year to $1 to $1,05, excluding items, from its prior guidance of 70 to 80 cents. The guidance for the 4th quarter earnings per share was given at $1 to $1.05, and this was below the current consensus forecast of $1.17. Some will be disappointed by the guidance, and the common shares may decline in trading as a consequence. I am fine witht he report as a bondholder.

5. Bought 50 of the ETF PIQ at $19.81 (see disclaimer): The Old Geezer apparently bought 50 shares of this ETF without telling anyone. So the LB, trying to deploy some of the cash raised by the OG, bought the other 50 to round the lot up to 100 shares. PIQ is a relatively high cost ETF from Powershares called the Dynamic MagniQuant Portfolio. Dynamic MagniQuant Portfolio - PIQ This "smart" index attempts to identify 200 stocks out of 2000 based on quantitative analysis. The current expense cap is .6%. This is a link to the current holdings: PIQ - Dynamic MagniQuant Portfolio Holdings

6. Added 50 ABWPRA-AVERAGED DOWN- AT $19.42 (see Disclaimer) This will be my last purchase of Associated's Trust Preferred issue. This brings my total to 150 shares. If and when the TP recovers to around $21.50, I will sell the higher cost shares using FIFO accounting and keep the shares bought today, thereby effectively lowering my tax cost basis. At a total cost of $19.5, the yield is around 9.77%. The common stock is rallying this morning, ASBC, up almost 5% in early trading whereas the TP continues to experience some selling pressure. ABWPRA is described at length in two earlier posts: FDIC Preference Rules for Seized Banks/EWBC/Bought 50 of the TP ABWPRA Added 50 of ABWPRA This is a link to a recent article from the Business Journal of Milwaukee discussing the informal agreement with the Comptroller of the Currency and summarizing some statements made by a spokeswoman for ASBC. The Business Journal of Milwaukee:

7. ING's 3rd Quarter Report (own hybrids only-IND, INZ and IGK): ING reported "underlying" net of 778 million Euros in the third quarter, a significant improvement over the 229 reported for the 2nd Quarter. Investors appear to like the results with the common rising over 5% in trading this morning, and the hybrids which I own are also rising in price. I read in the quarterly report that ING expects the European Commission to approve its restructuring plan before the extraordinary meeting of its shareholders on 11/25. As part of that deal with the EC, ING will issue common stock to pay back part of the aid received from the Dutch government. If that happens, I view it as a positive for the hybrid owners. The recent rise in the common stock price is also helpful, in that it makes it more likely that the share issuance will be successful. More on ING ING to Partly Pay Back Dutch State with Share Issuance/


  1. I wondered what your thoughts are on the ING hybrids post restructuring. When ING sells it's insurance business and American banking business it should require less capital, right? Or at least debt type capital that will cost them the same amount of money on a smaller earnings base. Especially the dollar hybrids (IND, for example) should become superfluous, right?

    Do you think it's likely ING will buy back some of that debt or do you think it's more likely that some of the debt will be transfered to other entities? IND to ING Direct for example instead of ING Groep NV.

    Note: I own a large position in IND.

  2. Paradoxianlp: Most likely, I will not own any ING hybrids after ING completes its restructuring. The settlement with the EC gives me some comfort over the near term that payments will not be deferred and the hybrid distributions are treated as qualified dividends for a U.S. citizen subject to a maximum tax rate of 15% currently. This makes them worthwhile to hold at least for now.

    However, when ING shrinks, there will be less of it to support payments, mostly it will be a regional bank in the Benelux region. Banks have a habit of blowing themselves up over time, and I am not in a position to monitor the financial viability of ING's banking operations in the Netherlands and Belgium.

    I think ING will have to shrink the amount of its hybrids. I believe that the coupon amount of all outstanding issues is over 11 billion, a figure that I just pulled from page F-182 of ING's 2008 annual report:
    1039765/000115697309000166/u06110e20vf.htm That is way too much for what will be left of ING.

    As ING sells businesses, pays back the Dutch government and shrinks its need for capital, I would expect some debt to be retired by it. There is other debt outstanding other than the hybrids as shown at page F-183 which lists another 7.5 billion. I do know that ING recently called in mid October 800 million of 2014 subordinated bond for payment and ran into trouble a few weeks ago for it. So apparently it sees the need to start retiring some debt.

    I believe that this debt is held at the holding company level. I would be surprised if any of it was off loaded to a subsidiary when it is sold, but only time will tell. I would not make that assumption now.

    If I was making the decisions at ING, I would keep the low cost perpetual hybrids and make an offer below par value for the higher cost ones like IGK and some of the other ones that require payments in excess of 8%, before I would call a perpetual obligation of 7.05%. I own 200 IND. But there is no way to know now what ING will do. Calling some debt at par value is an option. Another would be to make a tender at less than par like that Belgium bank, KBC, just did.

  3. Thanks for your well thought through response.

    I'm really interested in what's going to happen with ING and it's debt (and hybrids). With the stock offering coming soon and the reorganization a lot will change.

    Too bad that they are probably not allowed to do a tender offer on their hybrids to buy it back below par, they could make a decent amount of money on it.

  4. I am not aware of any restriction that the EC would have on buying back the hybrids at a discount, and the EC did allow KBC to do that recently. I would add that some of what ING plans to do with the proceeds from the sell of its insurance unit can be gleamed from this filing at the SEC:
    1039765/000095012309053155/u07803fwp.htm You may want to look at page 5. ING makes a cryptic statement, subject to some interpretation, that "Core Tier 1 securities and Group core debt to be eliminated using proceeds from Insurance divestments". Then it makes the statement just above that that the "remaining Core Tier 1 securities and Group core debt remain within Group/Bank" This is not very clear. Part of the Core TIER 1 securities to be eliminated would clearly be the securities currently owned by the Dutch government.

    Are you from the Netherlands? I have another reader from the Netherlands, DutchPerplex, who is interested in this topic.

  5. Yes, I'm from the Netherlands. I used to own ING stock but I sold it in August and bought ING debt (bonds and hybrids). I'm rather interested in the dismantling of this banking giant. In the end I think the dismantling of ING isn't the right thing to do. It looks to me like the EC wants to reduce the size of the banks that had state aid. But they do allow the merger of two state owned banks: ABN Amro and Fortis. The dismantling of the banks sounds more like a political statement ("We're going to take on those evil bankers") instead of a well thought through way of reducing risk.

    I reckon that it's going to be especially bad for the common stock owners as their earnings base will be much reduced. I think the ones that get off fine are the debt holders. If ING gets a particularly good deal on the insurance sale they might buy back some stock but I doubt that will be their priority.

  6. I also owned ING common stock first, sold it sometime during the summer of 2008, and started to trade the hybrids in October 2008 when INZ fell to around 10.

    There is a debate in the U.S. about shrinking the size of some our financial institutions. Given the lobbying power of financial institutions in the U.S. Congress, I doubt that anything significant will happen on that score, nor will anything significant happen to make it more difficult for Wall Street to blow up the world's financial system in the future.

    The EC is forcing the shrinkage of its large financial institutions. Possibly it views the size and complexity of an institution like ING to be unmanageable and creating too much systemic risk. It was the U.S. operations that bought 30 or so billion in Alt-a U.S. mortgages (liar loans) that resulted in the costly Dutch government guarantee. The INGDIRECT USA will bring in a lot of cash too when it is sold.

    I believe the first priority of ING will be to pay back the Dutch government. If the common stock offering is successful, it will retire 1/2 of that obligation soon. The remaining amount is 5 billion Euros plus a 50% premium when it buys it back, so that is a lot. After that is done, more attention may be focused on reducing leverage, including retiring some debt including some currently unknown amount for the hybrids.

    What is critical now is the strength and duration of a worldwide recovery, since both the common and hybrid owners will want the best possible prices for the units that have to be sold to satisfy the dictates of the EC.

    I am curious whether you receive for IND payment in U.S. dollars and whether any payments in dollars is then converted into Euros for you. This would lower the amount received in distributions recently as the U.S. dollar has sunk to new lows against the EURO. Also, if IND is held in U.S. dollars, and sold now for example, it would mean less in Euros if converted back now as compared to a few month ago. I own a number of Canadian companies that pay good dividends that are worth more to me as the Canadian dollar buys more U.S. dollars.

  7. Hmm, are you saying that the new deal with the Dutch State that reduces the prepayment penalty isn't applicable to the remaining preferred shares? Hmm, that's too bad. But there are some more exits, like converting the preferred to common stock.

    By the way, what are your thoughts on the deal that the Dutch State made? I'm not sure why the government did it but I think it's particularly bad. The dividend isn't mandatory as long as the common shareholders don't get any dividend and it's not cumulative either. In essence it's possible for ING to hold the debt forever without ever paying any dividend to the state, as long as they don't pay any dividend on the common.

    About the dollar issue: I have an account with Interactive Brokers with margin capabilities. So I bought the IND with borrowed dollars (but I have the euro's in cash). I don't lose anything on the purchase of IND but I do lose money on the profits. For example I buy 100 IND shares for $15 and I borrow $1500 for the purchase. I do have the corresponding euro amount in cash in my account. My net dollar account value is $0 so if the dollar goes up or down I'm not feeling it. Now IND pays it's dividend and my short dollar amount goes up to -$1456. Making my account value $44. If the dollar declines I will lose money on my profits. But I won't lose on the principal I used to buy it. I do pay about 1,6% interest on the dollars but that's a small price to pay so I can sleep at night not having to worry about the dollar devaluation.

    I hope the above made sense :).

  8. There is no maturity for the securities issued to the Dutch state. ING has the option after November 2011 to convert the remaining shares into common stock at a 50% premium (150% of the 10 Euro issue price). I doubt that ING will do that. Interest is not payable on those shares as long as there is no dividend paid to the common shareholder. While ING may be able to avoid paying a common dividend in 2010, their common shareholders will expect a resumption of payments if conditions continue to improve. It would be a good deal for ING if they could get away with never paying a common dividend again for an extended period, but I doubt that will happen as a practical matter. ING is paying accrued interest on those shares it plans to redeem later this year. The original agreement with the Dutch state can be found at
    u06110exv2w10.htm The recent modification allows for prepayment this year (until the end of Jan 2010) without the 50% premium.

    I understand what you are doing. I have never borrowed money to buy securities, do not have a margin account, and I have to manage currency risk in a different way. I just bought a ETF that double shorts the EURO for example as a prelude to hedging currency risk for purchases to be made on your European exchanges, only in the distant future when the dollar buys more than .8 EUROs.

  9. I haven't read the SEC link yet but the original agreement: states that ING can convert the preferred to common stock on a 1 for 1 basis. The state can opt for a €10 (the original issue price) cash payment instead. I believe the 50% penalty is only the case if ING wants to repay it early.

    That's why I think it's a fairly bad deal (for the state). There is no guaranteed payment and in the worst case scenario, except bankruptcy, the state is lending money to a bank for no return.

  10. You are correct. My memory is not what it use to be. If ING buys back those securities, other than those subject to the modified agreement, it has to pay a 50% premium. The modified agreement allows it to avoid that premium for the 5 billion in shares it plans to buyback this year. Three years after the original agreement ING may elect to convert 1 for 1 into common shares. If the Dutch state does not want shares, it can opt to receive 10 EUROs in cash. It would certainly make sense for ING to wait until late in 2011 and then give notice of the 1 to 1 conversion, then the Dutch state will ask for cash and ING can get out of it with a 10 EURO payment on the remaining 5 billion in Euros securities. ING could still start a common dividend provided it is willing to pay interest to the Dutch state the greater of a minimum of .85 EUROs per share annually or 125% over the common dividend paid in 2010 or thereafter.

  11. Hi TennIndependent and paradoxianlp,

    Indeed I have been reading your discussion with much interest. I have also been trying to find out the prospects of the hybrids after divestment of the Insurance branch. I discovered another presentation ING gave, in London on Oct 27th, which has a separate section 'Capital Management' on page 70 ff. Problem is I don't know much about accounting, so I have a hard time trying to make sense of it. Especially the table on page 75 indicates the amount of hybrids in the 'New Bank' will rise from 7.1 bn to 11.6 bn, whereas p. 72 seems to indicate the amont of hybrids at the Insurance subsidiaries remains at 12 bn. Would you know how to interpret this? See ING doc.

    As to the reasoning of the EC, Ms Kroes gave a speech yesterday in Amsterdam trying to explain why they did what they did. Quote:

    It is important to see that we are not here to destroy banks or impose our will. We are trying to build up solid banks by working with them to face certain realities. We need banks that recognise that we all live in the same world and we all have responsibilities. I have great respect with the work of Jan Hommen in trying to set ING "back to basics" for instance. And investors must take their responsibility too. See EC doc.

    I don't own dollar preferreds but rather euro perpetual bonds, so no currency risk for me either.

  12. DutchPerplex: I looked at that document and can not make any sense of it. I have never taken a course in accounting. All that I can gather is that ING has several options as it divests operations, and I am not going to try and figure out which one they intend to pursue until ING tells us precisely what will be done with the proceeds from divestment. For my purposes now, I would just assume that ING will reduce leverage as those divestments occur. For both the hybrid and common stock holders, it is a good thing that the EC at least gave ING to 2013 to complete these divestments, so ING can try to sell them for the best price.

    I do not intend to do anything with my hybrids until I have further concrete information or new significant adverse developments. An adverse development would be another major economic downturn, a second recession close on the heels of the last one, or a significant downturn in ING's fortunes which would call into question timely payments of the hybrid coupons. The next important event for the hybrid owner is the sell of the common stock to pay back 5 billion Euros in aid, which I view as a positive for the hybrid owners over the near term.

    There was no reason for the EC to gut ING, and that is just my opinion.

    I am curious how you provided a direct link in your comment. When I drag and drop a link into the comment section, it can not be clicked to send the reader to the external document, unlike when I drag and drop a link into the main post area.

  13. Thanks for your response. Let's first see how the share issuance goes.

    Re inserting links, I simply used hard-coded HTML (a with angle brackets). The help text when commenting told me I could use HTML codes like i, b, and a.

  14. Just to add: I bought the dollar hybrids because their yield is slightly higher and their discount to par is higher by a lot. I won't own these hybrids forever, I like the high yield but once they're trading at par (or slightly bellow) I will sell them again. That's why I bought the dollar hybrids: more room to grow.

  15. I may at some point buy a European hybrid that is available only in Europe provided the yield at my cost was greater than a comparable U.S. alternative and King Dollar reasserts itself. A good exchange rate for that kind of transaction for me would be a Euro for a dollar or better. It would not be an alternative for me now just given the weakness of my nation's currency.

    A discount to par value will juice the coupon yield, and I bought one from ING, ISF, at around $4.6 which translated into a 34% yield even though the coupon is 6.375%. My remaining INZ was bought at less than $8. All of the ING hybrids available in the U.S. are functionally equivalent, meaning the most important consideration for me is the current yield at my purchase cost and not the coupon. If the European hybrids had maturity dates, I would calculate the yield to maturity too, factoring into the calculation the additional yield resulting from a narrowing of the discount to par value, based on a time certain when that would occur.

    The U.S. hybrids from financial institutions have maturity dates. A number of them from institutions like J P Morgan, U S Bank and Wells Fargo suffered similar falls to the ING hybrids earlier this year, not quite as bad. Many of the U.S. hybrids from the large U.S. banks have recovered to near par. It is possible that over time, with improving fundamentals at ING and a more resilient world economy, with confidence restored in growth, that the ING's hybrids like ISF, IND and INZ will narrow that discount further to par value. There are two factors that will militate against that narrowing to some degree even with improving fundamentals, the first is a lack of a maturity date and the more important negative factor in my view is your European Commission and its recent actions including the burden sharing policy which has no parallel in the U.S. for our hybrids. The later issue may impact pricing some from now on.