Wednesday, November 18, 2009

EC Approves ING's Restructuring/ Decision Making Process on my Vanguard Industrial ETF/Sysco XOM /ING Reduces Dividends on its CEFs

1. ING and the European Commission: A reader from the Netherlands pointed out in a comment to me this morning that the European Commission has approved ING's restructuring plan. EUROPA - Press Releases - State aid: Commission approves ING restructuring plan and illiquid asset back-up facility This will the clear the way for ING to raise capital by selling common stock. Further, the EC has expressly made the statement that a deferral of the hybrid coupons will not be required by it:

"In the ING case, given that the bank recently launched a €7.5 billion capital increase aimed at repaying more than 50% of the capital injection of the Dutch State (including the accrued interests and exit premium fee), it will not be obliged to defer coupon payments on Tier 1 and Tier 2 instruments. Nevertheless, for the next three years or as long as ING will not have repaid the entire capital injection of the Dutch State (whichever is shorter), the calling of Tier 1 and Tier 2 instruments will have to be authorised by the Commission on a case by case basis. The Commission took note that the bank called a lower Tier 2 bond on 14 October 2009 without prior consultation. This was taken into consideration in the overall appreciation of the restructuring package."

Anyone interested in this topic may want to bookmark this page and check it periodically. EUROPA - Rapid - Recent Press Releases

2. Emerging Markets: I just read some interesting factoids about emerging markets. The float adjusted market capitalization of emerging markets is around 12% of the total world capitalization. But, 87% of the people live in those countries who also possess 68% of foreign reserves. Consumption in China is about 1/3rd of its GDP compared to 70% in the U.S.

3. Exxon (owned): The Barclay's analyst upgraded Exxon to overweight and raised his price target to $92 from $90. I am not sure that I understand why an equal weight target is $90 and overweight is at $92.

Berkshire recently disclosed that it had acquired about 1.2 million shares of Exxon.

4. Sysco (SYY) (owned) : SYY was bought primarily for its dividend yield in early March. When the price fell to below $20, I snapped up some shares based primarily on the relative safety of the dividend and the yield at my cost of $19.46, which juiced the yield at that cost to about 5% . Buys of CPB LQD SYY XKK/ As we know now, the relative safety of the dividend is an important consideration. Consumer staple stocks like Sysco maintained their dividend during the last recession and many of those companies have increased their payouts. This has to be contrasted with most banks and companies like General Electric. Sysco announced yesterday that it was raising its dividend to 25 cents per quarter, a 4% increase from the previous 24 cents.

I just checked the data going back 10 years, and Sysco has raised its dividend in every year from 1999 to present. I do not have data prior to 1999, but may look for it later today. This is an important consideration for me, because my cost basis is fixed at $19.46. So a firm that raises the dividend every year will increase my yield based on my fixed cost, which gives the common stockholder an advantage over the more senior preferred stock and bonds that have fixed coupons. The dividends paid during 1999 totaled 23 cents, and was more than doubled by 2004 to 58 cents. The 2009 rate was 96 cents, up almost 400% during a 10 year period. While that rate may not continue, it is a much faster pace than the large oil companies like Exxon and Chevron that are currently on a ten year cycle for a double. For an investor who is interested in both current yield and dividend growth, Sysco has historically been a good choice. It became a better choice when the price fell to below $20 in early March, and has since risen to $27.35 as of yesterday's closing price.

5. Tidbits: I am starting to see on the SUVs around here bumper stickers that say "Palin 2012". Sarah has many enthusiastic supporters in the SUV capital and would probably carry my city with at least 80% of the vote in a race against the Beanpole.

One reason, among many, that I avoid buying CEFs that trade at a premium to par value is illustrated by the trading activity in IGD yesterday, an offering from ING. ING Global Equity Dividend and Premium Opportunity Fund - Overview Prior to yesterday's open, IGD was selling for about a 8% premium to its net asset value. This CEF had maintained its dividend during the bear market, until yesterday, and it was generous. Still, there is no reason to buy a fund at a premium to its net asset value. Another CEF can often be found, similar in its objective, that sells at a discount with a similar or sometimes better performance profile, or a mutual fund selling at NAV. IGD lost its premium yesterday in heavy selling for this security, falling almost 8%. The volume was 1.417 million compared to the average of 374 thousand. I did note last night that this CEF reduced its monthly distribution from $.156 to $.125. In my opinion, the premium to NAV provided the fuel for the extent of the decline which may have started with this minor dividend cut. I noticed this dividend cut looking at the dividend page at the WSJ which I examine each weekday night. I own IGD, which was bought at a significant discount, and I have kept it due to its significant income generation and its monthly payment schedule, two important considerations for the way that I manage my assets since I use cash flow to expand my holdings. I thought about selling it last week but decided to keep my shares until the next "Trigger Event" in my Vix Asset Allocation Model, which is most likely a long way into the future (generally it would occur a minimum of three years into bull cycle with the VIX moving under 20 when the cycle is disrupted by a spike in the VIX to near 30 lasting a few days).

My other ING CEF, IAE, was also selling at a premium before yesterday's open, and it fell 4% losing all of its premium in yesterday's action. ING Asia Pacific High Dividend Equity Income Fund - Overview It declared its quarterly dividend, five cents less than its previous rate of 49.8 cents (see press release: ING) But as that press release makes clear, a good chunk of the IAE dividend paid so far this year is a return of capital, which is not taxed in the year paid, but does require me to reduce my tax cost basis by the amount of the return of capital. This is irrelevant for my holding of IAE in the retirement account, but it will increase by taxable gain when and if I sell IAE in the taxable account. Since I will be holding that security for more than a year, a sell of those shares would in effect convert the return of capital into a long term capital gain taxed currently taxed at 15%.

Being a lawyer in Russia can be hazardous to one's health and longevity: Dies in Jail - NYT

As it turned out, Moody's and Fitch provided a buying opportunity for ING's hybrids when they started to discuss their opinions on the likelihood that the EC would require a deferral of the hybrid coupons. Moody's said it was highly probable. Priority of ING Hybrids vs. Shares Issued to Dutch Government That is what caused me in August to start looking for ways to stop the EC and also for reasons to continue holding the hybrids based on mandatory payment events which occurred when ING paid interest to the Dutch state in May 2009 on the government's Junior Securities.

6 Vanguard ETF for Industrial Stocks (VIS) (Own): I like using the Vanguard ETFs to gain exposure to particular sectors. Their expense ratios are low, VIS is at .25%, and the holdings in the sector are comprehensive including companies both large and small. I bought 100 shares of this ETF at $42.46 on July 23rd. Bought 100 VIS at $42.46 It closed yesterday at $52.13: VIS: Do I take the $1000 profit or let it ride?

When I was thinking about this problem, I started to think about the buy and hold mantra drilled into the heads of individual investors by financial advisors. Since my early days as an investor were during the long term secular bear market that started in the mid-1960s and lasted until 1982, this buy and hold philosophy never did not make much sense to me as a hard and fast rule. It would not make much sense to a Japanese investor who bought the Nikeii index in 1989. For practical people, looking back at history, holding for 15 years with nothing to show for it does not sound like a game plan, but merely a lazy approach to investing. And going nowhere for 15 years or so is what happens during the long term bear market for a buy and hold investor.

Simply put, the bottom line is that buy and hold will work out okay in a long term bull market, but it is a losing strategy in a long term bear market unless going nowhere in 15 years is okay. Starting in the 1960s, an investor needed to sell the rips and buy the dips, possibly initiating some long term positions along the way in a few companies that looked good over the long term. There will always be one period in the long term secular bear market that will be the worst phase when those longer term positions can be initiated at extremely favorable prices. Such was the case recently in early March 2009, and in summer and fall of 1974 during the prior long term secular bear market.

During the long term bear market, a rally such as the one experienced from 1974 to 1976 would be sold, and the difficult decision is when to time the selling. And that is the main argument against trying to time the market, and it would make some sense in a long term secular bull market. Sure, it would pay to lighten up when prices reached levels significantly above traditional valuation criteria even in a long term secular bull trend, which are subject to nasty shorter term corrections. So, some adjustments would be in order but the overall thrust would be to maintain a higher than normal stock allocation during such a period due to the difficulties in making timing decisions. Unfortunately, if you are not willing to accept going nowhere for 15 years, timing decisions have to be incorporated into the decision making process. In retrospect, some buys and sells may be premature, but I am overall pleased with my substantial selling in 2007, primarily generated by my own timing model which I have dubbed the VIX Allocation Model, and partly due to my experience, natural conservatism, and a knee jerk reaction to selling when I start to form rational worries. Buy High & Sell Low /Retrospective on the Good & Bad Having raised 30% cash prior to 2008, I needed to time the re-entry and I did a good job on timing, starting to buy with gusto in early March as detailed in this blog. My mistake was being too timid when the DJIA was at 6600. But, I can live with that since I am now about 5% ahead of where I was in October 2007, and the period between 2002 to 2008 was a good one.

Once I embark on substantial changes in asset allocation, based primarily on my views about the world, I have to accept that not all timing decisions will be perfect or anything remotely resembling perfect. I could have for example gone 100% in U.S. Treasuries in October 2007 and 100% in stocks in March 2009. That is not what I am trying to do. Besides, it would increase the downside if I prove to be wrong. Instead, I am simply trying to advance my net worth by a reasonable amount, by making timing decisions on allocations during what has been without a doubt a long term secular bear market for a major asset class-stocks. While the allocation shifts are significant, they are not entirely one way or the other, but a complex series of decisions with many moving parts.

The reason for buying two industrial ETFs had to do with my macro research. I frequently refer for example to to the ISM manufacturing surveys, and discuss the relevance of various components such as new orders. That kind of research led me to a belief that manufacturing companies would be the first out of the gate in this recovery. Also, many of them are geared to selling products outside the U.S. particularly into emerging markets. It was not difficult to see that those markets were also recovering. So, my timing in adding both VIX and XLI could have been better, but I have done well with both of them.

One reason that I will keep VIS for a few more months is that I have already booked a gain on XLI, the Industrial ETF that contains only the industrial stocks in the S & P 500, a much narrower in scope offering than VIS. Bought 100 WMT at $49.55/Sold 100 XLI at $26.65/ I had bought that one at $22.16 in May: Bought XLI So it helps me to know that I have already booked, prematurely, a $400+ gain in one of the two Industrial ETFs, both bought for the same reason. The ISM release for April probably had the most influence on me: ISM Manufacturing INDEX The new order component for manufacturers increased from 41.2 to 47.2. I had previously discussed the importance of new orders as a timing indicator for a recovery: ISM Index of New Orders/

How long will the manufacturing resurgence last? That is the unknown and my main timing problem now. Based on what I know now, with the the stimulus infrastructure spending kicking in next year and the work down of existing inventories, I am speculating that I may have a few months before I have to make a decision. For me, a sector ETF is a trade, and VIS is no exception.

One problem that I have with VIS is that it includes companies that are not within my definition of industrial companies. Vanguard is simply using a third party index, the MSCI US IMI/Industrials. I just received my annual report for the Vanguard sector ETFs (FY Ends in August) and it showed VIS having 374 companies in it. This includes what I would consider transportation companies, including the airlines and rails, which I do not view as industrials. It helped recently to have the rails which includes Burlington Northern. I could do without the truckers and airlines however.

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