Wednesday, December 2, 2009

Aegon and ING News/ MS on the U.K./ Bought IDG/Gold and Chinese Demand/Quantitative Easing and 1932 Stock Rally

1. Aegon: In an important event for the owners of Aegon's hybrids, AEGON announced yesterday that it had paid back one-third of the capital received last year from the Dutch government via Aegon's largest shareholder. As explained in prior posts, the funds were loaned by the Dutch government to Aegon's largest shareholder who then used those funds to buy securities junior to the hybrids from Aegon.

To unwind that transaction, Aegon buys back those Junior Securities and then the majority shareholder pays back the Dutch government. In addition to buying back those Junior Securities, Aegon made a payment on them. Both the purchase of, and the payment on a Junior Security is a Mandatory Payment Event within the meaning of the prospectuses for the hybrids. Since the Junior Securities are classified, by me at least, as Annual Payment, this would trigger 4 mandatory payments on the hybrids, starting with the payment to be received soon on December 15th. I currently own AEH, AEB, and AEF.

2. ING: I do not own any ING common stock. But I was curious about how I would sell the rights subscription in the event I did not want to buy additional shares. This document filed with the SEC explains that the right can be surrendered and then sold by the ADS rights agent on Euronext Amsterdam and/or Brussels exchange. fwp This document also explains how much needs to be tendered for the shares by a U.S. owner to buy 6 additional shares for each 7 owned. The prospectus for the offering can be found at e424b5. I own only ING hybrids, which are similar to trust preferred securities issued by banks in the U.S. The European hybrids are bonds that are classified as capital only for regulatory purposes. Unlike American TPs, however, the European hybrids do not have maturity dates and would legally allow an indefinite deferral of distributions provided the stopper clause was not activated by some event involving a Junior Security.

3. Morgan Stanley on U.K. Debt & Angela Merkel Is Worried: I read yesterday an interesting article that the U.K. was in danger of a sovereign debt crisis in 2010, according to a report issued by Morgan Stanley. Telegraph Another surprise development for 2010 according to the MS report would be the strength of the dollar.

Another report in the U.K. papers yesterday was the Angela Merkel's government in Germany was preparing an aid package for its lending institutions after the Bundesbank opined that German banks faced another 90 billion Euros in charge offs and a recent survey indicated tightening credit conditions. Telegraph

4. Japan's Central Bank: In an emergency meeting, and apparently in response to political pressure, the Bank of Japan voted to provide 115 billion dollars ( or 10 trillion yen) in short term loans to banks to bolster liquidity. NYT The title of this action was "Enhancement of Easy Money Conditions" .pdf

5. Existing Home Sales: The National Association of Realtors reported yesterday that executed sales contracts for existing homes rose 3.7% in October, the ninth consecutive month of increases, with the reading now 32% over the year ago number. Nine Consecutive Gains for Pending Home Sales

6. Philadelphia Fed President Calls for Higher Rates: I previously discussed a speech by Charles Plosser, the Philly Fed President, who was concerned that the Fed was repeating the same mistakes now with its easy money policies that an earlier Fed committed back in the 1970s. Item # 9 Sold LT Sunopta at $4.06/Bought 50 LT SNV at $3.73/Wolseley & Landec Earnings/Repeat of the 1970s Inflation? In a speech yesterday, Plosser became to the first major Federal Reserve official to call for an interest rate rise:

"Ultimately, inflation is a monetary phenomenon and there is no question that current monetary policy is extraordinarily accommodative. The Federal Open Market Committee has maintained the federal funds rate near zero for just about a year now and the Fed has more than doubled its balance sheet in the process. Without appropriate steps to withdraw or restrict the massive amount of liquidity that we have made available to the economy, the inflation rate is likely to rise to levels that most would consider unacceptable. The great challenge facing the Fed is getting those "appropriate steps" right. ..

An alternative view shared by many others is that the just-described conventional wisdom misses the mark and without a more deliberate policy of reducing liquidity and raising interest rates sooner rather than later, we could very well see inflation become a serious concern. In this view, inflationary expectations play an important role in the dynamics of inflation. It is the Fed's credibility to keep inflation low and stable that is key to anchoring those expectations. So, the Fed must act in a way that assures the markets and the public that it will take the necessary steps to keep inflation low and stable. If it does not do this, expectations can become unanchored and inflation will rise regardless of the amount of unemployment in the economy.
This view is consistent with both theoretical and empirical evidence that finds that economic slack or low resource utilization is not a very reliable predictor of inflation. Moreover, several empirical studies have shown that economic slack is difficult to measure with any accuracy." Speech: Monetary Policy and the Wisdom of Wayne Gretzky (December 1, 2009) - Philadelphia Fed

He may very well be right but that is not going to change the path that the FED is now on.

I did not mean to imply in yesterday's post that the Federal Reserve is currently conducting a Jihad against the responsible persons in our society who saved money and spent within their means (just a slight Fib here). No, what I meant to say then was the responsible members are just collateral damage.
7. Citigroup on the Banks: The Citigroup analyst, Keith Horowitz, has Zions (ZION) as a sell, and I am staying away from the common stock. Reuters It is impossible for me to have any confidence whatsoever in the management of a bank that helps to funds a massive bubble in real estate in Arizona and Nevada. I do have small positions in Zions equity preferred issues (at parity with the government's preferred) and its TP issue. Horowitz has a low opinion about KeyCorp and Regions, and I share that low opinion. I recently added a small position in a Regions and a KEY TP. I own lottery tickets in both KEY and RF common shares. LOTTERY TICKET PURCHASES: LINKS IN ONE POST
I have placed both Key and RF in my category 1 for regional bank stocks which means that I have little confidence in these banks, NO CONFIDENCE IN MANAGEMENT, and I will not invest more than $300 in the common shares. I recognize that over a long period of time the bank at least has the potential to recover. Regional Bank Stocks It may take five or more years, however, to recover from the flagrant errors made by their managements, many of whom still have their jobs.
8. Bought 30 IDG at $18.33 in Regular IRA Yesterday (see Disclaimer): When ING was having their tussle with the EC, the possibility of a deferral of the ING hybrid dividends was a real possibility. In fact, Moody's said it was highly probable that the EC would demand a deferral. I did sell a 50 share position of ISF during that fear period to lock in a profit in my regular IRA, and that one had a huge percentage gain over a short period of time. The buy was at $4.6 in February 2009 (BUY OF ISF) and I sold those shares at $14.65. I do not regard that decision as a mistake under the prevailing circumstances at that time. With the dividend, my overall profit in that transaction was close to $500. With the recent settlement with the EC, and the statement made by the EC that no deferral will be required now, I decided to increase my position in ING hybrids by using the profits on the ISF transaction to buy shares in IDG, a functionally equivalent security. I went with IDG because it has different payment periods than my other ING hybrids, with the next payment due in January. The other hybrids that I own pay in December. The coupon on IDG is 7.375% on a $25 par value. The yield at a total cost of 18.33 is about 10.06%.
For those unfamiliar with the European hybrids, they are bonds. However, we call them hybrids because they qualify as equity for regulatory purposes in determining capital. Unlike the TPs issued by U.S. banks, the European hybrids pay qualified dividends, and IDG is listed at the Quantum site as one of the ING hybrids that pay qualified dividends. Preferreds eligible for the 15% Tax Rate Table - Based on my own 1099s received to date, I can only verify that IND and INZ do, since those were the only ING hybrids owned by me prior to this year. My 1099 for 2008 did classify the entire payments made on those 2 securities as qualified dividends subject to a maximum tax rate of 15%. (the bulk of ING hybrids are consequently owned in a taxable account) I would expect the ones bought in 2009 will show up in my 2009 1099 as paying qualified dividends when that form is received next year.
I also own INZ in the regular IRA which was bought opportunistically at $7.82, also in February: Buy of 50 INZ at 7.82 At that price, the yield is around 22.5%.
This is a link to the prospectus. 424B5 Dividends are cumulative. There is a stopper provision that is typical and I have discussed it many times in this blog. Unlike U.S. hybrids, there is no maturity date, a major negative, and no limitation on the period for a deferral, usually five years for a U.S. bank TP.
So, for the ING hybrids, I now own 200 IND, 100 IGK, 50 INZ and 30 IDG.
9. David Rosenberg/Gold/Chinese Demand: I could not help but notice at YF a story that David Rosenberg was predicting that gold was headed to $2600. Rosenberg The story was originally published at the online site Business Insider Rosenberg's missives can be found at Scribd, and this is a link to his discussion about gold at yesterday's Breakfast with Dave: Breakfast With Dave:
David is a frequent subject of my barbs about his stock market predictions since March, along with his soulmate Alan Abelson. Alan's main contribution to the philosophy of investing is the maxim: "the glass is either empty or full of untreated raw sewage". I did not know what to make of David's forecast. On the one hand, I own gold and silver and would profit significantly by the rise predicted by him. Then, if he proves to be more prescient about gold than stocks, what would that mean for other asset classes, other than a few foreign currencies?
He does bring up some facts that are interesting. The China Gold Association recently stated that China's gold demand was on pace to increase 14% in 2009 to 450 metric tonnes. Then he notes a quote from a Chinese official, quoted in a Bloomberg story, who recommended that the Chinese government increase its gold reserves significantly. Wow! Having said that I am not about to buy gold at the current prices. (I also own a sizable position in the Permanent Portfolio that has a significant ownership of gold and silver bullion: see Comments on Barron's Roundtable and Permanent Portfolio Family of Funds, Inc. Semi-Annual Report Form N-CSR-July 31, 2009).
After reading all of that yesterday, I cancelled an order to sell 100 RJZ, Bought MSPRA RJZ & ADX/ COMMODITIES AS AN ASSET CLASS, and to buy 50 shares of GLL with a below market limit order, per my plan to hedge my gold holdings, in order to further assess these developments. I am not talking about Rosenberg's opinion when I refer to developments, but to the Bloomberg story.
Another reason to cause some pause in adding GLL was this article written by Niall Ferguson in this week's Newsweek. I would concur with his observation made at the bottom of page 3. After reading that article, I asked myself whether gold is going up because foreigners have lost confidence in the U.S. government's ability to control spending.

10. Quantitative Easing and the 1932 Experience: In early March, I ignored the advice of David Rosenberg and Alan Abelson (Abelson and Rosenberg Again and Again/Shiller on Improving Psychology), who were predicting a further decline after the S & P 500 fell to 666. As an aside, hopefully hitting that number is merely a coincidence, and not a technical signal from the Lord, and that has worried the Old Geezer. Number of the Beast - Wikipedia This happened on March 6th: ^GSPC: Historical Prices for S&P 500 INDEX An email from a reader today reminded me why I had more confidence in that buying spree. In 1932, the Fed embarked on a quantitative easing program and the market took off. /Stock Rallies and Quantitative Easing
The LB pointed out that the low was 666.79, so not precisely 666, and that the Old Geezer was scared of his own shadow. The RB pointed out that it had to engineer a coup d'etat on 3/3 at the trading desk here at HQ since both the LB and the Old Geezer were hiding underneath the sheets crying for mama. RB Touts His Horn as HQ Closes for the Evening RB's Coup D'Etat on 3/3 

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