Thursday, May 6, 2010

Sold 110 WIBC at 10.99/News Corp/ CDS on PIGS Debt/Pricing Pressure on ING HYBRIDS

The ^VIX somehow managed to end the day below 25, closing at 24.91. The intra-day high was 27.23. Since bursting from a close at 17.47 on 4/26 to 22.81 on 4/27, the VIX has been moving in a manner inconsistent with the formation of a Stable VIX Pattern. The VIX had moved 41 consecutive days below 20 before the count was interrupted by the spike to 22.81. There have now been 6 out of 7 closing days above 20, and the velocity and height of some of the spikes is disconcerting. If there is one close above 25, or 10 days with closes above 20, I will restart the count. These spikes are more consistent with a continuation of an Unstable VIX Pattern. I am giving it some leeway due to the 41 days of continuous movement below 20, as well as the the long tortuous road the VIX had to make just to get back to 20 after the Lehman failure. This is a link, hopefully, to a two year chart: VOLATILITY S&P 500 Index Chart

A major negative, however, is that the VIX has crossed above its 200 and 50 day moving average lines. When there was movement below those moving average lines back in early April 2009, I believed that was very encouraging and it gave me confidence back then to do more buying. For an investor who is long stocks, the VIX is one security that you want to see fall below, not increase above, its moving average lines.

I believe that it is primarily the European sovereign debt crises that is causing the spike in the VIX. It is starting to look eerily similar to the Asian contagion from 1997 that started with the Thai Baht. 1997 Asian Financial Crisis - Wikipedia That is when I date the end of the long term secular bull market that started in August 1982. It was also the Trigger Event that ended the Stable VIX Pattern in effect since 1991, with a number of readings in the VIX above 30: ^VIX: Historical Prices for VOLATILITY S&P 500 The VIX thereafter returned below 20 in February 1998 briefly, which would be the opportunity to lighten up. On 2/27/1998, the S & P 500 closed at 1049.34 and was meandering over 1100 in April 1998. ^GSPC: Historical Prices Now, what exactly would we have missed by investing in 10 year treasury bonds then and selling out of stocks entirely? After the 70%+ rally off the March 2009 low, the S & P 500 closed yesterday at 1165.87. RB just said that it would have missed all of the fun. LB added that it needed the last 12 years to work in real time on its book of trading rules. (the 10 year treasury note was trading at close to a 6.5% yield in April 1998,, and it would take 11 years to double your money at 6.5%: Estimate Compound Interest )

China tightened bank reserve requirements by 50 basis points last Sunday, effective on May 10, and those continuing tightening moves are probably adding to the anxiety.

1. News Corp (own): News Corporation reported its 3rd quarter net income at 839 million or 32 cents per share. The film entertainment segment had segment operating income of 497 million, an 76% increase from a year ago, based primarily on the Avatar film. Cable network programming reported segment operating income of 588 million, an increase of 38%. The 32 cents in earnings beat the forecast of 22 cents, and NWSA also beat on revenues. The company reported 8.79 billion in revenues compared to the estimate of 8.24%. News Corporation raised its 2010 fiscal to operating income in the high 20% range from the low 20% range. However, the market views the comments made by the company about the 4th quarter of its fiscal year to be disappointing. On the conference call, the company said its expects 4th quarter results to be down from a year ago due to the timing of film releases. I own just 120 shares of NWSA prior to yesterday, with the last shares bought at $6.65 in November 2008.

J P Morgan downgraded News Corp to neutral from buy yesterday: FOX

2. Credit Default Swaps on PIGS Debt: The WSJ reported yesterday that the cost of insuring government debt issued by Greece, Spain and Portugal increased sharply early on Wednesday. It cost then $790,000 per year to insure 10 million of Greek government debt for five years. The cost to insure Portugal's debt increased $358,000 per year on 10 million dollars in debt. Moody's placed Portugal's debt on negative credit watch for as much as a two notch downgrade in debt from the current level of Aa2.

3. VALLEY NATIONAL (VLY)(own): This stock went ex for its 5% stock dividend yesterday. It is slightly annoying that Fidelity does not adjust the daily change for ex dividends which other brokerage firms manage to do.

4. Sold 110 Wilshire Banks at $10.99 (WIBC) (See Disclaimer): LB controls the trading desk. While LB provided some structure and logic to the RB's Regional Bank Stocks' strategy, the LB is far more cautious on whether the RB's long term strategy will work. For now, the peace is being preserved to a limited extent by the LB selling a few names in the basket, where the (1) percentage gains are large: (2) the bank is currently paying a negligible dividend, and (3) the bank was miserly in its dividend policy before the Near Depression. The last condition is probably the most important now. If I am going to hold a stock with a large unrealized gain now, I would want at least the prospect of receiving a good dividend when the bank returns to more normal earnings.

Wilshire, like East West, was miserly in its dividend prior to the Near Depression, paying a 20 cent annual dividend when it earned $1.16 in 2006 for example. According to the Morningstar data, the dividend has never been above 20 cents annually. This would give me a tad over 2% at the $11 sell price.

I had a good percentage gain in the WIBC shares, with 45 shares bought at $6.54 in November 2009 and 65 shares at $ 8.6 last January. The overall realized gain was close to 42%, and the EWBC realized gain was approximately 235%. The total proceeds of $2145 will be invested in regional banks with better dividends.

I do not recall reviewing the earnings report for the 1st quarter. It is not usual for me to miss an earnings report given the number of holdings. I was not impressed with Wilshire Bancorp's first quarter earnings report. My major concerns were the jump in non-performing loans increased to 4.34% of total loans versus 2.92% at year end. I am excluding the loans covered by an agreement with the FDIC. Part of the gain in net income was due to securities sales.

The remaining banks in the portfolio with negligible dividends, such as RF, WBS, MI, SUSQ, and HBAN, had decent dividends and payout ratios to net income before the onset of the Near Depression. I discussed in a prior post what my dividend yield would be for my WBS shares in the event Webster Financial returned to a 2007 dividend level: More on Regional Bank Strategy Those shares were bought at $4.58 in March 2009. Susquehanna (SUSQ) is another one where the dividend was slashed to the current picayune level of 4 cents annually. The annual dividend rate was $1.04 in 2008. While I do not expect a return to that level anytime soon, and it will be a prolonged healing process, the dividend yield at my cost of $5.85 would be 17.78% per annum when and if the dividend returns to that $1.04 rate. The when and if yield for WBS at my $4.58 cost would be 25.54% based on the hoped for return to a $1.17 annual dividend.

5. ING: The escalating sovereign debt problems in Europe are having some negative blowback on European hybrids, and all European bank securities. I do not consider myself a long term investor in the ING hybrids, with the possible exception of the INZ bought in the regular IRA during a meltdown at less than $8. I have sold most of my ING hybrids, using the volatility in these issues since October 2008 to trade positions and to collect good dividend yields at my acquisition costs. ING Preferred Stocks (Hybrids): Links in one Post With the payments in the third quarter of this year, and assuming no more mandatory payment events, the four period mandatory payments for the hybrids triggered by the payment on, and purchase of, junior securities issued to the Dutch government will expire. This will place the owners of the ING hybrids back into an enhanced risk profile, particularly if ING's financial position deteriorates based on currently unforeseeable or unknowable future developments in the Europe over the course of 2010.

I may purchase a small number of shares at some point in the next two or three weeks if there is a material slide in prices due to what is happening now in Europe. If I do purchase shares, it will be as a trade, and I do not expect to hold any material position in ING hybrids after the end of this year. When deciding which one to buy, the determining factor for functionally equivalent securities is the yield at my cost at the time of purchase. If the ING hybrid with the smallest coupon has the highest yield at the then available prices, then that would be the one for me to purchase. The coupon is not relevant to the decision. This is a sample of the yields at yesterday's closing prices (5/5/2010) for some of the ING hybrids:

IND: Coupon 7.05% Yield 9.33 Price 18.9 Ing Groep N V PFD 7.05%
IGK: Coupon 8.5% Yield 9.63% Price 21.85 ING Group 8.5PC Perp Hyb 8.5%
INZ: Coupon 7.2% Yield 9.35% Price 19.25 ING Groep N V PFD PERP DBT
ISF: Coupon 6.375% Yield 9.42% Price 16.92 ING Groep N V PERP HYB6.375%

The other ones that I would look at include ISP, ISG, & IDG. The prospectus links can be found at Debt securities - ING Group - ING or in my Gateway Post for ING hybrids-ING Preferred Stocks (Hybrids): Links in one Post. Quantumonline has links to the prospectuses for these hybrid securities from ING also (free site, registration required): Preferreds eligible for the 15% Tax Rate Table -


  1. Greece probably won't take down Western Civilization (after all, wasn't it the Greeks who founded it?) But I think the larger issue is moral hazard. When do the bailouts end? Who else is going to have to be bailed out? How much indolence and greed can be sustained by the prudence and industry of the rest?

    I think we as a global society are engaged in a long-term process of "exploring" those kinds of fundamental questions.

  2. Cathie: LB is not much of philosopher or theologian, so it does not think too much about moral hazards. Today, it is just mulling whether or not to buy back an ING hybrid, as the yield has now jumped back over 10%. The Greek parliament approved the austerity measures. And, it is hard to see the German parliament voting down tomorrow the German contribution to the latest bailout. When the execution risk of the bailout passes, possibly sometime tomorrow, then possibly the market's will start to reflect about the rationality of its current European sovereign debt concerns. Spain did sell about 3 billion dollars in five year government bonds today at 3.58%. I noticed that the market took a decided turn for the worse after El -Erian appeared on CNBC and stoke some of the fears: