Friday, March 11, 2011

ING News/Bought 50 of the ING Hybrid IDG at 23.96/EK/Edison Mission/ADDED 50 MSFT at 25.81

XKK (owned) was ex interest yesterday for its semi-annual interest payment.   This trust certificate represents a beneficial interest in senior Goodyear Tire bonds maturing in 2028 that are owned by a trust.  TRUST Certificates: Links in One Post   The coupon is 8% on a $10 par value. www.sec.gov  The underlying bond has a lower coupon at 7%. FINRA  During the Near Depression, the pricing on this one was just wild. Buy of XKK at $3.8 in IRA (March 2009)

Eastman Kodak (EK)(own senior bond only) announced earlier in the week that it intended to offer, subject to market conditions, 200 million dollars of senior secured notes in a private placement.  SEC Filed Press Release The pricing of this new bond was announced yesterday.  SEC Filed Press Release  The interest rate for this senior secured bond is 10.625% with a 2019 maturity date, which by itself shows that EK is not viewed highly as a credit risk.  In the press release, EK made the following statement:   "Kodak intends to use $200 million of the net proceeds from the offering for general corporate purposes and the balance to repurchase $50 million in principal amount of its 7.25% Senior Notes due 2013."

This announcement had a positive impact on the pricing of the 2013 senior bond, which moved from around 92 to 98.  RB Bought 1 Eastman Kodak Bond Maturing 2013 (Junk Bond Ladder Strategy) This purchase was in effect a bet that EK would survive until my loan was paid off on 11/15/2013.  The YTM at my cost is 9.03%. Moody's recently downgraded Eastman Kodak's long term credit rating from B3 to Caa1.

The market chose not to ignore negative news yesterday. Moody's downgraded Spanish government debt to Aa2, estimating that Spain will have to spend 50 billion Euros to shore up its banking system. Moody's kept a negative outlook on Spain's debt after the downgrade. The European debt crisis simply will not go away. The U.S. federal budget deficit hit a record $222.5 billion in February.    The seasonally adjusted claims for U.S. unemployment rose 26,000 in the week ending 3/5:    ETA Press Release: Unemployment Insurance Weekly Claims Report  Investors also reacted badly to a report that China had a trade deficit in February.  There was some news reports about rubber bullets fired at protesters in Saudi Arabia.  WSJ.com An oil prices fell over 2%, which contributed to some significant shares losses in the recently strong energy sector.  The DJ UBS commodity index continued to decline, falling 2.32 to close at 164.40, thereby giving the "principal protected" note MKN even more breathing room.  Long dated U.S. treasuries rose smartly in value, falling in yield, as the ten year treasury note rose 28/32 to close with a 3.366% yield.  The 30 year treasury bond rose 1 20/32 to yield 4.507%. Markets Data Center  - WSJ.com

My two Edison Mission bonds have gone down in value over the past few days, probably reacting to the negative news discussed in Item 3, DYN, relating to the serious financial difficulties of Dynegy and Energy Future Holdings (formerly known as TXU).   1 Edison Mission Energy 7.75% Senior Maturing 6/15/2016 1 Edison Mission 7% Senior Bond Maturing on 5/15/ 2017

1. ING News (own hybrids INZ and IDG):  There are several recent news items relevant to the owners of the ING hybrids.  ING Hybrids: Links in one Post  ING recently announced its intent to repurchase 2 billion Euros of the Dutch government's  investment in ING.  ING to repurchase EUR 2 bn core Tier 1 securities from Dutch State on 13 May  If this occurs, it will trigger in my opinion 4 mandatory quarterly dividend payments to the hybrid owners scheduled after ING effectuates the repurchase of those Junior Securities owned by the Dutch state.  See generally,  Summary of Arguments for Mandatory Payment Triggers: ING and Aegon Hybrids (August 2009); More on ING and AEGON Mandatory Payment Events/Alternative Payment Mechanism (August 2009); Pay Back Dutch Government=Buying Junior Security=Mandatory Payment Event/Bond Investing Process (August 2009);  Item # 2  More on ING (Oct 2009).

I would add that ING intends to pay back the balance of state aid in May 2012.  If that occurs, 4 more quarterly payments would thereafter have to be made under the Mandatory Payment Clauses contained in the hybrid prospectuses.  

During the Dark Period, many investors were concerned about the viability of ING and/or the deferral of its  dividends payable by its hybrid securities.  These concerns caused an extreme amount of volatility in the hybrids' share prices, with a substantial downside bias. For those willing to bet on ING, the prices of the hybrids during that volatile period presented what will likely be a once in a lifetime opportunity. The INZ shares that I still own in an IRA were bought at $7.82, providing me with a annual yield of about 23% in perpetuity or until ING calls that hybrid for redemption at its $25 par value. At that yield, money will double in 3.35 years before inflation and taxes.   

The current pricing of the hybrids do not suggest any investor concern about ING's solvency or the possibility of a deferral.  So, I would view the possible invocation of the Mandatory Payment Clause to be mostly a non-event, but it would provide the hybrid owners a measure of solace for one year and possibly two in the event ING completes the repurchase of those Junior Securities in 2012. 

Instead, the current issue with the hybrids is interest rate risk.  These securities are the most subordinated debt on ING's balance sheet and they have no maturity date. With increases in yields for higher quality long term bonds, these securities will become less desirable than now for yield hungry investors.   The problem is pinpointing when the transition will occur.  I am using a 4+% yield on the 10 year treasury as a trigger for paring lower yielding long term bonds and non-term bond funds.  

I will move in and out of small positions in both the Aegon and ING hybrids, while maintaining my current small long term core positions bought during the Dark Period.   I could add and keep a significant number of shares in hybrids from either of those Dutch companies and would still be playing with the house's money. Aegon Hybrids: Gateway Post

The other news is an article in Reuters that ING is preparing to sell INGDIRECT USA, its online banking operation in the U.S. 

2. Bought 50 IDG at 23.96 on Wednesday (see Disclaimer):  This purchase was made in a satellite brokerage account, where I have recently sold several stock ETFs (VV, VEU, VFH)  raising the cash level to an unacceptable level.  After nibbling at IDG, the cash level is still too high given its current income yield which is of course near zero. IDG is one of the ING hybrids traded in the U.S. 

The FED is forcing the OG to take more chances, when the OG just wants to relax, take a nap and eat some hershey kisses.   Even after this purchase, I am still playing with the house's money on ING hybrids.

I had a routine during the Near Depression of using their extreme volatility for successful trades. Embracing Volatility as A Risk Management Tool In the Sub-Asset Class of Equity Preferred Stock (May 2009 Post) Bungee Jumping Aegon and ING Preferred Stocks/ BlackJack and Stock Investing: Lessons Learned & Applied (March 2009)

I can confirm that the ING hybrids pay qualified dividends, based on the 1099s received in both 2009 and 2010.  I always believed that was the case. The European hybrids that I have bought have both equity and bond characteristics.  For regulatory purposes, they are included as part of issuer's equity capital.  If this changes, then I seriously doubt that their distributions would thereafter be treated as qualified dividends under U.S. tax law, but have not researched that point.  

For balance sheet purposes, the hybrids are in fact bonds,  junior to all other bonds in the capital structure and senior only to traditional, equity preferred stock and common stock. 

IDG has a different payment schedule than IND, INZ, and IGK, all of which went ex dividend in late February.  IDG goes ex for its quarterly dividend at the end of March.  ING Group Nv 7.375 Perp, IDG Stock Quote The payment date will be April 15th.    

The coupon is 7.375% on a $25 par value or about a 7.69% yield at a total cost of $23.96.  That yield was higher than the yield of either INZ or IND at the prices prevailing on Wednesday when I placed the order.  The yield was lower than IGK, but that one is trading above par value.  I am not going to pay more than par value for one of these hybrids.    Given the interest rate risk associated with a perpetual bond and the yield,  I did not want to buy more than 50 shares.

The ING hybrids are rated junk by both Moody's (Ba1) and S & P (BB), according to Quantumonline (free site, registration required). 

This is a link to the prospectus for IDG: 424B5

Prospectuses for the ING hybrids can be found in the links provided in my Post:  ING Hybrids: Links in one Post. They are also available from ING and at QuantumOnline.com

I previously had one small trade in IDG, selling those shares on a pop at $21.73 (bought at $18.33).  Most of the trading activity was concentrated in INZ and IND during the Dark Period.  

IDG closed at $23.92 on Thursday.

3. Added 50 MSFT at 25.81 on Wednesday (see Disclaimer):  I am naturally a contrarian value investor when it comes to stocks.  And, I am more contrary than usual after the nearly 100% spurt in the S & P 500 since March 2009. dshort.com The purchase of Microsoft shares, widely viewed as dead money at best, fulfills both my contrarian and value instincts. 

MSFT suffers from many of the same afflictions as WMT, discussed in yesterday's post after I added some shares to that position.  The affliction that I reference is not the one commonly identified by the talking heads who view the stock and company with disdain.   Instead, I view the problem with MSFT stock as typical for many of the largest American companies who reached unsustainable valuations in the late 1990s during the Death Phase of the long term secular bull market which commenced in 1982.  

As shown in this long term chart, MSFT rose from around $21 in February 1998, arguably a too rich price given its size, to a top at $60 by December 2009.  MSFT Interactive Chart   The P/E ratio exceeded 50 in 2000.  According to the VL data, MSFT had earnings of 70 cents per share in 1999. 

As a result of the valuation placed on this company during the Crazy Period, the stock has done well to fall into a channel trade, mostly in the $20 to $30, for several years after 2000.   Earnings have increased from that 70 cents per share in 1999 to $2.10 in 2010. The $25.81 price is less than 10 times the estimated F/Y 2012 E.P.S. of $2.76.   A double in earnings by 2015 from 2010 would not be surprising to me. So, MSFT is hated now as its stock price has gone nowhere for over a decade, while the P/E multiple has contracted from an irrational and unjustifiable 50 times earnings to an equally absurd 10 times earnings.  

Unlike 1999, when MSFT had no dividend, the company is currently paying a dividend that will hopefully provide some down support.  The current quarterly dividend is 16 cents per share, which works out to an annualized yield of 2.48% at a total cost of $25.81.  Assuming a continuation of the past trend, MSFT is on track to double the dividend in about six years.

MSFT needs to pay more of its earnings out in dividends.  The current payout ratio is just 25%.  While that is better than HP, which is just completely unreasonable in its dividend policy, a 40% payout ratio would be more in keeping with the utility like status of MSFT now. 

I have nothing to add to the other points made in a February Post after our RB BOUGHT 100 MSFT at 27.08.  I will be reinvesting the dividend to buy additional shares. I may sell part of the first lot when and if the price crosses $30, a typical trading pattern for me, as I book a profit and lower the average cost of my remaining shares using FIFO accounting.

MSFT fell 48 cents to close at $25.41 on Thursday.  On a decline to or below $25, I may add another 50 shares. 

I am busy on other matters including the excruciating preparation of my own 2010 tax return.  As a consequence, I am running way behind on discussing the trades.  I had three more trades from Wednesday that will be discussed in the next post other than the double short ETF which was added as a hedge late Wednesday afternoon. A discussion of the remaining trades from Thursday and Friday will also have to wait until next week.  

5 comments:

  1. re:Edison/Not sure if this is most current but it sounds ok til next year, anyway.
    http://findarticles.com/p/articles/mi_m0EIN/is_20100701/ai_n54304136/

    http://tinyurl.com/4og4yk7

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  2. As a tax preparer, I offer you my sympathies on what must be a Herculean effort to complete your Schedule D. Keep the caffeine, chocolate and Maalox flowing.

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  3. Our LB is doing everything possible to increase the size of Headknocker's tax return, with the ultimate goal of exceeding the width of the Nashville phone book.

    On the CEF's that invest in TIPs, there was another significant haircut in the WIW dividend on 3/1. The new monthly dividend will be $.0335, a 8.2% reduction in the recently reduced payout. IMF kept its payout at 5 cents but I doubt that it will hold at that level for much longer. The coupon on the TIPs, the "real yield" component, is just so low that I find them unattractive for current purchases, except as a short term trade as I have been doing in both IMF and WIW.

    The quote at Bloomberg shows the 10 year TIP coupon at 1.125%. The break-even point is close to 2.5% with the non-inflation protected 10 year yielding 3.62%. For an investor to do better on that 10 year TIP, the average inflation rate would have to be around 2.5% over the next ten years. And, even if that happens, which is questionable, what does the investor beat, a 3.62% yield.

    I am reluctant to trade the two CEFs unless I receive a better price than the ones prevailing today. Possibly an opportunity will arise in IMF when it is forced to cut the dividend. My last entry point on IMF was at 11.65 with the sale at 17.15.

    Thanks for the update on Fitch's rating of Edison Mission bonds. I am at my limit with 2 bonds, and the TXU and Dynegy bonds have been off limits to me even at their current yields.

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  4. I'm scalping a trade on IMF, discount is over 7%, and they already declared the 5 cent dividend for 3 months.
    I think we can get a couple more dividend payments on our 2 Edison bonds before it gets worse depending on their refinancing and emission laws.

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