Friday, June 17, 2011

Greece/Aegon Repays Dutch Government-Mandatory Payment Event/Apple/Sold 100 of the Canadian Bond ETF XRB:CA at 23.08 CAD

I noticed that Richard Lehmann recommended PFK, the senior exchange traded note issued by Prudential, in his most recent Forbes' column, when this bond was trading at $27. Par value is $25 with a maturity in 2018. This bond pays monthly interest based on a 2.4% spread to CPI. Pricing Supplement No. 122 dated March 31, 2006

I own PFK in both the ROTH IRA and a taxable account, with most of the purchases made in June and August of 2009. As explained in a recent post,  Is this Bond Safe?, my problem is whether I should at least pare my PFK position.  I would not buy more at its current price, which hit $28.55 last Wednesday. Prudential Financial Inc. Prudential Financial Inflation linked Retail Medium Term Nts, PFK  My shares were bought at a much lower level: Bought 100 PFK at 18.47 (June 2009 Post); Bought 90 PFK in IRA $18.94 (June 2009); Added 50 PFK at $17.83 (August 2009); Added 50 PFK in Roth at 20.88-Averaged UP (January 2010).

The CPI computation for PFK is similar to OSM and ISM, similar type bonds issued by SLM that are also traded on the stock exchange.  The difference is the spread to CPI.  The computations use the CPI Index for All Consumers without a seasonal adjustment. /CPIAUCNS The calculation will be based on a twelve month change in CPI, with a three month lag. (see computation for OSM at Item # 1 OSM). Due to the increase in CPI, the penny rate for PFK will be over 12 cents per share for the monthly payments in July, August and September.

Based on news reports yesterday (e.g. Reuters, the EU and the IMF are apparently willing to release their respective next bailout installments to Greece, notwithstanding considerable evidence that the money is being thrown into an ever widening and deeper sinkhole. It is not clear to me whether or not this will actually happen if Greece does nothing to pass an austerity package and legislation to privatize some government owned monopolies. I do not believe the market is pricing a Greek government default into current stock prices, though I am starting to see that possibility reflected in the price movement of some securities, including the common stock and preferred stock prices of Spanish banks.

STDPRB, an equity preferred floating rate stock issued by Santander Finance, fell yesterday 4.22% to close at $18.4. I have sold my position in that security down to just 50 shares this year based on concerns about Spain. The last transaction was in May 2011: Sold 50 STDPRD at 20.34 I am not adverse to buying back some of the shares sold, but I need a lower price to compensate me for what I perceive now to be an additional risk.  I am looking also for signs of stress in the common stock prices of BBVA and STD.

It is becoming increasingly clear to me that Greece will default, unless the EU and IMF decide to keep that country afloat for years by turning it into a European version of the U.S. money pits Fannie Mae and Freddie Mac. I suspect that Greece will not be able to actually comply with the conditions being requested by the EU and the IMF, so it is still unclear to me why the Germans and the Dutch will be throwing more money into that sinkhole. It is not like the Greeks are grateful, nor are they willing to live within their means, still evading their own tax obligations while asking responsible taxpayers from other countries to support them in their lifestyles. Greece-Entitlement Society Run Amok (February 2010 Post). A recent story on the rampant tax evasion can be found at The Globe and Mail.

News reports this morning indicate that Germany has retreated from its position of requiring private lenders to participate in the latest rescue plan. Bloomberg This reversal caused a rebound in European stocks this morning.

The Philadelphia FED released its manufacturing survey yesterday, showing a decline in the broadest measure of business conditions to a -7.7 in Any number below zero indicates contraction.

Apparently, the alleged willingness of the EU and the IMF to funnel more money into Greece, coupled with some alleged better data on the jobs front, caused the market to rise yesterday morning.  The purported good news on jobs, assuming I correctly understand the reasoning of some financial reporters, is that the initial unemployment claims data was revised up 3,000 to 430,000 for the previous week, while the estimate for the week ending 6/11 was at 414,000 or 6,000 less than expected by the consensus estimate. Any number over 400,000 is considered to be consistent with a weak jobs market.

In this video interview with Shiller, he believes that there is "substantial probability" of a recession within the next year, and the U.S. is at a "tipping" point now. I am always interested in the Professor's opinions. I read his book Irrational Exuberance soon after its publication in 2000, and it had a significant impact on my investment approach.

Bob Johnson, Director of Economic Analysis at Morningstar, is confident that the U.S. consumer will lead a recovery in the second half, and he is positive that no recession is near. Johnson did not see the soft patch coming either.

The ^VIX rose 6.24% yesterday to close at 22.65.  This type of movement is inconsistent with the formation of a Stable Vix Pattern, and is consistent with a continuation of the Unstable Vix Pattern in effect since August 2007. Vix Asset Allocation Model Explained Simply The movement in the VIX did not confirm the up move in the market yesterday morning and into the close.  Volatility can be an indicator for risk, real or perceived. An increase in the S & P 500 average's volatility above 20 will generally be associated with declining stock prices, as the market compensates for real or perceived increases in risk with lower stock prices.  Multiple Confirmations of VIX Model-Canary in a Coal Mine

Apple (AAPL) moved slightly below its 200 day moving average yesterday. AAPL Stock Chart For a brief period yesterday, the price was well below the 200 day moving average, falling to an intraday low of $318.33 before rallying late in the day to close at $325.16. Apple's stock has been The Market Leader since stocks hit their bottom back in March 2009. I would simply view this price action to be another warning sign.  It would be a positive sign to see Apple move up sharply today.

1. AEGON (own two hybrids and common as LT): I have sold all of my Aegon (AEG) hybrids other than AEH, bought at at $4.63  and 200 shares of the floater AEB bought at $4 to $8, both during the Near Depression period.  Aegon Hybrids: Gateway Post  Buy of 50 AEB at 4.8 (February 2009) Added to AEB at 5.5 (October 2008). It was a wild ride. Both the ING and Aegon hybrids were weak yesterday, probably in response to the deteriorating sovereign debt crisis in Europe. Most of the ING hybrids declined over 3% (e.g. IND, INZ, ISG, and ISF over 4%)

I thought that I had another 100 shares of AEB, but I apparently sold that 100 in a bout of profit taking.  The OG was sent by LB to find the missing 100 shares and reported back that they were gone, sold at $19.72 several months ago. This is a current snapshot of my remaining 200 shares:

100 AEB Taxable Account Average Cost Per Share $6.92/Pays qualified dividends at the greater of 4% or .875% above 3 month LIBOR on a $25 par value

100 Roth IRA Average Total Cost per share=$6.05

At some point, when and if I become worried about AEGON, I may sell the AEH since I do not want to lose the gain, and I do not have to pay taxes on gains realized in the IRA. AEH is currently selling near its $25 par value:    AEGON N.V. 6.375% Perpetual Capital Secs., AEH 

Since I have already taken profits in AEB, and that security serves a function in my bond portfolio, I am likely to keep the remaining 200 shares. AEB is just one strange security for a U.S. investor. In reality, it is a junior bond that pays qualified dividends. The dividends are cumulative. And, by paying the greater of a minimum or a spread over 3 month LIBOR, the security can serve a dual role in both inflation and deflation scenarios. Advantages and Disadvantages of Equity Preferred Floating Rate Securities  Floaters: Links in One Post Inflation or Deflation: Bond Alternatives (December 2008 Post) One of my first posts was on AEB: LIBOR AND THE AEGON FLOATING ATE PREFERRED STOCK (October 2008). 

LB likes to pat itself on the back for the way it managed risk in the purchase and sale of Aegon hybrids. If LB does not congratulate itself, it will not receive any recognition. After all,  HK is well into playing with the house's money on this grouping of securities (AEB, AEH, AEF, AEV). And both AEB and AEH will actually pay for their cost soon enough, without regard to profits from trading the other AEG hybrids, just from their own dividends. 

I am bringing this up now primarily to discuss recent news that is relevant to the hybrid owners. 

Aegon announced on Wednesday that it has repurchased the Junior Securities issued in connection with its receipt of state aid from the Dutch Government, originating in 2008: AEGON Completes Repayment to the Dutch State As previously discussed in nauseating detail, the repurchase of Junior Securities triggers the Mandatory Payment provisions in the hybrid prospectuses and would require AEG to make four quarterly payments on the hybrids after the occurrence of that repurchase. The payment is also triggered by the payment of a distribution on that junior security. Pay Back Dutch Government=Buying Junior Security=Mandatory Payment Event/Bond Investing Process  (August 2009 Post); More on ING and AEGON Mandatory Payment Events/Alternative Payment Mechanism (August 2009);  Summary of Arguments To Stop EC from Causing Deferral of Payments on the Aegon (August 2009 Post) Aegon and the European Commission: Resolution of State Aid Issue (August 2010).   

2. SOLD  100 of the Canadian Bond ETF XRB:CA at 23.08 CAD on Wednesday (Canadian Dollar (CAD) Strategy) (see Disclaimer):  This bond ETF is traded on the Toronto exchange and owns inflation protected bonds issued by Canada and its provinces. iShares DEX Real Return Bond Index Fund, XRB Fund Quote - (TOR) The yield is, as you would expect, low:  XRB Distributions. Last year, the fund distributed about 42 Canadian cents.  I intend to re-deploy those funds into another Canadian bond ETF that I own. 

I bought the shares last October at 22.09 CAD and received one semi-annual distribution paid last December.  The profit is calculated, converting the CADs back into USDs,  according to my broker:


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