Monday, September 12, 2011

European Banks and IAS 39/VIX/Sold 50 of the ING Hybrid INZ at 21.21 Bought at a Total Cost of $7.82-Last ING Hybrid Owned/Bought 50 SIVBO at 24.5 in Roth IRA/Bought 50 ACET at 5.07 as Lottery Ticket

Floyd Norris notes in his NYT column that European banks are placing differing values on Greek government debt, even when the same firm audits banks assigning different values to the same debt. The relevant accounting rule, IAS 39, is being applied in different ways.  Although the Greek government bonds trade everyday, Norris maintains that the French bank BNP Paribas claims that the Greek government bond market is inactive and consequently uses a model to value its bonds. The result is that the French banks have gone the furthest to pretend as if those Greek bonds were money in the bank. A letter was written by Hans Hoogervorst of the International Accounting Standards Board  complaining about the disparate treatment. While no bank was expressly mentioned in that letter, Norris maintains that Hoogervorst was referring to the French banks. The French banks fell again in trading last Friday: CREDIT AGRICOLEBNP PARIBASSociete GENERALE.   

The credit default swaps market rates the likelihood of a Greek government default at 90-91%. Bloomberg The Greek government's two year note was priced last Friday to yield 55.76%, another sign of a likely default.

Increased concerns about Europe sent the U.S. stock market into another downward tailspin last Friday. The precipitating event for Friday's move appeared to be the resignation of Juergen Stark, a German, from the six member Executive Board of the European Central Bank, apparently in protest of the ECB's sovereign bond buying program.  MarketWatch The market's decline last Friday seemed to be an excessive reaction to that news.

This is a link to a sobering assessment of the European Crisis situation made by Rob Arnott.

The Volatility Index (VIX) index for the S & P 500 rose 4.2 last Friday to close at 38.52. The index remains in an Unstable VIX Pattern and is dangerously close to moving into the catastrophic phase of that pattern, referred to as Phase 2.  Continuation of Unstable VIX Pattern/Possible Head and Shoulders in the S & P 500 Forming (July 28, 2011 Post). The Unstable VIX Pattern formed as a result of a Trigger Event in August 2007, VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern, which required a reduction in HK's stock allocation. Vix Asset Allocation Model Explained SimplyWhen VIX Model Gives A Signal To Change Asset Allocation-Each Individual Needs to Assess Their Own Situational Risks;  More Of Less Safe After Averages Fall-Tension with Vix Model (May 2009 Post); More on the Vix Model: What it Does not Predict is as Important as What it Does/Parallels to VXO 1987-1988 (May 2009 Post); SEPTEMBER 2008: FORMATION OF THE DEADLY PHASE 2 OF THE UNSTABLE VIX PATTERN (May 2009 Post); Trading and Asset Allocation in Stable and Unstable VIX Pattern (November 2008 Post).

1. Sold 50 INZ in Regular IRA last Thursday at $21.21 (see Disclaimer):  I do not find the news coming out of Europe to be comforting. My average cost basis for these 50 shares was $7.98:


I received 11 dividend payments of $22.5 or $247.5 on a total investment of $399 made on 2/18/2009 or roughly 62% just on the dividends.  The share profit was another $653.52 (snapshot last post: Stocks & Politics: Obama's Speech on Jobs and GOP Response/Mortgage Rates/Europe/Bought Municipal Bond CEFs: 200 NMO at 13.03, 200 MUE at $12.89 and 100 BAF at $13.89/Sold NQS at 14.44).

Given what is happening in Europe, I did not want to risk the previously unrealized profit in the shares.  Another consideration is that no tax is paid on the gain since the shares were held in an IRA.  If the opportunity arises and my comfort level with ING hybrids rises, I can buy back the shares at a later time, but only at a much lower price than prevailing today.

ING Groep N.V. 7.20% Perpetual closed at $20.17 in trading last Friday, down 51 cents for the day.

2. Bought 50 SIVBO in ROTH IRA at $24.5 Last Thursday (see Disclaimer): SIVBO is a trust preferred stock with a 7% coupon on a $25 par value. Like many bank TPs now selling near par value, SIVBO has minimum upside price potential, while having significant potential downside risks. 

SIVBO is a typical trust preferred stock. The issuer is SVB Capital II, a Delaware Trust, wholly owned by SVB Financial (SIVB), formerly known as Silicon Valley Bancshares.  The TPs are sold to the public by the trust, hence the name trust preferred. The funds realized by the sale of the TPs are used by the trust to purchase a junior bond from SVB Financial.  The TP represents a beneficial interest in the bonds owned by the trust. Distributions are taxed as interest and are cumulative.  Payments may be deferred for up to five years, provided the stopper provision is not activated.  Payment of a distribution on a more junior security, such as common stock or traditional equity preferred stock, would activate the stopper and prevent the bank from deferring interest on the junior bond for as long as those payments continue to be made. SVB Financial has not paid a common stock dividend since 1972, and does not presently intend to pay one. If interest payments are legally deferred, they will accrue interest at the coupon rate of 7%. 

This is a link to the prospectus: Both the TP and the underlying junior bond mature on 11/15/2033. That maturity date creates a great deal of interest rate risk for any investor desiring to hold the security long term. The value of this security will go down in a period of rising interest rates. Item # 2 Interest Rate Risks- Bonds;  Rising Rates and Your Investments and Risks of Investing in Bonds (SIFMA articles).

I am close to playing with the house's money on SIVBO, given the prior realized gains and interest payments.  Added 50 SIVBO AT $19.20 IN ROTH Added 50 SIVBO at $19.15 Bought 50 SIVBO at $19.49 Sold 50 of the 150 SIVBO at 24.65 Sold Remaining SIVBO at $25

2011 Realized Gain 100 Shares SIVBO Taxable Account=$513.84
2011 Realized Gain 50 Shares SIVBO ROTH IRA=$274.98

At a total cost of $24.5, the current yield is around 7.14%. When held in the ROTH IRA for a U.S. taxpayer, that is in effect a tax free yield.  Money will double in about 10.05 years at a 7.14% annually compounded rate. Estimate Compound Interest

SVB Financial may continue to count this TP as part of TIER 1 capital since it had less than 15 billion in assets as of 12/31/2009. (see pages 12-13 of the 2010 Form 10-K)

SVB Capital II 7% Cum. Trust Pfd. closed at $24.6 last Friday, up 10 cents.

SVB Financial participated in TARP and received $235 million. Form 8-K  The bank bought back the government's preferred stock in December 2009. (page 31, Form 10-K)

The current consensus estimate for SVB Financial is for an E.P.S. of $3.3 in 2011 and $3.48 in 2012.  The common is rated 4 stars by Morningstar.

3. Bought 50 of ACET at $5.07 on Wednesday (LOTTERY TICKET strategy)(see Disclaimer): This strategy was a gem in 2008-2010, but has not been working lately. The main purpose for this strategy is to keep RB occupied, and out of the LB's way. I have previously bought and sold this stock as part of the LT strategy: Bought 50 ACET at 5.2-LT (January 2010); Sold LTs ACET at $6.82 (April 2010). Aceto does pay a semi-annual dividend of 10 cents per share, which gives it close to a 3.9% yield at a total cost of $5.1. The price is also near where the stock has bottomed over the past five years. Chart 

RB made this purchase on 9/8, knowing the company was going to report earnings the next morning. Given the short proximity to an earnings release, LB would waited  to review the earnings report before making a decision.  RB could care less about that report.  Instead, the RB was just focusing on the dividend yield and the forward P/E estimate, which was less than 10 times earnings, since it can not handle more than two details without causing an inordinate amount of stress. Only one analyst follows the company and has a 12 cent estimate for the Q/E in June 2011. ACET The OG, always willing to help the RB out, added that the P/S ratio is .35 and the P/B ratio is .86 according to YF which was based on the period ending in March 2011.

Aceto reported Friday morning net income for its fiscal 4th quarter, ending 6/30/11, of $3.494 million or 13 cents per share, down from 17 cents in the year ago quarter. Revenues for the quarter were $121.204 million and $412.428 million for the year.  Non-GAAP E.P.S. for the F/Y was 47 cents up from 39 cents for F/Y 2010. 

Aceto rose 20 cents in trading last Friday to close at $5.31. A tiresome voice was heard to say "power to the RB".

No comments:

Post a Comment