Thursday, October 30, 2014

SA Instablog Published Re: Bar Harbor Bankshares (BHB)


This is the third and last bank earnings report that I will feature for the 2014 third quarter. The other two can be found in the following links: 



For SA readers, I also recently summarized my regional bank basket strategy in this post: 

Added 50 SAN at $8.6

Big Picture Synopsis: No Change

Recent Developments: 

The Federal Reserve has finally decided to end QE3 effective this month. Federal Reserve issues FOMC statement--October 29, 2014 The Fed believes that "economic activity is expanding at a moderate pace" and labor "market conditions improved somewhat further". Labor market slack is "gradually diminishing". The FED anticipates that ZIRP will "likely be appropriate" for a "considerable time following the end of its asset purchase program this month". 

As of 10/22/14, the Fed's balance sheet was almost $4.2 trillion. System Open Market Account Holdings - Federal Reserve Bank of New York

The government estimated the 3rd quarter real GDP increased at an annualized rate of 3.5%, higher than the consensus estimate of 3.1%. Current dollar GDP increased by 4.9%. The price index for gross domestic purchases increased by 1.3% or 1.5% excluding energy and food. Real PCE increased by 1.8%. Disposable personal income increased $126.4 billion or 4%. Personal saving was $720.7 billion in the third quarter, with a 5.5% personal savings rate.  Real final sales increased by 4.2%, higher than the 3.2% pace in the second quarter. News Release: Gross Domestic Product


1. Added 50 SAN at $8.6 (see Disclaimer): 

My position in the SAN common shares are viewed as a long term contrarian investment for the reasons stated in prior posts.

I have at one reader who will focus all of their comments, either here or at SA, on an investment that does not immediately pan out, making what I would generally characterize as gratuitous drive by hits. Nothing is ever said about those that work soon after purchase or over the long term. Any comment that thanks me for the effort put into these posts would be totally inconsistent with that person's character.

As I have noted in the past, I am fine with jerks ceasing to read my posts altogether and to vent their life's frustrations elsewhere. 

Snapshot of Trade: 


Closing Price on Date of Trade: SAN: $8.64 -0.22 (-2.48%)

The ordinary shares are priced in Euros and trade in Madrid. The price had closed a €6.86 on 10/29. 




Company Description: I recently discussed this company when I bought a 50 share lot. Item # 2 Bought 50 SAN at $9.73 (9/6/14 POST). I would just refer anyone interested to that post. 

I am reinvesting the dividend to buy more shares which avoids Spain's withholding tax. 

Banco Santander S.A. ADS (SAN) went ex dividend for its quarterly distribution on 10/15/14.  That dividend will be paid on 11/13/14. 

NASDAQ shows the total dividend paid in 2014 at $.80577 per SAN share. At that rate, the dividend yield is about 9.37% at a total cost of $8.6 per share.  

This last purchase was made when the stock had pierced its 50 SMA line to the downside. The stock also trading well below its 200 day SMA line which was then near $11.17. SAN Interactive Chart

The ordinary shares are priced in Euros. The Euro has been declining in price against the USD for several months. EURUSD 

Part of the SAN price decline can be attributable to that currency issue, as shown in this 6 month chart comparing ES:SAN (ordinary shares traded in Madrid and priced in Euros) and the ADS SAN priced in USDs. I am using the Marketwatch symbol for the ordinary shares here.  



The decline in the Euro will flow through into the price of the NYSE listed SAN shares causing them to underperform the Euro priced ordinary shares. 

There really has not been any negative news, specific to Santander, that would have caused the ordinary share price decline. SAN.MC Interactive Chart The chart does appear to have formed a double top formation near €7.9. 

My take on Santander is that there is long term recovery potential. The non-performing loans were still hovering over 5% as of 6/30/14, 2Q2014 Results: Santander made a profit of EUR 2.756 billion, 22% more than the first half of 2013. The next earnings report is scheduled for 11/4/14. The consensus SAN E.P.S. for the 2014 third quarter is €.12 per share, up from €.10 in the prior year. I retrieved that estimate from a Dow Jones news release out of Frankfurt, Germany dated 10/29/14. Most of the estimates originate from foreign brokerage firms and banks.     

Bloomberg Data (2014 E.P.S. estimate at  €.48 as of 10/29 or about $.60651) 

When I last bought shares, the 2014 consensus E.P.S. estimate was $.62 and is now 1 cent lower after rounding the USD number. SAN Analyst Estimates The current 2015 consensus estimate is for $.78, down from $.8 when I last discussed a SAN share purchase. 

SAN Filings With the SEC

Related Trades: I have done well with SANPRB, a floating rate preferred stock.

I have realized $900.26 trading that equity preferred floater in small lots. (snapshots in Sold Roth IRA: 50 SANPRB at $20.41; Item # 4 Added 50 SANPRB at $18.24 (sold); and in the Gateway Post Advantages and Disadvantages of Equity Preferred Floating Rate Securities)

I currently own 80 SANPRB shares: Bought: STDPRB at $13 (August 2011)(symbol later changed to SANPRB); Added 50 STDPRB at $15.44 (November 2011)

Santander Finance Preferred S.A. Unipersonal Floating Rate Gtd. Pfd. Series 6 Stock (SAN.PB:NYSE) 

SA Instablog Published Today Re: Risks Associated with Premium Price Contraction

Premium Contraction Risk - South Gent | Seeking Alpha

I use two examples to highlight this risk. One is the BDC HTGC and the other is the CEF PTY.

Tuesday, October 28, 2014

Sold 101+ LXP at $10.65/Bought 200 WIW at $11.45

Google remains intermittently unable to take visitors to my blog who are using the correct blog URL. I have quit using the blog URL to gain access. Instead, I will bookmark the "blog archive" for the latest month. Stocks, Bonds & Politics: October 2014


I am now on an irregular publication schedule. Some trades will be discussed here and some individual trades will be discussed at SA.

Google's software has inexplicable increases in the font size in this blog that can not be changed by any means known to me. I consequently quit writing it.  


I published the section dealing with the WIW purchase at SA, and it is easier to read at that website: Closed End Bond Funds: Bought Back WIW At $11.45 As A Trade: - South Gent | Seeking Alpha 

Big Picture Synopsis 

Stocks:

Stable Vix Pattern (Bullish)(Requires a Trigger Event To End)                   
Short Term: Market Needs to Correct 10% to 15%               
Intermediate Term: Slightly Bullish (gains to date borrow from the future)
Long Term: Bullish

The VIX remains in a Stable Vix Pattern. The brief spike to the mid-20s was insufficient to generate a Trigger Event under the Model.

VIX Short Term Spike in October-Closing Prices

10/20 Back Below 20
10/17 21.99
10/16 25.2
10/15 25.27 
10/14 22.79
10/13 24.64
10/12 21.24
10/09 Below 20


Bonds:               

Short to Long Term: Slight Bearish Based on Interest Rate Normalization


The 10 year TIP break-even spread closed today at 1.91% and has been trending down.

That forecast is known as the break-even spread, the average annual rate of inflation for the owner of the 10 year TIP to break even with the owner of the non-inflation protected treasury.

The break-even spread is calculated by subtracting the yield of the TIP


From the Yield of the Non-inflation protected treasury


The 10 year TIP break-even spread closed today at  1.91% and has been trending down.


That forecast is known as the break-even spread, the average annual rate of inflation for the owner of the 10 year TIP to break even with the owner of the non-inflation protected treasury.

The break-even spread is calculated by subtracting the yield of the TIP


From the Yield of the Non-inflation protected treasury

******************
Recent Developments:

UPS is predicting a 11% Y-O-Y increase in shipments for December. 

Fitch reported that current credit card delinquencies are 18% lower than a year ago.

Third quarter UK GDP rose a non-annualized rate of .7%. 

New orders for durable goods decreased by 1.3% in September. Excluding transportation, orders decreased by .2%. Durable Goods.pdf


Consumer confidence rose to 94.5 from 89 in September, a seven year peak.

*********************

1. Sold 101 LXP at $10.65 Taxable Account (see Disclaimer):

Snapshot of Trade: 

2014 Sold 101+ LXP at $10.65

As noted previously, I am in the process of transferring my LXP position solely to my Fidelity Roth IRA for the reasons given in South Gent's Instablog - Posts on LXP | Seeking Alpha. As noted in that post, I am receiving a 5% discount currently on the reinvestment price through Fidelity's indirect participation in the LXP DRIP plan. By owning LXP only in a Roth IRA now,  I also avoid the artificially created income generated by receiving a discounted rate on the reinvestment price. As shown in the snapshots contained in that SA Instablog, the amount of the discount was added to the dividend, creating artificial dividend income, and consequently the cost basis was also increased to reflect the artificially created dividend income.   

I have already bought the 100 shares in the Roth IRA that are being substituted for the 100 share lot sold in a taxable account. Added 100 LXP At $10.43 - South Gent | Seeking Alpha

Closing Price Today: LXP: 10.74 +0.16 (+1.51%)

I still own almost 55 shares bought in a Vanguard Roth IRA. I have decided to keep those shares for now and simply quit reinvesting the dividend. I am not receiving a 5% discount on the reinvestment price since Vanguard purchases the shares in the open market.  I may sell the shares in the Vanguard Roth IRA when and if the price goes over $11.5 and then wait for an opportunity to buy those shares back in the Fidelity Roth IRA.  

2. Bought 200 WIW at $11.45 (see Disclaimer): This is a contrarian trade. 

Snapshot of Trade:

2014 Bought 200 WIW at $11.45

Security Description: The Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (WIW) invests mostly in U.S. treasury inflation protected securities, weighted at 73.6% as of 9/30/14. The fund also owns some corporate bonds. 

The fund is able to pick up some yield by investing in high yield corporate and emerging market bonds plus a small weighting in foreign sovereign bonds. The fund had a small weighting 8.3% in non-U.S.  inflation protected bonds; 9.25% in emerging markets; and 8.99% in junk. 

The sponsor lists the duration as  years as 6.75 years as of 9/30/14. The sponsor for the main TIP ETF shows an effective duration of 7.58 years:  iShares TIPS Bond ETF | TIP


The fund was leveraged as of 10/24/14 at 26.23%, according to the sponsor. That leverage adds risks, while possibly creating a modest increase in yield given the narrow spread between the cost of borrowing and the yields provided by bonds purchased with borrowed funds. 

A treasury inflation protected security will increase the bond's principal amount (par value) semi-annually by CPI. Smart Bond Investing: TIPS and STRIPS - FINRA

Since this bond CEF is weighted in TIPs, the current yield will be low. The lower current yield, compared to non-inflation protected treasuries or corporate bonds, is the trade off for the inflation protection.

The fund is paying a monthly dividend of .0335. Distributions; 

At a total cost of $11.45 per share, the yield would be about 3.51%. At least that yield is better than the .01% paid by the money market fund used to fund this purchase.

Data as of Date of Trade: 10/28/14
Closing Net Asset Value Per Share: $13.47
Closing Market Price: $11.5
Discount at $11.5= -14.63%
Discount at $11.45 Purchase Price: -15%
Average Discounts:
1 Year: -13.35%
3 Years: -12.13%
5 Years: -10.37%


CEFConnect Page for WIW


Credit Quality as of 9/30/14:


Top Ten Holdings:



Last SEC Filed Shareholder Report (period ending 6/30/14)(unrealized appreciation +$31.894+M, page 29)

WIW Page at Morningstar (not rated)

Prior Trades: Eventually, I am going to get caught trading this bond CEF and will then become an involuntary long term owner. So far, however, I have successfully exited every position profitably: 


Total Trading Gains: $656.15 (snapshots in preceding linked posts, mostly in the last one)




Snapshots of IMF realized gains can be found in the last linked post and total $404.5.

Rationale: When and if inflation starts to become a problem, the cost of inflation protection will go up, probably before I would notice it or attribute the change to a fundamental shift in a long term outlook rather than a temporary aberration. 

WIW is selling an attractive discount as noted above. 

If I am caught holding WIW for the long term, I am fine with that result. Prior to this last purchase, I did not own any TIPs, directly or through a TIP fund.

There is a place for TIPs in a bond allocation due to their inflation protection and negative to low positive correlation with other asset classes. (Stocks, Bonds & Politics: Treasury Inflation Protected Securities as a Non-Correlated Asset; and see Cristine Benz article at Morningstar.)

Risks: A treasury inflation protected security will not protect an investor from a rise in rates due to interest rate normalization rather than to an increase in inflation and inflation expectations. As the comparable maturity non-inflation protected securities started to decline in price and rise in yield last year, the TIPs did the same.  The TIP ETF had a -8.49% total return in 2013.

Inflation and inflation expectations have been trending down. Thus the accretion in the TIP's principal amount resulting from inflation has been declining too. 

The current yields on TIPs are really low: Daily Treasury Real Yield Curve Rates; Chart 10-Year Treasury Inflation-Indexed Security, Constant Maturity-St. Louis Fed


When I sold my individual 10 year TIPs in 2012, the purchaser acquired bonds that had a negative yield of -.89%: Item # 1 Sold 3 TIP Bonds Maturing in 2019 at $120.45 I calculated at the time that my profit of $838.87 (see snapshot) would likely exceed the interest payments and principal accretion from CPI until maturity on 7/15/2019. I was then receiving less than $60 annually from that TIP with a 1.875% coupon purchased at auction. Needless to say, the pricing of that TIP at a -.89% current yield made no sense and was in my opinion the bond market equivalent of 1999 stock valuations. 

In addition, a bond CEF carries its own risks as to pricing. There is nothing to prevent investors from dumping shares and causing the discount to expand further after a purchase. While there would seem to be a rational limit on such an expansion, there is in reality an indeterminable one. The most severe crunch came in October 2008 when bond CEF discounts went over 30% and briefly over 40% in some cases.

The sponsor lists a variety of well known risks at its webpage, including a very long summaries relating to interest rate and leverage risks. For anyone unfamiliar with those types of risks, they can be read by clicking "risks and other considerations" near the top of the main sponsor's page for WIW.

Future Buys/Sells: For a low yielding CEF like this one, I need to successfully exist an existing position before buying more shares. I do not have a target price. A narrowing of the discount to 12%-13% with some slight net asset value appreciation, plus a few monthly dividend captures, might be sufficient to trigger a sell.  

Closing Price Today: WIW: $11.50 (unchanged)