Tuesday, September 14, 2010

Dick Bove-BankAtlantic/MSFT & Russia/SOLD KMB at 66.49/Bought 100 of the ETF EMLC at 26.18/

China's industrial production increased 13.9% in August, year-over-year, and retail sales increased by 18.4%.

Over the past few weeks, the stocks in my regional bank basket have been more volatile than the major market averages. Yesterday, I had 11 of those stocks increase in value by more than 5% and the overall basket increased by 2.66%, compared to the S & P 500 rise of 1.11%.

The GOP senators have asserted their intent to block the extension of the Bush tax cuts for 98% of the population, which they can do with their 41 votes, unless the Democrats agree to include the top 2% in the extension for an indefinite period of time. Mitch McConnell Stands Firm: No Partial Bush Tax Cut Extension - Political Hotsheet - CBS News NYT

The New York Federal Reserve purchased 3.4 billion dollars of U.S. debt maturing from 2016 to 2020 yesterday: Federal Reserve Bank of New York - Permanent Open Market Operations The NY Fed also set a tentative schedule for the purchase of U.S. debt for the remainder of September and into early October. Tentative Outright Treasury Operation Schedule This is part of the Federal Reserve's decision to continue quantitative easing by reinvesting the proceeds from maturing debt that it originally bought during its earlier massive quantitative easing program which ended last March. The FED has purchased 17.6 billion in U.S. debt since the Fed adopted this reinvestment policy last month. FRB: FOMC Minutes, August 10, 2010 The announcement of the repurchases probably accounted for a reversal in the decline of treasury prices with both the 10 and 30 year treasury closing up for the day.

I thought that I would lead off today's post with a brief discussion of a couple of articles from the Sunday NYT.

1. Dick Bove and BankAtlantic: I did not have access until last Saturday to a report, authored by Dick Bove in 2008, that ranked several banks based on criteria deemed significant by Bove such as the percentage of non-performing loans to total loans. In connection with a story in Sunday's paper, the NYT has published copy of the report at its web site: BankAtlantic v. Bove: Key Documents I reviewed Bove's report over the weekend. In my opinion, there was nothing in Bove's report that would give rise to a meritorious defamation claim. BankAtlantic (BBX), one of the banks included in two lists contained in Bove's report, did nonetheless file a complaint against Bove and his employer claiming defamation among other sundry alleged wrongs.

A news story about the filing of this suit, which contains some interesting statements by Alan Levan, the litigious BBX CEO, can be found at CNBC which shows why it is important for investors to look at source documents rather than limiting their intake to summaries prepared by financial journalists. A more balanced account of the suit's initiation can be found at Bloomberg. The main point made by Levan and his bank is the allegation that Bove failed to make a distinction between the holding company (BBX) and the bank wholly owned by it even though the only reference made in the report was the inclusion of the holding company (BBX) in two lists. {In the section of the BBX quarterly 10-Q which has a table of the capital ratios, BBX does not separate out the holding company from the bank, see page 48 of 10q. Many of the banks that I own, which have a holding company structure, provide capital ratios for both the bank and the holding company in this table.}

After spending $800,000 defending himself, Bove who has seven children and a wife blinded by multiple sclerosis, settled the case without paying any money to the bank. I would be curious to see how the defense bill reached $800,000. If I had been the judge, I would have given Bove a quick summary judgment dismissing the bank's lawsuit.

Bove's report is an expression of opinion protected by the First Amendment. And, as pointed out in the NYT article, 8 of the top 20 banks in Bove's list with high NPLs did in fact fail. One of the Banks listed in the top 20 was the holding company BankAtlantic Bancorp (BBX) whose stock is now trading at under $1 per share. Bove did not say that BBX was likely to fail.

The current consensus estimate for BBX among analysts is for a loss of $2.47 per share in 2010. BBX Analyst Estimates | BankAtlantic Bancorp, Inc.

BBX recently filed with the SEC Form S-1 indicating an intent to sell 125 million dollars of stock. The current market cap of BBX is around 56 million at Friday's closing price of $.92 according to YF.

The last 10q shows a loss of $1.02 per share, or 51.25 million for the Q/E 6/2010. For the first six months of 2010, BBX reported a loss of 71.681 million dollars compared to a loss of 84.967 million (from continuing operations) for the comparable six month period in 2009. According to the NYT, Levan claims that BBX is “a fantastic banking story of a bank that really did extremely well in this recession.” As of 6/30/2010 and on a consolidated basis, NPAs to total assets was at 8.9%; NPLs to total loans was at 6.43%; the Tier 1 risk-based capital ratio was 10.87%; and the allowance for loan losses to nonaccrual loans was at 49.88%: Press Release at p 6 of data attachment

As noted in the NYT article, BBX recently withdrew an offer to buy back its debt at 20 cents on the dollar. One of the hedge funds sent a reply back to Mr. Levan that is priceless, arguing that the lawsuit against Bove suggested the bank was not under financial distress sufficient to warrant such an offer and maybe Mr. Levan and his son need to take a big pay cut.

Part of the bank's equity consists of 315.2 million of trust preferred securities. The bank deferred interest payments on those securities in February 2009 to preserve capital. (p. 44 e10vq). BBX does have a publicly traded TP, BBXT, an issue from BBC Capital Trust II with a 8.5% coupon. I am simply noting that this TP's distributions were suspended in February 2009, not long after the Bove report. I have no interest whatsoever in any security connected with BBX (prospectus for the TP: e424b2)

It is also noteworthy that a federal district court judge granted a "summary judgment" on the falsity of a claim made by Levan on July 25, 2007. The ruling was made in a shareholder lawsuit filed against the bank (page 61 of Order starting a page 383 of the documents BankAtlantic v. Bove: Key Documents) The case is still pending.

Needless to say, BankAtlantic is not on one of my monitor lists. Readers are aware that I own over 50 regional bank stocks (Regional Bank Stocks), and I have about 100 or so which are not owned on a monitor list.

I have mentioned in the past the need to protect American citizens from lawsuits filed by corporations seeking to intimidate the constitutionally protected exercises of free speech. One recommendation that I have made, which will never be adopted given the real power structure in the U.S., is to require the party bringing a libel, slander or defamation suit to pay for an individual defendant's legal fees and costs unless it receives a final judgment action the defendant. This kind of alteration in what is called the American Rule on the payment of attorneys fees in litigation is viewed as essential to protect freedom of speech from the inappropriate use of litigation to suppress it.

In addition, in the event the party bringing a suit involving the exercise by the defendant of First Amendment rights loses the suit, I would then have a separate, limited trial on the issue of whether the suit was based on an objective standard of good faith. A complaint that fails to properly summarize the statements made by the defendant, or is misleading, would create a strong presumption of bad faith. If the original suit was found not be filed in good faith, with the burden of proof on the party filing it, then the defendant would be entitled to treble damages (which would include their attorneys fees and costs), with one-third of those damages paid by the lawyers signing the original complaint without reimbursement from their client. Since these kind of rules will never be adopted the offensive use of litigation to chill the exercise of First Amendment rights will be a continuing problem.

2. Microsoft and Russia: The NYT has exposed Microsoft's involvement in the Kremlin's suppression of opposition in Russia. I really do not need a reason to avoid Microsoft products, but that article reinforced my decision to just stay way. While it true that a repressive regime will find ways to punish dissent, no American firm should cooperate in such an endeavor anywhere close to the level described by the NYT in this article. After this article was published, Microsoft changed its policy about cooperating with repressive regimes to stifle opposition. Microsoft Changes Policy - NYTimes.com


3. Bought 100 of the ETF EMLC at $26.18 (see Disclaimer): EMLC is a new ETF from Vaneck that invests in emerging market bonds in their local currencies. www.vaneck.com/funds/EMLC So at the outset, just looking at the name of the fund, I know that I am exposed to the three main risks connected with owning foreign bonds (i.e. credit, currency, and interest risks). Dividends are paid monthly which is always a plus. The expense ratio after a cap is currently .49. Without the cap which expires on 5/1/2011, the expense ratio would be .6%. The fund currently owns 99 bonds. A list can be downloaded from the sponsor's web site. This ETF fills a hole in my bond portfolio which is the main reason for owning it. I have sold my main CEF (ESD) that invests in emerging market bonds. Another CEF that I own, JDD, does has about a quarter of its assets in emerging market sovereign debt. JDD - Nuveen Diversified Dividend and Income Fund I previously discussed the role of emerging market bonds in my asset allocation: Emerging Market Currencies and Bonds as Non-Correlated Asset Classes

Wisdomtree has introduced a similar ETF with a .55% expense ratio: WisdomTree - WisdomTree Emerging Markets Local Debt Fund (ELD)

Back in the day, the RB was the only Head Trader here at HQ who would buy emerging market debt. While the credit risk is still present, it does not appear to me now that the risk is as extreme as it use to be. In fact, a rational case could be made that sovereign debt issued by several emerging market nations look like better credit risks than many of the developed nations. And, what can you say about the USD long term when the nation is about to conclude its second full fiscal year with over a 1 trillion dollar budget deficit and printing money like crazy. The U.S. budget deficit in the current fiscal year, which ends this month, is on track to hit 1.3 trillion dollars. WSJ.com That is for one year, just to be clear. Prior to Reagan becoming President in 1980, the entire nation debt of the U.S. since the beginning was less than 1 trillion. United States public debt Now, the U.S. is spending enormous sums that it does not have and many want to extend all tax cuts at an estimated cost of 4.9 trillion dollars over 10 years. (2.7 billion of that sum is attributable to the Bush tax cuts -page 44 www.cbo.gov .pdf#page=44) The cost of those tax cuts over the past 10 years according to the CBO was 1.7 trillion. What can you say, except that the nation has lost its collective marbles. Predicting a favorable outcome from the current trajectory seems foolish to me, so it is best to start preparing for what may be inevitable.

4. Sold 50 KMB at $66.49 (see Disclaimer): I sold my remaining shares in Kimberly Clark, which just went ex dividend for no reason other than profit taking. Those shares were part of a 100 share lot bought at $60.58 last March.

I will be busy on other matters during this week, so the number and length of my posts will be circumscribed by other responsibilities.

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