Saturday, December 12, 2009

New York Community Bank (NYB) Mention in Barrons-Holding Period for Regional Bank Strategy/Kass: Short PBI?

Continuing the discussion from Friday night's post, and before the Headknocker showed up to pontificate, the LB said that maybe the Head Traders need to apply for government work, where their efforts would be amply rewarded. Apparently, according to the lead article in Friday's USATODAY, government work is not what it use to be. Surely, the LB could be one of those making 100 grand a year. In fact, RB, who occasionally has a spark of insight, then said why doesn't everybody just quit their jobs and apply for government work, $100,000+ a year with $42 thou in benefits with a nice pension and free health care. RB noted that this would solve the unemployment problem and obviate the need for "health reform". LB knew what was coming next. RB said that Santa Claus could be asked to pay one-half, and the Easter Bunny the other half, the RB added with glee realizing that it had just solved all of the pressing issues of the day, so Congress can go back home for the winter, and take next year off too added the OG.

The USA Today article points out that the number of federal employees making over 100 grand leaped to 19% of the federal work force during the recession. But OG said he was fine with all that, because the Chinese were paying for it anyhow.

The Old Geezer, concerned about his place in the scheme of things here at HQ, wondered whether the RB would be so kind to ask Headknocker why the OG was fired as Head Trader just before Christmas, after all the HK had just said that none of the HTs would be so fired as their just reward for advancing HK's capital position in 2009.

Whereupon upon the entry of the GL and before he started to pontificate for the troops, RB asked the HK whether he violated a promise to the OG by firing the Old Goat as the HT just before Christmas. The HK was stunned by the audacity of such a query, even from the RB, but realized that it was important to maintain the morale of the pion minions and the minion pions. HK replied that OG had not been fired but reassigned to a new position, as guardian ad litem for the RB who better get its ass in gear for trading next week.

With the Old Geezer out of the picture, HK let it be known that the HTs should not be making any more contributions to our Uncle Sam for the remainder of 2009, no matter how needy it is, by selling stocks for short term gains. Possibly, a loser could be sold to offset some of those gains the OG had taken since March whenever he got a little jumpy. Really, those $100 to $500 short term gains have added up.

HK concluded by saying the OG has a purpose at HQ, maybe he needs to spend more time reading newspapers, and culling through financial books and articles, possibly an idea may pop into that aging brain and remain there long enough to be communicated to the LB. And someone call the Doc, the HK ordered, and get some of those meds for anxiety attacks. The OG may need to be heavily medicated if allowed to return to the trading desk as the HT. And, the HK wanted to know if the RB had called the broker to ask for a mulligan on the Nestle sell, obviously justified since the OG was at the helm in an unmedicated state that day which is ipso facto sufficient by itself for a do over under one of HK's fiats, the broker is sure to understand and give the HK's account a credit for 100 shares of NSRGY: AFTERNOON COMMENTS: 6/23/09/ SOLD NESTLE & BOUGHT BRKB And that link jolted one of HK's ten functioning memory cells, ask him about a mulligan for the BRKB sell too by that Old Goat:/SOLD BABY BERKSHIRE SHARES/

1. New York Community Bancorp (NYB)(owned): Michael Santoli had some positive comments about NYT in his Barron's column. While noting that some analysts were not positive on NYB's FDIC assisted takeover of the failed Ohio institution, AmTrust, Santoli notes that the generous dividend paid by NYB appears to be safe if the 2010 consensus earnings estimate of $1.22 is "even close to correct" and there may be a couple of more dollars to the upside. I would not expect much more than the two dollar pop already received since my recent purchases in the short or intermediate term. The dividend is important, having a bond like quality at the qualified dividend tax rate, with my yield being over 9% at my average cost of a tad under $11. Any appreciation over that level would be viewed as gravy, and I already have about two bucks on 200 shares.
{New York Community Bank at $10.57 to $11.3 Bought 50 NYB at $11.3 50 NYB at 10.9 50 NYB at $11 Added 50 NYB at $10.57}

FBR Capital markets did raise its price target to $16 form $11 after the AmTrust acquisition was announced, and its opinion is summarized in Barrons research report section.

NYB is part of my Regional Bank Stocks' strategy. A reader asked me last Friday whether I intended sell one of the stocks bought pursuant to that strategy after it popped 15%. I think that it would be worthwhile to copy my response to him, which can also be found in the comment section to this post: Cramer Likes UBSI/Gannett/Links to Fed Tables: Real & Nominal Rates/Dividends & Interest/The Importance of History in the Investing Process:

"All of the bank stock buys since March are pursuant to a strategy modeled on what worked subsequent to the 1990-1991 near death experience for the banks. The intent is to hold them as a basket, not investing too much in any of them, and hold for five years or more. Occasionally, it will be necessary to sell one when it starts to look like road kill which I did with a small bank in California. I was reading a transcript of its earning call, and the CEO was saying that management had just recognized there was a downturn in the condo market in California. LB said that it knew about that downturn for at least a year before it occurred to this bank CEO, and LB was sitting at a desk in the SUV capital of the world, unable to even see California from his window. That was a sign of something amiss, so I sold, and it later turned out that the bank had not exactly been forthright in taking losses, the management was sacked, and the FDIC later seized it. I sold before all of that happened for a $50 loss.

So, that is my strategy for all of these regional bank buys that I add to this post as I make them:
Regional Bank Stocks/Divorcing Demand For A Service From Any Responsibility to Pay for It/CPB/ Existing Home Sales/ZBPRA In short, I am looking for several five baggers over the course of five to fifteen years, and I do not know now which ones will give me that kind of return or whether any will. Maybe one of those that I have placed in Category 1 will surprise me. But several banks produced those kind of returns for purchases made in the 1990-1991 period, and held for 10 years or so. The past is sometimes prologue, history does repeat itself, and this time may or may not be different, or maybe this latest bank debacle is different and the recovery will not be the same, not as robust or taking much longer to happen. So no one knows the future but that is how I am going to play it.

But I understand why others would clip profits on fast moves in this kind of dicey and uncertain market.

I would hasten to add for the strategy to work, something like a repeat of the 1992 to 2007 period for the banks will need to happen. UBSI, for example, was at over $35 in 2006, twice its current price. . . .

I would add the following to my last comment. So far, EWBC is up almost 300% and WBS is up over 200% since my purchases. And, I still own those two. I am cognizant that there is a duality of risk over long periods of time, a frequent topic of discussion in this blog. In fact, I believe that a longer holding period can increase risk rather than diminish it. I discuss that issue in the following blogs:

Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets/ Novartis or Sanofi

RB Wants to Tell a Story/VZ/Posts on Tax Issues relating to Equity and Trust Preferred Stock and Deferral of Cumulative Preferred Dividends

By holding EWBC longer, say for another five years, I increase my risk of something going terribly wrong and then losing my profit. On the other hand, if I held another five years, maybe it will go from 5 to 35 too. And maybe one of the banks held in category 1 will go from 3 to 30. That is why I would look at this strategy at the group level rather than focusing on individual security gains or losses.

Still I am mindful of the long term risk of the unexpected happening. So, in five years, I may start to take profits in one or more regional bank names. For example, assume EWBC is at $30 in 2015, I may sell even if it could go higher, just to lock in the profit at some point. But the key to this strategy is to let many of the investments run, and culling only when I view a failure is near at hand.

I would add that I can afford to patient because I am not risking much capital. The total amount invested so far is not material to me. That is an important psychological factor for the Old Geezer, who has a tendency to hit the sell button during one of his panic attacks.

So, there is no certainty about the future, which is always full of surprises, obvious points sometimes forgotten in the day to day process of decision making. I am confident, however, that I will increase my risk by extending my holding period deeper into the future, say 15 or more years from now, and I also can decrease it with a holding period of a shorter duration and by diversifying my risk with a large number of holdings. Five years is a good starting point from my perspective in starting to sell a few of the regional bank stocks which have been purchased since March, and in the upcoming weeks ahead, but some may end up being held for 10 to 15 years. Within 10 to 15 years from now, I suspect the risk related to holding bank stocks now will be sufficiently significant that it would be wise to liquidate whatever is still owned at some opportune time of my choosing then.

2. Bank of America (BAC)(own common, equity and Trust preferred): My larger position is in BAC common. I did sell some short term bonds, along with those from other firms, to fund the RB's stock market frolic in March through June { ITEM #8 Potpourri This Evening May 18th/Bought More AT & T & Item #4 Sold BAC Bonds} (also the exposure to BAC securities exceeded 10 thousand for over two years which was a major violation of one of LB's trading rules) It would have been better to keep all of those bonds and dip into the cash reserve. All of those bonds were paying monthly interest at over 5%. But, LB was a stickler for deviations from its Vix Model Asset Allocation Model before dipping into that reserve so bonds had to be sold instead.

It seems that BAC common has become the "it" stock in certain circles. I notice that those shares are recommended by Doug Kass in his interview in Barrons. John Paulson, the hedge fund manager who made a fortune better against the index (ABX) that tracks the strength of subprime mortgages (WSJ) told his clients in mid November that he expected BAC to double in price over the next two years. Guru Maybe I will consider splurging and buy another fifty shares, or maybe I will let the magic coin decide.

3. Kass Shorts Pitney Bowes: I also noted that Kass was shorting Pitney Bowes (PBI), which I do not own. I found his argument unconvincing. And, occasionally I like to highlight a short sellers best ideas and then come back to them later to see how well it turned out for them. PBI closed at 23.15 on Friday. Kass claims that more people are emailing and paying their bills with automatic withdrawals from their checking accounts. But PBI sell products and services to businesses, not to individuals. It has a 80% share of the postage meter market in the U.S. and a 60% share internationally. The problem is that the business is stagnant, not that it is going away. PBI's dividend at the current price results in a yield of over 6%, which gives the shares a good floor in the current rate environment, and Kass's fund will have to pay that dividend on his shorted PBI shares. short seller on the hook for dividends. While Kass is right about the debt being large, the free cash flow is also large. I think that the free cash flow in 2008 was around 750 million and PBI may exceed that number in 2009. If PBI started to grow revenue again organically, I would consider buying it. But, revenue is still decreasing year over year, with the 3rd quarter of 2009 showing a 12% decline from the 3rd quarter of 2008. We have been in a worldwide recession, so I would not be overly concerned about those numbers unless they persist into the first half of 2010.

I would add that it is entirely possible with RB at the helm of the trading desk next week that it might buy PBI on a dip just to be contrary to what he calls "know it all LBs".

4. Retail Sales and Consumer Confidence: The government reported that retail sales in November rose 1.3%, more than double the consensus estimate. ADVANCE MONTHLY SALES FOR RETAIL AND FOOD SERVICES: Latest Release Consumer confidence reported by the University of Michigan leaped to 73.4 in December 67.4 in the prior month. TABLE Reuters This is a link to a graph of this index since 1975: St. Louis Fed: Series: UMCSENT, University of Michigan: Consumer Sentiment It appears to me to be tracking the low levels from the 1980-1981 recession.

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