Friday, January 22, 2010

Bought 100 WLFCP at 10.1/SOLD 100 MSPRA at 21.43/Sold 50 CBG at 13.2/Took Wilshire (WIBC) out of Category 1 and Added 65 Shares at 8.6/Oceanfirst

Over the past several trading days, the market has been reacting negatively to positive earnings news. I view that as a negative sign. While some are saying that the market is using any excuse to take profits, there is an underlying stream of negative developments indicating some deceleration of growth along with more pessimism about jobs. The political environment has also turned decidedly more populist as Obama's problems multiply and openly hostile to large financial institutions. The VIX shot up almost 20% yesterday to close at 22.11, well above the important 20 demarcation line. On the other hand, I have not seen enough evidence of a slowdown that would call into question a slow economic recovery in 2010 and an end to job losses in the first quarter. The sharp, and so far short in duration, pullback in the market averages is indicative of corrections in an ongoing cyclical bull market. However, there is enough negative news in the political arena now to keep me from buying stock in any large financial institution.

1. Keycorp (own common as LT): KeyCorp (KEY) is just another large regional bank whose long term shareholders have suffered greatly under bad management. In any recession, even competent bank managers can not prevent greater than normal credit losses, the distinguishing characteristic between competent and incompetent is one of degree. KeyCorp reported another awful quarter yesterday. The 4th quarter loss from continuing operations was reported at 258 million or 30 cents a share. KEY increased its loan loss reserves by 756 million to 2.5 billion, a staggering 4.31% of total loans. For 2009, KEY reported a loss of 1.581 billion or $2.27 per share. The tier 1 risk-based capital and Tier 1 common equity ratios were 12.68% and 7.46% respectively as of Q/E 12/09.

2. AT & T and Verizon: I thought that this was an interesting article comparing Verizon and AT & T on some key metrics over the past decade: Seeking Alpha

3. Too Much Negative News To Overcome Yesterday: By far the most important negative development in my view was the announcement by Obama that he was going to try to reign in the risk taking of big banks. MarketWatch This sent the stocks of large banks down yesterday, and two of them are in the DJIA (JPM & BAC). Personally, I am not opposed to reasonable measures that will make it more difficult for the wizards to blow up the financial system while pursuing their own personal agendas to make as much money as possible for themselves regardless of the consequences of their actions to billions.

The next piece of bad news came from the labor department, which reported a 36,000 increase in initial claims for unemployment from the prior weeks revised number. ETA Press Release The last piece of news was the decline in the Philly Fed's manufacturing diffusion index of current activity from 22.5 in December to 15.2 in January. /business-outlook-survey/2010/ pdf MarketWatch The new orders component fell from the December levels.

On the positive side, the leading indicators from the Conference Board did increase 1.1%.

4. Wilshire Bank (WIBC)(own LT category)/Added 65 shares at $8.6 YESTERDAY (see Disclaimer): Wilshire Bancorp reported a 3.2 million dollar profit in the 4th quarter or 11 cents per share. The forecast was for earnings of 3 cents. For 2009, the earnings were 56 cents per share, down from 90 cents in 2008. Non-performing assets decreased by 12% during the 4th quarter. The allowance for loan losses as a percentage of total gross loans was strengthened during the 4th quarter to 2.56% from 2.24% as of 9/30/09. This is a summary of Wilshire's capital ratios as of 12/31/09:

Dollars In thousands except per share info)December 31, 2009Well Capitalized Regulatory RequirementsTotal Excess Above Well Capitalized Requirements
Tier 1 Leverage Capital Ratio9.77%5.00%$161,780
Tier 1 Risk-Based Capital Ratio14.37%6.00%193,025
Total Risk-Based Capital Ratio15.81%10.00%134,030

I am taking Wilshire out of my Category 1 and have placed it yesterday in my Category 2 of my Regional Bank Stocks' stratagem. Consequently I can increase my investment now over $300 based on what I perceive as satisfactory results.

Previously I had bought just 45 shares at $6.54. Item # 11 Bought LT WIBC This limit was due to the Category 1 restriction of $300. Since I lifted that restriction by placing Wilshire in Category 2 yesterday, I added 65 shares at to bring my total exposure to 110 shares.

Wilshire is a California based bank that primarily caters to Koreans.

In 2005 -2006, the stock was mostly trading in a channel between 16 to 20, and started to slide in 2007 before the onset of the Near Depression: WIBC Stock Charts - Wilshire Bancorp Inc The only worthwhile analyst report, which I can access, on this small regional bank is from Morningstar which rates it 4 stars.

4. Sold 100 MSPRA at $21.43 (See Disclaimer): I had a good profit in these equity preferred non-cumulative stock so I have harvested the profit yesterday. I bought these shares at $12.88 in May 2009 and received a few quarterly dividends. Bought MSPRA This sale may have resulted from an anxiety attack suffered by the Old Geezer when listening to the Beanpole yesterday morning. Listening to politicians from either Tribe has been known to cause feelings of extreme nausea.

5. VIX: Yesterday, the VIX jumped back over 20, a negative development in my VIX Asset Allocation Model. The move was significant, a rise of almost 20% to 22.11. ^VIX: This pattern of moving for a brief period below 20 and then bursting out to above 20 is indicative of an Unstable Vix Pattern. It would not be surprising now to see the VIX move up some more, possibly into the mid to high 20s. A burst back over 30 would be a very negative event. Vix Asset Allocation Model Explained Simply With as Few Words as Possible

6. Sold LT CBG at $13.20 (see Disclaimer): The movement in the VIX will cause some paring in what I view as speculative positions, particularly those with large unrealized long term capital gains. One of my most successful Lottery Tickets from 2009 was the purchase of 100 shares of C B Richard Ellis in two fifty share lots. One lot was purchased at $2.39 in an IRA and it was sold last year at $9.73. sold 1/2 cbg The second 50 share lot was bought in a taxable account at $3.49 in December 2008. CB Richard Ellis I wanted to wait until at least it turned into a long term capital gain before selling. I sold those shares yesterday at $13.2. So the percentage gains on those two sales were huge. Under the trading rules now in effect, I must invest the proceeds of LT sales into income generating securities that meet the standards of the LB.

7. Health Care Legislation: It is not surprising that the House will be unable to approve the Senate health insurance legislation without amendment. Pelosi admitted that she did not have the votes. From the viewpoint of the more liberal Democrats in the House, the Senate plan did not go far enough and had certain other objectionable features primarily to their union supporters. Obama has made it clear that the Senate should not act until the new senator from Massachusetts is seated, whereupon he will join the other 40 Republican senators in opposing even the watered down Senate version of the healthcare bill that did not include the public option. ABC News That will be enough votes to keep a filibuster alive and prevent a vote on an amended bill. The GOP senses now that he has a winning position by being completely obstructionist on this issue. Consequently, based on the unexpected development in Massachusetts, I would not expect any legislation to pass Congress extending any government supported private insurance to uninsured Americans, and certainly nothing resembling a "public option". In fact, it would be reasonable to conclude that the Democrats have had their one and only chance to do something on this issue for a generation. It is not likely anytime soon for the Democrats to have the 60 votes in the Senate to pass anything that would be controversial on health care, and most likely they will be lucky to have 55 votes after the midterm election. So, for those who supported health reform, the people in Massachusetts just killed your hopes. I was never a supporter of the Democrats' plans based on my fiscal conservatism, and a belief that the nation could not currently afford another large social program at a time when the government was already running trillion plus dollar deficits. Until the medicare and social security funding problems are adequately addressed, which has not yet happened, and bipartisan agreement occurs on how to meaningfully control the rise in medical costs, which may never happen, it is impossible for me to support another expensive health care program.

8. Bought 100 WLFCP at $10.1 (see Disclaimer): This is the income replacement for the 100 shares of CBG. WLFCP is a cumulative equity preferred issue from Willis Lease Finance Corporation. The fixed rate coupon is 9% on a $10 par value. So, the yield at my cost is a tad under 9%. Dividends are paid monthly. Quantum believes that the distributions are qualified dividends: I will not be in a position to verify that assertion until I receive my 1099 for 2010, sometime in early 2011. I did note in the prospectus a statement at page 61 stating the opinion of Willis that payments would so qualify. I have no reason to question that assertion. It is unusual to have a non-REIT cumulative equity preferred stock. The negative feature about this cumulative preferred is that no interest is paid on the deferred amount.

This is a link to the prospectus:

Willis is a lessor of aircraft engines. The common stock symbol is WLFC. The company has a lot of debt which is the main reason why I have not bought the preferred issue until I ran out of alternatives. WLFC: Balance Sheet for Willis Lease Finance Corporatio

The consensus estimate is for earnings of 2.38 in 2010: WLFC: Analyst Estimates for Willis Lease Finance Corporatio

I did review the last quarterly report which looked good to me: The company reported diluted earnings per share of 94 cents for the Q/E 9/09. The company also announced recently a stock buyback: / More importantly for me as a new owner of the preferred stock is that Willis recently closed an extension of its revolving credit facility:

In addition to the overall level of debt, another negative factor is the absence of a common share dividend. This simply means that there is nothing stopping a deferral of the cumulative preferred dividend. There is a stopper provision in the prospectus at page 58:

"We will not be permitted to pay or set aside dividends on, or redeem, purchase or otherwise acquire, any of our capital stock ranking junior to the Series A Preferred Stock unless we have paid or set aside for payment all dividends in arrears, if any, on the outstanding shares of the Series A Preferred Stock and any other series of stock ranking equally to our Series A Preferred Stock. As of the date of this prospectus, we only have one other class of capital stock outstanding, which is our common stock and related rights. Our common stock ranks junior to our Series A Preferred Stock as to the payments of dividends and in liquidation."

This would be activated for as long as the firm continued to actually purchase its common stock under its current stock buyback program.

I do not believe that this purchase has much upside appreciation potential in the stock price. I would be content to hold the security for two or three years, collect the dividends, and to sell the shares at $10.3.

9. Baby Berkshire & Regional Banks Provide a Ray of Light Yesterday: My baby Berkshire shares did split yesterday 50 to 1 and provided me with one of the few bright spots in yesterday's carnage. Post split, the shares rose $3.2 after gaining $144 the day before the split. The BRK-B shares are part of my 2010 Speculative Strategy.

The regional banks seem to be benefiting from the political harangues being leveled at their large brethren, and several of the stocks in my regional bank strategy had good gains yesterday along with most of my bonds. I suppose that the adoption of the Obama tax levied only against the liabilities of the big financial institutions, and this new regulatory push, may make the smaller regional banks more attractive to some investors. I have over 20 of these regional bank stocks in my regional bank strategy now. About five new names, my favorites among those not yet owned, have risen too much over the past few days for me to add any of them without a pullback in price. I am trying to remain somewhat disciplined in my purchases, and to avoid chasing stocks which seem to be gaining in popularity by the day now.

10. OceanFirst (OCFC): This small regional bank located in New Jersey reported disappointing results for the 4th quarter. OceanFirst Financial Corp. reported an E.P.S. of just 12 cents, well below the 25 cent estimate. And the bank cut the dividend from 20 cents to 12 cents. I would not expect a dividend in excess of earnings per share to be maintained for an extended period. So I am more disappointed with the earnings report than the dividend cut. I did not see anything in the report that would cause me to jettison my 50 shares or to buy another 50 shares even with a point decline in the stock price. The interest rate margin was 3.76%. Non-performing loans as a percentage of total assets stood at 1.55%.


  1. As always, thanks for your commentary. I was disappointed enough with OCFC results yesterday afternoon that I sold my lots bought at 10.04 and 10.30. I was in this for the .20 dividend and maybe made a RB decision to exit the shares. As for another nugget I picked up due to your publishing was UBSI for which I realized a 43%gain since my purchase at 16.65, including dividends and distributions. I was in this for the proverbial "long-haul" but had Jim Cramer's rant "bulls make money, bears make money, pigs get slaughtered" in my head and ended up realizing the gain, since it jumped to the extent it did in such a short time. Also, the pivot point is 22.70 with the recent "break out" and it really could go either way from here with the next resistance at around 24 and change and support at 21 and change. Thanks for the posts.

  2. Luther: I am sticking with my plan on regional banks, though I certainly understand the benefits of trading in what I call a long term secular bear market currently in an Unstable Vix Pattern ( a market pattern that is not conducive to long term buy and holds unless the objective is to end up nowhere after about 15 years). I have been mostly in a trading mode for about a decade or so now, going back to around 1998, and the regional bank strategy is an exception to that trading pattern.

    The market seems to be reacting favorably to the earnings miss from OceanFirst. Institutions will be less concerned about the dividend cut. It is more difficult for me to keep UBSI than OCFC, given the percentage gain that I have in UBSI, and far more difficult to hang onto WBS bought at $4.58 or EWBC at $5.7 than UBSI. Yet, I still own all of the above.

    I will end up with something like 30 names in my regional bank strategy, with the intent of keeping most of them for at least five years but no longer than 10. I have already experienced several unexpected gains such as the WBS and EWBC, and I do not know now which ones will ultimately turn into a ten bagger or turn into ashes. I expect both to occur. So that is why I will manage them as a group, mostly selling only after I became convinced the bank is moving toward failure.

    One benefit of a longer term perspective will be that the dividend yields at my cost will hopefully look very attractive in about 5 years or so for many of these banks. Some like UBSI were already attractive at my entry price. But, on the downside, I could lose my unrealized gain in UBSI pretty quick with one nasty earnings surprise, or even a change in the current perception on the likelihood of a double dip recession on the horizon.