I do not think the market appreciates the government's "criminal" investigation of the nation's leading investment bank. Goldman fell a stunning 9.39% yesterday and the ^VIX shot up 19.58% to 22.05, staying just one day below 20 after being jolted by news relating to the European debt crisis on 4/27/2010. ^VIX: Historical Prices for VOLATILITY S&P 500 It does not appear that the VIX is ready to form a Stable Vix Pattern. If I had to guess, I would anticipate that it will not form a Stable Pattern as defined in my VIX Asset Allocation Model anytime soon. Still, the movement on Friday is not sufficient yet to cause me to restart the count. If there is one more jolt up like today, taking the VIX to the mid 20s, then that would be consistent with the continuation of an Unstable Vix Pattern, and would require a restart of the count. Since I formulated this model, I have required continuous movement for 3 months below 20 in the VIX, allowing for some temporary and small deviations into the low 20s, before declaring the formation of a Stable Vix Pattern. Vix Asset Allocation Model Explained Simply With as Few Words as Possible More on VIX AND ASSET ALLOCATION
This is a discussion from a post in May 2009: "There will always be a lag on the signal for the next bull market due to the preservation of capital requirement inserted by the nerd that requires a 3 month period of the VIX below 20 before stamping it as a Stable Vix Pattern. There is a change underway, however, in what can be done now after the VIX fell below its 50 day and 200 day moving averages. CBOE VOLATILITY INDEX Index Chart"
When coming out of an Unstable Pattern, the importance of stamping the new pattern as a Stable Vix Pattern has more to do with my trading strategy and my willingness to commit sideline cash. If I develop more confidence in the long term duration of the cyclical bull move off the March 2009 low, I am more likely to hold onto positions far longer and to cut down the number of trades. A trading strategy is required to make money in a long term secular bear market. By stamping the pattern as a Stable Vix Pattern, which I have not yet done, I will be more likely to let positions run. The worse things to do in a secular bull market are to engage in market timing exercises and to trade a lot.
I would just illustrate this point with a quote from a previous point that breaks down the inflation adjusted return for the S & P 500 with dividends reinvested for what I define to be long term secular bull and bear markets:
"Over my lifetime, starting on 1/1/1951 to 12/31/2008, there have been two long term secular bear markets. Over that period of time (1951- 2008), the inflation adjusted annualized return of the S & P 500 with dividends was 6.49%, which I would view as a good long term inflation adjusted return. CAGR of the Stock Market: Annualized Returns of the S&P 500
But, I want to roughly break out two long term secular bull markets as I define it:
1/1/1949 to 12/31/1965: 14.4% annualized after inflation
1/1/1982 to 12/31/1997 (part of those years I would not include): 14% annualized after inflation
Now let's look at some of the bear data, and these are significant durations in an individual's life:
1/1/1966 to 12/31/1981= -1.04% annualized
1/1/1998 to 12/31/2008: -1.44% annualized
So, while it is difficult without question to identify whether the stock market is in a long term bull or bear pattern, and then to adjust your asset allocation accordingly, the significance of making a correct assessment can not be questioned by Siegel or anyone else without sounding ridiculous."
1. WesBanco (WSBC) (Regional Bank Stocks strategy): WesBanco reported earnings of 30 cents for the 1st quarter. The net interest margin was 3.57%. NPLs as a percentage of total loans was 2.84%. The total risk-based capital ratio was 12.68%, up from 12.37% as of 12/31/2009. Tangible equity to tangible assets was 6.06%. The tangible book value was $11.63 per share. Book value was $22.45 per share. The consensus analyst estimate was for 22 cents. This is the link to the SEC filed Press Release. WSBC repurchased the government's preferred stock in September 2009 (see page 12: Form 10-K)
2. Merchants Bancshares (MBVT)(own-regional bank strategy): Merchants Bancshares, Inc reported net income for the 1st quarter of 2010 of 3.83 million or 62 cents per share, up from 48 cents in the linked quarter. NPLs as a percentage of total loans was .99%. Net interest margin was 3.73%. Book value per share was $16.07.
3. Nasdaq OMX (NDAQ) (own-2010 Speculative Strategy): NASDAQ OMX reported a non-GAAP E.P.S. number of 43 cents per share, down from 48 cents Non-GAAP in the same quarter a year ago. The GAAP number was 28 cents. This was a disappointing report, missing the consensus estimate by 3 cents and light on the revenue also.
4. Bought 50 of the TP SBIBN at $23.2 on Thursday (see Disclaimer): This is a typical Trust Preferred security. The issuer is a Delaware Trust called Sterling Bancshares Capital Trust III, owned by Sterling Bancshares (SBIB). Sterling is a bank with operations in Texas. The bank has 58 branches located in San Antonio, Dallas and Fort Worth geographic areas. Reuters.com
This is a link to the prospectus: www.sec.gov Par value is $25. The coupon is 8.3%. Since I bought shares at a slight discount to par value, the yield at a total cost of $23.2 would be about 8.94%. The TP and the underlying bond mature on 9/26/2032. Interest is paid quarterly. As with other TP issues, the interest payments are cumulative and may be deferred up to five years provided no cash distributions are made on junior securities. (see page S-23) If a payment is deferred, interest accumulates on the deferred amount at the coupon rate. SBIB is paying a 1 cent a quarter common share dividend.
Sterling has not recovered yet to the point of earning a profit. It has repaid the government the TARP funds. It also recently completed a 86.9 million dollar share offering. SBIB reported a loss of 7 cents per share for the last quarter: SEC Filed Press Release The total capital to risk-weighted assets was 16.92%. The tangible capital to total tangible assets was 8.96%. The net interest margin was 4.02%. The consensus estimate is for a loss of 12 cents per share in 2010 and a small profit in 2011: SBIB: Analyst Estimates for Sterling Bancshares
There is no credit rating of this bond to my knowledge. I personally would not consider it to be investment grade which is one reason for the 50 share purchase. On the positive side, the bank can raise capital as shown by recent events and has repaid the government already.
This is not the same bank as STL, based in NY, which is also called Sterling. I own the common and a TP issue from the NY Sterling.
5. Sold 100 GYB at $18.08 in regular IRA (See Disclaimer): This shares were bought at $10.95 in April 2009. Given the conservative management strategy utilized for the retirement accounts, I thought that it would be best to trim my exposure to Goldman Sachs' bonds. I still own 70 shares in the regular IRA account. If it falls significantly, I will simply include it in my next Roth conversion. I am keeping 100 share of PYT in the ROTH bought in two fifty share lots at favorable prices. This is how I resolved the tension between the management style for these accounts and the GS stream of negative news. S & P downgraded the GS common stock to sell on Friday.
6. Bought 50 shares of Sanofi-Aventis at $34.21 on Thursday (see Disclaimer): My last purchase of SNY was at $27.43 in April 2009. I sold those shares on a pop after the payment of the dividend. Typical LB thinking, the RB added. The nerd just bought the same number of shares back that it sold last year and at a higher price.
SNY is selling at a depressed valuation, probably due to some drugs coming off patent like Plavix. There is already generic competition for Plavix in Europe.
The analysts estimate earnings of $4.48 this year and $4.52 next year. SNY: Analyst Estimates for Sanofi-Aventis RB would give the LB its due, noting that it is a somewhat sensible value investor. This would give me around a 7.6 P/E based on next year's estimated earnings. The dividend yield at my cost is around 4.7%. The next ex date is 5/17. So from a value investor's perspective, SNY combines a low P/E and a high dividend yield.
SNY reported a net income of €1.71 billion for the 1st quarter up from €1.58 billion a year ago. This translated into an E.P.S. of €1.31 compared to € 1.21 in the first quarter of 2009: Q1 2010
SNY is headquartered in France. It does file some information with the SEC, including its annual report (Form 20-F) and Forms 6-K which are Press Releases. Sanofi SEC Filings
7. PFBI (own Regional Bank Stocks strategem): Premier Financial Bancorp reported a 1st quarter E.P.S. of 24 cents on a diluted share basis. I am not aware of any analysts covering this bank. Item # 4 Bought 50 PFBI at 7.95 This thinly traded stock did gain five cents on Friday to close at $9.6.
8. GDP: The government reported that 1st quarter GDP rose 3.2%, below the consensus estimate of 3.4%. Gross Domestic Product This number is just the first estimate and will be revised later. Consumer spending rose by 3.6% annualized, the best rate of growth in about 3 years. Some economists estimate that GDP would have to grow at a 5% pace in 2010 just to reduce the unemployment rate by 1%.
9. Sold 100 Ameren at 26.03 (AEE) (see Disclaimer): Ameren unfortunately has significant operations in Illinois, widely viewed as having a hostile state commission responsible for approving retail rates. By hostile, I am referring to a commission that panders to the public and largely disregards traditional ratemaking principles to garner populist appeal. This kind of populist approach to ratemaking, when taken to extremes, will deny the utility a recovery of expenses and a reasonable return on capital. In a 3 to 2 decision, the Illinois Commerce Commission rejected all but 4.75 million of Ameren's 162 million dollar rate increase request. One of the dissenters described the majority decision as an abomination. Ameren responded that it will have to delay or suspend new projects and institute a hiring freeze: pjstar.com The harangue from the AARP supporting the decision typifies the kind of populist bombast that undoubtedly motivated the majority in reaching a decision. The basic approach by the AARP and the Illinois Commission is to expect the utility to provide reliable power, meet growing demand with new plant, and then reduce rates for the consumers. If the company makes a profit, then that is just proof of exorbitant rates. Apparently, Mr. Gallo of the AARP is not aware how much the stock of Ameren has fallen due to decreased profitability. The stock has fallen from about $55 at the beginning of 2008 to $26 now. Ameren Corporation Common Stock Share Price Chart Ameren also had to cut its dividend in half. Contrary to the impression left by Mr. Gallo, AEE's profits have actually declined since 2007. Its return on equity is hovering just over 8%.
In any event, when I see a utility commission abandon traditional ratemaking principals as the Illinois Commission had done, it is time to exit a position. I recently bought AEE at 25.8 , so this transaction was at close to break-even.
I have some other trades to discuss which hopefully will be included in the next post. I have not finished summarizing the trades from last Thursday and Friday.
10. Dividend Aristocrates: This article from MarketWatch has a list of the 43 companies that have increased their dividends every year for the past 25 years. This is a relevant criteria in a dividend growth strategy, where one purpose is to develop an income stream that will grow and even exceed the fixed coupon yield of the firm's bonds. In this list, I own KO, EMR, KMB, XOM, ED, JNJ, and PBI. The recently acquired PPH has LLY and ABT as constituents: Bought 100 PPH at 65.42 My largest positions are probably in KO and ED which are the only two companies on this list where I am currently reinvesting the dividends. I have stopped reinvesting the EMR dividends.
11. Wilber (own Regional Bank Strategy): Wilber reported net income of 1.764 million or 16 cents a share for the 1st quarter, up from 10 cents in the year ago quarter. wilberbank.com/PDF The one analyst that follows the bank had a 14 cent estimate. GIW: Analyst Estimates for Wilber Corporation NPLs as a percent of total loans were 2.43% as of 3/31/2010. The allowance for loan losses as a percentage of NPLs was 67%. The net interest margin was 3.9%. The efficiency ratio was at 68.78%. The Board declared the regular 6 cent per share dividend. GIW did rise 9 cents on Friday to close at $6.81. Volume was torrid for this security at 14,599 shares.
Wilber has yet to generate an unrealized gain for the HK but I am staying with it. This report looks fine to me. Overall the 38 banks in the regional bank basket had a collective bad day on Friday, declining $649 and reducing the unrealized gain to $6,871 (see last revised table at Bought 50 HCBK at 13.27)
I'm learning the hard way about the double whammy of currency risk and populist policy. I own a few shares of an Italian energy company, Enel. Not only is the share price declining as the euro drops, the value of the dividend has declined as well. The dividend was cut last year as the company tries to pay off some of its debt. And, to add insult to injury, the dividend is taxed at the rate of 27% by the Italian government, before it gets to me. (I own it in a ROTH account so US taxes aren't an issue, but neither do I get the credit for foreign taxes paid.)
ReplyDeleteI'm wondering if SNY is subject to the same problems. I want diversification into foreign markets, but the currency risks and heavy taxation are killers. As for Utilities...I'm about ready to throw in the towel on the entire sector.
CATHIE: Some countries have tax treaties with the U.S. that will give a rebate on a foreign tax levied on a dividend paid into a U.S. holders tax account. I am not however familiar with the applicable countries. I believe that TD Ameritrade gave me a credit on Canadian taxes a long time ago for dividends paid into an IRA, though that happened months after the tax was withheld. Fidelity did not do that so I quit holding foreign companies in the retirement accounts. The rebate is the only way to get a credit on foreign taxes withheld on payments made into a retirement account. It might be worth an email to customer service inquiring whether they even make an effort to seek rebates.
ReplyDeleteFrance will withhold either a 25% or a 15% tax. I am not exactly sure under the new treaty.
The matter is discussed at page 171 et. seq of its annual report: "Under French law, dividends paid by a French corporation, such as sanofi-aventis, to non-residents of
France are generally subject to French withholding tax at a rate of 25%" page 173
Under the Treaty, the rate of French withholding tax on dividends paid to an eligible U.S. holder whose ownership of the ordinary shares or ADSs is not effectively connected with a permanent establishment or fixed base that such U.S. holder has in France is reduced to 15% and a U.S. holder may claim a refund from the French tax authorities of the amount withheld in excess of the Treaty rate of 15%, if any. For U.S. holders that are not individuals, the requirements for eligibility for Treaty benefits, including the reduced 15% withholding tax rate, contained in the “Limitation on Benefits” provision of the Treaty are complicated, and certain technical changes
were made to these requirements by the new protocol. U.S. holders are advised to consult their own tax advisers regarding their eligibility for Treaty benefits in light of their own particular circumstances."
I bought SNY in a taxable account. I will make a note in the blog of the tax rate applied to the dividend that I will soon receive. I did own it for one dividend in 2009, paid in the amount of $71.95 and a tax of $8.64 was withheld. This is around 12%.
If you own any foreign security, you are subject to currency risk. This would be true for ownership of the security in ADR form. For Sanofi, I could buy the stock in Euros on the Paris exchange or use U.S. dollars to buy the ADR. While it may be imperfect at times, the ADR should reflect the same value to me as the shares traded in Euros on the Paris exchange. http://www.investopedia.com/university/adr/adr3.asp
You can find more information by searching Google with "currency risk ADR".
There is no way to escape the foreign currency risk except through hedging. Over time, the currency risk on the value of the dividend will ebb and flow. Sometimes, you will receive more when the dividend is converted into U.S. dollars (in effect a dividend raise) and sometimes less which acts to reduce the value of the dividend to a U.S. investor.
My main country currency risk is in Canadian dollars. But I do not convert my dividends from the Canadian currency into the U.S. dollar. Instead, I receive and keep the dividends in the Canadian currency. So, as long as I do not have to convert, I am not facing currency risk, though the value of the investments will fluctuate up and down based on currency movement. Some would call that a currency risk of course, but I am a long term holder of Canadian dollars. If the Canadian dollar continues to rise against the U.S. dollar over time, as I hope it will, then maybe I will convert some of those CADs into $ when the exchange rate is more in my favor than now, and it has been moving in my favor for some time already. If the CAD moves down, my Canadian securities will decline in $ terms. But if I sell at a time when the CAD buys $1.2, I have not realized a currency risk but a currency benefit, for example.
Thanks for your response.
ReplyDeleteStill many lessons to learn in this game.