Saturday, July 3, 2010

Added 50 HFFC at 9.71/VZ/Sold Last Double Short/Bought 50 COP at 48.75/Bought 50 REPRB at 20.19/Bought 100 BAB at 25.98/Bought 40 GE at 13.88

I sold my Verizon common stock last July at $31.64. I noticed that VZ completed its spin-off of "New Communications" on 7/1 which then merged into Frontier Communications (FTR) with VZ shareholders receiving 1 FTR share for every 4.165977 VZ shares. Verizon Completes Spinoff of Local Exchange Businesses and Related Landline Activities in 14 States I wanted no part of that transaction and was just waiting for it to be completed before considering buying back those 100 shares of VZ common. I currently own only a senior Verizon bond contained as the underlying security in the trust certificate PJL. That bond has held its value whereas the common shares have been in a slide.

After adjusting the VZ common price for the value of that spin-off, the recent downdraft in the market, and the disdain that investors have for both Verizon and AT & T common now, the price of the VZ shares are about five dollars per share cheaper now at Friday's close ($26.81) than when I last sold them. The yield at the current price is close to 7.1%. Verizon Communications Inc, VZ Stock Quote So, I may buy back that 100 shares.

1. Added 50 HFFC at $ 9.71 Friday (Regional Bank Stocks Basket Strategy-Cat 2)(See Disclaimer): I discussed this micro cap bank when I last purchased 50 shares at 10.12. Like a number of banks in the regional bank basket, I had an unrealized profit in the shares and now I have an unrealized loss. I also briefly discussed the bank's third fiscal quarter report in Item # 1 HFFC As noted then, the tangible book value as of 3/31/201o was $12.79 per share. Press Release

The one analyst who follows the bank estimates earnings at $1.54 in fiscal 2010 which just ended last month and $1.36 in the F/Y ending in June 2011: HFFC: Analyst Estimates for HF Financial Corp I would not place a lot of reliance on just one estimate. That estimate has also the bank earnings 40 cents in the Q/E 6/2010 and 32 cents for the Q/E 9/2010, the first fiscal quarter of the banks 2011 fiscal year.

The current dividend rate is at 11 cents per quarter so it is comfortably covered by earnings, at least so far. At a 44 cent per share annual run rate, the yield would be about 4.53% at a total cost of $9.71.

The Heartland Value Fundowns 4.68% of the shares (325,000) as of 12/31/2009. Major Holders Out of curiousity I checked the last quarterly filed with the SEC, Heartland Group, Inc., and confirmed that the Heartland Value Fund still owned 325,000 shares as of 3/31/2010 (under heading "Thrift and Mortgage Finance").

No preferred stock is outstanding (see balance sheet for the Q/E 3/2010 at p . 1

The allowance for loan losses as a percentage of non-performing loans was 90.78% (page 33- This is much better than many of the small banks discussed in this blog. I do not like to be surprised with the bank announcing a big loss because it has to reserve more for non-performing loans. Ideally, I would like to see this number of reserves to non-performing loans over 100% but 91% is good.

The ratio of non-performing loans to total loans is also good at 1.12%.

This small bank, with a market cap of about 67 million at the $9.7 price, operates primarily in South Dakota. Locations - Home Federal Bank

2. Downdraft in Regional Bank Stocks: My regional bank stock basket has taken a good hit since late April based on increasing evidence of an economic slowdown and escalating fears of an economic slowdown. I believe there have been 3 double dips in the last 150 years.

Another reason probably has to do with the new regulations on overdraft protection, a profitable source of income for regional banks. If you have a bank account, you have undoubtedly been bombarded with notices about authorizing overdraft protection on your account. Analysts are fearful that a good chuck of these fees will be lost as a result of these new regulations promulgated by the Federal Reserve (see, e.g. discussion at TheStreet Beyond overdraft fees)

I suspect that those who have relied on that protection for one reason or another will have already opted to continue it. Some rely on it since they simply have insufficient funds to pay all of their bills as they come due. Others are just bad administrators of their accounts. If the people who use that service do not opt in, then they will soon sign up for it after their checks start to bounce. Possibly, the banks will start to charge more fees for checking privileges to compensate for any loss income. This just appears to me to be primarily a case of some analysts hyper-ventilating about something which may only be a temporary hiccup for the banks, sort of like what is happening now in the market-imagining the worse possible outcome and then pretending it will happen with absolute certainty.

3. Bought 50 COP at $48.75 (See Disclaimer): I recently sold COP in two 50 share lots. The first transaction was a sell of 50 shares at 56.63 (bought at $51.22). The second 50 share lot was bought at 51.35 and sold on 6/17 at $54.71. All of those trades were of recent origin. I also bought and sold COP in 2009 as noted in earlier posts. Sold COP at $46.45 Buy of COP at $38.60 (March 2009 post). Possibly I would have been better off just holding onto those shares bought at $38.6 long term. But, in a long term secular bear market, I am 90% trader and I am not likely to be thinking long term if I receive a relatively quick 10% pop on COP.

So, my last buy of COP shares was at a lower price than the 2 fifty share lots previously bought and quickly sold. This is what I do in a volatile and risky market. If COP continues to fall, I may buy the other 50 shares at an even lower price than $48.75, and then sell the first acquired shares hopefully on a pop. Otherwise, I would be content to just collect the dividend.

This is a link to COP's 1st quarter report at its web site: 04-29-2010

The consensus estimate for 2011 is currently $7.39 per share: COP: Analyst Estimates for ConocoPhillips At Friday's closing price of $48.82, the forward P/E is 6.6.

The dividend has been raised every year since 2001 and there have been no dividend reductions in the data shown in the VL report which starts in 1994. Dividends as a percentage of net profits have been below 50% except for 2009 and the percentage for 2010 will probably be close to 30%. The dividend was raised from 47 cents to 50 cents in the 4th quarter of 2009 and increased again to 55 cents for the June 2010 quarter. At that run rate, the annualized penny rate would be $2.2 per share resulting in a 4.51% yield at a total cost of $48.75. The rate was at 90 cents in 2004, so that is a good rate of growth in recent years. This stock fits the criteria of the dividend growth strategy. Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds If it pops, it will be sold however. If the dividend doubles in six or seven years, and I decide to hang with the shares this time, the yield will double to around 9% at my constant cost.

These shares were placed in a new satellite brokerage account and is viewed as a risky alternative to cash earning nothing in a money market account. If I could receive 4% or 5% on relatively safe investments like Treasury bills or money markets, I would be taking less risks now, not only with stocks but with long term investment grade corporate bonds.

4. Sold Last Double Short on Friday-Used Proceeds to Buy 50 of the Trust Preferred REPRB and 100 of the bond ETF BAB (see Disclaimer): I have already discussed these securities. I previously bought 50 shares of REPRB at 20.78 before the quarterly ex interest date. The 50 share purchase bought on Friday was at $20.19, thus lowering my average cost on the round lot a tad. The yield on this TP is around 7.67% at a total price of 20.19. The YTM is around 8.21% using the Morningstar Bond Calculator. Par value is $25, the maturity is in 2034 and the coupon is 6.2%.

This is the link to the prospectus: Final Prospectus Supplement The underlying junior bond in the TP is rated investment grade. The bond is an issue from the large reinsurance company Everest Re ( RE). Everest pays a common stock dividend, always an important consideration for an owner of a more senior security. Earnings are estimated to be $6.89 this year and $11.95 next year. RE: Analyst Estimates for Everest Re Group, Ltd. I do not buy reinsurance common stocks. If I did not have that rule, this one would be tempting at its current price. Instead, I will stick with this junior bond. I am reasonably comfortable with the credit risk. It goes without saying that there is a lot of interest rate risk in a bond maturity in 24 years, when the OG will be a very old but still spry OG. The bond will need to be sold when and if I become concerned about a prolonged spike in rates.

I will always leave open the option, as picayune as it may be, to sell the higher cost 50 shares for a small profit, using FIFO accounting, and to keep the lower cost shares bought yesterday. Then, if there is a fall below say $19, I would consider adding those shares back. That is how I have been managing a number of these type of holdings since the summer of 2008. I have been using the volatility to sell on pops and then buy on dips. This particular TP, however, is currently not that volatile. Since July of last year most of the movement has been between $20 and $22. It is not unusual to see an up movement shortly before the ex interest date and then selling thereafter. This TP went ex interest on 6/11: Everest RE Capital Trust II, REPRB

The second security is a bond ETF, BAB, from Powershares: PowerShares Exchange-Traded Funds | Build America Bond Portfolio | BAB The expense ratio is .35%. The ETF contains Build America Bonds, which are taxable municipal bonds. Distributions are paid monthly. Currently, I do not intend to reinvest the cash flow to buy additional shares and will simply aggregate it with other payments to buy other income generating securities. This purchase was made at $25.98. This bond ETF has no term date and it owns long term municipal bonds. So, there is considerable interest rate risk and some credit risk which is mitigated by the overall quality and quantity of the portfolio. This is a link to the current fund holdings: PowerShares Exchange-Traded Funds | BAB - Build America Bond Portfolio Holdings The current yield is less than 6%, around 5.75% according to Powershares web site.

I recently bought 50 shares of a closed end fund, NBB, that invests in Build America Bonds. While I will not add to the ETF BAB, I may add to NBB, up to 150 more shares, in the event the discount expands significantly to net asset value. The ETF has a lower expense ratio . The ETF does not use leverage, whereas NBB does, which adds to the yield in the current interest rate environment. Item # 5 Bough 50 NBB at 19.67 The net asset value of NBB can be found at Nuveen's web site or at the relevant page at the CEFA.

5. Bought 40 GE at $13.88 (see Disclaimer): I am not a fan of GE's management. I view them to be like a major league baseball player, hitting .250 over his career, making an average number of errors and sometimes quite a few in a row, and wanting a big multi-million pay package with a boatload of perks, claiming to be the next Mickey Mantle or Willie Mays. And, what's worse, Jeff Immelt appears to be a whiner, blaming just about everybody other them himself and the knuckleheads at GE Capital for the current stock price and the huge dividend cut in 2009. Immelt hits out at China, Obama

Apparently, besides those who write comments to WSJ articles and articles for NewsBusters, or listen to "conservative" talk radio shows and watch the "fair and balanced" network for the gospel and assorted cliches accepted as the Truth, there are in addition an abundance of corporate leaders who are True Believers of the Rush Limbaugh gospel. Rush and Sean, along with the faux blondes at Fox, probably provide most of the thoughts about the world for these corporate titans. In their world, it is the existence of some new financial regulations and a potential tax increase next year on the wealthy that are responsible for the slowing economy.

Of course, none of them have ever made, nor will they make in the future, any rational and factual assessment of what went wrong and what is wrong now. Did the Bush tax cuts and the absence of virtually any regulation in the mortgage market prevent the Near Depression? Or was it the absence of regulation that caused the Near Depression, whether it be regulations limiting the risks undertaken by Freddie and Fannie stymied by the liberal Democrats, or the activities of mortgage originators and brokers and assorted Masters of Disaster who call their CDOs cubed and negative amortization loans with no money down as "innovations". Anyone could have stopped what happened with a few regulations on mortgage originations that would have stopped the factory spewing out toxic trash from every getting off the ground. Sure, home prices would have not gone parabolic, rising twenty per cent a year for several years when real wages were stagnant, but then they would not have crashed by 50% either.

Now, admittedly, none of these obvious problems are being addressed at its source by Congress. A modest proposal by the GOP to require a 5% down payment was shot down by the Democrats, and that is just one of a few regulations that could have prevented the Near Depression. Discussion of Corker Amendment This would need to be coupled with a few more regulations on mortgage originations: Item # 2 Delays in Foreclosure Encouraging Defaults

The regulations and potential tax increases on the wealthy have nothing to do with the current problem. Simply stated, and this is not difficult to grasp, trillions of dollars went up in smoke, and billions into the pockets of those who engineered the wealth destruction, as a direct result of a real estate bubble created by the improvident and reckless extensions of credit, aggravated by unprosecuted and widespread fraud in mortgage originations. This occurred at a time when consumers were taking on an ever greater amount of debt to their disposable incomes and dramatically decreasing their savings rate. And, to make matters worse, wage rates have failed to keep pace with inflation. I am not surprised that GE does not understand, as shown in Mr. Immelt's remarks, since GE Capital had the peddle to the meddle going into the Near Depression period. Who knew? That is just an excuse uttered by those in power such as Greenspan or positions of responsibility in major financial institutions who destroyed their companies or damaged them by failing to understand the broad and easily understood economic forces at work

I am still waiting for GE management to cut their pay. My thinking is that an economic recovery, when it comes and ultimately it will, could lift even a badly managed conglomerate like GE. And, then, I can say to myself or maybe even in this blog, that I was buying GE between $8 and $16, and reinvesting the dividends. This last buy brings me close to 500 shares.

I have financed this purchase, along with a few others to be made in the coming days or weeks, with the sell of a stock ETF that has not been discussed in this blog, sold at a small loss. After thinking about it, I viewed it as too high cost.

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