Thursday, July 15, 2010

Bought 50 ACTI at 1.93-LT/Sold MSPRA at 18.50/Bought 50 HMA at 7.55/FSBK NHTB/INTC/Allowance for Loan Losses & Ranking Criteria for Regional Banks

I received yesterday the proceeds from the partial redemption of DKY at par value, a senior exchange traded bond issued by Delphi Financial.

I did not realize until yesterday that SCEDN, a non-cumulative floating rate preferred stock from Southern California Edison, went ex dividend on 7/1/2010. The penny rate shown at the quote page is $1.5125. Prior to becoming a floater, SCEDN paid a fixed coupon and the penny rate then was $1.3373. So the float did result in a higher penny rate for the last quarterly dividend payment. This security pays a spread of 1.45% over the highest of the 3 month LIBOR, the 10 year treasury or the 30 year treasury. Prospectus Supplement The 30 year treasury would be the highest of those rates now. Although I have a decent profit on the shares, bought at $84 ($100 par value), I intend to keep them given what I view as an advantageous float provision and the overall quality of the credit. This security is hugging its par value, and I don't think there was much of a change on the ex dividend date. SCEDN Southern California Edison Co.: Charts

Walgreens (WAG)(owned) raised its quarterly dividend by 27% to 17.5 cents from 13.75 cents. Conoco (COP)(owned) declared its regular 55 cent quarterly dividend which goes ex on 7/29. ADX and PEO, two owned CEFs, declared their regular quarterly dividends. IGR, a CEF owning real estate companies worldwide, goes ex dividend on Friday for its regular monthly dividend. ING Clarion Global Real Estate Income Fund (IGR) Added to CEF IGR at $6.05 ING Clarion Real Estate Securities

I am not sure why anyone traded off the minutes of the Federal Reserve meeting on 6/23 released yesterday.FRB: FOMC Minutes, June 22-23, 2010 The Fed had already made it clear in its earlier announcement that it had downgraded its assessment of the U.S. economy. FRB: Press Release--FOMC statement--June 23, 2010 I would hope that even a Master of Disaster would realize that it makes no sense to trade on the same news every 3 weeks or so.

Only those who are delusional, or intentionally misrepresenting the best evidence, would make the claim that the Bush tax cuts paid for themselves. The Senate Minority Leader, Mitch McConnell, recently stated that those tax cuts did not diminish the government's revenue, and there was no evidence to the contrary. Some of the evidence that contradicts McConnell's statement is collected in this article in The Atlantic. (see also Tax Cuts Don't Boost Revenues - TIME; CBO Data Show Tax Cuts Have Played Much Larger Role than Domestic Spending Increases in Fueling the Deficit — Center on Budget and Policy Priorities; page 5 Testimony of Mark Zandi .pdf; Chart at Modeled Behavior; Figure 1 at Center on Budget and Policy Priorities) But ignorance is invincible, particularly when an opinion is held with the zeal of a religious fanatic. True conservatism is based in reality and a sober, unbiased assessment of history, rather than delusions, fantasies, countless distortions and factual errors, layered on top of endless cliches.

1. Intel (owned): I was impressed with this report. Intel reported a 2nd quarter profit of 2.9 billion for the 2nd quarter of 2010, or 51 cents per share, on revenues of 10.8 billion. The consensus estimate was for 43 cents on 10.25 billion in revenues. Intel's CEO said that the global economy continues to show upside momentum. The headline for this report states "Intel Reports Best Quarter Ever". The quarter's gross margin was 67.2%. As noted by Alexander Eule in his Barrons column, that gross margin number shows Intel's manufacturing and engineering execution.

My last add to my Intel position was at $19.08 which was an average up from buys at $15.87 and $14.46 in October 2008 and at $15.25 in May 2009. I was reinvesting the dividends and am now taking the dividends in cash. While I do not plan to add to my existing position, I thought that it was odd that Intel closed at $21.36, up only 35 cents in trading yesterday after hitting an intra-day high of $22.25. Volume was heavy at almost 200 million shares compared to a 3 month average of 78 million.

Of course, the price action in Intel and its current valuation do not have to make any sense to the Masters of Disaster. I noted a WSJ article earlier in the week about some whiz kinds at Rebellion Research programming computers to learn from the experience of trading. I can not resist repeating the quote from a 27 year old, who said that it is "pretty clear that human beings aren't improving". Wise beyond his years. I have come to the conclusion that some money managers are doomed to be mediocre while most of the rest spend their careers striving to reach mediocrity.

I have not decided on a price target for my Intel shares. Temptation will enter into the equation with a price in excess of $25, while fear of losing a profit will become dominant if and when the price crosses $30. We prefer not to use the word "greed" here at HQ. That word does not sound gentlemanly.

2. Bought 50 ACTI at 1.93 on Tuesday (LOTTERY TICKET category)(See Disclaimer): Headknocker could not be more please with Right Brain's (RB) purchase of ACTI on Tuesday. This feeling of satisfaction has nothing to do with the merits of the selection, or more appropriately the lack of merit. No, the main reason for the HK's pleasure is that the downside exposure is less than $100. And, so far at least, the re-start of the Lottery Ticket strategy has been keeping the RB from causing too much trouble.

Actividentity was previously purchased at at 2.20 as an LT and its business is described in that previous post. Those shares were sold at $3.19 shortly after purchase. Item # 7 Sold HSE:TO at 30.48 CAD/Bought 100 ETF CDZ:TO at 19.24 CAD and 100 of ETF CLF:TO at 20.10 CAD

RB points out that the gain was a whopping $31.54 after commissions, close to a 28% gain. While some readers may not be too impressed with all of that, no doubt about that LB muttered, RB would just point out that the HK had to work for two days in 95 degree heat back in the day to generate that kind of moolah. Value of Real Labor

While the last quarter's report was not very encouraging, ACTI did show 78.461 million in cash on the balance sheet and the market cap at the $1.93 price is just 93 million. (page 3 The firm has no debt.

The current analysis estimate is for an E.P.S. of just 14 cents in the F/Y ending 9/2011. ACTI: Analyst Estimates for ActivIdentity Corporation Earning money would be a welcome development for shareholders. I suppose one of the assets of this small company is the tax loss carryforward that management is adept at creating. The current price is close to book value: ACTI: Key Statistics for ActivIdentity Corporation

3. Earnings FSBK and NHTB (owned regional bank strategy): New Hampshire Thrift Bancshares (NHTB) reported earnings for the 2nd quarter of 32 cents, compared to 27 cents in the 2009 linked quarter. The one estimate was for earnings of 28 cents. The net interest margin increased to 3.52% from 3.39% as of 6/30/09. Nonperforming loans as a percentage of total loans was 1.48%. The tier 1 capital ratio was 8.25% as of 6/30/2010. At the end of the last quarter, book value was $14.27 per share with tangible book at $9.25. The board just declared the regular quarterly dividend of 13 cents per share. The current dividend yield is over 5%. My main discussion of this bank is in this post: Bought 100 NHTB at $9.51. Given my low expectations for earnings growth, I thought the report was a good one.

First South Bancorp (FSBK) reported somewhat disappointing earnings. The bank reported earnings of 16 cents per share, down from 18 cents in the 2009 linked quarter. There are no analyst estimates. This bank is paying dividends currently at 20 cents per quarter which suggests the possibility of a dividend cut at some point. The net interest margin is good at 4.64%. The nonperforming loans to total loans at 2.78% is on the high side for the banks in my basket. I currently own just 50 shares bought at 10.15, which at least produces a good dividend yield for as long as the bank maintains a 80 cent per year dividend. However, this report is insufficient to cause me to buy more shares.

4. Impact of Higher Than Expected Loss Provisions on The Share Price of Small Banks/Ratio of Allowances to Nonperforming Loans/ Ranking Criteria for Regional Banks: One of the hazards of my regional basket strategy is a sudden downdraft in share price caused by a greater than expected provisions for loan losses.By sheer luck, I sold my shares in Wilshire (WIBC) at 10.99 before that bank announced higher than expected loan losses. Wilshire Bancorp Provides Additional Information on Preliminary Financial Expectations for Q2 2010 The WIBC shares are now trading at around $7 per share.

I have a large number of these banks on a monitor list. I have them ranked according to the likelihood of a possible purchase. A number of factors enter into that ranking system including the dividend yield and payout ratio, P/E, adequacy of capital ratios, an evaluation of how well the bank performed during the Near Depression period, tangible book value and net interest margin, the P.E.G. ratio, reliance on government TARP money for equity capital, geographic service territory, loan losses as a percentage of total loans and the allowance for loan losses as a percentage of nonperforming loans. That last criteria is an important one. A number of banks will simply refuse to set aside adequate reserves for loan losses. During a recession, it would be common to see the ratio of reserves to nonperforming loans decline, possibly to 30% to 40% for some banks. Then, at some point in the cycle, the bank announces a big loan loss provision for its nonperforming loans. I will generally rank a bank higher who has already made allowances for 80% or more of nonperforming loans before I purchase shares. This criteria at least helps in reducing the number of sudden surprises from writedowns that needed to be taken but were not for one reason or another.

One of the banks on my monitor list, which was way down the list of 100 or so names, was a bank headquartered in Louisiana called Whitney Holding (WTNY). I have never owned shares. The shares declined yesterday almost 18% after Whitney announced greater than expected loan losses. The writedowns are expected to total between 57 to 62 million and relate primarily to commercial and residential real estate markets in Florida.

Sometimes I have to look pretty hard to find the ratio of allowances to non-performing loans in a 10-Q. I checked this number for Whitney in its last quarterly report and found it to be 51.27. (page 34: wtny1q201010q.htm) This number has declined from 58.79 for the Q/E 9/2009. Then, I decided to go back in time to look at this ratio in 2006. Do you think it was higher or lower? For the Q/E 9/30/2006, the ratio of allowances to nonperforming loans was 138 (page 25: This ratio does not tell me about teetering bad loans, where the borrower is somehow current on payments including situations where the bank has lent more money to allow the borrower to remain current in order to avoid a nonperforming loan classification.

5. Bought 50 HMA at 7.55 (2010 Speculative Strategy)(see Disclaimer): The OG had a feeling that HMA was about to decline a few weeks ago so the 100 share position was sold at 9.28 in late May. Those 100 shares were part of the 2010 Speculative Strategy, and most of the securities bought under that strategy were sold before the spring and early summer downturn in the market. Like the Lottery Ticket strategy, I am starting the 2010 Speculative Strategy back up--slowly. Both of those strategies are viewed speculative and easily the most speculative strategies currently being implemented to any degree here at HQ.

I bought 1/2 of the HMA position back yesterday after a 18.6% decline in the share price. Since this stock is viewed as speculative, I only bought 1/2 of a full 100 share position. If the stock falls below $7, I will buy the other 50 unless there is an adverse development which causes me to reconsider. That is one way to be cautious with a security classified as speculative, while another is keeping the total amount of exposure low. I discussed this owner of hospitals in Item # 3 to an earlier post.

Hospitals will ultimately be a beneficiary of the recently passed "health reform" legislation, assuming the GOP is not successful in repealing it which is their strong desire. That legislation passed with no support from the GOP legislators, and all of them would vote to repeal it. The Democrats will lose a lot of seats in the mid-term election and it would not be surprising to see the GOP regain control over the House of Representatives. However, I doubt that the GOP would gain enough seats in the Senate to overcome a Democratic filibuster (60 votes are needed out of 100), and consequently will not have enough votes to repeal it. For as long as their is a Democrat in the White House, the legislation is safe from repeal since the GOP will most likely never have enough votes to overcome a Presidential veto.

The reason why the legislation will benefit hospitals is the extension of insurance to most of the population but the major provisions that will have a favorable impact on hospitals will not take effect until 2014 which gives the GOP plenty of time to repeal what they derisively call "Obamacare" and a government takeover by "socialists" of healthcare Health Reform Implementation Timeline - Kaiser Family Foundation Health Care Reform Bill Summary A major problem now for hospitals is the unreimbursed cost of providing healthcare to the uninsured. It is not unusual to see bad debt expenses now at 10 to 20% of revenues. HMA's provision for doubtful accounts for the quarter ending 3/2010 was 12.4% of net revenue, page 20 FORM 10-Q.

{ Of course, it goes without saying that the True Believers do not have a clue about either the provisions in the recently passed healthcare bill ( or deliberately misrepresent them if known) or the true meaning of the term "socialism", and are without question hypocrites, in that they would be complaining the loudest about any cuts in the government run and subsidized medicare insurance program.}

The last HMA earnings report for the Q/E 3/2010 was better than expected at 19 cents per share. I discussed that report in an earlier post. Item # 6 HMA The current consensus estimate is for earnings of 60 cents in 2010 and 68 cents in 2011. HMA: Analyst Estimates for Health Management Associates The forward P/E on the 2011 estimate is around 11.

I did review the latest S & P report prior to making this small purchase yesterday. S & P has HMA currently rated at 4 stars with a $11 12 month price target.

6. Sold 50 MSPRA at $18.49 (see Disclaimer): MSPRA is a floating rate equity preferred stock issued by Morgan Stanley. The shares were recently bought at 15.7. This is my second round trip on this security. I did better on the first trip, buying 100 shares at $12.88 and selling them at 21.43. Par value is $25. When I make that kind of profit on a security, fairly quickly, I have a mental issue about buying it back, simply to avoid losing some or all of the profit previously realized. When I do buy the shares back, I am likely to buy less and to trade them in a narrower range which is what happened on the second round trip for MSPRA.

This security is part of Morgan Stanley's equity and is non-cumulative. I am unquestionably in a trading mode on this security and will stay in that mode for this type of security. I managed to sell a similar one issued by Lehman at a profit late in 2007, when it was trading over $20, and that security is now worthless of course. Avoiding those kind of debacles is part luck and and in part due to remaining vigilant about the news whenever I own a security which simply cuts down on the number of blowups. It is also partly due to keeping my finger on the sell trigger with non-cumulative equity preferred stocks from banks. So, it did not take much for me to sell that Lehman preferred late in 2007 since my trigger finger was perpetually itchy with those type of securities.

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