Friday, July 2, 2010

Jobs Report/Bought 50 BKMU at 5.51/10 Year TIP Auction Next Week

This is the second post for today and is more of a continuation of the earlier post than a new one.

There will be a 10 year TIP auction next week. The coupon will be too low for me to participate. .pdf The current coupon rate for the 10 year TIP is just 1.18%. Bloomberg Of course, the principal is adjusted by subsequent inflation numbers but the coupon is a constant for 10 years even if the principal amount of the note is rising some due to the inflation adjustment. The 10 year nominal coupon is 2.98% which gives me about a 1.8% break-even, the average amount of inflation needed over the next 10 years for me to break-even with the nominal yield by buying the 10 year TIP today. Advantages and Disadvantages of Treasury Inflation Protected Securities:

When I bought 2 10 year TIP bonds at an auction in my Roth in July 2009, the coupon yield was 1.92%, with the small OID, and the break-even was 1.59% Item # 4 10 Year TIP Auction I later bought a few more at a lower coupon, and then decided to quit buying them until the coupon rose to over 2% which is not going to happen anytime soon.

When I participate in treasury auctions, either through my treasury direct account or via Fidelity which does not charge a commission, I just enter a non-competitive bid which means that I will get whatever is the high rate at the auction. For the bids that are ultimately accepted, everyone receives the same rate: How Treasury Auctions Work Generally all non-competitive bids are accepted provided they do not exceed five million dollars.

1. Jobs Report: This report was neither good nor bad.Employment Situation Summary It does not rule out, or even negate, the possibility of a double dip recession, nor does it confirm the current level of bearishness in the stock market and jubilance in treasury bonds. In short, the report leaves investors in limbo waiting for further information about the direction of the economy.

Private sector jobs increased by only 83,000. The forecast was 110,000. The only way to characterize that number in a positive light is to argue that it is not a negative number. And the total hours worked per week fell from 34.2 to 34.1 which is also negative. Table B-2. Average weekly hours and overtime of all employees on private nonfarm payrolls by industry sector, seasonally adjusted

The fall in the unemployment rate to 9.5% is actually a negative. This was due to a drop in the labor force , as a large number of individuals just gave up trying to find work and are therefore no longer counted as unemployed: NYT MarketWatch

Another negative is that 45.5% of the unemployed have been without work for over 6 months. Table A-12. Unemployed persons by duration of unemployment

The U-6 number did decline from 16.6 to 16.5, Table A-15. Alternative measures of labor underutilization.

Factory orders decline 1.4% in May, larger than expected, and orders excluding transportation also fell by .6%. Economic

2. Bought 50 BKMU at $5.51 Yesterday (Regional Bank Stocks Basket Strategy-Category 1)(see Disclaimer): I mentioned the purchase in the title of the earlier post today without discussing it. I am placing this purchase in Category 1 of the regional bank stocks basket strategy. There are several reasons. The bank is not earning enough to cover its current dividend payout. The consensus estimate for 2010 is for an E.P.S. of 4 cents and 13 for 2011.BKMU: Analyst Estimates for Bank Mutual Corporation - So, even at $5.51, the P/E is extremely high even on the 2011 estimate. Another factor supporting the category 1 classification is that the bank was selling at a $10 to $12 range before the Near Depression, Chart, the best of times so to speak, which suggests that there may not be that much upside potential considering the downside risk. The chart looks awful. Lastly, the percentage of non-performing loans to loans receivable is high for me at 3.4%. And the allowance for losses as a percentage of non-performing loans at 37.97% raises some potential concerns. (see pages 37-38: e10vq)

Some of the upside factors include the banks low price to book at .63 and very healthy capital ratios that are discussed in this article from TheStreet. (discussed at page 6). As of 3/31/2010, the total risk based capital ratio was 21.99% and 10% is deemed well capitalized (see page 17: e10vq). The Tier 1 capital ratio was 10.06% (4% well capitalized) These capital levels may lend support to the bank keeping its 7 cent per quarter dividend, even though it has not been covered by earnings for years. (the rate was 9 cents in 2009 apparently) I would not be surprised to see a dividend cut however. So, the dividend yield at close to 5% is one reason to invest whereas the possibility of a dividend cut is a reason to invest less than $300 which is the maximum limit for a category 1 buy. ($2000 maximum for a category 2).

This bank is based in Milwaukee and a number of Wisconsin banks have not fared well during the Near Depression period. And generally, they have been slow to recover. An example would be Associated Banc-Corp.(own only 50 shares of its TP after selling 100).

A description of the bank and its locations can be found at Bank Mutual - About Us and in the Reuters profile section.

I did not see any preferred stock on the balance sheet (page 3) and none was outstanding in 2009. The bank did not participate in TARP (page 7 exv99w1)

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