Tuesday, October 26, 2010

GIW- Being Acquired/Bought 50 GYB @19.07/Sold: 50 HPQ @ 43.11, 50 WAG @ 34.45/Pared Trade: Sold 50 BMLPRJ @ 18.73-Bought 50 KRBPRD @ 25.14

I have a large inventory of stocks to sell into rallies. In an Unstable VIX Pattern, which has been effect since August 2007, I will do some minor selling when the VIX falls below 20 and will buy some stocks when the VIX shoots over 30. For purchases on those spikes, I basically attempt to identify whatever securities appear to me to offer value based on the then existing price, focusing mainly on those large cap companies that have good finances and stable and growing businesses.

I am that concerned about the firms earnings during a down economic cycle, but I nonetheless prefer to add consumer staples and less cyclical companies when making purchases during a long term secular bear market experiencing an Unstable VIX Pattern. Since I date the start of the long term bear market in stock as October 1997, I suspect that we are near the end of the current long term cycle, hopefully with no more than another two or three years to go. Or, alternatively with the VIX below 20 now, it may form a Stable Pattern which will give me a green light to add even more stock positions even if I believe that the longer term cycle remains in tact.

During the Unstable VIX Pattern Period, which can last for years, I may elect to pare positions on a day when the VIX is moving up significantly, as was the case yesterday, while the market was enjoying a rally. This assumes the VIX is below 20. At around 2:25 p.m EST, I noticed the S & P had moved up to 1191 from its starting value of 1183. The ^VIX , which ended the day up 5.75% at 19.86, was not confirming the market's move. The VIX was around 19.58 or so at that time as the market moved higher, up from its starting value of 18.78. That is an intra-day non-confirmation event, and that is when I decided to sell some stock. This is a variation of the swing trade discussed in this post from October 2008: More on the VIX AND ASSET ALLOCATION

I will generally require 3 months of continuous movement in the VIX below 20, allowing for some variations, before declaring the start of a Stable Vix Pattern. I am currently at day 9 in my count. I did not characterize the close at 20.63 on 10/19 as requiring a re-start of the count. However, it will be taken into account as a factor justifying a re-start of the count in the event of one or more closes above 20 soon.

The treasury re-opened a 5 year TIP, with 4 years and 6 months remaining, and the auction was at a coupon yield of -.55%. www.treasurydirect.gov .pdf This was the first negative yield for a TIP. WSJ The break-even point is around 1.7%, suggesting the market anticipates very modest inflation over the next five years (for a general discussion of what a TIP break-even point says about the market's forecast for inflation, see Advantages and Disadvantages of Treasury Inflation Protected Securities)

1. Wilber (GIW) Being Acquired by CBU (Regional Bank Stocks basket strategy): I was in the red on my Wilber shares almost from the time of purchase until yesterday. I stayed with the shares because I viewed this small NY bank to be undervalued. Bought 100 GIW at 7.03 Added 50 GIW at 6.55 The share price closed at $6.02 last Friday so this was one of my losers in the regional bank basket. The shares rose almost 48% yesterday in response to an offer to acquire GIW made by Community Bank System (CBU). The press release says the acquisition will be in stock and cash, valued at $9.5 per share, and I would assume that valuation would be at CBU's closing share price from last Friday. CBU expects the deal to be 2% to 4% accretive in 2011, excluding one time costs.

I was sufficiently interested in CBU that I looked at its last 10Q. I did check some items that I view as important. CBU did not have any government preferred stock on its balance sheet. It did not participate in TARP (see page 7 of 10k2008) I always like to see that in a potential purchase.

CBU earned 48 cents per diluted share for the Q/E 6 2010, up from 28 cents in the 2nd quarter of 2009. NPLs to total loans was at .68%. The allowance for loan losses to NPLs was comforting at 204%. The dividend payout ratio was then at 50.5% and the stock is currently yielding over 4%. The board increased the quarterly dividend by 2 cents in April 2010. pressrelease2010q1 The tier 1 leveraged ratio was 7.75% as of 6/30. The capital ratios for the year ending 12/31/2009 can be found at page 73 of the 2009 annual report. 10k2009.htm I counted six acquisitions of smaller banks between 2005 until the end of 2009 at pages 3-4 of the last annual report. My initial impression is that GIW is a good fit for CBU. CBU has 150 branches in upstate NY and northeastern PA. (operating under Community Bank N.A. & First Liberty Bank)

The consensus estimate for CBU, made by 6 analysts, is for 46 cents in the soon to be reported 3rd quarter and $1.81 in 2010. The estimate for 2011 is currently at $1.9: CBU Analyst Estimates | Community Bank System, So, one knock is a lack of earnings growth based on current analyst expectations. I will take a look at the earnings when they are released later this week.

2. NWBI (own-regional bank strategy): Northwest Bancshares reported net income of 15.5 million or 14 cents per share, up from 11 cents in the 3rd quarter of 2009. The consensus estimate was for 15 cents. The Board declared the regular 10 cent quarterly dividend. The net interest margin improved to 3.63% from the 3.47% reported for the Q/E 6/2010. As of 9/30/2010, tangible book value was $10.28 per share; NPAs to total assets was at 2.14%; NPLs to total loans was 2.7%; and allowance for loan losses to NPLs was 51.08% (below my comfort zone). The bank reported that it had experienced "strong lending and deposit growth".

3. Bought 50 of GYB @ 19.07 (see Disclaimer): I have bought and sold the synthetic floaters tied to Goldman Sachs' bonds on numerous occasions. I recently sold out of my positions entirely after netting close to $2500 in share profits, all with small positions (50 or 100 shares at a time), plus interest payments. These securities include GYB and PYT, both tied to a 2034 GS Trust Preferred, and GJS that has the 2033 GS senior bond as its underlying security. I am not including JBK in that computation, since it is no longer a floater. This is a summary of my trading activity in GYB, PYT and GJS in 2009-2010:

Profit after Commissions/ DATE

GYB $76.06 10/2010

$183.98 9/2009

$691.71 4/2010

$82.71 10/2010

$36.54 5/2009

SUB-TOTAL: $1071

PYT $685.02 9/2010

$187.73 3/2010

$20.98 2009

SUB-TOTAL: 893.73

GJS $64.08 10/2010

$ 244.53 11/2009

$168.15 2009 (3 ENTRIES)

SUB-TOTAL: $476.76

GRAND TOTAL: $2411.49

Trust Certificates: Links in One Post Duplicate Post

Synthetic Floaters

Some of my prior trades of GYB can be found in the following posts: Added another 100 GYB in Regular IRA at $11 Bought 50 GYB at $11 Sold 50 GYB at $15 Pared Trades in Roth: Sold 100 PYT at 19.25 & Bought 100 GYB at 18.98 Sold 70 PYT at 18.66 and Bought 70 GYB at 18.49 in Regular IRA Sold 50 GJS @ 16.20 & 100 GYB @ 19.9 Sold 100 GYB @ 19.4

I do not have high expectations for a purchase of GYB at $19.07. If GS survives and I held the security until the underlying bond matures, I would receive $25 for each share in 2034. It is extremely doubtful that I will hold onto these shares for more than a few months or a year.

GYB is a trust certificate that has as its underlying security a trust preferred issue from Goldman Sachs. While this security has multiple legal layers, I view the underlying security as a GS junior bond. While the underlying bond has a fixed coupon of 6.345%, www.sec.gov, GYB is a synthetic floater that pays the greater of 3.25% or .85% above the 3 month Libor rate, but no more than 8.25%, www.sec.gov. The float is created by a swap agreement with UBS.

The trustee for GYB collects the fixed coupon payments at 6.345% from GS and then exchanges those funds with UBS for either the guarantee of 3.25% or the amount due under the Libor float. So, that is a good deal without question for UBS now. UBS takes no risk of a GS default, which is borne by the owners of the TC, and collects the difference between the applicable rate now which is the 3.25% guarantee and the 6.345% paid by GS. The worm will turn against UBS when the LIBOR rate exceeds 5.495%. It is what it is and I can not be concerned about the merits of the deal for UBS but only whether I am satisfied with the terms of GYB at the $19.07 price. I would say just barely satisfied, and only barely in light of the Jihad by the Fed against savers now in its third year. So, it is relative.

At a total cost of $19.07, the current yield based on the 3.25% guarantee is 4.26% paid quarterly, which would be the minimum yield. The maximum yield, hit when the 3 month LIBOR hits .074% (maximum of 8.25% minus .85%=.074%), would be 10.82% (just multiply .0825% times the $25 par value and then divide by the total cost per share of $19.07) For as long as GS pays the interest due on the underlying security, I will receive a yield somewhere between 4.26% and 10.82%. I only own the synthetic floaters in retirement accounts due to complex tax issues associated with the swap agreement.

If the LIBOR rate rose to say 6% in the distant future, then the yield would rise to 8.69% at that total cost number.

Of course, if UBS goes bankrupt, and the swap agreement terminates, then the owners of GYB would receive the fixed coupon amount of the underlying bond paid on its schedule. JBK had this happen when Lehman, its swap counterparty, went bankrupt, and the trustee took the position that the owners of JBK were thereafter entitled to receive the the 6.345% of the 2034 GS TP rather than the much lower amount due under the swap agreement.

Information about the underlying bond in GYB can be found at FINRA.

GYB fell 51 cents yesterday to close at $18.7.

4. Sold 50 HPQ at 43.11 (see Disclaimer): Since I am admittedly not a tech investor, I will just try to trade them, clip a few bucks, and then move on to something where my comfort level is higher. HPQ may very well be undervalued at the $43.11 price. I certainly believed that the stock presented good value when I bought those 50 shares 38.2 in mid-September. I am not impressed with the actions taken by the Board and several Board members recently, or over the past several months. HPQ closed up 1 cent at $42.88 yesterday. The main reason for selling the shares is summarized in the opening part of this post.

5. Pared Trade: Sold 50 BMLPRJ at $18.73 and Bought 50 KRBPRD at $25.14 (see Disclaimer): I waited until my limit order on BMLPRJ was filled before entering an order on KRBPRD. Both of these securities are Bank of America obligations. BMLPRJ is an a non-cumulative equity preferred stock, originally issued by Merrill Lynch, that pays the greater of issue of 4% or .75% above the 3 month LIBOR rate. The KRBPRD security is a trust preferred security, that contains as its underlying security a junior bond originally issued by MBNA, which was acquired by BAC.

KRBPRD has a 8.125% coupon and a $25 par value, so my current yield is close to the coupon rate. It is rated the same as the other TPs originally issued by BAC. According to QuantumOnline.com, Moody's rates KRBPRD at investment grade, barely, at Baa3 and S & P has it rated BB, a junk classification. You can find these ratings also at Bank of America's web site: Bank of America | Investor Relations | Fixed Income Investor Relations

Bank of America also has links to the prospectuses for its trust preferred and equity preferred securities, along with some basic information about them at Bank of America | Investor Relations | Capital Issuances.

The TP and the underlying bond in the TP mature on 2/15/2032. This one has both credit and interest rate risk. Interest payments are made quarterly, and the distributions are cumulative. BAC would have to eliminate the common and equity preferred dividends in order to defer payments on its TPs. Any KRBPRD payment which is deferred will earn interest at the coupon rate. Assuming no activation of the stopper provisions, deferral can not be longer than 5 years. (see particularly page s-12 of the prospectus: www.sec.gov)

I own a similar security, KRBPRE, in the Roth IRA, but it was yielding less than KRBPRD yesterday. Both of those securities were yielding more than a TP, originally issued by BAC, that matures at around the same time. Bac Capital Trust I, BACPRW (2031-not owned); BAC Capital Trust VIII, BACPRZ (2035 not owned); & BAC Capital Trust IV, BACPRU (2033-not owned). Those TPs yield less than 7% at yesterday's closing prices.

Prospectus: www.sec.gov

Trust Preferred Securities: Links in One Post

BML-PJ closed at $18.35, down 35 cents, in light trading. KRB-PD closed down 5 cents at $25.13.

The reasons for the pared trades include a higher current yield in favor of the TP, its higher priority, the presence of a maturity date which is absent in BMLPRJ, and the cumulative nature of the TP's distributions. Given the current uncertainty in the foreclosure mess, I will move up the priority chain for more protection and, in this case, a higher yield.

I mentioned in a prior post that some recent developments relating to BAC have increased the OG's anxiety. Item # 3 BAC

6. Sold 50 WAG at 34.45 (see Disclaimer): I bought those shares in June at 30.15. The reason for selling those shares has less to do with WAG than the trading strategy currently being followed here, summarized briefly in the opening part of this post.

WAG closed at $34.44, up 37 cents.

I will discuss the earnings reports from MBVT, FNB, WSBC and FIBK, all positions in the regional bank basket, in the next post. Merchants Bancshares continues to impress. I also have one other purchase, a TC yielding around 8.75%, to discuss from Monday.

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