Tuesday, November 9, 2010

Sold: 150 BCBP @ 9.4, 50 RF @ 6.57, 50 HMA @ 8.57, 50 VLO @ 19.06 /Bought: 100 AF @ 13.08, 100 QQQX @ 14.08, 100 FAM @ 17.9, 50 KRH at 24.85

I am still discussing trades made from last week. The rally last Thursday created a flurry of selling activity along with a few buys, as the portfolio was re-positioned to earn more income.

Coca Cola sold three year paper last week with a coupon of .75% and a five year note with a 1.5% coupon. Bloomberg

Michael Santoli noted in his column that the Wilshire 5000 index has risen in each of the past 10 weeks, and 12 is the record.

1. Sold 50 RF at $6.57 on Thursday and Substituted 100 AF at 13.08 on Friday (Regional Bank Stocks' basket strategy)(see Disclaimer): I can barely restrain myself when talking about Regions. I do believe that the shareholders of that bank would have been better served by randomly picking names out of the Nashville or Birmingham phone book to serve in management positions. Since I was not going to read another ugly RF earnings report for years, I thought it best to simply take the profit on the 50 shares bought at $3.47 and just forget about this bank.

In its place, I substituted a profitable bank that pays a good dividend. Astoria Financial (AF) is a NY based savings bank that is currently paying a quarterly dividend of 13 cents per share. That equates into a dividend yield of 3.97% at a total cost of $13.08. The payout ratio was over 100% in both 2008 and 2009. And, that was after the dividend was slashed from an annual rate of $1.04 in 2008 to the current rate of 52 cents. Earnings peaked in 2005 at $2.26. The stock managed to trade at over $30 in 2005 and 2006.

S & P has a hold on AF with a $15 price target. S & P estimates that the dividend will be covered by earnings in 2010. Morningstar also has a 3 star rating on it. I am slightly more positive on this bank.

I had a favorable view of the last earnings report for the Q/E 9/2010. The bank reported earnings of 23 cents, up form 9 cents in the 3rd quarter of 2009, and beating the consensus estimate of 18 cents. 10Q for Q/E 9/2010 As of 9/30/2010, the NPLs to total loans was at 2.68% (page 56); the allowance for loan losses as a % of NPLs was 51.61%; the net interest margin improved to 2.32% from 2.07% as of Q/E 9/2009 (page 41); and there is no government preferred stock on AF's balance sheet. I had trouble finding the capital ratios in the 10-Q but the bank disclosed them in the press release announcing the third quarter earnings. The total risk based capital ratio was then at 14.13% and the tier 1 risk based ratio was at 12.87%. Tangible book value was $11.22 per share. I also looked at the SEC Filed presentation made at an analyst meeting on 9/30 which overall made me more positive about the bank than the analysts at S & P and Morningstar.

Astoria declined to participate in TARP after it received preliminary approval to receive 375 million: www.sec.gov And, I did not see any indication that this bank has sold stock to the public over the past two years, which has been so common among financial institutions. The bank has not bought back any stock since the third quarter of 2008 (pages 34-35: 10Q for the Q/E 9/2010)

2. SOLD 50 HMA at $8.57 on Friday (see disclaimer): I mentioned in a post from Friday that I sold 50 shares of HMA at $8.25, and gave my reason. Sold 50 HMA @ 8.25 I did not realize that I still owned 50 shares boughtat 6.75 in July 2010, so I sold those shares on Friday for the same reason. Maybe LB trades too much, RB added, and has too many accounts. "Admit it NERD, you are starting to lose it".

3. Added 50 KRH at 24.85 on Thursday (see Disclaimer): This purchase is another adjustment to a longer than expected Jihad against savers and all responsible Americans, currently being conducted by the Federal Reserve. I previously bought 50 shares of this trust certificate in a taxable account at $19 back in November 2009. I have bought and sold it in an IRA: Sold 50 KRH at 24.6 Bought 50 KRH in IRA at $18.62 This brings me back up to 100 shares of KRH held in a taxable account. I own more of another TC with the same underlying bond, PKM, which is now trading above its $25 par value: Bought 150 TC PKM (100 at $17.8 in taxable account & 50 in IRA at $17.6 Bought 50 PKM at 24.84

The underlying security in both KRH and PKM is a junior bond issue from Hanover Insurance company, whose common stock trades under the symbol THG. Hanover recently reported net income for the 3rd quarter of 52.3 million, up from 49.7 million in the 3rd quarter of 2009, beating estimates. The consensus E.P.S. estimate for 2010 is $2.77 and $4.12 for 2011, THG Analyst Estimates | Hanover Insurance Group Hanover also pays a common stock dividend which would have to be eliminated before it could defer the interest payments on its junior bond.

The FINRA site shows that this bond is rated BB- by S & P and BB+ by Fitch. I would just view as a higher quality junk bond. A Hanover senior bond, with a 2025 maturity, is rated at BBB- by S & P, FINRA. The only material difference between KRH and PKM is the coupon. While the underlying bond has a 8.207% coupon, the TC PKM has a 8% coupon and KRH is at 7.75%.

KRH Prospectus: www.sec.gov
PKM Prospectus: www.sec.gov

The underlying junior bond and the TCs mature in 2027. Interest payments are made in August and February. The yield on KRH is around 7.8% at a total cost of $24.85. PKM was about .1% higher at the $25.2 price at Friday's close. But I went with KRH since I already own PKM and wanted to round up my KRH position to a round lot.

I found the prospectus for the underlying bond, originally issued in 1997, at www.sec.gov. Distributions are cumulative but may be deferred for up to 5 years subject to the stopper provision found at page 9 of Exhibit 1.

I may sell 50 shares of KRH when it turns into a long term capital gain before year end. I may do a lot of that if Congress fails to extend the 15% tax rate for long term capital gains.

For those who are detail oriented as investors, which is the only way to go, I would add that the underlying security in KRH and PKM started as a TP. Hanover dissolved the trust and now anyone buying the underlying security is buying the bond directly rather than a trust preferred stock representing a beneficial interest in the bond. This is from an earlier post on this subject:

"Hanover dissolved the AFC Capital trust and delivered to the owners of that Trust Preferred the Hanover junior bond. So PKM now represents an undivided beneficial interest in a Hanover junior bond, rather than a beneficial interest in a trust preferred issued by AFC Capital that had as its underlying security the Hanover junior bond. Simply put, Hanover eliminated a legal layer. This is explained at page 13 of Hanover's last filed 10-Q as follows:

"AFC Capital Trust I issued $300.0 million of preferred securities in 1997, the proceeds of which were used to purchase junior subordinated debentures issued by the Company. The Company liquidated the Trust on July 30, 2009. Each holder of Capital Securities as of that date received a principal amount of the Company’s Series B Junior Subordinated Deferrable Interest Debentures equal to the liquidation amount of the Capital Securities held by such holder. These junior subordinated debentures have a face value of $165.3 million and $165.7 million as of June 30, 2010 and December 31, 2009, respectively, and consistent with the capital securities, pay cumulative dividends semi-annually at 8.207% and mature February 3, 2027""

Hanover did a tender for the 2027 junior bond in June 2009, an opportune time for it buy back some debt at a low price. www.sec.gov

Any bond or bond fund that has been bought over the past six months or so will most likely be traded, and I have low expectations for gains on the shares. If I can make one dollar net on all of those purchases, and just collect the distributions without suffering a net loss on the purchases, I will be satisfied. This approach is based on my belief that the long term bull market in bonds will end soon, and no one will be able to call the transition to a long term bear market in bonds. In all likelihood, I will be holding some of those recently added positions when the worm turns.

4. Sold 50 VLO at $19.06 on Friday (see Disclaimer): After buying those 2 bonds issued by Krotz, discussed in Item #5 of yesterday's post, I did not want to have a position in another refiner. So, I sold my 50 shares of ALJ on Thursday and my 50 shares of VLO on Friday. The Valero shares were purchased at 17.12 in July. At least I am improving my yield with the Krotz bonds, assuming I am paid par value at maturity in 2014 or early redemption by the company.

5. Bought 100 of the CEF QQQX at 14.08 on Friday (see Disclaimer): QQQX is the symbol for Nuveen's CEF NASDAQ Premium Income & Growth Fund. This fund will attempt to replicate the performance of the Nasdaq 100 index and will write call options on its long portfolio. According to the CEFA, the discount to net asset value at the 14.09 price was -4.6 at the 11/5/2010 close, and the distribution yield is slightly over 10%. This is a link to the last filed Shareholder report for the period ending in September: NASDAQ Premium Income & Growth Fund Inc. (QQQX) In that report, the expense ratio shown for 2009 1.11%. The 2009 annual report can be found at the SEC's web site.

This particular fund was managed by IQ Investment Advisors, and Nuveen took it over along with several other funds on 10/29. The Nuveen web site does not currently have any historical information about this fund at its web site. Historically, the fund was paying a quarterly dividend under its former managers of 32 cents, NASDAQ Premium Income & Growth Inc, QQQX Fund Quote

6. SOLD 150 BCB Bancorp at 9.40 (see Disclaimer): When I review a bank's earnings report, I will focus first on several financial criteria which give me a snapshot of how well the bank is doing and the overall competence of their employees responsible for making loans. Those criteria include the percentage of non-performing loans to total loans, the net interest margin, the efficiency ratio, the allowance for loan losses as a percentage of NPLs, the capital ratios, and whether the equity capital ratios are being juiced by government money and/or trust preferred stocks which are in reality bonds. Since I own a large number of regional banks, and monitor an even larger number (around 200), I need this kind of information clearly set out in an earnings report. I simply do not have the time or the inclination to perform the calculations with the raw data. Besides, the regional bank basket is just one small area of my investment strategy now, and I do not want to spend an inordinate amount of time on it.

BCB released its third quarter report last week and did not disclose any of this information other than the net interest margin. To make matters worse, the bank reported net income of 8.7 million or 93 cents per share, but that result was in large part due to a 9.256 million gain from the bargain purchase accounting relating to BCB's recent acquisition of Pamrapo Bancorp. The bank did not specify as far as I can tell what the earnings would have been without that one time accounting gain and the expenses associated with that merger. If I had to guess, I would say the bank had a small loss after tax, adjusted for those items, but I am not sure and that is my point. The provision for loan losses jumped to $800,000 for the Q/E 9/2010 compared to $300,000 in the year earlier quarter.

Since I view it as important that companies provide clear and comprehensive information that will allow me to make a judgment about my investment, I elected to sell my 150 shares at $9.40 on Monday. Those shares were bought in 3 fifty share lots: Bought 50 BCBP at 9 Rounded BCBP to 100 at 7.5 Bought 50 BCBP @ 8.82

7. Bought 100 of the CEF FAM at 17.90 on Monday (see Disclaimer): This bond CEF was trading at a small discount to its net asset value as of Friday's close (-2.07). The net asset value can be found at the sponsor's web site, First Trust, and at the CEF section at the WSJ's Markets Data Center under "World Income". This is a world bond CEF. Dividends are paid monthly at the current rate of 13 cents per month. At a total cost of $17.9, this works out to a 8.71% yield. This fund is leveraged. The credit quality is mostly investment grade with some junk: 27.72% in AAA; 2.78% AA+; 6.08% AA; 4.92% A; 5.13% A-; and 16.92% in the BBB classification.

This CEF closed Monday at $17.93, with a NAV of $18.3, and a discount to NAV of -2.02.

Beggars can not be choosy.

The remaining trades from Monday will be discussed in the next post.

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