Wednesday, January 26, 2011

Bought 100 MSF at 15.68/FNB UBSI CBU OPXT CIZN BDGE/Case Shiller/More on KTX

The Case Shiller Index for home prices in twenty metropolitan areas continues to confirm  a double dip in home prices.  The index for those 20 cities fell 1.6% in November from October 2010.  Only San Diego eeked out a gain with a .1% increase.  The remaining 19 metropolitan areas experienced a decline in prices from October, with the largest declines in Atlanta (-2.5%); Chicago (-2.2); Cleveland (-2%); Detroit (-2.7%); Minneapolis (-2.1%) and Portland at -1.6%. The report can be accessed at

This is part of Fidelity's response to my email requesting their rational for prohibiting purchases of HBAPRF while permitting the purchase of all kinds of securities that are virtually guaranteed to lose their customers money:

"Since an IRA is considered to be a significant source of retirement funds, it is important that the account be managed for adequate long-term growth. We can determine certain securities inappropriate for retirement and or non-retirement accounts especially those that tend to entail higher risks. The risks involved with the security included in your message have been determined as less than suitable for our investors at this time. We are not permitting buy orders for the security HSBC USA Preferred F (HBAPRF). You can contact a Fidelity Representative at 800-544-6666 available 24 x 7 x 365 for an interactive discussion. I regret any inconvenience you have experienced."

This was my response: 
"Please do not respond to this email. I view your responses on this subject to be pure garbage anyway. As I have said, your policy is just asinine and without any justification. Previously, you have justified the restraint on the grounds that your customers are not intelligent enough to understand these securities on your sh-- list. Fidelity's policy constitutes an unreasonable restraint on your customers' ability to conservatively manage their accounts for both capital appreciation and income. I would point out that Fidelity believes its customers are intelligent enough that you graciously allow them to purchase two other floating rate preferred stocks, HBAPRD and HBAPRG, AT LEAST FOR NOW, that are issues from HSBC USA, the very same firm obligated to pay HBAPRF which you will not allow me to buy. What about METPRA? Or GSPRA or GSPRD, when are they going to join the list? It goes without saying that I have other brokerage accounts, and I was able to place the order with a firm that does not want to treat its customers like children. By the way, did Fidelity prohibit its customers from purchasing common stocks that were clearly overvalued in 2000, which did not provide them with any income, which HBAPRF does? Could I buy FFIV in my regular IRA if I had sufficient funds this morning?"

The OG knows that it is futile to understand what is beyond rational explanation.  When I asked for their rationale, I expected no sensible explanation and none was given.  Although it has been said that the OG is more tolerant of stupid reasoning than Headknocker, that is not the same as saying the OG suffers fools with equanimity.  I am referring to those who are actually making the decisions on this issue at Fidelity, and not to their customer representatives.

And, this latest confrontation with Fidelity is draining what little energy the OG can muster after getting out of bed in the morning.   Possibly, with some stimulation of one sort or another, the OG will be in a position to discuss the two small purchases made yesterday in the next post.  One of the buys was a floating rate equity preferred stock with a guarantee, viewed as less credit worthy than HBAPRF, which the OG was able to buy in a taxable account at Fidelity.  But, "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines", and Emerson forgot to add Old Geezers.   

1. Bought 100 MSF on Monday at 15.68 (see Disclaimer):  This security is a CEF that invests in emerging market stocks, which I have discussed in several prior posts. (e.g. Added 100 MSF at 13.57 Bought 100 of the CEF MSF at 14.4 Sold 100 MSF at 17.02)

Last Friday, MSF closed at $15.69 and had a net asset value  at that time of $17.10 per share.  This created a discount of -8.25.  The daily NAV information can be found at the WSJ Closed-End Funds section under "World Equity Funds", at the sponsor's web site, or at  the Closed-End Fund Association.

With this last purchase I am now back up to 200 shares. My last buy was 100 shares in November 2010, and I received the fund's annual dividend for those shares:  BOUGHT: 100 MSF @ 15.69  I booked a $403.14 profit on 200 shares in 2010:

MSF closed on Monday at $15.7 with a net asset value up just two cents for the day to $17.12 per share.  On Tuesday, the net asset value per share fell 4 cents and MSF closed unchanged at $15.7. 

This is the link to this CEF's last filed form N-Q which contains its holdings as of 9/30/2010.  The last shareholder report is for the six month period ending in June 2010.

The net expense ratio is around 1.54%, which is not unusual for this type of fund:  Fund Details - United States : Individual Investor - Morgan Stanley Investment Management

The fund is not rated by Morningstar.  Another closed end fund that invests in emerging markets is  the Templeton Emerging Market fund (EMF), which has a 1.55% expense ratio and sells at a lower discount to net asset value.  As shown at the preceding linked page at the CEFA for EMF, the ten year annualized return based on NAV for EMF is  16.55% and 10.61% over five years.   MSF has done slightly worse over 10 years with an annualized return on NAV at 13.52% and 8.99% over five years.  That difference may explain the larger discount for MSF.   

2. F.N.B. Corporation (FNB)(own-Regional Bank Stocks' basket strategy):  FNB  reported net income for the 4th quarter of 23.5 million or 21 cents per share, up from 15 cents in the 4th quarter of 2009.   There were some extraordinary items that increased earnings by 6 cents per share.  Excluding those items, the bank earned 15 cents per share. The consensus estimate, made by 7 analysts, was for earnings of 13 cents.   As of 12/31/2010, the allowance for loan losses to NPLs was 78.44%; NPLs to total loans was at 2.22%; the efficiency ratio was at 59.96%; and the net interest margin was 3.77%.  I have sold all of my shares in FNB except for 50 shares purchased at $7.8.

3.  Community Bank System (CBU)(own: Regional Bank Stocks' basket strategy):  reported net income of 15.9 million for the 4th quarter or 47 cents per share, which included 2 cents per share relating to its proposed acquisition of Wilber.  I owned Wilber (GIW) and sold my shares in response to that offer.    I had not heard of CBU when it announced its acquisition offer.  After researching the bank,  I decided to buy a small stake: Bought 50  CBU @ 23.18 Sold 151 GIW @ 9.26 Bought 100 GIW at 7.03 Added 50 GIW at 6.55 The consensus estimate was for 47 cents.  

As of 12/31/2010, the loan loss allowance to NPLs stood at a very comforting level of 222% (compare that to Hudson); NPLs to total loans was at .62%; the TIER 1 leverage ratio was at 8.23%; and the net interest margin was at 4.07%.

CBU reported its 4th quarter earnings after the market closed on Monday.  In trading last Monday, the stock closed at $26.87, down 35 cents for the day.

The current consensus estimate for 2011 is for an E.P.S. of $1.98.

4.  United Bankshares, Inc (UBSI)(own:Regional Bank Stocks' basket strategy): UBSI had recently given upside guidance (Form 8-K) for its 4th quarter earnings.   UBSI reported 4th quarter net income of 19.3 million or 44 cents per share. I will just quote some pertinent passages from the press release:   " United continues to be well-capitalized based upon regulatory guidelines. United’s estimated risk-based capital ratio is 13.7% at December 31, 2010 while its estimated Tier I capital and leverage ratios are 12.3% and 9.9%, respectively. The regulatory requirements for a well-capitalized financial institution are a risk-based capital ratio of 10%, a Tier I capital ratio of 6% and a leverage ratio of 5%. . . . United’s asset quality also continues to outperform its peers. United’s percentage of nonperforming loans to loans, net of unearned income of 1.28% at December 31, 2010 compares favorably to the most recently reported percentage of 4.26% at September 30, 2010 for United’s Federal Reserve peer group. At December 31, 2010, nonperforming loans were $67.2 million, down $5.0 million or 7% from nonperforming loans of $72.3 million or 1.26% of loans, net of unearned income at December 31, 2009. As of December 31, 2010, the allowance for loan losses was $73.0 million or 1.39% of loans, net of unearned income, as compared to $67.9 million or 1.18% of loans, net of unearned income at December 31, 2009. United’s coverage ratio of its allowance for loan losses to nonperforming loans also compares favorably to its peers. The coverage ratio for United was 108.6% and 93.9% at December 31, 2010 and December 31, 2009, respectively. The coverage ratio for United’s Federal Reserve peer group was 71.0% at September 30, 2010. Total nonperforming assets of $112.0 million, including OREO of $44.8 million at December 31, 2010, represented 1.57% of total assets which also compares favorably to the most recently reported percentage of 3.58% at September 30, 2010 for United’s Federal Reserve peer group. "  

I thought that this passage was helpful, since the comparisons with the national averages explains why I emphasize certain items when discussing bank releases.  It is important to know about where a bank stands in relation to other similarly situated institutions.  I do not want to own a collection of banks that fall around the averages for the items viewed as important by me. 

 UBSI closed yesterday at $29.26, up 42 cents.    Bought 50 of UBSI at $16.65 (Nov 2009). 

5. Opnext (own: LOTTERY TICKET strategy):  HK wanted to know what the heck is a "high power, 60mW, 445nm blue laser diode" that consumes 30% less power than the "leading" blue laser offerings, according to an  Opnext press release.  Then the HK saw another Opnext press release yesterday, something about a "high power 404nm, 500mW violet laser diode for medical illumination", and wanted staff to research that product.  LB responded that it did not care, maybe the "HK needs to spend his time reading one of the novels downloaded into his Kindle."  LB has better things to do than to research one of the Nit Wit's LT selections.  Besides LB was recently fired -unjustly of course-as Head Trader and was not feeling well.  The OG did not know, which is his normal answer, and the OG then said that " my head started to hurt just listening to HK's quotes from those two press releases."  RB, who has been the moving force behind the Opnext buys, replied that it did not know either, which is always its response to any question requiring  knowledge of a fact, though RB added that it sounded "really cool, all of this blue light stuff".  RB was proud of the fact that it did not know anything about any of Opnext's thingamajigs, and then added it wanted to go "All-in, Swing that Big Stick and buy a 1000 shares."   Bought 50 OPXT at $1.91 Sold LT Opnext at $3.1 Bought 100 OPXT at 1.89 Sold 100 OPXT at $2.47 Bought 100 OPXT @ 1.6

LB does not know how much longer it can keep it altogether here at HQ.

6. Citizens Holding Company (own: Regional Bank Stocks' basket strategy): Citizens Holding Company had an uninspiring 4th quarter.  Net income was reported at 35 cents per share, unchanged from the 4th quarter of 2009.  The net interest margin decreased to 4.06%, compared to 4.22 in the year ago quarter, but that is still good compared to a lot of banks.  

7. Bridge Bancorp, Inc (own:Regional Bank Stocks' basket strategy):   reported 4th quarter net income of 2.4 million or 38 cents per share, up 9% from the 35 cents per share earned in the year ago quarter.  As of 12/31/2010, the net interest margin was 4.26%; the operating efficiency ratio was 60.92%; the NPLs to total loans stood at 1.33%; the coverage ratio was 126.35% (allowances as a percent of NPLs); and the total capital to risk weighted assets ratio was 13.7% (no TARP).    Total assets increased 15% in 2010.  Loan growth grew 13%, and deposits increased 16%.   I am not aware of any analysts following this bank.

8. More on KTX: A reader disagreed with my decision to keep KTX, discussed in Tuesday's post. He noted correctly that Xerox could call the underlying bond at a small premium to par value.  That is true. (see page S-13 of the prospectus:  My reply involves a condense version of one of my investment philosophies, the one known as "sometimes it is just better to leave it alone".   This is my email reply:

"You are right about Xerox having the right to call, even though there is no call warrant.  I am betting that Xerox will not want to call this bond, given its junior status and its rights of deferral for up to five years.  I would be more concerned about an exercise of a call warrant if and when the price exceeded 105. Xerox could refinance this TP at a lower rate by issuing a senior non-deferrable bond.   If it does so, I will lose less than $50 of price appreciation adjusted for the soon to be paid semi-annual interest payment. The alternative is to sell and then reinvest in a lower rated bond that yields less at my cost.  That could end up costing me more.   I am content with the 8% yield at my cost and particularly that yield now with this kind of credit and a 2027 maturity.  I look everyday at what I can buy in bond land, and it is really, really awful when you look at what is available in the bond market.   I can not get much more than 6% in a BBB bond purchase with a maturity in the 20 to 30 year range.  Most of those are trading at premiums to their par values.  And, the exchange traded bonds are becoming a dying species."  

Xerox does not really have any actively traded long bonds with a similar maturity.  Morningstar  I would guess that a senior bond could be floated, with a 2027 maturity, now at around 6%.   A new junior bond with deferral rights from Xerox Capital would probably yield about the same as the existing 2027 bond.   So, when you add the costs associated with refinancing, including a premium payment to the existing bond owners and the underwriting cost of issuing new bonds, there would still be a current cost advantage to replace the junior bond with a senior one,  but possibly not an important one considering the liberal deferral rights of the existing bond which are normal for TPs.   I would add that I simply do not know whether there is some advantage to Xerox Capital to have a TP which would enter into the refinancing consideration.   I would emphasize that I would not buy shares at the current price. My problem was whether I should sell the 100 shares bought near par value.  

Xerox reported earnings this morning.  XRX reported adjusted earnings of 29 cents per share, which excludes 17 cents primarily related to restructuring charges.  Operating cash flow was reported at 1.3 billion.  

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