Thursday, January 20, 2011

Bought 50 BDGE at 23.11/HCBK TRST RNST/Bought Back 300 of the CEF WIW at $12.17

I was watching over the weekend a CNBC special about our ability to focus on more than one task at the same time.   There was a test during the program, where the viewer was told to count the number of basketball passes by people wearing white jerseys.  There were also an equal number of players wearing black jerseys.  All of the players were in constant motion, intermingling with one another, and our LB announced with its usual certainty that there were 13 passes by the players wearing the white jerseys.   Then the announcer stated there were 13 passes, and LB smugly said to itself, "aced another test with an A+".  The announcer then asked, did you see the witch.  LB replied that there was no witch, just a bunch of people throwing basketballs to one another.   And, then the scene was replayed, and there was clearly a woman dressed as a witch who walked into the middle slowly, paused for several seconds, and then slowly walked out of the picture.  "Fooled the Nerd Machine," RB noted, then added, "RB saw the witch and told the LB, but the LB would not listen."

There was another test, where a clown was riding a bicycle at a college campus.  People talking or texting on their cell phones would not notice the clown, even when he circled around them.

Those who text while driving have a 23 times greater likelihood of causing an accident.  In fact, the driving ability of someone texting is similar to a driver who is legally intoxicated.

Most people are under an illusion that they can focus on more than one task at once.   A greater number are under an illusion that their opinions are supported by the best and most reliable evidence.

1. Bought 50 Bridge Bancorp (BDGE) at $23.11 on Tuesday (Regional Bank Stocks' basket strategy) (see Disclaimer):  Bridge is a small bank with 19 branches and headquartered in Bridgehampton, N.Y.   Bridgehampton National Bank | Corporate Profile  This is a link to a map of its branch locations: Bridgehampton National Bank  The stock is thinly traded, with a usually wide bid/ask spread.  I had it on my monitor list for regional banks, and noticed that the stock had declined into my buy range.   There are no analyst estimates.   It would probably be more advisable to wait for the bank's 4th quarter earnings report before taking a position.

In the Q/E 9/30/2010, the bank reported earnings of 38 cents, up just one penny from the third quarter of 2009.    Form 10 Q  As of 9/30, the total capital to risk weighted assets ratio was 13.8% and the Tier 1 capital to average asset ratio was at 7.8% (page 32).   The coverage ratio was then at 1.62%:  SEC Filed Press Release Net interest margin was at 4.09%.

BDGE did not participate in TARP:  SEC Filed Press Release

The current dividend rate is 23 cents per quarter. exv99w1 At a total cost of $23.11, the dividend yield is 3.98%.

Along with other regional banks, BDGE had a bad day on Wednesday, falling 3.58% or 83 cents to close at $22.38. The regional bank basket had a particularly bad day on Wednesday, falling 2.71%. 

2. Renasant (RNST)(own-Regional Bank Stocks' basket strategy):  Renasant reported net income for the 4th quarter of $4,721,000 or 19 cents a share.  As of 12/31/2010, the net interest margin was 3.43%; the tier 1 leverage capital ratio was 8.97%; the total risk based capital ratio was 14.83%; the tangible capital ratio was 6.76%; the efficiency ratio was 70.34%; the allowance for loan losses to total NPLs was at 84.32%; and NPLs to total loans was 2.46%.  

The consensus estimate from 11 analysts was for 19 cents. 

Like a lot of banks, Hudson City being a notable exception, RNST noted an improvement in the net interest margin from the year ago quarter.  This is mainly due to certificates of deposits being rolled over at lower rates. 

3. Hudson City (HCBK)(own-Regional Bank Stocks' basket strategy):  The 4th quarter report from Hudson City Bancorp contained a downbeat assessment of this bank's prospects in 2011.  The bank's net interest margin in the 4th quarter was a paltry 1.73%, and the bank predicted that highly unsatisfactory level may even decrease further in 2011.   Fortunately, the efficiency ratio is low too, one of the best at 19.68%.  That ratio is calculated by dividing non-interest expense by income. 

The bank reported earnings for the 4th quarter of 25 cents, down from 28 cents in the year ago quarter.  While this was two cents better than the consensus estimate of 23 cents, I would still have a negative view of the number. 

As of 12/31/2010, NPLs to total loans was at 2.82%, up from 1.98% as of 12/31/2009.  The allowance for loan losses to NPLs was a potentially troublesome 27.15%.  Many of the banks that I own have this ratio over 100%.   The higher number is always better in my view.  I do not want to be surprised by a big earnings miss due to a substantial increase in allowances for loan losses. 

The capital ratios for Hudson are good.  As of 12/31/2010, the total risk-based capital ratio was 23.04%.    

Hudson blames a number of factors on its poor net interest margin.  The main culprits are the low mortgage rates, and the extensive competitive involvement of the GSEs Fannie and Freddie in that market.  The low mortgage rates are causing a wave of refinancings, and competition from the GSEs is limiting Hudson's ability to grow its business. 

The only reasons for holding Hudson are that conditions may improve in 2012 for it, the dividend yield, and the strong capital position. I am reinvesting the dividend to buy additional shares. 

4. TRUSTCO (TRST)(own-Regional Bank Stocks' basket strategy):  Trustco reported lackluster 4th quarter earnings of 9 cents per share, down from 11.2 cents in the year ago.    As of 12/31/2010, the tier 1 risk adjusted capital ratio was 12.57%; the allowance for loan losses to non-performing loans (coverage ratio) was at .9%; the net interest margin was 3.43%; the efficiency ratio was 53.25%; and the NPLs to total loans stood at 2.07%.  I regard TRST to be a hold, and I do not plan to add shares until I see more earnings improvement.   This bank has 133 full service branches and is headquartered in Glenville, N.Y.  

5. Bought Back 300 WIW at $12.17 on Wednesday (see Disclaimer):  WIW is a bond CEF that owns mostly U.S. inflation protected treasury securities. 

In 2010, I harvested short term trading gains of $254.77 for  WIW and $213.12 for the a similar fund IMF, plus a total of $149.95 in dividends from those two funds.  Given their similarities, I view them as interchangeable, with the main difference from my point of view being their respective discounts to net asset value at the time of a contemplated purchase. 

On 1/18/2011,  the Western Asset Inflation Management Fund Inc. (IMF) fund closed at a -3.97% discount to its net asset value of $18.12.  The  Western Asset/Claymore Inflation-Linked Opportunities Income Fund (WIW) closed at a 8.13% discount that day.  The NAV per share for WIW on 1/18/2011 was  $13.28 and the shares closed at $12.20. 

WIW has about 89% of its portfolio in treasury inflation protected securities: 

 Before purchasing shares yesterday, I noted that the TIP ETF was rallying, which suggested that the WIW net asset value was rising as its market price fell.   This has been a normal phenomenon experienced by many closed end bond funds, since individual investor sentiment started to turn against bond funds a few weeks ago.  Given that change in perception, the discount  to net asset value has been expanding for virtually all of the closed end bond funds that I follow, including those that I presently own.    

When I last purchased WIW, I mentioned that it had just cut its monthly dividend from 4 cents to 3.65.   Bought 300 of the Bond CEF WIW at $12.14  I quickly sold those 300 shares  at 12.43. I support a dividend cut by a CEF that brings the dividend in line with the fund's earnings.  Other individual investors will sell on the news, preferring to have the fund return part of their capital in the guise of a dividend. 

When I last bought 300 WIW, the discount had expanded to -8.18 and the net asset value was $13.20. 

I have discussed buys and sales of this CEF in several posts:  Bought 300 of the CEF WIW at $11.94 SOLD 200 of 300 WIW at $12.5 Bought 200 WIW at 12.29 Sold 300 WIW at $12.53 Bought 300 of the Bond CEF WIW at $12.14  Sold 300 WIW at 12.43  In other words, I will likely sell the 300 shares bought yesterday for a small gain, with a rise over $12.4 as a trigger for a potential sale.

WIW rallied some later in the trading day to close up 3 cents at $12.23.  At that price, the discount to net asset was -8.05% with the NAV increasing two cents per share from Tuesday's close:   WSJ 

With the herd turning against bond funds, any purchase now, even for a trade, would have to be characterized as a contrarian play.  The only advantage to a fund like WIW is that treasury inflation protected securities will do better than a similar maturity fixed coupon bond fund, where inflation is rising, due to the inflation accretion in the TIPs' principal.

Advantages and Disadvantages of Treasury Inflation Protected Securities
Treasury Inflation Protected Securities as a Non-Correlated Asset

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