Monday, January 31, 2011

Sold 100 of 150 PKM at 25.93/STL/Added 50 FNFG at 13.97 & Sold 50 GBCI at 14.58/Term Junk Bond ETFs/ VLY NHTB/More on Vix Asset Allocation Model

The Old Geezer, our new Head Trader here at HQ, is already complaining incessantly about working too hard.  There is barely enough time during the trading day for the OG to leave the trading desk to munch on a few Fritos and to cram down the normal daily allotment of Hershey Kisses, just a small bag of each the OG noted for all of those health nut readers.   Headknocker was sympathetic sort of, or a more appropriate description would be sympathetic for the HK, and ordered a staff member to add some Kisses to the OG's IV solution, and to up the dose of Pepto Bismol to a liter per hour. HK had under active consideration a mainline infusion  into the RB of his special concoction of Xanax. Lunesta and Valium, since the RB was having an unusually strong, undo influence on the OG since LB went on strike. Yes, LB has gone on strike again after Headknocker ordered it to read about 20 Moody's reports over the weekend.  LB said that it gets not respect in this operation, even though it does all of the work, let that "Old Goat and his Nit Wit ally research their hair brain ideas which occur to them with increasing regularity".  RB replied, "go All-In".

The latest revision to 4th quarter GDP shows an increase of 3.2%: News Release: Gross Domestic Product Final sales increased by 7.1%, the largest increase since 1984.

One out of nine homes in Las Vegas received a foreclosure notice in 2010: MarketWatch

The market developed the shakes last Friday, as uprisings spread across the Middle East. I decided to do very little last Friday, and just wait to see what happens. If investors want to get the shakes worrying about something, just look at the emerging double dip in housing prices nationwide and the stubbornly high unemployment rate in spite of massive fiscal and monetary stimulus.  Evidence of the double dip in home prices nationwide can be found in an article in today's  WSJ.com and in the recent releases of the Case Shiller index, see for example my discussion at  Case Shiller.

The OG invited the LB back to discuss its Vix Asset Allocation Model, knowing the LB could not resist staying on strike when it had a platform to pontificate for hours about one of its pet theories:

The ^VIX popped 24.09% last Friday, closing at 20.04. That is not sufficient to interrupt the count of continuous movement below 20 relevant to the formation of a Stable Vix Pattern.  I will allow some temporary movement above 20, particularly when the movement has been below 20 for weeks which has been the case recently, and provided the break above 20 is relatively short and not too steep.

Zulauf  recommended buying volatility in the Barron's  Roundtable Part II. So far, based on last Friday's action, he has been correct on that call. I added in my discussion on his recommendation that buying volatility, and paring stock positions and/or buying hedges for stocks, was a strategy applicable in an Unstable VIX Pattern when the VIX moved below 20 and meandered below 20 for a few weeks. That reduced volatility would be accompanied by strong stock market performance.

The hallmark of the Unstable Pattern in Phase 1 is that the market will be easily spooked by an external event and volatility will spike, rising to the high 20s and then above 30. Vix Asset Allocation Model Explained Simply  The pop last week was due to the growing turmoil in the Middle East.  The pop in the VIX starting in April 2010 was due to the sovereign debt crisis in Europe. ^VIX Historical Prices That whipsaw pattern is the defining characteristic of the Unstable Vix Pattern.  I have made this point over and over again since starting this blog in 2008.  Back in 2008, I discussed buying SDS, the double short for the S & P 500, as a hedge when the VIX moved below 20 during the Unstable Vix Pattern. (More on VIX AND ASSET ALLOCATION: November 2008)

I would add this important caveat, however. History has told us that the Unstable VIX pattern will eventually give way to a Stable VIX Pattern, where volatility remains subdued for an extended period of time and stocks rise more or less in a 45 degree upward slope. VIX and S & P Compared 1990 to 1997 Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2 That pattern has lasted for years in the past.  Obviously, when the transition occurs, the investor does not know whether the stable pattern is forming or that the fall below 20 in the VIX is just another head fake in the Unstable Vix Pattern. If it is the former, selling stock in response to the decline below 20 would need to be reversed when and if there is a formation of the Stable Pattern (index investors would hold after the formation of the Stable Vix Pattern until the next Trigger Event before reducing again, the last Trigger Event was in August 2007-VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern).

It is not clear now whether a Stable Vix Pattern is forming or whether the market is going to decline again with the VIX spiking to well over 20. That is why I require at least 3 months of a dominant movement below 20 to make a decision on whether the transition has in fact occurred. This period was based on a review of historical VIX information performed when I first developed the model in the spring of 2007.  Based on the historical record only, I found that the movement below 20 for 3 months would signal the end of the Unstable period. This time may be different of course. I am starting the current VIX movement below 20 on 12/2/2010:  ^VIX Historical Prices (see also Current Status of The Vix Asset Allocation Model Signal (Aug 2010); Item # 3 Update to Status of VIX Allocation Model  (Jan 2011).

BMLPRL, a non-cumulative perpetual equity preferred floater with a guarantee, was ex dividend for its quarterly distribution last Friday. BMLPRH is on a different schedule and will go ex dividend on 2/11/2011, which is also the case for BMLPRG, I have said many times in this blog that the phrase "non-cumulative, perpetual equity preferred stock" is not brimming with favorable words for an investor.  Cumulative is better than non-cumulative. Perpetual for a fixed income type of investment is never preferable to a maturity date. A preferred stock has no equity interest in the business and is junior in priority to all bonds.

So, I do not go crazy with these investments. They do have a function, in that the guarantee provides a measure of protection for the fixed income investor during a period of deflation or low inflation while the float offers some inflation protection. The equity preferred and synthetic floaters, along with the CPI floaters, do provide ballast and some balance to a portfolio heavy with long fixed coupon bonds.

And, at least for now, the equity preferred floaters like BMLPRG, BMLPRH and BMLPRH pay qualified dividends, a relevant issue for well off U.S. citizens looking for income in taxable accounts.

Advantages and Disadvantages of Equity Preferred Floating Rate Securities (see also Synthetic Floaters Floaters: Links in One Post)

Guggenheim has launched several term junk bond ETFs:


This is a link to the holdings for the 2015 term ETF:  BSJF  The expense ratio is .42%.

This is a similar product to the term investment grade bond ETF discussed in several earlier posts.

Since I have a large number of stocks in my regional bank basket, and have already discussed a significant number of their respective 4th quarter earnings reports, I am going to omit discussions of the following, although I did review the press releases referenced below:

First Financial (FFBC):  FFBC 4TH QUARTER EARNINGS PRESS RELEASE 
Provident Financial (PFS)  SEC FILED PRESS RELEASE: 4TH QUARTER EARNINGS 

All of my positions in those banks are 50 share lots and are just immaterial.  Besides I am sick and tired of discussing these bank earnings. I will discuss the Sterling Bancorp's earnings since I own 210 of its TP STLPRA and 50 of its common shares, so STL is more important to me than ORIT for example.  I will pay more attention to STL because of my bond holding. 

On Friday, the 50 share position in WBS crossed the up 400% threshold.    

1.  First Niagara Financial Group (FNFG) and Valley National Bancorp (VLY) (own: Regional Bank Stocks' basket strategy): 

These two banks are important since I now own 250 shares of FNFG and 200 shares of VLY, and will consider adding more.

First Niagara reported non-GAAP income of 49.7 million or 24 cents per share, beating estimates by 1 cent. The comparable number from the 4th quarter of 2009 was 17 cents. The GAAP number which includes acquisition related expenses was 22 cents. The current consensus estimate for 2011 is for an E.P.S. of $1.02. The last earnings report is discussed in this article at TheStreet.

I have a favorable view of FNFG's pending acquisition of New Alliance (NAL), a well capitalized bank headquartered in Connecticut. NAL reported 11.3 million in net income for its 4th quarter. I owned some shares in NAL when FNFG made its offer. This is a link to a map of NAL's 88 branch locations in Connecticut and Massachusetts: Locations | NewAlliance Bank

As of 12/31/2010, FNFG's net interest margin was 3.64%; the efficiency ratio for its banking segment was at 65%; it had 257 branches; the total risk based capital ratio was 11.86% for the bank and 14.35% for the holding company; the nonperforming loans to total loans was at .85%; and the TEXAS RATIO was 8.94%. 

FNFG also raised its quarterly dividend by 1 cent to 16 cents per share. The current yield is around 4.57% at a $14 total cost number per share.  


I have those shares in two separate accounts. I am reinvesting the dividends in one and taking the dividend in cash in the other. I added 50 shares to FNFG on Friday, see # 2 below, bringing my total to 250 shares.  I added those 50 shares in the brokerage account where I am reinvesting the dividends. 

Valley National reported 4th quarter net income of 38.2 million or 24 cents per share, up from 18 cents in the 4th quarter of 2009 that was impacted by 3.5 million in dividends and "accretion" of Valley's preferred stock issued to the U.S. government. VLY redeemed that stock in full in 2009.  The consensus estimate was for 22 cents.  According to YF, the consensus estimate for 2011 is for an E.P.S. of 86 cents with the high estimate at 94 cents among the 10 analysts.

The net interest margin was 3.63%, up from 3.47% in the 4th quarter of 2009. As of 12/31/2010, the total capital ratio was at 12.91% on a consolidated basis; the Tier 1 leverage ratio was 8.31%; the efficiency ratio was at 53.97; the allowance for non-covered loan losses as a percentage of non-covered loans was 1.35% (VLY has a covered loan agreement with the FDIC); and total non-accrual loans as a percentage of total loans was at 1.12%.  

2. Sold 50 GBCI at 14.58 and and Added 50 FNFG at 13.97 (see Disclaimer):  When I discussed the 3rd quarter earnings report for GBCI, I referred to it as "borderline pathetic". Item # 1  GBCI. The bank's 4th quarter report was another less than stellar performance. The bank is basically just earning enough per share to cover its 13 cent per share quarterly dividend. While its capital levels are good, its earnings growth is disappointing and the level of its NPAs is not what I like to see, although that number improved to 3.91%. Glacier Bancorp, Inc. Announces Results for Quarter Ended December 31, 2010 

Its allowance for loan losses to NPAs is 51%. The 13 cent per share number for the 4th quarter included 2 cents from security sales and was a 13% decrease from the year ago 15 cents per share. While GBCI was listed as one of Cramer's favorites in his book "Getting Back to Even", I do not believe that strong capital levels is enough to keep me in the stock when a bank like FNFG looks a lot better to me now and over the long term.  So I sold out of GBCI and increased my position in FNFG by 50 shares to 250 shares. 

GBCI closed at $14.45 last Friday, down 4.24% for the day.   FNFG closed at $13.98, down 37 cents or 2.6%. 

3. Sterling Bancorp (STL)(own 210 shares of the TP STLPRA)(own:Regional Bank Stocks' basket strategy):             

Sterling reported net income of 3.5 million in the 4th quarter, an increase of 46% over the 2 million earned in the year ago quarter.  Sterling sold a lot of stock in March 2010 and its share base increased by 48% from the year ago quarter. Notwithstanding that larger share base, earnings per share were reported at 13 cents for the last quarter, up from 11 cents in the year ago quarter.     

As of 12/31/2010, the net margin was 3.98%; the total risk based capital ratio was at 14.68%; the tangible common equity ratio was at 6.81%; the Tier 1 risk based ratio was at 13.61%; the allowance for loan losses to nonaccrual loans was at 274.5%; and NPAs to total assets was at .29%. 

I own 50 shares of the common bought  at $6.58 (Dec 2009). I also own its TP, which has a 8.375% coupon on a $10 par value. Interest payments are made quarterly. While the the underlying bond and the TP mature in 2032, Sterling has the option to call both of them now. www.sec.gov  Sterling has less than 15 billion in assets, so it may continue to include its TP as part of its equity capital. I suspect that this call option will restrain any price appreciation above the $10 par value plus accrued interest.  

I have bought and sold the TP and currently own 210 shares.  


4. Sold 100 of the 150 PKM at 25.93-All Shares Sold in IRAs (see Disclaimer): I had received notices from two brokerage companies that PKM was being called at its par value of $25 plus accrued interest. PKM Called Unlike previous calls, I have not found any confirmation such as a filing with the SEC or a press release. In any event, the $25.93 gives me almost all of what I would receive in the event of a redemption on 2/15. I went ahead and sold the position in my retirement accounts, 50 in the ROTH IRA and 50 in a Regular IRA, so I could go ahead and plan for the reinvestment of those funds. 


The fifty shares in the regular IRA had a total cost of $17.76:


I still own 50 shares of PKM with a similar average cost, bought at about the same time.  PKM has a 8% coupon and pays interest on a semi-annual basis.  So the total return was good, particularly for a bond.

TRUST Certificates: Links in One Post

5.  New Hampshire Thrift Bancshares (NHTB)(own:Regional Bank Stocks' basket strategy): Friday was a bad day for the market and regional banks.  NHTB bucked the downtrend and closed at $13.20, rising 20 cents for the day. NHTB is one of my smallest banks in the regional bank basket. It has 28 branches located in west central New Hampshire and central Vermont.  Market capitalization is close to 77 million at the current price.  I bought 100 shares at $9.51 (JAN 2010).  At the time of my purchase, the dividend yield was around 5.5% at my cost.  Needless to say, with this kind of investment, I am not trying to shoot the lights out. I would be more than satisfied with a total return of around 10% annualized, with some years better than others. I could sell the shares now and realize much more than that 10% annualized total return.

When I originally discussed this bank, there was an analyst estimate but apparently that firm dropped coverage. NHTB reported net income for 2010 at $1.29 per share, up from $1.06 in 2009. At the $13.2 closing price from last Friday, that would translate into a P/E of 10.23  based on trailing earnings. The 4th quarter E.P.S. was 34 cents per diluted share, up from the 28 cents earned in the 4th quarter of 2009. The Tier 1 core capital ratio was 8.28% at the end of 2010. Book value per share was $14.26. The dividend payout ratio was 40.31% for 2010. The current quarterly dividend rate is 13 cents per quarter. At Friday's close, that would result in about a 3.94% yield.

On the downside, the bank has had a 52 cent annual dividend from 2008 through 2010. While there has been no increase in those three years, another way to look at it is that there was no decrease either.  The annual rate did rise from $.32 per share in 2003 to $.52 in 2008.  The share price topped out at $20.25 in 2005 and came close to $6 in both 2008 and 2009. New Hampshire Thrift Bancshares Stock Chart 

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