Thursday, April 28, 2011

Sold 120 of the TC JZV at $25.50/KTV REDEMPTION/Where Will Interest Rates GO After The End of QE 2/Bought 40 TBT at 36.58/Bought 100 FCBC at 13.89/NRIM VLY FNB ONFC NWBI

Notwithstanding overwhelming and reliable evidence proving that OBAMA was born in the U.S., a majority of Republicans preferred to believe otherwise, based on their own unique form of reality creation.

The President released his long form birth certificate yesterday and this is a link to a copy of that certificate.  Los Angeles Times  

Now that the official birth certificate has been released, in addition to the certificate of live birth released before the election, you would think the issue might die some.

Needless to say, two of our nation's leading TBs, Sarah Palin  and her soulmate Glen Beck, are now claiming that OBAMA released the certificate to distract the media from Bernanke's news conference.  It is impossible to have any confidence in a person's judgment after they have repeatedly proved their inability to distinguish fact from fiction.

One of the more important upcoming events will be the end of QE 2 in June.

It is interesting. The U.S. Federal Reserve is one of the main buyers of debt being issued by our U.S. Treasury Department. The FED is simply creating money.

So, who is going to buy that enormous amount of treasury paper when one unit of the U.S. government stops buying the paper being issued by another unit. Will interest rates go up or down?  My attitude is to make my best judgment and to act accordingly. I agree with Bill Gross who has started to short U.S. government debt, in effect betting that interest rates will rise and the value of existing U.S. debt will fall in value.

A contrary position is being taken by other bond managers.  The Federal Reserve did indicate yesterday that it will complete the 600 billion dollar purchase of treasury securities in June. FRB: Press Release--FOMC statement--April 27, 2011 However, given its more upbeat assessment about the economy, I would seriously doubt that it will launch QE 3 anytime soon.  The Fed noted that "the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually".

And Bernanke threw cold water on another round of money printing in his news conference yesterday. NYT  (a video is available at the FED's web site: Board of Governors of the Federal Reserve System)

The FED also announced its intent to continue its Jihad against savers by keeping the Federal Funds rate at the artificially low range of 0 to .25% for "an extended period".  In the judgment of staff here at HQ, this is going to end up bad by creating more asset bubbles and inflation, the most noticeable impact now is the acceleration in the real CPI (cash inflation excluding "owner's equivalent rent").

Besides the sheer amount of government debt that has to be issued to fund a trillion plus dollar annual deficit, and to retire maturing debt, inflation appears to be creeping up and cash inflation is certainly accelerating at an uncomfortable pace.

A repeat of the 1960s and 1970s is certainly one possible outcome, and that scenario would not be kind to those holding 4% 30 year treasury bonds or 3.5% ten year treasury notes. A negative real rate of return before taxes would be possible with inflation increasing slowly at first, then accelerating, as it did during that earlier period. Consumer Price Index, 1913- | The Federal Reserve Bank of Minneapolis

When you are living through that kind of period day by day, hour by hour, the problem may not become evident until it is too late. What is the More Rational Prediction for the Future-Inflation or Deflation (July 2010 Post); Managing Interest Rate Risk (June 2010); Item # 2  Interest Rate Risks- Bonds 

If the politicians in Washington manage to cut spending some, and reach a stalemate on raising taxes, the increased interest costs on the national debt will swamp whatever spending cuts that are likely to be made.

The current interest on the national debt could easily increase over 400 billion per year with just a return to normal rates. If you want to become sick, just look at the interest paid in the current fiscal year, starting 10/1/2010: Government - Interest Expense on the Debt Outstanding And, that number is at abnormally low interest rates. This expense is not going to get any better, and will likely become much worse. A trillion dollar per year interest expense on the national debt is certainly a possibility within 10 years, maybe even sooner. The interest expense for fiscal 2010 was $413,954,825,362.17.

I do not own any U.S. government debt other than some individual TIPs maturing in 2019, a TIP mutual fund and a bond CEF that invests in TIPs which I have bought and sold many times.

I do own some Canadian government debt.  My main interest rate risk is in long term corporate bonds, mostly investment grade, and a few bond CEFs that do not have term dates. I have decided to start a small hedge for those positions by buying TBT, the double short for the 20+ year U.S. Treasury. I will consider averaging down on this position but will not average up.  

1. Bought 40 TBT at $36.58  on Monday (see Disclaimer): TBT is what I call a double short ETF. As a conservative person, I would regard any security that attempts to double short anything to be dangerous.  I am not making a bet with this security.  Instead I am creating a hedge for an unexpected rise in interest rates.  The treasury bonds will be the most sensitive in price to a rise in rates due to their perceived lack of credit risk.  

I did find an even more gutless trade of TBT from 2009, made in my main taxable account, where I at least made a $175.09 profit on thirty shares:

This is the way that I look at it.  Since I built my home in 1982, where I still reside, I have paid Travelers insurance company every year to insure it. I have yet to make a claim under my Homeowner's policy. Was that a mistake?Sometimes, I just feel more comfortable buying some insurance even if nothing bad actually happens. And, I am not exactly confident that U.S. government debt is going to hold its value in the coming years. Disaster on the horizon is more of how I would characterize the prospects for our nation's debt.  In the last analysis, however, no one can predict the future. My house may never burn to the ground or be hit by a tornado and long term treasury bonds may rise in value to yield 2.5% again on the 30 year. 

I have in the past discussed at length the tracking problems associated with TBT. The sponsor states that the goal is to seek a return equal to -200 of the Barclays Capital 20+ Year U.S. Treasury Index "for a single day". ProShares ETFs: UltraShort 20+ Year Treasury – Overview After one day, the ETF may start to lose tracking with the index and the divergence can become significant.  And, it needs to be kept in mind what happens when the index goes up in value.  

While the double shorts have several problems, they do give me more bang for the buck than a simple short of an ETF like  iShares Barclays 20 Year Treasury (TLT). However, since I do not have a margin account, I am not set up to short securities, but I can buy ETFs that take short positions.

TBT has declined some since my purchase until yesterday. I expect this security to be volatile in the coming months. 

2. Bought 100 shares of  First Community Bancshares (FCBC) at $13.89  Last Monday (Regional Bank Stocks' basket strategy)(see Disclaimer): First Community Bancshares has 59 branches in five states: Virginia, West Virginia, Tennessee, North and South Carolina: The bank has its headquarters in Bluefield, VA. I had the bank on my monitor list for regional banks that has over 100 stocks. I thought that the recent earnings release was good, so I pulled the trigger and bought 100 shares last Monday at $13.89 in a satellite brokerage account. The regional bank basket strategy is sufficiently large to be material to me. 

The Lottery Ticket Strategy in its totality is not material. I have been buying some regional banks as part of the LT strategy and do not intend to monitor them.  I will monitor all of the stocks in the Regional Bank Basket Strategy. 

FCBC closed at $14.2 on Monday up 45 cents on below average volume.  The consensus forecast for the 1st quarter, made by seven analysts, was for an E.P.S. of 25 cents. First Community Bancshares reported earning of 5.75 million or 32 cents per diluted share. As of 3/31/2011, FCBC reported a total risk-based capital ratio of 15.81%; a tier 1 risk-based capital ratio of 14.55%;  a tier 1 leverage ratio of 9.66%; a tangible book value per share at $10.48, up 45 cents from 12/31/2010; and a net interest margin of 3.96%. 

The bank did participate in TARP and paid the government back in 2009. (see page 11  2010 Annual Report) As of 12/31/2010, the non-GAAP efficiency ratio was okay at 59.1%; NPAs as a percentage of total assets was at 2.13%; NPLs to total loans was 1.78%; and the allowance for loan losses as a percentage of NPAs was 89.3% (see page 41)

Wellington Management filed a Schedule 13-G asserting ownership of 7.57% of the outstanding shares as of 12/31/2010. 

The annual dividend per share hit $1.12 in 2008 before being slashed by the bank to 30 cents in 2009. The annual rate was raised to 40 cents per share in 2010 and has not been raised since then. The bank share's hit a high of $42.3 intra-day on 2/8/2007 (FCBC Historical Prices) before sliding to a low of $7.9 on 3/6/09.  

As noted, I made this trade last Monday. The stock has popped after my purchase, closing at $15.16 in trading yesterday. First Community Bancshares Inc VA

For banks on my monitor list, I will make a very quick review of earnings releases. If I see something interesting, I will read the entire release which I did shortly after the announcement from FCBC. I then decided to add the stock to my basket.  

3. NWBI ONFC FNB VLY NRIM (own: Regional Bank Stocks' basket strategy): 

Northwest Bancshares (NWBI) reported 1st quarter net income of 17.3 million or 16 cents per share, up 31.1% over the same quarter in 2010.

The estimate was for 15 cents.  The Board increased the quarterly dividend by 1 cent to 11 cents per share. As of 3/31/2011, NPLs to total loans was high for the banks in my basket at 2.85%, up from 2.16% in the 1st quarter of 2010; allowance for loan losses as a percentage of NPLs was an uncomfortable for me 48.96%; the net interest margin was 3.66%, up from 3.32% in the year ago quarter; tangible common equity to assets was excellent at 13.99%; tangible book value per share was $10.32; and the number of banking offices was at 172. Through 3/31, the bank had repurchased 3,173,423  million shares at an average cost of $11.96 per share.  

I am reinvesting the NWBI dividend to buy additional shares.  Added 50 NWBI at 11.88 Bought 50 NWBI at 11.47

Added 50 NWBI at 11.10 Bought: 50 NWBI at 10.45 Sold 50 NWBI @ 12.5

Northwest Bancorp continued to be listless, falling 6 cents in trading yesterday to close at $12.43. 

Oneida Financial  (ONFC) reported net income of 20 cents per share up from 9 cents in the year ago quarter. There are no estimates for ONFC.  I would caution that  Non-GAAP earnings, which excludes some non-cash items, was 18 cents for both quarters. As of 3/31/2011, the total risk-based capital ratio was 15.44%; tangible book value per share was $8.74; tier 1 capital to risk-weighted assets was 14.3%; the allowance for loan losses as a percent of NPLs was a comforting 114.45%; NPLs to total loans was at 1.41%; NPAs to total assets was at 1.16%; tangible equity to tangible assets was at 9.36%; the efficiency ratio was too high at 80.01%; and the net interest margin was 3.33%.

The quarterly dividend per share is currently 12 cents, resulting in a dividend yield close to 5.5% at a total cost of $8.75. Oneida Financial Corp, ONFC  I own only 50 shares bought at $7.7.

Oneida Financial closed at $8.89 in trading yesterday. 

F.N.B. Corporation reported net income of 17.2 million for the 1st quarter or 14 cents per share, compared to 14 cents in the 1st quarter of 2010. I have pared my position in FNB to just 50 shares purchased at $7.8. I sold my highest cost shares purchased at 9.36 and at 8.42, and do not intend to add to my remaining position. Sold 100 of FNB in 50 share lots at $10 and $10.18  At the current quarterly dividend rate of 12 cents per share, the dividend yield at a total cost of $7.8 is around 6.15%. At a total cost of $10.25, the yield is of course lower at around 4.69%.

F N B Corp rose 27 cents yesterday to close at $10.85. 

Valley National Bancorp reported net income for the 1st quarter of 36.6 million or 22 cents per share, up from 16 cents in the 1st quarter of 2010. VLY is one of my larger positions in this basket. The consensus estimate was for 20 cents.

As of 3/31/2011, the net interest margin was 3.71%; loans increased 7.7% on an annualized basis; the efficiency ratio was at 51.85%; the total capital ratio was at at 13.01%; the tier 1 risk-based capital ratio was 11%; Non-accrual loans as a percentage of total loans was at 1.06%; the allowance for loan losses as a percentage of non-accrual loans was a comforting 118.18%; and there is no government money on the balance sheet. VLY repurchased the government's preferred stock in 2009: Page 137 Form 10-K.

The 2010 Annual Report can be found at FORM 10-K.

Valley has a good dividend yield and the Board will also declare a 5% stock dividend:  Valley National Bancorp Board of Directors Declares a Five Percent Stock Dividend VLY operates 198 branches in 134 communities and is headquartered in Wayne, NJ.

Valley National Bancorp rose 25 cents in trading yesterday to close at $14.2.

Northrim BanCorp (NRIM) reported a 29% increase in net income to 2.5 million or 37 cents per share, compared to 1.8 million or 28 cents per share in the 1st quarter of 2010. The consensus estimate made by 2 analysts was for 31 cents. As of 3/31/2010, tangible book value per share was $17.13; the tangible common equity to tangible assets ratio was at 10.14%; the total capital ratio was at 16.23%; NPAs to total assets was at 2.02%; NPLs to total loans was as at 1.8%; the allowance for loan losses to NPLs was a comforting 128.42% (the "coverage ratio"); the net interest margin was relatively excellent at 4.72%; and the efficiency ratio was okay at 68.8%. I would like to see that number below 60%.

Northrim Bancorp rose $1.05 to close at $19.35 yesterday, up 5.74%.

Bought 50 NRIM at $16.66

4. Sold 120 of the TC JZV at $25.5 on Monday (see Disclaimer):  I am keeping 100 shares with a lower average cost held in my taxable account:

I did not remember owning 50 shares in the ROTH IRA, but noticed those shares in my account this morning. The Gremlins must have bought those shares or the OG had one of those senior moments.  The total JZV shares provided in the snapshot found at EXCHANGE TRADED BOND TABLE was consequently off by 50 shares. Prior to the sale of 120 shares, I actually owned 270 shares in 3 different accounts.

This trust owns a senior CNA bond maturing in 2023. The TC has a 7% coupon on a $25 par value.  I sold the 70 shares held in the regular IRA and 50 shares bought in a satellite taxable account. Bought 70 JZV @ 24.14-Regular IRA  Bought 50 TC JZV at 22.6 (6/2010 Post-Satellite account purchase). 

Of the 100 shares still owned, 50 shares were bought  at $9.93 (March 2009 Post) after several successful trades of this security (see snapshot above which includes commission cost). Most likely, I am playing with the house's money on this one now, taking into account realized and interest payments.

TRUST Certificates: Links in One Post

5. KTV REDEMPTION BY WELLS FARGO (OWNED 100 Shares at the Time of Redemption): As previously noted, Wells Fargo announced its intention to redeem the underlying Trust Preferred (TP) in this Trust Certificate (TC). Item # 1 Redemption KTV For the 50 shares held in the taxable account, I had a total average cost of $18.16 and my gain will be a long term capital gain. Wells Fargo had to pay a premium to par value to redeem the TP which flowed through to the owners of the TC KTV.  This is a snapshot of the redemption proceeds:

I had already booked a profit in this security several months ago and was content to hold it for its yield at my cost. But, of course, I have no choice once the security is called by the issuer or the owner of a call warrant for TCs. Rounded KTV to 100 Shares (February 2009 Post)

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