Thursday, July 28, 2011

FIBK FNB BRKL FMER/SOLD 100 PIS at 25.95/Bought 100 ERH at 11.69/Continuation of Unstable VIX Pattern/Possible Head and Shoulders in the S & P 500 Forming/Some Disconcerting Earnings Reports

A GOP Congressman from Georgia, Paul Broun, wrote an opinion column in explaining why he would not vote for any increase in the debt ceiling or to increase taxes on the Job Creators. Mr. Broun represents the   10th Congressional District in Georgia. Mr. Broun is a member of the GOP Tea Party Caucus.

Possibly, the market will see some light at the end of the tunnel today when and if the House votes to advance Boehner's plan.  If there are not enough GOP House members willing to vote for their Speaker's plan, then I doubt that enough could be mustered to approve Senator Reid's alternative. Senator McCain lashed out yesterday at the Tea Party GOP members, calling them "hobbits" and their obstinacy "bizarro". CBS News  CNN Some GOP adult needed to make those statements. 

Several newly minted GOP representatives from Tennessee are part of the Tea Party Caucus. At least two of those representatives, Diane Black and Stephen Fincher were elected in districts that formerly supported Democrats.  Those new representatives have voted for the Ryan Medicare plan which would have the inevitable result of bankrupting most of their middle class constituents who are currently 55 years old or younger. GOP's Plan To Bankrupt the Middle Class  The GOP Budget Plan and The Middle Class I would support the adoption of the GOP plan for Medicare, applied to those now 55 years or younger and living in those two congressional districts, as well as their lineal descendants for the next 300 years. GOP It is important to visit consequences on the voters for their actions.  GOP representatives from 235 congressional districts in total supported this plan to bankrupt the middle class. Final Vote Results for Roll Call 277

As an alternative, those residents could opt instead for the plan advocated by a former GOP senate candidate, where medical bills are settled with chickens (live ones only): Sue Lowden Stands by Chicken Health Plan

One of the new GOP representatives from Tennessee, Stephen Fincher, is a gospel singer farmer who has never lived outside of Frog Jump, Tennessee. Bloomberg The Federal Election Commission recently found that Fincher violated election laws in his disclosure relating to a $250,000 donation received from Gates Banking and Trust Company according to the The Jackson Sun This bank is a very small institution located in Gates Tennessee. Fincher is a vast improvement over my congressional representative.   

Glen Beck, one of the leading TB intellectuals, compared the young victims in Norway, murdered by a right wing extremist, to "Hitler Youth". USATODAY In this country during the last election, several GOP candidates talked about resorting to Second Amendment remedies in the event the nation did not reverse course. NYT

This is a link to an article published at  Fidelity about the dangers of prioritization in the event the debt limit is not raised by Congress. Fincher is giving the Treasury advice on how to prioritize payments. Congressman Stephen Fincher

The Fed's release of its Beige Book added to anxiety yesterday, as it showed the spreading of the "soft patch". FRB: Beige Book--Summary--July 27, 2011 The industrial bellwether Emerson Electric stated in a regulatory filing that it saw a "definite weakening of general business activity in June and July". SEC Form 8-K The poor results from Juniper added to the angst as the market started to reconsider the consensus upbeat economic forecast.  Juniper Communications Press release Emerson (EMR) declined 6.7% in trading yesterday to close at $50.43.  JNPR fell 20.89% to close at $24.66, as the analysts fell over one another downgrading the stock. Corning (GLW) reduced its forecast for LCD glass demand. Corning Earnings Release This is a continuation of a trend previously noted in several prior earnings releases.

In my opinion, notwithstanding the financial headlines to the contrary, the market's decline yesterday had to with an acceleration in worries about an economic slowdown, rather than the dysfunction among the nation's governing class.

I am currently more concerned about the impact of reduced federal spending on an already weakening economy than I am about a potential refusal to raise the debt limit, which I hope is avoided at all cost. I suspect that a downgrade of U.S. debt now would simply accelerate and aggravate a potential economic downturn.  The level of spending cuts made under both the Democratic and Republican budget plans would result in approximately a 1.5% lower GDP in Fiscal Year 2012. The U.S. fiscal years run from September. Washington Post That analysis is based on a study prepared by the IMF: .pdf The reduction in governmental spending is happening at all levels of government in developed countries. So this could easily turn into one of those Damned if You Do and Damned If You Don't Choices.

The  ^VIX rose 2.75 yesterday to close at 22.98. The market is still in an Unstable Vix Pattern, which has its own trading rules here at HQ. Vix Asset Allocation Model Explained Simply Even though I have recently raised cash by reducing my stock allocation, one of my trading rules requires that I take advantage of the volatility inherent in the Unstable Vix Pattern, buying and selling small increments of certain stocks at prearranged levels.  If one of those stocks stays below $36 today, I am required to place a buy order, though our HT has the option of buying anywhere between 30 to 50 shares and to move the position gradually back up to 200 shares by averaging down in similar increments.

This kind of trading pattern, in force since the advent of the Unstable VIX Pattern in August 2007, will stay in effect until a Stable VIX Pattern is formed, whereupon I will start to maintain positions for longer periods of time with much higher sell target levels for most securities.  VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern (showing formation of Unstable Vix Pattern-Sell Signal August 2007)

Part of the trading rules in the Unstable VIX Pattern is the establishment of hedges when the VIX starts to meander below 20 for several weeks, preferably adding most of them when the VIX is near 16.  Item # 1 Current Status of the Vix Asset Allocation Model/Illiquidity for the Small Investor in the Bond Market  More on VIX AND ASSET ALLOCATION  (November 2008 Post-Discussion about timing hedging by movement of VIX in a defined Unstable Vix Pattern) Earlier in 2011, the VIX was not able to sustain continuous movement below 20 for over 3 months, a condition precedent for the LB to declare the start of a Stable Vix Pattern.

A number of technicians are pointing to the possible formation of a head and shoulders pattern in the S & P 500:  MarketWatch The formation of that pattern would be complete with a break below the neckline, which is a tad over 1250 looking at the chart in the Barrons' article.

1. Earnings Regional Banks (FNB FMER BRKL FIBK: own)(Regional Bank Stocks' basket strategy):

Brookline Bankcorp (BRKL): Brookline, a recent edition to this basket, reported an uninspiring second quarter. Net income was $7 million or $.119 per share, including $.013 per share in expenses relating to acquisition activity. The earnings were $.1121 in the 2nd quarter of 2010. The bank is expanding, having recently completed its acquisition of First Ipswich Bancorp and is in the process of acquiring Bancorp Rhode Island. When the announcement was made on the later merger, the market reacted negatively which was when I initiated a position. Added 70 BRKL at 8.45 Bought 30 BRKL at 9.06 Net interest margin as of 6/30/11 was at 3.7%, down slightly from 3.7% as of 3/31/2011. 

FNB Corporation (FNB): FNB reported 2nd income of $22.4 million or 18 cents per share, up from 16 cents in the second quarter of 2010. The consensus estimate was for 17 cents. As of 6/30/11, the efficiency ratio was at 60.54%; the net interest margin was 3.79%; the dividend payout ratio was 75.25%; NPLs to total loans was at 1.9%; allowance for loan losses as a percentage of NPLs was at 85.84%; and the tangible equity to tangible assets ratio was at 6.5%. I have taken profits on all but 50 shares of FNB, and those shares were purchased at $7.8. (July 2010 Post)  

First Interstate (FIBK): First Interstate reported net income of 9 million or 21 cents per share, up from 14 cents in the 2nd quarter of 2010.  The consensus estimate was for 20 cents. FIBK Analyst Estimates NPAs increased to 4.05% of total assets as of 6/30/2011. The bank believes that those NPAs are at or near their peak. I would hope so. As of 6/30/2011, the net interest margin was 3.84%; the allowance for loan losses as a percentage of NPLs was 47.28%; NPLs to total loans was 6.15%; net tangible book value per share was at $13.45, and the total risk based capital ratio was at 16.01%. I made the mistake of following Cramer's recommendation on this one.  Bought 50 FIBK at 15.64 

FirstMerit (FMER): FirstMerit reported net income of $29.8 million or 27 cents per share, down from 32 cents per share in the 2nd quarter of 2010. The consensus estimate was for 28 cents.  The CEO commented that the economic recovery continued at a "very modest pace".  As of 6/30/11, the net interest margin was 3.77% (down from 4.02% a year ago); the allowance for loan losses to NPLs was at 158.3%; NPAs as a percentage of total assets was at 1.38%; and tangible common equity to tangible assets was at 7.79%.  Overall, this was a slightly disappointing report and the market took the shares down almost 7% last Tuesday, the day of the release. FMER Historical Prices The shares were smashed again yesterday, falling another 5.11% on heavy volume and establishing a new 52 week low at  $14.67.  I am reinvesting the dividend and plan to keep my shares.  The capital ratios are good, the dividend yield provides support, and I am comforted by the below normal NPLs and high allowance for credit losses.      

2. Sold 100 PIS at $25.95 on Tuesday (see Disclaimer): I sold the 100 shares of the Trust Certificate PIS, which has a $25 par value, the day before its semi-annual ex interest date.  I bought that 100 shares in two fifty share lots. Bought 50 PIS at 25 (October 2010 Post); Bought 50 PIS @ 24.32 (February 2011). This trust certificate represents a beneficial interest in a senior Liberty Media bond maturing in 2030: Prospectus The TC's coupon is 8.75% on a $25 par value, higher than the underlying bond at 8.25%. 

I still own 50 shares bought in the ROTH IRA: Bought 50 PIS at 24.88 in Roth IRA (December 2010).  These shares are on a short leash due to the persistent unfavorable actions taken by John Malone to disadvantage Liberty Media's bondholders. The latest salvo is discussed at Liberty Media and its Bondholders (June 2011 Post) I will wait until the dust settles on that Delaware litigation before deciding what to do with the 50 shares in the IRA.

Unlike bonds traded in the bond market, TCs trade flat. You have to own the TC on the ex date to receive the interest payment. PIS closed at $24.93 in trading yesterday which was up 4 cents taking into account the interest payment.  

3. Added 100 ERH at 11.69 on Tuesday (see disclaimer): I now have way to much in my cash allocation, due mostly to my stock allocation reduction. I am now starting to look around for some income producing securities to put some of that cash to work. The CEF ERH has a balanced portfolio of bonds and utility stocks and pays monthly dividends. It was selling at close to a five percent discount to its net asset value when I added to my position last Tuesday. I have nothing to add to my prior discussion.   Bought 100 ERH at 11.88 (April 2011)

Morningstar Page on ERH
Last SEC Filed Shareholder Report

ERH closed at $11.55 in trading yesterday, down 11 cents.

The current monthly dividend is $.075 per share. Wells Fargo Advantage Closed-End Funds Declare Monthly Dividends  

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