Tuesday, July 26, 2011

Sold 50 UNB at 19.5/TRST OCFC MOL GE/Pared JSN-Sold 100 at 12.38 in ROTH IRA/

In my opinion, the market still believes that the U.S. will manage to raise its debt limit, avoid a default and a debt downgrade from AAA. A zero possibility is being assigned to negative outcomes.

I would agree that a debt downgrade is more probable than a debt default, but both have greater degrees of occurring than the current market forecast.

Many pundits believe that a debt downgrade is no big deal. WSJ  I would strongly disagree with that opinion, believing such a downgrade would soon cause a 5% to 7% fall in the S & P, possibly another 5% to 10% in a few days thereafter.  This decline could accelerate based on more negative economic news which I would view as highly likely after a failure to raise the debt limit.

I listened to the President last night. As I have said, you can not reason with people who are totally out of balance zealots. My representative is one such person. It would be a waste of time to ask her to be balanced about anything. As far as I have been able to determine after many decades of intense study, the zealots are out of balance upon inception.

Another market consensus, which appears to me to be mostly wishful thinking, is that the current soft patch will be temporary and the U.S. will resume more robust economic growth in the second half of 2011 and into 2012. The current market level is not consistent with negative GDP growth in one or more quarters over the next year, a continuation of anemic growth and high employment, and/or a significant slowdown in growth in emerging markets particularly in China.

There are many who believe in the rationality of the market. I am not one of them, though sometimes the market may actually price securities within a zone of reasonableness. Efficient Market Hypothesis as Hokum  Somehow, a belief has crept into economic thought that human beings become rational and capable of exercising good judgment when they are in a herd, or when one focuses on their collective decisions rather than each individual decision? Is the collective judgment of all of those investors somehow prescient, more valuable than the judgment of one in isolation?  Yes, that rational man is one difficult to find person.

Can the market predict the future? On October 8, 2007, the DJIA rose 120 points to close at 14,164:  ^DJI Historical Prices At that time, the handwriting on the wall was already clearly visible, housing prices were going to implode and a recession was unavoidable. The only question remaining to be unanswered on 10/8/07 was whether the recession would turn into another Great Depression.  Nothing could have been done at that time to save the world from a severe recession.

It was clear that the Nasdaq Composite average was ridiculous when it closed at 5,048.62 on 3/10/2000. ^IXIC Historical Prices | NASDAQ  Was that level a rational forecast of future earnings growth, or more of a statement about the herd behavior of mostly irrational investors?  Due to the robust rally off the March 2009 lows, the Nasdaq Composite has returned to 2850 and change, recovering slightly more than 50% of its March 2000 value.

Cramer said yesterday morning that investors should not be selling stocks now, primarily due to the difficulty in timing news developments about the debt limit. And, of course, the lack of options to earn an acceptable return enters into his thinking.

I am not trying to time a news development on the debt limit issue. I am simply de-risking based on the uncertainty and the more than remote possibility of a catastrophic outcome. I am also de-risking based on my assessment that the market has excluded all possible economic scenarios other than the rosy one when there are rational and cogent reasons to expect less favorable economic data to continue and even accelerate to the downside. It is also relevant that I do not need to take unnecessary risks and can quickly shift gears in the event that I become more comfortable than now about a lot of things.

I did complete yesterday the paring of my stock allocation.  I just kept selling until I reached my comfort level.  Most of those sales will be discussed in the next post.  I decided to do finish this stock allocation reduction all at once rather than on a daily basis. The market could easily head south any day now.  I am not likely to buy any stocks, other than LOTTERY TICKET purchases, until I have more clarity.

A poll conducted recently by Pew shows that the GOP has made major gains since 2008 in those who identify themselves as republican or leaning in that direction. The gains are primarily among whites and voters under the age of 30. White Voters | Pew Research

The Washington Post has an article on Eric Cantor's opposition to a tax increase on hedge fund managers and private equity firms and campaign contributions receive by him from those groups. Perhaps, that is what Cantor means about taxing "working families".  It is good that the hedge fund types have a champion in Washington to protect their "carried interest" tax loophole.  And Cantor knows how to carry that interest.

I ran across an interesting story about John Boehner giving away campaign contributions from the tobacco industry on the House floor before an important vote impacting that industry. Bloomberg  It is better to hand out some of the  dough before the vote and some after.  That is not bribery of course. And my authority for that last statement is the Chief Justice of the Supreme Court, John Roberts, along with four other justices, who say that it is constitutionally protected First Amendment speech by corporations.

1. Sold 50 Union Bankshares (UNB) at 19.5 Last Thursday (Regional Bank Stocks' basket strategy)(see Disclaimer): These shares were purchased at $18. (July 2010). I was not pleased with the earnings report for the June quarter.  Sec Filed Press Release Many of the recent sales in this basket strategy are also part of my ongoing stock allocation reduction. 

2. Trustco (TRST)(own: Regional Bank Stocks' basket strategy): One of my three problematic holdings in this basket is TrustCo which reported net income of $7.8 million for the second quarter or 10 cents a share. The net income number increased 9% compared to the 2010 quarter. As previously discussed, I was somewhat peeved with this bank when it recently launched a large share offering, for no good reason as far as I could tell, that was at a 1995 price. Item # 1 TRST Rather than sell my shares, I decided simply to vote against the Board for as long as I have a position. 

As of 6/30/11, the efficiency ratio was at 51.33%, better than most of my banks; NPAs to total assets was at 1.34%; the NPLs to total loans was at 2.04%; the net interest margin was 3.47%; the coverage ratio was at 92%; the bank had 135 offices; and tangible equity to tangible assets was at 6.59%.

3. General Electric (own): GE reported operating earning of $3.7 billion or 34 cents a share for the second quarter. GAAP earnings were reported at 33 cents.  GE Capital's earned $1.7 billion.  Revenues were $35.6 billion, down 4% from a year ago, due primarily to sale of GE's majority position in NBC to Comcast. Excluding that impact, revenues increased 7%. The consensus estimate was for 32 cents on $34.7 billion in revenues.

Infrastructure orders increased 24% with equipment up 33% and service orders up 16%. I own close to 500 shares and have been reinvesting the dividend.  I will likely continue to reinvest the dividend until the shares trade at over $25 consistently for several weeks. See Item # 4 Snapshot of GE Purchases Made with Cash Flow

I decided not to pare GE yesterday.

4. Sold 100 JSN at 12.3845-ROTH IRA Last Friday (see Disclaimer): This was a partial pare of my position in this stock CEF from Nuveen and is part of my ongoing stock allocation reduction. These shares were bought at $9.04 (MARCH 2009), so the total return with the dividends was good:

100 JSN IRA 2009 Purchase at Total Cost per share =$9.04
The current quarterly distribution rate is 31.5 cents per share, down from 33.6 cents when I first purchased the shares in March 2009.  JSN - Nuveen Equity Premium Opportunity Fund

This sale was also part of my ongoing stock allocation reduction.

5. OceanFirst (OCFC)(ownRegional Bank Stocks' basket strategy):  OceanFirst Financial reported  somewhat disappointing 2nd quarter earnings last week. The bank reported reported net income of $5.1 million, or  28 cents per share up from 27 cents in the year ago quarter.  This missed expectations by one cent.

As of 6/30/11, the net interest margin was 3.67%; tangible equity per share was $11.32; the allowance for loan losses as a percentage of NPLs was at 45.93% (prefer 100% or higher); NPLs as a percentage of total loans was at 2.85% (at the high end of banks in my basket); and the efficiency ratio was at 56.86. The Board also declared the regular quarterly dividend of 12 cents per share.

This is a marginal hold.   Bought 50 OCFC at 10.4 (December 2009 Post)

6. MOL (own): This unsecured senior note issued by Citigroup Funding suffered a maximum level reversion yesterday, as the P.M. London gold fix exceeded the maximum level for the current coupon period.  The P.M. fix for 6/25/11 was $1613.50 per ounce. The maximum level was $1609.79. Stocks & Politics (November 2010 Post) As a result, this note will pay its minimum 2% coupon soon after the end of its current annual period.  I own 100 shares bought at less than the $10 par value. The note matures in 2014.   Prospectus  I will not be able to determine the starting value for the next coupon period until the London P.M. Gold Fix on 11/17/11. 


  1. ran across this re: NYB,

    NYB FDIC cert # is 16022, just enter to analyze a bank, maybe find other #s for your bank holdings,
    market doesn't think div is sustainable, but the metrics don't look that bad, 76% resid mortgages is high though.Rest is commercial.

  2. I checked that site out. It does provide some basic information that I routinely examine from earnings reports. This would include the efficiency ratio, the capital ratios, and the net interest margin.

    At the present time, I do not believe NYB needs to reduce the dividend. That is not the same as saying that the might want to retain more capital by reducing the dividend to a yield more in conformity with their pier group.

    Many investors are starting to focus on net interest margin compression, due to a continuation of low interest rates. Many banks got a temporary boost when higher yielding CDs rolled over and their depositors rolled them over into low yielding ones. A lot of that benefit has now been exhausted, and the net interest margin is starting to trend down for many banks. That will impede earnings growth, all other factors being equal.

    NYB did have a net interest margin of 3.5% for the recent quarter, but that was down from 3.58% in the prior quarter. Some investors would get spooked by that trend. I am not so concerned about it, since it is still an improvement over 6/2010.

    There is however nothing in the last report to cause me to sell my 100 shares or to buy more. If the stock continues to decline I might decide to add back part of the 100 previously sold. I am in no hurry to that now.