Monday, April 30, 2012

The GOP's Movement Toward An AYN RAND Vision for America/Sold 60 HBNC at $24.96/Earnings: BHLB PG FISI BHB FFBC

The "FreedomWorks for America" PAC has launched an ad campaign against the Republican Senators Orin Hatch from Utah and Richard Lugar, who are viewed as too moderate. Their campaign commercials "strain" facts according to

Hatch has a lifetime rating of 89.7% from the reactionary American Conservative Union and a 100% rating for 2011. FreedomWorks is one of those outfits that would have preferred that the U.S. default on its debt rather than increasing the debt limit.

The GOP is moving ever closer to achieving its Ayn Rand vision for America. Paul Ryan And Ayn Rand The Ryan budget, recently passed by the House with no Democrat votes, is consistent with that movement. The GOP makes no secret of its desire to slash tax rates even more for the wealthy while slashing programs for the poor and middle class. NYT;  Center on Budget and Policy Priorities

In the end, it will be the poor and the middle class who will pay for the Bush era tax cuts and the additional ones now proposed by the GOP in the event of their enactment. When the Bush tax cuts were fully in effect, 67% of the tax cuts went to the richest 20% and 15.3% to the top .1% of households. (Tax Policy Center: Individual Income and Estate Tax Provisions in the 2001-08 Tax Cuts) Their cumulative effect over one decade was to increase the national debt by about 3 trillion.

{through 2008, those cuts added $1.7 trillion in deficits and another $200 billion in interest costs: Economic Downturn and Bush Policies Continue to Drive Large Projected Deficits — Center on Budget and Policy Priorities; the remainder of the period estimate comes from the CBO as noted in fn. 143 "White House Burning" which has an excellent summary of how the U.S. developed its deficit problem}

When the day of reckoning comes, and it will come, those who received little or nothing from the Bush tax cuts will suffer a reduction in benefits and higher taxes. I view that outcome as inevitable, and the movement toward that resolution is already being proposed by the GOP, though few have seemed to notice.

The GOP's movement toward the Ayn Rand vision accelerated in 1994, with the election of a new generation of "extremist" and "radical" republicans, terms  used in Simon Johnson's new book "White House Burning". Back then, Newt Gingrich, who was the leader of the extremists in the House, was willing to shut the government down and to cause a government debt default, unless Clinton agreed to their proposals that would slash spending on social programs while granting the rich even more tax breaks. The same scenario was played out again last year.

The goal of the modern day GOP was aptly expressed by Grover Norquist, who stated that the "goal is to cut government in half in twenty-five years, to get it down to the size where we can drown it in the bathtub". The Nation Those spending cuts are not coming from defense.

The worst possible outcome for the GOP would be to achieve success in actually implementing their vision. In a few years thereafter, it would be difficult to convince independents and non-TB republican middle class voters that this vision is meant to help them in anyway. Its purpose is to roll back progressive legislation adopted over the past 80 years primarily for the purpose of making the rich even richer.

Their plan to end traditional Medicare for those under 55 and to replace it with a voucher for the purchase of private insurance did not go unnoticed here at HQ. GOP's Plan To Bankrupt the Middle Class That plan would cost those seniors twice as much as traditional medicare, and the middle class is not saving enough for retirement to pay that added burden. The math simply does not work for them.

This is not to say the Democrat party has a plan to meet the obvious fiscal train wreck lurking in our future. Their vision basically entails using the tax code to transfer wealth to their constituents. Rather than acting now to shore up Medicare and Social Security, their two great achievements as a political party, for the baby boom generation, they embark on yet another social welfare program likely to dig the fiscal hole even deeper.

The most basic problem is that the Ayn Rand party is highly rigid and ideological unlike the traditional republicans that they want to replace altogether. The Ayn Rand Party will not compromise on taxes, and the Democrats are not going to slash spending on social welfare programs without tax increases on the wealthy and the closing of tax loopholes.

The government's first estimate of first quarter GDP inflation adjusted growth was 2.2%. News Release: Gross Domestic Product Defense spending fell 12%. Consumers, however, increased their spending at a 2.9% annualized rate. Housing, which had been a major drag, made a .4% contribution to GDP growth.

Last Friday, Procter & Gamble released poor results for its fiscal third quarter ending 3/31/12. While I do not own the stock, I do have it on my monitor list for a possible purchase. I viewed the results to be sufficiently awful to lower my target price for a possible re-entry to less than $57. My prior target price was less than $60. The analysts were unusually confrontational during the conference call, as noted in a WSJ article.

PG shares declined 3.63% last Friday to close at $64.44. I have already sold shares bought at $47.49 and at $52.85. Both of those purchases were made in 2009, with the lowest cost one executed in March 2009.

EDGEN GROUP (EDG) stock had a disastrous debut last Friday. Originally, the underwriters were expecting to sell stock within a $14 to $16, but had to cut the IPO price to $11 to get the deal done. Edgen Group IPO On the first day of trading, the stock did not have a tick above that $11 IPO price, trading in a range between $8.87 to $10.44 on over 9 million shares. The closing price was $9.05. As I have mentioned, I have no interest in the stock.

1. Berkshire Hills Bancorp (BHLB)(own 50 shares: Regional Bank Basket Strategy): Berkshire, which calls itself "America's Most Exciting Bank", reported core earnings of 45 cents per share, up 50% from the core earnings of 30 cents per share in the 2011 first quarter.

The consensus estimate was for 45 cents.

As of 3/31/2012, the net interest margin was 3.62%; the efficiency ratio was 59%; NPAs to total assets was .58%; the allowance for loan losses to NPLs was at 143%; the tangible equity to tangible assets ratio was 8.8%; and the core return on average assets for the quarter was .94%.

Berkshire Hills Bancorp closed at $23.12 last Friday. This stock was a recent addition to the regional bank basket strategy:  Bought 50 BHLB AT $21.66 (3/12/12)

2. Sold 60 HBNC at $24.96 Last Wednesday (Regional Bank Basket Strategy)(see disclaimer): This stock went parabolic to the upside after Horizon announced its first quarter earnings. I discuss that report in Item # 3  HBNC

On 4/13/12, the stock closed at $17.66, slightly above my purchase price of $17.55 (3/29/12 Post). The stock then did a moon shot, closing at $25.19 on 4/25/12. HBNC Historical Prices

I had tried to buy 100 shares at a limit price of $17.55 in late March, and had a fill for only 60 shares. This stock has typically had very wide bid/ask prices, and it is against my religion to hit the ask price in those circumstances. 

At certain times last Wednesday, the bid/ask spread had widened to more than a $1. I entered a limit order to sell 60 shares at $24.95, when there was a 100 share bid at $24.95 and 400 shares offered at $25.40. I received a fill for only 31 shares at $24.95, and the bid then sank immediately to $24. After a few small trades in the $24 to $24.5 range, the stock moved back up, and filled the remaining part of my order (29 shares) at $24.97, as the stock moved back across $25:

2012 HBNC 60 Shares +$428.68 
It is impossible to give the OG a parabolic gain of almost 50% in three weeks without a harvest of that gain. Even after that moonshot, however, the stock is still selling at less than 10 times the $2.84 share consensus estimate for 2012, HBNC Analyst Estimates The result reached in this transaction is one of the benefits inherent in value investing, though it is unusual to receive that benefit so quickly.

Realized gains from stock sales now stands at $8,892.24 for this basket strategy, see snapshots at REGIONAL BANK BASKET STRATEGY GATEWAY POST. Over the life of the strategy, I anticipate that dividends will provide about 40% of the total return.  

3. Financial Institutions (own 50 shares: Regional Bank Basket Strategy)Financial Institutions reported first quarter net income of $5.8 million or 42 cents per diluted share, up from 33 cents in the 2011 first quarter. The consensus estimate was for 39 cents.

As of 3/31/12, the net interest margin was 4.05%; the efficiency ratio was 58.59% (down from 60.55% as of 12/31/11); total NPLs to total loans stood at .54%; the allowance for loan losses to NPLs was at 289%; the tangible equity to tangible assets ratio was at 7.64%; and the total risk-based capital ratio was 13.47%.

FISI was a recent addition to this basket strategy. Bought 50 FISI at $15.55 (4/17/12 Post)

Financial Institutions rose 70 cents or 4.17% in trading last Friday to close at $17.5.

4. First Financial Bancorp (own 103+ shares: Regional Bank Basket Strategy)First Financial Bancorp reported first quarter net income of $17 million or 29 cents per share, down from the 2011 first quarter net income of $17.2 million.  The consensus estimate was for 30 cents. This was uninspiring. The primary benefit of this stock is its dividend. The company pays a  base dividend of 15 cents per quarter (just raised from 12 cents) and a variable dividend representing the difference between the base dividend and the E.P.S. number for the prior quarter. So, the next quarterly dividend will be 29 cents combining the base and variable rates.

This bank has excellent capital ratios:

As of 3/31/2012, the net interest margin was 4.51%, which is excellent (up from 4.32% as of 12/31/11);  NPLs to total loans stood at 2.42% (prefer less than 1%); the allowance for losses to NPLs was 68.64% (prefer to see over 100%); and the return on average assets for the quarter was 1.05%.

First Financial Bancorp closed at $16.94 last Friday.

5. Bar Harbor Bankshares: (own 50 shares: Regional Bank Basket Strategy): Bar Harbor Bankshares reported net income of $3.2 million for the first quarter, or 81 cents per share, up from 74 cents in the 2011 first quarter. The estimate made by one analyst was for 72 cents per share. 

As of 3/31/12, the net interest margin was 3.3%; the efficiency ratio was 53.4%; tangible book value was $30.32 per share (up from $26.5 on 3/31/11); the return on average assets for the quarter was 1.07%; NPLs to total loans stood at 1.49%; the allowance for loan losses to NPLs was 73%; the tangible equity to tangible assets ratio was 9.61%; and the total capital ratio was 15.94%.

Bar Harbor was a recent addition to this basket strategy and has done very well since my purchase.  Bought 50 BHB at $30 (2/10/12 Post)

Bar Harbor Bankshares closed at $37 last Friday.

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