Friday, June 22, 2012

GS Says Short S & P 500/SDS Purchase/Bought 100 PBNY at $7.4/Philly FED PMI/XIN

Moody's downgraded 15 large financial institutions after the close yesterday. While the downgrades were expected, the announcement may add to the general angst among investors so prevalent now.

Credit Suisse was cut three notches, the largest downgrade. Morgan Stanley's unsecured senior debt was hit with a two notch to Baa1 from A with a negative outlook. According to the WSJ, ratings for senior unsecured debt were also reduced two notches for Goldman Sachs (now at A3), J P Morgan (now at A2 from Aa3); and Citigroup (now at Baa2), all with negative outlooks. Bank of America was reduced by one notch (now Baa2), with a negative outlook. (see also: MarketWatch) While the Royal Bank of Canada was taken down two notches, its new debt rating is Aa3.

The foregoing downgrades apply to senior unsecured debt. Securities, which are more junior in priority than unsecured senior debt, would also suffer downgrades. For example, BAC's trust preferred securities were rated at Ba1 by Moody's, as noted in item # 2 Bought Back 50 KRBPRE at $25.06-ROTH IRA (5/22/12). I checked the Bank of America website last night and noted a Ba2 rating for the TPs, which would be a one notch downgrade.  (see chart at Bond credit rating to compare ratings)

While the common share for the U.S. downgraded banks rose some in after hours trading last night, I doubt that will last.

This is a link to Moody's statement regarding these downgrades.

Xinyuan Real Estate (own as LT) announced that it had completed its $10M share repurchase program announced 5/26/11 by buying 4.5M ADRs. The Board announced a new $20M repurchase program. XIN rose 10 cents in trading yesterday to close at $2.78.

The Philly Fed manufacturing index fell to a -16.6 in June from -5.8 in May. Readings below zero in the regional federal reserve manufacturing indexes indicate contraction. The new orders index fell to a negative 18.8.

MarkitEconomics flash June manufacturing PMI for the Eurozone hit a 36 month low at 44.8. Any number below 50 indicates contraction.

Spain sold notes maturing in April 2014 to yield 4.71%, compared to 2.07% in the prior auction of the same maturity paper.

There seems to be a constant stream of negative news. LB sees no rational reason to be bullish about stocks over the short term. Over the long term, meaning 10 years or so, stocks should provide better returns than bonds purchased at today's low yields.

Under the trading rules for the Unstable VIX Pattern, I will frequently start to buy some hedges for my stock portfolio when the VIX falls below 20. Sometimes I may wait several weeks, or I may make a purchase soon after the VIX falls below 20. {Trading and Asset Allocation in Stable and Unstable VIX Pattern (November 2008 Post); More on VIX AND ASSET ALLOCATION (November 2008 Post); Mark Hulbert and the Use of the VIX as a Timing Model (October 2011 Post} I have been following that strategy since I first developed the VIX model in the summer of 2007.

I bought 100 shares of a double short stock ETF, SDS, earlier this week before the Fed meeting. I will generally hold double short ETFs over a brief period of time, since those securities are viewed as dangerous here at HQ and may start to lose their tracking one day after purchase. After doing some self psychoanalysis, their main purpose may be to relieve the Old Geezer's anxiety. SDS was bought in the Vanguard satellite brokerage account and is sufficient to hedge all of the limited number of common stock positions held in that account. ProShares UltraShort S&P500 (SDS) rose 73 cents, or 4.61%, in trading yesterday to close at $16.56.

Interestingly, Goldman Sachs came out yesterday with a recommendation to short the S & P 500 as a short term trade. WSJ  Bloomberg

An article in Forbes, published 6/21/12, noted a large inflow into the double short stock ETF SDS.

Given the carnage from yesterday, I was satisfied with the performance of my portfolio. In the main taxable account, I counted 51 securities that finished in positive territory. While that account still had over 200 in the negative column, the overall performance was much better than the 2.2% decline in the S & P 500. That account fell 1.19% in value yesterday. I place a premium on going down less on very bad days. Of course, the securities that were up in value did not increase much. Their overall impact was positive since capital was devoted to them, sometimes in significant amounts (e.g. the bond CEF ERC and iShares 1-5 Year Laddered Corporate Bond Index Fund), and they did not decline. Other large positions saw small declines, such as a 500 share position in iShares 1-5 Year Laddered Government Bond Index Fund, CLF Fund Quote - (TOR) CLF, which fell one cent per share. I would estimate that around 90% or so of the stocks positions declined in value which is not surprising when stocks are mauled as a asset class.

Back in October 2008, I remember a day when the DJIA fell over 600 points. I looked at that same account, and there was just one green arrow out of over 200 securities. As I recall, all of my investment grade corporate bonds fell in price that day, including the ones rated A or even higher. In response to that kind of debacle, and the overall decline in most asset classes during the Near Depression, I started to devote more time to identifying and purchasing securities that would be negatively correlated with stocks and/ or have low positive correlations, particularly in times of market stress and volatility. That effort requires a big picture analysis to determine the reasons for asset correlations and why those correlations may change over time. Instability & Volatility in Asset Correlations (May 2009 Post)

As one would expect, the Volatility Index for the S&P 500 had a strong negative correlation with stocks yesterday. The VIX rose 16.53% to close at 20.09.

Since I am busy on another matter, I will discuss only one trade in this post. When discussing just one trade, I will go into greater detail. 

1. Bought 100 PBNY at $7.391 Last Wednesday (Regional Bank Basket Strategy)(see Disclaimer): PBNY is the symbol for Provident New York Bancorp, a relatively small thrift operating in the Hudson Valley region of New York state. I have had the bank on my regional bank monitor list for a couple of years. I decided to purchase some shares after its recent decline and a favorable first quarter report. On the day of my purchase, the shares declined 30 cents or 3.9% to close at $7.40. Earlier this year, the shares were trading at over $9.  Provident New York Bancorp 

I am not personally familiar with the bank's geographic service area. I did review the area using the Google Map, and the area would generally be referred to as part of the greater NYC marketplace. The communities served by PBNY are north of NYC. In January, PBNY announced that it would acquire Gotham Bank of New York which would represent an extension of PBNY footprint into the greater NYC marketplace when completed. (Form 10-Q at page 42; and Press Release dated January 18, 2012). Gotham operates one branch in midtown Manhattan and had $169M in loans and $335M in deposits as of 9/30/11. The bank hopes to close this acquisition late this year. 

As of 3/31/12, the bank had 36 service locations. The bank operates primarily in Rockland (13 offices) and Orange County (14 offices). Eight office are in the continuous counties of Sullivan, Ulster, Westchester and Putnam. Two offices are in Bergen County, NJ. (Form 10-K at page 1)

For the 2012 first quarter, PBNY reported net income of 15 cents per share up from 10 cents in the year earlier quarter. SEC Filed Press Release 

As of the Q/E 3/31/2012, the net interest margin 3.57%; NPLs were 2.89% of total loans; NPAs were 1.8% of total assets; the allowance for loan losses as a percentage of NPLs was only 53% (prefer to see over 100% when making an initial investment); tangible book value per share was $7.25, slightly below my purchase price; the efficiency ratio was okay at 67.86% (prefer lower than 60%); and the return on average assets was .73%, much prefer over 1%.  

The capital ratios are good:
PBNY Capital Ratios as of 3/31/12
The bank did not participate in TARP, always viewed positively. {Form 10-K at page 32}

So, overall, this bank has some positive and negative characteristics. I generally have a favorable view of its service area. It would seem ripe for a takeover by a bank wishing to expand into this market. 

A five year chart reveals a stock that held up well during the initial stage of the Near Depression. PBNY Interactive Chart Until 2009, the stock was trading in a channel mostly between $10 and $12 during 2007 and 2008. Between 2/2009 through June 2011, the stock entered into a lower channel between $8 to $10. Thereafter, an even lower channel was formed, mostly between $6 to $8. The stock last traded over $10 in March 2011. I would consider selling at between $9-$10. 

The bank is paying a quarterly dividend of 6 cents per share, which works out to a dividend yield of about 3.25% at a total cost of $7.39. With a modest capital gain potential, absent an acquisition, a $9 price net realized price in two years would produce a total annualize return near 13.5% ($1.50 per share profit=20% or 10% per year, plus the 3.25% dividend)

PBNY has maintained the 24 cent per share annual dividend rate since 2007. The rate in 2007 was 20 cents. I would prefer to see dividend raises during the Near Depression period, but an unwillingness to cut the dividend is acceptable here at HQ given the circumstances. 

The bank actually increased income in fiscal years 2008 and 2009. 

Net Income F/Y Ending 9/30:
2007: $19.627M
2008: $23.778M
2009: $25.861M

The net income then started to decline, falling in F/Y 2010 ($20.492M) and again in F/Y 2011 ($11.739M). Those declines account for the weak share price discussed above. Those declines appear to be largely associated with an acceleration of NPLs (page 44: F/Y 2011 Form 10-K)

For the F/Y ending 9/30/11 PBNY reported only 31 cents in net income, down from 54 cents in F/Y 2010 and 67 cents in F/Y 2011. The current fiscal year has two more quarters left and the consensus estimate is for 57 cents, PBNY Analyst Estimates The F/Y ending in September 2013 has a consensus estimate of 62 cents. I would anticipate that the company will need to earn at least that much in F/Y 2013 to propel the stock over $9 per share by the end of 2013, with no earnings warnings for future periods.

Provident New York Bancorp closed at $7.24 yesterday. 

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