Friday, August 3, 2012

VIX/Added 50 FFBC at $15.95/Earnings: ONB, MTOR, MNI

The Chief Financial Correspondent for the New York Times, Floyd Norris, wrote a column in today's paper about GJN. The article appeared last night in the NYT online edition. I published a post about that article last night. GJN-Wells Fargo-New York Times 

I wrote an email to a reader about this NYT article earlier this morning. I call it my current analytical guess:

Wells Spokesperson uses plural of the word "hedge" and "substantially": Meaning?
The VIX has moved below 20 again. I require three months of continuous movement below 20, allowing for some temporary movement slightly above 20 without restarting the court, before declaring the termination of the Unstable VIX Pattern and the formation of the Stable VIX Pattern. Vix Asset Allocation Model Explained Simply With as Few Words as Possible The market has been in an Unstable Vix Pattern since the August 2007 Trigger Event that required a reduction in my stock allocation without equivocation. VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern  When VIX Model Gives A Signal To Change Asset Allocation-Each Individual Needs to Assess Their Own Situational Risks The Unstable VIX Pattern is a dangerous pattern for individual's to navigate. Its  defining characteristic is a whipsaw action in the VIX, mostly between 20 and 30, with spurts below 20 marking a market rise and above 30 indicating a market decline. Mark Hulbert and the Use of the VIX as a Timing Model

For now at least, I am not restarting the count with the 20.47 close on 7/24. It was a close decision given the magnitude of the move from the prior day. ^VIX Historical Prices The VIX returned to below 20 the next day (7/25) and has been below 20 since 7/25.

One of my 25 daily readers, judging by his recent remarks in the comments section, may have had a mind meld with Pimco’s El-Erian who called the recent purchaser manager's indexes in both Asia and Europe "frightening". He believes that there is a 35% chance of a Eurozone breakup within the next six months. His estimate for a U.S. recession is between 25% to 33%.

1. Old National Bancorp (own: Regional Bank Basket Strategy):  Old National reported second quarter net income of $27.2 million or 29 cents per share, up from 23 cents in the 2011 second quarter.  

The consensus estimate was for 24 cents.

The capital ratios are good:

ONB Capital Ratios as of 6/30/12
As of 6/30/12, the net interest margin was 4.26% (temporarily boosted by accounting issues related to acquisitions); NPLs to total loans were high for banks in this basket at 2.88% (prefer less than 1%); the coverage ratio for non-covered loans was 50% (prefer over a 100% when making an initial investment); and the return on average assets for the quarter was good at 1.27%. So there is a mixed bag on this one from my perspective.

ONB was a recent add to my regional bank basket. Bought 100 ONB at $11.85 (May 2012)

Quote:  ONB Stock Quote

2.  Meritor (own 100 Shares of the MTOR and 1 senior bond: Junk Bond Ladder Basket Strategy): The market has hammered Meritor common stock over the past two years. In February 2001, the stock was trading over $22 MTOR Interactive Chart I decided to buy earlier this year a couple MTOR senior bonds and up to 100 shares of the common stock. Since purchasing the 100 shares in two fifty share lots, the stock continued to decline and accelerated some after Cummins warned about earnings. That warnings indicated a falloff in demand for commercial trucks. Reuters Meritor manufacturers truck parts.

The warning from Cummins occurred around 7/10. I bought the MTOR shares earlier. {Bought 50 MTOR at $7.62 April 2012 and average down at predetermined price: Added 50 MTOR at $6.55 April 2012). I am okay holding those shares on my usual valuation analysis. I would always assume that a company like Meritor will ride the cyclical demand waves, up and down.The valuation of the company can not be based on peak demand earnings or results occurring during a slowdown. Neither will last for an extended period, unless a depression hits similar to the Big One.

I would not project a good quarter indefinitely into the future or one evidencing a deceleration of earnings for a few quarters. If I concluded that a down period would threaten the firm ability to survive until better times, then I would have to look at differently. So, you need to look more at normalized earnings over cycles, rather than paying attention to temporary noise. Institutional investors have already bailed on the company due to temporary cyclical factors, without knowing or caring how long those factors will last.

I made this kind of analysis when discussing Alexander & Baldwin stock back in March 2009. The market was valuing the stock as if the bad times would last forever. I will just take a snapshot of those comments: 

Alexander & Baldwin (March 2009 Post)

So, in a roundabout way, I am now ready to discuss Meritor's earnings report.

For its fiscal third quarter, Meritor reported GAAP net income 51 cents per share. On an adjusted basis, net income per share from continuing operations was 38 cents per share. Revenues declined 13% to $1.1 billion and adjusted EBITDA fell 11%, compared to the year ago quarter.  Free cash flow for the last quarter was positive at $46M, compared to a negative $1 million in the same period last year. The company had total liquidity of $732 million as of 6/30/12.

The consensus estimate was for 38 cents.

As expected, the company is seeing global weakness. Consequently, it reduced its fiscal 2012 forecast adjusted E.P.S. to a range of $.90 to $1.15 from $1.08-$1.39

As of 6/30/12, the company had $226M in cash and long term debt of $1.048B. 
I have an unrealized gain in the 2015 bond: Bought 1 ArvinMeritor 8.125% Senior Bond Maturing 9/15/2015 at 93.5

Quote: MTOR Stock Quote It looks like MTOR common will soon pierce the $4 price to the downside. 

3. Added 50 FFBC at $15.95 Last Monday (Regional Bank Basket Strategy)(see Disclaimer): What I am about to say will sound like nickel-and-diming (N & D) for a very good reason. That is exactly what I am doing with this add. For FFBC, the N & D strategy would have worked better by waiting to add this 50 share lot yesterday.

I took the following snapshot of my FFBC position shortly before placing a limit order to buy 50 shares:
FFBC  105+ Shares
As shown in this snapshot, I am struggling to move this position into the green.

My highest cost shares were purchased at a total cost of $17.01. When I am in a nickel-and-diming mode for a security which pays a good dividend, I may buy 50 shares with the intent of selling 50 shares currently owned after a pop. In this case, the shares would need to pop to around $17.5 before I would sell my highest cost shares using FIFO accounting. Bought 50 FFBC @ 16.85 November 2010; ADDED 50 FFBC at $14.87 December 2011.  Assuming that can be accomplished, I would lower my cost basis some while generating a tad more shares purchased with the generous dividends during the interim.

I commented on FFBC's last earnings report in Item # 1 FFBC.

Currently, this bank is paying a fixed dividend of 15 cents per share and a variable dividend equal to the difference between 15 cents per share and its earnings per share. Since the bank earned 30 cents in the second quarter of 2012, the next dividend will be 30 cents. I would not anticipate that the bank will continue with this generous payout for a long time. It current says that it will continue adding that variable rate until the end of 2013 unless there is a material change in the bank's capital position:

FFBC Statement on Variable Dividend

Quote Taken From: First Financial

At the fixed rate of 15 cents, the dividend yield would be about 3.76%, which is okay, at a total cost of $15.95 per share. That is the yield that financial websites like Marketwatch will show. First Financial Bancorp (Ohio), FFBC Stock Quote It is not the correct yield given the variable rate addition to the 15 cent fixed rate. On an annualized basis, including the variable dividend, the dividend yield would be about 7.52% at a total cost of $15.95. I am reinvesting the dividend to buy more shares.

My average cost is now $16.06 on 155+ shares.

Quote: First Financial Bancorp (Ohio) (FFBC)

4. McClatchy (own 1 unsecured 2017 Bond):  Before discussing MNI's earning release, I would like to confess that there is no rational explanation for this bond purchase. Possibly, the OG has a fondness for newspapers, typical of those individuals from his generation. Personally, I do not know any young person who actually subscribes to a paper. When RB bought this 2017 bond (who else!), there was an acknowledgement that MNI had made a potentially fatal mistake in acquiring Knight Ridder, near the top of newspaper valuations. Without question, that was a colossal mistake, as shown in the long  term chart:  MNI Interactive Chart Of course, the well known problems impacting all newspapers have only made matters worse. Bought 1 Knight Ridder 5.75% Senior Bond Maturing 9/1/2017 at 85 If I could sell that bond at 85, I would do it. The bond trades lightly with the most recent trades mostly between 78-83.

I will mention that I made a slightly better purchase for a family member, by buying a 2017 senior secured MNI bond well below par value, when I was able to buy just 1 bond during a severe downdraft  last October.  FINRA I am stuck with the 2017 senior unsecured. FINRA I gave that bond a 10- risk rating in my personal risk ratings. Personal Risk Ratings For Junk Bonds It was a dumb, inexplicable buy.  Having lambasted myself, I am not currently worried about default anytime soon. There is a significant risk related to refinancing a large debt load as notes come due.

MNI reported a second quarter profit of $26.9 million or 31 cents per share, up from 6 cents per share in the year ago quarter. SEC Filed Press Release Adjusted for special items, the company had a net profit of $16.1 million in the last quarter.  Debt was reduced by $35 in the second quarter and by $70.5 million in the 2012 first half. Revenues declined in the quarter by 4.8% compared to the 2011 second quarter.

As of the Q/E 3/25/12, the balance sheet shows an uncomfortable amount of non-current liabilities:

Form 10-Q A discussion of the long term debt can be found at pages 12-13. It is important to keep in mind the refinancing risk for a highly leveraged company. Some of the debt is relatively low cost and matures in 2027 and 2029 (365+M). However, the senior secured note has $846M in face amount and it matures on 2/15/2017 before my unsecured 2017 note (9/1/17). The only other bond maturing before mine is a 4.625% coupon maturing in 2014. FINRA

Based on what I now see, MNI should be able to service the debt, provided it continues to post operating profits. The major issue will likely be the refinancing of both the senior secured and the unsecured debt maturing in 2017.

This report is discussed in a MarketWatch article.

The common stock is on my monitor list for Lottery Tickets. I have not pulled the trigger. The stock is trading mostly in a $1.5 to $2.8 channel this year, and is closer now to the bottom of that range.  MNI Stock Charts

Quote: MNI Stock Quote

5. R R Donnelley (own 2 senior bonds): S & P lowered its rating on RRD senior unsecured debt to BB from BB+ for the reasons given in a press release. TEXT-S&P The outlook is stable.

Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89

Bought Back R.R. Donnelley 8.875% Senior Bond Maturing in 2021 at $96.95 


  1. You wrote:
    "If there had been adequate warning, short interest in the security would have spiked after JPM's announcement and the GJN price would have plummeted"

    I can only imagine these WFC guys looking at the price increase, knowing what is going to happen, (laughing at those naive investors buying at close to $25)...
    It would be interesting to know if there were any shorts at that time, and if some came from WFC....

  2. Norris made a good point. He noted that short interest declined after the JPM redemption announcement. This would indicate that professional short sellers did not have a clue that a huge windfall was available to them by seling short GJN in the $24.4 to $25 range, wait a few days and then collect over $10 a share in profits.

    That would have probably been the easiest profit that any of them ever made. The non-existence of short sales is a further confirmation of the inadequacies in the WFC prospectus.

    I too would be interested in knowing the identity of the short sellers.