Friday, September 7, 2012

Regional Bank Basket Table/ADP Private Payrolls Report and ISM Services Report/Bought 50 EWH at $16.72/Bought 100 EWS at $12.96

The VIX reversed its recent uptrend yesterday, declining 12.06% to close at 15.6.  VIX Asset Allocation Model Update (8/20/12 Post).

ADP reported that private payrolls increased by 201,000 in August, higher than the consensus estimate of 143,000-145,000. ADP also raised the July payroll number to 173,000 from 163,000. adpemploymentreport/pdf The service sector added 185,000 of those jobs in August. Large businesses, defined to mean firms with 500 or more employees, added just 16,000 jobs. Small businesses (1-49 employees) added 99,000 and medium size businesses (50-499) added 86,000. It would not be reasonable to expect large U.S. corporations, flush with record amounts of cash, to make a significant contributions to hiring, at least in their U.S. operations. Mostly, those companies just whine about the need for more tax breaks as they outsource jobs overseas.

The ISM Non-Manufacturing Report for September was better than expected at 53.7%. Employment increased to 53.8 from 49.3. The new orders component was reported at 53.7.

Freddie Mac's Primary Mortgage Market Survey of mortgage rates for the week ending 9/6/12 has the average 30 year mortgage rate at 3.55%. The 15 year average rate was 2.86%.

Morningstar has a new article discussing MLP ETFs and ETNs. Previously, I highlighted the main disadvantage of MLP ETFs as the tax liability at the corporate level. MLP ETFs are organized as "C" corporations since the Investment Company Act of 1940 prohibits open end funds from having a greater than 25% weighting in MLPs. While organizing the fund as a "C" corporation avoids that limitation, it comes with the tax baggage of that corporate form of ownership. The corporation has to pay income taxes on any taxable income received from the MLPs and on the net gains received from trading the securities. The fund will estimate the amount of taxes that may be owed and accrued that potential tax liability. It is my understanding that the fund will account for that accrued tax liability in the fund's net asset value. The Morningstar article points out this downside but also notes that a MLP ETF may have less downside in a bear market for MLPs since some of its losses can be written off against the deferred tax asset.

After discussing the pros and cons in a prior post, I characterized the issue simply as picking your own poison. Item # 1 Stocks, Bonds & Politics: ADDED 100 YMLP at $18.75 I recognized that the MLP ETF would capture less upside due to its tax obligation, compared to the ETN form of ownership. While it is a close call for me, I do not want the added risk of the ETN which exposes the investor to the credit risk of the issuer. I no longer regard owning MLPs directly as an alternative due to tax preparation issues. Since I have had enough experience with K-1s generated by direct MLP ownership, I would simply avoid MLPs altogether if my choice was owning them individually.

Currently, I own the following MLP ETFs: 200 shares of YMLP, 100 shares of AMLP mentioned in the Morningstar article, and 100 MLPA. All of these purchases were recent. 

PAR Technology, a LT, was awarded a $48M contract by the U.S. Army.

Today, I will briefly discuss the purchase of two stock ETFs that will slightly increase my exposure to Asia. Both ETFs pay decent dividends on a semi-annual basis. I will buy individual stocks based in Hong Kong, but I currently own only a recently purchased 50 share position in Hutchison Whampoa. Bought 50 HUWHY at $17.35

1. Bought 50 of the Stock ETF EWH at $16.72 Last Wednesday (The $500 to $1,000 Flyers Basket Strategy)(see Disclaimer): iShares MSCI Hong Kong Index Fund (EWH) is a relatively low cost way to gain quick access to HK listed companies. The fund currently owns 43 HK based companies and has an expense ratio of .52%. Dividends are paid semi-annually, with the large distribution made in June. The last semi-annual dividend, paid in June, was $.37 per share. The dividend will vary, of course. The 2011 distribution totaled $.411 per share. Distributions At that annual rate, the dividend yield would be about 2.48% at a total cost of $16.72.

This is a link to the current Holdings. I have passing familiarity with about 6 of those companies.

I will sometimes buy individual HK listed stocks. In addition to Hutchison Whampoa, I have the following companies on my monitor list: AAGIY AIA GroupHSNGY Hang Seng BankSWRAY Swire Pacific and WARFY Wharf Holdings.

Quote: iShares MSCI Hong Kong Index Fund
EWH: 16.97 +0.25 (+1.50%)

2. Bought 100 of the stock ETF EWS at $12.96 Yesterday (see Disclaimer): iShares MSCI Singapore Index Fund (EWS) is a relatively inexpensive way to gain exposure to Singapore stocks. It also has a .52% expense ratio and currently has 33 holdings. Holdings Dividends are paid semi-annually, with the larger distribution paid in December. For 2011, the fund paid $.466171 per share. At that rate, the dividend yield would be about 3.6%.

I do not attempt to follow individual companies based in Singapore.

The performance return of this index is interesting and worthwhile even with the downside risk evidenced by the 2008 decline: iShares MSCI Singapore Index Fund (EWS): Performance

There is one closed end fund that invests in Singapore stocks, which I do not own currently. Singapore Fund (SGF) Morningstar has a 3 star rating on SGF. The expense ratio on this CEF is high. (SEC Filed Shareholder report)

I have bought and sold EWS at lower levels: BOUGHT 100 ETF EWS AT $10.9 February 2010-Sold EWS at $11.55 June 2010

Singapore and Hong Kong sovereign debt are both rated AAA.

Quote: iShares MSCI Singapore Index Fund
EWS: 13.15 +0.19 (+1.47%)

3. Regional Bank Basket Table As of 9/6/12 (Regional Bank Basket Strategy): My last table was posted back in June: Updated Regional Bank Basket Table As of 6/19/12 I am currently under invested in this strategy based on my opinion about valuations. The current interest rate environment, likely to persist for another two years or so, places downward pressure on banks' net interest margin. Most of the CDs issued by banks have already been repriced to the current abnormally low rates which can not go lower.

This is a chart showing the net interest margin for all U.S. banks:

Net Interest Margin for all U.S. Banks As this chart shows, the net interest margin started to roll back down in early 2010.

I concentrate a lot of my attention in smaller banks, where the net interest margin is better than the 3.41% national average. The average net interest margin for banks with less than $1 billion in assets is 3.88%. Net Interest Margin for U.S. Banks with average assets under $1B While net interest margin is one component of a bank's profits, it is certainly one of the more important components.

I also focus on regional banks that have relatively low problems loans as a percentage of total loans. All other things being equal, a bank with non-performing loans of less than 1% will be doing better than one with over 4%, an observation that is frequently overlooked and not likely to win the OG a Nobel Prize in Economics.

It has been helpful that problem loans have been declining. I place a premium on a bank that managed to keep NPLs at less than 1% during the Near Depression period:

Nonperforming Total Loans (past due 90+ days plus nonaccrual) , Banks with Total Assets from $10B to $20B

As shown in this next graph, banks with assets between $1-$10 billion did much better than the $10-$20B banks during the Near Depression period and its aftermath, indicating far better underwriting standards:

Nonperforming Commercial Loans (past due 90+ days plus nonaccrual), Banks with Total Assets from $1B to $10B Possibly those banks were small enough that they gained valuable lessons from the 199-1992 banking debacle and actually retained those lessons which were of course lost on the big banks infested with Masters of Disaster.

In this basket, I am not keeping track of reinvested dividends in the following table. The dividend yield is at yesterday's market price rather than at my cost. I am tracking realized gains/losses with snapshots found at the end of this subject's Gateway Post. REGIONAL BANK BASKET STRATEGY GATEWAY POST I am tracking only the total amount of dividends paid on an annual basis. Realized gains to date currently stands at $9,708.

Over the life of this strategy, which is likely to last another 3-5 years, I would anticipate that dividends will provide about 40% of my total return. 

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