Friday, October 26, 2012

End of Daily Posts After Today-Start of New Weekly Format 11/2/12/SOLD LT TEX at $23.27/Sold 1 First Tennessee 6.3% TP Maturing in 2034 at 96/ Earnings: FISI, XRX, FMER, RSH, GLW, CLGX, Apple/Increasing Risk Rating on RSH Bond to 9 from 7

This will be my last daily post. After this post, I am going to omit discussion of earnings reports and most transactions, and go to a Friday publication schedule.

Since starting this blog in October 2008, I have written 1749 daily posts, mostly very long ones.

The new format will be to publish one post a week. Unless there is some major event or a major shift in my asset allocation, the weekly post will be published on Friday morning each week. The new format will exclude discussions of most items traditionally discussed in the daily posts. Instead, I will start with a general overview of my big picture views and I will then select two to five trades to discuss. Those trades will be selected primarily to illustrate the process and reasons that led me to buy or sell that would have some general applicability and would be familiar already to long time readers of this blog. I am after all primarily an income and value investor.

I will not be discussing earnings reports after this post except in the context of discussing a buy or sell. I will not update my opinions about securities discussed in this blog, unless the security is selected for discussion in the Friday post.

I will be totally eliminating any discussion of Lottery Ticket selections, both buys and sells.

I will not be adding snapshots of buys and sells to any of the Gateway Posts. So the Lottery Ticket Gateway Post and the Regional Bank Basket Gateway Post are now frozen as of 10/26/12 for example. Lottery Ticket Strategy: New Gateway PostREGIONAL BANK BASKET STRATEGY GATEWAY POSTTrust Certificates: New Gateway PostREIT CUMULATIVE PREFERRED LINKS IN ONE POST/Advantages & disadvantagesFloaters: Links in One PostSynthetic FloatersJunk Bond Ladder StrategyAdvantages and Disadvantages of Equity Preferred Floating Rate SecuritiesAegon Hybrids: Gateway PostAdvantages and Disadvantages of Equity Preferred Floating Rate Securities

I will not be adding any other material to prior posts. So, for example, if I sell a junk bond, that will not be noted in the Gateway Post for the Junk Bond Ladder Strategy. If I change my opinion about the risk of a junk bond, the new risk rating will not appear in the post on that subject.

The introduction of the weekly post will be in this general format:

Big Picture Synopsis:

Stable Vix Pattern in Force
Stock Outlook: Cautious & Bearish Short Term/Bullish Intermediate and Long Term
Bond Outlook: Neutral Short Term/Intermediate Term-Slightly Bearish/Extremely Bearish Long Term

My opinion about the big picture/macro type issues will drive my asset allocation and trading strategies within asset classes. Consequently, these issues are viewed as the most important ones for any individual investor. If I had any situational risks, which are absent in my current situation, I would need to take those risks into account when performing my asset allocation.  Big picture issues includes more than an analysis of what is happening in the world economy, but encompasses an appraisal of valuation and risks. In 1999, irrespective of an investors's age or risk tolerance, it would not have made any sense to maintain stock exposure at anywhere near normal levels based solely on the market's clearly excessive valuation for example.

{Some of the important posts on this subject include the following: Static v. Dynamic Asset Allocation (December 2008);  The Big Picture Questions (August 2011); The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets (June 2011);  ERROR CREEP and the INVESTING PROCESS (December 2011); Instability & Volatility in Asset Correlations (May 2009 Post); Precipitating Cause of Long Term Bear Markets (June 2011 Post); The Roller Coaster Ride of the Long Term Secular Bear Market (May 2010 Post); To Professor Siegel: Time for a Re-Think (May 2009);  Mark Hulbert and the Use of the VIX as a Timing Model (October 2011 Post)}

I would then briefly discuss some important economic and event news viewed as material to the Big Picture Synopsis. Then, there will be a discussion of two to five trades made during the prior five trading days.

The Trade section will follow the following format:

Description of Security and Trade Snapshot for Sells
Recent Earnings Release (may be no discussion for a sell)
Trading History, if any
Rationale for the Trade
Future Buy And/Or Sell Considerations

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In case anyone missed it, Richard Mourdock, one of the GOP's now dominant breed of reactionary Know Nothing Zealots, stated that a pregnancy resulting from rape was God's will. (video embedded in Richard Mourdock On Abortion: Pregnancy From Rape Is 'Something God Intended') Mr. Mourdock is endorsed by Romney in the upcoming Indiana Senate race.

Mr. Mourdock beat the sensible and grounded in reality Senator Luger in the GOP primary 60.6% to 39.4%. Richard Mourdock While I would consider voting for someone like Luger, I would never vote for Mourdock. Among Mourdock many reactionary beliefs, he is of the firm opinion that both Social Security and Medicare are unconstitutional (YouTube), and he favors the Ryan voucher program for future beneficiaries. POLITICO.com

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In an another irritating act, HCA announced a special common dividend of $2.5 per share to be "funded through borrowings under the Company's credit facilities". HCA is already over-leveraged with over $25 billion in long term debt as of 6/30/12. Form 10-Q Atrocious is the only description. Possibly, the bond owners need to exercise more care when negotiating covenants for new bond issues to pay off the maturing debt. I own two HCA bonds as part of my junk bond ladder strategy.

I do not have a position in Apple. After the market closed yesterday, Apple reported its fiscal 4th quarter earnings that slightly missed the consensus estimate, and guided its 2013 first quarter well below the consensus estimates on both earnings and revenues. Text of press release issued by Apple Inc. on October 25, 2012 (First quarter E.P.S. of $11.75 vs. consensus at $15.49, Bloomberg) This will not faze the Apple bulls, but some investors who have experienced large recent gains may start to pare their positions. I did notice at Fidelity a research report by a firm specializing in technical analysis that Apple stock had already formed a double top and had no discernible downside support yet.

Another negative for trading today is the earnings release from Amazon (no position). PRESS RELEASE

The market reacted favorably yesterday to the earnings report from Vale. Bloomberg Vale was recently added as part of the Flyer Strategy. Bought 50 Vale at $15.9 (August 2012 Post). Since that purchase, the stock has gone ex dividend. Iron Ore delivered to Qingdao China - 62% Ferrous Content - USD/dry metric ton Analysis -Bloomberg; Yesterday's Close: VALE: 18.34 +0.90 (+5.16%)

The market also reacted favorably to the Unilever earnings report: 3rd Quarter Results Unilever is a long term holding with over a 100% unrealized gain on the shares. Added to UL at 18 (March 2009 Post). Yesterday's Close: UL: 37.03 +0.92 (+2.55%)

The market reacted negatively to the report from France Telecom (discussed in this Motely Fool Article Dwindling Dividend to Rule Them All) After selling FTE shares many times profitably and collecting its oversized dividend, I am now stuck with 150 shares, with the last batch bought at $12.45. Headknocker is now what the LB calls an involuntary long term holder. Yesterday's Close: FTE: 11.45 -0.67 (-5.53%)

CoreLogic had a comforting third quarter report for bond owners. Press Release for Period Ended September 30, 2012 I own two lightly traded senior 7.55% bonds maturing in 2028, originally issued under the name of First American. The original issue amount was $100M but the company has repurchased about 40% of those bonds pursuant to a tender offer. S & P has a B+ rating. Moody's rates the bond at B1.

Ford announced that it was accelerating the transformation of its European operations. SEC Filed Press Release In this context, transformation means plant closures and layoffs. Ford increased its 2012 loss estimate for its European operations to exceed $1.5B.  (see article at Bloomberg)

I noticed last night, reviewing the WSJ dividend page, that my LT National Penn Bancshares increased its dividend to 10 cents per share from 9 cents. NPBC is scheduled to release earnings this morning, and that report will be reviewed to confirm that this stock is eligible for an upgrade to the Regional Bank Basket Strategy from the Lottery Ticket Basket Strategy. Item # 1 RB Bought as LT 30 NPBC @ $7.83

1. Sold 30 TEX at $23.27 Last Tuesday (Lottery Ticket Basket Strategy)(see Disclaimer): These shares were purchased at $14.43 last July. The realized gain on just 30 shares was $249.43 on a total investment of $440.70. This sell was my second round trip on a 30 share Terex lot this year:

2012 TEX 30 Shares (10/23/12) +$ 249.41

Those two 30 share lots have netted a total 2012 realized gain of $426.41.

A 2011 thirty share slip yielded $116.38, bringing the total for three 30 share flips to $543.08.

2011 TEX 30 Shares +$116.38
I still own 1 Terex 2017 subordinated bond.  Bought: 1 Terex 8% Senior Subordinated Bond Maturing on 11/15/2017 at 96.947 The current price of that note is close to the 104% price that Terex would have to pay for an optional redemption in the year commencing on 11/15/2012. The optional redemption premium declines to 102.677% after 11/15/13, then to 101.333% for the one year period after 11/15/14,   and then to no premium. Prospectus at page S-83 There is also a "change of control" provision set forth at that page. I suspect that Terex will redeem the notes before maturity, but may wait until the prepayment penalty shrinks.

After I sold my stock last Tuesday, the company reported better than expected earnings but reduced its forecast for revenues.  Terex Announces Third Quarter 2012 Results

Since I have bought and sold this stock three times over the past year, I will obviously buy the shares back at the right price. Most likely, I will have to raise my re-entry price above the price paid for the last three purchases.

Quote: Terex
Yesterday's Close: TEX: 21.89 -0.96 (-4.20%)

2. Xerox (own 100: $500 to $1,000 Flyers Basket Strategy): Investors reacted irrationally to Xerox's third quarter earnings report, released before the market opened on 10/23/12. The shares closed down 36 cents or 5.12% that day and declined another 2.85% on 10/25, closing at $6.48. XRX Historical Prices

Xerox met expectations of $.25 per share excluding items for the third quarter. The company did lower its 2012 estimate to $1.07-$1.09 from $1.07 to $1.12. In the third quarter, revenues from Xerox's service business rose 6% in constant currency, while revenues in the technology business (copiers, etc) declined by 7%.

I recently elevated XRX shares to the Flyer Basket Strategy from the Lottery Ticket Basket Strategy:  Added 60 XRX at $7.1

3. FISI (own 50: Regional Bank Basket Strategy): Financial Institutions (FISI) reported non-GAAP operating income of $.50 per share for the third quarter. SEC Filed Press Release The consensus estimate was for 45 cents. FISI Analyst Estimates The GAAP number included merger and acquisition charges of 9 cents per share and 12 cents per share after tax cost relating to the retirement of FISI's CEO.

As of 9/30/12, the net interest margin was 3.96%; the efficiency ratio was 64.29%; NPL ratio=.63%; the coverage ratio was 233%; NPA ratio=.43%; the tangible common equity to tangible assets ratio was 7.05%; tangible book value per share was $13.31; the total risk-based capital ratio was 12.16%; and the return on average assets for the quarter was .92%.

Bought 50 FISI at $15.55 (April 2012 Post)

Financial Institutions Stock Quote
Yesterday's Close: FISI: 18.56 +0.44 (+2.43%)

4. FirstMerit (own 137+ sharesRegional Bank Basket Strategy): FirstMerit reported net income of $35 million or 32 cents per diluted share, up from 29 cents in the year ago quarter.  The consensus estimate was for 32 cents.

As of 9/30/12, the net interest margin was 3.66% (down from 3.75% a year ago); the efficiency ratio was 61.75%; tangible common equity to tangible assets was 8.18%; NPA ratio=.77%; and the bank earned .94% on average assets during the quarter (up from .86% in the 2011 third quarter).

The current quarterly dividend is 16 cents per share. The recent dividend history of this bank indicates a steady grower from 1986 to the second quarter of 2009, when the quarterly rate was slashed from $.2858 per share to $.1577. The current 16 cent quarterly rate has been in effect since the 2009 4th quarter. FirstMerit Dividend History

Needless to say, I view that history as a negative, though nowhere near as bad of course as Citigroup and Bank of America. The CEO since May 18, 2006, Paul Greig, reportedly received compensation valued at over $6 in 2011 according to Businessweek. In my book, that is just ridiculous given the bank's performance during his tenure. The stock closed at $23.23 on 5/18/2006: FMER Historical Prices Whenever I see something remotely close to this, I will vote against the entire Board and cast my advisory vote against all compensation arrangements.

I have traded FMER shares profitably. My total average cost for the remaining shares is $14.86. I am reinvesting the dividend. I may add an odd lot before year end if and when the price falls below $13.75. 
5. MBVT (own 50: Regional Bank Basket Strategy): Merchants Bancshares reported third quarter net income of $4M or 64 cents per share. The consensus estimate, made by two analysts, was for 58 cents. MBVT Analyst Estimates

Merchants is a community bank with 33 branches located throughout Vermont. Locations | Merchants Bank

Earlier in the month, MBVT declared its regular quarterly dividend of 28 cents, the 28th consecutive quarter at that payout level. ($.27 in the 2005 4th quarter) The good news in that statement is that this small bank did not cut its rate during the Near Depression. The bad news is that there has not been any dividend growth for a long time. .

As of 9/30/12, the net interest margin was 3.27%; the efficiency ratio was 58.64%; the NPA ratio=.16%; the NPL ratio=.26%; the total risk based capital ratio was 15.83%; the tangible capital ratio was 7%; and the return on average assets for the quarter was .97% annualized. The bank had no loan charge-offs during the quarter, and its non-performing loan ratio is the best among all of the banks in my regional bank basket.  

A non-performing loan to total loan ratio tells me a lot about the management of the bank, and gives me comfort about the safety of the dividend.

An investor can examine a wealth of information at the bank's website and by going to the SEC Edgar site. This is a link to the SEC filings for MBVT. When seeking comfort about the current dividend level, I asked myself about the bank's performance during 2008 or 2009. I can do that by scrolling to 10-K Annual Report filings. In 2008, MBVT reported net income of $1.96, up from $1.77 in 2007.  Annual Report for 2008 at page 22 I can see that the NPLs had moved up some, but the total during that dismal year in the banking industry ended at 1.37% NPLs to total loans. The bank is going to take hits during a deep recession. The only way to avoid those losses is to refuse to make any loans at all which is not exactly a prescription for success either.

While I do not know management, I can reasonably draw the conclusion that they are careful stewards of shareholder money. Their style is revealed in the financial statements. By the end of 2011, the NPL ratio was down to .24%.  2011 Annual Report at page 22 So, a review of the bank's history during the Near Depression gave me some valuable information about the future.

Now, if some bright new youngster, with a freshly minted M.B.A., gained control and started to talk about making condo development loans in Miami Beach, as a way to accelerate growth so that the Master of Disaster could receive huge bonus checks, then it would be time to exit my position for sure. During the Near Depression and its aftermath, a number of regional banks disappeared, or came close to self immolation, by venturing into non-traditional areas. MBVT is a Vermont community bank. Maybe it would be okay for the bank to gradually expand in New Hampshire, for example, or to make a prudent small acquisition in a neighboring state, but no more.

My last purchase was a 50 share odd lot last May: Bought 50 MBVT at $26.25 The dividend yield at a total cost of $26.25 is about 4.27%. The bank certainly has room to increase the dividend whenever it chooses to do so. A special $4.5 dividend was paid in 2004. Dividends | Investor Relations | Merchants Bancshares inc.

I earlier bought and sold 50 shares. Bought 50 MBVT at $22.9 (April 2010)- SOLD 50 MBVT at 26.5 (July 2011).

I passed on the opportunity to sell my 50 shares at over $30 last month. MBVT Historical Prices

MBVT Stock Quote
Yesterday's Close: MBVT: 28.25 0.00

6. Radioshack (own two 2019 unsecured senior bonds: Junk Bond Ladder Strategy) RSH continues to struggle for relevance and profits.  RadioShack reported another dismal quarter and a much wider than expected loss. For the third quarter, the company reported a loss of 33 cents per share, excluding items, compared to a consensus estimate of a 17 cent per share loss. Revenues fell to $1B from 1.03B in the 2011 third quarter. Same store sales declined by 1.6%. Fortunately for bond owners, the company eliminated its dividend to preserve much needed cash.

FITCH has reduced its credit rating to CC for the unsecured bonds. TEXT-Fitch The new senior secured loan is rated at "B" by Fitch.

Based on this last report, and the ongoing and persistent weakness in RSH's business, I have decided to raise the risk rating to 9 from 7.  Personal Risk Ratings For Junk Bonds I considered raising it to 10, but the company still has a lot of cash and bank loan liquidity, the total liquidity still exceeds total debt, and RSH appears to be on track to redeem the 2013 busted convertible bond maturing in 2013, the nearest maturity.

After today's post, I will no longer discuss changes in risk ratings.

The RSH has $325M outstanding of the 2019 bond.

7. Sold 1 First Tennessee Capital II 6.3% Maturing in 2034 at 96 Last Tuesday (see Disclaimer): This bond was sold at near break-even. Bought 1 First Tennessee Capital II 6.3% Maturing 4/15/2034 at 95.5 I was not pleased with the last earnings report. ZacksReutersFIRST HORIZON NATIONAL CORPORATION FINANCIAL SUPPLEMENT

More importantly, the 6.3% coupon for such a long maturity did not seem worth it given the credit and interest rate risk. I came of age as an investor in the late 1960s and 1970s. My favorite line from that era was "how does one become a millionaire in bonds, you start with two million".

When I bought this bond, it was rated investment grade by Moody's and Fitch, and is now rated in junk territory by all three rating agencies. FINRA Fitch cut the debt ratings in June 2012: TEXT-Fitch S & P revised its outlook to negative in June: TEXT-S&P

A potential upside would be a possible call by First Tennessee. The bank will have to phase out the use of trust preferred securities as Tier 1 capital, and this TP can be called now. However, the upside is to 100 from 96, or just $40 for one bond.

I still own FHN shares as a LT selection.

6. AGY Holding (own 1 second lien 2014 bondJunk Bond Ladder Strategy): I currently have a 10+ risk rating on this bond and fully expect to take a loss.  Personal Risk Ratings For Junk Bonds; Item # 3  AGY Holding  I do not have a risk rating higher than 10+. This purchase has turned out to be less than an optimal selection. To date, there has not been a missed interest payment.

I received an email notification that S & P had reduced its rating to "C".


Due to the change in format, I will no longer be discussing earnings issued by companies, including those companies that issued the junk bonds that I currently own. AGY filings can be found at the SEC's EDGAR site. I will review those reports, which should be routine for anyone owning the bond or contemplating its purchase or sell.  The 2014 AGY bond is currently trading below 50. I would gladly sell my bond at 48 if I see a bid at that price willing to accept that one bond. There have been some trades on 10/24 and 10/25 in the 48 range.  Otherwise, I will just hold and wait for the word.

7. Corning (own 50 shares: The $500 to $1,000 Flyers Basket Strategy): Corning announced third quarter earnings before the market opened on 10/24, and all  of my unrealized gain on a recently purchased 50 share lot went poof. Bought 50 GLW at $11.98 I thought the report was okay under the circumstances. The decline in the share price was probably due to the downbeat remarks made by the CEO, which are now being echoed by many CEOs. The comments made by Corning's CEO are discussed in this Seeking Alpha article.

Corning reported an adjusted E.P.S. for the third quarter of $.34, ahead of the $.32 consensus estimate. Revenues declined by 1.7% compared to the 2011 third quarter.

Closing Price on Day of Earnings Report: GLW: 12.15 -1.26 (-9.40%)
Yesterday's Close: GLW: 12.09 -0.06 (-0.49%)

8. Berkshire Bancorp (ownRegional Bank Basket Strategy)Berkshire Hills reported core net income per share of 52 cents per share, up from core earnings of 43 cents in the 2011 third quarter. The consensus estimate was for 49 cents. {Including non-core charges for mergers and systems conversions, GAAP net income was 46 cents compared to 22 cents in the year ago quarter.}

The Board also increased the quarterly dividend to 18 cents per share. The prior dividend rate was 17 cents. Dividends | Berkshire Bank This bank did not cut the dividend during the Near Depression period. There was a one cent quarterly dividend raise in the 2008 second quarter to 16 cents, followed by another 1 cent raise to 17 cents during the 2011 4th quarter.

As of 9/30/12, the net interest margin was 3.5%; the efficiency ratio was good at 57%; NPL ratio=.76%; NPA ratio=.59%; the coverage ratio was 126%; the tangible equity to tangible assets was 8.04%; tangible book value increased at a 10% annualized rate during the quarter to $15.86 per share; and the core return (annualized) on average assets during the quarter was 1%.

Third quarter deposit growth totaled $40M or 5% annualized with loan growth at $53M.

Bought 50 BHLB AT $21.66 (March 2012)

Yesterday's Close: BHLB: 23.70 +0.32 (+1.37%)

9. New York Community (own 150: Regional Bank Basket Strategy): New York Community Bancorp  reported GAAP net income of $128.8M or 29 cents per share, up from $.27 in the 2011 third quarter. (non-GAAP E.P.S. of $.32). The consensus estimate was for 29 cents per share. NYB Analyst Estimates The Board also declared the regular quarterly dividend of 25 cents per share.

This bank has 274 branches through two operating banks: New York Community Bank, a thrift, and New York Commercial Bank. NYB has used the Near Depression to expand beyond its base in Queens, Staten Island and Brooklyn, NYC, to include operations in Arizona, Ohio and Florida through FDIC assisted acquisitions of AmTrust based in Ohio and Desert Hills Bank. Item # 8 NYBFDIC: Press Release on Desert Hills; FDIC: Press Release on AmTrust.

As of 9/30/12, the net interest margin was 3.17% (down from 3.33% 9/30/11); the cash efficiency ratio was excellent at 39.1%; tangible book value per share was $7.22; tangible equity to tangible assets ratio was 7.62%; cash return on average tangible assets was 1.37%; NPL ratio for non-covered loans=.82%; NPA ratio for non-covered assets=.66%; and the cash return on average assets for the quarter was 1.29%.

The capital ratios are good:

Capital Ratios of Operating Banks as of 9/30/12

Earnings Call Transcript - Seeking Alpha

My last purchase was at $12.79. Added 50 NYB at $12.79 (February 2012). Prior to that add, I bought two fifty share lots in 2009 in the main taxable account. Bought 50 NYB at $11.3Added 50 NYB at $11.  My total average cost per share is $11.86.

NYB has been paying a $.25 per share quarterly dividend since the 2004 first quarter when the dividend was 21 cents per share. New York Community Bancorp Dividend History Assuming a continuation of the 25 cent rate, the dividend yield at my total cost of $11.86 is about 8.43%. For the time being, I am content collecting that dividend.

I sold 50 shares in an IRA for a $331.03 gain. Sold NYB in IRA at $17.51 (snapshot in Item # 1  2/7/12

Yesterday's Close: NYB: 13.90 -0.02 (-0.14%) 

Wednesday, October 24, 2012

Blogger Deleted My Long Post Scheduled for Publication on Thursday

A very long post scheduled to be published tomorrow was deleted by blogger.com before publication. Although the long post had been saved many times, it was lost entirely after I accidentally moved my wireless mouse slightly to the right which caused a page shift. When I returned to the post, there was nothing left but a blank space and a considerable amount of time was just wasted preparing that post.

I  am not going to write it again. I discussed several recent earnings reports, a few sells, and a number of other items.

I have experienced similar problems with blogger. I found that this latest obvious software flaw to be extremely irritating. Consequently, I have decided to publish only one post a week, probably on a Friday, and to omit discussions of several items that are routinely discussed by me.

I am going to omit discussions of a large number of transactions after the next post, and all earnings reports for positions owned by me, except for those that have already been written. I will then have more time to conduct research and to manage my own money and that of family members. Since I will not be discussing most transactions after the next post, I will not even mention them in the text. Instead, I will select a few transactions to discuss in each week's post.

There will be a post on Friday of this week, unless blogger deletes my draft, and another one next Friday (11/02/12) 

Earnings: WASH, NBN, TRST, CCNE, DD, MMM/Sold 50 AVK at $16.92-ROTH IRA/Sold 50 EWH at $18.42

The earnings disappointments, primarily from multinationals adversely impacted by currency headwinds and the European recession, continued yesterday.

The two main culprits yesterday were DuPont and more importantly MMM.

3M reported net income for the third quarter of $1.65 per share on a slight decline in revenues to $7.5B (down .4% year-over-year). Organic local currency sales grew 2.2%, not much better. The company lowered its full year forecast to $6.27 to $6.35 per share from its previous estimate of $6.35 to $6.5, "reflecting current economic realities". Revenue for 2012 are expected to be flat, as currency headwinds wipe out any organic increase which is expected to grow between 2%-2.5%.

Yesterday's Close: MMM: 88.73 -3.80 (-4.11%)

For the third quarter, DuPont reported a 9% decline in sales to $7.5B, compared to the consensus estimate of $8.15 billion. Excluding significant items, DuPont reported net income per share of just 32 cents, down from 69 cents earned in the 2011 third quarter, and significantly lower than the consensus estimate of 46 cents. The company plans to lay off about 2% of its worldwide workforce, approximately 1,500 workers. DuPont now expects its 2012 earnings, excluding significant items, to be between $3.25-$3.3 per share.

Yesterday's Close: DD: 45.23 -4.53 (-9.10%)

{Dow Chemical inadvertently and prematurely announced last night its plans to eliminate 5% of its workforce (2,400 jobs) and to shut down 20 factories, Bloomberg,  WSJ.comDow Announces New Date and Time for Third Quarter 2012 Earnings Conference Call}

I do not have a position in either DD or MMM.

I have no interest in DD shares anywhere near their current level.

I would consider buying a small odd lot position in MMM below $75.

My last buy of DD shares was at $16.68. The Most Abused Word: Reform/Buys of IR & DD/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology (March 2009). Those shares have already been jettisoned. SOLD DD AT $39.6 (August 2010)

Bar Harbor Bankshares (own) increased its quarterly dividend to 30 cents per share, up 1.7% from the prior quarter and a 7.1% increase compared to the 2011 4th quarter. Bought 50 BHB at $30 (February 2012 Post-regional bank basket strategy)

The treasury sold two year notes yesterday at a .295% yield. treasurydirect.gov .pdf There is a period before the "2". It would be almost 100% certain that the buyers of those notes will experience a negative real rate of return, with the prior 12 month inflation rate at a non-seasonally adjusted 2% through September. Professional forecasters are estimating greater than 2% CPI increases between 2012-2014. Third Quarter 2012 Survey of Professional Forecasters - Philadelphia Fed

The OG did not have much fun yesterday.

Yesterday's Closes:
S & P 500: 1,413.11 -20.71 (-1.44%)
DJIA: 13,102.53 -243.36 (-1.82%)
VIX: 18.79 +2.17 (+13.06%)

TLT: 122.69 +1.73 (+1.43%)
LQD: 122.72 +0.21 (+0.17%)
TIP: 121.78 +0.27 (+0.22%)
BAB: 30.04 +0.27 (+0.91%)

The portfolio in my main taxable account fell .59% which is viewed as satisfactory for a day like yesterday.

The trust certificates and numerous bonds that I own in that account gained in value yesterday (e.g. Trust Certificates: JZV, JZJ, KTN; bond PFK which is also owned in retirement accounts):

Trust Certificate  KTN
Trust Certificates JZJ JZV
Exchange Traded Bond PFK

I would not buy any of those securities anywhere near their current prices.  Most of my TCs have been called by their respective call warrant owners. Most of my exchange traded bonds other than trust certificates have been redeemed by the issuer or sold for profits. Most of the bonds that are now owned were bought in the bond market.

My regional bank basket performed relatively well, down $114 or .3%, with 7 out of 27 stocks rising in value, including two out of the four discussed in this post.

1. WASH (own 50 sharesRegional Bank Basket Strategy): Washington Trust reported third quarter net income of $8.9M or 54 cents per share, up from 46 cents per share in the 2011 third quarter. The consensus estimate, originating from two analysts, was for 53 cents.   

As of 9/30/12, the net interest margin was 3.28%; NPAs stood at .69% of total assets; the total risk-based capital ratio was 13.18%; the Tier 1 risk based capital ratio was 13.18%; the tangible equity to tangible assets ratio was 7.84%; tangible book value per share was $14.29; and the return on average assets during the quarter was 1.17%.

Bought 100 WASH at $15.26-Sold 50 of 100 WASH @ 22.44

The current quarterly dividend is 24 cents per share. At a total cost of $15.26, the dividend yield at that run rate is about 6.3%.

I have a realized gain on 50 shares of $347.03.

2011 WASH 50 Shares +$347.03

The remaining 50 shares of the 100 share lot bought at $15.26 have not been sold:

50 WASH Unrealized Gain as of 10/23/12=+$552
Like most of the banks in my regional bank basket, Washington Trust did not reduce its dividend during the Near Depression. The quarterly dividend was hiked by 1 cent to 21 during the 2008 second quarter and then raised by a penny again in both the first quarters of 2011 and 2012. The Washington Trust Company - Dividends/Stock Splits I bought my share during January 2010, so the dividend has been raised twice since my original purchase.

The dividend growth rate is slightly slower than a double over the past decade. In early 2002, the quarterly rate was 13 cents and is 24 cents per share now.

The quarterly rate in the first quarter of 2001 was 12 cents per share, so that would be a double in 11 years. If that growth rate continued for another 11 years, the first quarter of 2023, then the dividend yield would be about 12.58% at a total cost of $15.26.

Since WASH did not cut the dividend during the Near Depression and does not appear to be governed by worse than worthless Masters of Disaster that routinely make money disappear by the truckload at larger banking institutions, and given the stock profit already booked to date, I am likely to hold this one for a long time and simply ride out the vicissitudes in the stock price, for as long as that dividend continues to go up.

Quote: Washington Trust Bancorp
Yesterday's Close: WASH: 26.38 +0.33 (+1.27%)

2. NBN (own 100 shares: Regional Bank Basket Strategy): Northeast Bancorp reported net income of $1M or 9 cents per share. There is no analyst consensus estimate. The Board declared a 9 cent quarterly dividend. 

The net interest margin for the quarter was 3.8%. The efficiency ratio was way too high at 81.12%. The NPL ratio was 1.35% (non-performing loans to total loans)

The capital ratios are good:

NBN Capital Ratios as of 9/30/12
Bought 100 NBN at $8.7

Quote: Northeast Bancorp (NBN)
Yesterday's Close: NBN: 9.49 +0.20 (+2.15%)

3. Trustco (own 403+: Regional Bank Basket Strategy)TrustCo reported third quarter  net income of $9.8M (up 5.7%)  or $.104 per share. The consensus estimate was for 10 cents. 

As of 9/30/12, the net interest margin was up slightly from the prior quarter at 3.21%; the GAAP efficiency ratio was good at 51.3% and 49.18% non-GAAP (prefer below 60%); NPL ratio=1.92%; the coverage ratio was 94.9% (prefer over 100%); NPA ratio=1.36%;  tangible equity to tangible asset ratio was 8.27%;  tangible book value per share was $3.81; and the return on average assets for the quarter was .85% (prefer over 1%)

Compared to the 2011 third quarter, average loans were up $134.7M or 5.5%.

This bank is held primarily due to its dividend yield. The dividend payout ratio for the third quarter was 66.51%.

Quote: Trustco Bank  (TRST)
Yesterday's Close: TRST: 5.60 -0.06 (-1.06%)

4. CCNE (own 50 Shares: Regional Bank Basket Strategy): CNB Financial reported net income of $4.6M or $.37 per share, up from $.33 in the year ago quarter. The consensus estimate, originating from two analysts, was for $.35.

CCNE is a small bank with 28 full service branches in Pennsylvania.   CNB Bank - Locations & Hours

As of 9/30/12, the net interest margin was 3.53%; NPAs stood at 1.12% of total assets; the tangible net asset value per share was $10.64; the tangible common equity to tangible assets ratio was 7.67%; the total risk-based capital ratio was 15.36%; the Tier 1 risk-based ratio was 14.1%; and the return on average assets for the quarter was 1.05%. 

Total loans increased by 8.9% and total deposit were up 14.1%, compared to the 2011 third quarter.

CNB Financial is currently paying a 16.5 cent quarterly dividend.  On the positive side, the dividend was not cut during the Near Depression period. However, it has not been raised since a bump from 16 cents to 16.5 cents in the 2008 third quarter. CNB Bank - Stock Splits/Dividends

Bought 50 CCNE at $11.06 (June 2010)

Quote: CNB Financial Corp. (Pennsylvania)
Yesterday's Close: CCNE: 16.75 -0.10 (-0.59%)

5. Sold 50 AVK at $16.92 Last Monday-ROTH IRA (see Disclaimer): When I bought AVK, a CEF that invests in convertible securities, it closed at a -7.27% discount to its $16.5 net asset value per share. Bought Roth IRA: 50 AVK at $15.3 (6/27/12 Post) Last Friday, the discount had narrowed to -2.13, based on a closing market price of $17.01 and a net asset value per share of $17.38. I received several monthly dividend. When the discount narrows,  the net asset value per share goes up after a purchase, and the fund pays several dividends ($14.1 on 50 shares for 3 months), I will make money in three ways. I took a snapshot of my realized gain on the shares:

2012 AVK 50 Shares +$66.98
Altogether (dividend + realized gain), the total annualized return would be 10.5% on a $772 investment achieved in four months.

Closed-End Fund Association page on AVK

Quote: Advent Claymore Convertible Securities & Income Fund (AVK)

6. Sold 50 of the ETF EWH at $18.4228 Last Monday (see Disclaimer): I am simply raising some cash with this minor sales. These shares were recently bought:

2012 EWH 50 Shares +$69.21
Bought 50 EWH at $16.72 (9/7/12 Post)

Quote: iShares MSCI Hong Kong Index Fund
Yesterday's Close: EWH: 18.34 -0.14 (-0.76%)

****************

I had one more sell from Monday, another stock CEF, which I hope to discuss briefly in tomorrow's post.  I expect the market to be choppy for the remainder of October, with a downside bias. My current downside target in the S & P 500 is 1300, returning close to the levels from June 2012. S&P 500 Index Chart Sine that is a guess originating from the OG's gut, I will probably add odd lot positions on down days where it makes sense to me. 

Tuesday, October 23, 2012

Household Debt Service Payments as a Percentage of Disposable Income/Earnings: GE, MSFT, MS, FNFG, CAT/SVU/SOLD 209 Stock CEF JSN at $12.49-ROTH IRA/Edgen Murray 2015 Bond Redeemed

Berkshire Hills (own) completed its acquisition of Beacon Federal Bancorp for $60M in cash and 2.7M shares of BHLB stock. The cash portion was funded by selling $75 Million in subordinated fixed-to-floating rate debt. The fixed coupon will be 6.875% for the first ten years.

Even with home price declines, the median income household can afford the median price home in 14 out of the top 25 metropolitan areas. Homes| Interest.com That site is owned by Bankrate.com (RATE), whose stock took a beating in the market last week after a warning. RATE Interactive Chart; SEC Filed Press Release As a consequence of that decline, I have placed RATE on my both my LT and Flyers monitor lists. Yesterday's Close: RATE: 10.88 -0.09 (-0.82%)

SupervValu shares rose from the dead yesterday, based on reports that Cerberus Capital Management was lining up bank support of at least $4 billion to acquire the company and to invest $800M to 900M of its own money. Yesterday's Close: SVU: 3.17 +0.98 (+44.75%)

The SuperValue/Albertson's long term bonds barely budged in response to this possible LBO bid. The shorter term 2016 bond started to rise last week after SVU revealed there were several interested buyers. Bloomberg Adding a ton of  senior secured debt to an already highly debt ladened balance sheet is certainly not a positive for owners of senior unsecured debt, unless the indenture for that unsecured senior debt has a "change of control" provision requiring the repurchase of that debt generally at 101% of par value and that provision is triggered by the buyout. Change of control provisions will vary. Some may require a debt downgrade by all three agencies from investment grade to junk as a condition to bond owners forcing the debt repurchase, while other indentures may contain no such limitations. The 8% 2016 bond does have a "change of control" provision. Prospectus I sold this bond  at 104.125 back in November 2011.

Caterpillar reported earnings of $2.54 per share, excluding items, up from $1.71 in the 2011 third quarter, on revenues of $16.45B. SEC Filed Press Release CAT cut its full year forecast to $9 to $9.25 from $9.4, due to sluggish economic conditions. CNBC Yesterday's Close: CAT: 85.08 +1.22 (+1.45%)

Yesterday's Closing Prices:
VIX: 16.80 -0.26 (-1.52%)
S & P 500: 1,433.81 +0.62 (+0.04%)
TLT: 120.96 -0.78 (-0.64%)
LQD: 122.51 -0.29 (-0.24%)
GLD: 167.58 +0.61 (+0.37%)

I last took a snapshot of this data back in early August 2012 when the ratio was 10.98%:



Household Debt Service Payments as a Percent of Disposable Personal Income FRED - St. Louis Fed

The continued decline in this ratio is viewed as a positive for future U.S. economic activity.

With some more light selling yesterday, the OG has relieved his anxiety that was building up after reviewing earnings reports.

1. Microsoft (own 100 shares: Common Stock Dividend Growth Strategy and Large Cap Valuation Strategy): For its F/Y 2013 first quarter, MSFT reported quarterly revenues of $16.01B, and net income of $4.47B or 53 cents per share. Those results reflect the deferral of $1.36B in revenues and $.13 in diluted earnings per share, due to Windows Upgrade Offer, pre-sales of Windows 8 to OEMs prior to general availability and the Office Offer: SEC Filed Press Release; Form 10-Q for the Q/E 9/30/12 In the year ago quarter, MSFT reported revenues of $17.372B and an E.P.S. of $.68.

Earnings and revenues, adjusted for the deferrals, were below expectations of $16.4B in revenues and an E.P.S. of $.56.

The server and tools business was a bright spot, with a 12% increase in operating profit to $1.75B on a 8% increase in revenues.

Cash and short term investments totaled $66.644B as of 9/30/12.

This position has slid since my recent repurchase  at $29.81

This report is discussed in articles published by the BloombergWSJ.com,  Reuters and MarketWatch.

This report was released Thursday after the market's close. Last Friday, MSFT declined to $28.64, down $.86 or -2.9% for the day. I thought the decline was unjustified unless those sellers know already that the new product launches will be a disappointment. A typical sour note is sounded in this week's  Barrons cover story, titled "Bye-Bye, PCs", where the author Tiernan Ray states that "tech investors, long accustomed to a lift from Windows, are primed for disappointment".

A recent report from Gartner estimated that 80% of corporations will take a pass on Windows 8 through at least 2014. While I have not tested the new operating system, several reviews suggest that users will need to spend time learning how to use it. Young people, used to navigating touch screens with their smartphones, will adapt to the software quicker than the old fogies. I suspect that corporations using Windows will more readily adopt the Windows 8 tablet for those employees who need it. 
2. General Electric (own 510+): Three weeks ago, GE was targeting 2012 revenue growth at 5%. In its earnings release last week, the company lowered that target to 3% growth, due to shrinking GE Capital. Revenue for the third quarter would have been $1.1B higher. Third quarter revenue rose 3% to $36.3B, compared to the 2011 third quarter, failing to meet the consensus estimate for $36.94B. Operating earnings of 36 cents were in line with the consensus estimate. SEC Filed Press Release

Revenue from GE's industrial businesses rose 6% to 24.8B and profit in those businesses grew 11% to $3.57B.

The earnings were released before the market's open last Friday and the shares declined more than the major averages. Friday's Close: GE: 22.03 -0.78 (-3.42%)

GE has bought back over $3 billion worth of shares during 2012. 

This report is discussed in article published by  BloombergMarketWatch, WSJ.com,  Bloomberg and Reuters

Earnings Call Transcript - Seeking Alpha

Yesterday's Close: GE: 21.70 -0.33 (-1.50%)

3. Morgan Stanley (own 250 MSPRA only): For the 2012 third quarter, Morgan Stanley reported $561 million in income from continuing operations ($.28 per share, excluding charges associated with the valuation of its debt. Tangible book value per share was $26.55. The Tier 1 capital ratio was 16.7% under Basel 1.

4. First Niagara (own: Regional Bank Basket Strategy)First Niagara reported non-GAAP E.P.S. of 19 cents per share (GAAP of 14 cents which includes acquisition and restructuring charges). The consensus estimate was for 18 cents. Excluding loans acquired through the boneheaded, idiotic and indefensible $1 billion acquisition of HSBC branches, average commercial loans increased by $463M, up 17% over the prior three month period.

As of 9/30/12, the net interest margin was 3.54%; the GAAP efficiency ratio was 71.69% and 64.71% non-GAAP (prefer less than 60%); tangible book value per share was $5.59; the NPL ratio was good at .75% with a 105.3% coverage ratio; the Texas Ratio was good at 14.16%; and the return on average equity was unexceptional at .83% non-GAAP and .66% GAAP (prefer over 1%).

Compared to other banks in my regional bank basket, the FNFG capital ratios are no longer viewed as satisfactory and have been declining due to events connected with the HSBC transaction:

FNFG Capital Ratios Taken from Press Release
First Niagara: Just Another Incompetent Bank Board of Directors (December 2011); First Niagara Dividend Slash (December 2011)

I do not view the FNFG Board of Directors as incompetent as the Directors of Bank of America, the ones who allowed Ken Lewis to acquire Countrywide Financial when the subprime loan problems were crystal clear to even a casual observer.

FNFG now has approximately 430 branches.

Earnings Call Transcript - Seeking Alpha

Yesterday's Close:  FNFG: 8.32 +0.08 (+0.97%)

5. Sold 209 of the Stock CEF JSN at $12.49 Last Friday-ROTH IRA (see Disclaimer): The primary goals of the retirement accounts are income generation and capital preservation. I do not need the accounts to grow, since I am unlikely to ever need them. The money must still be around, rather than in money heaven, in the unlikely event that I need any of those funds, hence the emphasis on capital preservation rather than growth. Nonetheless, the money has grown nicely with my mostly esoteric income investments over the years.

As previously noted, I had a gut feeling that the market was overbought, and far worse for the OG, a queasy feeling after reviewing several recent earnings reports, notably the ones from IBM and Google. It does not take much anxiety for me to jettison a stock fund position in an IRA, and that would include stock CEFs that generate good income.

The shares have generated $380.67 in income since 1/1/11, and that income is tax free when paid into the ROTH IRA.

JSN Vanguard History After Share Transfer from Fidelity Roth IRA
It would be too time consuming to compile the income generation from March 2009 (original purchase date) to 1/1/11 from the old Fidelity ROTH IRA account. I did take a snapshot of the historical dividend page at the sponsor's website, JSN - Nuveen Equity Premium Opportunity Fund:

JSN Historical Dividends

In addition I realized a gain of $84.37 on this last transaction;

2012 JSN 209 Shares +$84.37
Another  gain was realized from a July 2011 pare in the ROTH IRA:

2011 JSN 100 Shares Roth IRA + 327.42
Pared JSN-Sold 100 at 12.38 in ROTH IRA

Based on my objectives, the foregoing is more than good enough.

Yesterday's Close: JSN: 12.39 -0.04 (-0.32%)

6. Edgen Murray Redeems 2015 Bond at 108.83 (Junk Bond Ladder Strategy): The issuer redeemed this bond, using a make whole calculation. See Item # 1 Edgen Murray 2015 Bond Redemption

Proceeds from Edgen Murray 2015 Bond Redemption
I realized over a $100 gain on this one bond position plus interest. Bought 1 Edgen Murray Senior Secured Bond Maturing 2015 at 97.5