Tuesday, April 30, 2013

More Bad News for Exide/Bought 50 ANCX/Sold 2 Pactiv 6.4% Senior Bonds Maturing in 2018 at 93/Added 50 SWZ at $12.22/Added 50 GHY at $18.55/Sold 300 of the Bond CEF MMT at $7.57-ROTH IRA/Sold 50 EELV at $29/GE, MSFT, Zurich Financial/GDP, Home Prices, Durable Goods

Big Picture Synopsis 


Stable Vix Pattern (Bullish):
Short Term: Slightly Bearish
Intermediate and Long Term: Bullish

My short term outlook for stocks continues to be slightly bearish. While I am expecting a 10% correction, the market is not cooperating with that forecast, even though it made a feint in that direction last week. It is entirely possible that the market will rise more than 10%, possibly considerably more, since I inaugurated this short term bearish tilt, making the forecast less than optimal.

There are always reasons to be bearish. A number of bears are Seeking Alpha contributors. I responded to one of them who believes that the stock market is still in a long term secular bear market starting in 2000, which is about to reassert itself. (Lawrence Fuller Article dated 4/28/13 published by Seeking Alpha; and Fuller article dated 2/25/13 at Seeking Alpha). He may end up being right but his reasons are not convincing and do not support his opinion when countervailing evidence is evaluated along with the items relied upon by him.

I am not naturally bullish or bearish and will always try to form an opinion based on the available evidence.  I am inclined to make a judgment based on a non-biased evaluation of the evidence-all of the evidence that I know, rather than bits and pieces selected only for their support of a pre-existing opinion or tendency. And, I am certainly not inclined to twist or to clearly misinterpret that selected evidence to support one thesis or another.

I am currently inclined to believe that the U.S. stock market started a long term secular bull trend on March 8, 2009. I would anticipate that the first phase of the long term upward move will last up to two more years, followed by a prolonged period of digestion and sideways movement before the bull reasserts itself. A 10%-15% correction can happen at anytime and is not inconsistent with the long term bull thesis. Historically, long term bull moves will produce 14%+ annualized gains in the S & P 500, adjusted for inflation and with dividends reinvested. A long term chart will reveal a 45 decree upward sloping move with blips. A large part of the gain can be concentrated in a few years, such as the move from March 2009 to date.  


Short Term: Neutral
Intermediate Term: Bearish
Long Term: Extremely Bearish

Durable Goods:

The Commerce Department reported last week that the shipment of durable goods in March declined by 5.7%. Excluding transportation (e.g. aircraft), orders declined 1.4%. census.gov.pdf

FHFA and Case-Shiller Reports On Housing Prices:

The Federal Housing Finance Agency reported that home prices rose a seasonally adjusted .7% in February compared to March. The Y-O-Y increase was 7.1%. fhfa.gov.pdf However, the FHFA home price index is still 13.6% below its April 2007 peak and is near its October 2004 level.

Case-Shiller reported that home price rose 8.6% and 9.3% for the 10 and 20 city composites for the 12 months ending February. The largest one year change was a 23% increase in Phoenix, followed by 18.9% in San Francisco; 17.6% in Las Vegas and 16.5% in Atlanta. The lowest Y-O-Y increase was 1.9% in New York.

First Estimate of 1st Quarter GDP:

Last Friday, the government released its first estimate of first quarter GDP, and it was a disappointing report.  News Release: Gross Domestic Product Real GDP was estimated to have increased 2.5% in the 2013 first quarter from the 2012 4th quarter.

The price index for gross domestic purchases increased 1.1%, down from the 1.6% increase in the 2012 4th quarter.

Real personal consumption expenditures increased by 3.2%, up from 1.8% in the 2012 4th quarter. However, the personal savings rate decreased to 2.2% from 4.7% in the prior quarter.

Real GDP for the private sector rose 3.3%.

Real federal government consumption and gross investment decreased 8.4% in the quarter. Government  spending reduced GDP by .8%, with the federal government's spending contributing to a .65% decline, partly due to the sequester which started on March 1, 2013.

Residential construction grew at a 12.6% annualized, seasonally adjusted rate.

The personal consumption price index fell to 1.3% annualized from 1.6% in the 2012 4th quarter.

March Consumer Spending and Income

The Commerce Department that consumer spending in March increased .2%, while incomes rose .2%. The personal savings rate was 2.7% in March. Real disposable income increased .3%. The price index for personal consumption expenditures declined .1%.

News Release: Personal Income and Outlays


The EU's statistical agency Eurostat reported that the euro area (EA17) seasonally adjusted unemployment rate rose to 12.1% in March, up from 12% in February. The EU27 unemployment was 10.9%. Germany had a 5.4% unemployment rate while Spain and Greece continue to suffer at depression level rates of 26.7% and 27.2% respectively. eurostat.ec.PDF

Eurostat reported that euro area inflation is expected to decline to 1.2% in March down from 1.7% in March. eurostat.ec.PDF


Zurich Financial Dividend (ZURVY):

This Swiss financial company paid its annual dividend on 4/22/13. The entire dividend was classified as a return of capital:

ZURVY Annual Dividend
Zurich is earning the dividend. Since the dividend was paid from capital contribution reserves, I did not have to pay Swiss withholding tax on the dividend, and the dividend was classified as a return of capital. Consequently, I will not pay a tax on the dividend, but my cost basis will be reduced by the amount of the dividend. The same treatment occurred with the annual dividend paid in April 2012: Item # 2 Zurich Financial ($1.85 per share dividend paid in 2012 reduced my cost basis from $24.8 to $22.95 per share).

Item # 2 BOUGHT 100 ZFSVY at $24.72

As a result of those two annual dividends being classified as returns of capital, my cost basis is now $21.13 per share.

Microsoft Sells Bonds

Last week, Microsoft raised $1.95B by selling the following senior unsecured notes:

$450M Maturing in 2018 at 1%
$1B Maturing in 2023 at 2.375%
$500M Maturing in 2043 at 3.75%


Microsoft sold another €550M 2.625% notes due in 2033.

General Electric:

For now, I am reinvesting the GE dividend to buy more shares:

The market responded to GE's first quarter earnings release by knocking the stock down about 4% percent. SEC Filed Earnings Press ReleaseGE Historical Prices: 4/19 GE reported operating earnings of $.39 per share on $35B in revenues, but industrial operating earnings were down 11%. E.P.S. was $.35 from continuing operations. Profit in the power and water businesses slumped 39% to $719M on a 26% decline in revenue.  The transportation segment reported a 15% increase in profit to $267M. The oil and gas segment reported a 4% decline in profits to $325M. Aviation's profit increased by 9% to $936M.

The most important decline is in the power and water business segment, where there has been a significant decline in orders for gas turbines in developed countries Y-O-Y.

The backlog increased to its highest point ever at $216B.

Cash balances increased to $138.1B from $125.9B at the end of the prior quarter.


EXIDE: Update from Exide (4/9/13 Post)

The bad news continues for Exide, as California ordered Exide to suspend operations at its Vernon battery recycling plant due to the release of hazardous materials into the soil allegedly resulting from a degraded pipeline. latimes.comExide Receives Order From California Department of Toxic Substances Control Regarding Its Vernon, CA Facility

At least on the surface, Exide management appears clueless about the Vernon plant's operational issues and problems and are in a reacting mode rather than being proactive in preventing problems before they arise.

I am not making any suggestion that the order by California is justified by the facts.

The stock cratered again on 4/25/13: XIDE: 1.02 -0.32 (-23.88%)

I do not own the common. In a recent Seeking Alpha article published on 4/19/2013, the author, Tom Konrad, mentioned that he had bought Exide common at $1.4 and $1.42 in his "most aggressive mandate". I left some comments to that article.

However, the news about the forced closure of the Vernon plant was enough to turn Konrad bearish and to sell his position at a loss. Selling Exide - Forbes

A bankruptcy filing is certainly a possibility, which would likely wipe out the common shareholders and cause the owners of senior secured debt to take a significant hit.

Bankruptcy may even be the best option as Exide's legal problems mushroom.

There are a number of legal issues involving environmental cleanup responsibilities after a bankruptcy filing provided the company abandons the site. The Discharge of Environmental Claims in Bankruptcy; Environmental Injunctions are Not Claims Subject to Discharge in Bankruptcy

I still own two senior secured bonds maturing in 2018, which are in effect second lien bonds, that declined about six points in response to this news. Online bids for this bond disappeared throughout 4/25/13. This bond traded as low as 65.4 before closing at 69.125. I would anticipate continued downward pressure on this bond. The price may ultimately reach a level where investors are pricing the bond's value in a bankruptcy organization.

FINRA - Investor Information - Exide 8.625% Bond Maturing 2018

The 2013 busted convertible, a senior subordinated bond which matures this September, closed last Friday at 29. Needless to say, that price for a bond maturing in September 2013 is not consistent with a likely pay off at maturity.

When and if I can sell those two bonds near 80, I will probably do so. Otherwise, I will just continue monitoring the worsening situation. Those bonds have value, given their security, but the security is  second lien to the collateral that secures the bank borrowings.


1. Added 50 of the Stock CEF SWZ at $12.22 (see Disclaimer): I try to buy at least 50 or 100 shares of SWZ every year. I am reinvesting the dividends. I have traded this CEF in a retirement account  (Sold  SWZ in Roth IRA), but have not sold shares in the taxable account, where I now own over 500 shares. 

The Swiss Helvetia Fund (SWZ) is a closed end stock fund that invests in companies headquartered in Switzerland. The fund is not currently using leverage based on information contained in the last shareholder's report.

I discussed this CEF in more detail when I made my 2012 purchase last November:  Item # 3 Added 50 SWZ at $10.64 I have little to add to that post.

The Swiss Helvetia Fund: Shareholder Report for the Period Ending 12/31/12

The expense ratio is high at 1.44% for the previous year (see page 30). As of 12/31/12, the fund shows net assets of $402.279+M, purchased at a cost of $283.947+M (page 25).

For several years since around 1994, most of the dividends paid by this fund have been from capital gains, primarily long term capital gains. SWZ.com - Swiss Helvetia Fund

Long Term Capital Gain Distributions Per Share By Pay Date
SWZ.com - Swiss Helvetia Fund
2012: $1.074
2011: $  .727
2010: $  .264
2009: $  .366
2008: $  .023 and $ .097=$.12
2007: $1.162; $ .527 and $1.175=$2.864
2006: $  .203 and $1.276= $1.479
Total LT Distributions 2006-12=$6.894 per share

During the foregoing period, there were several short term capital gain and income distributions.

Data As of 4/19/13 (Date of Purchase)
Closing Net Asset Value Per Share= $14.16
Closing Market Price: $12.23
Discount: -13.63

Data as of 4/25/13
Closing Net Asset Value Per Share= $14.45
Closing Market Price= $12.41
Discount: -14.12

Sponsor's Website: SWZ.com - Swiss Helvetia Fund

SWZ Page at the Closed-End Fund Association

SWZ Page at Morningstar

SWZ Page at CEFConnect

2. Sold 2 Pactiv 6.4% Bonds Maturing in 2018 at 93 (Junk Bond Ladder Strategy-No Longer Being Updated)(see Disclaimer): I have now sold out of all Tenneco Packaging/Pactiv bonds. 

Bought 1 Pactiv 6.4% Senior Bond Maturing on 1/15/2018 at 91.5 April 2011Added 1 Pactiv 6.4% Senior Note Maturing in 2018 at 77 October 2011

I will receive $35.2 in accrued interest from the buyer:

Sell Confirmation Pactiv Bonds
The price shown in the confirmation of 92.6 reflects a $8 commission off the sales price of 93 (proceeds from the principal amount at 93=$1,860; adjusted to $1852 in confirmation to reflect the brokerage commission). Brokerage firms that I use do not show the commission in the confirmation but adjust the price to reflect the commission.

I made $93.98 on these two bonds plus interest payments.

The cost basis was adjusted by the broker up to reflect an amortization of the market discount from the acquisition date through the disposition date using a straight line method.  Tax Accounting For Bonds Purchased in the Secondary Market-Too Complicated This calculation is just one of many way for the IRS to needlessly cause consternation to investors. I suspect that the rationale has something to do with the lower capital gains rate and the government's desire to classify some of the profit as interest taxable at an investor's highest marginal rate (the amortized portion), rather than the lower capital gains rate.

Cost Basis - Bonds bought at a discount
Taxation of bond discounts and premiums. - Free Online Library
‎www.aaii.com/journal (page  32)

Tenneco Packaging changed its name to Pactiv which was then acquired by Reynolds Group, a highly leveraged company based in New Zealand, a serial acquirer using junk rated debt. In my opinion, the senior unsecured debt is deservedly rated deep into junk at Caa2 by Moody's

FINRA - Investor Information on the 2018 Pactiv Bond

FINRA - Investor Information on the 2025 Tenneco Packaging Bond

FINRA - Investor Information on the 2027 Tenneco Packaging Bond

3. Sold 300 MMT at $7.57 Roth IRA (see Disclaimer): The MFS Multimarket Income Trust (MMT)

2013 Sold 300 MMT at $7.57
This is a snapshot of my recent ROTH IRA history for this holding:

ROTH IRA History
As noted in that history, 100 shares was transferred to this brokerage firm from another.

I also generated a profit on the shares. Any profit for a bond fund is viewed as acceptable:

2013 Roth IRA 300 MMT +$217.15
Item # 3 Added 200 MMT at $6.8 in Roth IRA (June 2011)

Data as of 4/19/13 (Friday)
Closing Net Asset Value: $7.73
Closing Market Price: $7.58
Discount: -1.94

Data as of 4/22/13 (Monday-Date of Sell)  
Closing Net Asset Value Per Share= $7.74
Closing Market Price: $7.55
Discount: -2.45%

Data as of  Friday 4/26/13
Closing Net Asset Value Per Share= $7.76
Closing Market Price= $7.65
Discount: -1.42%

CEFConnect Page for MMT

MMT Page at Morningstar (rated 3 stars; three year average discount -6.03%; dividend not supported by a return of capital)

Prior Trades:

Item # 5 Sold 300 of 1000 MMT at 6.89 (July 2011); Item # 1Added 300 of the bond CEF MMT at 6.61-Satellite Taxable Account (March 2011)

Sold 300+of the Bond CEF MMT at $6.83-Another Satellite Taxable Account (January 2012)(contains snapshot-$84.07 profit on the shares plus dividends)- Item # 2 Bought 300 of the Bond CEF MMT at $6.49 (September 2011)

Sold 300 of the BOND CEF MMT at $7.09 (January 2012)(contains snapshot-+$26.66 on the shares plus dividends)- Item # 1 Bought 300 MMT at 6.95 (October 2010)

Bought 100 MMT @ 6.67 (November 2010)

4. Sold 50 EELV at $29 (see Disclaimer): The PowerShares S&P Emerging Markets Low Volatility Portfolio Fund  (EELV) This sale is part of my ongoing pare of low yielding stock ETFs.

Sold 50 EELV at $29

2013 EELV 50 Shares +$74.06

Bought 50 of the Stock ETF EELV at $27.2 (November 2012)

5. Added 50 GHY at $18.55 (see Disclaimer): The Prudential Global Short Duration High Yield Fund (GHY) is a bond CEF that invests in short term junk bonds.

I recently discussed this bond CEF. More detail can be found in that post: Item # 4 Bought 50 of the Bond CEF GHY at $18.77-Roth IRA

This last purchase was made in a taxable account, where I may gradually buy more shares at lower prices.

Data from Date of Purchase (4/24/13):
Closing Net Asset Value Per Share= $19.07
Closing Market Price= $18.47
Discount= -3.15%

Data from Friday 4/26/13
Closing Net Asset Value Per Share: $19.11
Closing Market Price= $18.72
Discount= -2.04%

Dividends are paid monthly at the current rate of $.125 per share. At a total cost of $18.55 and assuming a continuation of that rate which is no way assured, the dividend yield would be about 8.09%.

GHY Page at CEFConnect

Sponsor's Website: Prudential Global Short Duration High Yield Fund, Inc. - Prudential Investments

Holdings: Holdings - Prudential Investments

Last SEC Filed Report for the Period Ending 1/31/13: Prudential Global Short Duration High Yield Fund, Inc.

6. Bought 50 ANCX at 12.11 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer):

Company Description: Access National Corp. is the bank holding company, founded in 2002, and headquartered in Reston, Virginia which is located in the metropolitan D.C. geographic area. ANCX is the parent company of Access National Bank. This is a small bank with five branches: Locations The market cap is approximately $126M at the $12.11 price.

Dividends have been paid since 2006. Access National Bank Initially, the quarterly dividend was .005 per share and is now $.10 per share.  The dividend was recently raised from $.09 to $.10 per share. The bank currently intends to pay out 40% of its core earnings.

At a total cost of $12.11 per share, the dividend yield would now be about 3.3%.

Profile Page at Reuters

The current analyst forecast is for an E.P.S. of $1.19 in 2013.

Apparently, the stock rose earlier this year in response to a rumored takeover, but the bank denied that it had received any offer and had not solicited any. The CEO then said in an interview that the bank was not in "active" discussions (see interview at Washington Business Journal) The stock hit $17.63 back in March: ANCX Interactive Chart The stock price decline also coincided with the announcement about the closure of the Denver mortgage office.

Prior Trades: None. This stock was on my monitor list for potential adds to the regional bank basket.

Last Earnings Report: I initiated a position in this small bank since I liked a number of items in its last earnings report. The NPA ratio is one of the lowest that I have seen, matched only by Merchants Bancshares (MBVT). The return on assets and return on equity are among the highest in my basket. The dividend is being raised at a decent clip. On the negative side, E.P.S. growth is slowing:

Access National Increases First Quarter Earnings and Dividend
2013 1st Quarter vs. 2012 1st Quarter
Net Income: $3.684M/ $3.437M
Diluted E.P.S.: $.35/ $.33
Net Interest Margin: 3.73%/ 3.82%
Efficiency Ratio (bank only): 53.22% / 52.17%
NPA Ratio: .2%
Coverage Ratio: 739.93% (the highest that I have seen)
Return on Average Assets: 1.66%
Return on Average Equity: 16.03%

The bank did announced the closure of its Denver mortgage production branch on April 2, 2013 and presented pro forma number for the March quarter which excluded the activities for that branch. As shown in the pro forma numbers, that closure would reduce net income numbers significantly, as shown in the bank's pro forma analysis for 2012: (8-K $1.71 to $1.17)

The bank did not report its capital ratios in this earnings release, other than the equity to assets ratio which was 10.72%. I did look at the Annual Report and made a snapshot of the capital ratios as of 12/31/12.

2012 Annual Report at page 72

Rationale and Risks: The risks are the usual ones for small community banks, which include net interest margin compression due to the Fed's Jihad Against the Savings Class, increased regulatory costs, a slow down in earnings growth due in large part to the preceding factors, and a potential for an acceleration of loan losses particularly during a recession.

When addressing those risks, I attempt to focus on a number of items from the last earnings report and the bank's ability to navigate through the recent Near Depression. I do not want a bank managed by Masters of Disaster who are likely to blow their bank up in pursuit of their own personal greed. I therefore attempt to make a judgment about the bank's management by looking at loan losses during a stress period and currently.

The non-performing assets to total assets ratio for this small bank is among the lowest that I have seen to date at .2%. The allowance for loan losses as a percentage of NPAs is the highest that I have seen. Normally, I am comfortable when a bank has already set aside 100% in reserves for NPAs when I make my initial purchase. Access had a coverage ratio of 739% as of 3/31/13. I believe the Texas Ratio is extremely low at around 2.3%. (see discussion of the Texas Ratio at dallasfed.org.pdf; a third party service calculated the Texas Ratio at 2.61% as of 12/31/13: Access National Bank)

The most recent Annual Report, referenced above, contains historical information relevant to assessing the prudence of this  bank's management at page 25. The bank did take a hit in 2008, with an E.P.S. of $.46 per share and net charge offs to average loans at 1.12%. The bank bounced quickly back in 2009 with an annual E.P.S. of $.93 per share. Net charge offs to average loans had fallen to .13% in 2012.

While the total risk based capital ratio declined to 13.11% in 2008, that is still a good number and started to improve significantly in 2009 (page 26).

ANCX declined to participate in TARP: 2009 10-K at page 10

For this bank, I would highlight one additional potential risk and benefit. The mortgage division operates in several states and is not focused in Northern Virginia. Some banks have experienced problems when attempting to go outside of their local territory for mortgage originations. The 2012 Annual Report shows mortgage originations by state at page 4. Virginia accounted for only 21.36% of mortgage originations during 2012. I would not be too concerned about this national mortgage operation provided rigorous loan criteria are followed and monitored aggressively by risk officers.

Future Buys: I may average down at below $11.5.

This post is long enough, particularly considering the other lengthy post published on Monday. I will discuss some of the trades in the next post made prior to this post's publication. 

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