Saturday, January 25, 2014

Vix Asset Allocation Model and the 1997 Asian Contagion/Update for Regional Bank and Lottery Ticket Basket Strategies/Sold 50 UNB at $24.56/Bought as LT: 15 SQM at $27.74/FNFG/CBU, TRST, WTBA, HBAN, FNB, NPBC

The Lottery Ticket and Regional Bank Basket strategies are normally updated on the last Monday of each month. The following two tables will have closing prices from the previous Friday.

I decided to publish the update today and include an introductory discussion of the Vix Asset Allocation Model and the Asia Contagion from 1997.

Closing Prices Friday 1/24/14:

S & P 500: 1,790.29 -38.17 (-2.09%)
VIX: 18.14 +4.37 (+31.74%)
TLT: 107.48 +0.69 (+0.65%)
GLD: 122.29 +0.50 (+0.41%) : SPDR Gold Trust

My weekly blog will be published on Monday or Tuesday next week.

The long anticipated correction may have started last week, triggered by growth concerns and a worrisome slide in emerging market stocks, currencies and bonds. The decline in emerging markets accelerated last Thursday and Friday.

The slide is reminiscent of the 1997 Asian Contagion which started with a meltdown in the Thai Baht. 1997 Asian Financial Crisis

That crisis caused a Trigger Event in my Vix Asset Allocation Model. VIX Historical Priced (data starting on October 27, 1997 shows a Trigger Event under that model) The subsequent Unstable Vix Pattern lasted until January 2004.

Vix Asset Allocation Model Explained Simply

VIX and S & P Compared 1990 to 1997


The foregoing was easy to classify as a Trigger Event under the Vix Asset Allocation Model. Note the duration of the move over 30 and the rapid rise from 19.85 to 23.17 and then to 31.12.

The VIX subsequently returned for a brief move below 20 in February 1998 that would have allowed an investor to sell stocks at higher levels. The S & P 500 closed at 1130.54 on 4/22/1998 as the VIX fell back under 20, but was unable to form a Stable Vix Pattern until January 2004 due to repeated moves over 20 including several long duration ones. The entire move in 1999 was not confirmed by the VIX, as it meandered between 20 to 30, a Non-Confirmation Event under the Model. When the Stable Vix Pattern started to form in October 2003, the S & P 500 was at a lower level than in April 1998. Historical Prices | S&P 500

Chart of Unstable VIX Pattern Period October 1997 to January 2004:

The lower left hand corner shows the end of the Stable Vix Pattern while the lower right hand corner shows the start of the January 2004 to August 2007 Stable Vix Pattern. In between, the market remained in an Unstable Vix Pattern, viewed as dangerous for most investors other than very talented and frequently lucky traders.

My current guess is that the latest emerging market meltdown will not cause a Trigger Event.

Last week Argentina's peso fell 15% and more declines may be in store this week. Bloomberg Occasionally, I will venture into Argentina with a LT buy, the last being GGAL which was sold last year. Sold LT GGAL at $9.6 I suspect that it is too early to buy back those 40 shares. BOUGHT 40 GGAL at $6.72-LT Category I have another Latin America stock under review for a possible LT purchase, with operations in both Argentina and Venezuela, two of the worst nations in the world for business. But, as our RB is fond of saying, at least a business owner may be able to fire someone in those two countries, unlike France, for pretending to work.  

1. Update of Lottery Ticket Basket Strategy

The Lottery Ticket Basket Strategy uses a deep contrarian value strategy, appropriately characterized as catching a "falling knife". A common criteria for the stocks contained in this basket is a smashed stock price at the time of purchase and an ugly looking chart. Any technical analyst would most likely have a sell rating on the stock.

See 2004 Study by the Brandes Institute: "Falling Knives Around the World" 

Selections are made primarily on statistical criteria including price to book, price to sales, forward P/E, cash per share and/or free cash flow. I spend anywhere from thirty minutes to an hour researching a potential purchase prior to purchase.

For many selections, I may be pessimistic about the firm's future, but not as pessimistic as the market. I will also occasionally see a ray of light at the end of a dark tunnel. Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits. 

After experiencing some success with this strategy, I now have a requirement that my total investment in all LT holdings can not exceed my total realized gains for this basket strategy. My total exposure is currently slightly under $6,000.

The name of the strategy aptly describes the risk. It is somewhat analogous in many cases to playing a hand of blackjack for the purchase amount knowing that the card count favors the house. It is a form of entertainment and an alternative to a casino visit. Based on the results to date, this strategy is far more likely to produce positive results even with the LB's skill at the tables. The primary purpose of the LT strategy is to entertain Right Brain, let it swing for the fences with up to $300, and to keep the Nit Wit from interfering with Left Brain's management of Headknocker's portfolio.

Snapshots of realized gains can be found at the end of the Gateway Post on this topic: Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

Net Realized Gains: $13,581.67

As previously noted, Google owns Blogger, and its software is turning my snapshots dark, making it more difficult to read. The snapshot has a white background until it is uploaded to Blogger. This is a relatively recent flaw in Google's software.

Click to Enlarge:

Lottery Ticket Basket as of 1/24/14 
The top percentage unrealized gains based on last Friday's closing prices are as follows:

AMOT +87.19%

STKL + 60.93%
CIDM +57.33%
CPST +57.16%
FCA/A +54.41%
ING +48.44%
FCF +36.98%
ELON +32.7%
ELON is among the most tepid buys made in the LT category, a mere 50 share purchase of a $2 stock. Bought:  50 ELON at $2.23. The shares popped when Google announced a $3.2B acquisition of the smart thermostat maker Nest Labs. Echelon Corporation Stock Chart Echelon is in a similar business. 24/7 Wall St.  Two other publicly traded stocks rose in response to the Nest Labs news: Control4 Corporation | CTRL Interactive Chart and Lantronix| LTRX Interactive Chart

SUSQ +28.08%
SUSQ had one of the largest percentage retreats last week among the LTs, declining from a closing price of $12.97 (1/21/14) to $11.7 last Friday. The decline was apparently triggered by the earnings report. SUSQ reported a 4th quarter E.P.S. of 22 cents beating expectations by 1 cent. SEC Filed Press ReleaseEarnings Call Transcript - Seeking Alpha

A. Capstone Turbine: On 1/9/13, Capstone announced that it had received multiple orders totaling 6.4MW of electric power. Those turbines orders are for use in the Marcellus and Utica shale plays.

Closing Price 1/9/13: CPST: $1.57 +0.12 (+8.28%)

After reviewing that announcement, I noted several other press releases announcing orders earlier in January:

Capstone Further Penetrates the Oil and Gas Market in Russia With Two Orders Totaling 24MW

Capstone Secures 1MW Order From Regatta Solutions for CCHP Installation at Hawaiian Resort 

December 2013 Press Releases:

Capstone Further Penetrates Pharmaceutical Market With 2MW Combined Heat and Power Application in Northern California

Capstone Receives Multiple Orders for Offshore Platforms from New Alaska Distributor Chenega Energy

The shares popped again on 1/17/2014 after the company announced several turbine orders for customers involved in the Permian shale play: Capstone Receives Multiple Orders for Customers in the Permian Basin Shale Play

Closing Price 1/17/2014: CPST: $1.73 +0.14 (+8.81%)

The price retreated some in last week's rout, closing at $1.59.

Bought 300 CPST at $.9852-LT Category

B. Banco Santander Brazil (BSBR): BSBR declared a $.66728 per share dividend which went ex dividend on 1/10/2014. This was on top of another $.11342 per share dividend which went ex dividend on 1/7/2014. Banco Santander Brasil (BSBR) Dividend History This distribution is part of a capital restructuring discussed by Moody's which reaffirmed the bank's credit ratings.

C. Bought 15 SQM at $27.74 (see Disclaimer): I bought these shares last Wednesday. SQM slid some during the emerging market selloff late last week after my purchase. SQM is based in Chile. That stock market fell more than 5% last week and is currently in a bear market cycle. IPSA SANTIAGO DE CHILE Index ChartChile Stock Market (IGPA)| Historical Data

Friday's Closing Price: SQM: $26.40 -0.90 (-3.30%)

Snapshot of Trade:

I was permitted to exceed the $300 by adding to that number a prior realized gain in SQM shares:

SQM +$126.7
Sociedad Quimica y Minera De Chile S.A. ADS (SQM) is not from around here. This company is based in Chile and is engaged in the production and distribution of fertilizers, potassium nitrate, iodine and lithium chemicals. The Lithium and derivatives segment produces lithium carbonate which is used in a wide variety of applications including batteries for mobile devices and electric vehicles. Applications of lithium SQM controls about 30% of the worldwide lithium market. It also has a 25% share of the global iodine market. Iodine is used also in a wide variety of applications including x-ray contrast media, antiseptics, biocides, assorted disinfectants, and in the synthesis of pharmaceuticals. Applications of Iodine

The two other divisions are Industrial Chemicals and Specialty Plant Nutrition.

SQM's share of the worldwide iodine and lithium markets come from a Morningstar report. Another report prepared by an investor has higher numbers. I did not attempt to establish which estimate is accurate or closer to being accurate. For my purposes, it is important only that SQM has a significant market share.

Sociedad Quimica y Minera de Chile SA Profile Page at Reuters

The company files reports with the SEC under Chemical and Mining Company of Chile: EDGAR 

The stock price declined precipitously starting in March 2013. SQM Interactive Chart I wrote down some closing prices to highlight the plunge that ultimately qualified this stock as a LT:

9/20/12: $65.09
3/13/13: $56.67
7/24/13: $38.17
8/28/13: $24.98

The swoon starting in July was caused by Russia's Uralkali quitting its partnership with Belarusian Potash that set off concerns about a price war in potash, which accounted for almost 28% of SQM's revenues for the first nine months of 2013.

Twelve analysts following the company and most have the stock rated at neutral, underperform or sell.  An overall pessimistic view shared by the herd is a standard feature for stocks selected as Lottery Tickets.

For the 2013 third quarter, SQM reported net income of U.S.$138.9M or $.53 per share, down from $.63 per ADR share in the 2012 third quarter.

The current consensus E.P.S. estimate is for $2.08 in 2013 and $1.95 in 2014. SQM Analyst Estimates I would not put much faith in those forecasts.

The company does pay dividends semi-annually that will fluctuate based on earnings. The payout in 2013 was based on 50% of net income before amortization and negative goodwill. The 2013 annual payout was $1.03946. SQM Dividend Chile has a withholding tax (35%-subject to reduction), and then there will be a ADR administration fee deducted from the payout in addition to that tax. Consequently, I would not own shares in a retirement account.

If SQM has paid a corporate income tax called a First Category Tax on the "income from which the dividend is paid, a credit for the First Category Tax effectively reduces the tax rate". (Quote from SQM Dividend Policy at SQM - Sociedad Quimica y Minera de Chile S.A. - Investor Relations - Stock Info - Shareholder Structure and Ownership)

This is a link to articles about SQM published by Seeking Alpha. While I was already familiar with the company, I did find the overview given in this Seeking Alpha helpful.

Uralkali recently signed a new potash contract with China, taking a 24% price cut from the $400/mt set in the prior contract. Reuters Bloomberg Possibly, potash prices have stabilized at around $300/mt, but I would not expect much upward movement over the next year or two unless Uralkali and Belaruskali start cooperating again in their pricing and marketing. That is a possibility given the recent management change at Uralkali.  

OUTLOOK ’14: Fertilizer Market

I do have some concerns about governance issues. (e.g. SQM’s Ponce Facing Chile Trading Breach Charges; Shares Fall - Bloomberg)

2. Update for Regional Bank Basket Strategy:

This strategy is explained in my Gateway Post on this topic:

The dividend yield showed in this table is calculated by Yahoo Finance based on last Friday's close. My dividend yield for each position will be different based on my total cost numbers. In most cases, with FNFG and VLY being notable exceptions, my dividend yield will be higher.

I am not tracking reinvested dividends in the following table. The unrealized gains per holding do not include reinvested dividends.

Over the life of this basket strategy, I anticipate that the dividends will provide 40% to 50% of the total return. I am generally keeping my total exposure between $40,000 to $50,000.

I am currently about $5,000 below the lower end of that range, as shown in the table below (subtract total unrealized gain from total value shown)

As a result of profit taking over the past several months, I am currently well below my minimum $40,000 out-of-pocket investment threshold for this basket. I am not comfortable with valuations in this sector. The price declines last week brought a few near the upper end of my fair valuation range. Hopefully, I will see a number of 10% to 20% corrections over the coming weeks that will provide far better buying opportunities in this sector. I have not been impressed with most of the 4th quarter earnings reports from regional banks. While net interest margin has not contracted much, it is yet to show any expansion either for most banks. Chart: Net Interest Margin for all U.S. Banks - St. Louis Fed

One ETF will own several of the small cap regional banks and REITs that I own now or have owned in the past: PSCF | S&P SmallCap Financials Portfolio

I had one add since my last update: Bought 50 LARK at $19.7 (1/13/14 Post) 

Net Realized Gains to Date: $15,645.08
Dividends 2010-2013 (updated yearly only)= $6,623.72

In 2013, my dividend total from this basket totaled $1,932,93, up from $1,896.25 in 2012 and $1,660.57 in 2011. I will have to increase my current exposure significantly in order to exceed the 2013 amount this year.   

I took a hit last Friday in this basket, hurt particularly by FNFG.

Click to Enlarge:

Regional Bank Basket as of 1/24/14 
A. Huntington Bancshares (HBAN): Huntington Bancshares reported net income of $157.8M or $.18 per share, down from $.19 in the 2012 4th quarter. The consensus estimate was for $.17 per share.

Net Interest Margin: 3.36%
Efficiency Ratio: 62.9%
ROA: 1.13%
ROE: 11%
ROTE (return on tangible equity): 12.7%
NPL Ratio: .75%
Coverage Ratio for NPLs: 221%
NPA Ratio: .82%
Charge Offs as a % of Loans (annualized): .43%

The capital ratios are good:

This report is discussed in this article published by TheStreet.

The CEO noted that the rise in longer term interest rates did not do "much for most bank's interest margins, because certain loan types, including home equity loans and equipment leases keep repricing lower, because the federal funds rate remains in a range of zero to .25%".

Huntington was originally part of the LT strategy and was later promoted to the regional bank basket: Added 40 HBAN at $7.04Bought 30 HBAN @ 7.25 as LTAdded 30 HBAN as LT at $4.8

Analysts do not expect E.P.S. growth 2013-2014. The current consensus E.P.S. estimate is for $.72 in 2014. HBAN Analyst Estimates E.P.S. for 2013 was $.72.

B. Citizens and Northern (CZNC): For the 2013 4th quarters, CZNC reported net income of $.34 per share, down from $.48 in the 2012 4th quarter. SEC Filed News Release The estimate, made by just one analyst, was for $.4 per share. The NPA ratio increased to 1.53% from .83% as of 9/30/13. The NPL ratio increased to 2.8% from 1.45%. Both of those increases are troubling and reflect the primary source of the earnings downdraft. The bank had to increase its provision for credit losses to $1.559M during the 4th quarter from $239,000 in the prior quarter. The coverage ratio declined to 47.95% from 75.63%. Overall, this was a poor report.

The capital ratios remain excellent: 

Exhibit to SEC Filed Press Release

For 2013, CZNC reported net income of $18.594M or $1.5 per diluted share, representing "an annualized return on average assets of 1.5% and an annualized return on average equity of 10.25%".

I only own 50 shares: Stocks, Bonds & Politics:  Bought 50 CZNC at $19.15

I previously booked a $517.61 gain on a 100 share lot:

Item # 1 Sold 100 CZNC at $16.53 (September 2011)(snapshot)- Item # 1 Bought 50 CZNC at $11.77 (August 2010); Item # 1 Added 50 CZNC at $10.46 (August 2010)

The dividend yield at my total cost is over 5% based. The quarterly rate was $.25 per share: Citizens & Northern Corp (CZNC) Dividend History I was surprised to see a one cent increase to $.26 per share. Citizens and Northern Bank | C&N Declares Dividend At a total cost of $19.15 per share, the yield becomes 5.43% at the new quarterly rate.

Given the good capital ratios and dividend yield, and considering that I am almost playing with the house's money, I have decided to stay with the 50 share position until I review the next earnings report.

Last Friday's Closing Price: CZNC: $19.75 -0.15 (-0.75%)

C. Sold 50 Union Bankshares (UNB) at $24.56 (see Disclaimer): Union Bankshares, a small bank headquartered in Morrisville Vermont, reported 4th quarter net income of $1.5M or $.34 per share, down from $.5 in the 2012 4th quarter. The bank did not realize any gains from the sale of securities compared but did recognize a $629,000 gain in the 2012 4th quarter.  E.P.S. for 2013 was reported at $1.6, up from $1.54 in 2012.

At a $24.56 price, the TTM P/E is 15.35 which I view as slightly expensive for a small bank barely growing its earnings. I decided to sell my position.

The dividend yield is decent which is a countervailing consideration. The Board did raise the quarterly rate by 1 cent to $.26 last year. SEC Filed Press Release

Snapshot of Trade:

2014 Email Confirmation Sold 50 UNB at $24.56
Snapshot of Profit:

2014 Sold 50 UNB +$238.61
Bought 50 UNB at $19.45 (January 2013)

If I had waited another day, I could have transformed the profit into a long term capital gain so the timing was deficient in that regard.

This is my second round trip in UNB shares. I will consider buying this lot back at below $20, preferably below $19.

Closing Price Last Friday: UNB: $23.80 -0.30 (-1.24%)

D. F.N.B.: For the 4th quarter, F.N.B. reported operating net income of $32.5M or $.21 per share.

The consensus E.P.S. estimate was for $.21 per share. FNB Analyst Estimates

Net Interest Margin: 3.67%
Efficiency Ratio: 57.77%
NPL Ratio: .81%
NPA Ratio: .88%
Coverage Ratio (originated loans): 135.42%
Net Charge Offs Annualized: .32%
Return on Average Tangible Common Equity: 14.51%
Return on Average Tangible Assets: .94%
Dividend Payout Ratio: 60.48%

After some profitable trading, I was left with 50 shares bought at using FIFO accounting. Added 50 FNB at $7.8 (July 2010). I later added another 50.  Bought 50 FNB at $11.25 (6/24/13)

E. Trustco (TRST)TrustCo reported 4th quarter net income of $10.6M or $.112 per diluted share, up from $.104 in the 2012 4th quarter. The consensus estimate was for $.11.

Net Interest Margin: 3.15%
Efficiency Ratio: 52.15%
NPL Ratio: 1.49%
Coverage ratio: 110%
Tangible Equity to Tangible Assets: 7.99%
Dividend Payout Ratio: 58.44%
Full Service Banking Offices: 139

Earnings Call Transcript - Seeking Alpha

My last two transactions were to pare my position based on valuation. Sold 308 TRST at $6.64 (profit $271.05); Sold 50 TRST at $7.29 (profit: $32.67). I currently own with 315+ shares at an average cost of $5.16. Bought 50 TRST at $4.01 (August 2011)ADDED 50 TRST at $5.1 (June 2012); Added 150 TRST at $5.17 (January 2013)(plus some reinvested dividends)

Last Friday's Closing Price: TRST: $6.81 -0.18 (-2.58%)

F. Community Bank System (CBU): For the 2013 4th quarter, Community Bank System reported an adjusted E.P.S. of $.54 which excludes $.04 of acquisition expenses and a $.12 per share after tax loss relating to the disposition of securities. As of 12/31/13, the NPL and NPA ratios were at .49% and .32% respectively. The coverage ratio was at 201%.

The consensus estimate was for $.51 per share. CBU Analyst Estimates

Earnings Call Transcript - Seeking Alpha (Loan growth was seasonally atypical in the 4th quarter, up 8% on an annualized basis; during the quarter, CBU closed its acquisition of 8 BAC branches in northwestern PA; banking fee income 9%; revenue growth in wealth management and benefits administration up 11%).

I currently own 50 shares: Bought 50 CBU @ $23.18 (October 2010)

Last Friday's closing price: CBU: $37.43 -0.55 (-1.45%)

G. National Penn Bancshares (NPBC): National Penn Bancshares reported adjusted E.P.S. of $.17 per share for the 2013 4th quarter.

The consensus estimate was for $.17 per share. The 2014 E.P.S. consensus forecast is for $.71. NPBC Analyst Estimates

Net Interest Margin: 3.51%
Efficiency Ratio: 57%
NPL Ratio: .55%
Coverage Ratio 168.1%
Charge Offs to Total Loans Annualized: .41%
Adjusted ROA: 1.19%
ROA: 1%
Return on Average Tangible Equity: 9.73%
Total Capital Ratio: 16.63%
Tangible Equity to Tangible Assets Raio: 10.31%

NPBC was initially bought in the LT basket and was later promoted to the regional bank basket with the original LT purchase remaining in that basket. Item # 2 Added 100 NPBC at $10.68 (8/17/13 Post)Added 50 NPBC at $9.85 (October 28, 2013 Post);  Item # 1 RB Bought as LT 30 NPBC @ $7.83 (4/26/11 Post)

Earnings Call Transcript - Seeking Alpha

H. First Niagara (FNFG): I am sitting on an unrealized loss in my FNFG shares, and I contemplated buying another 50 shares last Friday. But the LB noted a pearl of wisdom, frequently ignored here at HQ by the OG, that an investor who is in a hold needs to quit digging. Fortunately I have resisted that temptation so far with FNFG.

My loss in FNFG was caused by the boneheaded decision made by FNFG to acquire branches from HSBC for $1B in cash. To raise the funds for that ill advised purchase, the Board slashed the quarterly dividend by 50% and sold a boatload of stock and other securities at unfavorable terms for existing shareholders. First Niagara: Just Another Incompetent Bank Board of DirectorsFirst Niagara Dividend Slash It will likely take more than a decade for the quarterly dividend to be restored to its 2011 level of $.16 per share. First Niagara Financial Group Inc. (FNFG) Dividend History While the Board replaced the CEO responsible for that decision, Board members who approved of a clearly improvident acquisition are still around, I will vote against all of those board members for a very simple reason. Their lack of good judgment has already been amply established by approving the grandiose plans of the former CEO.

The shares slid last Friday in response to FNFG's earnings report and conference call. The bank guided down 2014 operating income to $.72 to $.75. The consensus estimate was for 79 cents. The bank is going to spend more money on new products and service platforms.

Last Friday's Close: FNFG: $9.08 -1.26 (-12.19%)

First Niagara reported net income attributable to common shareholders of $70.1M or $.2 per share. This was in line with the consensus estimate.

Net Interest Margin: 3.41%
Efficiency Ratio: 61.46%
NPL Ratio: .87%
NPA Ratio: .56%
ROA: .82%
ROE: 6.18%
ROTE: 12.64%
Total Risk Based Capital Ratio: 11.53%
Tangible Common Equity to Tangible Assets: 6.02%
Dividend Payout Ratio: 40%

The capital ratios are low for banks in my basket.

Earnings Call Transcript - Seeking Alpha

On the bright side, I am reinvesting the dividend, a parody of its former self, to buy shares which have become cheaper as new management tries to enhance operating underperformance. I am now an involuntary long term holder of FNFG stock.

FBR Capital downgraded the stock to market perform from outperform last Friday.

I. West Bancorp (WTBA): For the 2013 4th quarter, West Bancorporation reported net income of 4.3M or $.27 per share, up from $.22 in the year ago quarter. The Board declared an $.11 per share quarterly dividend.

The consensus estimate was for $.25. WTBA Analyst Estimates 

In addition to E.P.S. and net income, several of the material metrics improved over the reported numbers from the year ago quarter, including the net interest margin, ROA, ROE and the Texas Ratio, while the efficiency ratio and tangible assets/equity ratio went slightly in the wrong direction:

Total non-performing assets dropped to the lowest level since 2008. Overall, I view this as a good report based on the limited amount of data made available in the press release. The 10-Q for the third quarter showed the NPL ratio at .92% (page 47) and a total capital ratio of 14.08% (page 50).

This small Iowa bank will provide more information about the 4th quarter when it files its 2013 Annual report in March.

Bought 100 WTBA at $11.67 (6/29/13 Post)

Closing Price Last Friday: WTBA: $14.69 -0.12 (-0.81%) 

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