Thursday, April 23, 2015

Bought: 50 EROL at $24.45 and 50 AMNB at $22.07/Reality Creations Made by Politicians, Citizens and Investors and the Profound Negative Consequences Flowing Therefrom

I excerpted the discussion of the EPOL purchase for publication as an Instablog.  I have a long introduction section in that Instablog discussing investment strategy that is not found here.  

Bought IShares MSCI Poland Capped ETF (EPOL) With An Investment Strategy Discussion Introduction - South Gent | Seeking Alpha

Stable Vix Pattern (Bullish):
Links to SeekingAlpha Instablog, Articles and Comments:

South Gent's Instablog | Seeking Alpha

South Gent's Articles | Seeking Alpha

South Gent's Comments | Seeking Alpha


Recent Developments:

Existing-Home Sales Spike in March |

I left a comment at SeekingAlpha today discussing the obstacles to interest rates being set by the market using traditional criteria such as inflation and inflation expectations and how the FED is now in a box. The abnormal central bank policies worldwide have both current and potential negative repercussions.

Seeking Alpha

Reality Creations: 

While many may differ, I have noticed over the past 40 years that most individuals engage in a constant stream of reality creations and false memories about important issues. It is only a  question of decree.

The political ideologues who engage in fact creation to confirm their beliefs will do the same when investing their money. And when I read what they have written and corrected facts that are clearly wrong with citations to original source material, they refuse to look at the material or just dismiss it and resort back to their own created reality. The false reality is more comfortable psychologically and fits into an ironclad belief system that will never be questioned by them no matter how much contradictory evidence is placed before them.

The observation that I have noticed over 40+ years is that facts do not matter to them. Facts are false whenever they do not confirm their carefully drilled round hole since any fact having a different shape is per se false or at best classified as unimportant by those whose brains have not yet calcified by 100%.

While ideologues of all stripes are frequently reality distorters, the most prevalent reality creators in our society are the right wing reactionaries who adopt the gospel according to the Fox propaganda machine, Rush Limbaugh, Glen Beck, Ann Coulter and other zealots. They are not in any sense conservative, but the antithesis of true conservative values.

I see the same reality creation even when the subject is investing, an area where it is just patently obvious that individuals need to cleanse their mind of all pre-existing ideologies, particularly those that are based on political or social issues that are likely to cause the most errors when transferred into the investing arena. Instead of reality creations and the psychologically related emotionally driven impulse decisions,  the objective of an investor has to be the collection of all relevant data and then allow the facts to form the opinion rather than the opinion forming the facts.

At SA, I have repeatedly corrected reality creations hatched normally by individuals whose political beliefs are not open to dispute.

Even if I cite a bevy of factual data contradicting a statement made by them, they will ignore it and then make the same easily disprovable statement over and over again.  Facts do not matter and never will.

I saw an example of how beliefs create reality rather than the more productive path of facts creating opinions, when reading the comment sections to a WSJ articles, one of the many places where reality creators hang their shingles.

I am doing investment research of psychological abnormalities that impact investment decisions when reading those comments. The WSJ comment sections are productive laboratories for real time research with subjects eager and willing to provide free of charge material for my research in what one observer called in 1841 Extraordinary Popular Delusions & the Madness of Crowds by Charles MacKay.

There are a lot of similarities between accepting,  even  now, the reasons given for the Iraq Invasion and those type of financial events, including the bubbles in Japanese stocks that developed in the late 1980s and in U.S. stocks in the late 1990s; the parabolic spike in home price in the U.S. between 2002 and 2007, a similar land bubble in Florida during the 1920s; the gold and silver price spikes in the late 1970s and again in 2009-September 2013 (just look at the linked charts); the vast array of Ponzi schemes, and so on until one becomes weary of typing the list.

Maybe I could just type the symbol for infinity to express the time period associated with Extraordinary Popular Delusions and the Madness of Crowds:  ∞

Several commenters in a WSJ thread were aggressively dismissing a comment made by one of the few rational human beings who, for whatever futile reason, decided to leave a factually based comment. That individual was simply saying that the so called mobile biological labs in IRAQ did not exist. I do not make any comments there wishing to maintain my status as an objective observer.

The reality creators were not citing any authority, apparently relying on the pervasive false propaganda that poured from the mouths of those fixing the facts. One noted that those purported biological labs could be placed in operation quickly and could produce a variety of biological weapons to reign down on NYC in another 9/11 attack. I am being fair in that description.

The rational human being was citing an array of actual data that those alleged biological mobile labs, found buried in the desert, were actually for the production of hydrogen gas to fill artillery balloons. From 'Biological Laboratories' to Harmless TrailersIraqi mobile labs nothing to do with germ warfare, report finds

The CIA knew that the primary source of that information was and Iraqi seeking asylum in Germany, and who was justifiably called "Curveball" by his handlers.

Curveball later admitted that he fabricated the story. No one should be surprised that those relying on his tale are not surprised by that admission. Defector admits to WMD liesIraqi  Admits WMD Lies - ABC News'Curveball': I lied about WMD to hasten Iraq war-NBC News

Dick Cheney still believes that those hydrogen gas trailers are biological labs.

The foregoing is just one of many reality creations used to justify the Iraq Invasion.

Other well documented ones include the then known falsity that aluminum tubes intercepted in Jordan were not appropriate for uranium enrichment, as claimed by the administration and the obviously forged Niger yellow cake documents (known to be forgeries before the invasion)

The foregoing is not a political discussion. I would be equally critical of LBJ's rationale for the Vietnam war and its escalation.

As I have said here many times before, going to war decisions are not political but should involve a fact based and truthful assessment (internally formulated and externally expressed to the population) of how the expenditures of large sums of borrowed money and the loss of life (both U.S. soldiers and civilians) furthers, in a rational and objective manner, national security interest that are jeopardized by a failure to act.

Lies and misleading statements are made regardless of party affiliation. For politicians, their power and influence is frequently far more important to them than a real concern (distinguished from the prevalent pretend variety) about  the best course of action for the nation. A failure to disclose details that would undermine or call into the question the rationale for a $2+ trillion expenditure, using borrowed money that will probably have to be refinanced forever,  is no different that an outright lie.

A statement made that the aluminum tubes were for uranium enrichment, based on some non-expert opinion advanced by a guy named "Joe" at the CIA, is not false because Joe made that claim which he did do. The evidence then showed how Joe had repeatedly dismissed the own experts hired to rebut U.S. scientists after they agreed with the U.S. centrifuge experts at our Oak Ridge facility.

The Big Lie was the failure to say that the experts in gas centrifuges at the U.S. Oak Ridge enrichment facility had examined the tubes and found them to be inappropriate for gas centrifuges, a fact known at the highest levels of the Bush Administration before the Invasion and disclosed to members of the Senate's Intelligence Committee and in a brief sentence in a footnote to a security briefing document disclosed only to those politicians who took the time to review it.

Only a few politicos actually reviewed even that abbreviated version, If the politicians had reviewed just that footnote, a bright red flag would have been raised about other false justifications.

For political survival, it is best to say I voted for the Iraq Resolution and there is no paper record that I reviewed that report.

Why did Hillary lose to Obama in the Democrat primaries?  Obama gave a speech opposing the war and Hillary voted for it and too much was then known, during that nomination process by Democrats, about the false factual assertions made to justify the incursion, as well as the costs and loss of life with over 100,000 civilians killed in the conflict and the emergence of Iran as a more powerful regional power.

E.G.  Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent? (12/25/2008 Post)

Lexington Realty (LXP) Reinvestment Price:

As I noted in an SA Instablog, I moved my entire position in LXP to my Fidelity Roth IRA, the only account that I have where I can receive a 5% discount on the dividend reinvestment price and avoid a tax on the fictitious income created by the IRS based on that discount.

My Fidelity Roth IRA reinvestment price for the last quarterly dividend was $9.2825, below the 52 week low price of $9.49 as of 4/21/15.

For a family member who does not have a Fidelity account, the average was was $9.74. The broker aggregated the LXP dividends received by all of its customers requesting reinvestment and then used those funds to make an open market purchase. That is what is done with all of my brokers, with Fidelity being only a limited exception. The market purchase of shares will of course be without a reinvestment discount available under a corporation's reinvestment program. And, that practice frequently results in significant price differences depending on the timing as I have noted here in the past.

This issues are discussed by me in a SA Instablog: Lexington REIT (LXP) - South Gent | Seeking Alpha

Fidelity does not sign their customers up directly for the company reinvestment plan. Instead, it goes through a Depository Trust program that is limited in scope to participating securities. I currently own one other security that offers a 5% discount through DTC, and that is  Bridge Bancorp (BDGE). I own that position in a taxable account and quit reinvesting the dividend based on valuation issues. I do not know now whether the discount is still being offered by DTC and BDGE. If I buy more BDGE shares, when those valuation concerns no longer exist, the placement will be in the Roth IRA.

Conclusion of My Effort to Secure the Correct Withholding Rate for the SVNLY Dividend: 

As expected. Fidelity did not change its position that the non-treaty rate of 30% was final, rather than the lawful treaty rate of 15% applicable to me as a U.S. citizen, as clearly spelled out in Article 10 of the Sweden's tax treaty with the IRA and the opinions of Big Eight accounting firms.

I summarized a reply in an addition to this earlier blog:

Scroll to Update April 22, 2015:

Stocks, Bonds & Politics: Update on Svenska Handelsbanken (SVNLY) Dividend Withholding Tax

The importance of this 30% vs. 15% has to do with customers who have to fill out the cumbersome IRS Form 1166 to claim a foreign tax credit due to running over the minimum levels for a simple line entry in the 1040. If Congress had any interest whatsoever in making taxpayers incur more in costs than the benefit to the government from a low or regulation, then the full tax credit should be allowed without filling out that form and creating a nightmare for everyone concerned, but alas that is just irrelevant. Possibly, if some contributor laid out a few million in "campaign" contributions, spread it around in the most productive manner, then someone may actually listen. Otherwise, just forget about it.

Since the dividend is qualified, subject to a maximum rate of 15% for me, that complex form and burdensome form limits my credit to no more than 15%, my qualified rate, which the rate that I would have to pay but for the credit.

A reader of one of my SA articles reproduced a reply from Fidelity on the withholding tax issue for TD's dividend payment into an IRA and how Fidelity decides whether or not to claim the tax treaty exemption.  I would recommend reading its, particularly for investor who have MLPs in an IRA and believe that Fidelity is making the UBTI computations necessary for filling out the IRA Form 990-T:
Link to Reader Comment: Dividend Growth And Large Cap Valuation Strategies: Bought Toronto Dominion Bank - Toronto-Dominion Bank (NYSE:TD) | Seeking Alpha

Link to My Response (quickly made, since I instantly recognized the importance): Dividend Growth And Large Cap Valuation Strategies: Bought Toronto Dominion Bank - Toronto-Dominion Bank (NYSE:TD) | Seeking Alpha


1. Bought 50 EPOL at $24.45 (see Disclaimer):

Snapshot of Trade:

Security Description: The iShares MSCI Poland Capped ETF (EPOL) attempts to track an index representing Poland's stock market.

MSCI Poland Index.pdf

Sponsor's website: iShares MSCI Poland Capped ETF | EPOL

Sponsor's Fact Sheet as of 3/31/15: EPOL (beta vs. S & P 500=.57; the standard deviation is high at 21.92 over 3 years compared to SPY at 9.56)

I view the expense ratio as high for an ETF at .6%.

Sponsor's Website: iShares International Select Dividend ETF (expense ratio: .5%)

I am not familiar with any of the stocks owned by this fund.

I took a snapshot of the top 15 holdings as of 4/16/15:

The fund at that time owned 45 stocks.

I know nothing about those stocks and would never take the research them for a possible purchase. A few of the top 15 names are at least capable of being pronounced by me.

I just limited myself to looking at the Marketwatch pages for the top two holdings and glanced at their recent earnings reports:

Powszechna Kasa Oszczednosci Bank Polski S.A. Stock Price Today (PKO:WAR)
Financial Reports | Investor Relations | Polish PKO Bank | Bank PKO Polish
ADR Trades in USDs on the Pink Sheet Exchange: PSZKY

Powszechny Zaklad Ubezpieczen S.A. Stock Price Today (PZU:WAR)
Financial Data
Analyst Coverage And Recommendations

One money manager currently calculates the following valuation metrics for Poland's Stock Market based on what was shown as of 4/20/15:

Shiller CAPE P/E: 10.2
P/E: 19.8
Price to Book: 1.3
Price to Sales:   .8

Even with three low ratios, I would not have bought this ETF but for the substantial decline in the Polish Zloty's value against the U.S.

Two themes are being played with these small foreign county ETFs: a substantial decline in the ordinary currency vs. the USD and a low Shiller and other valuation ratios.

The Polish stocks have 3 out of 4 of those valuation ratios suggesting only a low valuation. As with any individual stock, there are reasons why investors are not enthusiastic about future prospects, at least when viewed at the current moment in time.

Shiller CAPE P/E: 28.8
P/B: 2.9
P/S: 1.7
P/E: 20.6

Global Stock Market Valuation Ratios

The sponsor claims that the P/E ratio was 17.7 as of 3/31/15. It is important to click the "i" next to that number to see how that P/E is calculated. The P/E is based on trailing 12 months earnings but excludes "extraordinary" items, companies with negative earnings and stocks with greater than 60 P/Es. My response is to give me the facts as they are rather than after a massage.

In my article discussing the purchase The Global X MSCI Norway ETF ( NORW), I noted that the Shiller CAPE P/E frequently has no relationship with annual performance numbers.

Some of the worst performing stock markets in 2014 had the lowest CAPE ratios (e.g. Greece and Russia), while some of the higher CAPE ratios performed well into positive territory.

Meb Faber has the CAPE ratios as of 12/31/13 and the 2014 performance numbers.

There are other objective and subjective factors that will have material impacts on overall performance, ranging from rational economic future forecasts to delusions.

Poland had a 12.3 CAPE as of 12/31/13 and EPOL lost 15.34%. The highest CAPE was Indonesia at 26.5 with a +24.05% performance. Those who adhere tightly to Shiller's CAPE will argue that the high CAPE ratio countries will revert to their means, which is established by data since the 1880s for the U.S. stock market.

Poland's Economic Indicators: 

The EU believes that Poland "weathered the economic crisis and its aftermath very well".

Sourced: poland/ pdf

Poland's unemployment rate is currently high at 11.7%.

Poland's annual GDP growth rate has averaged 4.2% from 1995 until 2014. The 2014 GDP increased by 3.1% compared to the 2013 4th quarter.

On a negative note, Poland's CPI numbers have been negative since June 2014, with a -1.5% reading in March 2015. The average inflation rate was an unhealthy 9.64% from 1992 through 2014. While it is to soon to know, replacing those problematic historical inflation numbers in the rear view mirror and generating low future inflation numbers, would be more positive operating environment. Persistent deflation and problematic inflation numbers are unhealthy

EU Forecasts for Poland's economy:

Sourced: .EC Forecasts as of February 2015/pdf

Prior Trades: None. This is my first purchase.

Dividend History: Dividends are paid semi-annually at variable rates.

The fund paid out $.827638 per share in dividends. If I use that number, the dividend yield would be about 3.39% based on a total cost per share of $24.45.  The actual yield will vary based on future distributions.

Chart: The price peaked in April 2011 near $40 per share and then crashed to about $23.5 within a few months thereafter. A low was hit near $20.9 during May 2012. Since that time, EPOL has been trading in a channel mostly between $24 to $30. The last upward price spike started in June 2013 near $24 and peaked at near $31.5 in November 2013.

All of the foregoing severe up and down spikes contribute to the high standard deviation number. Usually, I prefer far less volatility in a stock or a fund.

Standard deviation is explained in a number of articles  available for review using the internet, including these articles published at Morningstar and StockCharts.

Rationale: I have been buying 50 share lots of foreign country ETFs that have low Shiller P/Es and other ratios, particularly compared to the U.S. stock market, and whose currencies have declined 20% or more versus the USD.

The large decline in the Polish Zloty ("PLN" hereinafter) against the USD makes Polish stocks cheaper for a new buyer of a USD priced ETF that owns stocks priced in PLNs.

A one year chart shows the carnage. The important point is that I missed the decline until the date of my purchase.

One Year Chart PLN/USD:

7/14/14: 1 USD=3.04 PLNs
3/15/15: 1 USD=3.954 PLNs
PLN's Value -30.07%
TOP on Day of EPOL Share Purchase 4/15/15=3.8
% Decline 7/14/14 to 4/15/15: -25%

The USD is at a ten year high against the PLN. USD/PLN Chart The prior spike in the USD topped at 1 USD buys 3.9 PLNs on 2/18/2009. The USD was strong against most major currencies during that post Lehman bankruptcy period. The recent spike high hit 3.954 on 3/15/15.

It remains to be seen whether or not that level will be the top.

In a recent article, I discussed the rationality of the USD spike against major currencies: Added To iShares International Select Dividend ETF-iShares International Select Dividend ETF (NYSEARCA:IDV) | Seeking Alpha

It is impossible to know at what level or the time period of a parabola's peak, up or down.

And, it is possible that the USD's parabola will collapse upon itself using the U.S. Dollar Index (6 currencies weighted in the EURO) or the broader Bloomberg Dollar Spot Index with 10 foreign currencies, while the PLN remains weak against the USD for reasons specific to that country.

The PLN is not included in those two Dollar indexes, where dollar strength is measure when the line moves up. The 5 year charts for the DXY and the Bloomberg Dollar Spot Index clearly shows the USD's current parabola.

Seeking Alpha published an article after my purchase discussing his arguments for PLN to continue its decline against the USD.

There is some dividend support for the ETF.

The $24.45 current price was near the low end of the 2012-April 2014 price channel.

Risks: Currency risk is of course a dominant risk as noted above.

The fund describes the usual risks in the Prospectus (e.g. risks associated with concentration, country, currency, stock, sector risks (e.g. financials), non-diversification, EU, etc.and so on)

Barron's published a negative article about Poland's stock market in November 2014. One of the problems was the overweight in financials that were in the author's view richly priced at the time.

There is certainly concentration risk with this ETF.

I suspect that Poland's stocks are feeling some blowback from Russia's renewed military aggression. Poland borders both the Ukraine and Russia. The Ukraine confrontation appears to have just boiled to a simmer in recent weeks.

And, as we know, Russia had an ongoing military occupation of Poland after WWII.

And the current Ukrainian President claimed that Putin privately threatened to invade Poland, Hungary and the Baltic states. Sounds about right but who knows unless there is a recording and that would need to be forensically examined by impartial experts.

2. Bought 50 AMNB at $22.07 (REGIONAL BANK BASKET STRATEGY)(see disclaimer):

Snapshot of Trade:

Company Description: The American National Bankshares Inc. (AMNB) is a bank holding company for the American National Bank that has 27 branches located in Virginia and North Carolina (8). AMNB's headquarters is located in Danville, Virginia. ( nice building: Google Maps)

Map of Branch Locations

Prior Trade: Item # 5 Sold 50 AMNB at $23.03(profit snapshot=$77.57)- Item # 4 Bought 50 AMNB at $21.16 (9/7/2013 Post)

I chucked this position due to a negative E.P.S. trend which is still continuing. I decided to try again and see whether the bank, which has positive metrics, can receive a lift from a recent acquisition and an improvement in its net interest margin later this year or in 2016.

I am referring to the acquisition of MainStreet Bankshares, the holding company for the Franklin Community Bank, that was consummated on 1/1/15. SEC Filed Press Release This acquisition expands AMNB's territory into the Roanoke, VA. metropolitan area, which I view as a long potential positive development.

Roanoke, Virginia - Wiki

Dividends: The good news is AMNB did not cut is dividend during the Near Depression period or its aftershocks. The bad news is the dividend has remained constant since it was first paid during the 2007 second quarter. Prior to this long dividend increase moratorium, the bank was doing just fine with its dividend growth rate, raising the quarterly rate from $.075 (1st Q. 1996) to that $.23 (2007 2nd Q.). That increase in about 11 years amounts to +206.67%. Calculate Percent Increase

At a $22.07 total cost per share, the current dividend at its long term running in place number is 4.17%, which is pretty good in the sixth year of the FED's Jihad Against the Savings Class.

Chart: The five year chart is not appealing. AMNB Interactive Stock Chart The stock has not gained ground over that period. At least I have not been a long term shareholder going up and down and ending up at the point where I started in one of the largest percentage moves in history and the second longest without a 10% correction.

Just unappealing.

I cast my votes in every annual shareholder's meeting. When looking at that kind of chart, I will vote against the Board of Directors and against any measure requesting approval of their compensation and benefit packages.  I am just calling balls and strikes as I see them.

Results: 2014 vs. 2013 (2015 1st quarter not yet available for review)

This snapshot highlights the problems and is self-explanatory. Suffice it to say that E.P.S. was reported at $1.62 in 2014 and at $2 in 2013:

Earnings are trending down, not up.

ROA and ROE down year-over-year.

Efficiency ratio going the wrong way.

NIM went from 4.1% in 2013 to 3.66% in 2014.

One positive trend is that NPLs decreased year over year and are also good (

Two other positives are a low charge off ratio of .07% in 2014 and a coverage ratio of 302.01%:

There was also some growth in AUM, deposits and loans.

SEC Filed Press Release

Rationale and Risks: This bank's managers and Board are not adding value. The shares are just running in place for the most part in a fairly narrow channel as shown in the preceding chart. The results including in the Y-O-Y snapshot are not going to entice many investors to become shareholders.

Still, the dividend is secure and well above the ten year treasury yield and investment grade corporates maturing in 10 years or less.

Some metrics are positive including the

There is at least some possibility that shareholders will at some point benefit by a takeover.

AMNB discusses risks incident to its operations starting at page 14 of its 2014 Annual Report. 

3. Regional Bank Reports and BHB Dividend Increase: 

A. CNB Financial (CCNE): Actual E.P.S. $.39 vs. Estimate of $.38 (one analyst)

Looks fine to me. Market does not care about this small PA bank.

CNB Financial Corporation Reports First Quarter Earnings for 2015

B. First Bancorp (FNLC): Actual E.P.S. $.39 (No Estimates)

2015 1st Q. vs. 2014 1st Q

"The local economy has rebounded considerably in the past year".

The First Bancorp Reports Record Quarterly Net Income

C. Financial Institutions: Actual E.P.S. $.46 vs. $.44 estimate (2 analysts)

Financial Institutions, Inc. Announces First Quarter Earnings: FISI

D. Bar Harbor raised its dividend again. Bar Harbor Bankshares Increases Quarterly Cash Dividend As noted in that press release, Bar Harbor had increased the dividend by 12% since the 2014 second quarter. The rate is $25 per share. This raises my yield to 4.6% based on a total cost of $21.74 per share.

Snapshot of position is in the latest update: Update For Regional Bank Basket Strategy As Of 4/20/15 - South Gent | Seeking Alpha

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