Thursday, December 14, 2017

Observations and Sample of Recent Trades: AROW, IPG, NYCB, PEO, VEIRX


The government reported that CPI rose .4% last month on a seasonally adjusted basis, driven up by energy prices. Core CPI rose .1%. 

Over the twelve month period through November, CPI was up 2.2% and core CPI increased by 1.7%.  

Consumer Price Index Summary

The government claims that health insurance costs rose zero percent over the past 12 months. Health insurance costs are listed under the category "Medical Care Services" which is weighted at 6.655 in the BLS CPI calculation. The weight given health insurance expense is only .995. 

Table 2. Consumer Price Index for All Urban Consumers (CPI-U): U. S. city average, by detailed expenditure category

Small-business sentiment in November powers to the second-highest reading on record - MarketWatch

U.S. wholesale inflation hits nearly 6-year high, adds to case for Fed rate hike - MarketWatch


Market Commentary and Markets

Stocks to take a 'breather' in 2018, says Wharton's Jeremy Siegel

Bond guru Gundlach warns tax plan could have ‘unintended consequences’ for junk debt - MarketWatch (relates to limits on the deductibility of interest in the GOP's "tax reform".)

UBS: Cryptocurrencies like bitcoin are ‘the bubble to end all bubbles’ 

People are taking out mortgages to buy bitcoin, says Joseph Borg

The Bond Ghouls had an interesting reaction yesterday to the .25% increase in the federal funds rate:

The decrease in yields for 10 to 30 year treasury bonds may be more due to the FED reiterating their projection for a .75% increase next year. The Fed-December 13, 2017: FOMC Projections materials, accessible version The FED did increase slightly its GDP projection for 2018. 

The squashing of the yield curve is not good for banks. The SPDR S&P Regional Banking ETF (KRE) declined 1.08% yesterday. (the 52 week high was $61.26 hit on 12/4/17)

The underlying consensus view of the Bond Bookies based on their bond pricing, which I believe to be unwarranted, is that a .5% or .75% hike next year, probably in .25% installments spaced out in time, will either cause an abrupt slowdown in the economy or result in historically low inflation to fall further, thereby expanding the real return of longer term bonds.  

As I have noted many times in the past, the initial reaction of the ten year treasury note to the FF increases starting in June 2004 was to go up in price and down in yield. That period started out at a 1% FF rate which was persistently raised until the FED stopped at 5.25% two years later. That period is much different than now, where the FED is only up to 1.5%, an abnormally low level, after several increases and is showing no intent to increase the FF as rapidly or as far as that earlier rate increase cycle. 

I am capturing higher yields now with newly purchased short term bonds and CDs compared to the yields of maturing short term fixed income securities. I have a constant flow of maturing securities.   


This is one blistering editorial: Will Trump's lows ever hit rock bottom?: USA Today Editorial Board 
("President Trump has shown he is not fit for office. Rock bottom is no impediment for a president who can always find room for a new low. . . A president who would all but call Sen. Kirsten Gillibrand a whore is not fit to clean the toilets in the Barack Obama Presidential Library or to shine the shoes of George W. Bush.. . Donald Trump, the man, on the other hand, is uniquely awful. His sickening behavior is corrosive to the enterprise of a shared governance based on common values and the consent of the governed. ..Trump’s utter lack of morality, ethics and simple humanity has been underscored during his 11 months in office. . .  a president who shows such disrespect for the truth, for ethics, for the basic duties of the job and for decency toward others fails at the very essence of what has always made America great.")

Polls: Majority of voters believe Trump guilty of sexual misconduct-CBS News

Trump Takes Credit for Killing Hundreds of Regulations That Were Already Dead-Bloomberg

Trump Is a No-Show in the Fight Against Opioids - Bloomberg 

Nearly half of Americans still oppose Republican tax bill: Reuters/Ipsos poll (49% oppose, 31% support, and 20% are in a blissful state of "I don't know"). 

Mueller hones in on Flynn's last days in obstruction probe: NBC

Trump sex harassment accusers demand Congress investigate as lawmakers resign: CNBC 


Regional Bank Highlight-Arrow Financial (AROW)

Website: Arrow Financial Corporation 

AROW possesses several financial characteristics that I view as a favorable. As long as those characteristics continue, I am likely to hold long term. 

I purchased 50 shares at $26.25 in March 2016. Item # 3. Update For Regional Bank Basket Strategy As Of 3/17/16 - South Gent | Seeking Alpha

In addition to AROW's regular dividend, I have received two 3% stock dividends that have increased my total to 52 shares, with fractional shares liquidated (.03 x. 50 shares= 1.5 shares, with one share credited to my account and the .5 share turned into cash by Arrow: Arrow Financial Corporation Declares Stock Dividend). The two stock dividends have reduced my cost basis to $24.76+ per share according to IB. 

Arrow Third-Quarter Net Income Up 10.1%; Double-Digit Loan Growth Continues

I am looking for the following when reviewing a regional bank stock. 

1. Efficiency Ration Less Than .6% (lower being better)

2. Charge Off Ratio (charge offs to loans annualized) Less Than .4% (lower being better)

3. Non-Performing Loans to Total Loans (NPL ratio) Less Than .5% in an economic expansion with less than 2% during a recession (lower numbers being better)

4. Loan and Deposit Growth

5. Coverage Ratio Greater than 100% (reserves set aside already for bad loans as a percentage of non-performing loans)

6. Return on Equity ("ROE) at Greater Than 10% (higher is better) with return on tangible equity being at least 14% 

7. Return on Assets ("ROA) at Greater than 1% (higher is better)

8. Capital Ratios Significantly in Excess of Minimum FDIC Requirements for Well Capitalized Banks

9. Profitable during recent Near Depression with no dividend cuts (dividend raises better)(shows prudent risk taking, good risk management, and better than average underwriting). 

10. 5%+ E.P.S. annual average E.P.S. growth 

11. Bonus points given for refusing to accept TARP money

12. I would like to see the Net Interest Margin ("NIM") expand but that is just not meaningfully possible in the current narrow spread environment. Now I just hope to see it mostly stableY-O-Y or moving up slightly which is what passes for good now.   

It is not necessary that all measures be present but most of them with some numbers being good or excellent compared to the average bank. 

Those numbers can be found in AROW's Third Quarter Report: 

E.P.S. Growth Y-O-Y: 10.42% excellent for a small regional bank

Coverage Ratio: 243.16% Excellent
NIM: Stable, with a slight uptick Y-O-Y
Efficiency Ratio: Good at 55.79% 
Capital Ratios: Good
Charge-Off Ratio for Quarter: Good at .11%
NPL Ratio: Good at .38% 
ROA Fine at 1.08%
ROE Fine at 12.07%

Sourced 10-Q for the Q/E 9/30/17 

To ascertain how the bank did during the recent Near Depression, a true test for prudent risk management, there is a table in every Annual Report that has five years of financial data. I want to see data from 2007 through 2010 so I just go to the 2010 Annual Report, SEC Form 10-K filed in March 2011.  Earnings and the dividend went up!

10-K at page 14 (amounts adjusted for stock dividends and splits) 

The bank did not participate in TARP: Page 15 

So Arrow is a long term hold as long as these metrics continue, making allowances for an acceleration in bad loans during recessions. 

Only 1 analyst provides an earnings estimate which predicts a $2.43 E.P.S. next year, up from $2.08 this year. I do not know whether that prediction includes a lower tax rate, but analysts have generally refrained from adjusting earnings estimates until they actually have a law to base an opinion. 

Arrow generally pays close to 30% now. 



Regional banks will generally reduce their effective tax rate below the current 35% statutory rate through tax credits and tax free municipal bond income. Some are still carrying forward losses from the Near Depression era.   

This stock ran too far, too fast late last year, going over $40 per share in December, and has been mostly range bound in 2017 between $32 to $35. AROW Stock Chart 

Closing Price 12/13/17: $35.4 +$.2


Mutual Fund Dividend Reinvestments

I have changed my dividend option to payment in cash for all mutual funds except for the following: 

MAPTX Matthews Pacific Tiger Investor Fund
MCDFX Matthews China Dividend Investor Fund
PRPFX Permanent Portfolio Permanent I

There are two reasons for continuing dividend for those funds: (1) all three fill niches in my asset allocation and (2) I have already pared my positions in MAPTX and PRPFX down to my minimum allocation by eliminating positions in other accounts and the position in MCDFX is immaterial. After a parabolic spike in 2015, I eliminated MCDFX by selling 204+ shares for a $821.83 profit (profit snapshot in linked post).

Item # 4 Eliminated MAPTX in Fidelity Account (profit snapshot +$2,573.82)

Item # 2,A. Eliminated PRPFX in Vanguard Account (profit snapshot +$308.84)

PRPFX is an unusual fund. I characterize it as my "disaster" mutual fund. As previously discussed here many times, the fund maintains a relatively constant allocation to gold and silver bullion, U.S. treasuries, high quality corporate bonds, Swiss government bonds, and stocks which the fund categorizes as "growth", "natural resources" and "real estate".

See Pages 8-14  SEC Filed Report



A. Added 50 NYCB at $12.8- A Roth IRA Account:  

History in This Account:

Quote: New York Community Bancorp Inc. (NYCB)

Company Profile: NYCB "is one of the 25 largest bank holding companies in the nation, with assets of $48.5 billion and a market cap of $6.3 billion at September 30, 2017. With deposits of $28.9 billion and 255 branches in Metro New York, New Jersey, Florida, Arizona, and Ohio, we also rank among the largest depositories in the United States." The bank is a leading "producer of multi-family loans for portfolio in New York City, with an emphasis on rent-regulated buildings that feature below-market rents."

NYCB is another out-of-favor bank and deservedly so. 

E.P.S. has been stagnant for several years; and the dividend was cut last year from $.25 to $.17 per share.

Five Year Data Through 12/31/16: 

Sourced: 10-K at page 35

Note that the E.P.S. was $1.13 in 2012 and $1.01 last year.

NIM needs to improve. 

Trading Profits All Accounts to Date = $1,433.95 (snapshots in Gateway Post)

Links to most round-trip trades:

Update For Regional Bank Basket Strategy As Of 10/19/15 - South Gent | Seeking Alpha: Item # 1 Sold 150 NYCB at $18.57 (profit snapshot= $999.66)-Item # 1 Added 50 NYB at $12.79 (2/7/2012 Post); Item # 2 Bought 50 NYB at $11.3 (10/15/2009 Post); Item # 2 Added 50 NYB at $10.90 (10/27/2009 Post);

Stocks, Bonds & Politics: Item # 7 Sold 50 NYCB at $17.51 in a Regular IRA Account (7/28/2010 Post)-Item # 4  Bought 50 NYCB at $10.57 in Regular IRA Account (11/4/2009 Post)

Stocks, Bonds & Politics: Item 2.D. Sold 50 NYCB at $14.25 (3/25/13 Post)-Bought 50 NYCB at $12.94-Regular IRA (12/12/2009 Post)

South Gent's Comment Blog # 5: Sold 50 NYCB at $15.58 in Roth IRA Account (11/16/16 Comment)

Needless to say, this stock has performed poorly over the past 2+ years.

Dividend: When I first purchased NYCB shares (the symbol then being NYB), the quarterly dividend rate was $.25 per share but the payout ratio was  generally over 90%. 

The company cut its dividend rate to $.17 per share, effective for the first quarter of 2016. Dividend History

As I recall, the dividend cut occurred in connection with NYCB's proposed acquisition of Astoria Financial that was eventually abandoned due to regulatory opposition. While that proposed acquisition may have provided the cover for a dividend cut, it was necessary to slash the dividend given the lack of earnings growth and dividend payout ratio. 

At the current rate of $.17 per share, which is not likely to be raised IMO anytime soon, the dividend yield is about 5.31%.  

Likely Changes in CCAR

The Senate's Banking Committee reached a bipartisan agreement to change Dodd-Frank's Comprehensive Capital Analysis and Review rules for banks with assets between $50B to $250B. Banks with assets between $50B and $100B would be immediately released from those rules when and if the bipartisan agreement becomes law which looks likely. 

I have previously discussed the fact that NYCB would be a beneficiary of this change since its assets were at $48.5B as of 9/30/17.  

The CEO of NYCB recently commented that the change is asset threshold for his bank "would facilitate our ability to engage in mergers ... and enable us to grow our loan portfolio organically, as well as through acquisitions". IMO, one bank that may be on NYCB's shopping list would be Valley National, with operations in a contiguous state (New Jersey) and expanding operations in Florida. VLY's stock is also beaten down and has gone nowhere over five years. 

An article in Barron's noted that the elimination of the CCAR rules "would remove a big hurdle to higher profits and share prices for regional banks" impacted by that rule change. Lifting the Lid on Regional Banks’ Share Prices -Barron's

Effective Tax Rate

Page 79 Form 10-Q for the Q/E 9/30/17


Sourced from 10-K

NYCB estimates that a reduction in the corporate tax rate to 20% would by itself be 23% accretive to earnings.

Sourced Page 12:  Investor Presentation

Recent Earnings Report

New York Community Bancorp, Inc. Reports Third Quarter 2017 Diluted Earnings Per Common Share of $0.21 

The bank "reported net income of $110.5 million for the three months ended September 30, 2017, down 4% from the $115.3 million reported for the three months ended June 30, 2017. Net income available to common shareholders also declined 4% from the prior three-month period to $102.3 million, or $0.21 per diluted common share."

The decline in quarterly earnings was attributed to the sale of assets as described below:

The Company’s performance during the third quarter was impacted by several factors. Foremost amongst these was the sale of our mortgage banking business, including our mortgage servicing rights portfolio, which had an aggregate unpaid principal balance of $21 billion, to Freedom Mortgage Corporation. This transaction closed on September 29, 2017, and we expect to see the benefits, including lower expenses, beginning in the fourth quarter."

On July 28, 2017, we closed on the sale of our one-to-four family residential assets covered under our Loss Share Agreements with the FDIC to an affiliate of Cerberus Capital Management, L.P. In connection with this transaction, we received cash proceeds of $1.9 billion, generating excess liquidity which will be redeployed into higher-yielding assets going forward.

Due to the the asset sales, analysts are currently predicting a decline in E.P.S. in 2018 compared to 2017. NYCB Analyst Estimates The decline may not happen for a variety of reasons excluding the favorable change in the effective tax rate. The bank says it intends to redeploy the proceeds into higher yielding assets and the pace of that redeployment may change the future prediction now being made by the analysts. There is also a possibility of NIM expansion next year and lower charge offs from 2017 problematic loans including taxi medallion loans discussed below. 

"Total loans originated for investment increased 24% on a sequential basis, to $2.3 billion, including 50% growth in multi-family originations and 30% growth in commercial real estate (“CRE”) loan originations. The growth in loan originations during the current third quarter reflects improved market conditions and increased demand. The Company continues to originate multi-family and CRE loans which adhere to its conservative underwriting standards."

The bank has experienced bad taxi medallion loans whose due largely to Uber: "Net charge-offs for the current third quarter rose to $40.4 million, or 0.11%, of average loans compared to $11.4 million, or 0.03%, of average loans in the second quarter of 2017. The increase was due to charge-offs on the taxi medallion-related loan portfolio. Taxi medallion loans accounted for $40.6 million of this quarter’s charge-offs compared to $11.3 million in the trailing quarter." (emphasis added) Any lender making taxi medallion loans has suffered high default rates. Overall, the net charge off ratio is below the national average. Charge-Off Rate on All Loans, All Commercial Banks-St. Louis Fed

"Non-performing non-covered assets declined 7% to $84.7 million, or 0.17%, of total non-covered assets at the end of the current third quarter as compared to $91.6 million, or 0.20%, of total non-covered assets at June 30, 2017. Non-performing non-covered loans decreased 16% to $69.0 million, or 0.18%, of total non-covered loans at the end of the current third quarter as compared to $82.0 million, or 0.22%, of total non-covered loans at June 30, 2017." 
The nonperforming loan and asset ratios are good. 
The efficiency ratio is good. The capital ratios are currently better than average.  

Sourced: New York Community Bancorp, Inc. Reports Third Quarter 2017 Diluted Earnings Per Common Share of $0.21 

3. Short Term Bond/CD Ladder Basket Strategy

A. Bought 2 Merrick Bank 1.85% CDs (monthly interest payments) Maturing on 11/29/19

B. Bought 1 Compass Bank 1.5% CD Maturing on 8/30/18 (8 month CD)

C. Bought 2 Toyota Motor Credit 1.7% SU Bonds Maturing on 2/19/2019:

Finra Page: Bond Detail

Credit Ratings:

Moody's affirms Aa3 and P-1 ratings for Toyota Motor Credit Corporation with a stable outlook

Fitch Affirms Toyota Motor Credit Corporation and Affiliates at 'A'; Outlook Stable

Bought at a Total Cost of 99.817

YTM at TC = 1.851%
Current Yield at TC = 1.703%

D. Added 1 Treasury 1.5% Coupon Maturing on 8/31/18-A ROTH IRA Account: YTM 1.525%

E. Bought 1 BP Capital 1.676% SU Bond Maturing on 5/3/19:

FINRA PAGE: Bond Detail (prospectus linked)


Moody's at A1
Moody's upgrades BP's rating to A1; outlook is positive
Moody's upgrades BP for first time in 19 years: CNBC

Bought at a Total Cost of 99.662

YTM at TC = 1.917%
Current Yield at TC = 1.6817%

4. Small Ball

A. Sold 50 of 70 IPG at $20.77

Quote: Interpublic Group of Companies

Trade Snapshot: 

Profit Snapshot: +$81.29

Closing Price Day of Trade: IPG $20.68 +0.59 +2.94%

I held this position long enough to receive one quarterly dividend. 

I am building a non-trading position in my Fidelity account, using commission free trades, and currently own only 20 shares.  I can only average down using my trading rule for this stock there. Stocks, Bonds & Politics: Item 2.B. Bought 20 IPG at an Average Cost Per Share of $18.73 (11/9/17 Post) 

B. Added 15 of the CEF PEO at $18.71-Used Commission Free Trade

Quote: Adams Natural Resources Fund

Sponsor's Website: Adams Funds

This fund went ex dividend for its annual distribution before this purchase. Adams Natural Resources Fund Declares Year-End Distribution; Exceeds Its Annual 6% Minimum ($.88 per share of which $.68 was sourced from long term capital gains)

Adams Natural Resources Fund Announces $18.77 Issue Price Of Shares For Year-End Distribution (that price assumes the broker will not take the dividend in cash and then buy the shares in an open market transaction and instead takes delivery of the shares directly from the fund)

Data Day of Trade (12/7/17)

Closing Net Asset Value Per Share: $22.04
Closing Market Price: $18.7
Discount: -15.15%
Average 1 Year Discount: -14.43%

CEF Connect Page for PEO

Last Discussed: ITEM 1.B.

Last Eliminated: Item # 1 Sold 104+ PEO at $27.06 (8/10/13 Post)

ADAMS NATURAL RESOURCES FUND, INC. - FORM N-Q - SEPTEMBER 30, 2017 (Holdings)(expense ratio .79%)

PEO is currently rated 4 stars by Morningstar.

I am reinvesting the dividend. IMO, energy companies are still in a bear market of unknown duration that started in the 2014 summer. Within the confines of a bear market, there will be cyclical bull moves of relatively short durations.

Analysts expect these energy stocks to rise the most in 2018 as oil rebounds - MarketWatch

Weekly U.S. Field Production of Crude Oil (Thousand Barrels per Day)

Cushing, OK WTI Spot Price FOB (Dollars per Barrel)

5. SOLD $1,000 of VEIRX

Whenever this mutual fund goes up more than $1K, I sell $1K. The value has to be above $51K before I will sell $1K.  

Quote: Vanguard Equity Income Fund-Admiral Class (VEIRX)

Closing Price 12/11/17: VEIRX $78.89 +$0.25 +0.32% 

My last pare was on 11/29/17.

Stocks, Bonds & Politics: Item # 5 Sold $1,000 VEIRX (11/30/17 Post)    

DisclaimerI am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members. 


  1. The stock market turned south today after Senator Mark Rubio (R-FL) said he would vote against the GOP's tax bill unless the child credit was expanded.

    Rubio statement: “I think my requests have been pretty reasonable and consistent and direct. Right now the refundability level is $1,100, it needs to be higher.It’s a pretty straightforward ask. If the refundable portion of the child credit is substantially increased beyond the $1,100 it currently is, I’ll vote for the bill. If it’s not, I won’t.”

    Donald is certain that "Little Mario" will vote for the final bill.

    Since that increase would benefit the lower and middle income quintiles, the powers that be in the GOP now rejected his demand earlier, but negotiations are still ongoing to see what he will accept and what the other republicans are willing to give which appears to be not much if anything.

    The republicans can afford to lose Rubio and Corker who is a definite no and still win passage in the Senate.

    But that would mean keeping Senator Collins in line, and she appears to be willing to vote for the bill at the moment. I would not say she is a 100% yes vote:

    No one else could bolt except for Rubio and Corker which then would require Pence to break a tie vote since all Democrats are expected to vote against it.

    I am assuming that the vote will be taken before Doug Jones has to be seated. It appears that Senator Lee (R-UT) is giving some lukewarm support to Rubio's effort to expand the child credit limit.

    Looking at what has been disclosed as a broad outline of an agreement in principle among House and Senate GOP representatives, it looks to me like they are struggling to come up with all of their gifts to the rich and corporations and remain under the $1.5 trillion loss in tax revenue objective which is an absolute requirement for the Senate to pass the bill now under the budget reconciliation rule that avoids the filibuster.

    The WP is reported that one proposal now under consideration is shortening the time period for the individual tax cuts even further. If that is done, the odds of the Democrats regaining control over both the House and Senate in 2018 go up dramatically.

    In the agreement in principle, the top rate would be reduced to 37% from 39.6%, and that loses $100B in revenue over the ten year period at issue.

    The corporate AMT would be eliminated which the Senate needed as a last minute change to bring its bill under the $1.5 trillion limit.

    The Corporate tax rate would be reduced to 21% rather than 20% but would take effect next year rather than delayed for a year which was in the Senate's bill.

    Unlike the House bill, the compromise would allow for medical cost deductions (unclear on whether this is a keep the current law or modify it). There would still be a deduction of up to $10K in state income and property taxes (which is not going to help at all for those taxpayers whose increased standard deduction renders it more advantageous to claim the SD rather than to itemize or those taxpayers who pay a lot more than $10K in state income and property taxes (don't forget that exemptions are eliminated as well which takes away a good chunk of the SD increase.

    The AMT for individuals is not eliminated but kicks in at $500K for singles and $1M for couples.

    Apparently, the compromise includes the Senate's pass through entity measure, but the deduction is likely to be lower than the 23 percent deduction in the Senate-passed bill."

    The fact that this bill has no bipartisan support means that whatever ends up being in it will change drastically when the Democrats control both the House and Senate with a Democrat as President. That may happen after the 2020 election. The Democrats can use budget reconciliation just like the republican senators to avoid the 60 vote filibuster rule.

    1. It looks like the GOP leadership caved on Rubio's demand for an expanded refundable tax credit which will benefit families who do not owe any federal income taxes. That expansion would be to $1.4K from $1.1K.

      McCain who said he would vote for the bill earlier is back in the hospital and his condition his health status is unclear. If he is unable to vote, then the GOP will need Rubio.

      I did notice a pop in regional bank stocks when the WP released this story about 30 minutes ago online.

  2. I have published a new post: