Thursday, January 27, 2011

27 January 2011 Ain’t Got No Home


27 January 2011 Ain’t Got No Home

Clarence “Frogman” Henry recorded this pseudo novelty song in 1956. Influenced by Fats Domino and Professor Longhair, Henry had few nice size hits but also was the opening act for 4 guys from Liverpool in 1964. He had a home in New Orlean’s, can vote there and even run for office there. No such luck for one Rahm Emanuel former Chief of Staff who left the White House to run for Mayor of Chicago. Ya see he has a home in Cook County but he rented it out when he went to DC where he had lived for the last 3 years. He tried to get the renters out, but found that is not as easy as you might expect. Perhaps he thought he could have them expelled like the 300,000 families in the Chinese Valley’s of the 3 damn projects. Fortunately, China does not own that much of the US to Give the White House that much power. So Emanuel tried to claim a “national service” exemption in order to get on the ballot.

The Chicago Board of Elections (LEFT) known for its centuries of accurate and upright vote tabulations, said that “national service’ exemptions apply to voters and not candidates. It has gone to appeal, but the election is Monday. This could be and looks like a major career Oooops. And this guy was our President's right hand man. At least Hilary was smart enough to get an address in New York before she tried to run. The real irony is that one Mr. Obama used the same tactic (residency issue) to remove several people from the Illinois Congressional Ballot he was on in 2000.

Wait too long

What do you think cost most investors to not make money or loose money? Good homework? Bad decisions? Bad timing? Inaccurate information? Bad Stock Tips? None of the above.

Most investors or home gamers either wait too long to do anything or they wait too long to do NOTHING. That is why you have to have a plan and rules. Both take you, with all of your insecurities, egos, ineptness, procrastinative tendencies, and distractions out of play. There are people right now reading this that have told me they want to get in the game. Every time I see them they say, yeah we are going to put some money in the game. Some have been saying this since March 2009. (Dow at 6,600 S & P at 690) They may have missed one of the best rally’s of their and their kid’s lives.

So decide to do it. Have goals and rules so you don’t screw things up! Know what you have to do to find a good place to put your money. Know all the homework involved. Decide a fair value for the stock and try and buy it at that price, not a dime more. If you can’t, don’t buy it. Before you buy it know where on the downside you are going to sell and where at the upside you will take some or all of your profit. Decide all of that before you buy, then go do it.

One of our readers asked us to kick the tires on a stock here is the process in action

HCBK Hudson City Bancorp, Inc. operates as the bank holding company for Hudson City Savings Bank that provides a range of retail banking services. It offers a range of deposit accounts, including passbook and statement savings accounts, interest-bearing transaction accounts, checking accounts, money market accounts, and time deposits, as well as IRA accounts and qualified retirement plans. The company's loan portfolio primarily comprises one-to four-family first mortgage loans for residential properties; multi-family and commercial mortgage loans; construction loans; and consumer loans, such as fixed-rate second mortgage loans and home equity credit line loans, as well as collateralized passbook loans, overdraft protection loans, automobile loans, and secured and unsecured commercial lines of credit. As of December 31, 2009, it operated 95 branches located in 17 counties throughout the State of New Jersey; 10 branch offices in Westchester County, 9 branch offices in Suffolk County, 1 branch office each in Putnam and Rockland Counties, and 6 branch offices in Richmond County; and 9 branch offices in Fairfield County, Connecticut. The company was founded in 1868 and is based in Paramus, New Jersey.

Let’s Look at the fundamentals

Yeah they got a nice Dividend (probably what caught the reader's attention) but look at the payout ratio. Over 50% means they might be straining to pay the 5% dividend. ROE, how management handles the resources is a sickly 9.90% we prefer 25% or better. The price performance for the week, month, half year is yucky. As you will see on the chart in a line or two, it is like trying to catch a falling knife.

Then we go to their last Quarterly SEC Filing

The CEO spends a lot of time explaining that the Reform Act signed into Law by president Obama is changing all of the regulations and they are changing their charter from a savings and loan to a national bank. More importantly, he explains some of the operational pressures of lower interest rates and the GSEs (Fanny Mae Freddie Mac) putting on the interest levels. Here is a highlight:

“Net income amounted to $124.6 million for the third quarter of 2010, as compared to $135.1 million for the third quarter of 2009. The decrease in net income for the third quarter of 2010 is the result of a decrease in net interest income reflecting a lower net interest margin, an increase in the provision for loan losses and higher deposit insurance fees, offset in part by an increase in realized gains from securities transactions. Net income increased 6.5% for the first nine months of 2010 to $416.0 million as compared to $390.7 million for the first nine months of 2009. The increase in net income for the nine month period reflects an increase in net interest income, an increase in realized gains from securities transactions and the absence of the FDIC special assessment offset, in part, by significantly higher deposit insurance fees as well as a higher provision for loan losses.

For the quarter ended September 30, 2010, our annualized return on average assets and average shareholders’ equity were 0.82% and 8.86%, respectively, as compared to 0.93% and 10.34%, respectively, for the corresponding period in 2009. For the nine months ended September 30, 2010, our annualized return on average assets and average shareholders’ equity were 0.91% and 10.07%, respectively, as compared to 0.92% and 10.17%, respectively, for the corresponding period in 2009. The decreases in our return on average equity and average assets are due primarily to the increase in the average balances of shareholders’ equity and total assets for the three and nine months ended September 30, 2010 as compared to the same periods in 2009. (I am just guessing here but think that they had to increase equity balances to meet the baning industry stress tests.) In addition, the decreases in our return on average equity and average assets for the quarter ended September 30, 2010 as compared to the same period in 2009 are also due to a decrease in net income for the same corresponding periods.

Net interest income decreased $35.2 million, or 10.8%, to $290.3 million for the third quarter of 2010 as compared to $325.5 million for the third quarter of 2009. Net interest income decreased primarily as a result of a decrease in the weighted-average yield of our interest-earning assets. During the third quarter of 2010, our net interest rate spread decreased 31 basis points to 1.73% and our net interest margin decreased 34 basis points to 1.97% for the third quarter of 2010 from 2.31% for the third quarter of 2009. Our net interest margin decreased during the third quarter of 2010 as the average yield on interest-earning assets and the average cost of interest-bearing liabilities both decreased while the average balance of interest-earning assets increased. Net interest income increased $27.3 million, or 3.0%, to $939.0 million for the first nine months of 2010 as compared to $911.7 million for the same period in 2009. During the first nine months of 2010, our net interest rate spread decreased 3 basis points to 1.86% and our net interest margin decreased 8 basis points to 2.10% as compared to 2.18% for the same period in 2009.

Market interest rates on mortgage-related assets remained at near-historic lows primarily due to the FRB’s program to purchase mortgage-backed securities to keep mortgage rates low and provide stimulus to the housing markets. In addition, over the past few years, we have faced increased competition for mortgage loans due to the unprecedented involvement of the GSEs in the mortgage market as a result of the economic crisis. The GSEs involvement is also an attempt to provide stimulus to the housing markets and has caused the interest rates for thirty year fixed rate mortgage loans that conform to the GSEs’ guidelines for purchase to remain artificially low.”

You can read it in its entirety by clicking on the link above.

Now let’s look at their chart

Ok this is one of the most hideous charts I have ever seen. It is hard to find a chart that has the price drop through the 50 day moving average like this on has. Especially when the 50 day moving average is heading down by 20%. Every surge in volume has been on the down side. This is a put or short candidate.

So the technical term for this equity would be Ka Ka!

Can’t leave ya with a looser so let got to:

Pick of The Day

MRCY Mercury Computer Systems, Inc. engages in the design, manufacture, and marketing of high-performance embedded, real-time digital signal and image processing systems and software for embedded, and other specialized commercial and defense computing markets.

We tripped over this as we were doing some homework today at lunch (waiting for a contractor to call about an inspection). It should have been open our horizon as they report big two days ago. We did the fundamentals on this charmer and even though the company is named after a deadly heavy metal, or perhaps a Greek God, They Look Great. 

Anyway we are loving the no debt, $3.38 a share cash, great gross margin, and the target price of $24.50 gives a nice margin of safety. (22.8%)

If you are into reading tea leaves (yes I am becoming a technical analysis convert as it has improved my guessing skills) check out the cute little cup in August September followed by the adjustment with low volume. Oooh be still my heart! Woulda coulda shoulda. Then we were off to the races and look at the huge institutional buy in around Christmas. Now we have a little price contraction on LOW volume, which could be setting us up for a nice run.

DO YOUR HOMEWORK. Part of your homework has to be the most recent SEC Filings

Some highlights worth mentioning was a stronger increase to commercial customers and decline in military order. Now the commercial customer seem to be mostly in the semiconductor industry. Most of the segments of that industry are in good shape (except PCs)

Now their drop in military order revolved around the completion of an “UAV” unmanned aerial vehicle aka drone program.

The good news to that story is, with outlined cutbacks to certain Jet programs, the military will be more reliant on Drone technology. This plays well for Mercury long term. The only negatives we could find was a 2009 registration to sell an additional 100 million shares. Also they have a new loan with some negative covenants, but there are well with in ratio and look like than can easily stay clean for the next 12 months. We like what we saw, but follow the link and read the filing. Make sure you check out the discussion about free cash flow.

There are no calls on this baby so we had to use real money but we are in at $19.95. We have stops in place at $18.50 and are looking for a 25% pop before March 31 and then we will re-evaluate.

More Eyes If You Please

Two new readers (that makes 46) have joined us along with a few hundred lookie loos from Rudy and Don from Table 1 at Hanna’s are now getting The Salve Lucrum Blog. They sent a cute piece about Derivatives we will close with tonight. Hope you enjoy:

Understanding Derivatives -- A Primer

Heidi is the proprietor of a bar in Detroit.

She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. Heidi keeps track of the drinks consumed on a ledger (thereby granting the customers' loans).Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit .

By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral!!!At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINK BONDS.

These "securities" then are bundled and traded on international securities markets.Naive investors don't really understand that the securities being sold to them as "AAA Secured Bonds" really are debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb!!!, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.  One day, even though the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.  Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.

Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. (This is Brian interrupting, since the bar is in Detroit, Heidi would have taken her last 50 dollars and had the place burned down and collected the insurance, but I digress.) The bar closes and Heidi's 11 employees lose their jobs.

Overnight, DRINK BOND prices drop by 90%. The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community. The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the BOND securities.  They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.  Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, nondrinkers who have never been in Heidi's bar.

Now do you understand?

Salve Lucrum


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