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Week 67: Sitting Tight

Portfolio Performance

Volatility

I always have a volatile portfolio.  I don’t think that there is any way to outperform the market and not be volatile.  If there is I haven’t found it.

Two weeks ago it soared up 6%.  Last week i gave back all of those gains.

Volatility is just something I have learned to live with.  The important thing is not to let it shake you out of your positions prematurely.  When you get skyrocketing stocks like Nationstar or Impac Mortgage they are bound to have fast and sharp corrections.  What I have to try to do, and what can be very difficult to do, is to divorce myself from the immediate price movement and simply ask myself the question of whether the story is intact and whether the value is reflected.

I am reminded of the following excerpt from Reminiscences of a Stock Operator:

I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but also the intelligence and patience to sit tight. Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.

When a stock is rising the market will try to buck you off with violent corrections.  The key, and the difficulty, is in discerning when something has changed and when it has not, and acting appropriately.

Two new Bank Stocks with Mortgage Banking Business

Both JP Morgan and Wells Fargo reported earnings on Friday.  While those earnings were impacted by shrinking net interest margins, a consequence of the aforementioned rate squeeze, the impact was more than offset by mortgage banking revenue.  The Wall Street Journal had this to say about the results:

Mortgage-lending revenue was up 57% at J.P. Morgan, the nation’s largest bank by assets, and more than 50% at Wells Fargo, which is the biggest U.S. home lender and No. 4 by assets.

After scouring for another mortgage originator like Impac Mortgage to no avail, I have begun to look for banks with strong mortgage banking franchises.  So far I’ve found a couple.

The most interesting of the two is Monarch Financial.  Monarch is trading at a little over tangible book value, only has about 1% non-performing loans outstanding, and should be able to earn about $1 per diluted share this year.  Even though the company has had little in the way of non-performing loans, they have had a few quarters with big loan loss provisions.  Without those provisions, earnings could even be higher.  Most importantly, mortgage banking makes up about 60% of income.

A second bank I found is PVF Capital Corp.  The company also trades below book value, but is still recovering from a large nonperforming loan book and has had negative earnings for the last three years.  Three years ago non-performing loans were 11.14% of total loans, whereas today they are down to 3.6%.  Mortgage banking makes up about 40% of income.

I plan to do more detailed posts on both companies in the near future.

Lightening up on gold

I sold out of OceanaGold this week, and trimmed some Esperenza Resources.  In both cases, the stocks have moved a lot in only a few months and have reached levels where, when I bought them, I would have been happy to have let them go.  I also remain concerned (excited?) that the US economy may surprise to the upside over the next couple of months and that gold may take a hit when that happens so I wanted to take some profits before anything like that happens.

Impac Mortgage

I increased my position in Impac Mortgage last week in the practice portfolio, but this doesn’t reflect any changes to my actual portolio.  Instead, I just realized that I was not reflecting the weighting properly and so I made the adjustment to rebalance.  This happens from time to time. While I try to be diligent and replicate the same trades in the practice portfolio as in the real one, the practice portfolio has this flaw which is that limit orders don’t always fill, even if the limit is passed. So sometimes the two portfolios get out of whack and in the case of Impac Mortgage that became obvious because the practice account didn’t move as much as the actual one when the stock more than doubled.  So I investigated and that’s why.

US Stocks

I am still in the middle of reflecting my US positions in US dollars, rather than having all positions reflected in Canadian dollars.  While this makes things appear somewhat confusing right now, as there are a number of US positions that show up in the Canadian section, that should lessen with time.

Portfolio Composition

Note: I have begun to add all new US holdings in US dollars. This will make it easier to distinguish between US dollar and CDN dollar holdings. However, I cannot move currencies for existing stocks and preserve gains so existing US stocks in the portfolio will continue to show up in the CDN Holdings portfolio
Also note that the Nationstar % Gain/Loss is wrong. There has been a glitch in this number since I sold half of my position.

Click here for the last two weeks of trades.

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