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Millennium Management's largest positions in 3Q 2013

Part 7
Millennium Management's largest positions in 3Q 2013 (Part 7 of 7)

Millennium Management buys PPL, BHI, AEP, CMS, and SRE and sells DRYS and NYCB—13F Flash G

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Millennium Management is a global investment management firm with approximately $20.1 billion in assets under management and offices in the United States, Europe, and Asia. Founded in 1989 by Israel Englander, it employs a global multi-strategy investment approach, opportunistically engaging in a broad array of trading and investing strategies. It’s structured to allocate capital globally across a diverse set of strategies involving a variety of predominantly liquid asset classes. It focuses on generating uncorrelated returns by engaging and overseeing over 140 specialized trading teams, each of which pursues specific strategies.

In this seven-part series, we’ll go through some of the main positions Millennium Management traded this past quarter.

Its largest buys in 3Q 2013 were PPL Corp. (PPL), American Electric Power (AEP), CMS Energy (CMS), Baker Hughes Inc. (BHI), and Sempra Energy (SRE). It sold Dryships Inc. (DRYS) and New York Community Bancorp Inc. (NYCB).

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Why sell New York Community Bancorp Inc. (NYCB)?

New York Community Bancorp Inc. generated GAAP earnings of $114.2 million, or $0.26 per diluted share, in 3Q 2013 down from $128 million and $0.29 per diluted share in 3Q 2012. Total revenue was down 8.8%, to $478.4 million. The reduction in earnings was primarily due to lower mortgage banking income, as a further rise in residential mortgage interest rates in 3Q continued to discourage refinancing activity. The impact of the decline in mortgage banking income was, to a large degree, offset by the benefits of strong prepayment penalty income and robust production in the company’s multi-family lending niche.

Its assets rose $1.6 billion from the year-end 2012 balance to $45.8 billion at September 30, 2013. Most of this growth occurred in just the last quarter and was driven by the production of multi-family loans in the company’s traditional lending niche. However, activity in the mortgage banking space remained weak. Sequentially, rate-lock volume fell 50.8%, to $1.2 billion, and as a result, mortgage banking income fell 30.2%, to $16.2 million, during this time. NYCB said the declines are consistent with those of other banks with mortgage banking operations and aren’t unique to NYCB Mortgage Company.

It originated $3.4 billion of loans held for investment, including $2.6 billion of multi-family loans. In contrast to the residential housing market, where loan demand has significantly fallen, demand for multi-family loans has been strong throughout 2013. The increase in demand and production has largely been driven by an increase in property transactions, as the economic environment in the Metro New York marketplace remains very robust. This in turn has given rise to a solid stream of prepayment penalty income, as reflected in the levels NYCB recorded to date in 2013.

Non-performing non-covered assets declined $54.7 million sequentially, to $196.9 million, representing 0.46% of total non‐covered assets at the end of September 30, 2013.

The company declared a quarterly dividend of $0.25 per share with its earnings release. Analysts are currently positive about the stock as the company is expected to gain from a strong assets portfolio, diverse revenue sources, and a robust dividend policy. Its competitors include JPMorgan Chase (JPM), Astoria Financial (AF), and Wells Fargo (WFC).

New York Community Bancorp, Inc. is currently the 20th largest bank holding company in the U.S. and a leading producer of multi-family loans in New York City, with an emphasis on apartment buildings that feature below-market rents. The company operates two bank subsidiaries—New York Community Bank, a thrift, with 237 branches in Metro New York, New Jersey, Ohio, Florida, and Arizona; and New York Commercial Bank, with 35 branches in New York City, Westchester County, and Long Island, including 18 branches that operate under the name Atlantic Bank.

Millennium Management buys PPL, BHI, AEP, CMS, and SRE and sells DRYS and NYCB—13F Flash GEnlarge Graph

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Millennium emphasizes diversity in asset classes, industry sectors, and geographic boundaries and it invests in a variety of domestic and foreign equity and debt securities, asset-backed securities, currencies, futures and forward contracts, options, and other financial instruments. Its approach is to prioritize capital preservation. It aims to achieve absolute returns, rather than outperforming a given benchmark or asset class. It capitalizes on opportunities in a diversified portfolio while minimizing risk. An important feature of Millennium’s approach is that it doesn’t make firm-wide, concentrated investments. Each of its trading teams focuses on the specific opportunities and strategies it specializes in, subject to the company’s overall risk management and hedging of aggregate exposures where appropriate.

Millennium founder Israel Englander has over 35 years of experience in securities and derivatives across a broad range of instruments and strategies. A Brooklyn native, Englander earned a B.S. in finance at NYU before dropping out of the university’s MBA program to work full-time on Wall Street as a trader and floor broker at the American Stock Exchange.

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