Taking Stock: For Sale-North Korean Bonds, Iraqi Dinars and a Cool Bridge

Dear Mr. Berko: Please give us your thoughts on First Commonwealth Financial (FCF-$5.77), which is here in Pennsylvania and which is where we have our checking accounts. Also, give us your opinion of Popular Bank, which is in Puerto Rico.

My brother has worked for Popular Bank for 11 years, and he believes this bank is going to have a strong recovery in the coming two years. He also suggests that we invest $17,000 to buy $100,000 face value of North Korean bonds, which we can buy from the broker his bank uses. He thinks that because of the change in leadership and an agreement to talk about nuclear issues, the new leader will pay off these bonds at 100 cents on the dollar plus accrued interest. What do you say about this?

--GK in San Antonio, Texas

Dear GK: An acquaintance who works for the foreign bond desk at Goldman Sachs told me that North Korean bonds have had a mild uptick in activity since the Enduring Most Highly Esteemed, Glorified Loved and Wondrous Kim Jong-il recently kicked the bucket, passing power to his Venerated, Cherished, Exalted, Heroic, Eternally Loved and Adored son Kim Jong-un. The bonds, issued in 1970, now trade at 14 cents on the dollar. And the interest accrual, since their 1984 default, amounts to more than 500 percent of the principal in unpaid interest. So if North Korea makes these bonds good, current buyers will enjoy a payoff equal to the combined payout (in Euros) of the U.S. Power Ball, the Irish Sweepstakes and the National Lottery of Elbonia.

Some believe the death of Kim Jong-il has paved the path for North Korea to participate in the International Chamber of Commerce and World Trade Organization. However, most observers believe that camels will quote verses from the Koran before that happens. The leadership of North Korea has really done a fine job of managing their country, its industry and its economy. Most North Koreans are happy as hogs on ice. The divorce rate is negligible, and few babies are born out of wedlock. Crime hardly exists, everyone has good medical care, there is nearly full employment, their schools are well run, there are no slums or ghettos, drug use is nonexistent, their politicians do not rape the country, and contrary to Western propaganda, the people are not starving. Maybe we can learn something from the North Koreans.

Meanwhile, those bonds are being pushed by some of the same snake oil salesmen who were selling Americans trillions of worthless Iraqi dinars a couple of years ago. GK, you don't need any more brothers like this one.

POPULAR BANK (BPOP-$1.58), with 309 branches in Puerto Rico and 131 in the U.S., finally made a profit of 11 cents in 2011 after a four-year string of draining losses. This year, BPOP thinks it will earn 40 cents, completing 2012 with $40 billion in assets, $26 billion in loans, net interest income of $1.5 billion and a $4.29 book value, all of which will have increased 10 percent from last year.

Contrary to your brother's sanguine outlook, BPOP is on a slow recovery. In about five years, as loan activity rebounds nicely, return on equity could improve to 15 percent to 16 percent, return on assets could reach 2.9 percent, and earnings could come in above $1.20 a share in the coming year. Business on the island appears to be gaining appetite for market expansion, and attractive real estate evaluations seem to be emerging from the recent downturn. I think the short term (18 to 24 months) is neutral, but the longer term could be promising. And a 1,000-share purchase may be worth $10,000 by 2016 or 2017. It's a good gamble.

FIRST COMMONWEALTH FINANCIAL (FCF-$5.77), a Pennsylvania bank that operates 116 branches in the Keystone State with 1,700 employees, managed to move 85 percent of its problem loans off of its books last year, causing 2011 earnings to tumble about 40 percent. And now that credit quality is well on the mend, better economic conditions are on the horizon and credit costs are declining, FCF anticipates good growth over the next few years. Some brokerages believe FCF will earn $1.19 by 2016 and raise its dividend to 48 cents, and that the shares could trade in the high teens or low $20s. FCF also appears to be a good speculation.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko @yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www. creators.com.

Copyright 2012 Creators.com

Published: Thu, Mar 29, 2012