US Banks (2008)

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mw
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Post by mw »

Wall Street Journal:

Investors Hide as Banks Come Knocking
Financial Firms Struggle to Get Capital
From Big Players Burned Once Already
In the past several weeks, bank executives have encountered unexpected resistance from investors, who have expressed reluctance to participate in the capital-raising transactions sweeping through the industry, according to people familiar with the situation. Already bruised by big losses and fearing that bank shares haven't yet hit bottom, some of these investors are choosing to tighten their purse strings.

"The window for capital-raising is closing," says Brad Evans, a portfolio manager for Heartland Advisors Inc., a money-management firm in Milwaukee that invests in small, regional banks. "Investing in a bank right now means investing in a large portfolio of loans that are essentially a black box."

The change in sentiment could have sweeping implications for financial institutions that are trying to shore up their balance sheets by issuing stock and other securities to their investors. Some may be forced to lure investors with sweeter terms, further raising the costs of doing these deals.
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Post by kcowan »

But isn't this the natural outcome of the ABCP mess? Why would anybody risk good capital in a US bank? Falling knives are all over the place.

Even the spillover to Canada is tangible.
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Post by augustabound »

Not sure if this has been posted yet. It's up to date to June 18th.
http://financialsector.blogspot.com/200 ... s-top.html
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Post by adrian2 »

Point of No Return or Perfect Buying Opportunity?
The recent declines in many Financial stocks have put them in unprecedented negative territory. Below we highlight historical charts of the percentage from 52-week highs for Lehman (LEH), Wachovia (WB), Citigroup (C), Merrill Lynch (MER) and Bank of America (BAC). At its low point earlier this month, Lehman was 72% below its 52-week high, making it the furthest below it has ever been. Wachovia is 68% below its highs over the last year, and Citi got down to 66% below back in March. Merrill Lynch and Bank of America aren't quite at record territory yet, but they're getting close. Back in 1998, Merrill got down to 65% below its 52-week high, and it is at -60% now. In 1990, BAC was 66% below its 52-week high, and it's at -50% now.
Note the graphs going back 20 years or more. Of course, this time may be different.
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Post by mw »

I'm keenly aware of how far price has moved in my favour as well as how price compares with historical levels. Lately with my US bank short positions I've been trailing profit stops substantially closer to current price - approximately back near the two day high.

Certainly the selling pressure and current prices are on the minds of everyone involved; holders wishing the carnage would stop; shorts, who tend to be somewhat more astute to price movement than the average investor, are concerned about the length of this leg, and long-side traders / "value" hunters are also looking for opportunity, any signal, to buy. When price gets so stretched a bounce of some proportion becomes rather more likely.

Now, with the foregoing in mind, think diabolically for a moment.

We can interpret those long dated charts as if the too-stretched bounce has already occurred, because in fact it did - the LEH blowup initiated a significant rally. Time is compressed in the charts at the link provided, making making it difficult to see the double test which occurred this year.

Price has already met the case which shorts fear most - price approached or hit historical lows and a significant rally ensued. That rally ran out of steam, reversed, and many stocks within the group are now back or below this year's spring low. This is not seen as capitulation but continuation of a strong trend, a down trend.

Having said that I do expect in some names to see price bounces along the way. It still feels to me that price has gone awfully far, awfully fast, and I must be wary of fast, violent, V-shaped bottoming action and take some or all of my financial-sector shorts off table. When it occurs, it will be obvious. No one will know if its "the" bottom or not. Depending on price action I might even start some long positions but will probably restrict my US activity to ETFs given the high risk which will remain regardless of what stock prices happen to do in the interim.

Will I short again? Based on the current picture, yes. A bounce based on price and not proof of improving fundamentals is likely not to hold long enough to see those fundamentals improve.

This market reminds me very much of the tech bubble imploding. Sharp rallies suck buyers in, only to destroy their confidence within months. Clearly finance is not quite like tech circa 2000 but some traits are the same. Except the losses are bigger.

It took more than 10 quarters for tech to move from top to bottom (2002). Speaking of 2002, some US financials / indexes / etfs are but a 10 percent decline away from the 2002 lows in that sector, after just over 4 quarters of decline. It seems likely the sector will try to form a bottom near there. Whether it holds or not is another matter. If forced to guess for entertainment sake only I'll say it will not hold, but that's not how I'll deal with the trade.
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Post by EmperorCoder »

It's funny to see how the market sentiment evolves.

In march & april, even though the general sentiment was negative there was a couple of people calling bottoms in financial stocks, or seeing value picks here and there.

Now, with all the negative press around financials increasing, and a vast majority of analysts saying 'don't buy' or 'it's going ot take decades to recover from this mess', I'm wondering if that should be considered a contrarian indicator.

Moreover, like in every crisis, some players go down, and some players eventually benefit from the crisis longer term (because of the erosion in competition or by cherry picking fairly-valued aquisitions). The old saying 'what doesn't kill you makes you stronger' also applies to companies, I guess.

Which US financials do you think will benefit from the present crisis in the long term ?

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Post by sydney2 »

BAC
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Post by AltaRed »

sydney2 wrote:BAC
Can you expand on why? FWIW, I own a partial position which is currently underwater.

FWIW2, I tend to agree with you (relative to other big financials that is). But BAC may still be paying too much for Countrywide and they may not yet to have a good handle on losses yet to come from defaulting consumer loans. Executives often don't perceive cascading events very well, i.e. the proverbial snowball turning into an avalanche.
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Post by EmperorCoder »

Yeah it might be a little early to see the end of the tunnel for the big banks because of their complex balance sheets.

Personally, I've taken position in a couple of regional banks which I believe are run very conservatively and will step out of the crisis barely bruised.

I had taken a position in BAC early 2008 which I then closed when I felt I did not grasp all the parameters fully. Since then I've seen better value with less risk in regionals, and I'm sticking with them for now.
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Post by twocentsworth »

Care to name those regionals, Emperor? :)
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Post by EmperorCoder »

twocentsworth wrote:Care to name those regionals, Emperor?
Sure. The omission was intentional, due to a lack of time to post. I don't like posting my stock picks without backing them with some analysis.

So here they are:

SIERRA BANCORP (BSRR)

+ Outstanding return on equity (>17%) and return on assets (>1.5%) over a long period
+ Founder is still serves as CEO 30 years later, he owns a chunk of the company
+ The bank is growing organically, 5-year dividend growth is >17%
+ P/E ratio at an all-time low just under 8, does not reflect the growth potential

BANK OF THE OZARKS (OZRK)

+ Outstanding return on equity (>20%) and return on assets (>1.5%) over a long period
+ Management recently reaffirmed its guidance in response to turmoil of other regional banks cutting dividends or raising capital. It has no plans to raise capital, and on track to achieve record interest income in 2008. The company even raised dividends recently during the big banks turmoil.
+ Founder and CEO is still very young, so he's in for the long run. He still owns a chunk of the company.
+ P/E ratio just under 9, does not reflect growth prospects, the company is growing organically and expanding in Texas and other states.

Both banks have also been very aggressive in their bad loans provisioning and generally conservative in their guidance. If anyone is following these banks, I'd be interested in sharing thoughts.
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Post by patriot1 »

AltaRed wrote: But BAC may still be paying too much for Countrywide and they may not yet to have a good handle on losses yet to come from defaulting consumer loans.
BAC is also known as "Bank of Amigos" because it issues credit cards to illegal immigrants. Kind of risky I would think.
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Post by pitz »

patriot1 wrote: BAC is also known as "Bank of Amigos" because it issues credit cards to illegal immigrants. Kind of risky I would think.
Yet a hard working Canadian like myself couldn't even get an account with them when I tried walking into one of their Oakland, CA branches with $1000 cash in hand and my passport a few weeks ago.

WTH?
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Post by kcowan »

pitz wrote:
patriot1 wrote: BAC is also known as "Bank of Amigos" because it issues credit cards to illegal immigrants. Kind of risky I would think.
Yet a hard working Canadian like myself couldn't even get an account with them when I tried walking into one of their Oakland, CA branches with $1000 cash in hand and my passport a few weeks ago.

WTH?
Mehtinks you needed to present a fake SSN and CA DL like the illegals do. OTOH they never want a bank account so that was a dead giveaway.
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Post by pitz »

Mehtinks you needed to present a fake SSN and CA DL like the illegals do. OTOH they never want a bank account so that was a dead giveaway.
The hang-up was actually having a street address in CA, which I don't. I know people who have opened them without proof of address (ie: they use their hotel's address), but since I am white, trying in Oakland, and was flush with the rarest of commodities these days -- cash -- I must've looked awfully suspicious, and they wouldn't budge on the proof of residence requirement (ie: utility bill, which I obviously couldn't provide)..

Hopefully I'm not on a DHS watchlist now :(.
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Post by AltaRed »

Proof of a US address is what all(?) the US banks use as the criteria for being a 'resident' to open an account. A rather weak (dumb) choice for residency but it seems no one else, e.g. IRS, Homeland Security, really cares.
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Post by twocentsworth »

twocentsworth wrote:Care to name those regionals, Emperor?
Thanks for your wisdom on those two, Emperor.
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Post by sydney2 »

A few posts ago AltaRed asked me why I thought BAC was a good buy. I didn't answer because it has always been my feeling that this bank would come out on top, but looking at our own portfolio, we are so far down on this investment that whatever is said would hold no bearing.

However, for the long term we will hold on, they are one of the biggest banks, good dividend, even if they cut a percentage, it should still be ok...unless they cut it altogether and I don't think they will, but what do I know....no crystal ball here. They paid 1B less for Countryside that originally bid, they will get tax write-offs from this, and apparently that is what no one saw going into this merger. So for the time being I will hold it and hope that in a few years this will look like a good move, I would like to buy more at these prices but will try not to press that "buy" button until we see some light at the end of this tunnel.
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Post by EmperorCoder »

EmperorCoder wrote: BANK OF THE OZARKS (OZRK)
OZRK just announced another 8% raise of its dividend.

Some may see it as foolishness in the current market.

What I see is a well-managed company that runs its business properly despite a tough environment.
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Post by kcowan »

Citi manoevres to get around Glass-Steagal restrictions
In a securities deal announced last week, Citicorp, the bank holding company, said it was issuing $47 million of mortgage-backed securities through its Citibank Delaware Inc. subsidiary. The move was aimed at avoiding - some say circumventing - a Federal court order that would have blocked the New York-based Citibank from issuing securities backed by residential mortgages originated by the bank.
-New York Times, March 23, 1989

Maybe something illegal went on back then (or maybe just immoral)?

(Thanks Barry Ritholz & Bill King)
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Post by EmperorCoder »

WFC now yielding 5.5%. Although I don't expect any rosy news ahead, I'm pretty confident the dividend is safe.

As we have seen recently, this one tends to drop just before earnings (drowned in the general bad financial news) and usually comes out with better-than-the-analysts-expected news. Whether this time will be different, I don't know.

They report earnings wednesday. We'll see.
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Post by sydney2 »

I find it hard to believe that with time u.s. bank stocks won't survive and we could look back on this as being a huge buying opportunity, that I missed, but still haven't got the fortitude to jump in again at these prices.

Wachovia today at 9.65 and a dividend of 1.52 is making it so hard to stay out of this market, especially when the loonie hit par today. :roll:
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Post by JaydoubleU »

Wachovia is going to lose $2.5 billion this quarter and eliminate the dividend. Nor is this the end of it. Signs of mismanagement are not inspiring confidence.

That's why.
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Post by Norbert Schlenker »

Nothing can protect people who want to buy the Brooklyn Bridge.
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Post by EmperorCoder »

EmperorCoder wrote:As we have seen recently, this one tends to drop just before earnings (drowned in the general bad financial news) and usually comes out with better-than-the-analysts-expected news.
WFC just announced EPS of 53 cents compared to analyst consensus of 50 cents. Raises dividend. Here we go again.
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