Action

Am planning on closing out my SKF and SDS position today. SKF was hedging my JPM, and has offset the decline in that stock. My sense is that JPM will rally into or post earnings. I will keep the proceeds as cash, so slightly less bearish but not bullish. Made 12% on the SDS, and if I think the banks will rally into earnings, hard to see SPY going down. Will keep those proceeds in cash, so a little less defensive, but am quite comfortable with my holdings. Need some individual shorts though.
By the way ACE better rally stock has been disappointing recently and it should really move to BVPS which is going to be around $48. AOCI will be a plus but also op earnings will be strong due to limited CAT losses this quarter. That would be nice as it is my largest position. Glad I took more than half of my RIG position off at $82, as the stock is way back down. BP went up and down thought the dividend yield there makes it a keeper so not touching that. SBUX has been languishing, which one could say about the whole market. I probably need to write calls again. The problem is that transaction costs are a big problem given that my position sizes are not so large for the covered calls.

RIG

I know, I know, well I sold the RIG that i had added at $72 at around $76, and rolled a portion into CPX. As RIG is down more than CPX and my cash position went up, kind of a winner. Anyways, was a mistake to jump back into RIG, but made some money on the trade and am now back to my more defensive posture. APOL and ACE continue to outperform on the downside and with my SKF and SDS and Cash, I am quite comfortable when the market tanks.
Am still doing work on CPX, it is a small position that I will hopefully build as cyclical conditions improve. Valuation is favorable, though there is need for signs of a cyclical recovery for the stock to move. On that front, it looks like RIG count is bottoming but natural gas storage is stubbornly high above the 5 year average, so if anything I am likely to be early.
Still hunting for shorts - it is hard honestly as mean reversion favors longs. I will say MI is still trending down at $4.65, what an opportunity that was. At this point based on my numbers, it would be a buy. That being said it is option like vs. equity given its frolicking with insolvency...

Update

Well, my streak of selling too soon continues with SLM. Now over $10! Aaagh, oh well can't be greedy, but definitely something to pay attention to, as in SLM and XL, I had great timing, valuation support, but chickened out after 50% return. Great numbers, but in this situation, patience and perseverance would have been rewarded. XL over $11 is painful.
Good news, bought back RIG at $72, sold at $83, now back to $76. Wonder how that will work as frankly this is not based on hard analysis. NOW with APOL, I did the grunt work, and that one crushed it today in earnings and is at $72, not bad at all for a pretty low risk stock, at least on economics (risk is regulatory). Bought at $58, so 22% not bad with market basically flat in interim. Now if only ACE could move, it is stuck in the mid forties, I think earnings will be a catalyst as BVPS growth will be apparent. JPM is flat for me as well, though apparently I-bank will be strong. SKF has been painful but still downside support, and am flat on the SDS, also downside hedge. Am about 20% cash as well.

Moves

Sold SLM today 47% gain not bad, probably will go up, there is additional value but I am getting ancy on this market, and have not been following the stock too closely. I also cut in half my RIG position yesterday taking a 30% gain, since it just seems that oil is ahead of itself. That being said still have my BP and it is kind of my inflation hedge. I also sold BECN a legacy position that I basically broke even on over the past 2.5 yrs. At one point I had a 50% gain, and at one point a 50% loss! Also have not been following the stock so out it goes. So have raised a bit of cash. Am thinking of buying a little bit of SDS which is the ultrashort on the S&P to go with my SKF as I look to play defense. It is either that or raise more cash. Not sure.
I do have ACE and APOL which are pretty defensive as well so overall my portfolio is quite defensively oriented. If the market surges from here i will miss out, but on the other hand if it declines will definitely outperform, which as i don't have a job, is much more important given my job prospects are correlated with the market.
Was looking at MI as a possible long, speculative but it needs to come down more and complete its ATM capital raise.

PS: I just bought some SDS, small position between that and the SKF it is about 6% of my portfolio so some downside protection, cash I am at about 30% and the rest is long individual names: ACE, APOL, SBUX,JPM, BP and RIG now that SLM and BECN are gone

KRE

KRE puts nicely in the money, have begun to cover as I think this justified pullback has largely run its course. Most of the junk that rallied in the short squeeze, MI, SNV, RF etc... have come back 30-35%. if broader market continues to decline well I will be wrong but the easy call is done, i believe

COF

Out of COF today, 45% in 2 days not bad. Must be short squeeze. But hey needed that, why not eh....
My stalwart ACE has been underperforming by a ton, back to BVPS but it will come back

moves

Trimmed my SKF position, as it was basically hurting too much and bought some COF yesterday. COF was up 15% yesterday and looks to open up 20% today. Should take the sting away form my SKF losses.
market has shifted from a focus on P/TB to normalized P/E. Makes sense as going from who survives to who thrives? That being said any delay in recovery or any shock and you will get a big downdraft.
Anyways have opted to position my brokerage account more conservatively as I may need that money someday if I don't get a job, and I'm letting it RIP in my IRA.
In all honesty, I left so much money on the table. Bought XL at $3.60 sold at $5.50 now over $10. Bough COF at $11 sold at $14, back in at $22, now at $26. Bought UYG at $2-$2.40, sold at $3.50, now $4.20. I think I saw the valuation opportunity in Feb-March, but I remained too risk averse. Made very good money, but could have made an absolute, once in a blue moon, killing. Very frustrating, an important lesson that I learn AGAIN.

APOL

Sold some ACE today. Still my largest position but time for a trim given its big run. RIG and BP have been very nice for me. Do I take money off the table? I will let it roll i guess. Just bought APOL, bought some puts to protect against regulatory "CAT" which i think is the only real risk there, and sold calls to help pay for the protection. SKF is hurting, I'm down 10% on that, but I am holding it as a hedge vs. the rest of my portfolio. S&P Puts looks to expire worthless, as this rally has kept on going. Still even with SKF and puts etc.. I am still up 10% YTD with a bunch of cash, vs. the market down a bit.
We shall see. SLM coming back a bit, very small position.

SKF

I finally sold my UYG and bought some SKF. I've been feeling concerned about how financials were shrugging off all these capital concerns, and at least now have my portfolio aligned with my feelings. My S&P puts look to expire worthless in May baring a sudden market collapse, who knows?? but at least the SKF will act as a hedge in that regard.
No other shifts, though I did buy SLM, very masochist of me since I always get burned with that, but it is a small position so will not worry too much. RIG and BP performing very nicely for me and should also do well in a downdraft. Am comfortable with ACE obviously, and JPM is my one bank.

XL - shot through the heart

XL is at $7.20. Goddamn, should have have stuck to my guns instead of wimping out at $5.50. This market is crazy, I guess when you see a 60% gain in a few weeks, you are not thinking, just wait a few more and it will be 100%. The velocity just spooked me, I admit it, even though my analysis supported the higher valuation. Plus I think having time on my hands leads to churn, plus I am scared of losing money given my unemployed status.
WFC - well NIM surged, this should be good for all deposit franchises and credit losses lower than expected. WFC had the WB merger so that is hard to project vs. others. Back in July the WFC announcement and dividend raise (an act of bravado, which they had to walk back with a massive dividend cut) sparked the bank rally. Now, we have had a huge rally, is the WFC pre-announcement the end of the rally?. Is it possible that expectations fully capture the losses that are coming in CRE and C&I, or that NIM expansion will counter these losses? A lot of these banks are trading above tangible book now signifying a waning of market capital concerns. Hard to imagine that credit has crested, but time is on the banks side, given that current loan margins are fantastic. Boy we really are setting ourselves up for trouble if this quarter is not the bottom from a macro standpoint. Even so negative GDP growth even if less negative is still going to stoke credit losses. So unless Q3 GDP is positive this is too early to be off to the races. In short I will continue to take profits, and expect a pullback. The alternative is wrapping myself into a pretzel as I try to game expectations.

trade update

WEll, I have done pretty well in this market rally except for the SLM debacle where my calls expired worthless as the stock got cut in half because of the Obama budget proposal. Oh well c'est la vie. I am still well ahead of the S&P this year. Have added RIG to the portfolio, and am looking at other energy names - particularly natural gas, but still have to do a lot more work as I am not up to speed in that sector for sure. Trimmed a little ACE last week and then wrote calls against my position, 50 strike, I just don't see the stock getting there anytime soon, as I think there will be a market pullback, but I don't see ACE going down to its lows of early march either. Have cut my UYG position in half end of last week, also just don't want to ride this back down, as I think bank earnings are going to be bad, and people are going to get very nervous ahead of the stress tests results, gives me a little firepower to redeploy if there is a pullback, but still have skin in the game if i am wrong - how is that for conviction!
Also bought some puts on SPY, 77 strike to give me some short term protection against a market pullback. Probably will get burned with that, since my track record on options stinks, but trial and error is the way to get better!
Oh and pocketed my XL gains, though not at $6.13, rather in the 5.50 range. still not bad given my $3.60 cost. Honestly the stock could go higher, but I rolled into UYG, which probably was cowardly, and left some dough on the table.

UYG

bought some of the UYG today for the PA. I know some financials are in trouble, but the system will survive, so we shall see.
On a more rational note, have been buying ACE over past few weeks. Average cost around $34.5, so almost break even. This one I am quite confident of, though they do hold bank debt, which could be an issue, or not. Hard to know how much is post FDIC guarantee stuff as well.
XL i am breaking even or slightly making money on at $3.60/share so that is one to watch.

XL logic

Anyways had a little flurry of activity in my personal account, bought some ACE (long term hold), some COF (my one bank play, I actually like the credit card overweight, very high dividend yield, and high TCE+reserves), SLM calls (March 10X), and XL (my spec play).
I think XL is interesting for the following reasons.
1. Stock has been pummeled for its investment portfolio. However marks seem reasonable, and any narrowing of spreads will rocket the stock. That being said the company clearly is facing concerns from rating agencies, and is reducing premium expectations for next year as clients shy away in certain long tail lines, and as the company preserves capital.

2. What is exciting here, is that unlike a troubled bank that cannot take advantage of fatter spreads and tighter conditions, pricing in P&C is not that compelling, and XL being forced to pare back may well be a blessing in disguise (though reduced premiums would negatively impact operating cash flows, and if there is a major CAT, the company would have to potentially sell investment securities to pay the losses, thus realizing unrealized losses).

3. Moreover, unlike a bank that would need to grow now to overwhelm garbage assets on their books, XL's reserves look redundant and are an eventual source of capital, so shrinking now is not a bad thing (ex the big CAT, but reduced premiums would hopefully mean reduced exposure).The company seems to understand this and is cutting expenses to match the lower premium expectations. XL's assets have been marked to market, but the liabilities have not, and will provide a source of earnings and capital through reserve releases. In a bank we know the liabilities but the assets have not been marked, at least on the loan portfolio.

4. The key risk is further losses in the investment portfolio triggering multiple downgrades. There are no collateral issues unless there is a two notch cut from AM Best (could trigger some issues with LOC, though those have not been drawn on at present). A two notch cut from AM Best or S&P would also basically force the reinsurance side of the business into Run-off, and would impair the insurance side as well. With that said, given that the company is a trading at 1/3 tangible book of $12.88, and liabilities are likely overstated (favorable reserves), the company in run-off is likely worth more than here. There are also no ST liquidity needs to force a default type scenario, unlike a bank. There is also no regulator stress test overhang etc...

5. Company is still being able to write business, and competitor PRE, though not naming names, said that the January renewal market was stable, both for them and competitors pointing to limited shopping of business at present.

6. The marks on the investment portfolio seem reasonable, and though anything can happen, risk/return is in one's favor. Dividend yield is still 10%, post cut, and dividend coverage from earnings not an issue. It is solely the investment portfolio that is the question mark. If I had to take a stab at a stock that could easily double, this is one I would seriously consider. You would have to get comfortable with the marks on the investment portfolio to proceed

new purchases

Well, I have been away for a time, focused on other stuff, will try to be more up to date with my postings in the future.
Anyways, I am back in on SLM calls, March $10 strike, after making some good money on the Jan calls. The TALF program will be a big boost for these guys, I believe, and that should be up and running soon, I hope. I also bought today ACE, a stock I love that is trading at book with large unrealized losses, most of those should come back, and in any case the stock should trade at a premium to book.
Also bought some XL, and COF. XL is speculative, it is really cheap, and I prefer taking a chance with a company hit hard by securities losses, than a bank with accrual loan losses that I htink will be getting worse. GS and MS have rallied hard because of their MTM assets, and XL has the chance to double. It is up 55% today, but I did not get all of that. COF is well reserved, and CC receivables will be supported by TALF. I like this company and think it has potential going forward, I think the CC losses are more transparent and analysable than CRE and C&I, and am more comfortable with their book vs. other regional banks.

SLM calls

Look at SLM go. As no one reads my blog, no one made money on this but me! weee.... and in a down market.
Nothing new to report, need to start digging for new ideas.

ACE-XL speculation tie up

ACE was up today as was XL. Now XL was up even with a ratings downgrade so must be on sale talk. ACE file a mixed shelf today. So here is my speculation, ACE is going to buy XL and issue common to do so. The price will be close to today's price, and ACE will take a huge mark on the investment securities, so Xl's book value will be written down to pretty much nothing. They get XL's platform some good teams, and very large cost savings, and take out a major competitor. If the securities are not that bad, and they should not be, they get upside on the securities, as the majority of those should come back. They can issue equity above book, so this deal will be accretive on book, and massively accretive on earnings.
You heard it here first! or maybe this is the talk of the town, but i am cut off, sorry.

WABC - a short idea

Just did some work on WABC. Basic thesis very good bank but priced to perfection in an unfortunate location, and will not escape unscathed. Analyst estimated for losses are way too low:

WABC is a very well run institution with conservative lending standards, and a more than adequate capital cushion. The company trades at a significant premium to its peer group (Bloomberg) at 3.4X Price/Book, and 5.25X Price/Tangible Book vs. peers at 1.16X and 2.24X respectively. Other bank indices are trading at even lower multiples, with the Nasdaq Bank index at 1.03X Price/Book, and the KBW bank index at 0.74X Price/Book. The company’s sole area of operations is Northern and Central California, and as the research indicates, estimates for 2009 are significantly too high, as loan loss provision assumptions are much too low. Downwards estimates revisions will lead to significant multiples compression for this institution that is priced to perfection.
In addition, the significant valuation premium (41% deposit premium) makes it very unlikely that WABC is acquired and significantly reduces the likelihood that this stock will lead any bank sector snap-back.
Based on my earnings assumptions and using a modified dividend discount model, WABC should trade closer to 1.9X BVPS, still well above its peer group. This would result in a $27 share price. Given the volatility of bank sector earnings, Price/Book is a more appropriate metric at present.

It is clear that WABC’s credit metrics have been very solid. The company has also largely avoided the most problematic areas: C&D loans are a small part of the portfolio, the company maintained standards on home mortgages (no sub-prime, 80% LTV and full documentation), and has minimal 2nd lien exposure. That being said, CA is the epicenter of this economic downdraft, and conditions have worsened significantly since the end of Q3. Home prices have declined 48% since the peak, making even 80% LTV loans underwritten back in 2005 underwater. Office vacancies are increasing rapidly, unemployment in the State is now at 8.3%, retailers are under severe pressure, and the state is in fiscal crisis. CRE prices are also declining reducing collateral protection in that asset class. This points to increased pressure in CRE, both owner occupied and non-owner occupied, as well as growing pressure on C&I loans. At a recent conference in San Francisco, it was disclosed that pools of performing CRE loans were receiving bids of $0.80-$0.85. Commercial property prices are down 15-35% in the San Francisco/Northern California area.
The consumer portfolio is largely auto loans, and though WABC had solid underwriting, auto prices are down 12% according to the Manheim index. This will lead to a higher severity of loss in that portfolio.
High unemployment and talk of raising the sales tax in California to offset a massive fiscal deficit will put great strain on the C&I portfolio which consists largely of small businesses.
The current CEO has been running WABC since 1988 so a historical look back is worthwhile. NCOs peaked at 0.65% back in 1993. Assuming NCOs peak in 2009, provisions will be highest this year. My loss estimate for the portfolio has NCOs peaking at 1.5% in 2009, and staying high at 1.4% in 2010. The company has stated a desire to keep the allowance over 2% given its geographic concentration, and the allowance peaked at 2.45% during the early 90s. Macro conditions are significantly worse this time around and WABC will surely be impacted to a greater extent than in 1993. Assuming NCOs are closer to the 1993 peak vs. my estimate, will still lead to a greater than 10% shortfall in EPS.
With net interest margin peaking, and a shrinking balance sheet, pre-provision earnings are likely to be flat at best. WABC is no longer buying back shares, and it is hard to see how the company can keep EPS flat to slightly up y/y as according to consensus.
The company’s efficiency ratio is already at 40%, and it is unlikely that the firm can reduce operating expenses to offset the impact of increased provisions and a shrinking balance sheet.

Recent results:
WABC reported GAAP EPS of $0.00 but excluding the impairment on FNM/FRE preferreds, an operating EPS of $0.78 excluding the $0.81 impact of the FNM/FRE charge and $0.03 tax benefit. WABC was able to expand net interest margins by 85bps y/y offsetting the impact of a 12% reduction in earning assets. Total revenues fell 2% linked quarter however, as 3bps of net interest margin expansion was more than offset by a 3% decline in earning assets. Fee income was down 4% from the prior quarter offset by a similar reduction in operating expenses. The company’s efficiency ratio is an impressive 40%.

Valuation:
Street estimates for 2009 of $3.10/share are too high. I forecast $2.37/share Analysts reach that number tweaking several different factors:
1. Continued net interest margin expansion: Most foresee continued net interest margin expansion. Given the already low rates, and increased competition for deposits, it is unlikely that WABC will be able to expand margins further.
2. Street analysts forecast continued reduction in operating expenses. This is unlikely given the already efficient operation that WABC is running.
3. Balance sheet growth: WABC is forecasted to grow its balance sheet, even though the company has explicitly stated its cautious outlook, and has shrunk earning assets by 12% y/y.
4. Drawing down loss reserves: some analysts foresee a reserve drawdown where NCOs exceed provisions. This is highly unlikely when the company has explicitly targeted a 2%+ allowance ratio, competitors are scrambling to increase reserves, regulators are pushing for conservatism, and the economy is declining at a rapid rate.
5. Loss provisions: this last point is the most crucial. Apart from one outlier that is forecasting $20M in provision expense, the street is clustered around a provision expense in the low single digits. Not only does this indicate no deterioration of credit, but also the street, as mentioned above, is factoring a drawdown in the allowance. Both conclusions are very hard to see in this economic environment. My analysis of potential embedded losses in the portfolio point to significantly higher losses. I see charge offs peaking in 2009 at 1.5% of average loans, and provisions in 2009 of $38M or 1.6% of average loans. WABC will likely build the allowance, provisioning more than charge offs in this environment, and losses embedded in the portfolio are likely to be significantly higher than in the early nineties. As previously mentioned, charge offs peaked at 0.65% in 1993. The current environment points to significantly higher severity of losses across the board, and increased frequency.
· It is also unlikely that WABC grows its loan portfolio, as it is more likely to conserve capital against any unexpected losses, particularly from its investment portfolio. Based on my earnings expectations of $2.37/share, WABC should trade closer to 1.9X to 2.0X BVPS. This would still confer a significant premium to its peer group. On a tangible book basis, the $27 target would equate to 3.0X tangible book still at a large premium to its peer group. On a PE basis, 11.2X 2009E is appropriate, given the earnings shortfall and the limited visibility in this environment. Smaller regional banks with limited exposure to capital markets and sub-prime lending have significantly outperformed their larger peers. However as we have seen in the past, the credit crisis began in sub-prime mortgages but expanded to hit other sectors. At present, prime mortgages are under pressure, CMBS pricing points to significant deterioration in CRE loans, and C&I loans are bound to be impacted. Accounting and loan composition have shielded some of the regional banks to date. WABC valuation will appear even more stretched, if its peer group multiples compresses to closer to some of the larger regional banks. Eventually all institutions, even the most conservative will be affected. Though not factored into the analysis, WABC will also have to bear the cost of a proposed sharp increase in FDIC insurance premiums (expected to rise 5bps for WABC, $0.06 impact).
· WABC’s significant premium to the sector makes it an unlikely acquisition target, and its defensive characteristics make the stock unlikely to lead any market snap back. Both attributes provide investors with downside protection.

CMA and others

Was just gearing up to do some work on banks and CMA tanks. Oh well, my basic thesis is that C&I delinquencies and losses have lagged but this will be the first big quarter. Most bank valuations are very low, and with federal funds they may well be able to avoid dilutive capital raises, and be able to wait a few years before raising common. There are some banks that are still trading very rich. WABC is over 5X tangible book. I have to check that one out, because one slip and it will be cut in half. I am sure it has strong capital ratios, but it can still go to 2.5X book.
CMA has been one of my short ideas since summer. Of course the change of rules in september would have killed that position, but in the end they did cut their dividend and will have to do so again. they have grown in TX, but that state is not immune and will be dragged into things. They also have midwest exposure and construction loans, but I am waiting for C&I to fall off a cliff. I think this quarter but Q1 at the latest.

SLM calls

I just bought some January SLM calls at $10 strike. Now I know the volatility is high, but I think there is a big catalyst with the ABCP renegotiation which will happen prior to expiration. With a little christmas rally in the mix (a necessary component unfortunately), I could be money good.
We shall see.

Random musings

NDX down 82% peak to trough, XLF down 77% peak of 38 in 05/2007, and trough to date on 11/21/08. Looks like financials bubble just as powerful as TMT. Unfortunately much more pervasive and interwoven with macro.SPX down 47% peak to trough 2000-2002, SPX down 49% peak to trough to date. Multiples were 2X as high entering last correction, so there is leeway fro even more significant earnings cuts. Based on long term average of 14-15X, looks like $60 for SPX is being build it. That seems reasonable.If credit markets normalize, and massive fiscal stimulus comes through paired with continued monetary creativity, we could be approaching a bottom.. though recovery will likely be slow and painful for broader economy.What do you think?
Still scanning for fresh ideas.