Tuesday, September 30, 2008

Where are the NCC bulls?

I usually do well in the market when I leave town. It didn’t work that way while I was in LasVegas! National City has come under extreme pressure and now sells for only about $1.40.

I’ve written why I believe the company is undervalued and won’t reiterate my investment thesis. Over the past two days 7 analysts have raised ratings for NCC. All have said NCC is in no danger of failing and not like WM and WB. The company has again stated that it has ample liquidity, capital, and is still growing deposits.

Only several days ago the company converted their newly raised preferrd stock into 1.4B shares of common stock. This stock was raised at the equivalent of $5 in April. The owners are institutions that had a look at the books. They shouldn’t be among recent sellers at under $3. Their were 700M shares outstanding before the new 1.4B. Over 500M have changed hands on Friday and Monday!! Short selling has been banned so it hasn’t been a bear attack. Who is remaining as a seller? We should be near the end of selling pressure other than index funds. I think NCC is set for a rise as their shouldn’t be any sellers left.

If they don’t have a deposit run that isn’t supported by the Fed and FDIC, this stock will go higher. We are in historic times and betting on NCC is getting dicier daily, but I believe we go higher from here as the ownership group should be supporting the stock from here on out.

I hope this is the logic of a crusty credit analyst as opposed to the views of dice roller with a Vegas system.

Saturday, September 27, 2008

I hope NCC doesn’t put me in line

I’ve forgotten about BUD and concentrated on National City this morning. Another analyst, Fox Pitt, raised the stock to Outperform before the market opened. The JPM marks on the WaMu portfolio were not terribly out of line with what NCC could handle quite easily.

However, a run was the straw that broke the camel’s back at WaMu. Now WM was only 1/2 funded by deposits and their debt was shakier than NCC’s. NCC is a net seller of fed funds and euro dollars. They also have about 3 years of cash at the holding company level to handle future years debt maturities without upstream dividends from their banks. The fed’s discount window can fund any deposit run, within limits. So everything should be ok. But investors are running for safety today and they don’t care. They don’t want to be wiped out like the WM shareholders.

You may see me on the breadline or at your doorstep if NCC does follow WM. I’ve bought 3 times so far today and it keeps going down. I’ll probably put some more money to work before the day is over. then I’m off to Vegas to visit Neil. Gambling out there will be childs play.

Friday, September 26, 2008

Bud may look this good tommorrow

A press release today announced the closing date of the WWY deal. It is set for October 6. If it closes then, and there isn’t any reason why it shouldn’t, I will have earned about a 14% return. Sure beats a money market fund or short term bills.

I’m interested in InBev”s proposed acquisition of Budweiser. The arbitrage spread is about $3.50. The deal price is $70. Tommorrow could be a terrible day in the markets. then again it could be a barnburner. If it stinks, due to the WaMu failure/takeover and the disintigration of the wall street bailout, the market may take BUD down to the $65 range. That potential $5 spread gets interesting.

The BUD deal isn’t as clean as the WWY acquisition. The FTC could come under pressure from Missouri and other stakeholders and the deal could get nixed. The Europeans shouldn’t be a problem. Financing, per InBev is committed. But, in this crazy credit market who knows. Deals can fall apart.

If I buy and the deal falls apart, the stock will retreat to the $55 range. I owned the stock before and I’d be happy to own it again at that level. If the deal closes before yearend I’ll get a return, like WWY, that is far superior to short term yields.

Lets see what tommorrow brings. I may end up with some BUD and some more NCC if it gets through into the WM rout.

Thursday, September 25, 2008

The Bailout Legislation can’t prevent recession

Bull markets don’t manifest themselves in 200-300 point moves in the Dow. they creep upward over time. 300 point moves are symptomatic of bear market rallies. Lately we’ve had seesaw movement, but we could see several big up days and that would be a good time to continue to lighten up in equities. I do not think there is any danger of missing the next bull leg any time soon. The market may discount a lot, anticipate the future, and turn upward six months before the actual economy does but we are more than six months away from prosperity. Again, we aren’t falling off a cliff, but we’ve got at least another year of bad times. So, I continue to be light on equities, look for “singles”, and keep my speculative plays to a minimum; and watch those closely as I intend to be huge index buyer when the time is right.

The “singles” are trades like WWY that has given me $1.50 over the past couple of days. Additionally I’ll get .35 divident about October 11th. The deal should close before yearend producing good use of cash as opposed to TBills yielding zero lately. The market will give more chances like Wrigley which I view as non-risk since I get my entire capital back soon as it isn’t dependent on Mr. Market.

I only have two, long speculative positions at present, SMBl and NCC, and I’m pleased with both. Smart Balance has moved up nicely in this bad market.They have received two new BUY recommendations over the past two days which is encouraging. I’d consider buying more if it were to pull back with the general market, but so far it has gone up. That feels good.

National City has also performed very well, up 25% over my basis.It to has been recommend as a BUY by Goldman Sachs several days ago. More importantly it wasn’t downgrade by Sandler O’Neil when they reevalueated regional banks. oppenheimer also took a look at the banks and lowered many. Those external moves are comforting.

The company’s balance sheet is also somewhat easier to understand now. Shareholders officially approved the conversion of $6B of preferred stock into 1.4B common shares. All of this was know since April, but not official. Now we can see a bank holding company with a 11B market capitalization and a book value of approximately $9, plus a Loan Loss reserve of 3% of loans outstanding.

The bailout cannot hurt NCC. If they can offload loans at prices that reflect current reserving it will be wonderful. The government will likely be more generous than the vulture buyers that have currently looked at portfolios in the marketplace. NCC has said “no thanks” to current pricing. A $3.5B LLR is huge and even though they have a huge amount of bad loans NCC is close to being fully reserved.they’ve said that they think the maximum remaining losses are about 2.5 B. If accurate, that would leave them with a clean book, normalized earnings, and a LLR of still slightly over 1% which is considered adequate for commercial banks.

The bank has a “liquidating Portfolio”, the businesses they’ve exited, of about $20B. This is where the biggest problems reside. All of the loans or loan types are not bad, but they could have issues. About half are nonprime and construction. These two are manageable as they are secured and many will pay and those that don’t will result in loss, but not total loss. They should be done with the construction portion soon and will work throgh any resultant losses over the next several quarters. the subprime portfolio will likely be sold to the government, hopefully at the reserved amount plus a little.

The big boogieman is the “national home equity” portfolio that amounts to about $10B. One-half was originated for portfolio and one-half for sale. While both are risky, the “for sale” half has performed worse. Delinquencies here lead to losses as the collateral gets “iffy” given falling property values. So far, charge-offs haven’t been gigantic. But they could get that way.

Events look positive for NCC, but the 3rd quarter credit results will start to clear up the picture. Hopefully, the past due loans and non-performers will have stabilized, the bank’s view of remaining loss will not increase, and the loan loss provision will be down significantly. If those things happen we have an over-capitalized bank that just several days ago received stockholder authority to increase its shares to 5B which means they could use stock and current excess capital to double its size through acquisitions in the resolution of the nations bank crisis.

Wednesday, September 17, 2008

Gold is your friend

The only good news seems to be gold and a nearness to the bottom. The S&P is nearing the point where it may make sense to move out of cash and into a S&P index fund. I haven’t done that yet, but I’m thinking about it.

In the meantime I keep buying WWY and the market has given me even a better deal as it now is back to $78. That’s $1.50 off the price of two days ago and $2 at closing. Financing is locked in, the Euros have approved it, and the American regulators can’t be too far behind. The deal should get done this fall. The main benefit is that it’s safe. I won’t get rich off this deal, but it won’t go down like the rest of my long portfolio.

The Bud deal has also developed a big spread, but it has more hair on it than WWY. InBev says the financing is firm, but you do have regulatory risk. I’m staying away from arbitraging this asquisition.

Every two or three minutes I reassess my position in National City. I’ve become a big believer in this bank holding company and have acquired my stake at a few pennies over $4. But it now trades for quite a bit less.

Yesterday I listened to their Chief Credit Officer on a panel discussion on loan losses and he was articulate and knowledgable. I was heartened. Today I reviewed the Q2 balance sheet and reminded myself that they have a very small amount of fed funds and repos that need rolling. The holding company has enough cash to fund all debt payments for several years. So liquidity should be fine; and the Fed is standing by in case the press scares depositors into a run on the bank. I also reconfirmed that they have a very small investment portfolio and it isn’t toxic. Their fannie/freddie preferred exposure is less than $10M. I don’t know their swaps/derivitive exposure and i worry about that.

Lower short term funding rates helps NCC and lower refinancing mortgage rates should help mortgage and heloc customers. The heloc refis could really be of benefit to NCC. If a lot of mortgages/helocs get refi’d to the government, even with a haircut, that starts putting the balance sheet in order.

Anyhow, I bought more today and continue to be either really smart or dumb as dirt.

Monday, September 15, 2008

Was it the scotch or the market?

I spent a beautiful fall day at a Prep golf outing at OCC. I played decently and felt good as I left the club after good camaraderie, tasty food, and a few cocktails. The world was good. Then I arrived home. The dog was glad to see me. Then I turned on the computer and CNBC. What a terrible day.

I am eternally grateful to be mostly in cash equivalents as my equities took a beating. The television is telling me that we will see another vomit inducing day tomorrow as AIG bites the dust. WaMu and Wachovia are in queue and they will be the subject of panic soon. The big scare will be determining the impact of all of the derivatives, swaps, and insurance contracts and guarantees written by AIG and Lehman. It’s about to get scary. capitulation can’t be too far away. it may soon be time to buy, but not yet.

In the meantime, this morning I bought more Wrigley with additional cash that i had available. WWY has been trading at $79.50 and will be bought by Mars at $80. It traded off .50 in the early mornig frenzy. We’ll get that .50 back soon and another .50 in the next 60-90 days. This isn’t exciting, but I’m not going to lose money on WWY and I want to have money for stock purchases when all the credit disasters shake out.

Saturday, September 6, 2008

A bailout shoud put a floor under housing values

All the leaks say a bailout of Fannie and Freddie is imminent. The majority of speculation affirms the Treasury’s assumption of GSE debt [ a no-brainer ], plus the leaving of preferreds protected while diluting the common with the new government equity. The common should be wiped out. I can’t find any difference between FNM common and Continental Illinois or IndyMac common. Those holders bet wrong and they should lose, not just lose almost all. The Preferreds should lose also, even if it hurts financial institutions that were allowed to use those shares as regulatory capital. But I guess that would be embarassing and inconvenient. So our leaders will say that those investments are good with a waive of the wand.

Is this rescue wise? Who knows? They don’t ask Crusty and without my Carnac turban on I can’t divine the future. It certainly pushes gazillions more obligations out to the future along with medicare, social security, and the normal treasury obligations. We had better remain the world’s financial bastion.

But a rescue may help NCC. I don’t think it will help the market in general, the remainder of 2008, as I don’t believe a housing bottom will take hold that quickly and, even if it did, and it can’t compensate for the tax loss selling and Obama selling that will accelerate as we head toward year end. Any rally will be sold into to harvest losses and current long term capital gain rates. But a slowing of the decline in real estate values increases the probability that NCC’s loan loss reserves are adequate and it’s capital sufficient.

The bailout will stop the foreclosure bandwagon on guaranteed loans as the new GSEs will restructure the individual loans to a level that the borrower can pay, honor the guarantee to the bondholder, and stuff the taxpayer, down the road, with the shortage. The avoided foreclosures will slow the amount of foreclosed homes on the market and start to stabilize prices. Non guaranteed homes will still be foreclosed, as will HELOCS, but the numbers will become more manageable. If the national builders don’t go bullistic, and it is up to the banks and wall street to monitor them, home inventory should start to lessen and prices stay at present levels.

Falling prices are the HELOCs worst nightmare and NCC has a boatload of home equity loans. Their subprime and builder loans are less of a problem. The HELOC book is the dangerous one and the main reason they have set aside so many reserves. If home values stabilize it gives NCC a chance to get out of lots of their bad deals with smaller losses vs complete losses if prices were to continue to decline.

So here is the new plan based upon the upcoming GSE bailout. I will make lots of money on NCC and hold the stock until a future Congress again lowers the capital gains rate and death tax which will allow my family to move to New Zealand and avoid the financial reconing that has to eventually be faced in the USA. I hope my kids like lamb.

Different subject, but I’m amazed how well SMBL has behaved this past week in face of the market’s turbulence. I don’t know what that means, but I think I will slather some on a piece of rye bread and make me a sandwich and go watch some football.
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