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.

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