Tuesday, October 21, 2008

NCC’s second quarter was improved

A bank run was the wild card that could have derailed NCC’s turnaround. The latest FDIC increase to $250,000 has all but eliminated that possibility. NCC has only 5% of their funding in uninsured deposits. Therefore I’m not going to worry about that risk any longer.

Neither should other bank stock investors. That leaves credit quality and capital dilution as remaining worries. Now that the deposit run fears have ebbed, investors should be able to make estimates on the remaining two risk areas and come to the same conclusions that I have. If so, the stock price will rise.

NCC is cheap as a survivor and cheap as an acquisition. At quarter end NCC had a bok value of about $9ish and tangible book of $6.50ish. At a $3 share price it is selling at 1/3 of book and 1/2 of TBV, much lower than most regional banks. That would be warranted if their oan portfolio was going to deteriorate significantly requiring a capital raise with related dilution. but NCC already raise their $7B of capital in April which allows Tier 1 capital to be 11%, the highest of big regional banks. they also have a $4B loan loss reserve. If loans deteriorated sharply and they lost $8B that would eat through the LLR and require another $4B of provision to write-off the loans and an additional $2B to replenish the reserve. That $6B would be equal to $3 per share, leaving $6 still in book value-twice the current share price. I don’t think they will lose $8B and eventually investors and acquirors will come to the same conclusion.

The new Federal capital injection program will augment NCC’s capital and that of other regional banks. Deals will be easier to do and capital will be available. I remain hopeful that the share price will move up over the net 3 months. Ideally there is not an acquisition and the price moves up over the next 12 months as the credit picture gets clearer and I enter capital gains territory.

NCC is a special situation and similiar opportunities will present themselves over the next 5 years. These mispriced investments are where money can be made. The broad market is going to be mediocre at best. There remains too much debt to liquidate and the resultant slowing of consumption will result in a slower growth economy. We are not going back to endless credit, 7 year car loans, large credit card lines, home equity cashouts, and exotic mortgages. Only the credit worthy will have access to cheap credit and everyone will save more. We are entering into an era of anti-consumerism. it won’t be the time to invest in index funds as the overall market will not do well over thenext 5 years.

Additionally we still haven’t learned our lessons. We still pay attention to and invest in activities that have no economic basis. We constantly worry about the VIX and base decisions off this invention. I’ve gone to the Chicago Board of Options Exchange, read the VIX description, and I have no idea what it is. We’ve got another storm brewing in synthetic CDOs. Real CDOs consist of lousy bonds, but at least bonds. The synthetic variety consist of income derived from credit default swaps and are leveraged. Great! Until we work through all of these crazy investments created by brilliant ivy league types and get back to plain vanilla, logical investment structure we will continue to have problems in both the credit and stock markets.

I’m staying cautious because of the forgoing belief and looking for only special opportunities. Remain cautious.

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