U.S. Bank Shares: Pump Almost Over, Get Ready for the Dump 21 comments
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For the past couple of weeks, bank shares have grown in share price faster than a steroid-induced bicep. There has not been much reported by the media in terms of negative news about the U.S. financial industry from Ben Bernanke, bank CEOs, or even the Federal Reserve, even though the bank stress tests resembled a public relations campaign much more than a stress test. Despite the rosy picture painted by the financial media of the U.S. banking industry and the consensus that “the worst is behind us now” by financial executives, the 3-ring circus that is the U.S. Federal Reserve, the U.S. financial industry, and the U.S. Treasury still can’t seem to get their stories straight.
Consider the following highlights (or lowlights depending on your viewpoint) from a story released by Bloomberg on May 11th:
“Bank of New York Mellon Corp., Capital One Financial Corp., U.S. Bancorp and BB&T Corp. will sell shares to repay U.S. aid after stress tests showed they don’t need additional cushion against a deeper recession. BNY Mellon, the world’s largest custody bank, said today it will sell $1 billion of stock in a public offering and may use the funds to repurchase preferred shares sold to the U.S. Treasury under the Troubled Asset Relief Program. Capital One said it would sell 56 million shares of common stock to raise as much as $1.55 billion, U.S. Bancorp said its sale would total about $2.5 billion and BB&T began a public offering of $1.5 billion of stock while reducing its dividend.”
“Regulators examining the 19 largest U.S. lenders last week said the four firms wouldn’t need more capital to survive a deeper, longer recession. U.S. Bancorp Chief Executive Officer Richard Davis and BB&T CEO Kelly King had both said they wanted to repay their $6.6 billion and $3.1 billion in TARP funds as quickly as possible. BNY Mellon got $3 billion from TARP.”
“This was something that was really hanging over the group, so a lot of peoples’ viewpoint on it is that, ‘Hey, the worst-case scenario got taken out, this group’s going to still be around,’” said Kevin Fitzsimmons, a Sandler O’Neill & Partners LP analyst. “
“Capital One, the McLean, Virginia-based credit-card lender that received $3.56 billion from TARP, said in a statement it would sell shares at $27.75 each, an 11 percent discount to the bank’s $31.34 closing price on May 8. The shares dropped $4.24, or 14 percent, to $27.10 at 4:03 p.m. in New York Stock Exchange composite trading.”
“KeyCorp, which the government deemed needed an additional $1.8 billion in capital after the stress test, today registered to sell as much as $750 million in common shares. The bank said it expects to raise about $739.4 million from the offering after expenses and commissions.”
“Cleveland-based KeyCorp, which last month slashed its dividend to 1 cent, said that because of the economic and regulatory environment the company didn’t expect to increase the quarterly dividend “for the foreseeable future and could further reduce or eliminate our common shares dividend.”
“We firmly believe this action is in the long-term best interests of our shareholders and our company because of the risk and uncertainty associated with being a TARP participant,” BB&T’s CEO Kelly King said in a statement. King said the decision to cut the dividend was “the worst day in my 37-year career.”
“Banks that accepted TARP money are subject to government oversight and restrictions on compensation that that they say put them at a disadvantage to competitors. Banks that want to repay the funds must get approval from the government and show they can sell debt in the public market without federal backing.”
“U.S. Bancorp also plans to sell $1 billion of five-year notes without a government guarantee as soon as today, according to a person familiar with the offering who declined to be identified because terms aren’t set.”
“Wells Fargo & Co., which the government said needed $13.7 billion in additional capital, raised $8.6 billion selling shares last week, more than planned. Goldman Sachs Group Inc. in April, before stress test results were released, said it would raise $5 billion to repay federal rescue funds. Principal Financial Group Inc., the Des Moines, Iowa-based life insurer, today said it would offer 42.3 million shares to raise funds for “general corporate purposes.”
“Morgan Stanley last week raised $8 billion by selling stock and debt. The stress tests found that New York-based Morgan Stanley needed $1.8 billion in additional common equity as a buffer against potential losses.”
So let’s analyze the most pertinent points from above:
Bank of New York Mellon Corp. (BK), Capital One Financial Corp. (COF), U.S. Bancorp (USB) and BB&T Corp. (BBT) will sell shares to repay U.S. aid after stress tests showed they don’t need additional cushion against a deeper recession. If there is a better example of an oxymoron, I don’t know one. So if these four financial institutions don’t need any more capital whatsoever, why do they need to execute significant secondary offerings that will inevitably massively dilute shareholder value. If they are so well capitalized as the stress test results indicated, why can’t they repay the TARP money from operational earnings?
Banks that accepted TARP money are subject to government oversight and restrictions on compensation. BB&T’s CEO Kelly King stated that he was cutting dividends and diluting shareholder value by offering another $1.5 billion of stock to help payback TARP money more quickly because it was in the best interests of shareholders. US Bancorp is conducting a secondary offering of $2.5 billion of new shares as well as an additional $1 billion offering of corporate debt and Capital One is offering $1.55 billion of more shares.
Since when is slashing dividends and diluting shareholder stock in the best interests of shareholders, unless the shareholders are the executives that have used this pump and dump scheme to dump stock at artificially high prices and now can begin the process of paying back TARP money so they can start raising their compensation levels to obscene, exorbitant amounts again?
To date, Wells Fargo (WFC) & Morgan Stanley (MS) have moved the quickest of all financial institutions to use their artificially elevated stock prices to already complete respective secondary offerings of stock (& debt) of $8.6 billion and $8 billion.
Capital One issued a statement regarding a secondary offering of shares at $27.75 each, an 11 percent discount to the bank’s $31.34 closing price on May 8. An 11% discount to market prices at the time of a secondary public offering announcement is huge and always in the worst interest of current shareholders. It is not rare for well- run companies to issue secondary offerings that are even above market share price in the interest of protecting their current shareholders. A 2% or 3% discount is sometimes understandable, but by offering a huge discount through a massive secondary offering, executives reveal the belief that their shares are overvalued.
In a pump and dump scheme, there is always a phase II. Note the urgency of many financial institutions to complete their secondary public offerings of stock and debt as soon as possible. This urgency is a classic sign of a pump and dump scheme as it signifies that the rapid rise in current bank share prices have been built on zero fundamentals and is thus unsustainable. Now that the pump scheme is largely in play already or in some instances, has even been completed, get ready for phase II - the dump.
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"Since when is slashing dividends and diluting shareholder stock in the best interests of shareholders"
The smartest thing the banks can do right now TO BENEFIT SHAREHOLDERS is to raise capital. the preferred coupon to the TARP is in the way of ever being able to increase buybacks or dividends as things improve. They need to clean that up and pay back the gov so they can get back to business. Smart managers sell stock when they can, and right now, these banks are able to sell stock easily. The secondaries are being placed so quickly that the roadshows to promote the offerings are being cancelled. It would be scary if the banks didnt use this window that they didn't have just 7 weeks ago.
Or is it simply rats leaving a sinking ship.
If the stock's price is higher than tangible book value, and if there are opportunities in the lending market to put funds to work, how exactly is raising equity dilutive?
Why in the world would a shareholder EVER want the company he/she invests in to be at the whim and wish of the government? There is no contradiction here. If you believe the stress tests (another issue entirely) those companies don’t need additional capital. In many respects, they are raising new capital simply to replace that which the government gave them under TARP.
I don’t have a lot of USB in my portfolio but if they need to dilute my shares in the short term to pay back the TARP (and all its strings) then so be it. If you’re a dividend investor it might not be such a good deal but I’m not. I’m in it for growth and value and USB is among the better financials in that regard for the long term.
1. It is important to differentiate the Wall-Street "investment" banks from "regular" commercial banks.
-- The Wall-Street banks do NOT create any value for anybody except for their executives. Their activities were/are highly detrimental and toxic to US economy and political environments.
-- At the same time, "regular" commercial banks do place an important and beneficial role the economy.
2. Getting from under a "TARP umbrella" will indeed open more room for banks executives to raise their compensations. It is true. But, at the same time, it will allow commercial banks to operate with less government interference in their decision making process.
3. Finally, banks executives understand very well that the present euphoria about soon to be improve economy is just BS. The future course of US and world economy is highly unpredictable. Therefore, the presently available opportunity to raise cash should not be missed.
Have you had a close look at the methodology and laughable levels of bank debt "inspection" contained in those tests? Still think that they're "stellar?"
You don't seem stupid; just totally enthralled by the psychotic ego-maniac on that blog which you incessantly quote. People like him, who sell simplistic "certainties," are called snake-oil salesmen or confidence tricksters - not geniuses. He's very far from being the "Third wisest human in the world" that he claims to be.
Trust me; decades of experience have taught me that there are no certainties in investing. None. Caution and diligence are the essentials that will serve you well - not misplaced over-confidence.
In the interests of balance; why don't you check out the polar opposite viewpoint of the, vastly more experienced, egotist Karl Denninger.
market-ticker.org/inde...
On May 12 12:31 PM Cetin Hakimoglu wrote:
> The markets have turned a leaf because the financial crisis has been
> fixed evidenced by the stellar stress test results. Still much more
> upside to come.
>
It will be very interesting to see the house of cards collapse, again...
i.e. COF's public secondary offering was for 56 million shares on a current float of 380.34 million shares. Keycorp offered up another approximate 115 million shares (if we assume the secondary offering was priced anywhere near their current market price) on a float of 429.80 million shares. You can figure out how many shares the other banks offered up as well by the total amount they have targeted to raise and then comparing it to the current float. So a 14.7% and 26.8% dilution in the float is significant, if not already massive.
But I figured that these secondary offerings would "inevitably massively dilute shareholder value" because in addition to the secondary offerings, many banks were offering them at significant discounts to the present market price, which again, I believe is a sure sign that the executives understand their share values are grossly distorted and have been inflated on the back of deceit and creative accounting techniques.
Since the Bloomberg article I referenced was dated May 11th, here's the proof of whether my prediction of massive devaluation of shares will come true. I've listed below the share prices of many of the banks discussed above below as of market close on May 8th:
COF $31.34
USB $20.54
WFC $28.18
MS $28.18
KEY $6.97
All we need to do is to revisit these prices several months down the road and see where they stand to see if I was right or wrong. I'll come back and post the shareprices several months from now right here even if I was wrong, for there is no one in the world that will be right 100% of the time. And if it turns out I was wrong, I'll be the first to admit it.
However, in the end, I never believe that attempting to expose shenanigans and deceit that will help investors prevent losses is "borderline reckless"; rather misleading investors, ignoring clear warning signals, and advising clients to buy into the US financial sector at this point is what I would consider to be very unwise.
On May 12 07:04 AM Joshua Morgan Brown wrote:
> this is borderline reckless
>
> "Since when is slashing dividends and diluting shareholder stock
> in the best interests of shareholders"
>
> The smartest thing the banks can do right now TO BENEFIT SHAREHOLDERS
> is to raise capital. the preferred coupon to the TARP is in the
> way of ever being able to increase buybacks or dividends as things
> improve. They need to clean that up and pay back the gov so they
> can get back to business. Smart managers sell stock when they can,
> and right now, these banks are able to sell stock easily. The secondaries
> are being placed so quickly that the roadshows to promote the offerings
> are being cancelled. It would be scary if the banks didnt use this
> window that they didn't have just 7 weeks ago.
>
Also, case in point : Ford
Monday - $6.08
Tuesday - $5.01 (annaouncement made after the market closed) . After market trading closed the price at $4.99 on heavy volume
Wednesday ???
Future - If the market does indeed fall and we factor in a 40% drop in the dow, as some people are expecting, then we're looking at a price of $2.99/share within months. No wonder the UAW don't want to swap entitlements for stock.
> i.e. COF's public secondary offering was for 56 million shares on
> a current float of 380.34 million shares. Keycorp offered up another
> approximate 115 million shares (if we assume the secondary offering
> was priced anywhere near their current market price) on a float of
> 429.80 million shares. You can figure out how many shares the other
> banks offered up as well by the total amount they have targeted to
> raise and then comparing it to the current float. So a 14.7% and
> 26.8% dilution in the float is significant, if not already massive.
In using float rather than shares outstanding, are you just ignorant of the which is appropriate, or are you intentionally trying to overstate your case by choosing the wrong one?
> many banks were offering them at significant discounts to the present
> market price, which again, I believe is a sure sign that the executives
> understand their share values are grossly distorted and have been
> inflated on the back of deceit and creative accounting techniques.
You might want to learn the mechanics of secondary offerings, especially how they are priced, before you make such assumptions (and potentially libelous statements).
So no, I was not trying to overstate my case. Chalk it up to carelessness but my point was that these banking shares were sure to take a hit in the future (in my opinion) and to catch unknowing investors suckered into this rally offguard due to the combination of
(1) the dilution of the secondary offering; (2) the discounted prices of the secondary offering; and (3) the deceitful earnings announcements of many banks in the banking sector that was able to raise the sector as a whole recently.
Deceit often wins short term. Fundamentals win long-term. We'll check back in several months and see how things turned out.
> Yes I admit I was a little careless in my explanation above but...
>I purposely selected companies
> in which the difference between the float and outstanding shares
> was either negligible or just slightly higher.
Purposely selecting companies with a high float percentage does not show carelessness. It shows that you intended to use float. Since you're railing against deception, I'll chalk this up to you not knowing how to properly calculate dilution.
> (1) the dilution of the secondary offering;
If the stock is trading at a premium to book value, and if the capital raised can be put to work at the same return as current capital, is the secondary really dilutive? We've all heard a lot of talk about "banks not lending." Shouldn't you be figuring out the impacts of the capital raise on future profitability results before declaring them to be bad?
> (2) the discounted prices of the secondary offering;
Again, you should do a little research into HOW offerings are priced, since it appears you think the offering companies make this decision unilaterally.
> and (3) the deceitful earnings announcements
> of many banks in the banking sector that was able to raise the sector
> as a whole recently.
Two things. One, that's not what you said. You painted with a broad brush, saying that executives of banks issuing new shares are guilty of lying about their earnings. So just to be clear, you think that the executives of Wells Fargo and U.S. Bancorp have been cooking their books and lying about it, right?
> Deceit often wins short term. Fundamentals win long-term. We'll check
> back in several months and see how things turned out.
I find it amusing that you think several months is "long term."
1. Even though rally started on Mar 8th, COF surged most between May 5th to May 10th, just before public offering ! Does SEC not investigate this like they do the Shorts ?
2. Is n't this stock getting dumped into my 401K at artificially inflated prices by manipulating my fund manager ?
3. Most importantly, if these companies did not need TARP funds, why do not they just return it rather than raise more capital from the market ?
Posted by Karl Denninger in Editorial at 09:28
No, There Is Not a New Bull Market
C'mon guys.
The callers are all out this morning.
Jesus, can we have a bit of reality? There are a few listings of actual ALT-A mortgage defaults out there on structured deals, where its easy to get the numbers.
They're running anywhere from 35-50% with fairly tight clustering, so ~40ish percent is about right.
These are 60 day+ delinquencies, which means they're not someone who missed a payment or two; they are people who can't restructure because they're severely underwater and would have to bring tens of thousands of dollars (which they do not have) to the closing table.
90% of those loans are going to foreclose. This is a fairly representative look at the 2006 and 2007 production in the "ALT-A" (Option ARM and Liar Loan) space, which was 30-40% of the market during those two years. These foreclosures have not yet happened but they will, and so will their economic impact. That's a certainty over the next 6-12 months.
All this "new bull market" nonsense is crap.
Pure, unadulterated crap.
What we've got going on in the market is massive short-covering that is driving prices higher along with people in the media that are lying outright.
Look, the law of mean reversion has not been repealed and neither has the fact that one pays for forward and sustainable earnings when one buys stock.
ACTUAL P/Es are off the charts stupid. If you look at the various market data pages you will see this note that "Forward 12 months" is based on some estimate from one firm or another.
The problem is the estimates. They're still way too high. Does anyone remember last spring when everyone was saying that the S&P 500 would have $100 in cash earnings by this year? Did it?
Past performance is no guarantee of future results but when you make enough bad calls you should be ordered out of the pool before your sharts turn into a biological contamination disaster.
I said quite some time ago that I expected this sort of rally, and in fact I still think we are going to get some sort of pullback before the 'final thrust" higher - but there is a decent chance that we got the pullback two weeks ago, it was weak, and we're now going to make that next thrust NOW. I cover this stuff nightly in the videos on Tickerforum (for Gold Donors) with my commentary being tailored for short-term trading, not longer-term investing. Drop on in if you'd like to see 'em.
The point for longer-term investors, however, is risk .vs. reward.
Consider this: If 666 was either "a" or "the" bottom on the SPX, how much further is it likely to run this year?
You've had a 32% run. If we were to get a 50% run you'd be up around 1,000 on the SPX. Possible? Sure.
But if you're a long-term investor and got trapped here's the question you need to be asking yourself:
Are you willing to risk losing half (from here) in order to capture (another) 13% gain (again, from here.)
That is always the question you need to be considering - all investments must be looked at from today and this is the only question you ask:
At today's price, would I buy this position?
If the answer is "no" you sell it. Period.
As things stand today sitting in cash, in terms of house prices, is actually appreciating. The same is true of the price of many other capital goods. That's deflation, which takes the "inflation penalty" off the table - at least for right now.
For those who are trapped I see this as a tremendous opportunity to scale out of positions that you should have sold in early 2008.
If we really do get the proper "buy signals" for a new bull market, then we do. But before I would be willing to jump on that I'd have to see evidence that total debt load is coming down and coverage (that is, the ability to make the payments) is improving.
So far there is no such evidence and the above statistical information makes clear that the "mortgage mess", despite all the crooners, is nowhere near over.
++++++++++++++++++++++...
Interesting comments as of Apr.30/09. It certainly does appear the "unusual activity", being large spikes at numerous end of day trading, have been able to prevent the market from correcting lower over the past six weeks. The bigger question is how much longer can the late day spikes keep saving the bear market rally?