Financial Stocks: A Look at the Big Picture

There’s enough talk on the blogosphere regarding Bear, and yes those that bought Puts last week made a killing, but I believe we have our emotional climax bottom in the financials. And behavior in many stocks that have been high on our sector list not only held up in this last shake to the downside, but a few even rallied on strong volume. Let’s bang em out quickly because any long ideas would be found in the same list I’ve been screaming BUY on.

BB&T (BBT) is priced where a long position would have limited downside. I don’t see the regional banks and financial intermediary’s like BBT looking like the next Bear Stearns, other than maybe National City (NCC). The only reason the red flag goes up with National City is because the behavior in NCC puts is similar to how BSC puts were trading late last week. Month’s way out started trading deep out of the money puts before the meltdown. So the trick is probably to look for another one likely to have to be bailed out. I don’t think it stops with Bear Stearns and if Lehman Brothers goes, wow. They emphatically illustrated their multitude degrees of readiness with excess liquidity, but wasn’t Schwarzman telling the markets rumors of Bear’s liquidity problems were untrue? Is that a case of losing confidence in a financial house that acts more like a hyper-leveraged hedge fund? Yes. Anyway, deep out of the money April Puts are trading multiple times their open interest. So there is a lot of either hedging or massive short building on Lehman. Can you imagine knowing that Bear was having liquidity problems because you are one of two dozen banks providing liquidity? There is a tremendous amount of money your proprietary trading desks can clean up.

Let’s go back to BB&T. The following chart should show those of you that care about the technical’s a compelling picture. Those of you that swear by the numbers only, just know the technical supply/demand picture confirms the fundamentals and accumulation as close to $30 as possible is a good move.

Late last week, an entity floated on Eurex by the Carlyle Group went thermal (i.e. busted like Bear). I’m beginning to wonder if the recent IPO’s by the major PE shops are one of the links on this domino board.

Here’s something very interesting, on Feb. 14^th, the FT reported a renegotiation of the deal between CITIC of China and Bear.

Under the terms of the deal struck in October, Citic agreed to pay $1bn for securities that would convert to about 6 per cent of Bear Stearns and the US investment bank would eventually pay the same amount for about 2 per cent of Citic.

Ouch. Could Citigroup be next to devalue itself after taking tens of billions of Arab and Chinese money? I knew these dollars were “sterilized” but I never imagined this would be the mechanism. Seems strangely like the crash of Japan in the late 80’s. I don’t know, maybe a couple dozen deep out of the money puts in forward months?

This next chart shows Citigroup and National City overlaid with Citi on the right in red and green and National on the left in blue.

Would the next rally in C present a great shorting opportunity in Citi, which is an 800-lb version of National? Perhaps a “bail out” of Citi in the low single digits is on the horizon?

If JP bought Bear for $2, why is it trading at $4.80? I hardly think anyone is going to step in and “outbid” JP Morgan, as this is a bailout orchestrated with the Federal Reserve.

I can see a potentially strong and fast tradable surge in Goldman (GS) from the $150 level to $180-$190. It’s a very nice range and a good technical picture:

Just for kicks, I wanted to show you what technical analysis is actually good for. As a gauge of the overall supply & demand picture, there is nothing better than a long-term chart. In the case of JP Morgan (JPM) below, this is a monthly chart dating to 1988. Never has this stock come out from being accumulated. Even when the stock and the broader market entered periods of sustained declines, the accumulation line (in red below prices) looks like a perfect rising mountain side.

And if JPM buying Bear Stearns for $2 a share isn’t reason enough for you, the chart above tells a beautiful tale to those whose eyes are trained to recognize the indications.

Comments

[deefree]

BBT has 21.24% or $19.5 billion of its loan portfolio in construction loans. This is 153% of shareholder's equity, which by the way has a bunch of goodwill in it. As of 12/31/07 BBT had $3.3 billion of Alt A loans. BBT's loss reserve as percentage of its loan portfolio was 1.11%. Does valuation even matter any more?

[deefree]

As of 12/31/05 BBT had $11.94 billion in construction and land development loans. As of 12/31/07 BBT had $19.47 billion. The $7.53 billion in construction and land development loans underwritten in the last 2 years represent commercial and residential construction projects underwritten during the boom years of real estate expansion and are now being finished--just in time for the biggest contraction in real estate values since BBT was created. This portfolio of construction loans is now turning into devalued real estate assets. This means the $7.53 billion might be a 50% write off in 2008. Current loss reserves for BBT are slightly over $1 billion. These construction loans are the bomb that could sink BBT just as sure as sub prime mortgages sank Bear Stearns. Don't say you weren't warned.