This compilation of “informed opinions”* covers two important areas of research and insight. These two opinions have been extracted from the blog postings of individuals who strive for accuracy, thoroughly study transcripts and SEC filings, and then provide informed background and opinions. I obtained permission from the authors for posting their information here on Seeking Alpha.
*Seeking Alpha provides a forum for individuals who have an “informed opinion” to publish their ideas. Published materials from Seeking Alpha provide broader circulation of valuable research and opinions. Informative and insightful research and opinions should be publicly published for the good of the investment community.
The following are be covered:
- 5-19-08 SEC Filing to register sale of 94.9 million shares
- 5-16-08 Summary of HELOC and Mortgage Activity discussed in May 16 Annual Shareholder Meeting
The first posting is extensive, and is informative and pertinent to investor concerns relative to E*Trade’s (ETFC) SEC Filing to register the sale of 94.9 million shares this last week. This posting came under the heading, “Citadel: Are they selling bonds but buying more stocks?” (By Blog Author: numbersssss) The content is as follows:
The second posting summarizes the discussion of E*Trade’s HELOC and Mortgage Debt from the transcript of last Friday’s Annual Shareholder Meeting. This information is an update from the April 17th Quarterly report on the performance of E*Trades Mortgage Portfolio. This posting came under the heading, “One bit of commentary …” (By Blog Author: prescient11).
Yesterday, when I first saw the filing , I said
1. It's a legal formality. After the lock-up period, it's routine for such large holders to file this so-called shelf registration filing. They may not sell any at all AND when it comes to their stock holdings, I'd be shocked if they will sell any at these prices.
2. Indeed, if one digs deeper and compares the latest filing with their past but also pretty recent filings, we would realize that Citadel actually bought, repeat BOUGHT shares as of the latest filing (I did have a math error in my yesterday's message --- depending on if two of the funds listed in the document are controlled by KG, their buying was 0.5m shares or 2.9m...will update when I'm clear if Investment Partners and Investment Partners II belong to Cit or Blackrock. Nonetheless, the fact is they bought.)
Today, May 20, 2008, I was watching the relative performance between the stock and bonds closely. This is still tender but offers the first confirmation to my gut/guess as to their actual actions after the filing: Citadel might actually sell a bit of their bonds but use this FUD generated weakness in ETFC buying more stocks to bring their ownership closer to the 25% limit they have secured from regulators.
Why do I say that?
1. Just some simple facts: ETFC the stock still at give away level, bonds however traded up from yielding in mid teen % a couple of months ago to closer to 10% just before this filing, still high but quite an upgrade by bond standard. As smart and as keep on value as KG is, he sure knows this.
2. Remember, before this filing, Cit did a separation deal in the notes put options between KG's fund Windgate and KG's controlled entity (probably worth repeating here my early observation: after the deal signed KG put bonds in his hedge fund while keeping the stocks all for his absolutely controlled entity --- a very bullish arrangement for the stock)
3. We all saw the stock intra day today, decent to say the least, but the bonds fell quite a bit more today. Not sure if it's their selling. Perhaps we can imply this bit: while more equity holders wise up to realize that KG actually bought more lately and may still buy more taking advantage of this FUD, bond holders seem to really worry about the prospect.
4. After reading the lines in the SEC filing document, I noticed these two quotes, which can perhaps give us some hints:To our knowledge, there are currently no plans, arrangements or understandings between any selling security holders and any underwriter, broker-dealer or agent regarding the sale of the securities. Selling security holders may ultimately not sell all, and conceivably may not sell any, of the securities offered by them under this prospectus.
This paragraph talks generally about both kinds of securities, stocks and bonds.
Then this (from page 10): (!)In pursuing its economic interests, Citadel may make decisions which may be different from those you may make as a holder of the Notes. As a creditor and shareholder, Citadel could choose to pursue or support transactions that could enhance its equity investment, even though such transactions might involve risks to you as a holder of the Notes.
The content is as follows:
Although no blockbuster news came out of the shareholder meeting, what did come out is the fact that they again are affirming the $1B-$1.5B loss estimates on the HELOC portfolio. Further, they again affirmed that their current loss reserves of over $500M are enough to cover at least 4Qs of chargeoffs in the HELOC portfolio. They have already charged off $300M approximately. Thus, if $1B is correct regarding HELOC losses they only have $200M left to reserve for and if the $1.5B is more accurate, then they have only $700M left to reserve for. They are not expecting any serious amount of chargeoffs in any other portfolios, and apart from the first lien portfolio, their institutional holdings are doing fine. Thus, this is simply a question of when, not if Etrade will return to normal.
In other words, it's a waiting game. Once all these bad loans are washed through the system, what are we left with, but a brokerage that is second to none and makes great profits, and an institutional side of the business that will earn great returns as well.
Moreover, look at Etrade's capital position. They were at $700M by the end of 1Q. Mr. Layton stated that they still had $500M in asset sales planned in the near future, most in this Q. Their goal is to get to $1B of excess cash. Thus, they will have $200M JUST FROM ASSET sales left to do whatever they need to do. They just sold the Indian assets for $150M. They are only $150M from their goal of excess cash in the $1B range. The year end goal is for a risk-based capital ratio of 13%, which is better than any bank I can think of. Because they no longer originate loans or buy them wholesale, increased customer cash deposits through the year, and the loans running off, they will smash that goal of 13% risk-based cap ratio. Put in perspective, JPM has a 12.4% ratio.
Not only that, but they will be reducing debt as much as possible. $700M in debt reduction at the parent is planned this year. $450M will be retired for 25M shares, i.e. at $18/share. They have already reduced the debt by $100M. Thus, only $150M in debt reduction is left for the year and the $550M was accomplished through minimal dilution, especially considering the severely reduced and manipulated share price.
Disclosure: Cindy Reed holds a long position in ETFC