Metrics, Mortgages and Analysts

May 2008 brokerage metrics were released this past week by E*Trade (ETFC), Schwab (SCHW), and Ameritrade (AMTD).  Reuters summarizes their comparative performances nicely by stating:

NEW YORK, June 18 (Reuters) - E*Trade Financial Group Inc (ETFC) on Wednesday reported its average daily trading volume rose 4.1 percent in May from a month before, slightly outperforming its rivals TD Ameritrade (AMTD) and Charles Schwab Corp (SCHW).

Average daily trading volume, a key indicator in the on-line brokerage industry, increased 10 percent from a year earlier while its retail customer assets were up 3.9 percent month over month.

But its retail customer assets were still down 15.6 percent over a year before. In November, customers fled in large numbers after E*Trade's holdings in risky mortgage securities generated big losses.

At a Sandler O'Neill conference earlier this month, E*Trade's Chief Executive Donald H. Layton said the brokerage was focusing on its main brokerage business as if there was no crisis.

E*Trade continues to outperform in the online brokerage market and for all of 2008 has strongly established that “their core business is intact.”  But the mortgage portfolio problem is constantly being presented in current articles as a problem; not because recent developments or announcements from E*Trade indicate any problems exist, but because unplanned exorbitant subprime write downs are daily presented in the news from other banks and financial institutions; so the assumption is that E*Trade’s Mortgage Portfolio must be having the same issues.   

This assumption that E*Trade’s Mortgage Portfolio currently has similar problems is completely contrary to the report by Donald Layton earlier this month at the Sandler O’Neill conference.   Below are a couple of slides and commentary by Mr. Layton from that conference. 

How is the home equity doing?  It is the big item here.  Interestingly enough, markets have been bad, economy has been bad, but as we show here in the first quarter, something is a little better than the usual run of the mill troubled home equity portfolio on [E*Trade’s] books.

Per Layton’s comments:

This chart shows the change in the total delinquencies, one universally regarded leading indicator for charge offs during the last several quarters … what you see usually is that there is a credit cycle where  delinquencies grow rapidly, then they grow at a low rate, then they go flat, then they will decline.  The first quarter was quite a surprise because it showed a very small dollar growth in the delinquencies and as a percentage (8 percent) a very low growth rate …

In addition, the leading indicator of delinquencies, even more, is the early stage delinquencies (the green line 30 to 89 day buckets) which are called special mention loans.  We had a reduced growth rate in the 4^th Quarter and an absolute decline in the 1^st Quarter.   While it is too early to claim victory, this was very positive.

Mr. Layton finished by commenting on a common question he is asked:

Why is E*Trade having a more favorable experience in regards to portfolio performance in comparison to Bank “X” and Bank “Y?” 

He gave a few reasons why:  1) Early in 2007 E*Trade ceased to accept the types of “2007 vintage” loans that are resulting in higher subprime defaults.  The “2007 vintage” loans are much worse than 2006 or 2005 loans and E*Trade has a lower quantity of those problematic 2007 loans; and 2) E*Trade maintained a higher FICO score requirement for loan applicants.  While this has not prevented defaults, it has resulted in lower delinquencies. 

In summary, the performance of E*Trade’s Mortgage Portfolio and management’s position of “full disclosure” are unusual in the current financial industry.  As a result, analysts have recently responded favorably to E*Trades positive results. 

On June 11, the S&P Upgraded E*Trade and specifically stated,

We think management has been straightforward in their disclosure of exposures to troubled mortgage securities and has made strides to reduce this exposure. It has also been able to attract customers and post strong trading volume despite balance sheet issues. We expect loan loss provisions and valuation adjustments will continue to weigh on results, but we think ETFC has acted in a timely manner and should be able to sustain its business.

A summary of E*Trade’s analysts, change dates, rating changes, and target prices is shown on the chart below (click to enlarge).   

Sources: (AOL, Yahoo)

The most recent analyst change prior to the S&P was a Target Price revision to $6.00 per share on April 24, 2008.  This target price by analyst Michael Vinciquerra from BMO   Capital is significant because Mr. Vinciquerra is a 4-star accuracy ranked analyst (see here for more details on star ranking of analysts).  An average of all the analyst’s target prices is $4.89.

Since late November 2007, E*Trade’s share price has been range-bound:  dropping as low as $2.08, rising as high as $5.48, and sitting at around $4 for the past two months.  The current $3.60 to $3.80 range is lower than in November  2007 when no one was sure whether E*Trade would survive bankruptcy. 

E*Trade has done more than survive bankruptcy.  April and May metrics were better than the industry averages, and their loan portfolio is actually performing better than management expectations.  Unique marketing strategies, innovative brokerage tools (BlackBerry), improved brokerage metrics, and stabilizing balance sheet transactions are assurances that E*Trade’s shareholder value will continue to improve, especially with the potential continuation of favorable results in the 2^nd Quarter 2008 report next month.

As stated in a prior article, many financial stocks like Lehman (LEH), Merrill Lynch (MER), UBS AG (UBS) and Citigroup (C) have just started to reveal their problems, are questioned regarding whether they are revealing the true extent of their problems, and are still figuring out what they are going to do to survive.  E*Trade’s true position among them is more of a “First One In,  First One Out” and moving forward with success.    

Disclosure: Long ETFC

Comments

[LABMAN]

I concur with your analysis but why hasn't the street recognized
the apparent turnaround.

[ZenInvestor]

The other obvious from the 'investment banks' is that E*Trade bank is FDIC regulated. They have a layer of reasonableness tests that no Lehman or Bear Stearns ever had to adhere to, and the E*Trade Bank call reports and capital levels are strongly into the well capitalized side.

The reason the 'street' does not see it is fear, and part of that is well founded since many regulated banks were able to hid portfolio issues from regulators through their sheer size and the complexity of the deals. Cindy's point about 'first in, first out' of the crises is well founded. The fact that E*Trade owned up quickly and sold the sub prime to Citadel for a deep discount has set them up to exit the credit crunch early. Q2 will be the real sign that their recovery, if not complete, is well down that road.

[Ben Williams]

Excellent post Cindy. Thanks for your insight and just for summarizing the news about E-trade from other sources as well. I know the usual cast of characters will come in and try to debunk and trash this stock as usual, but the numbers continue to get better and the stock is poising itself for a run up when the market itself recovers somewhat. I believe E-Trade is the baby being thrown out with the bathwater in the financial sector as it is being driven down with the others who have much larger exposure to these bad loans and have not really owned up to their problems like E-Trade has done. Next month's numbers and the continued addition to the E-Trade accounts month after month should squash some of the fear and the market will begin to warm up to this stock once again. The shorts are starting to take notice and I would not be surprised to see some of those positons begin to dwindle somewhat in the coming months. For full disclosure, I am long ETFC both in equity and options. I have added more positions the past two days as the price has dropped with the market.

[theinvestingspeculator]

Banks are going to have more write-offs from bad loans. Housing is going down more. The people that think that housing will go back up again are crazy. They don't understand the history of the housing market. I will tell you what it is @
theinvestingspeculator...

[Wez]

Loan losses will rise, thinking Etrade is immune to what is happening to every other bank is foolish.

[prescient11]

Wez, really, how stupid can you be? Do you actually engage in analysis or spout off random thoughts only? Etrade has an extra $1B in cash just sitting around, in case they haven't provisioned enough. That is a HUGE cushion that can absorb any further blows.

Who said Etrade is immune? Stop constructing straw men. Etrade's stock price has been destroyed because everyone assumes they will get hit very hard. So think before the next time you write, for all of us.

Speculator, your analysis is about as good as Wez's. Thanks for your self-promoting non-analysis.

[Ben Williams]

Wez, No one here is saying E-trade is immune to what is happening to the financials. In fact, we are actually supporting that cause. That is why the stock is down so much. However, CEO Layton and E-Trade have minimized their risk with the mortgages by getting rid of the majority of bad loans and have disclosed the bad loans they do have. He has done an awesome job of selling of what needed to be sold, going back to its core business, and raising capital to ensure they have the funds to cover any losses that still might occur. A look at ETFC's financials might be in store for you to see that have over a billion, thats right, BILLION dollars, sitting on the books. Obviously you are not here to add any insight, good or bad, but to make some moronic statement that serves no real purpose.

[VERONICA]

Dear Cindy,

Thanks for continuing to accumulate and present fact-based reporting of Etrade. So much of the market analysis has become "Cramerized,"... with pure opinion and sensationalism that it becomes very hard to see what ground-floor sensibility even looks like. Thanks for the clarity... you are a beacon.

Hopefully someday your "colleagues,"... in the investment community will join you in writing articles that are based in reality.

Thanks for Listening.
VERONICA

[dualist1]

On the subject of outperforming rival brokers...does anyone have details for Etrade, Schwab and TD regarding advertising spend versus increase in average daily trading volume for the month of May?

The advertising spend must be significant at Etrade. Can't wait to see earnings for quarter 2!

[jbmaria]

Cindy reminds me of a bulldog,biting into its prey and refusing to be dislodged short of shooting the stubborn bitch.

Her latest piece of puffery would have you rely on management pronouncements and analyst opinions.I can almost hear the chorus of sighs and "Uh-ohs" arising from the readers now.

Take a few minutes and look back at the pronouncements of virtually every CEO in the mortgage space for the last year or so.

After reading that endless stream of lies and half truths,why would anyone in their right mind believe a word any of them uttered?????


Then look at the BMO analyst and note how long he remained at "Outperform" on ETFC in '07. All thru the year from the mid $20's all the way down to the $4-5 level when he finally downgraded 11-30-07.
It's fair to assume this guy was OBLIVIOUS to the mortgage issues at ETFC and yet now we are asked to trust his "insight".Co... me skeptical.

[lavalyn]

jbmaria - I'd agree, but with less... vitriolic words.

Seriously, Cindy, you damage your credibility by lauding this one company, all the time, never faltering like this. I'm almost convinced you are a paid pumper.

[jbmaria]

" I'm almost convinced you are a paid pumper."


Nah,who'd pay her for this stuff????

[forwoodenboats]

jbmaria, please take your ghetto mouth somewhere else. If you feel the data you've presented (crickets chirping) is more comprehensive and your analytical skills (oops, you left those on the bus, too) are superior to Cindy's by all means start publishing them.
Just grab a stapler and go find yourself a few telephone poles......

[lounge707]

Cindy, love the fact that you use just simple common sense. It's really rare to find writers/analysis that are simple and precise with their writings. I'm really impressed with how you present the facts, so a BIG thank you. As far as E trade goes, I never listen to the analysis say really. When our good buddy Prashant screamed fire at Etrade, who created a self fulling prophecy. However, its funny because Citibank-where Prashant is employed, is the company in turmoil. I wonder how Prashant feels, because Citibank is at all time low, and worse yet, they have so much crap in their vaults. So while Citi is falling.....Etrade is probably going up. See ya on the way down Prashant. lol!!

[Wez]

Prescient11 & Ben,

Sorry to piss on the pumping game the two of you are up to. Looking at your comment history reveals you two as doing nothing but pitching Etrade....so much for your "insightful analysis". It's not hard to see Etrade's financials, I know they have cash, they also have a huge loan book that maybe more subject to losses than what the CEO thinks....as has been the case with every other bank. I was simply countering Cindy's constant pumping of her position in Etrade. Balanced discussion are much better than one sighted prayers that everything will be fine.

Long ETFC btw........

[lounge707]

To "THE REAL EXPERT" I hear you out. No one can say Etrade is bullet proof. There is risk, but thats with any equity, commodity, or derivative asset. You are right the housing debacle is messy and probably will get worse.


However when you start calling people idiots and name calling, that ain't cool. You can disagree with Cindy and others, but lets name start downing people because they do not share the same opinions with you. Lets keep this forum clean debate. State your opinions and let the readers decide what they want. PEACE!

[jimmy46]

who wants etrade with its high commissions when Scottrade is only
$7 for a limit order?

[anastos]

I'm with Wez....long etfc but these articles are getting out of hand.

[prescient11]

Wez, nice retort, as informative as your first.

[Ben Williams]

Well, Jimmy46, apparently a number of people want E-Trade over Scottrade based on the numbers. I am not "pumping" any stock. Please read all my posts as they are all consistent; I make full disclosure of my positions and am FULLY aware of the risk in ETFC.

Having said that, I am not caugt up in the pinheads who want to rain on E-trades parade where they HAVE shown improvement, HAVE improved their capital position and have increased business. People presenting the numbers can lie, but the numbers don't. E-trade is moving in the right direction and you can post back here a year from now and see who is right and who is not. Hear me now, believe me later.

[prescient11]

The real expert,

We'll see won't we. I'll remember this come 1Q of '09 and we can see whose call was right.

So rather than listen to your blathering Monday morning quarterbacking about oil, etc. How about you enlighten us as to your calls that will take you to 1Q of '09 and we compare then, shall we?? I believe ETFC will yield a 200% gain by then.

We await your genius.

[Wez]

Ermilo, the Expert wasn't the first person to start name calling....

This site has a huge amount of rabid ETFC fan "boys", Cindy being one of them. I hope this stock goes higher, but reading all the desperate bullish comments about ETFC and SIRI on this site is pathetic. Just because you own a stock and want it to go higher doesn't mean you have to put the blinders on and start pumping.

[Shock]

What is ETFCP? Can someone tell me all about it and were I can find more info about?

[Educated Investor]

Look, all the comments out here have measures of validity depending on each persons opinion. Those calling out that the mortgage and banking industry have problems are absolutely right; we hear about it every day and the 200 point drop in the DOW validiates the problems. Why would I need to write about that since it is so obvious?

The fact is, E*Trade's comments in June's conference are something that is not generally known to the investment public. Since that information indicates E*Trade will be able to maintain unique performance differences in comparison to the industry, I felt those comments needed more publicity. My decision to publish that information shows that I have confidence in Layton as a man of integrity; unlike other Wall Street Financial Company CEOs. His reputation and experience speak loudly, and he would not risk his reputation to mislead investors regarding E*Trade's Mortgage performance.

I have shared my "Due Diligence" in deciding that I am going to hold on to my long position in ETFC. If you don't feel the same, then sell out your position or don't bother buying the stock.

I am not a paid pumper, nor do I write any lies, unless a positive attitude is construed to be a lie. I fail to understand how my presentation of my "due diligence research" to maintain my long position in holding a stock compromises my integrity as a researcher. I am pleased with my research, pleased with this article, and pleased with my long position in E*Trade. Hope you all have a great day!

[jbmaria]

" My decision to publish that information shows that I have confidence in Layton as a man of integrity; unlike other Wall Street Financial Company CEOs. His reputation and experience speak loudly, and he would not risk his reputation to mislead investors regarding E*Trade's Mortgage performance. "

Not sure why you're so enamored of Layton?

Press reports confirmed he wasn't the top choice of the BOD.
He's not a turnaround expert.
He hasn't done much for the stock price.
His policy of announcing dilutive swaps after the close on Friday's is considered slimy by many Wallstreeters.
And ,rightly or wrongly,Layton was tarnished by some involvement in the Enron debacle.


Please explain what he's done to earn your adulation.

[Educated Investor]

Well, JB

nv.intellectspace.com/...

study the information from this link and you will see that he is very qualified to lead E*Trade through this difficult time. I have never heard his name linked to Enron so I think you are just dropping that "well known negative" out here with no reference to back it up. Give me a reference for this Enron involvement so that I can feel that you have integrity and factual basis for what you say.

[stealthflow15]

He was involved with enron....

he sent an email while at jpmorgan to execs saying enron may be doing some shady stuff. they went after him like they are doing the bear sterns guys for no reason, just to find a scape goat.

he was first to realize the problems which is a testament to his expertise. i don't see it as a negative.

[jbmaria]

Cindy,you know I don't lie or you should.
That's why my ID is over 10 years old and I stand behind every post even though a few of the calls over the years weren't exactly "brilliant".... that your pumper partners "numbersssss"... changes his often and the other boy wonder pres just started posting in January-wonder why? Prescient11 even admits ETFC is his first major stock holding,did you know that?

That said ,your inability to do even the most basic research on Layton is troubling. Everyone who follows the OLB space knew about Layton and Enron,as minor as it might be,only a rookie pumper like you would be in the dark about it.
A simple google would have found it.

Sad to see what passes for "expert research" on SA these days.

[jbmaria]

SA software is acting up and shortening sentences indiscriminately,I'll try to post it in toto once again:

Cindy,you know I don't lie or you should.
That's why my ID is over 10 years old and I stand behind every post even though a few of the calls over the years weren't exactly "brilliant".
Note that your pumper partners "numbersssss"... changes his often and the other boy wonder pres just started posting in January-wonder why? Prescient11 even admits ETFC is his first major stock holding,did you know that?

That said ,your inability to do even the most basic research on Layton is troubling. Everyone who follows the OLB space knew about Layton and Enron,as minor as it might be,only a rookie pumper like you would be in the dark about it.
A simple google would have found it.

Sad to see what passes for "expert research" on SA these days.

[jbmaria]

OK Cindy,now that we've determined you haven't done your homework on Layton,lets talk about the analysts. How is it almost all these banking analysts missed this multi TRILLION dollar meltdown in the mortgage space? Why should we listen to them now????

Even more germane,why do all the ETFC pumpers hate Bhatia,one of the few analysts who warned of the problems in August
BEFORE everyone started talking about them.
Shouldn't that make him a bit of a hero?
It does to me.

[Wez]

Regarding Layton:

""I AM QUEASY." Complex deals involving cash advances raised concerns with JP Morgan Vice-Chairman Donald H. Layton. "We are making disguised loans, usually buried in commodities or equities derivatives (and I'm sure in other areas)..." Layton wrote in an internal 1999 e-mail to credit-risk managers that was introduced as evidence in the trial. (Parenthetic remark in previous sentence is Layton's.) He also wrote: "I am queasy about the process."

When pressed to explain what he meant, Layton testified that his concern was with such lending practices in general, and he could not recall the controversial transactions with Mahonia. Layton would have no further comment for this article, JP Morgan said.

From the get-go, JP Morgan has insisted it followed the law in all its opaque deals with Enron. In July, under questioning from Senator Carl Levin (D-Mich.), then chairman of the Senate Permanent Subcommittee on Investigations, bank execs asserted that there was nothing improper about its Mahonia deals -- the same assertion Harrison made last week. Yet in August, under growing pressure, JP Morgan announced it was forming a committee to review its practices."


That actually gives me more confidence.

[jbmaria]

'"I AM QUEASY." Complex deals involving cash advances raised concerns with JP Morgan Vice-Chairman Donald H. Layton. "We are making disguised loans, usually buried in commodities or equities derivatives (and I'm sure in other areas)..." Layton wrote in an internal 1999 e-mail to credit-risk managers that was introduced as evidence in the trial. (Parenthetic remark in previous sentence is Layton's.) He also wrote: "I am queasy about the process."'

Legally,he's guilty only of wondering out loud if something funny was going on.We're not holding him to the highest standards here,a real "boy scout" might have made some real noise.But I'm adult enough to know how biz works and also smart enough to think this is a small negative for a CEO running a co. I invest in.
If nothing else,it shows at least a little willingness to play ball with others to cover up shady stuff.
There was talk he retired early over this smear but how do you nail that down-you can't.

[rossetti2000]

Cindy. Once again, you have presented facts and have arrived at a logical conclusion: Whether by necessity, or as a result of astounding foresight, Etrade calculated its heavily burdened risk, found a way to rid itself of the risk that it could never manage, and to dampen and leverage the risk that might ultimately provide a reward.

Compared to the likes of Lehman, Bear, Citibank, Bank of America, or Countrywide, Etrade sits on a small acreage of financial real estate, one that it can "till" and one that it can build upon without being overwhelmed by excipient, dilutive market conditions that might continue to destroy its core brokerage business.

Etrade is compact; it is strong, and it is ready. And if I am not mistaken, Etrade also has a 723 million dollar tax write off that it can carry back two years and forward 20 years. If that is the case, Etrade can carry back about 523 million dollars against taxes paid in 2005 and 2006, and Etrade will be left with about a 200 million dollar carry forward (check the Etrade balance sheet posted on the NASDAQ website). This tax credit may be the reason why Donald Layton mentioned that Etrade's bank would be self sufficient going forward. If my thinking is correct, 732 million dollars will provide substantial support for Etrade's turnaround effort.

Once again, thank you kindly, Cindy, and please continue to inform us concerning Etrade's future progress.

[Long time Etrade Customer]

I have been holding this stock and some various call options since November last year and it has been a test of patience, but turnarounds always take time this one is no different. This stock wont budge in my opinion untill they prove (even with their morgage and consumer loan exposure) they CAN make a profit. Which I believe that day is coming soon. We could not have better leadership than is currently in place, these banking veterans have the experience and ability to right this ship. But it will not happen overnight it would be foolish to think it could. So ETFC investors need to sit tight and wait, and when the stock getting dragged down by unfounded negative sentiment as it is currently is, buy more. I believe someday ETFC investors will be rewarded nicely.

[jbmaria]

So Cindy,you seem reluctant to discuss Layton and Enron???
Perhaps because there's only two logical conclusions,you left it out intentionally since it didn't fit your thesis (you lied by omission) or your research skills are severely absent or biased?????

Anyway,pumpers are always citing Layton's pay package being tied to performance.That's true enough but there are some other ways to look at it.
Layton's got his $1million stock buy back and plenty more with any luck at all.That buy of stock was IMHO, a down payment on the job he wanted and not a big amount to him,he earned $15 million total compensation his last year at JPM. If he hadn't been appointed CEO of ETFC he might have walked and sold his tiny stake-not much of a risk on his part.He's pretty well covered as I see it.
But below is the language from the SEC filing describing his ETFC CEO compensation:

"Mr. Layton will receive an annual base salary of $1,000,000, and the Company granted to Mr. Layton stock options and restricted stock, which will vest on a quarterly basis through 2009 and have an initial aggregate value of approximately $15.4 million (with the value for the stock options based on an option valuation methodology and for restricted stock based on the intrinsic value on the grant date). Mr. Layton and the Company will enter into an employment agreement with a term through 2009, which will provide for no further equity grants and no opportunity for any cash bonuses during the term. Under the employment agreement, if Mr. Layton is terminated without cause, or if after a change in control, he resigns for "good reason" (as defined in the Company's previously filed form of executive employment agreement), he will receive a severance payment of $5 million and accelerated vesting of his equity awards. He will not receive separate compensation as Chairman or as a director."

Is it possible that even if Layton presided over the sale of ETFC for only $1/share,he'd still get a $5m bonus and restricted shares could still be granted to him then????? That seems to be the way it reads?

[Educated Investor]

JB, I haven't answered your above discussion of Enron because I wasn't around. Unlike you, I have a life besides the Yahoo Message Board and the Seeking Alpha Comment Posting.

Well, I read through what you and WEZ said about the 1999 Enron problem, did some research, and it seems like you are extracting some commentaries here and there; I still have looked around now and have not been able to find any conclusive link to Mr. Layton and Enron; except for some minor interactive type things that can happen in the business world. He definitely was not "IN" on anything illegal that happened there.

Now you are also