Trevor Phillips'  Instablog

The trade I suggested Friday (long CIT.C preferred, short CIT common) looks like it's panning out pretty well if you were able to get a borrow on the short side.  CIT common has risen dramatically as a rescue package from bondholders came to light.  However, as expected, the preffered shares outperformed by decent margin.  I'd expect more of the same as the company tries to restructure it's balance sheet by diluting common shareholders to help make whole it's debtholders.

Cit may get a deal done at the last minute or it may file for bankruptcy.  Either way, you can go short the common stock and long the preferred shares, series C (CIT.C).  If they file for bankruptcy, your preferred shares are likely worthless but you can be assured that so too will be the common which is lower in the capital structure.  So if CIT goes bust, you shouldn't lose any money on the trade.  If CIT cuts a deal, it's going to have to involve 1 of 2 things.  Either they could be bought outright as is, in which case it's highly unlikely that the buyer would pay much more than it's worth today (say, a couple bucks at best).  Meanwhile, in that instance, the preferred shares would instantly become good paper, soaring a couple thousand percent or so to a level closer to par and the overall trade profits handsomely.  More likely perhaps is the idea that CIT bondholders (and possibly preferred share holders) would swap their debt for equity as we've seen all too often this year.  This process would essentially dilute the current shareholders into oblivion as the debtholders will garner most of the equity, again creating value for the preffered shareholder before any chance of doing the same for the common.  In the second scenario, it's likely that the common shareholders get left with almost nothing while the preferreds could either become good paper, get equity in the company (certainly much more than the common holder would get) or get wiped out as well.  The important thing is that if the preferred holder gets wiped out, so must the common so again, the trade shouldn't lose any money in that scenario.  All in all, a very high reward to risk ratio.

Disclosure:  No position

In case you haven't noticed, the canadian banks are absolutely on fire.  They've rebounded from their lows nearly all the way back to pre-October '08 levels.  The big 5 now trade at 2 or 3 times book value and many savvy investors are wondering if they've gone too far.  Canadian Western Bank, by contrast, trades at 1.42x book value (16.25/11.42).  Canadian Western bank is out of favor right now but remains very profitable. The bank has suffered from net interest margin compression as their loan book adjusts gradually to falling interest rates.  Now that interest rates have been flat for awhile, I expect those margins to start improving.  Better still, when rates do finally rise, the reverse effect will play out, driving strong profits and improved spreads on loans.  The market is overestimating the risk here as management has built a very strong loan portfolio with no exposure to CMBS, CDO, RMBS or any of the supposedly toxic loans the other banks all hold.  Given the relative valuation based on either earnings or book value, I think you can sell TD (currently 60.36) and buy CWB at 16.25. 

Disclosure:  Long CWB