OJO Zafado

Fifth Third Bank: Drink Deeply of the Poison

We see the '12 & '13 maturity FITB bonds showing up on the block with the same YTM as WaMu , Morgan Stanley(some debt just downgraded), Capital One and even AIG subsidiaries like International Lease Finance (airliner leasing)& American General Financing. It seems quite unlikely that all the characters in this on going fiasco are going to be survivors. It is then left to figure out which will go the route of Bear Stearns and be rescued at a higher price than they are at now or continue down the road to oblivion wiping out their investors. The C-PrM recently went out at +8% and is now down in price to yield +9%. Here is perhaps the nation's most international bank franchise with their global platform, teetering? The Fed's response? Hold until relieved. The markets late in the week showed their distain for the current economic policies of Bush and his gangsters. We are squarely lodged in a stagflation. The real world of US finance is transforming itself into an Orwellian one. Based on how the FITB bonds are trading the picture for FITB looks bleak. It would seem too early still to get into these banking shares until a few actually go under and we see who the survivors will be. While the Bank of New England went under in 1990 the Bank of Boston traded down into the single digits. If you waited for the Bank of New England to fail before buying Bank of Boston you would have done quite nicely. Every time it is different. This time we may be heading for a more persistent inflationary spiral than we saw in the post Vietnam War era. This time we have destroyed the dollar by fighting a war of mass deception with over a trillion dollars of electronic funds. While saving the taxpayers money on printing costs the profligacy continues by the Fed. 100s of Billions every month in TAFs and TRCAs on top of guaranteeing tottering investment banks. The elected politicians still pandering to the electorate as massive spending deficits loom in the "near years" for Medicare and Social Security. We now have Republicans running for office as "candidate for". You won't know they are Republicans unless you look very closely at their campaign materials. No union label watermark! They are outed! The Democrats are just as bad criticizing the massive budget deficits but promising not to raise taxes to pay for anything either. Nothing will come out of Washington in the next 6 months to stop the insanity of these fools that the American people elected and now so richly deserve. It seems quite clear no action or intervention will take place before the Election to save the value of the US dollar. This means oil, other energy,gold, and agribusiness related will soar even as the Dow makes it's way to 10,000. That should happen by Oct. There was Oct '29 and then there was that Oct 87 thing. When Ben the dollar Slayer came into office as Fed chairman he said in his speech,"The Fed's goal will be to maintain the current expectations for inflation". This past April when oil was at the astounding price of $100/BBL "BTDS" testified for Congress, "We expect inflation to moderate in the coming quarters", "We expect oil prices to moderate due to weaker world markets in those same coming quarters". Ehhh..uhht real shrewd thinker...It will be a lot safer for you if you just buy the SDS or DXD even at these levels of valuation!!!

Fifth Third Clobbered in Capital Raising Plan

Window effectively closed for financing subordinated debt? Lehman just floated out a 8.75% Cvt issue. They were seeing C's 8.5% on their last issuance and raising them a quarter. Now FITB is announcing they are going to raise $2 billion? How do they expect to float one out now at less than 9% ? It is obviously time for a "Resolution Trust" type of intervention from the Federal government. The affordability index that distressed sellers are selling into in the Ohio-Michigan area has not improved very much, if at all. We now see a lot of the lower pricing of homes being eroded by mortgage interest rates that are actually higher to reflect real credit & inflation risk, as well as monthly heating costs increasing by 25-35%. Ben the Dollar Slayer has let the Genie out of the bottle. His puppet master has totally destroyed the Republican party. It is to the point now where Republicans are having a problem even finding candidates for Congress and Governorships. When they do they campaign as "Candidate for" The only way you can determine they are Republicans is the lack of a union label watermark on their materials. Without some kind of gov't takeover most of these banks that are still claiming dubious assets as capitalization are going right out of business. WM, & WB will go right after FITB goes bust proving there is no salvation.

The Second Wave of Bank Troubles

Another thought.

Does any one have an opinion of the ETF PGF? Starting to look like a dollar cost averaging candidate.

The Second Wave of Bank Troubles

The player to be named later by Lehman has been named. The $2 billion in new convertible preferred will go out at 8.75%. They are seeing the C-PM of 8.5% currently priced at 8.7% and raising them a full quarter percent. So this would lead to Wachovia or Fifth-Third comming to the market soon with an even better hand, raising the pot amnother quarter % to a full 9%. Somethin's happening here...? A bird in the hand is worth ???? ...

The Second Wave of Bank Troubles

It's the math that does not make "cents". 18 months ago it was "we are heading for recession because of the inverted yield curve". Now we find the opposite. The Fed with it's rate at 2% and the banks offerring 3.5% on one year CDs, (both short term instruments) while these financials float out ever more subordinated debt at +8% (long term debt). Now these new preferreds are long term instruments but the gap is too wide to make economic sense. Unless... Merideth Whitney is probably right. Most common shareholders in even the top 4 banks are likely to see their diividends cut drastically. C and WB shareholders can just kiss the dividend on the common goodbye! With it's global platform the recent C-PM went out at 8.5% and ended last week at 8.7%. The real contest now is to see who will be the first to broach a +9% offering. Of course they are over subscribed! What will Lehman float out there to lure the fish? Have they said yet? The preferred share line cutters always make out. Too bad if you own any common shares in banks. The real bargains though are in these beaten down issues with near term call dates like FBF-PN (BAC) and USB-PE. How these banks can still sell CDs at what they are paying with 100% tax liability when stuff like the FNM-PP is out there paying +6.25% inflation protected at the 15% preferred tax rate on dividends is the math I don't get?

Banking Sector: 'Buy When There's Blood in the Streets'?

SW Rich has defined the new paradigm. Slowly I turned inch by inch step by step, We have not yet seen two consecutive negative TIC reports in the last year or so. It seems that Ben the Dollar slayer was being too cute with his remarks on linen fiat currency. Recently we have seen hundreds of billions of "dollars" created by the Fed electronically. $75 billion here for some TFAs a couple hundred billion there for some TRCAs to the ECB, SNB, & BOE. Hey no problem Ben has saved the taxpayers money by not printing the linen, but instead creating it with a few key strokes to the computer and a "press SEND". Electronic money! We are the ones who flooded the world with dollars to fill the shelves of Walmart and supply the refineries of Exxon-Mobil. "They" are just not playing fair converting those dollars to assets with intrinsic value after we also slimed "them" with subprime CDOs, SIVs and other junk debt. UBS is a Swiss or German bank. They are the ones leading the pack admitting to over $40 billion in write downs ..so far. It is not a US Bank that is losing the most. The Chinese have gotten crushed in US treasuries even as rates hit new lows. Now they spend more US linen on stocking their Strategic petroleum reserve than buying new US treasuries. It became a perfect storm when the advent of the ETF allowed any John P Public with $500 to open a Scottrade acct, to own GLD, SLV, USO,UHN, KOL,UNG, DBA,MOO etc, You name it if it has intrinsic value you can now own some of it in lieu of the US$. We are seeing the slowly I turned stealth run on the dollar. Now rates are moving quiclkly higher and there are some other major slobs, probably some CD holders getting the short end of the trade in PST & DXKSX. There are just not enough chairs when the music stops. I may still end up drawn like a moth to the flame buying some WB if it trades below $23. It will be an interesting Summer market. Either a stronger move higher based on some vague "Change" enthusiasm or the typical Summer doldrum market that anticipates a rearranging of deck chairs in Nov. It seems that it will be not of much consequence to those shivering in the cold next Winter who becomes the new "Leader of the Free Money World".

Charge-Offs Hammer Banks

Preferreds are cratering? UBS-D is moving consistently higher these last weeks even as they lead the pack so far admitting to over $40 billion in write downs of US subprime debt. The C-F is 2 1/2 above it's 52 wk low. The JPM-W is trading around par and has also been quite steady. We see little movement in the(BAC) FBF-N standing it's ground nicely at ~$21.50. The MJH has not done that well over the last week but has not been crushed either. The BAC-E has been beaten down but will likely move higher as the rate adjusts thru the gap, to the new higher interest rates. The WB S was stubbornly trading above par until it came in the last couple days. It is true that there is huge dilution going on in the common shares of these banks. Still the quality of the subordinated debt of the 4 largest banks seems quite good. Most common shareholders do not fully comprehend what is being done to them! The banks have even been issuing converts. Selling the common share holders on the idea that this is married to the stock performance. That may be but if the stock goes nowhere the convert preferreds still get the 8% which takes away cash resources to support the common dividends. Without dividend increases the common will underperform the market. I own no WB preferreds but do own preferreds of the other 4 majors as well as Morgan Stanley,USB,TWC ,AES, FNM and Goldman Sachs. The spread between the yields on med/long term similiar quality corporate bonds is so huge as to make barbelling out at these +7.5% yields worthwhile. Especially with stuff like FBF-N and HJJ with near term call dates where calls are likely to be made for a 3-4 point gain. I also own a position in the DXSKX as a hedge against what went on the last few days in the bond market. You could do a less restrictive trade in the ETF PST. The time is not that far off now when 4-7 year maturity corporate bonds will be worth buying for a bond ladder once again. In the meantime every market dislocation brings opportunity. With the GSE FNM-P yielding an adj +6% and 15% tax qualified, why buy much lower yielding bonds that are not tax qualified unless for a tax sheltered acct? FNM-P has also been performing fairly well recently. I agree with the author and would steer clear of both MER and WB as well as Lehman. The C on the other hand has a large global platform that ultimately will return it to profitability. Not before Meredith Whitney's prediction that the common dividend will be eliminated. That may indeed be the time to add some more C preferreds. FITB seems perhaps a little stronger than might be indicated. It is just not in a part of the country that seems likely to have the strongest rebound if indeed theree is an up turn in the economy in 09. The slime continues to creep!

Insider Trends in the Financial Sector

I tend to agree with Serge. WB looks the most vulnerable. I do not see these financials bottoming until after the annual Summer sell off. We are going to see this bear market persist, after this bear trap rally past 1400 S&P ends. There is still time to get some puts on. BOA is big enough to weather the storm and will most likely rally strongly in the year end rally. JPM has capable leadership. C has a new CEO and he means business. All the deadwood will be out of Dodge at C in short order. Wells Fargo is very much exposed to the Calif. realestate market but was a little more selective than most in loaning money on realestate without equity. They have reasonably capable leadership as well. That leaves WB with their lame CEO who has embarrassed himself and the bank. Many times proclaiming the dividend secure in the months and weeks up to this past week's disasterous numbers and not just triming but brutally slashing the dividend by 40%. WB was still running their PicAPay mortgages ads(Neg amort) on TV just weeks before they reported. WB is the most vulnerable of the top 5! The leadership is either shell shocked or just really stupid! There is one place to gain a foothold in these financials NOW though. There are fabulous and relatively safe yields to be had on the existing prefferred subordinated debt shares of the better banks. USBPrE, JPMPrW, are good yielders. There are also some issues of BOA &WFC that are good as well. The WBPrS is up over 8% and that is a signal to stay away. These can be augmented with ADJ rate issuances like UBS-D, BAC-E & FNM-P for inflation protection. A position in DXKSX will also help offset any inflation issues. WB could easily break through $20 to the down size if they do not have a mangement change soon. Since the exposure of the LIBOR fixing fraud UBS-D has rallied sharply and may be best acquired on a pull back.