rossetti2000

Metrics, Mortgages and Analysts

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.

S&P Upgrades E*Trade Despite Struggling Financial Sector Peers

It pays to do our homework, doesn't it, Ms. Reed, and you have done yours well. A reward lies ahead foe Etrade investors, in the not too distant future. Thanks for sharing your effort with all of us.

E*Trade's 'First In, First Out' Position: Yes, 111M Shorts Can Be Wrong

The wait shall be worthwhile.

Who Will Trigger E*Trade's Magic Moment - and a 111.4M Short Squeeze?

I agree.

There are basic rules when shorting any stock:

First: those investors who choose to short a stock have to be ready for a long-term commitment, and the chosen stock should have relatively very little value.
Second: Shorting a stock should evoke the thought of becoming a penultimate risk manager. For example:
Before taking the "plunge", short traders should think about responding to a Dirty Harry–like question. However, instead of, "Do you feel Lucky," the question might be, "Can you handle the share price doubling." Short traders should not want to bail and sell at an insanely high price. Most players who trade short want to stick it out, to "invest" for the long term (like longs are prone to do). However, there is more risk for short traders, because large short positions are dangerous. Any sudden shift in opinion or momentum could pop the share price and rapidly devastate traders who are late to cover a short position.

Third: Shorts have to bear value investing in mind, and they have to remember that takeover values are related to market values. If a market is crazy, takeover values might be insane. In addition, shorts must be vigilant about certain "special events" and here are a few events to consider:

Recapitalization;
Share Buy Back ;
A takeover ;
A change in management ; and
Any similar event that might force a trader out of a short position.
If a short trader is holding a position and the particular stock starts going up, but not too wildly, a short (like a long) might choose to average in.

With the discussion outlined above in mind, let's take Etrade as an example. Let's hypothesize that a trader expects Etrade to go bankrupt under toxic mortgage debt and other financial pressures, and the trader shorts Etrade at $2.08 In January 2008. Then E*TRADE's share price moves rapidly to $3.00 a few trading days later, that short might assess special events before averaging in, such as:

1. E*TRADE's recapitalization (the consequence of the November 2008 Citadel bailout);

2. E*TRADE's share buy back potential (and it was clear that there was no such potential at the time);

3. A takeover possibility (At the time, chances of a merger were slim to none after the Citadel deal, because Etrade chose a bailout and it was left with a lame banking arm); and

4. A change in E*TRADE's management (there was no real change at the time except for Caplan leaving, and Layton becoming a figurehead chairman).

The average short trader might think that E*TRADE's HELOCs were a financial time bomb waiting to happen. In January 2008, subprime paper was a sure negative. Likewise, competition in the brokerage core was hard enough to contend with (e.g., Scottrade, Fidelity, BOA, Tradestation, etc.), without simultaneously contending with the extra heavy burden that had become E*TRADE's banking arm...so in late January 2008, even at $3.00 (a paltry price indeed), it might have been a wise decision to continue shorting Etrade. After all, the thought of E*TRADE's bankruptcy still loomed.

However, as we all know, at approximately $5.45 intraday in February 2008 (more than a doubling of E*TRADE's intraday low of $2.08), Etrade had almost made it up to $6.00, or nearly triple its lowest price.

But, in looking again at "special events" mostly everything about E*TRADE's status had not changed during its rise in share price to $5.45. While E*TRADE's general health might have improved, the improvement was certainly not enough to discourage short traders from continuing to average their positions on the way up. After all, without further news of great metrics (Etrade had reduced its metrics reporting from monthly to quarterly) how much more could E*TRADE's share price rise before the first quarter 2008 conference call? Therefore, short traders felt confident about adding to their positions and sending short interests into the stratosphere. In doing so, short traders accumulated total positions that would exceed the number of available Etrade shares to cover in the face of favorable special events.

However, special events mean more to a short's survival than they do to a long's eventual success.

For example in following the rules of shorting, short traders should keep the following question in mind: "Is there something out there, some news, and event, or a report that will take E*TRADE's price down, considerably?" Once short traders "buy into their short positions", their goal should be to hold their positions as long as they can. This is the paradox of shorts having to be "longer" than longs."

Therefore, in that long term short commitment, short traders have to keep their eye earnings reports and ask: "Will there be disappointment?" Short traders welcome earnings disappointment, especially in an overvalued stock. If the disappointment is big enough, short traders will pull the trigger and collect bountiful rewards.

To recapitulate, short traders look for the typical overvalued but growing company. Short traders do not take positions in companies that have real value, but they do take positions in companies that may have perceived value, or a rapidly sinking value relative to the current share price.

Short traders who follow the rules of shorting will not maintain a lengthy short position in any company where value is gaining on price.

On the other side of the coin, Etrade longs are convinced that E*TRADE's value is catching up with its price because:

1) Recapitalization has already happened with Citadel and recapitalization will continue with "front door" debt for equity swapping;

2) Share Buy Back seems more possible; E*TRADE's banking arm continues to strengthen and Layton might pull a Winter of 2008 surprise by plowing several hundreds of millions of dollars of no longer needed banking reserve into a share buyback program;



3) A takeover is looking better with each passing week, because the banking arm is becoming less of a problem and because Layton is "teasing" the toxic portion of it out of E*TRADE's financial makeup and business model; and

4) A significant change in management has taken place in 2008.

Once again, in assessing whether Etrade is a good candidate to keep shorting, the ever present question for short traders is "Do you feel lucky?" The translation here is, "Do you feel that you can short Etrade 'forever'?" Because long-term shorting is one of the cardinal rules for shorting a stock...a short trader must outlast a long-term investor holding similar positions.

There are a few other considerations for the short trader. One consideration is that shorting gains becoming ordinary income. Another worry is that if E*TRADE's share price rises considerably (i.e., presently, if it doubles to $8.00), a short trader's risk goes up with the share price. The short trader's risk increases exponentially, because Etrade (our example) becomes a considerably larger part of the short trader's portfolio. It is just the opposite for long-term investors; i.e., Etrade suddenly becomes a lesser part of a long's portfolio (a long can sell half of the shares and wind up with a welcomed paradox of taking the original investment amount out, yet leaving the original investment amount in).

So a word to those who are still brave enough to short Etrade...follow your cardinal rules of shorting; realize:

1) That E*TRADE's management has changed;

2) That Etrade is becoming more strongly capitalized everyday;

3) That E*TRADE's banking arm is healing and that the arm's toxic fat is disappearing;

4) That acquisition is looking better everyday;

5) That Layton could spring a share buyback program (large or small scale) at anytime he feels that he can release all or a portion of the conservative portion of E*TRADE's banking reserve;

6) That debt for equity swapping is now a reality, and that it will not be dilutive enough to cause a notable value drop; and

7) That E*TRADE's recent change in management was not conducive to a long-term rampage of shorting.

Those are the current Etrade shorting considerations.

In other words, realize that Donald Layton's supervision of E*TRADE's turnaround in Q2, Q3, and Q4 of 2008 will likely result shrinking losses and noteworthy gains for Etrade. Thereafter in following the cardinal rules of shorting, think about whether a possibility looms that Etrade will see $8.00 to $10.00 by January of 2009 (a doubling or better of the current $4.00 price). Lastly, reconsider whether any wise short trader will be able to be short, forever, if necessary (one of the foremost cardinal rules of shorting).

If the answer seems to be, "No," then rethink your positions and cover while you still have a realistic opportunity. Don't let the recent Proxy share authorization increase fool you. If E*TRADE's Board chooses to issue only a low number of those new shares, with restriction, E*TRADE's market trading shares may become very scarce indeed.

After all, how much more of E*TRADE's increasing value to share price movement (perceived or not) will a short trader be able to sustain in the long term?

E*Trade: What the Analysts and News Haven't Told You

Thanks, Cindy for bringing balance to Etrade's turnaround saga. The effort to right Etrade's ship in a sea of $135.00 a barrel oil, a housing recession, and a looming threat of brisk inflation will not be an easy job for Donaly Layton. However,presently, Mr. Layton has risen to the occasion by increasing reserves, divesting of non-core assets for cash, dampening, and deftly dealing with corporate debt.

In an attempt to understand where Mr. Layton is sailing Etrade's ship, one can wade through 8Ks, 10Ks, and other SEC filings and still not come to a substantial understanding of just where Etrade will be in the future, but lots of diligence and common sense does point to a bright future for Etrade, its customers and investors.

Perhaps Prescient11 has said it best:

"In other words, it's a waiting game. Once all these bad loans are washed through the system, what are we left with, [is] 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."

We all have to hold on to the thought that every financial institution will have the same general economic ride through the current economic miasma and the pending US economy. However, Donald Layton has the "jump" on like financial institutions, and being smaller in size and more technically oriented, in this economy, is a good thing.

Etrade is closer to seeing the light at the end of this disasterous US economic tunnel, and the road to prosperity, than most institutions. As each financial reporting quarter passes for Etrade, those who are investing their dollars in Etrade, today, should see a great return on investment within one to two years, and a handsome return on investment by year's end.

Once again, thank you, Cindy, for your interest in bringing balance to the heavily negative analyses that everyone is privvy to in the press, on cable and on the Internet. You have done Etrade, its customers, and its investors a wonderful service, and I hope to be reading your analyses more often.

E*Trade Financial: Laying the Foundation for Success

Layton seems capable and honest.

www.cnbc.com/id/158402...

In his interview with Mr. Rattigan, not once, but twice, Layton said that ET's ABS CDO toxic portfolio was behind ET; over and done with.

Layton also said that, by the end of 2008, ET would be back to where people would think that what Etrade was dealing with in the financial end of its business, would be thought of as "normal business circumstance", and that, in general, the financial industry would be in better shape before the end of 2008. That is before Etrade itself reached that position.

Layton's interview occurred on March 3, 2008...that interview is probably the reason why we are seeing the decline in ET's share price.

Quick money investors, anticipating a merger and acquisition before year's end, are selling, and the traders hare having a field day with the resulting choppy, high beta performance.

During his interview with Rattigan, Layton appeared to be honest and in command. While Layton informed listeners that ET might need more infusion on the financial side, he wouldn't have taken the position he did, accepting a non-cash compensation package, unless there was light at the end of the tunnel.

I believe that Layton thinks that ET's brokerage side can supply the cash necessary to bail out Etrade's banking side, and that if Etrade should require further assistance, there will be such support from lenders.

Lenders will be willing to infuse the remaining necessary cash to cover defaults, because ET will be able to show that it is largely funding its own recovery. That showing will provide the confidence for lenders to provide Etrade with the remaining fractional amount necessary to achieve the last of the mortgage write downs, and to relieve the brokerage side of the immediate, heavy responsibility that it now has and will continue to have in rescuing the banking side of the business.

If worse comes to worse, ET could dilute a bit, issuing more shares for a public sale, or it could float a bond, like other banks have done to acquire working capital.

Mr. Layton was steadfast during the interview, and he did not look slie a liar to me.

hanks for posting this interview. I feel much better about ET and Layton, after viewing it.

I am going back to my Strong Buy sentiment