Chris Shenfield

Should You Invest in Banking Stocks?

I'll just comment on Citigroup, which is the stock I own. Your analysis is not analysis at all. I'm not sure what it is. Citigroup is not trading in a range of $2 to $4.25. It is trading with technical support at $4.34, it has just passed the golden cross where the 50 day average moved over the 200 day average on strong volume, and the next resistance is $6.15. On a fundamental basis, Citigroup is way undervalued at $4.56 when book value is over $6.20 and its peers are trading at 1.5 times book. Citigroup will never see $2 again. The only reason it was at that level was because we faced economic meltdown until the Fed stepped in with massive liquidity injections. All the data show that Armageddon is not going to happen and we are pulling out of the recession. At 1.5 times book, Citigroup should be trading at $8 per share, which is where I expect it will be by years' end. You need to get your head out of the charts and THINK about history and what historical factors created the price points on these charts.

Regions Financial: Sitting on a $22.8 Billion Sink Hole?

I disagree with your article. The "Fair Value Estimate" you cite does not equal what you call the "real value of all those toxic loans". In fact, the "Fair Value Estimate" substantially underestimates the value of the assets. Unfortunately, banks are required to manufacture and report these numbers because of ill-advised, improperly developed, and harmful accounting rules that reflect a fundamental misunderstanding of the realities of finance and banking.

The Fair Value Estimates reported on banks balance sheets is based upon the interpretation by auditing firms of the Statement of Financial Accounting Standards No. 157 (see first note on the 10Q RF page in your post). The use of FAS 157 has caused a downward impact on valuations and on the cyclical nature of valuation and liquidity. In an environment where one bank, due to liquidity issues, is required to dispose assets at unnaturally low prices to improve liquidity in the short-term, other banks are subsequently required to impair their own securities to reflect the new lower price point set by the distressed bank. This circle of impairment is self-perpetuating, despite no change in the risk underlying the security. As asset pricing degrades, this impairs institutions’ ability to provide liquidity to the markets due to capital constraints. That lack of liquidity further erodes pricing, accelerating the decline in liquidity pricing, and around and around we go.

FAS 157 essentially validates the use of low quality price reference sources over fundamental economic valuation methods that have proven effective and reliable for many years. For example, if a loan to finance a car wash has been producing a steady stream of income for the past five years, with predictible annual increases, the "real" value is and has long been accurately developed by taking that income stream and capitalizing it at an appropriate rate of return based on existing interest rates to come up with the valuation. However, FAS 157 requires banks to value the loan based upon how much that loan would fetch in the secondary market today, even though the bank has no intention of selling the loan (why should they, since they are earning a steady stream of reliable income). When the secondary market is weak, the only banks selling similar loans are distressed banks who must sell. Of course they sell at much lower prices than the economic valuation determining by capitalizing the income stream. Now the good bank is required to write down its performing car wash loan and set aside a loan loss reserve even though this does not reflect a true impairment of value. In short, the banks are obliged to use price quotes that are supported by little market evidence, which lack prices reflective of actual transactions, or that include expectations of transactions with truly distressed sellers.

All of this reflects a fundamental misunderstanding of how banks operate. Paulson realizes this. He understands that these FAS 157 "Fair Value Estimates" are rubbish, and that the true value of these assets is much higher.

The New Bull Market Fallacy

"The markets can stay irrational long than you can stay solvent"
John Keynes

Bove Sees the Light on Banks?

Let me just add that while I agree that traditional domestic demand for credit is soft, the banks can find other ways to make money, particularly outside the U.S. See for example Citigroup's position as market maker in the Chinese bond market. Article at online.wsj.com/article...

Bove Sees the Light on Banks?

I don't think you can lump all the banks together. Let's take the most troubled of the big banks, Citigroup. I have looked very hard at its regulatory filings. The assets look really bad. Yet the stock has gone from $2.65 to nearly $4 today. Why? Because it was undervalued. If a stock is undervalued, a subsequent rise is just as much of a rise on "substance" as a growth stock rising because of raised earnings estimates. Citi at $2.65 per share discounted for its bad assets and then some. At $2.65 the stock was trading at a fraction of tangible book value. Citigroup's exposure to commercial real estate is far lower than Wells Fargo, JP Morgan, or Bank of America. Since the beginning of the year, Citigroup has significantly increased its Tier 1 capital and viability. It has sold off unproductive assets to focus on its core businesses. Citi retired a huge amount of preferred stock, getting the company out from punishing preferred dividends by converting the preferred stock to common stock. While this technically was dilutive to the commons, it actually is a positive since it will so drastically improve the company's cashflow. Investors finally realized this and bid up Citi's shares over the past couple weeks to nearly $4.
I think this trend will continue. There is still money to be made in beaten down bank shares. Selected regional banks will be next to follow Citi's lead. Just wait and watch.

Are You Sure You Really Want to Chase XLF?

Thank you Wayne for your response to my comment and informative chart and analysis.

Are You Sure You Really Want to Chase XLF?

XLF closed at $13.02 on May 8th, over 3 months ago. The 200 day moving average is presently $12.91. I agree that the index is somewhat overbought on a very short term basis, but I think a pullback won't go much below either of these two numbers (the index was heavily oversold in June). The components of this index are still just too undervalued for there to be a big correction. A good bet on a pullback to $13 would be Jan 10 Calls at $12-13 strike price. Even better would be the Jan 2011 calls at same strike price, which in my opinion are a bargain even now.

Are You Sure You Really Want to Chase XLF?

I just ran charts comparing XLF with its top 7 holdings: AXP, BAC, BK, GS, JPM, USB and WFC. Over 3 months XLF was outperformed by AXP, GS, USB and JPM. Over 1 month XLF was outperformed by AXP, USB, BAC, & JPM . Your charts must be wrong.

Are You Sure You Really Want to Chase XLF?

You have the actual price of XLF on the left vertical axis. What have you plotted on the right axis? They are not the stock prices. Please explain.

Why the Bear Market Bottom Is Not Yet In

When Sir John Templeton said that “The four most dangerous words in investing are: 'this time it's different'” he was NOT referring to bull markets or bear markets or cycles. He was referring to the fact that many investors tend to repeat their mistakes or the mistakes of others and was warning against investing with the safety of the herd. We are now in the bottom of a decades long downturn in which bonds have outperformed stocks, the NASDAQ is far below its levels of nearly a decade ago, and many sound Dow companies are trading for a fraction of their prices a few years ago. We're still trying to come out of the worst recession in this country since the great depression. We're trying to recover from a war on terror, the most significant armed attack on this country since Pearl Harbor, a credit crisis that has resulted in the most significant government intervention since the New Deal, and the sharpest postwar downturn in housing that anyone under 65 can remember. This is EXACTLY the time that the great contrarian, Sir John Templeton, would would say to invest. He would say "Peter, stop reading charts and books, put away your fortune cards, and BUY!

Why We're Not Buying This Market

Once we really see much more fundamental improvement in the US, the rally will be over. As for emerging markets, the fundamentals have already started improving. By the time you start buying, I'll start selling.

On Jun 01 12:51 AM Shareholders Unite wrote:

> Squares, we agree to a certain extent. The rally so far was justified,
> at 6500, a severe depression was priced in (we're not THAT pessimistic),
> but much more upside is not justified. Unless we really see much
> more fundamental improvement, we can't really see the rally get past
> 1000 on the S&P anytime soon. We do not think it's likely that
> we'll see that much fundamental improvement, for the reasons stated
> in the article. But we have no crystal ball..

Why We're Not Buying This Market

It was John Keynes, the influential British economist, who once said "the market can stay irrational longer than you can stay solvent".
What this means is regardless of whether you characterize the present market as "irrational" based on a dire economic prediction (as this article seems to do) or as a strong rally based on real prospects of improving fundamentals (see www.minyanville.com/ar...), Mr. Market is the final arbiter of stock prices. I go with the latter and have been buying this rally aggressively based on my view that prices move first, then fundamentals.

8 Charts for Trading Financials

Correction: I meant never sell a WINNING stock.


On May 10 11:51 PM Squares7 wrote:

> I agree with Marco that there could be a lot more upside to financials,
> including these banks charted. There seems to be a lot of skepticism
> and criticism, bordering on anger, among the commentators, mostly
> centered on general distrust of the bank's financial statements and
> disagreement with the government's role in propping up these institutions.
> My response is that after years of successful investing, I've learned
> one thing--don't fight the tape. There is a huge amount of momentum
> here. Failure to break UPSIDE resistance doesn't indicate anything
> more than a pause. It's only breaking resistance on the downside
> that would indicate reversal. I have ridden Citigroup from $1.25
> and Bank of America from $5 up to their present prices, and its been
> a great ride because I've learned to never sell a losing stock. Just
> raise your trailing stop losses and enjoy the momentum while it lasts.
> It could continue for quite awhile.

8 Charts for Trading Financials

I agree with Marco that there could be a lot more upside to financials, including these banks charted. There seems to be a lot of skepticism and criticism, bordering on anger, among the commentators, mostly centered on general distrust of the bank's financial statements and disagreement with the government's role in propping up these institutions. My response is that after years of successful investing, I've learned one thing--don't fight the tape. There is a huge amount of momentum here. Failure to break UPSIDE resistance doesn't indicate anything more than a pause. It's only breaking resistance on the downside that would indicate reversal. I have ridden Citigroup from $1.25 and Bank of America from $5 up to their present prices, and its been a great ride because I've learned to never sell a losing stock. Just raise your trailing stop losses and enjoy the momentum while it lasts. It could continue for quite awhile.


On May 10 11:29 PM Marco Hickey wrote:

> Alan you're right I failed to draw in the support lines, but I clearly
> stated that they need to break above with the help of the market,
> and nobody knows what could happen in the next days to come. I never
> intended the charts to be bullish, nor am I bullish as stated I am
> taking profits (sold nearly 60% of my financial positions Friday).
> I agree with twotraps, it's a momentum game now and until these stocks
> indicate the trend is down, I'll hold onto some of my position in
> financials.
>
> And to answer moron's question about taking the stress test results
> at face value... No, I simply stated what the Fed is "expecting".
> I certainly have no idea of what these banks will lose as most of
> the banks don't even know what to expect! The rally could continue
> IMO based on: how much money is on the side lines, and the fact there
> is absolutely no clarity.
>
> And, yea I certainly bought what AIG said, that's how I've paid off
> my car loans, and 100% of my college bills with the money I made
> in September and October buying PUTS on all the major banks...<br/>
>
> Simply a momentum game for now... I'll be buying more put protection
> when the momentum changes.. But in the last 8 weeks, being a bear
> wouldn't have worked too well.
>
> On May 10 08:32 PM Alan Young wrote:

Earnings Preview: Citigroup

The "investors" worried about Citigroup's creditworthiness are in fact hedge funds who shorted the stock and are now losing billions of dollars as the stock price rises and since it appears that the conversion of preferred to common shares will be delayed and there reportedly will be no market for "as-issued" shares.