FIG trader_

Tom Brown’s School Days

It was a cheap shot, and yes out of context. From my recollection, he was one of the first to call for a shakeup at C, before doing so was an easy "sell".

As Mortgage Shops Close, Big Banks Are Looking Better and Better

Nice call on CFC

Does Capital One Deserve Valuation Multiple of Bigger Banks?

The author was comparing apples and oranges; the the higher loan spreads and default rates are almost exclusively due to different portfolio characteristics than that of "peers" mentioned. How can the respected author fail to notice. Ultimately, higher rewards corresponding to higher risk; Nothing revealing there? If anything, the company (pre merger) could have been compared to the BAC credit card subsidary (MBNA), JPM's or C's credit card . (Credit loss and chargeoff numbers are remarkably close for credit card subs of majors) Post-merger, the banking comparisons will at some point be valid, but only to the extent they are valid for any two banks. Are C and BAC, and WFC and WB comparable? They are comparable to the extent that they are institutions leveraged (8/10 to 1), have some mix of retail/consumer, commercial, investment banking. The company "pressed the bet" on the credit card side when they could do so with good expected returns (Nineties) and backed off (i.e.went into more retail/international banking/ and auto) this decade. It seems very sensible strategy in a higher risk credit card environment in US. In fact, the auto play also was well timed (see captives GM and F under financial stress) . No numbers on ROE's but it is not hard to imagine they are/will obliterating these two under financial stress. Surely, Fairbanks is not a magician, but who best to strategize and minimize risk while maximizing ROE. its 10% to 15% average annual return will still be near top over next five years.

Does Capital One Deserve Valuation Multiple of Bigger Banks?

For many unfamiliar with the COF story, the above "sophisticated" (though curiously selective) analysis may make sense. But anyone covering the stock for the last ten to twelve years knows there is much more than meets the eye. I'm not sure where Scott Black got has info, but COF's mortgage portfolio prior to the acquisitions was minimal. True, the credit card portfolio may be less than "prime"', though it has been generating 20%-plus ROEs for many years (as is auto finance, many fewer years). The complexion of the company has changed, but the valuation (especially circa $70 where a previous strategy of mine posted on seeking alpha of going long COF/short AXP) reflects expected lower ROEs, substantially less than that expected by the banks. (The acuisition at substantial premium to book redced the ROE substantially,but will get back up to mid to high teens by 2008) The stock trades at 1.4 x book for X-sake, the lowest valuation (exclsuive of a few dips such as post Q2 earnings and again back in 2003). The rocket scientists crunching #'s there are equal to none in the business. Fairbanks has been shrinking the risky stuff (domestic card book), lengthening the maturity of the portfolios (credit cards are short, mortgage s are theoretically longer). They have been waiting for this accdent to happen for long time (Jim Grant too), but somehow the company keeps getting back on its feet, outperforming everybody in its class, who has to get acquired (or spun off KRB, , Discover, PVN, ). Long COF/short AXP will still work exceptionally well at least until the price/book-ROE equation (multi-year outlook) is equalized, assuming AXP doesn't have "accident" like last time. remember who was buying junk bonds for AXP advisers????

Citigroup: Does a Breakup Make Sense?

To quote the master, the market is a voting machine in the short term, and a weighing machine over the long term. So any attempt to extrapolate from recent performance how well the company is doing and/or whether it should be split up is just watercooler talk. As noted in previous posts, the company outperformed its "peers" substantially over the ten year period, and the stock is only underperforming in the most recent 5 year stretch (though it is catching up fast). The gentleman uses IRA Bank monitor data for comparison purposes, but those figures conflict with reported numbers at 9/30 (for ex C reported a 18.9 ROE for the quarter) and one should be suspect of the inference that portfolio quality reflects mostly subprime (mostly from Associates acquisition) based on the supposed duration of 1.6 (seems like a misprint if you ask me). Default rates of 300 basis points is not sub-prime. In fact, the ongoing rate for most consumer credit card businesses (including COF, MBNA, Discover, AXP ) has consistently been somewhere between 250 and 400 basis points for several years now. I'm not sure where the author is going with all this, since reporting methods change so dramatically over the course of the years, and economic and interest rate cycles, and most companies purposely attempt to obfuscate and hide problems anyways. From investors standpoint, its ROE, ROE, ROE and institutional investors (who do no better at figuring it out than anybody else) seek the business with the best chance of sustaining the current high ROEs at the lowest risk. To try to reduce the size of the industry buckets in which these companies are thrown in more than is already done by S&P in its sector ratings would be a waste of time. For one who has been through the excercise numerous times, its easy to reach the conclusion that PM's are just managing around their core benchmark holdings anyway. Its the safe way to play..............unti... its not.

Tom Brown's Financial Services Picks

the link you had showed an April date on Tom Browns report a $49 target and possible $60 with breakup. Since the stock has achieved the former price without breakup, they must be doing half way decently, though clearly not as right as some of the other banks, and for the most part just being in the right sector has worked. But go back ten years C (under Weill) has still outperformed everybody over the ten year period (even BAC, WFC, BRKA, JPM), with most outperformance coming in the first five years. Any short period of time can tilt toward any one business, say mortgage (WFC) insurance (BRK), investment banking GS; But, I'm not sure Brown's conclusion (selling assets) is the right medicine, or whether its just water cooler talk. Clearly trying to time entry and exits into specific lines of business was the sine qua none of Sandy's magic, but few other major bankers can make that claim, nor can one of the smartest ex sell side banking analyst do so without providing more detail as to how what the company will do with cash, and how secure the returns will be in the next few years (not just quarters), after he sells for top dollar today.

Bank of America, Citibank Takeover Targets On Paper Only

Its now going to be reasonably clear that the call for "cheap financial stocks'' by MS strategist) was a hint of temporary top for the subsector. The question as to when "they" will provide value will be better determined at lower prices and additional data, earnings, $/euro rates/ and widening spread of the 10/30 Treasuries; By anecdotal evidence is the spread rarely gets this narrow, and the reversal (i.e. rates going higher, the 30 year backing up faster than the 10) suggests this will confirm the end of the financials rally for now. Most expensive financials for long short trades AXP, SLM, FMD and mid sixed p/c stocks

Bank of America, Citibank Takeover Targets On Paper Only

Unless one lays out the scenario for the next three years about where rates will be (long and short term), and incremental drivers of earnings and the ROE, its hard to counterargue. My guess is that we are closer to the end rather than the beginning in this "cyclical" rally in financials. It should be patently obvious, since credit costs, the largest potential swing factor on the income statement have nowhere to go but up. That puts the odds of lower earnings for 2007/2008(versus 2006) at two to one in my book, under virtually almso any "interest rate scenario; subnstantially lower in some. The only scenario in which "financials" could be considered cheap is much "lower rates" (short and long; i.e. lower than that priced into Fed Funds futures), concurrent with flat credit costs. For now the valuations seem reasonably fair, though, in my humble opinion, the stocks carry substantial risk that you are not getting paid for. I think mid single digit returns (dvds plus little else is what you'll get annually through 2009)

Bank of America, Citibank Takeover Targets On Paper Only

I looked through Henry McVey's (Morgan Stanley equity strategist ) recent research for specifics in terms of coming to the conclusion that the aforementioned stocks are "cheap", but couldn't find what I hoped to find. Since company specific research is done at the analyst level, the top down view has more to do with other macro issues. But here is where I think his view is infected with bullish bias on several levels, both as a "banker", and sector analyst (he is former Financial Institution analyst). In the mid to late Nineties there was equal exuberance, when more cautioned should have prevailed during big consolidation period, not just with the Net stocks, but with the serial diluters among bank acquirers. That term was coined by former DLJ analyst, who lost his job for being somewhat skeptical. With financial stocks at or near highs, after substantial gains ($ based at least), is this a hnt that we may be near highs. In fact, it could even mean we are about to embark on one last "binge" of deals, before the garnd finale. Far be it for me to rain on the parade, but I think we are closer to the highs rather than the lows in financials, given where we are in the the credit and interest rate cycles, near peak ROEs, fair and reasonable valuations, and decelerating economic growth workdwide. As I've said in prior postings, I think it all comes down to dollar stability, and the implications of continued weakenss in the $ on confidence in gloabl financial institutions.