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TCE may be driving COF higher, but should it be?

|Includes: AXP, BAC, C, Capital One Financial Corporation (COF), JPM, WFC

COF keeps going higher in this mostly sideways market. The stress testsonly required a TCE of 3. COF's TCE rose from 4.6 to 4.8 with the inclusion of its recent purchase of Chevy Chase bank. This might seem to put it in good position. However, there are other factors which make me think this is not so. COF number of NPL's is increasing significantly. It is especially having problems in New York with its high priced real estate there. Chevy Chase Bank may have added to COF's TCE, but its loans are also forecast to give COF a lot of NPL problems in the near future. The charge off rates in the credit card business have been going up dramatically. Normally they tend to mirror the rate of unemployment. In March the COF's charge off rate was 9.3%; and it is expected to increase much further. Plus COF doesn't really have any liquid assets to pay off extra bills. It will have to sell stock or bonds to get the money to fund its coming losses. When the credit card business starts losing money (extremely likely in Q2-Q4 of this year), COF's TCE will not save it from having to raise capital. Plus the NPL's are also likely to become an increasingly bigger problem for COF in the coming quarters. Looking at this stock on its own, I can see no real force pushing it to the upside. Just the opposite, I see forces pushing it down. Yet it has risen dramtically today.

Let's look at some of the other things happening in the sector today. A big one was the Chrysler bankruptcy yesterday, which should be negative for all banks. AXP's creidt rating was downgraded to junk. Mitsubishi UFJ (Japan's biggest bank) lowered its 2009 earnings guidance to a loss of -$2.6B from its Feb. 6 guidance of +$0.5B for the year. MA reported lower earnings. It reported 6% more transactions; but it reported 10% less in total dollar charges. This might indicate that COF's credit card business will be even less profitable (less income with higher charge off rate). Plus the stress tests supposedly indicate that a number of banks will have to raise more capital. This will lead to further share dilution (i.e. banking stock prices will likely go down). This is without even considering that the lawmakers may be correct in saying that the stress tests are too close to the current conditions (i.e. not stressful enough). In other words, after the government requires banks to raise capital in the very short term, it may require them to again raise capital several months from now. Then too there is the wildcard of the Swine Flu. If a pandemic actually occurs, some have estimated that this could cost the world economy $4T or more. Imagine what this would do to most banks. This picture does not make it look like banking stocks should be going up. Many of them are not. JPM, BAC, C, WFC, AXP are all down today. If COF is going up based on its TCE, my own thought is that this is crazy!!!