Friday, June 27, 2008

Wild Ride: Weekly Wrap 6/27/2008

And What a Ride it was!

WEEKLY WRAP

6/27/2008

Stock

P=Put

C=Call

Purch. Date

Purch. Price

per share

Friday

Close

6/27/

2008

Net

Gain/Loss

Week Ending

6/20/2008

Net

Gain/Loss

Week Ending

6/27/2008

BAC 1/30s P

6/4/2008

3.00

7.40

92%

147%

XLK 1/25s C

5/22/08

1.70

.85

(17.6)

50%

COF 1/50s P

4/28/08

8.10

14.80

58%

83%

NCC 10/10s C

4/09/08

1.30

.10

(96%)

96%

NCC 10/8s P

4/07/08

1.55

3.40

106%

119%

BAC 1/27.5 P

6/12/08

3.15

5.60

37%

78%

COF 1/40s P

6/12/08

6.00

8.10

18%

35%

HBC 12/75s P

6/24

3.90

6.10

N/A

56%

BAC 1/22.50s P

6/24

2.25

2.93

N/A

30%

*Yellow highlight represents new positions.

The BAC BUG
My first position in BAC was a 1/30 P on 6/4. Since then, I added a second position of 1/27.50s on 6/12. This week I added a third position of 1/22.50s on 6/24. Everything I have read, and the credit climate I see tells me this stock has the potential to drop down into the teens like Citi (C). While Citi has an unbelievable amount of exposure to the consumer lending market...BAC has a similar risk in its extremely heavy credit card portfolio. Of course, this also comes on the tail of a ill-advised merger with CFC. To brighten the day on Wall Street, one story congratulated the brilliance of BAC management because the CFC purchase had garnered the bank a tax write-off over teh next 20 years. My belief is BAC should worry more about the here and now, and forget about the back slapping of "brilliant" ideas. Now, there was more reason to cheer as BAC announced it was going to "lay-off" more than 7,500 employees over the next two years. (1) It is my belief between the CFC merger and credit card exposure BAC still has a distance to run down.

What's in Your Wallet?
Unfortunately, Capital One (COF) is taking a beating here. And it may only be the tip of the iceberg. According to Fitch Ratings analyst Christopher Wolfe,
"The deterioration in credit cards is accelerating faster than many had expected." (2) Organizations like Capital One went to great lengths to ensure anyone who had a pulse got a credit card. Clever T.V. marketing ploys made Capital One credit cards a household name. Now, I am sure the executives at COF are re-evaluation their decision. In this case, the genie is already out of the bottle. COF can only go into damage control mode at this juncture. I am still contemplating a well OTM call on COF...this company may well drop into the single digits like NCC has.

National City's Nuisance
When you have the reputation of playing the get-rich scheme, and then paying the piper no one ever feels sorry for a company. In most cases though, it is usually the employees and endowments that suffer. Much is the case for NCC. (3) Motley Fool, who occasionally over-exaggerates a story even mentioned NCC as an Enron waiting to happen. This one could very well drop into the $3.00 range by the end of summer. Too bad the workers and good soldiers of this organization are left paying the price for management's mistakes.

Techs Fizzle
After unloading the dead weight of TRLG last week, I was feeling pretty good about this portfolio's position. After all, you can't be short on everything right? I gave XLK a chance to recover a bit of lost ground. I was rewarded by watching this call option slip into the 50% loss category. I actually tried to unload it on Friday but set a limit price that was too high. What's the old saying, a penny wise and a pound foolish.

The New Kid in Town
HBC is probably one of the most responsive banks to the sub-prime debacle. It has gone into proactive mode to work with risky loans that were made inside the United States. (4) That being said, there are several reasons why I choose a bank with such a good track record. Regardless of the mortgage end of the business, HBC has substantial risk on the Household Finance portion of its business. For one, the business is no longer growing. Secondly, and more importantly the banks had loaned out considerable amounts of money during the credit boom. According to one lender, "A 584 score was no problem for loans even last year. Now, we won't even talk to them." If this was the only problem we would still not have a lot of reason to short this stock. However, it is easy to go back to the theme of credit cards again. As a matter of fact, there are several pending class action suits against this lender. (5) It should also be duly noted that HBC broke the $80.00 resistance point. To me a simple bearish sign. The question is if it breaks another resistance point at 70...it could really get ugly.

Points to Consider
1. BP, XOM, TOT, RDS.A were awarded no-bid contracts to Iraq's oil fields.
2. GLD on a pull back as we are sure to get a positive bump on Wall Street...Why? Who knows...the reason is being manufactured this weekend.
3. Energy particularly VDE
4. Transportations...CSX, BNI



Thomas Lee JP Chase...No Ninjas Here!
XLF down 12% from original purchase price of $23.33.
XLY down 4% from original purchase price of $29.70.
XLE up 1% from his purchase price of $86.02.

Sources Cited
1. http://www.fool.com/investing/dividends-income
/2008/06/27/the-2008-banking-crisis-continues.aspx
2. http://www.smartmoney.com/breaking-news/on/
index.cfm?story=ON-20080627-000596-1054&afl=yahoo
3. http://www.fool.com/investing/small-cap/2008/06/25/a-nation-of-enrons.aspx
4. http://biz.yahoo.com/bizwk/080627/0827b4091038376313.html?.v=1
5. http://householdwatch.com/news/interactive/568

Tuesday, June 24, 2008

Is there a Goat in the house?




A local UPS dirver stopped by and we engaged in conversation on the housing market. He noted that his grandmother's house is on the market for $114,000.00. It is a post-war bungalow...but still in pretty decent shape. He told my wife an I that they had an offer for $92,000 on the house and the potential buyers asked that the seller come up with a down payment for them as well. He said "I will burn it down before I give the house away." The UPS guy is not a goat!

Just when you thought you have heard it all...another half-cocked loan scheme has come to fruition. Evidently, non-profit organizations have now entered the housing picture. They are "helping" people with their down-payment. I guess this is a nice effort of behalf of the non-profit organizations...but so goes the old adage..."Give a man a fish...he fishes for a say. Teach a man to fish, and he fishes for a life-time." Sometimes non-profits have a heart that is in the right place, but they have the brains of a goat. Money is easily squandered if it is not respected...hey it's not my money.


According to chart one on average it appears that 22.50% (on a conservative estimate) of these loans have gone belly-up. An employee of Household Finance has told me the basic problem is people are not managing their money well. They are buying things they don't need with money they don't have to impress people they don't even like. While owning a home is part of the American Dream, responsibility of ownership plays a major role. Quite simply, if you can't afford things, don't buy them.

More dismal news on the housing front. "Inflation, political flux and job insecurity have created an "uncertainty more acute, perhaps, than any time since 9-11," said William Hummer, chief economist at Wayne Hummer Investments. An analyst at Wachovia said that consumer confidence hit the 1992 low, and pointed out this is the most troubling economy since the 1980's. (1) Interestingly enough, banks found cause to rally today.

Dodd's Housing Bill received an 83-9 vote to limit discussion. However, discussion is what makes America a Democracy...and this could be one of the most anti-democratic moves of this century. Even Bush didn't pull this kind of stuff on the road to Iraq! At least we can count on Bush to VETO this bill. (2) While some of the financials responded positively to the news that this bill may pass, it won't. There is no quick fix to Wall Street's problems. The U.S. taxpayer should not be the scapegoat on this one! Could you imagine what would happen to the value of a dollar if the U.S. government took on the sub-prime loans? That's just crazy!

Please note the Countrywide is facing the first, in what will eventually become a landslide of lawsuits against deceptive and unfair lending practices. (3)

For me, I found another opportunity to buy BAC 1/22.50s. I see no reason for anyone to rally around Wall Street anytime in the future. I was slightly rewarded as the put moved into positive territory as market close. A quick trigger on the inflation button would see a move on interest rates...with housing in the dumps...and a need to encourage investment and innovation this would be a mistake at this juncture. There is an outside risk of a .25-.50 percent increase in Fed rates...however, the biggest concern at this juncture is the economy...then inflation...getting oil under control will be the quick fix for inflation...

Must read article. Click here


Works Cited
1. http://biz.yahoo.com/ap/080624/economy.html
2. http://www.marketwatch.com/news/story/senate-votes
-move-forward-housing/story.aspx?guid=%7BED5CF63A%2D7F4C%2
D46E0%2D946A%2D34765424BC97%7D&siteid=rss
3. http://news.yahoo.com/s/ap/20080625/ap_on_bi_ge/
countrywide_financial_lawsuit

Friday, June 20, 2008

Weekly Wrap 6/20/2008


Two Bear Stearns "Big Wigs" were arrested today following a "probe" for misconduct and financial improprieties.

Question: Who is a bigger threat to capitalism...a couple of crooks like these guys or Karl Marx?


WEEKLY STOCK WRAP

Stock

P=Put

C=Call

Purch. Date

Purch. Price

per share

Friday

Close

6/20/

2008

Net

Gain/Loss

Previous

Week 6/13/2008

Net

Gain/Loss

Week Ending

6/20/2008

BAC 1/30s P

6/4/2008

3.00

5.75

40%

92%

XLK 1/25s C

5/22/08

1.70

1.40

(17.6%)

(17.6)

TRLG 10/22.5s P

5/14/08

3.20

2.55

(20%)

(37.5)

COF 1/50s P

4/28/08

8.10

12.80

32%

58%

PQ 10/20s C

4/15/08

2.60

5.90

92%

127%

NCC 10/10s C

4/09/08

1.30

.10

(96%)

(96%)

NCC 10/8s P

4/07/08

1.55

3.20

106%

106%

BAC 1/27.5 P
6/12/08
3.15
4.30
(3%)

37%

COF 1/40s P
6/12/08 6.00
7.10
(8%)

18%

*Additions highlighted yellow.

**Liquidated positions blue.

Liquidated

1. What a difference a week makes! I started the week by watching PQ make a 35% improvement over last week's position. While it would have been nice to play the greed factor, I opted to liquidate this position. Later that afternoon, news broke that Oil dropped $6.00 a barrell, and I was feeling like one of the smartest guys around. However, later the call moved to 7.90 per share...


2. TRLG crossed an investment threshold which told me to take it like a man, and except the loss of 37.5%. While I do believe that TRLG will sink like the Titanic, obviously my timing was a bit off. I will continue to track this stock and look for another opportunity to short it.

Winners
After researching, and writing an article entitled "Credit Card Crash" last week, I upped my positions in COF and BAC. Last week, I was down 8% and 3% respectively. The gut check was telling me to increase my positions again looking for the TWEENER (in between play) on my positions. This would have been a COF 1/45 and a BAC all the way down to 25 (Since the middle of the tweener was already covered). But, I didn't. If and buts right? Regardless, both positions improved tremendously as oil, credit, and a special report on the amount of money moving on to credit cards was reported. I am still contemplating an increased position here.


Not with My Money MISTA LEE
After microscopic gains last week, Mr. Thomas Lee (not to be confused with Bruce) from J.P. Morgan is probably wearing a disguise kit...as every one is now in the red!!! Remember folks, he gets paid for losing people's money! I'm sure we can count on another big week of consumer spending... There was another "guru" who recommended Carnival Cruises and Royal Caribbean as the hot picks...I think that is a great idea as long as everyone uses their Capital One or Bank of America credit cards for the trip they "owe to themselves!"

XLF down 6% from original purchase price of 23.33
XLY down 5% from original purchase price of 29.70
XLE even though this one closed down...I'll give him a push...original purchase price 86.02


Iceberg spotted... Hopefully these guys have some life boats for their investors... Unfortunately, the captain rarely goes down with the ship on Wall Street.

Tuesday, June 17, 2008

Stock Market Coverage: The Whole Nine Yards

"You can fool some of the people some of the time. You can fool some of the people all of the time. But, you cannot fool all of the people all of the time." -Abraham Lincoln

The short-lived rally in financials came to a screeching halt mid-morning Tuesday proved Lincoln right...that same morning pundits on CNBC attempted to jump-start the stock market on GS earnings, others remarked about the Fed's desire to increase interest rates, yet most of Wall Street sifted through the smoke screen of half-truths and wishful thinking to punish the financials once again!


The Whole Nine Yards*
The "bear" case laid out against Wall Street in general, and the financial sector in particular included the following points:
1. A 1.4% increase in the Labor Department's PPI Index.
2. The Federal Reserve reported a .2% drop in industrial production.
3. A 3.3% drop in new housing starts.
4. The Federal Trade Deficit soared to 176.4 billion dollars this quarter.
5. Soaring oil prices.
6. Continued concern on the stability of financial institutions including: default rates, continued sub-prime fallout, and liquidity issues.
7. The continuous flow of "bad news" from Wall Street instead of coming clean with the public.
8. The specter of another Bear Sterns (BSC) type collapse.
9. Uncertainty...the most important one factor.

Implications: You Cannot fool all of the people all of the time!
Quite frankly, Wall Street and the way Wall Street operates is as much at fault for the current financial fallout as are the negative economic reports. Financial institutions have been battered unmercifully. NCC was thought to have come clean once they received the cash infusion from Corsair Capital LLC only now reveals that there was a Federal probe that basically put the bank on probation. (2) Capital One Finance is another institution which is continually muddying the waters. COF acknowledged a .20 percent increase in the annualized charge-off rate on credit cards only to boost itself on the 30 day delinquency rate with a -.09 percent decrease. (3)

Conclusions
While Wall Street and TV analysts may be pushing for a quick end to the Wall Street meltdown and keeping a positive spin on news, the investor is looking for truth and transparency. If companies are to earn back investor trust, then Wall Street must to its share to rebuild their credibility. Since many of the financials have started to come clean, it is now important for those with major exposure to additional sub-prime, risky auto-loans, and credit cards come clean...totally clean with the public. Honest Abe would have it no other way.

Sources Referenced
1. http://biz.yahoo.com/ap/080617/economy.html
2. http://www.reuters.com/finance/stocks/keyDevelopments?symbol=NCC.N
3. http://www.insidearm.com/go/arm-news/
capital-one-credit-card-charge-offs-rise?tag=today

Sources Cited
Graph NYT: http://www.nytimes.com/imagepages/2008/06/16/business/16earnings.graphix.ready.html

*In World War I, machine gun bullets came in nine yard strips. If the all the bullets were fired, the gunner would say "The whole nine yards were fired."

Monday, June 16, 2008

COF NEWS

Capital One (COF): The Consumer Goes To The Mattresses

The consumer is bled dry. That is the message from an earnings warning at Capital One (COF). Mortgage lending was getting bad, but the latest news is that auto and credit card lending are falling apart. According to The Wall Street Journal "Capital One is expected to announce today that it expects charge-offs of $5.9 billion in 2008, up from its October forecast of $4.9 billion to $5.5 billion, partly because of worsening economic indicators that include rising unemployment."(1)

WSJ May 15, 2008 : Capital One Financial Corp. saw net charge-offs in its U.S. card and international segments climb in April, as delinquencies dipped at the U.S. card unit but rose in the auto-finance and international businesses.

In a filing with the Securities and Exchange Commission, the credit-card issuer and bank said net charge-offs in the U.S. card segment — which includes the domestic credit-card business, small-business lending and installment-loan business — rose to 6.08% of average loans held for investment in April, up from 6.07% in March and 5.5% in February. (2)


June 16, 2008
Capital One Financial Corp. (NYSE: COF) reported today that the annualized charge off rate in May for its credit card portfolio was 6.28 percent, up from 6.08 percent in April. The lender reported the 30 day delinquency rate on its $67.9 billion card portfolio was 3.81 percent in May, down from 3.90 percent in April, according to a filing with the U.S. Securities and Exchange Commission. (3)

On Thursday, July 17, 2008, at approximately 4:05 p.m. Eastern time, Capital One Financial Corporation (NYSE:COF) will release its second quarter 2008 earnings results. Additionally, the company will host a conference call at 5:00 p.m. Eastern time to review its financial and operating performance for the quarter ending June 30, 2008.

The call will be webcast live and the earnings release will be available on the company's homepage at www.capitalone.com. A replay of the webcast will be available 24 hours a day, beginning 2 hours after the conference call, until 5:00 p.m. Eastern time on July 31, 2008, through the company's homepage. Capital One will also make an MP3 file available for download the next business day following the conference call.

Sources Cited
http://www.247wallst.com/2008/01/capital-one-cof.html
http://www.thedisciplinedinvestor.com/blog/2008/05/15/capital-one-cof-rising-charge-offs-in-april/
http://www.insidearm.com/go/arm-news/capital-one-credit-card-charge-offs-rise?tag=today
http://community.investopedia.com/news/BusinessWire/20080616/6836091284913934.aspx

Friday, June 13, 2008

Weekly Wrap 6/13/2008

Stock

P=Put

C=Call

Purch. Date

Purch. Price

per share

Friday Close

6/12/

2008

Net Gain/Loss

Previous Week 6/6/2008

Net Gain/Loss

Week Ending

6/13/2008

BAC 1/30s P

6/4/2008

3.00

4.20

22%

40%

XLK 1/25s C

5/22/08

1.70

1.40

12%

(-17.6)

TRLG 10/22.5s P

5/14/08

3.20

2.55

(31%)

(-20%)

COF 1/50s P

4/28/08

8.10

10.70

17%

32%

PQ 10/20s C

4/15/08

2.60

5.00

115%

92%

NCC 10/10s C

4/09/08

1.30

.10

(96%)

(-96%)

NCC 10/8s P

4/07/08

1.55

3.10

106%

106%

BAC 1/27.50s P

6/12/08

3.15

3.05

N/A

(-3%)

COF 1/40s P

6/12/08

6.00

5.52

N/A

(-8%)

*Additions highlighted.

BAC gained 18% from last week’s close. BAC experienced considerable pressure as the financials were shaken by more bad news on LEH and to a lesser extent KEY. Note that this position was increased on 6/12/2008 on positive retail news. I am contemplating increasing this position again if 1/45s become more affordable. See blog entry “Credit Card Underwriters in Jeopardy” for complete details.

XLK took on a bit of water this week moving from a winner to a loser…as the Yahoo MSFT merger fell through. Look for a rebound next week.

TRLG moved 11% points closer to the break even point. While I am still down 20% on this one, the fundamentals are still there to see this stock retrace its move up with a move down.

COF increased 15% from last week’s position. This one was also up close to 45% at one time, but backed off with positive retail news, Greenspan’s comments, and the short-lived hope of a recovery in the dollar. I increased my position on this one as well.

PQ was dropped 23%…this one was on a roller coaster ride. Should the energy sector become a “hot area” again, it may be time to take profits. While G8 is calling for increased oil output, the oil is still priced in dollars...and as of late a dollar isn't worth a dollar anymore. Good volatility here!!!

NCC unchanged. I will look to liquidate this position on more bad news from the bank. However, I will hold on to the calls in hope of a buyout…wishful thinking here.


Tracking Thomas Lee
JP Morgan's Thomas Lee tauted three sectors last Friday indicating that each should finish the year in positive territory. From a pure statistical point of view, he was off to a god start. A week of huge volatility ended in his favor. Interestingly enough, it is prudent to point out the fact that NONE of the selections finished higher than a six-tenths of a percent gain. So from my point of view, congratulations are in order, however I'm much more comfortable playing the market my way. I will continue to track MISTA LEE.

Stock

Date Recommended

Purchase

Price

Price as of

6/13/2008

Net Gain/Loss

XLF

6/6/2008

23.33

23.38

0.2 %

XLY

6/6/2008

31.26

31.72

.01%

XLE

6/6/2008

86.02

86.60

.06%

Thursday, June 12, 2008

Why Credit Card Underwriters are in Jeoprady


Today in Cleveland, Randall Kroszner, a member of the Federal Reserve in Washington D.C., noted that three-fourths of all consumers have some type of debt. Kroszner noted that credit is the life-blood of the economy. (1)

Credit Card companies are the center of concern. Simply put, Kroszner believes that credit card companies need additional regulations to police various business practices. Two areas deserve particular scrutiny:

1. Two-cycle billing in credit cards. (2)

2. Practices such as add-on interest where payments are posted to the lowest interest rate first, and the highest interest rate last. (3)

Credit Card
companies were placed in the same category as other predatory lenders (a.k.a. loan shark) type operations who have been blamed for a large portion of the foreclosure crisis. In an election year, not to mention weak economic conditions, it places credit card companies in the unenviable position of political fodder for the political pundits. Barack Obama is even pledging a credit card user's Bill of Rights. (4) This will force McCain to make a gesture vilifying credit card companies as well.

Collateral and Liens
Unlike the banking and mortgage industry, credit card companies do not have secured debt. While there are various ways to "collect on debt" it is apparent that underwriters of credit cards have serious exposure when it comes to collecting delinquent debts. According to one source, Citi (C) grants consumers $2,500.00 worth of credit based on a name that matches a social security number. Beyond that limit, an actual address is needed as well. Should the economy continue its slowing cycle, credit card underwriters will face considerable risk. According to Jack Craven of Debt Settlement U.S.A. "The Consumer Debt Index reflects an alarming trend for consumers who are trying to get out of debt. Clearly, people are increasingly unable to pay their credit card bills and mortgages." (5)
Implications
Bank of America (BAC) is the largest credit card issuer in the United States, and is currently facing intense pressure from Wall Street. Capital One Finance (COF) who serves a standard and sub-standard market is also at considerable risk. Enjoy the short-lived rally of these underwriters, as there is no doubt that both will return to their slide into the abyss.

Sources Cited

1. http://cleve.live.advance.net/business/plaindealer/index.ssf?/base/business-6/1213259651300500.xml&coll=2

2. http://www.bankrate.com/brm/definitions.asp?Page=3&channelId=25&slid=3&termUid=892

3. http://www.bankrate.com/brm/definitions.asp?Page=1&channelId=25&slid=1&termUid=2297

4. http://www.barackobama.com/issues/economy/

5. http://www.insidearm.com/go/arm-news/debt-settlement-usa-launches-consumer-debt-index?tag=consumer