Sunday, December 20, 2009

ZBPRC vs. ZBPRA/ WSJ Mention of MI, SNV and HBAN/Strategists Stock Forecasts for 2010/

Since I will be busy most of Monday, I went ahead and wrote a post for Monday morning, and decided to post it now. If anyone wants to analyze the problem presented at the end of this post, please feel free to post a comment.

On many occasions, I have referred to the location of HQ as being in the SUV Capital of the World. One reader made an inquiry about how I could be so sure about that designation. It is complex but I will make an attempt to explain. The LB would simply count the number of SUVs per person, and compare the total to other localities. That calculation might justify the classification, but we are much deeper thinkers than that Nerd calculating machine. It is not just the sheer number of SUVs. Many other factors enter into this designation, primarily involving the conduct of said SUV drivers. A few examples will suffice to buttress our designation.

Just the other day, the Old Geezer was driving his Saturn, much preferred over that damn Jaguar, minding his own business and going the 30 miles speed limit in downtown Brentwood, keeping as usual a safe distance behind the car in front of him, something that all SUV drivers have long since forgotten. So, in the rear view mirror the OG sees an SUV firing on all cylinders, pedal to the metal, approaching within five inches of his bumper before swerving to change lanes at the last millisecond before hitting his car, with the driver yelling- get out of my fu----- way Grandpa-as the SUV guy with a W sticker on the bumper and rear windshield swerves in and out of traffic at 70 miles per hour in congested downtown Brentwood talking on his cell to one of his mistresses and playing video games over the internet with a 5 year old in Argentina- hey look ma no hands. You can see what I mean.

Then, just the other day, the OG was driving his Saturn, waiting patiently to make a safe right hand turn onto Franklin Road, during rush hour. And what I am about to describe happens at least once a day. As the moment is about to arrive for a safe right hand turn, a SUV pulls into the left hand turn, completely obstructing the vision of the OG. Now, you can imagine what the Headknocker would do, lay a few honks on that driver, but the OG is more mellow and used to the ways of other humans. And, the OG wants to apologize to lemmings again for comparing them on so many occasions to humans. So the OG looks up at that driver, way up in the sky from his perspective, sees a woman about his age putting on her makeup. Need I say more. Well I will just give another example to prove my case, make it airtight so to speak.

Needless to say, there are many churches in the SUV Capital. As I drive Sunday morning down Franklin Road, where it turns into two lanes from four, there is the entrance to a large evangelical church. A police officer will stop traffic to let people in and out. As he stops traffic in my lane, I get into line, being the kind of person who will get into a line rather than break into line (the latter are simply referred to as LBs here at HQ), for there are two fundamental types of people in this world when it comes to lines. Now, you can probably guess at what I am about to say. A line of say 10 cars forms, and suddenly, I see two SUVs with W stickers on the bumper zoom by on the shoulder of the road, stopping just in the nick of time, in order to move a little further up in the line, forcing their way into line near the top, busy and important people no doubt. Now, to finish the story, of those who get into a line rather than break into it, there are two distinct subgroups, OG has observed over many decades as a student of human behavior. The first group consists of those who will allow the line breakers into the line, knowing exactly what is happening. Then there is the OG. The OG would have required those line breakers to smash into even a new JAG, which he once had, rather than letting one of the LBs get in front of him.

1. WSJ Article on my Lottery Tickets MI, SNV and HBAN: A lottery ticket, as the name implies, is a gamble where I hope to improve my odds of winning compared to say playing the Powerball. I will limit my exposure to less than $300, with certain exceptions, and 2009 has been my best year ever in this insignificant investment category for me. LOTTERY TICKET PURCHASES: LINKS IN ONE POST I have only recently formed this category however. I did an evaluation of my results for 2009 in a post from September. Evaluation of Lottery Tickets so far in 2009 Sometime early next year I will summarize the results for 2009, which will easily be the best year in the LT category, and most likely the best year for many years to come. One common characteristic of a LT is that the price has already been smashed to smithereens when I make my initial purchase, usually for good reason. How to Find Stocks Masquerading as Lottery Tickets/Bary's Columns In this Week's Barrons In fact, in my entire 40+ years of investing, I had my largest 1 year percentage gains in some of the selections in this category. The RB will always say why didn't you buy a 1000 rather than 50 or 100 shares of those selections. It is easy to look back in that rear view mirror. At the time that I bought those securities, like GRTPRF, NADX, ISF or CBG ( and many more which subsequently gained over 200%) everything looked pretty bleak, and I was buying the LTs only with cash flow from dividends and interest.

One area for the LTs has been beaten down regional bank shares. Some of my LTs have already had significant rises, such as over 300% for EWBC and over 200% for WBS. All of these bank LTs are being held in furtherance of a stratagem explained in Regional Bank Stocks and this will require a multi-year holding period for them as a group. For certain of these bank LTs, I have been critical of the management, and have zero confidence in them. This would include SNV, MI and HBAN. Even if you did not know anything about how these banks got into trouble, the long term charts would show that 20 years of price appreciation has been destroyed, and their long time shareholders have suffered massive dilutions of their ownership interests with huge share issuances at price prevalent in the early 1990s. There is no other description for this kind of management failures other than referring to it as a "colossal failure". Anyone connected to it should have already been fired. Unfortunately, in many instances, colossal failure is rewarded in the U.S. particularly in the financial services industry.

So why bother when I have such a negative opinion on banks like MI, HBAN and SNV? I do not view their current situation as hopeless. The potential upside for these banks, hovering in the low to mid single digits, is large, and it is conceivable that the worst is over. I have linked an article in a prior discussion about SNV that was more upbeat than me about the bank's prospects, written by Thomas Brown: Guru

Another more detailed discussion, presenting a more nuanced case, can be found at The Inoculated Investor: The Bull and Bear Case for Synovus Financial (SNV). This later discussion is strictly for LBs who want to take a break from reading the Internal Revenue Code.

In other words, when I recently made small LT investments in SNV, HBAN and MI, I at least knew about some of the dangers, most of the carnage had occurred with stock prices returning to the 1990-1991 level, and the dilution had already taken place (though some argue that more may be necessary for SNV). If these banks survive, I would expect that the recovery process will be a long one.

The WSJ article points out that these three banks will unlikely pay back TARP anytime soon. I would have no reason to disagree with that conclusion. I would be surprised by a payback in 2010 from any of them. The most important reason to read this article is its discussion of how these banks have reserved for loan losses. For example, in this article, it points out that Huntington (HBAN) has a loan loss allowance of only 47% of nonaccrual loans compared to the average of 86%.

I have had nothing positive to say about MI, HBAN and particularly SNV. If these banks survive and recover, or if one of them shocks me and prospers in the decades to come, it will not be in my opinion the result of the efforts of anyone at those institutions who contributed to their current predicament. I refer to it as analogous to that blind squirrel stepping on the acorn, that is, economic conditions will improve to such an extent that even the most leaky boats will rise, and the most incompetent fisherman will find lots of fish. If a double dip recession occurs within the next year or so, it may be hard for these institutions to navigate it successfully. So, at a minimum, I would expect that they would need about three or four good years before the next downturn to gain more secure footing.

I thought that I would link the long term charts of SNV, MI, and HBAN going back to 1990:

When you look at those charts, to me, that defines colossal failure.

Synovus is primarily a Georgia bank. Georgia leads the nation in bank failures this year. What is the problem with Georgia? Some of it is exposed in this article from (see my earlier discussion: Synovus Gets Some Attention From Bloomberg) Basically, it is what I would call the Good Ole Boy banking practices. There is no excuse for that. Synovus was recently moved by KBW last week from its main banking index, and SNV was replaced with First Niagara (FNFG) Reuters First Niagara is not owned at HQ. It is one of Cramer's five recommended regional banks stocks mentioned in his book Getting Back to Even, at pages 134-136.

This is a handy list of the banks that received TARP money: Bailout Recipients | Eye on the Bailout

The FDIC publishes a list of the banks seized by it: FDIC: Failed Bank List

For anyone interested in a short hand explanation of the categories of bank capitalization, these two articles are good introductions: Capital requirement - Wikipedia

This kind of information can be found by individual bank name at Safe & Sound (tm): Bankrate free rating system for banks, thrifts, credit unions

2. List of Banks that Have Already Deferred Paying the Government's Preferred Dividend: For the last payment due for the 3rd quarter, 33 banks failed to pay the government its cumulative preferred dividend in August. I found a list at the When it gets so bad that the bank has to stiff our destitute Uncle Sam (at least the government's preferred dividends are cumulative for recepients who have bank holding companies), I would be reluctant to spend the time trying to find an LT worthy of even a few dollars of my capital. This list is not exactly where I would go to find candidates for a LT purchase. That is the LB talking, saying please don't make it look at this crap. It is not well known, but the OG has a gambling streak that must be hereditary since he once bet a nickel when he was five on which rain drop would hit the window sill first. So the OG may just look at that list, and let that $300 fly.

I did not realize until this weekend that banks without holding companies are allowed to pay non-cumulative dividends to the government, and a few have quit paying those dividends. This information was found at scribd.

3. Strategists' Predictions for 2010 in the Stock Market: In Barrons this weekend, I noted that GS was predicting that the S & P 500 will move up to 1300 at the start of 2010, and then pull back. If that happens, I will be trimming some of my stock positions. At the start of that article, the author mentioned that 2010 will be the year for "guarding gains and managing risk". I would view risk management to be key during every year of a long term secular bear market, where I follow an entirely different set of trading rules. I have been constantly managing risk for almost a decade now, in a somewhat hyper fashion at times, that extends to major shifts in asset allocation and managing risk for many individual security selections within each asset category.

I am just going to make a few other notes from this article since some interesting points are made. The consensus for the strategists is for S & P 500 earnings of $76 in 2010, up from $61.33 in 2009. GS economists expect unemployment to peak at 10.8% in 2011. The futures market expects a 1% federal funds rates by the end of next year, while GS thinks the Fed will be on hold for longer. Corporations are flush with cash after cutting capital spending by 16% in 2008 and 32% in 2009. A Merrill economist points out that consumers in emerging nations are at the start of a credit cycle, with mortgages at a small fraction of what they are in the U.S. compared to GDP. Laszlo Berinyi claims we are in an early stage of a bull market. Merrill expects a 5% appreciation of the Chinese currency against the dollar, and for the dollar to rise against the Euro. Another article in Barron's by Randall Forsyth makes the case for the dollar rally to continue "for Now"

And even Alan Abelson sounded a tad bullish on the greenback in his column in Barrons. He discussed a call from Deutsche Bank's forex team on 11/26 that the dollar was more than 20% undervalued versus the Euro. I had seen estimates from other firms in the 20 to 30% range. Abelson adds that the Deutshe Bank team at least mentioned that the dollar would rally about 12.5% over the next six months after reaching a 20% undervaluation level, based on past historical experience. But as the last paragraph of the column shows, Alan is still clinging to the hope that the market will see his wisdom and retest the lows from 1932 soon. I would urge any Abelson fan to re-read his column from the weekend before the market took off:

It did seem to me that the dollar sell-off was overdone, so I bought the ETF that attempts to double short the Euro and sold all of my WIP and BWX. Bought 50 EUO at $17.17 as a Hedge If those two international bond funds had been paying decent dividends, I may have kept some shares. But I started to view them as primarily bets against the dollar that I was no longer willing to make. Sold all of WIP ETF-View Risks Now Outweighing Potential Reward/ Sold BWX at 59.38/ Both of those ETFs would have to fall at least another 10-15% before I would start to nibble. When I sold both of them, I viewed the risk outweighing the potential reward. In addition to the currency risk heightened by a prolonged and steep fall of the dollar, government bonds from foreign developed nations have also enjoyed a long term bull market, and are subject to a reversal of that good fortune when interest rates start to rise in their host countries. Those are just two major risks with these foreign bond ETFs. If I buy a ten year U.S. treasury bond to yield say 3.4%, which I would not do if you held a gun to my head, I would not face currency risk. I do face interest rate risk. And, there is always the risk of lost opportunity, that is, earning more with those funds by investing now in assets that will hopefully provide a much larger real rate of return and/or by waiting to invest that money in 10 year treasuries until the potential return outweighs the risks. For me, if I could buy a ten treasury with a 7% yield now, I would buy some, but not a lot.

4. ZBPRC or ZBPRA (currently own 100 ZBPRA bought at $7.8 and 30 shares of ZBPRC bought at 18.4): Today's problem is to decide whether or not to buy $5000, hypothetically as a mental exercise of either ZBPRC or ZBPRA. I would never come close to investing that sum in Zions. The first issue is whether to take the risk in either of them. The second assumes that the decision is made to invest, and the appropriate amount is 5 thousand considering the risk, and then to choose one or the other preferred stocks at the closing price on Friday or assuming that ZBPRA falls to $11 after the exchange offer expires (/More on ZBPRA)

ZBPRC at $19.7 ZB.PRC Stock Quote / 254 shares for $5,000
ZBPRA at $12.44 ZB.PRA Stock Quote (closing price as of 12/18/09) 402 shares for $5000
ZBPRA at $11 (hypothetical price after exchange offer)= 455 for $5000

ZBPRC Par value $25 9.5% fixed coupon
ZBPRA Par value $25 greater of 4% or .53 above 3 month Libor

Both are of equal priority, from the same issuer, non-cumulative, perpetual, and classified as equity preferred at the same level of priority as the government's preferred stock. Bought 50 ZBPRB in Roth at $19.9 Dividends are paid quarterly. Zions is paying a common stock dividend currently of 1 cent per quarter.

Historical Libor Rates: LIBOR Rates History (Historical)

Current 3 month Libor: .25%

AS of 9/30/09: Zions has a Tier 1 risk based capital ratio of 10%, total risk based capital 0f 13.24% , and nonperforming loans at 5.4%Form 10-Q Zions claims to have 800 million in cash at the holding company level and annual cash flow requirements of about 160 million. AllBus

My analysis of this problem is in the next day's post: Analysis of Prior Question: ZBPRA vs. ZBPRC OR ZBPRB/

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