The Stock Sleuth

Detecting deep values in turbulent markets

A Common (Pun Intended) Misconception-Shorting BAC Won’t Force A Capital Raise $BAC $JPM $WFC $GS

Many of the pundits on financial entertainment channels keep claiming that the bank vigilantes want to put banks out of business, or force them to raise capital by excessively, or even naked shorting the bank stocks. One big problem with that though, it won’t work. Not even close.

Without even going into how U.S. banks are currently excessively capitalized (thus delaying the effects of QE2), the general misunderstanding concerns tier one common equity. This is the ratio of common shareholder equity that a bank must hold per new banking requirements to ensure that a major institution will not contribute to or cause a financial crisis. In Europe, the hullabaloo involves the marking down of sovereign debt to appropriate levels, and what condition Euro bank balance sheets would be in after the markdown. So, in essence the bond shorters in Europe are trying to damage bank balance sheets. This is effectively a run on the bank, as they would need to raise capital to maintain regulatory tier one ratios.

In the U.S., this has little relevance. The major U.S. banks have minimal exposure to Euro sovereign debt, and during the conference calls they all disclosed their total exposure to Euro debt including corporate lending. Realistically, if BAC owns Ferrari bonds, do you think they will have to write that down? JP Morgan was very clear about this, they said they will be taking up market share from those banks that run scared of lending to worthy companies in the Euro region.

The bottom line is that by shorting BAC stock, they won’t be forcing a write down of the common equity. BAC is sitting on a ton of cash, unlike in 2008 when all the major banks were looking for deposits to shore up their capital base. In fact, some banks are charging a fee to hold excess cash. In 2008, the shorters were trying to strangle the bank’s ability to access capital from the equity markets. BAC doesn’t need to sell stock.

Once BAC gets the mortgage deal with the Attorneys General behind them, and the AGs are pushing to get this done in the next few weeks, the majority of BAC’s problems will be behind them. They’ve settled with the GSE’s already, and any dispute you hear about, from NY type attorneys trying to make a political name for themselves, will be settled in court. Meanwhile, BAC can easily handle another $25B hit to the balance sheet, when they crank in $35B per year in revenues and 10B+ in income.

Dick Bove even suggests that if BAC stock were worth one penny, it wouldn’t matter. Once you understand how tier one common equity works, then you will understand that he is right. The stock is dirt cheap and universally hated. I hope it goes lower so I can grab some cheap LEAPS. Here is Bove’s interview with Bloomberg. Take particular note of Ms. Brennan’s failure to understand the relationship between equity price and common equity. This is a major public misunderstanding:


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Checking in with Ford-Still Not Feeling the “Impending” Recession: $F $GM

Ford’s internal sales analyst George Pipas had this to say a few days ago:

“At this point, we haven’t observed any slowdown in the pace of sales in August resulting from the [debt ceiling] debate in Washington or the stock market volatility.”

And sales were up in the second week of August over the first week?! said Thursday that so far, stock market volatility has not negatively impacted auto sales. The firm said the seasonally adjusted annual sales rate through the second week of August was 12.2 million, a slight increase over 12.1 million in the first week.

“Since the industry maintained sales in the face of last week’s turmoil and uncertainty, then it is likely that confidence has not been undermined enough to prevent the to prevent the release of pent-up demand this fall,” said Edmunds economist Lacey Plache, in a prepared statement.

George comes back with an explanation. Just because uninformed clowns on CNBC scream recession every 5 seconds, it doesn’t mean that they can stall the economy:

Ford is for now sticking to its estimate that total US light-vehicle sales will reach 12.7m to 13.2m this year. “Clearly, there’s an elevated level of uncertainty as it relates to the economy compared with three weeks ago,” says George Pipas, the company’s sales analyst, “but that doesn’t necessarily cause you to change your forecast.”

Here are the facts:

-Ford sales increased 13% in the U.S. in July and 3% in China.

-Ford’s balance sheet improved by $3 billion last quarter buy using cash flow from operations to pay off debt, saving considerable interest expense. This is now saving $1B/year in interest expense due to the retirement of $20B.

-Big key here-Ford labor negotiations are ahead of schedule, this is NOT going to be contentious, and may be done before Sept. 14th:

Other supporting links:

Filed under: Uncategorized

The Real World Continues To Improve-$HD $LOW $MGM $F $GM $BZ $GGP $JPM $WFC

There is absolutely no doubt in my mind that the fears present in the stock market (and certainly not present in the swap and lending markets) are overshadowing what is really happening. Home Depot is a proxy for household and small business spending, and they are not concerned:

From the call today:

Christopher Horvers – JP Morgan Chase & Co

First, since you opened up the dialogue, just curious if you could elaborate on what exactly quite positive means in terms of August trend, because obviously, we’re all very focused on if the markets had any impact to your sales?

Carol Tomé-CFO

Well, I’ll start with an answer to your first question. Based on the guidance that we have given you, it implies a 3% comp in the back half of the year, and that’s where we’re trending. So from that perspective, it’s quite positive.

There you have it. More positive up to the minute (because the analysts are incredibly skittish) commentary from management tied directly to the U.S. consumer. They go on to talk about how their sales are generally correlated to GDP, and HD for some reason is seeing a decoupling of GDP with their same store comps. It is a very real possibility that GDP will be revised upward at some point in the future. These numbers are revised several times.

This supports my prior post that America will chug along, regardless of ineptitude in Washington, or misconceptions of the risk associated with European sovereign debt issues. Here are a few other reasons why this is not 2008. I can’t believe that I even have to go through this exercise, but here goes:

1. The banks have plenty of money. They have begun to charge customers for excess balances, and the money supply has gone parabolic. This cash will have to be deployed in assets riskier than 0%. QE2 has not been felt yet, while every bozo on CNBC calls it an unmitigated failure already. I’m not saying they are wrong, I’m just saying we don’t know yet.

2. Industrial production increased in July, and May and June were revised upward. Everyone ignores upward revisions to prior numbers, but the market generally hammers the bad numbers upon release (so much for the myth of forward looking stock markets):

3. Lending is increasing, and lending standards are easing:

“Like the previous survey released in early May, the new survey found that banks continued to ease terms for business borrowers, including those seeking to take out commercial and industrial loans. More competition among lenders was the most commonly cited reason for the loosened standards, although “a more favorable or less uncertain economic outlook” also factored into the decisions, the Fed survey found.”

This is 180 degrees the opposite behavior of the banks in 2008, period.


4. Fuel prices are dropping. In Massachusetts, I expect $3.50/gallon to be the bottom, but this is a significant boost to consumer spending, and other areas of the country are seeing a more significant impact.

5. Consumer spending is not going fetal like 2008. In fact, the CEO of Saks (the high end that everyone is worried about) stated today that comps are up and inventories are really lean. This was a major problem for marking down and taking losses in 2008. Consumer spending was up 8.5% last month from July 2010, as gasoline prices were falling. Auto sales were very strong. If you think it’s all gas prices, you are wrong:

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CEO’s Don’t See Demand Destruction-$F $GM $JPM $BZ $CODI $AAPL $GGP $BRKB $MGM

This article quotes a variety of executives across several business types. The general theme is that they continue to see recovery, and the black box algo-machines haven’t done any damage thus far.

On every earnings call I’ve been on this quarter, I’ve heard not only very positive commentary, but also that the summer has started off excellently, including Ford, GM, MGM, TAL, Compass Diversified, Boise Inc., etc. Even serial disappointer Cisco’s growth estimates were above “expectations”.

What executives are saying flies in direct contrast to the fear on Wall Street. Furthermore, there are positive data points in the past several weeks. Analysts equate stock prices directly with the economy. You hear that on every call, and these CEO’s are literally hand-holding and  reassuring nervous analysts.

This guy parades out a host of positive weekly data points that are pointing to a continuing recovery:

Pricing a Collapse That Isn’t There:



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Vegas Sees 16th Straight Month of Visitor and Room Rate Increases $MGM $LVS $MPEL $WYNN

“June brought Las Vegas its 16th straight month of visitation and room rate gains, according to numbers released today.

The number of visitors for June increased by 7 percent from 3.1 million in 2010 to 3.3 in 2011, according to a monthly report from the Las Vegas Convention and Visitors Authority. Room rates for the month increased 13 percent from $90 last year to $101 in June of this year.”


There wasn’t a bad conference call among the group over the last two weeks. They were very bullish on Vegas, (yeah, yeah, and Macau).

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More Technical BS, The “Trend” Was Broken Last Summer Too-$SPY $F $GM $MGM $GGP $BZ $BRKB $JPM

Doesn’t it seem like Carter Worth is pretty much always wrong? In May of 09, he said to sell, the rally could not go through the summer. Not only did it continue, but it took the Macondo disaster in 2010 to derail it. Last June he called a bottom, and here we are at 1120. Now he says the “trend” is broken, and it market will not be able to get above 1250 this year. Just like all the hot air that Merideth Whitney spews constantly, as Jamie Dimon would say, “that is pure hogwash”.

Just last summer, the ridiculous trend lines these guys drew on the S&P chart was violated. If you had taken your ruler, and that is essentially what these guys do, drew a line along the dips from March of 09 to April 20, this trendline was broken as the S&P dropped 200+ points after a mini-slowdown, Macondo spill, and all the pundits came out to yell double-dip all day on the financial entertainment networks. Remember the Hindenburg Crossover?!

What happened at the “resistance” levels? The S&P wasted no time knifing though those technical levels. You can say it was because of  The Bernanke, but the truth is that we don’t know what the catalyst will be this time. It could even be a realization that the double-dip is not going to occur, and there are a lot of people actually studying the facts that believe this to be true:

Tons of evidence here:

Short-term positive macro data points here:

Refuting this being 2008 here:

When Charter Worth tells you to sell at resistance levels, it’s wise to just ignore him and focus on the fundamentals of the companies you actually follow, listen to the conference calls, and make your own decision for the long-term.

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