The Credit Crisis Financial Stocks Short Journal

I think you're right, however what if bondholders are forced to take a haircut bigger than 25%?


Quote from Daal:

Financial stocks nosediving 6%, preferreds down 13% and C bonds tanking, YTM of 15% on the highest yielding, reaching junk status

The one I own went into the red yesterday and trades at 68c on the dollar with a 5% coupon(YTM 13.3%), my short C stock hedge worked up to this point so I still show a small profit but the short is now so low I'm basically naked long the bond

These yields seem absurd, even in worst case scenario of nationalization and say a 25c haircut for the bonds(and this scenario would destroy bank senior debt markets so its not going to happen), then they became de facto agency bonds with 5% coupons. In that event I would have a capital gain as they go to premium to par(par being 75c on the dollar)
I think the market is nuts in leaving those yields out there
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This administration is much slower at doing things.

I'd say that there is a 75% chance that there is no concrete response from Obama / Geithner before Monday morning.

Announcements to the effect of "We'll come up with a plan" do not count as a concrete plan. If this was pre-Jan 20, Paulson would be working all weekend and have a bailout ready by Sunday evening.


Quote from Daal:

C bonds reaching junk
http://reports.finance.yahoo.com/z1?b=1&is=citigroup&sf=y&so=d

The question is how long will the administration watch as everything collapses in their face
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Quote from m22au:

I think you're right, however what if bondholders are forced to take a haircut bigger than 25%?
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I guess I will have to take that risk, in that case though financial stocks will dive so much I should benefit in other shorts. But at this point I believe large US bank bonds are as good as agencies bonds and they are worth 100c on the dollar(more if the coupon is 5%+), yet they trade around 75-90c. The market seem to be taking the fear a bit too far
 
However the chance of a concrete response from Obama / Geithner before Monday morning increases as the stockmarket tanks, particularly if the Dow closes below 7282 (9 Oct 2002 closing) and 7197 (10 Oct 2002 intraday)


Quote from m22au:

This administration is much slower at doing things.

I'd say that there is a 75% chance that there is no concrete response from Obama / Geithner before Monday morning.

Announcements to the effect of "We'll come up with a plan" do not count as a concrete plan. If this was pre-Jan 20, Paulson would be working all weekend and have a bailout ready by Sunday evening.
More...
 
Quote from m22au:

Thanks Stinkyfelix.

Earlier in the week, the cynic in me thought that the government will not allow BAC and C to fail the 'stress test'.

However your argument makes a lot of sense.
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This past week has been a "stress test" of sorts. Looks like they both failed with flying colors.
 
Looks like instead of overnight nationalizations we will get creeping nationalization due political reasons. We are seeing a gradual process where banks get more capital, 'agree' more and more with government moves, have the government rising as a share of their equity

The thing is if the banking system needs more capital even above the TARP amounts, nationalization wont do anything about that problem.

That is, unless preferred holders and perhaps senior bondholders are wiped out as a way to 'recapitalize' the bank. Dodd is saying is politically impossible to get more funds due widespread anger, this could mean Bill Gross will overestimated the degree of which the government would handout cash to him. I might get hurt as well as a bondholder but C bonds are already pricing in a haircut.

There is $500b in C bonds out there, will the government really have the guts send half trillion in losses through the world and raise lots of the issues of counterparty fears that have diminished?I find that doubtful
 
Quote from Daal:


I put 1% of my networth on SPY puts yesterday, will probably buy more. I'm bought half MAR 31 75.00 and half JUN 77.00 puts. I beginning to think the JUN look more attractive since by the time the lows get tested we should see a double whammy effect of the IV of the puts and Vol going through the roof and you also get more time, of course your pay off is worse but a VIX at 60 could hand you a nice profit to take
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I said I would probably buy more, well I didnt. This lastest stock plunge shows I problem I have been having in trading.

I have been trading too 'jewishly', I keep trying to get a nickel in bargains discounts to buy or waiting for bigger rallies to short and endup losing whole dollars. Loading up in JUN puts should have been a 'home run' trade for 2009 like fed futures last year, due my conservative position size and waiting for a better bargain, the gains were limited and could be wiped out if C bonds are wacked
 
Going to have to take profits on SPY puts on the open since the reason I bought them has played out(JP Morgan research on bears low testing). The trading service I subscribe to(quantifiable edges newsletter) says the market is very oversold and there is an significant upside edge, so unless we get a Oct 08 type crash, the market should come back. I'm long SPY to help me hold bank shorts, fed futures, long dollar betting on the rebound, but the position is already underwater, I plan to add more on the open

There is an interesting article on the FDIC problems at running banks
http://online.wsj.com/article/SB123543631794154467.html?mod=article-outset-box
This could mean we will get this hybrid nationalization instead of FDIC take over, I think the implication for bank shareholders is the same, dillution and lower prices
 
Bill Gross is saying nationalization is a bad idea
http://www.pimco.com/LeftNav/Featur...ll+Gross+March+2009+Hairy+Lips+Sink+Ships.htm

Now of course, pimco has a interest on keeping the current policies as it makes him money but his argument makes sense

The total amount of large bank debt and preferred stock is in the range of trillions, if the government were to wipe that out to 'capitalize' the banks, it could swap one problem for another. Banks would have capital but perhaps insurance companies would drop like flies, even Berkshire would lose big as almost 1/3 of their stock portfolio is in financials, plus who knows who else is holding this stuff. To wipe that much wealth out in the range of trillions is like selling a put in the financial system, perhaps you collect something in terms of less moral hazard or lower fiscal cost but you risk disastrous consequences

In the other hand, common stocks, preferred and to a much smaller extend bank bonds, have already collapsed, so any institution who keeps their book in a mark to market basis has already taken big losses in those assets, the question is if further losses would make a difference. Bank common and preferred shares probably wouldn't(XLF is already at $8, PGF at $7) but the bonds almost certainly would as they havent collapsed yet and their size makes the stocks look like nothing
 
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