The Credit Crisis Financial Stocks Short Journal

m22au,
the CAP terms seem quite tough
http://www.treasury.gov/press/releases/reports/tg40_captermsheet.pdf

highlights
-9% dividend yield on pref, that needs to be paid either no matter what(even on an eventual conversion to common), it says using stock is acceptable. Dilution
-Dividends at 0.01c a share, and the bank is prohibited from paying preferred dividends(I didnt understood this part fully, it seems they can only pay private pref dividends if they pay the government first)
-If the bank is behind dividend payments governments gets to apoint people for the board of directors(nationalization, plus USG will became majority owner as the stock will sink in antecipation the government will be paid in common stock)
-No share repurchases, no repurchases of preferred stock, mergers need to be approved if they affect the gov preferred
-Plus more warrants dilution
-If shareholders dont approve dilution clauses of Convertible Preferred, the dividend will be raised by +20% per year!Plus the conversion price tanks by 15% per year the more shareholders wait to approve(talk about forced seizure of private property)

The conversion price will be a bit high since financials tanked after the 20 day period ending in feb 9, but it looks like shareholders weren't treated so kindly on this one
Bottom line is if a bank needs capital UST can provide but its quite costly in terms of freedom, dilution. It just doesnt seem to make any sense to get the preferred, you might as well convert right away(you are forced to anyway, unless you get private equity capital, issued at no less than 25% of the government conversion price, to buy the government out), looks like Geithner is on the way to became the largest owner of XLF
 
Quote from Daal:

m22au,
the CAP terms seem quite tough
http://www.treasury.gov/press/releases/reports/tg40_captermsheet.pdf

highlights
-9% dividend yield on pref, that needs to be paid either no matter what(even on an eventual conversion to common), it says using stock is acceptable. Dilution
-Dividends at 0.01c a share, and the bank is prohibited from paying preferred dividends(I didnt understood this part fully, it seems they can only pay private pref dividends if they pay the government first)
-If the bank is behind dividend payments governments gets to apoint people for the board of directors(nationalization, plus USG will became majority owner as the stock will sink in antecipation the government will be paid in common stock)
-No share repurchases, no repurchases of preferred stock, mergers need to be approved if they affect the gov preferred
-Plus more warrants dilution
-If shareholders dont approve dilution clauses of Convertible Preferred, the dividend will be raised by +20% per year!Plus the conversion price tanks by 15% per year the more shareholders wait to approve(talk about forced seizure of private property)

The conversion price will be a bit high since financials tanked after the 20 day period ending in feb 9, but it looks like shareholders weren't treated so kindly on this one
Bottom line is if a bank needs capital UST can provide but its quite costly in terms of freedom, dilution. It just doesnt seem to make any sense to get the preferred, you might as well convert right away(you are forced to anyway, unless you get private equity capital, issued at no less than 25% of the government conversion price, to buy the government out), looks like Geithner is on the way to became the largest owner of XLF
More...


2 months to do stress test .Another 6 months to raise private capital.

What a comedy.:p


I see no reason to buy banks based on this plan. And alot of reasons to short them assuming more loan losses.

We will need to see bottom line economic #'s turn now. It's obvious the government is out of bullets.
 
Looks like Obama will get more funds for the US banks through his Federal Budget, this should make it easier to pass since it will contain lots of goodies and stuff that congress people want. The FDIC type nationalization and wiping private investors even at the bond level to generate capital seems to be off the table.

Althought shareholders and pref shareholders aren't being treated so kindly. Looks like pref shares wont pay a dividend(They seem to be trying to force the conversion) at C and the premium for the conversion for common stock is not really important since the hole that Citigroup is in is gigantic and shareholders should expect a dilution of 99%+ after its all finished, a little premium here or there wont make much difference

This should apply to other banks as well. As a long the short seller is right the bank has a big hole in the balance sheet, the current government policy and a low stock market cap should help the stock to be driven close to $0
 
Thanks for that post Daal - I had not seen the Siegel article.

Interesting logic, it does make me somewhat less bearish on equities.

However I still think that this is a Japan type situation, where years of balance sheet repair (individuals and businesses) may be required.

The only alternative that I can see is for the printing presses to be used with more vigour.



Quote from Daal:

Jeremy Siegel wrote for the WSJ that the market is not so expensive and financials could be distorting the PE ratio. The bloggers who feel that need to be bearish all jumped on him but I think he is dead right
http://macrospeculations.blogspot.com/2009/02/jeremy-seigel.html
More...
 
Quote from m22au:

Thanks for that post Daal - I had not seen the Siegel article.

Interesting logic, it does make me somewhat less bearish on equities.

However I still think that this is a Japan type situation, where years of balance sheet repair (individuals and businesses) may be required.

The only alternative that I can see is for the printing presses to be used with more vigour.
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I'm less bearish as well. But I'd agree, I'm nowhere thinking of going long(except a few deeply undervalued equities), this whole European mess could blowup and that would be a LEH in steroids type event
I shorted some GS on monday, I'm going to short some more today. They have been decoupling and have rallied. I dont believe this, I think their levered portofolio could easly have a 'sudden deterioration' like MER after the BAC purchase. They brought down their levered by selling the good stuff
 
Quote from Daal:

Jeremy Siegel wrote for the WSJ that the market is not so expensive and financials could be distorting the PE ratio. The bloggers who feel that need to be bearish all jumped on him but I think he is dead right
http://macrospeculations.blogspot.com/2009/02/jeremy-seigel.html
More...

Remind me of the last post-bubble bust that stopped going down when values become "not so expensive".

True crashes don't stop at fair value, or even cheap. They stop at absurdly undervalued levels. Benchmark post-bubble decline is 75% and sometimes it goes even more, like 80, 90, 95%. Personally I think 75% is quite likely this time, but would not rule out 80-90% even though it is less likely.

Also, last year you said you focused too much on short-term timing, not holding on enough to conviction positions, and how that cost you lots of missed profits. You seem to be repeating this self-confessed error (easy to do, hell I've missed plenty by trying to "trade around" some of the positions). It might be better to stop watching the day to day news, and start looking at the bigger picture on a longer timeframe.
 
I agree Cutten (and I think Daal agrees as well) - Siegel's article made me less bearish on equities, but definitely not bullish.

For example I note that the fertiliser stocks are well above their November lows, so whenever "the" equity bottom occurs, they might be a good buy at the November 2008 levels.


Quote from Cutten:

Remind me of the last post-bubble bust that stopped going down when values become "not so expensive".

True crashes don't stop at fair value, or even cheap. They stop at absurdly undervalued levels, and not a moment before.
More...
 
Quote from Cutten:

Remind me of the last post-bubble bust that stopped going down when values become "not so expensive".

True crashes don't stop at fair value, or even cheap. They stop at absurdly undervalued levels. Benchmark post-bubble decline is 75% and sometimes it goes even more, like 80, 90, 95%. Personally I think 75% is quite likely this time, but would not rule out 80-90% even though it is less likely.

Also, last year you said you focused too much on short-term timing, not holding on enough to conviction positions, and how that cost you lots of missed profits. You seem to be repeating this self-confessed error (easy to do, hell I've missed plenty by trying to "trade around" some of the positions). It might be better to stop watching the day to day news, and start looking at the bigger picture on a longer timeframe.
More...

If you look at Ken Rogoff's work the avg equity market decline in financial crisis is 55% real terms(this is probably 45% nominal). US is over that, since this is global thing its probably resonable to expect more. I theorized that a great depression 2 could occur because even though US authorities seem to have learned from the 30's in terms of protectionism and monetary policy, we need governments all around the globe to do that since globalization is now much bigger than in the 30's(the european situation is particulary troubling since Merkel from Germany doesnt seem to get it)

So I'm not enthusiastic about US equities but I recognize the R/R is getting worse and the PE is not that bad. I need to find counter arguments to my trade because overall bearishness has became the norm and the last time I was in this position I was long oil equities and ag commodities, if I had gotten carried away I would have lost something like 15% of my networth.

With regards to short-term trading I've cut back but some amount of trading seems inevitable. I shorted WFC and said I didnt care about the big rally everyone was predicting, the SPY put a +20% after that but the position is still well in the money. If I tried to time my entry I could have missed it. But its hard, I always seem to want a better bargain with market timing
 
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