Online brokerage firm E*Trade Financial Corporation (NASDAQ: ETFC) hasn't escaped the financial-sector pain this week. The shares plunged 4.7% on Wednesday after E*Trade warned that it expects three-year cumulative losses on its home-equity portfolio to exceed the top end of its previously forecast range of $1 billion to $1.5 billion. Additionally, the firm confessed that its total pretax realized loss on its preferred equity holdings in Fannie Mae and Freddie Mac amounted to $150 million, net of hedges, for the third quarter.
In response to the news, Fox-Pitt Kelton widened its third-quarter loss estimate for E*Trade. The analysts now expect a per-share loss of 42 cents rather than 27 cents. In comments accompanying the revised outlook, Fox-Pitt noted that ETFC's efforts to patch up its damaged balance sheet haven't been sufficient to eliminate doubts regarding its home-equity line of credit losses.
Yesterday's headlines probably came as an unpleasant surprise to the new crop of ETFC bulls. The International Securities Exchange (ISE) is experiencing a surge in call volume on the stock, which has now racked up a 10-day call/put ratio of 6.51 on the exchange. In other words, traders have purchased about 6.5 calls to open on ETFC for every 1 put during the past couple of weeks.
Of course, one might argue that ETFC cannot possibly fall too much further on the charts, which reduces the attractiveness of even in-the-money put positions. The equity has recently established something like a floor near $3, and it's hovering narrowly above this region in today's session.
However, the rampant call volume is still a point of concern. ETFC may have found a measure of support to stem its decline, but this doesn't necessarily mean that the stock is poised to rally. In fact, the situation here is somewhat analogous to the one faced by Sirius XM Radio (NASDAQ: SIRI), which Douglas McIntyre suggested today may be ripe for delisting. While E*Trade shares only have about 3 points to lose from their current perch, yesterday's announcement underscores the fact that there are still key fundamental weaknesses pressuring the stock.
Until ETFC fully purges its balance sheet of toxic debt, it's wildly optimistic to assume the shares will collect significant gains anytime soon. And, if bullish option players decide to unwind their call positions as the stock remains stagnant, it could serve to exacerbate E*Trade's difficulties.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
9-12-2008 @ 2:10AM
paul said...
Phone discussion & comment on real estate and mortgage recovery
Thank you for having taken my phone call on 09-10-08
Re:Fannie and Freddie bail out Phone discussion & comment on real estate and mortgage recovery
As I mentioned I have over 38 years in real estate and mortgage banking.
I truly understand both markets and know that I have a realistic strategy to help the real estate industry and the mortgage industry to reach it highest and best use as well as stimulate the local community economics through out the USA.
I do not think the government can do it for us. we together must do it for ourselves and for the good of our community.
Paul Runninghorse Vigil
303-921-8193
www.capitalvigilfundingdept.com
paul.vigil@comcast.net