Fifth Third Bancorp (NASDAQ: FITB - option chain) shares are trading higher today after the company assumed $250 million of insured deposits from Freedom Bank, a failed bank in Florida. Investors seem to be taking this move as a sign of the bank's health, even though the total value of assets assumed only reached a small fraction of FITB's total deposits of more than $100B. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on FITB.
FITB opened this morning at $11.19. So far today the stock has hit a low of $10.92 and a high of $11.79. As of 12:30, FITB is trading at $11.40, up 55 cents(5.1%). The chart for FITB looks neutral and S&P gives FITB a 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a November bull-put credit spread below the $7.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just three weeks as long as FITB is above $7.50 at November expiration. Fifth Third would have to fall by more than 34% before we would start to lose money. Learn more about this type of trade here.
FITB hasn't been below $7.80 at all in the past year and has shown support around $10 recently.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in FITB.
In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.
If you live or work in Cincinnati, it's impossible to avoid Fifth Third Bancorp (NASDAQ: FITB). Branches and ATMs pop up around nearly every street corner, and, if you're downtown at lunch time, you'll see hundreds of employees from FITB's downtown headquarters flooding the sidewalks. (They're easy enough to pick out, since they're required to wear gold 5/3 insignia pins.) And please, don't get me started on the madness that is Fifth Third Day, which naturally falls on 5/3. Despite its impressive banking dominance over this Midwestern city, FITB -- to paraphrase Chris Farley -- just can't seem to get its share price on the right track.
What went wrong? At number 16 on our list of SPX laggards, FITB shed 76% of its value during the 10-year period ending June 30, 2008. If you're mentally steeling yourself for another subprime sob story, Fifth Third won't deliver. The stock has crumpled steadily since its April 2002 peak at $69.70, defiantly blazing a path lower even as the rest of the broad market enjoyed a stellar bull run.
In the late '90s and through the turn of the century, FITB grew at a pace that cancer cells would envy. From CNB Bancshares to Vanguard Financial to State Savings, the regional bank swallowed up its peers and rivals with a voracious appetite to rival Jabba the Hut's. A fine growth strategy -- if your bean-counters are all on the same page. When FITB took a $54-million charge against earnings after improperly accounting for some mortgage-backed security investments, it drew the attention of the SEC. In the meantime, the Federal Reserve Bank of Cleveland and the Ohio Department of Commerce imposed a moratorium on any further acquisitions.
The Wall Street Journal's "Fund Track" reported that some banks struggling to raise capital may sell their money management units. National City Corporation (NYSE: NCC) is selling its Allegiant Funds, Fifth Third Bancorp (NASDAQ: FITB) is considering selling its Fifth Third Asset Management, and KeyCorp (NYSE: KEY) will possibly sell its Victory Capital Management unit.
The Wall Street Journal also reported that Andrew Cuomo, the New York state Attorney General, is preparing to file civil securities-fraud charges against UBS AG (NYSE: UBS), possibly as early as this week. Sources said the lawsuit may include allegations of malfeasance by senior UBS executives.
WEB SITES:
Bloomberg reported that money manager John Paulson, the owner of Paulson & Co., is launching a hedge fund that will provide capital to financial firms which have been damaged by the housing crisis. Paulson, who wants to open the fund by December, used bets against the U.S. housing market to help him earn $3.7B in 2007.
After U.S. lawmakers reached a deal on legislation to alleviate the housing recession, the House of Representatives will today vote on a rescue plan for Fannie Mae -- Federal National Mortgage Association (NYSE: FNM) -- and Freddie Mac -- Federal Home Loan Mortgage Corporation (NYSE: FRE). Representative Barney Frank said that the package, which increases the likelihood Treasury Secretary Henry Paulson will get the authority to inject capital into the two, is "fully acceptable," Bloomberg reported.
Oil trading losses forced SemGroup LP, which used to be America's 12th largest private company, to declare bankruptcy yesterday. Reuters noted that SemGroup LP's parent company is SemGroup Energy Partners LP (NASDAQ: SGLP).
Minyanville's Sean Udall dares to share the kind of keen insight and actionable information you won't find in any prospectus. For more original thought, visit www.minyanville.com.
Earlier in the week, I noted that Goldman Sachs(NYSE: GS) was well positioned to capitalize on what's happening in the financial services space. And nowhere is that becoming more clear than in the advice it's offering and capital raises it's conducting for troubled institutions like Fifth Third Bankcorp (NASDAQ: FITB), Wachovia(NYSE: WB) and Washington Mutual(NYSE: WM).
Like looking to IBM (NYSE: IBM) for your office computer needs in the old days, Goldman is now the obvious choice if you're a bank CEO under siege.
But this may be a short-term benefit for Goldman, as the excessive concentration of business in one firm ultimately puts that firm's whole franchise at risk. If the Goldman brand is to maintain value with investors, it must become increasingly selective as to who it sponsors. But being choosy puts clients at risk.
In the banking world, the worst time to raise money is when you really need it. Ironically, this is the predicament for many banks – especially those that binged on subprime mortgage.
One of the latest victims is Fifth Third Bancorp (NASDAQ: FITB), which traces its roots back to 1858 (the company is the result of the merger of Third National Bank and yes, the Fifth National Bank).
Well, Fifth Third announced Wednesday that it plans to raise a minimum of $2 billion, which will include convertible preferred shares as well as the sale of non-core assets (for example, there is an electronic processing business that is likely to fetch a good valuation). There's more: the company says it will reduce the dividend by 66% (I guess it's better than nothing).
Basically, Fifth Third has heavy concentration in Florida and Michigan, both undergoing economic stress (whether from autos, real estate or construction). There are also some problems with leveraged leases that recently also suffered an adverse court ruling.
Unfortunately, in the current environment, it's not going to be easy to raise new capital. That is, the terms are likely to be harsh.
And investors are already anticipating this. In Wednesday's trading, Fifth Third's shares plunged 27% to $9.26.
Fifth Third Bancorp (NASDAQ: FTIB) is recently trading down $1.73 to $11 in pre-open trading.
FITB announced the planned issuance of $1 billion in tier 1 capital in the form of convertible preferred shares. FITB declared a Q2 dividend of 15 cents, a reduction from the previous 44 cents per share quarterly level. FITB says the anticipated sales of non-core business would supplement common equity by an estimated additional $1 billion.
FITB overall option implied volatility of 86 is above its 26-week average of 47 according to Track Data, suggesting larger price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
The level of bad loans at US banks is getting worse and not better. According to the FT, "Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, said it was likely loan-loss provisions and bank failures would rise in coming quarters as the fallout from market turmoil hits the real economy."
Three banks have failed this year and the FDIC says the number of "problem" banks sits at 90.
All of this may be tough on regulators who may have to bail banks out, but it could be tougher on shareholders who have stock in mid-sized and regional banks. NCC (NYSE:NCC) has already had to raise $7 billion. Its shares are down to $5.68 from a 52-week high of $35.83. Other banks in the same category, such as Fifth Third (NASDAQ:FITB) and KeyCorp (NYSE:KEY), have lost about half their price compared to 52-week highs.
The news from the FDIC shows that investing in financial firms remains tricky and dangerous. It is not for the faint of heart.
Douglas A. McIntyre is an editor at 247wallst.com.
The Wall Street Journal reported that a federal judge said that the government had "sufficient evidence" for a jury to conclude that a conspiracy to fraudulently boost the financials of American International Group Inc (NYSE: AIG) began with former CEO Maurice R. "Hank" Greenberg. That led to a transaction that artificially inflated AIG's loss reserves.
Citigroup Incorporated's (NYSE: C) Falcon Strategies fixed income hedge fund is down 75%, the Wall Street Journal reported, bad news for the three U.S. banks that invested in it to help increase returns on employee life insurance. One of the banks, Fifth Third Bancorp (NASDAQ: FITB), is suing Transamerica Life and Smith Barney, both of whom helped to arrange the investment, and some are now questioning whether Citigroup will be forced to give back some of the investments as they have with individual investors.
After it stopped offering some mortgages last month because it was swamped by volumes of new applications, the Financial Times reported that First Direct, a unit of HSBC Holdings Plc (NYSE: HBC), has resumed lending to new customers. The bank said it has continued to receive "significant interest" in its mortgages from existing customers.
OTHER PAPERS:
In an effort to raise capital from shareholders, the Telegraph reported that Barclays Plc (NYSE: BCS) is considering a takeover bid for a rival in the U.S. or UK. Sources believe Barclays may attempt to acquire an investment bank, a struggling bank or a deal in a fast-moving economy. Potential names mentioned include UBS AG (NYSE: UBS) and Lehman Brothers Holdings Inc (NYSE: LEH).
National City (NYSE: NCC) volatility Elevated; NCC sells off on EPS & loan exposure. NCC reported 3rd quarter 2007 net income of $106 million, or 18 cents per diluted share. Goldman Sachs says "turning NCC around is going to take time. Mortgage contributions are likely to remain depressed, while credit will remain an issue." NCC has a current dividend yield of 7.34%. NCC November option implied volatility of 45 is above its 26-week average of 31 according to Track Data, suggesting larger price fluctuations.
Fifth Third Bancorp (NASDAQ: FITB) volatility Elevated as FITB near 10-year low. FITB, headquartered in Cincinnati, is recently down $0.99 to $28.99. Smith Barney says "while FITB was going through its regulatory issues, it tried to offset by taking on more rate risk. One of our concerns has been that it was also taking more credit risk." FITB November option implied volatility of 38 is above its 26-week average of 27 according to Track Data, suggesting larger price risks.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
MOST NOTEWORTHY: Palm (PALM), Fuel Tech (FTEK), Weyerhaeuser (WY), and John Wiley & Sons (JW.A) were today's noteworthy upgrades:
Palm Inc (NASDAQ: PALM) was upgraded to Outperform from Market Perform by Morgan Keegan, who expects PALM's recapitalization to bring more financial discipline, better growth from new products, and views the valuation as compelling.
FuelTech Inc (NASDAQ: FTEK) was upgraded to Buy from Accumulate at ThinkEquity, which believes the company technologies are well-positioned as the U.S. Clean Air Act takes effect.
Bank of America upgraded Weyerhaeuser Company (NYSE: WY) to Buy from Neutral, citing valuation and their prediction that the company's restructuring will create value for shareholders.
John Wiley & Sons Inc (NYSE: JW.A) was upgraded to Buy from Hold by Stifel Nicolaus & Co, which views the company as a consistent performer with emerging catalysts and reasonable valuation.
Fifth Third Bancorp (NASDAQ: FITB - option chain) shares are trading higher today after the company assumed $250 million of insured deposits from Freedom Bank, a failed bank in Florida. Investors seem to be taking this move as a sign of the bank's health, even though the total value of assets assumed only reached a small fraction of FITB's total deposits of more than $100B. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on FITB. 
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Minyanville's Sean Udall dares to share the kind of keen insight and actionable information you won't find in any prospectus. For more original thought, visit 
In the banking world, the worst time to raise money is when you really need it. Ironically, this is the predicament for many banks – especially those that binged on subprime mortgage.
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