It has been five weeks since I posted Serious Money: Tempting fate with 10 financials. The results of buying into the following pool of financial stocks at a time when the "hate 'em" factor was at a peak has been tremendous. The over all return has has been 26.3% with eight stocks up and two down.
For investors this might have been too speculative; for traders, they are probably grinning from ear to ear. For me -- we will see where we stand next year. As one of my colleagues reminded me, this is the real test, although I think there is reason for optimism.
The leader of the pack was MBIA Inc (NYSE: MBI), up 228%. In the absence of that gain the appreciation would have only been 3.5%. That beats all the indices but is not as dramatic.
Citigroup Inc. (NYSE: C) -- $18.45 down 63% from its 52 week high of $49.90; closed yesterday at $19.11, UP 3.57%
Lehman Br Holdings (NYSE: LEH) -- $16.88 down 75% from its 52 week high of $67.73; closed yesterday at $16.13, down 4.44%
Merrill Lynch (NYSE: MER) -- $26.25 down 67% from its 52 week high of $79.72; closed yesterday at $27.75, UP 5.7%.
MBIA Inc (NYSE: MBI) -- $4.92 down 93% from its 52 week high of $68.98; closed yesterday at $16.14, UP 228%.
E*TRADE (NASDAQ: ETFC) -- $3.06 down 84% from its 52 week high of $19.39; closed yesterday at $3.25, UP 6.2.
East West Bancorp (NASDAQ: EWBC) -- $12.46 down 67% from its 52 week high of $20.88; closed yesterday at $13.01, UP 4.4%.
Gramercy Capital (NYSE: GKK) -- $6.72 down 77% from its 52 week high of $29.45; closed yesterday at $6.80, UP 1.2%.
Newcastle Investment (NYSE: NCT) -- $5.88 down 72% from its 52 week high of $20.88; closed yesterday at $6.89, UP 17.18%.
Wachovia Corp. (NYSE: WB) -- $15.70 down 70% from its 52 week high of $53.10; closed yesterday at $16.65, UP 6%.
Washington Mutual (NYSE: WM) -- $4.43 down 89% from its 52 week high of $39.48; closed yesterday at $4.24, down 4.29%
In my original post I emphasized that you had to buy the pool for safety. During the last month, we have seen many stories about Lehman Brothers' demise or the collapse of a major bank like WaMu or Wachovia, and if that had happened the gains in MBIA would have made up for the total and complete collapse of any one of them. I have no reason to believe this is immanent. I do have reason to believe the opposite. During the last month I bought additional shares of WaMu, one of the two down stocks at $3.50 per share.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of MBI, NCT & WM.
The stock market was down yesterday and it is down again today. Bearish sentiment is roaming through Wall Street right now, so I thought I would look back on another occasion when the market was going through similar turmoil and I wrote about the following eight stocks, which I thought would be "safe havens" in such a storm.
Six of the eight did well and two did not, and of course one of those two was a disaster. Among the losers, I do not think anyone is fretting about UPS, which is still one of the few triple-A rated companies along with Berkshire Hathaway. It has been well reported that the slowing economy and higher fuel prices have been the major culprits affecting UPS's earnings. In the case of WaMu, it's demise has also been well reported, but at the time I recommended it WaMu had a stellar reputation of growth and high yield for over two decades. There is no hiding, it turned out to be a lousy pick and an ANTI-SAFE Haven
Washington Mutual(NYSE: WM) closed Monday at $4.21 down from $45.50; a 98% loss.
Fortunately the remaining six picks have done very, very well. If you had bought the pool, the average gain over the last two years would have been 7.14%. Adding the dividends over the two years would have raised this to 13.14%.
Yesterday the Dow Jones Industrial Average was down 225, so I decided to peg the financial stocks I wrote about investing in as a pool. We are often accused of bragging on the good days and having memory loss on the bad so I wanted to be transparent and forthright on the downside.
To my surprise the financial stock pool is actually up 9.96% on average. Six stocks increased in value, two were down and two stocks were even money. The big winner was MBIA Inc (NYSE: MBI) up over 68%!
In the same time frame the DJIA has gone from 11,397.56 to 11,431.43 (even) and the S&P has gone from 1263.2 to 1266.06 last night, for basically no change either.
The market is rebounding as I write so I expect the news is even better. Although, this pool of stocks beat the market so far in the short run, I hope to track this group for a year, or at least until Major League Baseball's spring training opens in 2009.
Oh, happy day. Mortgages issued in the first half of 2007 are going bad at a rate much faster than those issued in 2006. According toThe Wall Street Journal, data from the "Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months."
The news means that earnings could get worse at large banks that have mortgage loans at the center of their businesses. Wachovia (NYSE: WB) and Washington Mutual (NYSE: WM) come to mind. That should be especially interesting for investors in the two companies. Over the last month, both stocks have recovered. Washington Mutual is up about 2% and Wachovia has risen a remarkable 30%.
Wall Street had hoped that bank stocks, especially those with businesses focused on the mortgage markets, would improve as subprime loans worked their way through the system. That may have worked if prime mortgages weren't going bad at an increasing rate these days and loans from 2007 didn't appear to present more risk than those from earlier periods.
All of that is to say that a stock like Wachovia, which fell as low as $7.80 and then recovered to $18.41, is not out of the woods. As a matter of fact, it may be heading back in.
After the market closed last night, with the Dow Jones Industrial Average rebounding from Monday's notable drop and ending the trading day at 11,397.56, up 266.48 (+2.39%), I posted Serious Money: 10 finance stocks as the market bounces. This is the follow-up post listing the full pool of speculative stocks that as a group I believe will beat the overall market in the next 12 months.
The prediction business is thankless and the speculative business is even worse; it is often painful. I usually refrain from this activity but today I play the contrarian in a Sir John Templeton (RIP) sort of way, jumping into the stock market's worst performing sector with both feet. I believe the market is at or near a bottom and this summer is the time to buy.
Looking for a break in the clouds, yesterday I started choosing ten stocks knowing that three or four may go to zero, a few more will survive with modest gains, and three or four will rise, not returning to their old glory soon but more than covering the ones that fail. The first four picks have been bleeding all over Wall Street for a year now and the blood-letting is not done yet.
Initially I was looking for stocks that had fallen at least 70%. After reviewing my figures, I have compromised and changed that to 63% so that I could include some of the major companies like Citigroup Inc. (NYSE: C) that are broadly held and have strong reader interest. Prices are as of July 29, 2008.
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.
Seattle-based Washington Mutual, Inc. (NYSE: WM) was doing just fine on the charts, thank you, until the entire financial-services sector was upended in 2007 by the twin evils of caustic subprime loans and the ensuing credit crunch.
While it's an honor it would probably just as soon not claim, WaMu is a prime example of an otherwise decent stock that got slammed by a macroeconomic stealth bomb.
What went wrong? At No. 9 on our list of SPX stragglers, WM shed 83% of its value during the 10-year period that concluded on June 30, 2008. Prior to June 2007, the stock was trending higher along support from its 50-month moving average. Double-top resistance near $46 proved difficult to surmount, but WM was holding up respectably ... that is, until the first shock waves of the credit crunch hit in spring 2007.
Following news of massive subprime-related losses at hedge funds owned by Bear Stearns, Wall Street's attention was suddenly riveted to mortgage loans and the banks that carried them on their balance sheets. During WaMu's first-quarter report, chairman and CEO Kerry Killinger attempted to reassure anxious investors with the optimistic statement, "Over the past 12 months, we have taken a number of prudent actions to reduce our exposure to the subprime mortgage industry ... [which] limited our exposure to the mortgage market's downturn and position us well to expand and grow as market conditions improve."
Financial stocks were hammered again Thursday with Washington Mutual Inc. (NYSE: WM) chalking up the biggest percentage decline – about 13% – as questions remain about the bank's mortgage portfolio. Earlier this week, the savings and loan company reported a $3 billion loss -- the biggest quarterly decline in the bank's history.
The bank came out late in the day saying that it does its business through its banking operations and "does not rely on commercial paper" after a report took a shot at the bank's credit quality. But despite that reassurance, investors are left to wonder just how sound Washington Mutual really is.
And who can blame them? The collapse of the once-venerable Bear Stearns and the failure of California-based thrift IndyMac prove that it's hard to give even the biggest, most respected ones a safety seal of approval. And with expectations that more will fail (see list of those at risk), I've gotten curious about how my own bank is faring.
While I've been more than impressed with my bank, Chevy Chase 's services, a new tool from bankrate.com that lets you check the safety of your hometown bank, has me more than a little concerned. The Safe & Sound rating system uses a series of 22 tests to measure the capital adequacy, asset quality, profitability and liquidity of each financial institution.\
Joining the likes of other larger financial institutions and banks, mortgage giant Washington Mutual Inc. (NYSE: WM) joined the billion-dollar loss club. The company's quarterly results reflected a $3.33 billion loss, bringing its total loss reserve to $8 billion due to bad loans in its portfolio.
Similar to what kindergarteners face, the mortgage industry's "monkey see, monkey do" attitude just keeps the billion-dollar losses coming quarter after quarter. WaMu did say that it would be trimming up to $1 billion in costs by the end of next year. Ah, how nice! If you're a WaMu shareholder, does that statement give you any comfort? Probably not.
To go from an $830 million profit in 2007 to a $3.3 billion loss in 2008 is unspeakable, but it's almost the norm these days with mortgage-involved entities floating at the top of the fishbowl. Even though WaMu reflected a capital raise in April in its loss, the company still lost $3.34 per share even at that. Writeoffs totaled $2.17 billion and the company changed the time period from three years down to a year in which to evaluate defaults in its prime mortgage portfolio. As of this morning, WM shares are down over 20% from before Tuesday's report, and down over 57% for this year as well.
It's officially a trend because it's happened more than three times -- a bad financial report leads to a spike in stock prices. (I posted here and here about this phenomenon with Citigroup (NYSE: C) and Bank of America (NYSE: BAC) respectively). Now, the New York Times reports that five banks lost billions, or saw their profits plunge, but their stock prices rose an average of 12.9% in the wake of those reports.
Why? The conventional wisdom suggests that investors expected them to do much worse and were pleasantly surprised. And this phenomenon is not confined to banks -- this morning, Yahoo (NASDAQ: YHOO), which reported a penny less profit per share than the 10 cents analysts had expected, is up 3% in premarket, reportedly because it did not lower its guidance.
I am not convinced by conventional wisdom about why these stocks are up. My hunch is that there were many traders who sold short the stocks of these companies because they expected them to do worse than they actually did. When reported results beat expectations, investors bought the stocks, perhaps due to bottom fishing. These buyers caused the stocks to rise enough to trigger margin calls for those who were short. The shorts bought to satisfy those margin requirements, causing a buying panic. I wish I had data to test this hypothesis.
Again this week, in a list of earnings expectations for some prominent companies in a variety of sectors, we see an apparent optimism. That is, analysts are anticipating more earnings growth than earnings declines.
Analysts surveyed by Thomson Financial expect the following companies to report a rise in earnings when compared to the same period of the previous year.
The Securities and Exchange Commission (SEC) is becoming the very thing it is supposed to be stopping -- a stock market manipulator. The SEC was first established after the Great Depression to protect the general public from the shady stock dealings that caused that catastrophe. But the Wall Street Journal reports that the SEC has now become the epitome of the very thing that it's supposed to prevent.
That's thanks to a temporary rule it created last Tuesday that blocks the short selling of the stock of 19 big banks and financial institutions unless the short sellers can borrow those shares. (As Barron's [subscription required] points out -- it's interesting that the SEC has announced it is enforcing this so-called naked short rule since the practice is already illegal).
I can only imagine the profit opportunities available to those who had early access to this list of 19 -- which according to my calculations have risen an average of 27.5% since Tuesday. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- whose CEO made $20 million last year, according to AP -- are the biggest winners -- up 90% and 74.5% respectively since then. Meanwhile, all the other companies that the SEC did not protect are wondering why they were not on the list.
People familiar with the issue said that European regulators are gearing up to file new antitrust charges against Intel Corporation (NASDAQ: INTC). The charges, the Wall Street Journal reported, would allege Intel gave major European retailers an incentive not to sell computers that use Advanced Micro Devices Inc (NYSE: AMD) chips.
OTHER PAPERS:
The New York Times reported that News Corporation's (NYSE: NWS) New York Post and The Daily News, owned by Mortimer Zuckerman, are exploring a print pact and have been in talks to find ways to combine some business functions of the papers, according to people briefed on the matter.
Three people familiar with the matter said that the SEC subpoenaed Wall Street investment banks including The Goldman Sachs Group Inc (NYSE: GS), Deutsche Bank AG (NYSE: DB) and Merrill Lynch & Co Inc (NYSE: MER) in its hunt and crack down on suspected manipulation of Bear Stearns and Lehman Brothers Holdings Inc (NYSE: LEH) shares. Bloomberg reported that two of the people said the SEC, which yesterday curtailed short selling in financial stocks, is looking for e-mails and trading records and is also examining whether securities firms have "adequate controls" to deal properly with misconduct.
While those names could sound tempting for investors who may think they are cheap, BusinessWeek's Karyn McCormack reminds us that not everything that is cheap is a good bargain, and there are some risks that need to be taken into account.
One common problem for most of these stocks is that they trade under $10 for a reason. That reason is usually hardly any earnings growth, if any at all. And with a weak economy, these companies would have an even harder time to stimulate growth. Add to the mix the fact that institutional investors don't like to touch stocks under $10 and the potential for recovery is not good.
TheStreet.com's Jim Cramer says the acquired Bear Stearns portfolio is worth even less than he thought.
How bad was that Bear Stearns portfolio? I am beginning to believe that JPMorgan's (NYSE: JPM) (Cramer's Take) buy of Bear is looking like a big mistake. It can only be justified by what might have been an even bigger problem for JPM -- the collapse of the trades that Bear made, which were being processed by JPM's clearing.
We are now beginning to get a real sense of the worthlessness of the mortgage portfolios. Not that we got any help from the SEC, which has taken a "we don't care what's in the mortgages as long as you tell us you have mortgages" attitude. That's been worthless for investors, and maybe even for JPMorgan.
The losses now exceed $400 billion, according to my modeling (if you simply assumed that 50% of the exotic mortgages that were issued from 2005 to 2007 eventually went into default). That's amazing, but it looks like I dramatically underestimated the losses. UNDERESTIMATED!
The most egregious issuers of these exotic mortgages were Bear, Merrill Lynch (NYSE: MER) (Cramer's Take) and Lehman Brothers (NYSE: LEH) (Cramer's Take). I believe that JPM has taken in a huge number of uninsurable, non-hedgeable mortgage instruments that are a pure write-off. And that means they are probably underwater on everything they took in.
It has been five weeks since I posted Serious Money: Tempting fate with 10 financials. The results of buying into the following pool of financial stocks at a time when the "hate 'em" factor was at a peak has been tremendous. The over all return has has been 26.3% with eight stocks up and two down.
The stock market was down yesterday and it is down again today. Bearish sentiment is roaming through Wall Street right now, so I thought I would look back on another occasion when the market was going through similar turmoil and I wrote about the following eight stocks, which I thought would be "safe havens" in such a storm.
Yesterday the 
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Here are some highlights from this past week's 
Financial stocks were hammered again Thursday with 
Joining the likes of other larger financial institutions and banks, mortgage giant 
It's officially a trend because it's happened more than three times -- a bad financial report leads to a spike in stock prices. (I posted 
The Securities and Exchange Commission (SEC) is becoming the very thing it is supposed to be stopping -- a stock market manipulator. The SEC was first established after the Great Depression to protect the general public from the shady stock dealings that caused that catastrophe. But the .gif){kind=logo}
The weak market conditions have caused many stock prices to fall under $10. Not only smaller -- and perhaps lesser known -- stocks trade under $10 these days, but also some big and famous names such as 
Serious Money: How 'Stable' after 345 DJIA drop? -- CB, DIS, JNJ, TEVA & XEL
Closing Bell: Dow plunges amid grim economic news; AIG, CIEN, LM, TEX decline, WMT gains
Is BT's offer to save Britain's red phone boxes for £500 fair?
