Random Thoughts and Opinions on Market Stories

Just some stories I wanted to share and my thoughts on them.  Bottom line is I don't see much optimism in many of the stories or data out there.  The recovery is still nascent and, I believe, on the edge of stagnating.  As I have stated, I am not a huge fan of risk, which keeps me from putting on meaningful positions.  I still do not believe that the market has factored in the risks - geopolitical or financial.




Saw the following on Bloomberg today:

Swiss regulators, spooked by the near collapse of UBS in 2008, may require the two Zurich-based lenders to sell the securities, known as CoCos, to avoid future bailouts. Gruebel has called the debt, which turns into equity when a bank’s capital drops below a certain level, “dangerous.” Dougan, who runs the firm Gruebel once led, sold the first CoCos last month.

Credit Suisse is using the bonds to replace so-called hybrid debt, which will no longer count as the highest-quality capital under rules approved last year by the Basel Committee on Banking Supervision. For UBS, which has less such debt to replace, CoCos may prove a more expensive way to fatten capital cushions. Simon Maughan, co-head of European equities at MF Global Ltd., estimated that selling the securities may shave 10 percent from UBS’s annual net income after 2012.

The disagreement over CoCos may play out around the world if the Basel committee approves the use of CoCos to fulfill added capital requirements for systemically important financial firms and governments force lenders to sell them. Banks globally may need to issue $1 trillion of CoCos over the next decade to meet tougher rules designed to prevent another crisis, Standard & Poor’s said in December. 

The market for CoCos is going to be big.  But, as stated, it will be contentious depending on which bank is being looked at.  Given the implications on hybrids of Basel III, I believe that hybrid issues are still somewhat attractive.  As the story would suggest, look for those issuers that have a large amount of capital derived from hybrids as they will be the first to try a call of those issues.   


From the Atlantic today:

The Fed has rejected Bank of America's bid to modestly increase its dividend.  The problem isn't the loss of the dividend itself, of course--even major investors aren't really going to miss a cent a share.  Rather, the problem is what this herald's for Bank of America's financial condition.  Other banks have been allowed to increase their dividends, which suggests that the Fed thinks BofA is still unusually weak. 

I don't see any positive to this.  While the dividend increase might have been nominal, the Fed saying a further increase isn't going to happen does not bring comfort.


BAC 5.875 01/15/21  +185/181/10YR   bonds out 3bps today
BAC equity closed at $13.65, down $0.23 or 1.66% on230MM shares (avg volume is 166MM shares).


On BusinessWeek:

A nearly 50 percent increase in vegetable prices should ease in coming weeks as farmers deliver more tomatoes, lettuce and other crops to grocers.

Prices shot up last month after cold weather destroyed winter vegetables in the southern U.S. and Mexico. From tomatoes in Florida to lettuce in Arizona, fruit and vegetables became frostbitten, and prices rose.

Grocers and farmers say they expect crops planted after winter freezes to reach stores in the next few weeks. That's expected to bring prices down.

Once again, does the Fed eat their veggies?  50% price increases - even if they fall somewhat, don't think they will fall much.  What is this then?  Oh yeah, inflation.

From the WSJ:

Best Buy Co.'s fourth-quarter earnings fell 16% as declining domestic same-store sales masked margin growth.

The largest U.S. consumer electronics retailer has struggled in recent months, losing market share to online retailers such as Amazon.com Inc. and big-box and discounters such as Wal-Mart Stores Inc. and Costco Wholesale Corp. The electronics seller was one of the few major retailers that reported an outright sales decline in December, following a dismal third quarter dragged down by weak domestic revenue.

In the U.S., same-store sales of TVs and other consumer-electronics products fell 6.5%, while home-office sales rose 2.5%. Domestic same-store sales of entertainment software and hardware dropped 14%. 

With fuel and food costs up, consumers are backing off discretionary purchases. 

From the BBC:

The southern Syrian city of Deraa has been hit by daily protests for the past week against the government of President Bashar al-Assad, posing the greatest challenge to his rule since he took office in 2000 on the death of his father, Hafiz.

Located 120km (75 miles) south of Damascus, just a few miles from the Jordanian border, it has long been Syria's gateway to the south.

But the main challenge to the Assad government would be the loss of control over the Jordanian border.

Jordan's Islamic Action Front has a significant following in the nearby city of Irbid. 

Unrest continues, and Syria leads to Jordan.  There are also fundamentalist factions in the south which have to be considered.


From Reuters:

Capitalism may be to blame for the lack of life on the planet Mars, Venezuela's socialist President Hugo Chavez said on Tuesday.

"I have always said, heard, that it would not be strange that there had been civilization on Mars, but maybe capitalism arrived there, imperialism arrived and finished off the planet," Chavez said in speech to mark World Water Day.

Thank you Hugo, it is now crystal clear to me.

Bank of America - Equity Raise Acheived

Another headline on the tape for BAC this morning:

Bank of America Corp. (BAC) has received confirmation from the Federal Reserve that the company fulfilled its commitment to boost its equity by $3 billion, a spokesman for the bank said Monday morning.

The bank, the largest U.S. bank by assets, committed to raising $3 billion in equity capital when it received approval to repurchase $45 billion in preferred stock in December 2009 acquired as part of the Troubled Asset Relief Program. The Charlotte-based bank faced a year-end deadline to raise the equity.

Bank Of America sought to raise the capital by selling assets.

If the bank hadn't raised the capital by the deadline, it said it might have to pay some employees' bonuses in stock instead of cash. The bank also warned investors it might need to make a dilutive share offering to raise the capital.

Bank of America sold such assets as 51.2 million shares in BlackRock Inc. (BLK) and the right to purchase additional shares in China Construction Bank Corp. 

I am somewhat torn on the Blackrock sale weighing core business vs. investment prospects.  That said, the combination of some legacy agency put-back issues being put to rest and the equity all clear by the Fed puts a nice base under the company.  I believe the equity and debt will have a good year this year and are decent investment candidates.  Admittedly, I am long BAC common and Merill preferreds.  I have a bigger position in Citi, however, as I believe it is better positioned, has less headline risk and wikileaks doesn't seem to be in the cards.

Bank of America - Deal Reached, Put Backs Increased

Way back in October, I wrote that I did not believe that BAC was reserving enough for Put back provisions (seekingalpha.com/article/230817-addressing-bofa-s-mortgage-data-reps-and-warranties) well, It looks as if I was right:

Bank of America Corp., the biggest U.S. bank by assets, resolved disputes with Freddie Mac and Fannie Mae by agreeing to pay more than $2.6 billion to settle disputes that it sold loans based on faulty information.

The lender advanced 4.6 percent in early trading after saying fourth-quarter results would include a $2 billion impairment charge and a $3 billion provision.

Mortgage buyers including McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae are trying to force lenders to buy back loans that may have been made with incorrect data on income and home values. Before the settlement announced today, Bank of America faced $12.9 billion in unresolved putback demands on soured mortgages, with about half related to government-sponsored entities, according to an Oct. 19 presentation to investors. The company said in October it had reserved $4.4 billion for costs related to the problem.

“Bank of America believes that it has addressed its remaining exposure to repurchase obligations for residential mortgage loans sold directly to the GSEs,” the Charlotte, North Carolina-based company said in a statement today.

Hopefully this will go a long way in the effort to put this to bed and move on - until the next BAC issue.

Disclosure:  Long BAC equity and Merill preferred

Allstate Sues Bank of America - Its Not Our Fault Litigation

From the "It Couldn't Be Our Fault" files, we have a new entry.  Now, I am not saying that the loans were good and did not pose risks, but come on, you honestly didn't know there could be problems?  I remember hearing terms like "liar loans" and other terms of affection during that period.  Basically, no one expected HPD or home price depreciation.  It was the "prices go up always" mentality.   Makes me wonder what type of analysis was done.  There were no stats on the loans?  That I am aware, they broke down the pools and you could see the LTVs, FICOs etc.  


Mine is not a popular view, admittedly.  I realize that suing issuers is all the rage as some of the biggest names have done it, but do the investors have no liability here?  I was an institutional investor for 15+ years, and I would not pursue litigation if the error was mine.  If it were fraud and we had no information on it or could not have picked it up through our analysis (which was thorough and involved more than a cursory rating review) then it was go time (an example was the split up of Tyco).  If you didn't do your homework, take your lumps.

(Reuters) - Allstate Corp has sued Bank of America Corp, its Countrywide lending unit and 17 other defendants for allegedly misrepresenting the risks on more than $700 million of mortgage securities it bought from Countrywide.

Allstate, the largest publicly traded U.S. home and auto insurer, alleged it suffered "significant losses" after Countrywide misled it into believing the securities were safe, and the quality of home loans backing them was high.

The lawsuit also names several former Countrywide officials as defendants, including longtime Chief Executive Angelo Mozilo. Countrywide was the largest U.S. mortgage lender before Bank of America bought it in July 2008.

Allstate said that starting in 2003, Countrywide quietly decided to boost market share and ignore its own underwriting standards by approving any mortgage product that a competitor was willing to offer, in a "proverbial race to the bottom."

Countrywide then passed on the added risks to investors who bought debt backed by the mortgages, Allstate said.

PIMCO Buying Bank Debt - Good Trade

I hate to say it, but "good call!" to PIMCO on buying bank bonds.  I could not agree more that there is value in bank debt - I am still staying at senior level, but sub level could be an interesting bet.

Some levels:
BAC '21s  +240
C   '20s  +185/10s
JPM  '18s  +80/10yr

Pacific Investment Management Co., manager of the world’s biggest bond fund, is betting the rally in U.S. bank bonds is set for further gains with economic growth ready to accelerate next year.

Bank of America Corp. and Citigroup Inc. are poised to be “two of the stars” in fixed-income markets in 2011, said Mark Kiesel, the global head of corporate bond portfolio management at Pimco in Newport Beach, California. The largest U.S. lenders are an attractive value compared with “every bank you can buy in the world,” he said.

Pimco, which boosted its forecast for economic growth last week, reaffirmed its conviction in bank bonds after the securities returned 7.62 percent this year, lagging behind the gain of 7.95 percent for investment-grade company debt, Bank of America Merrill Lynch index data show. Lenders and other U.S. corporate borrowers will benefit as the economy revives following President Barack Obama’s agreement to extend tax cuts, Kiesel said.

“That was the catalyst that sparked upward revision in growth,” said Kiesel, who was nominated for fixed-income manager of the year by Morningstar Inc. “That Obama is showing some indication he’s willing to move more toward the center, that’s net-net going to be marginally more positive for business.”

Disclosure:  Long BAC and C common and preferred. - If I like the lower parts of the cap structure, the fundamental thesis is there.  I think the value is too.

Bank of America - Too Much is Never Enough

WikiLeaks founder Julian Assange, who told Forbes magazine that he’ll release documents from a U.S. bank next year, said in 2009 that his group had a hard drive from a Bank of America Corp. executive.

“We are sitting on 5GB from Bank of America, one of the executive’s hard drives,” Assange said in the Oct. 9, 2009, interview with Computerworld magazine, referring to five gigabytes of data. “To have impact it needs to be easy for people to dive in and search and get something out of it.”

 Yuck

Banks - Stress Test II before Capital Distribution

Press release by the Fed:

The Federal Reserve Board on Wednesday issued guidelines for evaluating proposals by large bank holding companies (BHCs) to undertake capital actions in 2011, such as increasing dividend payments or repurchasing or redeeming stock. The criteria provide a common, conservative approach to ensure that BHCs hold adequate capital to maintain ready access to funding, continue operations, and continue to serve as credit intermediaries, even under adverse conditions.
The criteria for evaluating capital distributions are outlined in a revised temporary addendum to Supervision and Regulation letter 09-4, "Dividend Increases and Other Capital Distributions for the 19 Supervisory Capital Assessment Program Firms." The guidelines state that any capital distribution plan will be evaluated on the basis of a number of criteria, with particular emphasis on:

• the firm's ability to absorb losses over the next two years under several scenarios, including an adverse macroeconomic scenario specified by the Federal Reserve and adverse scenarios appropriate for a particular firm's business model and portfolios;
• how the firm will meet Basel III capital requirements as they take effect in the United States, in the context of the proposed capital distributions as well as any anticipated impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the firm's business model or capital adequacy; and
• the firm's plans to repay U.S. government investments, if applicable. BHCs are expected to complete the repayment or replacement of any U.S. government investments in the form of either preferred shares or common equity prior to increasing capital payouts through higher dividends or stock buybacks.

The Federal Reserve expects to respond to capital distribution requests beginning in the first quarter.
The Federal Reserve will evaluate requests for planned capital actions in the context of its broader process for assessing capital adequacy at the largest BHCs. As part of the regular supervisory process, the Federal Reserve is requesting that large U.S. BHCs submit comprehensive capital plans by early next year, regardless of whether a capital action is planned. The capital plan review is the latest step in the Federal Reserve's efforts to enhance supervision of banking organizations. As recognized by the Dodd-Frank Act and demonstrated by the Federal Reserve-led Supervisory Capital Assessment Program in 2009, regular, horizontal reviews across groups of firms provide regulators with both firm-specific and industry-wide perspectives of various issues and trends. The Federal Reserve plans to undertake these capital plan reviews on a regular basis and will consult with primary federal bank regulators.

This is stress test part II.  Before the BHCs can begin releasing capital through dividends, they are going to have to show that they, essentially, have surplus capital to return.  Positive for bank longevity, but the anticipation of individual results and the headline gussing could lead to volatility.

Disclosure:  Long XLF, C and BAC (equity and preferred positions)

BAC - MBS Suits Limited

(Bloomberg

Bank of America Corp. said its Countrywide subsidiary got a court ruling that limits mortgage-backed securities at issue in a lawsuit brought by investors, including the Maine State Retirement System.

The Nov. 4 ruling by a federal court in California is expected to limit the case to instruments with a notional value of about $31 billion, compared with $352 billion previously, the Charlotte, North Carolina-based firm said today in a statement.

Obviously good news for BAC, should the ruling stand.

BAC To Punt BLK Stake

Bank of America Corp., the biggest U.S. bank by assets, may record a pretax gain of more than $600 million by selling a portion of its stake in BlackRock Inc. 

Bank of America plans to sell 34.5 million shares in BlackRock, the world’s largest money manager, plus another 6.3 million depending on demand, BlackRock said today in a statement. The Charlotte, North Carolina-based bank’s 34 percent stake in BlackRock had a carrying value of $10.1 billion, or about $156 a share, according to a June 30 regulatory filing. The gain would be about $695.2 million if all of the shares were sold at yesterday’s closing price of $173.04. 

“The transaction is consistent with our strategy to narrow the focus of our franchise and ensure that every activity we have at Bank of America is core to our three customer groups, consumers, companies and institutional investors,” Jerry Dubrowski, a Bank of America spokesman, said.

I personally think this is shortsighted. BLK serves as a revenue/earnings diversifier that has a consistent record of success.  BAC does not need the capital right now, so why punt?

Bank of America - Let the Beating Continue

Another day, another BAC Whack-A-Mole!

Little equity snapshot:

Yeah, Hows that feel?

Lets turn to the smart money - bonds:

This morning I saw the following quote:

BAC 5 ⅝ 07/01/20    +260/25

Now I am seeing:

BAC 5.625 '20  +268

and

Ya know, the other day I caught some flak over my comment they were under-reserving for reps and warranties.   Ummm, nope, appears others might think so too.

Do not touch the equity until bonds have finished getting spanked!

Wednesday Bonds

Credit did well today with both IG and HY turning in positive advance/decline ratios of approximately 1.1x.  New issue flow was muted and secondary activity kept pace with yesterday, but not much more.

 

BAC continued to be in the headlines today as folks pondered the whole FRBNY/PIMCO/BLK repurchase story.  Wells' earnings did nothing to help their beleaguered peer.  At first bonds started to claw tighter, but couldn't keep the momentum going and slipped deeper down the well.

Looking at the BAC 5.625% 7/20:

How do you think this will fare tomorrow when folks have read - and knee-jerked to -the WSJ story stating:

The federal regulator overseeing Fannie Mae and Freddie Mac hired a law firm specializing in litigation as the agency considers how to move forward with efforts to recoup billions of dollars on soured mortgage-backed securities purchased from banks and Wall Street firms. 

The Federal Housing Finance Agency, which in July issued 64 subpoenas to issuers of mortgage securities, bank servicing companies and other entities, is working with Quinn Emanuel Urquhart & Sullivan LLP, a Los Angeles-based firm that specializes in business litigation, to coordinate its investigations.

Since the financial crisis, 400-lawyer Quinn Emanuel has avoided building a banking clientele, making it a top suitor for plaintiffs pursuing banks. The firm has represented MBIA Insurance Corp. in several lawsuits against top U.S. mortgage banks alleging that the insurer was fraudulently induced to cover losses on mortgage-backed securities. Those cases are ongoing.

Yeah, gonna be fun for BAC holders again. On the fly, I would say BAC holders can feel fortunate they don't own H&R Block paper.  H&R Block CDS rose to 768 from 722 on Tuesday and continued to bleed out today. A credit strategist focusing on U.S. banks said the company could face the same issues as Bank of America because of a legacy portfolio of mortgages from Option One Mortgage Corp., which it agreed to sell in 2008.

The HRB 5.125% '14 opened weak at $92ish and rolled over during the day to land around $89. Oh, did I mention the downgrade?  Yeah, hope those tax receipts are huge - best of luck (honestly though, the company's on the hook for the mortgages even though they were sold, but they have decent enough cash flow to cover a good chunk - but if the repurchases are larger than expected - POW).  Might look at these as a value play soon - wait for them to shed more points.

Moving on....

With the dollar down, risk on trade happening today, govvies did pretty well, all things considered.  Tomorrow 2yr, 5yr and 7yr get announced for auction next week.

Curve steepened a bit in 2-10s and flattened some in 10-30, the net being marginal.

Tomorrow: we get jobless claims (455k expected, 462k prior) and Philly Fed (1.40 expected, -0.7 prior), claims last week were a disappointment - wouldn't be surprised to see modest bounce - and Philly Fed forecasters are looking for uptick, just might get it.
Does it feel like a bubble to you?  Me neither.

BAC - If It Was Attractive Before...

Kinda made me laugh:

Gee, if it was attractive before, its getting really attractive now (courtesy NASDAQ).

Dipped my toe in the BAC equity water (already own BML preferreds) and quickly went underwater.  Fortunately, I tend to leg into the falling knives.  I also believe that it is a decent long-term play (and yes, I bought it with that intention being a value/credit guy).

Bank of America - Mortgage Data (Reps and Warranties)

BAC released earnings this morning (they beat) and rather than focus on the earnings and the segment revs and earnings, I wanted to address the reps and warranties issues (aka the mortgage mess).

From the investor presentation (full presentation here:  BAC Investor Presentation);

Outstanding claims increased by $1.7B from Q2 to Q3.  The pace of growth slowed due to a slowdown in monoline claims.

Now that we have a claim number (or a snapshot of 9/30s claim number), lets look at what they have reserved for these claims:

The provision for reps and warranties has dropped due to a reduction in monoline provisioning.  Using these numbers, BAC is holding about 30% of the claims in reserves.


Whole Loan Investors/Private Label Securitizations
$3.9 billion of repurchase claims received through 9/30/10; $1.0 billion remain outstanding of which $0.5 billion already reviewed and declined to repurchase;  Approximately $1.0 billion approved for repurchase. 
This seems to point to a repurchase rate of approximately 50%. Claims received to date equate to approximately 86bps of the outstanding balance thus far.

Private Label Securities wrapped by monolines
As of 9/30/10, $4.8B of repurchase claims received; $4.2B remain outstanding of which $2.7B already reviewed and declined to repurchase;  Approximately $550M approved for repurchase.
It looks like a "declined" rate of around 65%, will probably head higher, lets call it a 70% "declined" rate, which should imply a 30% "approved" rate. As an aside, the claims equate to approximately 6% of outstanding loans.


$1.2T loans sold to GSE's, $18B of claims received to date (1.5%).  Does 30% provisioning rate seem enough?  No, it doesn't.

Citi CDS Trading Tighter Than BAC

Citigroup’s rate fell below Bank of America’s this week for the first time since September 2007.

The five-year swap rate for Bank of America rose today to 200 basis points, according to Phoenix Partners. The rate stood at 180.5 basis points yesterday, based on Bloomberg data. Each basis point equals 0.01 percentage point and amounts to $1,000 a year on a contract protecting $10 million of debt. Citigroup’s rate was 165.4 basis points yesterday.



Lets not forget that Citi disposed of the majority of their toxic assets to the govt and wrote down a massive amount of the rest.  I have long said that Citi's books are cleaner.

Disclosure:  Long C equity and preferreds. 

Bank Asset Slight of Hand

On the wire:

Bank of America Corp., seeking to reduce risk and meet new capital standards, upgraded billions of dollars of distressed mortgage bonds by repackaging them into new securities using a variation of a Wall Street technique that failed during the credit crisis.
The transactions, known as re-remics, are designed to add a layer of protection to residential mortgage-backed securities that sustained losses, enabling them to regain investment-grade ratings. The strategy helped the bank pare its RMBS holdings by $5.2 billion in the second quarter, or about 15 percent, according to a company filing.

Article here:  Re-remic capital magic

Seriously?  This is what got us here.  I wonder if investors believe they can understand the movement of these securities with housing price depreciation and artificial interest rates?  Yeah, sure they can. the Marquis de Sade of markets.