Why I just sold my stake in one of the big banks
This morning I wrote up a huge post on one of the major banks that I own and its portfolio of legacy assets. I went into the post with the intention of justifying my purchase of this company's preferred stock at the height of the stock market panic several months ago.
My theory was that despite the fact that they acquired a huge chunk of terrible "legacy" aka garbage assets ($100 billion+ portfolio of the worst pick a payment loans that were originated at the height of the housing boom in Arizona, California, and Florida) during a buyout last year, it's huge deposit base, traditionally conservative lending standards, and the steep yield curve would eventually enable it to earn its way out of this mess.
That might very well be the case, but I am becoming less and less sure that it will. During my research for the blog post I became increasingly uncomfortable with this company's legacy assets. I suspect that the zombie homeowners with no real stake in the homes that they occupy to whom these loans were made to are going to default at a much, much higher rate than the 20% that this company has written the loans down. To be honest, I would not be surprised if the default rate was triple that.
Anyhow, I really can't talk any more about this specific company, but I can talk about my thoughts on the current state of the market and banks in general. Basically I am taking advantage of the recent tremendous rally, which for the life of me I cannot understand, to trim or eliminate my positions in the riskiest companies that I own. I am taking a particularly close look at the banks that I own stock in, many of which have doubled since I purchased them not that long ago.
I went into these investments with my eyes wide open. I was well aware of the problems in the economy and at the specific banks that I bought stakes in, but the low stock prices at the time of my purchases made the risk / reward ratio attractive enough for me to make a small wager on this situation.
The share prices of these companies are significantly higher today than they were several months ago and at this point the risk of owning banks with a massive number of loans on the books no longer justifies the reward. I am not willing to take the risk that I will be forced to convert my preferred stock into non dividend paying common stock when these guys need money again down the road, which is very possible. I'm taking my profits on many of the banks that I own. Will I regret this move years from now, perhaps but I no longer have the appetite for risk that I once did. Besides, I cannot understand the recent rally in the markets for the life of me. I'm not short anything at this point, but I'll gladly take a short-term double in a risky stock in the teeth of a terrible economy and risk missing out on a multi-bagger.
At this point in my life my first and foremost duty is to protect my family, not sitting on a beach somewhere on a tropical island sipping a cold drink while in early retirement. I'll take the cash and run now. Priority number one is building up a huge cushion so that I am able to keep my house in the event that my wife or I lose our jobs. They both seem fairly stable right now, but I have no doubt that unemployment is headed to double digits.
I plan on redeploying the funds from the banks that I sold in more conservative dividend paying common stock, possibly in the consumer staples or healthcare sector. I'll look around at the available bonds again, but they are much less attractive today than they were when I jumped into them with both feet several months ago.
As far as new cash goes, the money that I earn from the side consulting work that I do and my tax refund all went into a good old plain vanilla savings account to build up a nice cushion. I hit bonds hard at the end of 2008 and I will redeploy the money from anything that I sell, but I have not really put any new money to speak of into stocks in months. Once we experience another pullback or I am comfortable with the size of my new, larger emergency fund I will consider adding new money to my investment accounts.
It's amazing how much one can learn by researching and writing about an issue. I did a complete 180 on a stock that I own in the process of writing a post about it. It is important for everyone to evaluate their holdings from time to time and ask themselves things like why they own something, if the story has changed, what its future prospects are, and if the risk justifies the reward.