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Why I just sold my stake in one of the big banks

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May 19, 2009 – Comments (30)

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.

Deej

30 Comments – Post Your Own

#1) On May 19, 2009 at 12:15 PM, Gemini846 (45.99) wrote:

Just to make you feel better about your decision. I live in the Tampa, FL area. There was a story yesterday in the local paper about a renter who ripped the gutters off his rental house and sold them for scrap. He got $11 and cost the home-owner $4,000.

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#2) On May 19, 2009 at 12:23 PM, Melaschasm (53.85) wrote:

Great post!  This reminds me of the type of articles that I would like to see the Fool staff writing.

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#3) On May 19, 2009 at 12:27 PM, portefeuille (99.66) wrote:

Do we have to guess the company now? Well Fargo?

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... the recent tremendous rally, which for the life of me I cannot understand, ...

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The thing that I cannot understand is how so many people are so obsessed with mentioning how "irrational"/"impossible to understand" everything is.

I thought you were a step beyond that by now. Do you remember your "my father said ..." blog post. You might want to read it again ...

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#4) On May 19, 2009 at 12:30 PM, innerflame (< 20) wrote:

Good post. Reasonable, practical, informed intelligent responsible choice. Not the most common type of thinking these days..

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#5) On May 19, 2009 at 12:31 PM, portefeuille (99.66) wrote:

... for those who do not know what I was referring to:

---------------- 

It is possible it is better to be 200 yards from hell and moving away than 10 miles away and moving toward it.

---------------- 

(from here)

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#6) On May 19, 2009 at 12:40 PM, portefeuille (99.66) wrote:

... and please have a look at this chart (everybody).

What you see are the S&P 500 index and the DAX.

Does that not make you wonder whether maybe, just maybe, these tiny pieces of news on Obama and the Fed and the dollar and all this other garbage might not be all there is?

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#7) On May 19, 2009 at 12:46 PM, portefeuille (99.66) wrote:

Okay, maybe that does not address any of your local problems, but somehow quite a few people in the "caps" blogs seem to have completely forgotten that the stock market (and the stock market is of relevance in the "caps" blogs I assume) is NOT a local thing.

It is funny that I am still angry. I thought writing this would help. I should read less "caps" blog posts and U.S. newspapers ...

(and I am not even sure what is the object of my anger)

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#8) On May 19, 2009 at 12:47 PM, portefeuille (99.66) wrote:

gggggrrrrrrrrrrr

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#9) On May 19, 2009 at 12:48 PM, portefeuille (99.66) wrote:

I rest my case.

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#10) On May 19, 2009 at 12:49 PM, portefeuille (99.66) wrote:

Well Fargo

Wells Fargo

(now I rest my case)

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#11) On May 19, 2009 at 1:24 PM, JakilaTheHun (99.93) wrote:

The rally seems fairly easy to understand to me.  Stock prices are going up because equities were undervalued due to being priced for worst-case scenarios. 

Stock market psychology can work in the short-term, but in the long-term, people are eventually going to see the value in buying good companies at huge discounts to their intrinisic value. 

Did anything really change in 1932 when the stock market reversed?  Or did people simply realize that you could essentially buy stocks below their liquidation values?  Don't know how many companies I've encountered where it would appear to me that I might even earn a positive return if they went bankrupt.

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#12) On May 19, 2009 at 1:41 PM, TMFDeej (99.23) wrote:

Hey port.  I'm not sure why you're angry.  I'm not saying that I think that we are headed for some sort of huge stock market crash.  Just that the doubling of many of the banks stocks that I personally own makes the risk of owning no longer worth the reward for me.

Did you see the part where I mentioned that I was redeploying the funds from these sales into the market?  I just think that there are better opportunities out there than banks stocks right now.  I prefer consumer staples which have been left behind in the recent run.  I have already upped my stake in a company in this sector.

As far as not putting any "new" money into the market after its recent huge run goes, everyone has their own level of risk tolerance.  I do not in the least feel worried about whether I am about to miss out on the next great bull market.  I am more concerned about providing stability for my family and having peace of mind.  If that means having a cash cushion that's large enough for me to be out of work for a looooong time and not have to worry about my ability to pay my mortgage sobeit.

I still agree with my father's quote 100%.  It is better to be 200 yards from hell and moving away than 10 miles away and moving toward it.  To me the economy has stopped falling off of a cliff, but that doesn't mean that it won't continue to get worse...just at a slower pace.  The quote doesn't imply that one can't wonder about the validity of the current rally and whether stocks have gotten ahead of themselves.  Given all of the fundamental problems with the economy I have serious questions about where growth is going to come from over the next several years.

Anyhow, really I don't have to justify my actions to anyone other myself and my family, but that is my thought process for selling some of the stock right now.  I enjoy talking about investing with my friends here at CAPS and thought that I would share my current thinking with everyone.

Deej

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#13) On May 19, 2009 at 1:57 PM, portefeuille (99.66) wrote:

I just commented on this little piece:

... the recent tremendous rally, which for the life of me I cannot understand, ... 

Somehow I show an allergic reaction to statements like this one.

I think the rally is neither tremendous nor difficult to understand.

And again, I cannot understand that there are so many claiming that they don't understand "what is going on" and that "everything is so confusing".

If they really do not understand "what is going on" and are "so confused" then they should start changing that. It is really not that difficult ...

 

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#14) On May 19, 2009 at 2:08 PM, russiangambit (29.40) wrote:

> Okay, maybe that does not address any of your local problems, but somehow quite a few people in the "caps" blogs seem to have completely forgotten that the stock market (and the stock market is of relevance in the "caps" blogs I assume) is NOT a local thing.

--------------------------------

Anybody who thought so (the idea of decoupling) was sadly disappointed when emrgin markets crashed 80% because US stopped buying their commodities.

Now, the decoupling idea is coming back because China is buying stuff. But China is no replacement for the US consumer.

As for the US banks, if they do have any influence on the global markets, it is negative because they are sucking out liquidity of the global market as a giant black hole.

I think the rest of the world is angry at the US because the US created the mess for everybody  and somehow US didn't have to pay for it (YET) due to USD being the reserve currency.

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#15) On May 19, 2009 at 2:12 PM, TMFDeej (99.23) wrote:

Thanks Melaschasm .

Deej

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#16) On May 19, 2009 at 2:15 PM, russiangambit (29.40) wrote:

> I think the rally is neither tremendous nor difficult to understand.

---------------------------

I think we all understand that the rally is due to more buyers than sellers. But the question is WHY? Why do people feel compelled to buy the higher beta stocks, the most unreliable ones with highest debt load? My answer is - to make a quick profit and then dump the stuff. This is by no means a reliable rally and it can turn on a dime.

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#17) On May 19, 2009 at 2:18 PM, outoffocus (22.35) wrote:

Sorry Port but the Fool community has spoken. If you are right about this really being a bull market (and part of me wants to believe you) then I hope you make tremendous profits.  Then you can look back at how most of the Fool community was overly pessimistic.  However, a few cliche'd sayings are relevant here. "Sell in May and go away" "If its too good to be true then it probably is" and "If it walks like a [suckers rally], quacks like a [suckers rally] then it probably is a [suckers rally]".

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#18) On May 19, 2009 at 2:27 PM, TMFDeej (99.23) wrote:

Well, it's official.  I just perused the list of available corporate bonds and as I suspected the yields are pretty bad...much worse than they were several months ago when I could pick up bonds in big blue chip companies with awesome assets that mature in much less than 10 years with yields of +/- 10%.

The only way to get anything that yields more than 7% is to buy the trashiest of trash or lock myself up for 20 years...neither of which I plan on doing.

I'm off to look at my existing dividend-paying common stock holdings to see which one deserves my redeployed funds.

Again I am not putting any "new" money in the market for now.

Deej

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#19) On May 19, 2009 at 2:33 PM, portefeuille (99.66) wrote:

#17 If the comment #14 above by russiangambit was not a sarcastic one then maybe not the entire "Fool community" disagrees with me.

And I have with no word made any statement on whether I believe something to be a "bull market". Actually I have always refrained from making any predictions on "the market".

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#20) On May 19, 2009 at 2:34 PM, bigpeach (27.57) wrote:

Sorry Port but the Fool community has spoken.

I'll tell you what I don't get. Why so many people on this site can't fathom that the Fool community could be wrong.

If its too good to be true then it probably is

Ever consider that Feb. might have been too bad to be true?

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#21) On May 19, 2009 at 2:39 PM, portefeuille (99.66) wrote:

Ever consider that Feb. might have been too bad to be true?

I like that!

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#22) On May 19, 2009 at 3:08 PM, Donnernv (< 20) wrote:

Deej:

Check out the DonnerDiv portfolio.  It's real life, for exactly the objectives you voiced.

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#23) On May 19, 2009 at 3:36 PM, awallejr (75.45) wrote:

Deej, I think your ultimate strategy is a good one.  You caught the bonds at exactly the right time, and now taking your profit and redeploying.  Same thing with your financials.  If you doubled, why not just sell half though? 

Contrary to many I do see many banks longterm keepers.  It isn't just accounting gimmicks like some say.  Banks are literally getting free money either from the Fed or their depositors and lending it out on substantially higher terms and under less risky standards.  Last quarter refinancings literally gave the banks a chance to turn weak loans into solid loans.  The bulk were not just foreclosure modifications.

Wait until the July earnings come out. And those earnings won't be gimmicks.  I am still a C bull bigtime at its current price even with the preferred conversion dilution.  But my horizon is a 10 year one.

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#24) On May 19, 2009 at 5:04 PM, eldemonio (97.98) wrote:

Deej,

Thanks for the post.  Banks hedging losses by betting on their defaulting helped boost the latest figures that surprised a lot of people.  Don't feel you must justify anything you do with your money.  The only thing you need to justify is what you do with other people's money. 

port - for someone so in tune with the market, why the hell aren't you making any predictions?  Here's my prediction for you - you'll die very lonely, living out your last years trying to catch those pesky neighborhood kids throwing rocks at your windows.

 

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#25) On May 19, 2009 at 5:08 PM, portefeuille (99.66) wrote:

aha

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#26) On May 19, 2009 at 5:10 PM, portefeuille (99.66) wrote:

If there is anything the world does not need it is predictions on "the market". I think ...

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#27) On May 19, 2009 at 5:14 PM, portefeuille (99.66) wrote:

for someone so in tune with the market

... and I am really completely not "in tune with the market" (I do not want to look up what that actually means, I think I have an idea)

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#28) On May 20, 2009 at 10:27 AM, dwot (44.78) wrote:

I haven't seen anything to make me like banking stocks, even when they were at their lows.  This is a wait and see who survives.

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#29) On May 20, 2009 at 5:22 PM, TMFBabo (100.00) wrote:

I especially like the part about the portfolio re-evaluation.  I also like doing this periodically, and I find a stock or two from time to time that I'd rather replace with something else.

I admire the fact that you're looking out for family first.  You're absolutely right.  Protecting your money and having a large emergency fund is definitely much more important than chasing higher potential returns. 

Although I am primarily a small cap investor, I've been looking into buying some stable dividend-paying large caps for part of my portfolio.

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#30) On May 20, 2009 at 5:34 PM, EggplantWizard (99.31) wrote:

The fool's policies prevent Deej from disclosing the bank, but using deductive reasoning, I would presume he is talking about BAC, which had some very attractive preferred shares at the bottom -- not Wells.

Obviously, no denial or confirmation is expected.

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