I'm holding my nose and buying Hampton Roads Bankshares

Hampton Roads Bankshares (HMPR) is a microcap bank holding company that operates community banks in southern Virginia and North Carolina. It is also a debt ridden carcass. It recently cut its dividend and cancelled a 32.5 million share stock offering without giving any reason. They swung to a loss in the most recent quarter, losing $42.6 million in the second quarter. If you look at the summary of risk factors from the August 10th 10Q, you will be positively frightened. This company is facing a number of difficulties. Loans and deposits are decreasing. The asset base is eroding. There have been significant changes in senior management. Non-performing loans increased over 50% from last quarter. The stock has basically been cut by 2/3 since the beginning of the year. So why do I like it?

Well, it's extremely cheap. It's trading at a 52-week low. It's trading at about 1/3 of book value. It's heavily shorted(10%), so there could be a short-covering pop coming soon. I like that they suspended the dividend. They need the cash. It's a responsible move by management.

This is basically betting that the company can get the capital it needs to ride out the storm.

In short, I don't think that thing can get much worse for the company. This is a classic point of maximum pessimism call. This is speculative and I'm not going to use just a tiny sliver of my portfolio in order to stake out this position. also, I'm going to slowly build a position, buying in chunks and using tight limit orders.

Heads, I win big, Tails, I don't lose much. That's my approach to speculation.

Liz Claman gives us the scoop on FICO changes

I love Liz Claman. I think that she's the hottest anchor on television. I try to work her into a blog post whenever I can. This just happens to be a time when it's pertinent.
On Tuesday, she spoke with FICO CEO Mark Greene. Not only are they changing the ticker symbol from FIC to FICO, but they're also changing how they calculate FICO scores.
This video also contains some important information on banks. He explains why banks aren't lending money and their preparations for the coming storm in credit card delinquencies.

Bank Bonuses

Yesterday New York Attorney General Andrew Cuomo released some fairly damning numbers concerning $1 million bonuses handed out at banks that received TARP (your hard-earned) money. Here's a short synopsis of some of the bigger pigs. MS, GS, and JPM paid out bonuses that were greater than their profits for 2008!

Bank of America: 172

Bank of New York Mellon: 74

Citigroup: 738

Goldman Sachs: 953

JPMorgan Chase: 1,626

Merrill Lynch: 696

Morgan Stanley: 428

State Street: 44

Wells Fargo: 62

Check out this particularly troubling exerpt from the New York Times article:

At Morgan Stanley, for example, compensation last year was more than seven times as large as the bank’s profit. In 2004 and 2005, when the stock markets were doing well, Morgan Stanley spent only two times its profits on compensation.

Yet we still regard these banks as sophisticated investors? Hardly, they are big compensation schemes. I am aginst completely setting aside hundreds of years of contract law in order to claw back money, but this is obnoxious, tone deaf behavior. I have no problem with a self-supporting organization paying its employees whatever they'd like, but if Uncle Sam owns you, than that's different. You should at least pretend that you care about how this will look. The goverment owns a third fo Citigroup. Shouldn't it flex its muscles just a bit.

Allied Irish Bank

Allied Irish Bank (AIB) is one of the big boys of Irish banking. They pretty much do it all: corporate banking, retail banking, investment banking, asset management,etc. This company got killed in the last year, losing about 80% of it's value. It reached a 52-week low of 72 cents back in March. It's yielding 40% and is still cheap on a P/BV basis. It's selling for 0.16 of price to book! It's also selling for far less than the cash on the books.

What are the risks? Well this company was involved in pretty much every frothy real estate market in the West, especially Ireland. It's still unclear if the all the damage has been done. Their Tier 1 capital ratio is about 7%, which indicates that it's wouldn't be in a great position to sustain further massive losses. For instance, a conservatively-financed bank like State Street (STT) has a tier 1 capital ratio of 13.5%. I would say that you ideally would want the bank to be 10% or above in this environment. Still, it all depends on your loan portfolio. They also need to raise a significant amount of money next year in order to further solidify their balance sheet. They may sell some American and Polish assets in order to do this.

The bottom line is that this is a speculative pick in the short-term, but long-term, unless you think that the Irish growth story is dead, should pay off handsomely for the patient investor.

Nice numbers from JPMorgan Chase

JPM posted some good numbers in Q2. Buoyed by trading and underwriting profits, they earned 27 cents per share, easily surpassing expectations. They even ponied up $27 billion of TARP money. That's the good news. The bad news was in commercial real estate and credit cards. CEO Jamie Dimon doesn't see the recession ending just yet, so they're upping their loan loss reserves.

So how do you play this? I'm looking hard at shorting the KBW Regional Banking ETF (KRE). Compare it the Financial Select Sector SPDR ETF (XLF). The former is off about 36%, while the later is only down 3%. KRE is also trading at a higher P/E than XLF. I would think that's going to change soon. The regional banks don't have the same wherewithal as the big banks to handle the commercial real estate and credit card meltdown that's underway.

Were you buying in February, March, and April?

I must admit that I wasn't. I was scared. I didn't have the cojones to be greedy when others were fearful. I'd been salivating over Goldman Sachs (GS) for months. I even wrote about how I was going to pounce all over it when it went below $140. I got my opportunity, but I didn't go near it when it was trading in the 40s and 50s. Why? Fear. Confusion. I felt that the government wouldn't let it go down, but I wasn't sure the common wouldn't be wiped out. I eyed C when it was around a dollar, but I couldn't pull the trigger on that one either. Or what about Freeport McMoran in the teens? I think that I've learned my lesson, but I won't be sure until the next shakeout.

If you must buy a bank, look to the Great White North

Canadian banks are as solid as they come. They are a bit more expensive than their U.S. counterparts, but paying extra is worth avoiding subprime exposure. They have decent yields and great margins. This is also a good play on the strength of the Canadian dollar. Check out Toronto-Dominion Bank(TD), Bank of Nova Scotia(BNS), Bank of Montreal(BMO), Canadian Imperial Bank of Commerce(CM), and Royal Bank of Canada(RY).