Thanks Hank

I needed the Fannie/Freddie bailout during the last week of August, not yesterday. I shorted FNM at $3.99 on 8/21 and ended up covering at $6.18 on 8/27. I shorted FRE at $2.96 on 8/21 and threw in the towel on 8/27, covering at $4.54, They both climbed higher still that week before cratering yesterday.

I knew a government bailout was coming, so why didn't I stick with the trade? It came down to money. First of all, this wasn't my money; it was my girlfriends and I wouldn't have slept well knowing that I'd lost a large chunk of her account on these two trades. Secondly, I was unwilling to sell other positions in order to meet the margin call. That was really, really stupid in retrospect, I have no idea what I was thinking. Shorting takes a different mindset, one that I'm learning to embrace, especially in this market.

Not all the financials suck

If you've own BAC, C, AIG, LEH, or heaven forbid,BSC, you've taken quite a bath. The money center banks, the regional banks, the savings and loans, insurance, investment banks, brokerages, pretty much have all gotten hammered( notable exception, Hudson City Bancorp-HCBK. However, on group within financials have actually done well over the last year: asset managers. The worst haven't suffered as much and the best have far outpaced the sector and the general market.

I've put together a small watchlist of names that I plan to buy on a pullback:

EPHC
BLK
TROW
GROW*
JNS
IAAC
EV
WHC
VALU
BEN
IVZ

* This mutual fund company is wedded to commodities and emerging markets. YOu might want to wait for the current correction in these markets to end before buying.

Jamie Dimon eyeing a fat pitch

I just read this Reuters wire story about Jamie Dimon and his stewarship of JPM. JPM has for the most part avoided the subprime meltdown and has not needed infusions of foreign money to shore up its tier 1 capital. Tier 1 capital is a core measure of financial strength from the regulatory perspective, measuring how well the bank can weather unexpected losses. The finance textbook definition of it is core equity capital / risk weighted assets. It includes of common stock, preferred stock that is irredeemable and non-cumulative, and retained earnings(note, that these are all highly liquid assets). Think of it as a nitrous oxide boost for a race car or a cornerback's closing speed.

Dimon is the sort of conservative, cost-conscious manager that I want running a company, especially a bank. CEOs are often trigger-happy when it comes to acquisitions. CEO bonuses are often predicated on increasing EPS or selling the company, giving them a perverse incentive to go shopping. Granted, banking is an industry that is ripe for consolidation: there are thousands upon thousands of banks and thrifts in the United States in an industry that scales extremely well. Consolidation is a rational approach to growing earnings and the depositor base. However, M & A is not simply about what accounting tricks or financial engineering can be brought forth to squeeze savings out of the combined enterprise. Culture matters. Personnel matters(see Citigroup, Weill,Sandy, and Reed, John). And of course, the vision thing.

JPM is now in a position to pick through the rubbled and find some real gems. As the story says, he is looking to enter the troubled subprime and jumbo mortgage loan markets. For the past two years, phrases like "toxic waste" have been bandied about to describe these instruments, but that is an oversimplification. So many of these mortgages were originated and turned into CDOs and CMOs because they were highly profitable. After the repricing of risk has concluded, they will be less so, but still have better margins than lending at prime rates to the best consumers. Besides, do you think that the banking industry is going to stop lending money to the poor to buy homes? If so, then the Community Reinvestment Act would probably have something to say about that.

Remember, Citadel made a fortune buying Amaranth's natural gas positions and in 1998, Warren Buffett no less was trying to take over some of LTCM's positions. More recently, Berkshire Hathaway is entering the bond insurance business now that players like MBIA and Ambac are reeling. Chaos creates opportunity. Always has, always will.

If you are interested in learning more about bank capital reqquirements, visit this link that explains in detail the three tiers of capital .

Freddie Mac gets the knife

Shares of Freddie Mac(FRE) hit the skids this morning. Fitch Ratings is has put the rating on their preferred stock on negative watch. This is not a downgrade. not yet at least. Fannie Mae(FNM) also got a haircut. Defaults are rising at both outfits. They are government sponsored-enterprises(GSEs). That doesn't mean that they are government-owned, but it does give them access to great interest rates and the perception that the government won't let him fail. I think that Uncle Sam will live up to this perception. At some point, another bailout is coming. These are the last bastions of liquidity in the housing market so everyone has a stake in them being healthy companies. I'm adding both these stocks to my watchlist. If they get under $20, then I'll pull the trigger.

Freddie Mac Conference Call

Dipping my toe in the E*Trade pool

After some more research, I've decided that the sky is not falling at E*Trade. Despite the kick in stomach it got from a full-page Wall Street Journal ad by TD Ameritrade, I know that the stock resembles Jan-Michael Vincent right now, but E*Trade is not down for the count. So far this morning, it's lost about ten percent. That's perfectly fine with me. I have no problem averaging down on this one. This company isn't going bankrupt. The only way it's folding is through a merger, probably with someone like TD Ameritrade. I don't see any better values out there. This stock is selling for half of book value. I know that more writedowns are coming in this sector, and maybe at this company. It's going to require patience to make money on this position, especially when things get uglier and the market as a whole is convulsing. It's these times of market uncertainty, when astute value investors step in and buy good companies for practically nothing.

Contemplating an investment in E*Trade?*%#@!

Surely you've seen that iPod Touch commercial featuring the song, "Music is My Hot Sex." That song is the work of a Brazilian band called Cansei de Ser Sexy which translates as, "tired of being sexy." That's exactly what's happened to the brokers. For the last five years, these stocks have been on a tear. They were like a "beautiful" woman that you met in dark bar and took home for one hell of a one-night stand. When morning came, you had a chance to really look at her and she wasn't pretty at all. Most of her was fake, and those parts that weren't were ugly in fact. E*Trade(ETFC) is now considered coyote ugly. It looks as if there are more writedowns on the way then they'd thought back on October 17th. So is the worst over? Maybe? Some analysts are predicting bankruptcy and it can't get much worse than that. Maybe not? Management once again guided lower, the fifth time in eight quarters. Looking at E*Trade's most recent monthly activity report for October, you'd surmise that this was a fairly healthy company. There will be the inevitable dead cat bounce, but I'm not talking about a trade. It's trading at 3x earnings and might might a good long term holding if they can avoid bankruptcy. This is a very hard call to make. A big, one-time, fixable problem is what every value investor love, but it's unclear if the term "fixable" applies to this situation.

Is the worst over for the banks and brokers?

I see the fat yields. Citigroup(C) is yielding 5.70%. So is Bank of America(BAC). I don't think so. I'm still staying away from bank/brokerage stocks. Citigroup has said that they aren't expecting the messed to be cleaned up until the middle of next year. Shares are at a 4-year low.
I think that there are a lot more writedowns in the offing. Stan O'Neal and Chuck Prince paid the price not so much for individual incompetence, but because the mortgage-backed security trade went bad for their banks. Goldman Sachs is the only one of these banks that has bounced back significantly from the August lows and woes. I would liket to see more disclosures before I plunk down my money in this sector. Although I agree with Bill Miller that this is a great opportunity to pick up great companies for fire sale prices, I think that he is still very early. I will keep shorting these stocks.

A cheap, fast-growing Chilean stock

Administradora de Fondos de Pensiones de Provida SA(PVD) is a Peruvian pension benefit administrator. It is the rough equivalent of a Prudential. It has a P/E of 7.8 with a 5.8% dividend yield(additionally, the dividend has been growing at a 12% annual rate for the last five years). The margins are enormous for this business. Return on Assets is 15.8%: return on equity is 26.4%. The margins are very healthy( operating margin of 35.6%), it's sitting on over $300 million in cash and has no debt. Oh, and let's not forget that year over year profits have nearly quadrupled. I usually don't like to recommend stocks that have just hit a 52-week high, but this stocks is just too cheap.