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Positions: Short Capital One (COF); Short Bank of America (BAC); Short Hudson City Bancorp (HCBK); Short American Express (AXP)

 

Currently in the Hedgeye Virtual Portfolio we have four short positions in financials and no long positions.  So if you were wondering where we stand on financials, there you have it.  Lately in our morning meetings, our Financials Sector Head Josh Steiner has been highlighting the accelerating risk with certain financial stocks and the sector more broadly.

In part, this accelerating risk with certain financial stocks can be seen in their Credit Default Swaps.  In the chart below, we’ve highlighted Bank of America CDS swaps and the fact that they are well off of their YTD lows, which signals accelerating default risk.

As it relates to the four positions above, the cliff note version of the short theses are as follows: 

  • AXP - We think that imminent growth slowdown at American Express will lead to further multiple contraction over the next couple of quarters;
  • COF – We are concerned about Capital One’s mortgage put back liabilities, which we believe are not currently priced into the stock;
  • HCBK – Hudson City Bancorp has exposure to pending real estate shocks that will eventually be reflected on its balance sheet; and
  • BAC – Another case of put back liability is Banker of America, which will take the equity lower when the issues bubble to the surface. 

Two of our shorts are based on mortgage put back liabilities.  As Josh and his team wrote in a recent note, titled “BAC – Quantifying Mortgage Putback Liability - $19.0 Billion”:

“We've tried to quantify the exposure that we think is realistic and likely. We map out every step in our assumption process as well as which pieces are our assumptions and which are Bank of America's disclosures. The bottom line: we think BAC is under-reserved for mortgage putbacks to the tune of $19.0 billion, which works out to $1.31 in tangible book value per share, or roughly 10.2% of tangible book value. That's not to suggest tangible book value will actually decline by $1.31, as it is more probable that the company will earn its way through this. While this is well below recent Armageddon-esque estimates put forward by conflicted parties, the reality is that for those who think the concerns are wildly overblown this will consume most, if not all, of next year's expected earnings.”

This is a small portion of Josh’s extensive work on this issue.  We would recommend that if you are doing work on financials or currently own financial stocks, you connect with our sales team via to learn more about Josh’s work.

Suffice it to say, we don’t like the financials.

Daryl G. Jones
Managing Director

Where Are We On Financials? 4 Short, 0 Longs - 1