Archives for June 2009

Bank Lending Still Down And For Good Reason

According to a report by CNN Money, lending is still down at the nation’s largest banks. There has already been a significant decrease in residential borrowing as banks have tightened credit standards and loan demand has decreased. Residential borrowers are overextended and have found it near impossible to get financing without a very good credit score and significant capital reserves. Loan demand has dropped and the personal savings rate has skyrocketed to 6.9%. Now that the residential side appears to be stabilizing, commercial real estate is showing weakness. Commercial and industrial lending has seen a precipitous decline as businesses are looking to get leaner and borrow less money.

Lending activity has been curtailed due to lender concerns over economic stability, involuntary unemployment and credit borrowers defaulting on credit agreements. Many consumers who have defaulted on loans during the economic downturn will find it more difficult to borrow in the future due to having an adverse credit rating. Adverse credit means that a consumer is unlikely to be able to gain access to traditional lines of credit for the purpose of debt consolidation, particularly if a tenant or homeowner has little equity.

Banks are lending less and they have a good reason for it. Many economists estimate that banks are only halfway through the losses that they will suffer over the next few years. While most subprime loans and residential loans have already been accounted for, many commercial loans are just starting to show weakness. Many commercial borrowers are looking to refinance loans that have interest rates that are resetting. These borrowers are unable to obtain financing because the value of their commercial properties has dropped below the principal owed on the property. Even M & A activity has seen a severe decline as banks are looking to lend less.

So what is the next shoe to drop? Credit cards.We are just beginning to see weakness in the credit card market. Credit card lenders American Express and Capital One are seeing increased delinquencies. The monthly charge off rate rose to a record high of 10.6% as consumers continue to grapple with the debt problem. Moody’s expects charge offs to peak at 12% meaning more losses for financial stalwarts such as JP Morgan, Bank of America and Citigroup. Many borrowers, who pay their bills on time, have seen their credit terms changed to cover the growing deficit from increasing charge offs. Individuals with good credit have seen their credit limits slashed and interest rates rise.

While the speed of the economic slowdown is declining; the economy cannot heal until unemployment, foreclosures and defaults stop cascading downward.

Shorting Financials

I added shares of FAZ again at $4.70. This ETF has worked pretty well for me as a trade. I buy when it drops to the mid 4’s and sell it over 5 dollars. I am still not seeing too many buying opportunites for stocks yet.

A Roller Coaster Market

This market has been pretty erratic over the past week. I have heard various commentators speculate as to why the market is up or down on a given day. At best these are simply guesses. It appears that the market is searching for direction. Stocks are nowhere near their highs of a year ago and are well off their lows from March of this year. While there are some examples of stocks that are trading too high and some are too low; Could it be that most stocks are not overvalued or undervalued but are at their appropriate valuations? This is truly a stock pickers market because there just aren’t that too many screaming buys out there. It is difficult to find many stocks that appear to be undervalued on their current earnings basis.

Endo Pharmaceuticals

Another drug stock that I really like is Endo Pharmaceuticals (ENDP). Endo Pharmaceuticals is a midcap biotechnology company that is know for developing and selling pain management drugs and therapies. This company may be a good investment as a play on an aging baby boomer population. The generic pharmaceutical market is a highly profitable market as drug patents expire from bigger name players. Endo also has a strong drug development division along with established money makers Percocet, Percodan and Endocent.

Endo currently trades at just over $17 per share. Based on the average earnings estimates of $2.64 for the current fiscal year the stock has a PE of 6.4. EPS has grown at an impressive rate of 18.63% over the last five years. EPS should grow at about 10% for the next 5 years. Endo has a ROE of 20.78% and a ROA of 14.20% over te past 5 years. Endo recently used its strong cash position to acquire Indevus Pharmaceuticals. Since the acquisition Endo has less cash and more debt but the company still has a solid balance sheet with almost 400 million in cash alone. This is a sizable amount for a company with a 2 billion dollar market cap.

I have recently started buying shares of Endo in the $16’s. The company’s long term prospects appear bright with many of their drugs in Phase III trials and existing cash cow drugs not expiring till 2019. Many analysts also deem the company to be a good takeover candidate. If earnings growth remains strong this stock could easily see the mid 20’s over the course of the next year.


I have sold all of my short term positions in Charles Schwab (SCH), Manitowoc (MTW), United States Oil ETF (USO) and the ProShares UltraCrude ETF (UCO). I think that the long expected reversal is finally under way.

Major Down Day

I sold all of FAZ today at $5.30. It had a nice gain over 12% today. I am looking at two small pharmaceutical companies. One is Cubist Pharmaceuticals (CBST) and the other is Endo Pharmaceuticals (ENDP). BP (BP) is also starting to look attractive. i am looking at adding more shares for my long term portfolio. The stock has dropped to the mid $40’s and I love the dividend.

I bought  a few more shares of the UltraShort S&P500 (SDS) at $58.30.

Today’s Purchases

I bought FAZ again for a short term trade. I didn’t plan too but it dropped so rapidly at the market close. I bought a small amount at $4.94 per share. My thinking is that we could have a brutally down day tomorrow and some quick profits could be made with FAZ. I added more of the Ultra Basic Materials ETF (UYM) below $18. I

Today’s Sale

I sold the rest of my FAZ position between $5.15 – $5.20. I think this ETF still has room to increase but with banks repaying TARP funds; I didn’t want to take that chance.


Bought shares of US Bancorp (USB) at $17.70 today.

Today’s Buys

For my long term portfolio I bought the following:

Added shares of Nike (NKE) at $55.35 

Bought shares of Endo Pharmaceuticals Holdings (ENDP) at $16.65.


For my short term portfolio I bought the following:

 ProShares UltraShort S&P500 (SDS) at $55.90.

 ProShares UltraLong Basic Materials (UYM) at $18.50.

 ProShares UltrasShort Real Estate (SRS) at $20.