Thursday, July 20, 2023

Maybe Regional Banks Are Fine. Options Traders Seem to Think So; I nailed the bottom of regional banks on May 3 and May 4; Greetings from Oregon

By Whitney Tilson

1) Regional bank stocks have been ripping this week – even drawing in options traders, as this Wall Street Journal article noted: Maybe Regional Banks Are Fine. Options Traders Seem to Think So.

Yesterday, Western Alliance Bancorporation (WAL) rose 8% after reporting strong earnings, and is now up 522% from the 52-week low it hit on May 4, only two and a half months ago.

And this morning, Zions Bancorp (ZION) is soaring on solid earnings, and has now doubled off its May 4 low.

I hope you were paying attention back then, because I handed this to you on the platter. On May 3, I wrote:

I think these fears are way overblown and that yesterday's sell-off – and this hysterical, over-the-top, wrongheaded article – may mark a bottom for the sector...

If the banking sector truly does enter a crisis, the Fed can quickly cease or reverse its rate hikes, eliminating the bondholders' losses...

This is a fundamental difference between today's situation versus the global financial crisis, when banks had actual losses in their loan portfolios.

And as the sector tumbled again the next day, I quoted my friend, "the smartest bank analyst I know," who said:

This is simply false to say that 50% of the banks are insolvent. Yes, there are a big chunk that have seen their capital become thin on a mark-to-market basis, but there are very few that are truly insolvent.

I would agree though with all the commentary about the Fed having created a mess and being hell-bent on continuing to throw fuel into the fire by raising rates again today. The crazy thing is that they have really wounded the banking sector and the availability of credit is going to decline sharply, which will help calm inflation.

The other thing that the markets seem to have wrong is they don't realize that banks have reserved for loan losses and are still going to earn some money as we go through a potential credit cycle. Take Zions Bancorp for example: they have $618 million of loan loss reserves and are expected to earn another $800 million this year. Even if they only earn half of that they still have the power to cover a lot of credit losses.

Not that analysis seems to matter right now, as sentiment in the bank space is as bad as we can ever remember it...

The shorts are being very aggressive in some of the banks like MCB, WAL, ZION, etc. If there is even a hint of an improvement in deposit insurance, we could see a short squeeze for the ages that sends these stocks up 20%-plus in a matter of minutes, and many of them would still be dirt cheap.

Since that day, Metropolitan Bank (MCB), WAL, and ZION shares are up 139%, 155%, and 83%, respectively.

I also wrote:

My friend Doug Kass of hedge fund Seabreeze Partners sees opportunity in two of the most bombed-out regional bank stocks:

Off the WAL: Two Bets on Two Banks

I am taking a very small speculative buy of both PacWest ($2.65) (PACW) and Western Alliance Bancorp ($18.90).

Since that day, WAL shares are up 155%, as noted above, and PACW shares are up 275%.

In our April and May issues of our Empire Investment Report newsletter, I recommended a basket of six banking stocks – including Zions and Metropolitan – and I'm still as bullish today.

Subscribers can access all of our back issues right here... And if you aren't a subscriber, you can learn more about Empire Investment Report and find out how to gain instant access to these banking stock recommendations – and the rest of the portfolio of open recommendations – by clicking here.

2) This article in yesterday's WSJ relates to another big winner we recommended to Empire Investment Report subscribers: How a Once Unpaved Stretch of Highway Became One of Florida's Hottest Rental Markets. Excerpt:

The area along Scenic Highway 30A has seen explosive growth over the past two decades, with the development of new communities with golf courses, bike trails, boutique stores and high-end restaurants. Vacation rental prices have gone up too: Earlier this summer, Allred rented Gulf Front Sanctuary, a half-acre property with a roughly 7,800-square-foot home, in Seagrove for two weeks at a cost of $114,000, including taxes and fees.

Located on the Emerald Coast, between Pensacola and Panama City, the area's popularity has skyrocketed since the pandemic, according to local real-estate agent Jonathan Spears of Spears Group. While wealthy Southerners have flocked to vacation on the Emerald Coast for decades – earning 30A the nickname "the Hamptons of the South" – the area has seen a recent influx of renters coming from further North as well, according to Spears, which has increased prices in recent years.

Real estate development company St. Joe (JOE) is perfectly positioned to benefit from this booming area of northern Florida. It has a master plan approved by all of the necessary government entities to develop more than 110,000 acres, which in coming decades will be home to 170,000 houses, 10,000 hotel rooms, and much more...

Last September, I flew down to the company's headquarters in Panama City Beach and spent eight hours over two days with the CEO Jorge Gonzalez and CFO Marek Bakun – touring the area and seeing all of the properties St. Joe is developing.

I was so impressed that I immediately recommended the stock to Empire Investment Report subscribers in our October issue. Readers who followed our advice are up 64% since then.

Again, you can find out how to gain access to this and all of our other back issues – plus a full year of 12 upcoming issues, each with my favorite investment idea – by clicking here.

3) I've been pounding the table on this outrageous conflict of interest for years, so it's good to see that a strong new law might finally pass: Senators to Propose Ban on U.S. Lawmakers, Executive Branch Members Owning Stock. Excerpt:

Two U.S. senators are set this week to introduce bipartisan legislation to bar members of the federal executive branch and lawmakers from owning stock in individual companies, as new polling shows broad public support for such a measure.

The bill from Sens. Kirsten Gillibrand (D-NY) and Josh Hawley (R-MO) would permit the president, vice president, lawmakers, Capitol Hill aides and employees of the executive branch to own mutual funds and broad industry and index funds.

But it would prohibit them from owning stocks in individual companies, even in blind trusts.

The legislation is the latest in a series of measures to be introduced in Congress in response to the Wall Street Journal's Capital Assets series last year, which found that many top executive-branch employees owned stocks in companies that their agencies helped to regulate.

Yesterday I e-mailed four senators I know – Cory Booker, Chris Murphy, Michael Bennet, and Chris Coons – and they all assured me they support it.

4) Greetings from Oregon!

Three days after I got back from Europe, Susan and I flew to Portland yesterday morning for our annual trip with Backroads – this one for six days of hiking, biking, and kayaking in the Columbia River Gorge (details here), which I've never been to before.

It didn't start until this morning, so we spent yesterday with my cousin and her family, driving 90 minutes to the coast and going on a beautiful five-mile hike. Here's a picture:

Best regards,


P.S. I welcome your feedback at [email protected].