Met with Mike Mayo of CLSA yesterday (he along with Merideth Whitney are the UBER BEAR faces of banks)

Post the meeting I went back to the slide that interested me the most to compare the results from the Great Depression to what we are seeing today (most comparisons for anything go back to then and that was the last major deleveraging period). I thought the findings were pretty interesting and the net is that if this cycle follows the depression cycle, and if the banks anticipate the peak in NPA’s by three months like they did in the 1990’s cycle or coincidently like they did in the 2000’s cycle then my guess is sometime in the beginning of 2010 it will be the right time to be more bullish on banks. The movie will not follow the exact same script but I thought this was an interesting way to look at the state of the union currently.

Details:
· 1927-1930 and 1937-1941 exhibited similar net charge offs (.41% of loans) compared to the non stressed periods in the 90’s and 00’s (.45%) (ex 90/91/92/01/02/08).
· 1931-1936 is a much different story as NCOs went from .68% in 1930 to 1.29% in 1931, 2.29% in 1932, 3.14% in 1933, 3.36% in 1934, 1.57% in 1935 and .93% in 1936.
· The peak in NPAs (the leading indicator and what I think people are again watching again this cycle) was in the end of 1932/beginning of 1933 or 1-2 years ahead of the peak in NCOs in 1934.
· Here is my logic for the beginning of 2010 as being a potentially good time to be more bullish on banks. 2008 saw NCOs of 1.56% vs. the .52% seen in 2007 and the 1.29% seen in 1931. Therefore call 2008 1931, 2009 1932, 2010 1933 and 2011 1934 (Q109 largest 20 banks put up an annualized 2.13% NCO rate vs. 2.29% for 1932 so this continues to feel right). We therefore would not see a peak in NCOs until 2011 (that feels about right given where we are in the C&I and CRE credit cycles). However NPAs would peak 1-2 years ahead of that or sometime in the beginning of 2010. If you say coincidently the banks will outperform that peak in NPAs that would mean the beginning of 2010 would be the time to turn bullish.

All of the above being said I shorted FITB today and went long PBCT in a pairs trade. There is no way FITB's equity looks next week like it does this week. That bank needs to be shot. The government will either force them to raise private capital or force them to sell assets to others or the PPIP and there is no way it will be at a premium. There are 3 buckets of banks in the stress test. Bucket A are the survivors with little or no need for additional capital from where we sit today (JPM and GS fit this bill). Bucket B are the survivors that will need additional capital (WFC, STI, BAC fit this bill). Then there is Bucket C which is those that should have already died and FITB is in that camp IMHO, maybe even Citi. The reports have gone from saying only 1 bank needs capital this weekend, to 3 by Monday, 3-4 by yesterday and now 6 today. My guess is that it moves to 8-10 when the results are released next week. Maybe I am wrong but FITB is a dead horse nonetheless. I used PBCT as the long offset as they have something like a 20% TCE ratio, which is rediculous. The major banks are around 4% and the regionals that have yet to go through the C&I and CRE cycle are around 6%. PBCT will 1) be around, 2) not have to raise capital and 3) will be able to buy loans/securities from others. I view them as a way to buy a piece of the 1990's RTC or a play on this cycle's RTC, the PPIP. Would love to hear what you all think of the above. Like Pink Floyd said is there anyone out there (other than Solwold)?