Third Stress Test

I had a spectacular week, thanks to the Federal Reserve's "Comprehensive Capital Analysis and Review" or third stress test of the largest banks (and bank holding companies). The summary report can be found here.

These tests were the most rigorous so far. The Fed's assumptions were that unemployment jumped to 13%, real estate prices fell by 21%, and equity prices fell by half. After this "worst" case scenario, only 4 of the 19 banks were found to have insufficient capital. Among the 19 banks, they have current aggregate tier one capital coverage of 10.1%, and under the stress test, that number would fall (in aggregate) to 6.3%, above the 5% minimum.

The losers were MetLife, Citibank, Ally (formerly GMAC), & SunTrust. More importantly, there was a spectacular winner and I'm not talking about what would happen in another downturn. Bank of America's stock price took off like a rocket this week, ever since JPM got the scoop on the Fed's announcement Tuesday:


The WSJ included the following graphic in a Wedensday article about the results of the test. This shows the strength of the banks' balance sheets in the Fed's 2012 stress test, as well as what they were in 2009's test:

As you can see from the report, all banks have significantly improved their positions over 2009. However, I think that as it's been mostly bad news out of BAC, people were more pessimistic than they should have been. CEO Brian Moynihan has brought BAC back from the brink by shedding non-core assets and repairing the balance sheet. A giant pile of money from the taxpayer never hurts, but I think this test makes clear that you also need good leadership at the top. I'm hesitant to put more money into BAC stock, even though it looks poised for more gains.

That's stupid

So, I filed my taxes for 2011 and I received a pretty sizable tax break for my AgFeed losses. That's pretty crazy. Why does the federal government subsidize my gambling?

Margin & Options

There's enough risk in my portfolio that I've a had a great 2012 so far. My 2011 was horrendous, posting losses of 27%+. I'm up 24%+ so far this year, but well under my peak of January 2011. I bought more BAC at $6 a share, which was pretty spectacular. It's trading over $8 now, so I've realized some gains there. I'm still averaged at about $10.50, so I'm down 22% overall. The only winner I had in 2011 was my Pimco bond fund, (NYSE: PHK) which I sold in January, taking a 20%+ gain over about a year.

I'm taking Derivatives right now with Alan Marcus, author of 'Investments.' His textbook is used by something like 75% of all MBA programs in the world. I can't remember the exact statistic, but BC used that as a selling point when I applied. Most of the class (including me) did poorly on the midterm. It was a pretty hard test, but it was the first time in my program that I haven't aced something. I think part of the problem is that I have no experience trading derivatives. It's all very abstract to me. In any other class when we learn something new, I can come home and actually try to replicate it with my own stocks. In order to take a bit more from the class, I just added a margin account and options trading to my brokerage account. I'm not about to add leverage to my portfolio or sell puts or something, but I may try to hedge out my market risk in an effort to learn how it's done. That may or may not be a good idea with my portfolio, but the Dow is at 13,000 and it seems like a good hedge at this time.

I'm also headed to the Berkshire Hathaway shareholder meeting in May. BC has three seats at the meeting, so they give them to interested students. I applied aggressively (in the same way that I got into the MIT Sloan class) and booked my flights last week. I'll try to take lots of photos and post them here. I'm sure the coverage of that meeting is pretty comprehensive anyway, but maybe I'll be able to add something.

2011: Let's All Try to Forget It

I had a horrendous 2011. The Dow was up 5.5% for the year, but I was down a staggering 27.5%. Without AgFeed, I still would have been down 14.9%. I sold my AgFeed position at the end of August for $1.012 a share. It stopped trading in December at $0.39. There's now a class-action lawsuit against AgFeed, but unless they're insured against the losses, I doubt I'll see anything. Well, it sucks, but better men than me have been burned by sketchy Chinese equities. See: John Paulson.

I've plotted my returns since 09/30/2008 against the Dow 30, above. I was outperforming the market from March of 2009 to March of 2011, but I've since eaten it. There's a lot of risk in my portfolio, so I can wait on a rebound, but I may have a really weak porfolio. I'm not getting rid of my casinos and my only winner has been the Pimco-managed bond fund (NYSE:PHK). I bought additional shares of Bank of America at $6, which will probably bite me in the end. The graph below plots my excess returns (the difference between my performance and the Dow's). If the graph is positive, I'm beating the Dow and if it's less, I'm underperforming. Proof I suck. I'm learning a lot in my Master's program, so when I'm less busy at work, I hope to revisit my portfolio and fix its weaknesses. Until then, I'm just praying for a rebound.