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Articles by Donald E. L. Johnson

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Today is Friday, October 28, 2016


Chris Dodd’s financial reform bill would limit credit, kill jobs, promote corruption

Senator Chris Dodd (D-CT) is being forced to retire because he allegedly took mini bribes from a mortgage bank. Yet President Barack Obama is working with Dodd to “reform” financial and credit market laws and regulations. 

It’s no surprise, then, that the Dodd bill is as intellectually corrupt as its creator. And it’s no surprise that the bill would add bureaucracies that would force large banks and manufacturers to hire more lobbyists who would pour more money into the campaign fundraisers held by presidential candidates and members of Congress. Big government is corrupt government, and the financial reform bill would make the Federal government even more corrupt than it already is. By “corrupt,” I mean that politicians work for lobbyists and special interests who contribute to their campaigns, not for their constituents and country.

Here are links to some articles that discuss the weaknesses in the financial reform legislation being pushed by Obama and Dodd:

CBO cost estimate, S. 3217, Restoring American Financial Stability Act of 2010. CBO. 26 pp.

CBO confirms you’re on the hook for Wall Street bailout bill. The Heritage Foundation.

Democrats reach deal on tough derivative law. By Ronald D. Orol.

Financial reform’s big unknowns. By Robert J. Samuelson.

Senator Dodd’s Regulation Plan: 14 fatal flaws. By James Gattuso, The Heritage Foundation.

Dodd’s job-killer. By Mark A. Calabria, Cato Institute.

Back to basics on financial reform. By Niall Ferguson & Ted Forstmann. April 23,

The new master of Wall Street. Obama surveys the financial kingdom that may soon be his. Editorial. April 23, 2010.

Crisis and ideology: The Administration’s financial reform legislation. By Peter J. Wallison, American Enterprise Institute for Public Policy Research.

Yes, it’s a bailout bill. By Phillip Swagel. The American, the journal of the American Enterprise Institute.

Do you have any reforms in size XL? Gretchen Morgenson, NYT.

Posted by Donald E. L. Johnson on 04/25/10 at 03:20 PM
BanksPPCFinancial ReformEthicsStocksBank StocksPermalink

Denver councilmen join President Obama in trying to micromanage mortgage lenders

A couple of Denver city councilmen are demanding that banks do more to protect financially weak and troubled home owners from foreclosures. Like President Obama, the councilmen are trying to buy votes with bank depositors’ money. Most important, they are after headlines, and they’re getting them.

The councilmen are 

Posted by Donald E. L. Johnson on 03/27/10 at 08:50 AM
BanksColoradoEconomicsPoliticsPPCRead More

Minneapolis Fed debunks 4 myths about the financial crisis

The Federal Reserve Bank of Minneapolis has debunked four myths  about the financial crisis of 2008. Read the six-page paper and review the charts and you’ll see that non financial borrowers have had pretty normal access to the credit markets during the crisis.

The financial
press and policymakers have made the following four claims about the nature of the crisis.
1. Bank lending to nonfinancial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by nonfinancial corporations has declined sharply, and
rates have risen to unprecedented levels.
4. Banks play a large role in channeling funds from savers to borrowers.

This brings up the question: Recognizing that there is a credit crisis, what’s the problem?

It’s that large money center banks have been required to market troubled assets to market, and that has put them in financial jeopardy. This has frozen the credit markets for financial instituitons, if not for non financials, if I read the paper correctly.

That the United States is undergoing a financial crisis cannot be disputed. Evidence
of the financial crisis consists of the following: First, several major financial institutions have
failed. Second, various stock markets have fallen dramatically, especially in the week after
the bailout plan was passed. Third, spreads on a variety of different types of loans over
comparable U.S. Treasury securities have widened dramatically.


The United States is indisputably undergoing a financial crisis. Here we examine four claims about
the way the financial crisis is affecting the economy as a whole and argue that all four claims
are myths. Conventional analyses of the financial crisis focus on interest rate spreads. We argue
that such analyses may lead to mistaken inferences about the real costs of borrowing and argue
that, during financial crises, variations in the levels of nominal interest rates might lead to better
inferences about variations in the real costs of borrowing.

Hat tip to National Review’s Corner.

Posted by Donald E. L. Johnson on 10/27/08 at 10:46 PM
BanksEconomyStocksBank StocksPermalink

Small banks are winning market share from big regional and national banks

Small independent community banks are welcoming new customers who are taking their money out of the impersonal branches of the large national banks such as Bank of America (BAC), Wells Fargo (WFC), J.P. Morgan Chase (JPM) and Citigroup (C) as well as Wachovia (WB) and Washington Mutual, according to the Washington Post.

Whether this will become a major problem for the mega banks remains to be seen and won’t be known for several weeks.

Impact graph:

Although exact numbers tracking the flow of this panic won’t be available for a few more weeks, Chris Cole, spokesman and regulatory counsel for the Independent Community Bankers of America, said many of the 7,000 community banks in the country are reporting an influx of deposits. Indeed, Burke & Herbert, with $1.6 billion in assets, has seen a staggering $45 million in new deposits in the past two weeks. The draw of community banks, Cole said, is the relationship. “At times like this, people may feel it’s time to shift to a bank that’s nearby, where their neighbor may bank, where they may know the loan officer,” he said, “a place that they know is safe.”


Posted by Donald E. L. Johnson on 10/12/08 at 08:52 AM
BanksSmall BusinessStocksBank StocksPermalink

Small businesses looking like weak customers

Small businesses are looking like weak customers to a wide variety of banks, credit card companies and software vendors.

American Express (AXP) reported that its survey of small businesses found that some 18% of their owners fear they are on the brink of failure. And 63% say they’re having a harder time accessing credit, up from 50% in August, reports here.

Reuters also reported that Goldman Sachs (GS) downgraded Netsuite (N) and (CRM), which sell online accounting and contact tracking software to mostly small and medium-sized businesses.

The Wall Street Journal last Tuesday published an even more bearish story on N, CRM, RightNow Technologies (RNOW), Concur Technologies (CNQR) and Taleo Inc. (TLEO), which serve small and medium-sized organizations.

It also could have listed Adobe (ADBE) and Intuit (INTU), which sell software to small businesses.

And what about Jack Henry & Associates (JKHY), which sells software to small, independent banks that deal primarily with small businesses?

Daily charts for these stocks are here. Click on a chart for a gallery of charts.

I don’t own any of these stocks.

For educational purposes. Investigate before you speculate.

Posted by Donald E. L. Johnson on 10/10/08 at 03:54 PM
Bankse-commerceSmall BusinessSpeculationFundamental AnalysisStocksPermalink

Independent banks reassure, appeal to small business owners

While the mega banks like Bank of America (BAC), Wells Fargo (WFC) and J. P. Morgan Chase (JPM) buy up their failing competitors like Countrywide, Merrill Lynch (MER), Washington Mutual and Wachovia (WB), small independent bankers are trying to retain their small business customers.

Indeed, with the increase in FDIC protection for bank customers to $250,000 on savings and checking accounts as well as certificates of deposit, independent banks may win some small business clients away from the big, impersonal national chains. It’s well known that the financial conglomerates like Citigroup (C) haven’t been particularly successful, to put it mildly.

Therefore, the recent and pending acquisitions by BAC, WFC and JPM may not only make them less attractive to investors but also to small businesses and wealthy individuals.

But, then, these companies didn’t get where they are by serving only big organizations. And they may actually win a greater share of the small business market. It’s hard to predict.

As an owner of a small business, I felt better dealing with an independent bank than I did when I banked with a couple of the national and regional banks.

Here’s an example of the public relations efforts small, independent banks are waging to retain and win over owners of small businesses.

Jay Davidson, CEO of First American State Bank, Greenwood Village, CO, placed this article in a local business magazine.

I don’t own any of the above stocks. Their daily charts are here. Click on a chart to see a variety of charts.

For educational purposes only. Investigate before you speculate.

Housing bill may not help housing nor banks and is a huge risk for taxpayers

The housing bill being rushed through Congress may not help the housing market or banks and will cost taxpayers billions, according to the lede editorial in today’s edition of The Wall Street Journal.

This is the best explanation I’ve seen of the housing bill that Democrats are pushing through Congress and President Bush promises to sign.

In its editorial today, The Wall Street Journal ( calls on Senate Republicans to filibuster the bill until the most offensive provisions are deleted. Good luck.

Congressional Republicans have spent the last decade trying to out spend Democrats. But their attempts at vote buying are being trumped by the Democrats, and the Republicans wind up offending their fiscally conservative base.

What’s sad about all this is that the housing issue is so complex that the advocates of the bailouts of Fannie Mae (FNM), Freddie Mac (FRE) and the politicians and executives of home builders, mortgage bankers and Wall Street geniuses who profit from their boondoggles can convince voters that the housing bill is a good thing. Long-term, it’s not.

The WSJ editorial concludes:

For proof of how powerful they remain, even in their straitened circumstances, look no further than Majority Leader Harry Reid’s refusal even to allow a vote on an amendment proposed by South Carolina Republican Jim DeMint to bar the two from lobbying in the future. Senator DeMint has threatened to filibuster if his amendment isn’t aired. By itself, the antilobbying provision won’t save the taxpayer from Fan and Fred, but it’s a start.

Democrats are rushing this bill through because of the favors for Fan and Fred and new spending for left-wing activists like Acorn. But the reluctance of many Republicans to look out for taxpayers is harder to comprehend. They’ll get little credit this year for letting the majority Democrats say they did something for “housing,” and GOP voters will blame them for rescuing the irresponsible.

Meantime, the White House and Treasury are betting that this bill will put a floor under the housing market and buoy bank stocks, and thus avoid a deeper financial downturn. The rescue will only delay a housing market bottom, and it may or may not help bank stocks. The one certainty is that taxpayers are assuming a huge new risk.





Posted by Donald E. L. Johnson on 07/24/08 at 07:42 AM
BanksReal EstateStocksBank StocksPermalink

How to evaluate a bank, specifically JP Morgan (JPM)

Figuring out which banks are good bets for speculators can be more challenging than a cross word puzzle for some traders, and Peter Eavis offers an important tip, “Check Banks’ Provisions.”

He uses JP Morgan Chase (JPM) as an example and concludes in his article:

J.P. Morgan looks well prepared for a worsening of the credit storm. Its reserve rose to 2.57% of total loans in the second quarter, from 2.29% in the first. And it represented 1.5 times the bank’s annualized charge-offs in the latest quarter. That compares with 1.2 for Wells Fargo.

If that is the science, the art is in looking at the riskiness of J.P. Morgan’s loan books and guessing whether charge-offs could yet swamp the provisions if economic conditions get much worse.

The bank doesn’t have particularly dangerous exposure to toxic subprime or Alt-A mortgages. Risky home-equity lines of credit are more of a concern. But the second-quarter spike in prime-mortgage charge-offs was ugly. They doubled to $104 million in the second quarter, compared with the first, and Chief Executive James Dimon predicted they could soon rise to $300 million a quarter.

That sounds scary, but the fact that Mr. Dimon was talking frankly about the prime-mortgage challenges could actually be a sign that the bank is on top of its risks—and is adequately reserved.

If that is the case, investors may want to bet on J.P. Morgan being among the first to enjoy a bounce from lower provisioning when the crisis abates.

As a result of JPM’s huge rally last week from about $30 to $40.02, it’s daily chart and its point and figure chart are bullish with a price objective of $64. But the weekly chart is still bearish. That means, beware. The charts are here.

For covered call traders who sell one call option contract for every 100 shares they buy of JPM, the August JPM 37.50 calls offer an annualized return of 40.6%. The JPM 40 calls offer an annualized return of 70%, and the JPM 42.5 calls offer an annualized return of 33.8%. Bearish traders will buy the 37.50 strike covered calls, neutral traders the $40 strike and bullish traders the $42.50 strike.

Writing covered calls is for experienced options traders. While this strategy can provide good returns, it is very risky when it involves volatile stocks like the banks. pretty much agrees with the price objective, estimating JPM’s fair value is $60, but it issued its estimate with a high degree of uncertainty.

JPM’s $1.52 per share annual yield is a relatively good 3.8%.

I don’t own JPM.

For educational purposes only. Investigate before you speculate.

Posted by Donald E. L. Johnson on 07/20/08 at 06:52 AM
BanksStocksBank StocksCovered CallsPermalink

Buy some banks

“Buy banks,” is this week’s Barron’s cover story, but online, the head is a more temperate “What to bank on.”

Indeed, Barron’s cover story by Andrew Barry discusses banks that look like great long-term buys and banks that should be avoided.

Stocks that analysts quoted by Barron’s like include:

• Wells Fargo (WFC)
• JP Morgan Chase (JPM)
• Lehman (LEH)
• Travelers (TRV), an insurer
• Bank of New York Mellon (BK)
• Merrill Lynch (MER)
• Bank of America (BAC)
• American International (AIG)
• Prudential Financial (PRU)
• American Express (AXP)
• U.S. Bancorp (USB)
• PNC Financial (PNC)

Their daily charts are here and here. Their point and figure charts are here. Stocks with bullish price objectives include: JPM, LEH, PNC and AXP.

Stocks “worth avoiding” include:

• Fannie Mae (FNM)
• Freddie Mac (FRE)
• Washington Mutual (WM)

Their charts are here, and their point and figure charts are here.

FNM and FRE have bullish price objectives on their point and figure charts, amazingly enough.

Barron’s quoted analysts who believe BAC, Wachovia (WB), WM and WFC may need to raise additional capital, and that means they may have to cut their dividends if they haven’t already.

Fifth Third (FITB), National City (NCC) and Sovereign Bancorp (SOV) don’t need capital, according to analysts at Keefe Bruyette and Woods, which specializes in financial companies.

I own BAC and other banks’ stocks.

For educational purposes only. Investigate before you speculate.


Posted by Donald E. L. Johnson on 07/19/08 at 06:24 PM
BanksStocksBank StocksPermalink

Ten troubled banks reported

Ten banks on a list being circulated in Washington and on Wall Street as of March 31 had a high ratio of non-performing loans to their assets and reserves. Many of these banks have had time to reduce these ratios and improve their financial conditions, but their current conditions won’t be known until the FDIC issues its next report.

ABC News provides a list of the banks devleoped by a private research firm here.

Posted by Donald E. L. Johnson on 07/15/08 at 10:23 AM
BanksStocksBank StocksPermalink

BAC: Bank of America is a 5-star stock that pays an 8.4% dividend; how to increase the yield

Bank of America (BAC) is a severely depressed, undervalued five-star stock that pays an 8.4% dividend and will yield close to 20% if you sell call options on the stock. Barron’s Michael Santoli notes, traders are playing banks’ shares to “crack to new lows” short term and “Longer-term types are warming to financials as cheap on a two-year horizon.”

In other words, while BAC is weak now, longer term it could not only pay high dividends and generous returns on covered calls, it also could appreciate 20% to 30% over the next couple of years. Or, of course, it might not. Most stock pickers don’t want anything to do with BAC these days because they’re bearish on the financials and the stock. gives BAC a five-star rating, but other independent stock market research firms are less optimistic, given the fairly high chances that the bank will have to raise more capital and might have to cut its dividend in the face of continuing credit market problems. Morningstar estimates the $30.30 stock’s fair value is $56. It might be years before the stock reaches that fair value, if ever. And chances are good that it will go lower before rallying. After dropping 4.7% Friday, the stock is trading 42.4% below its 52-week high and 44.6% below its five year high, according to Morningstar.

Here’s how I’m playing BAC to achieve about a 19% return annualized.

The dividend is just too high for me to pass up even though it is at risk of being cut. The stock’s current price anticipates a dividend but, but it could fall some more if the dividend actually suffers the 30% to 50% cut I’m anticipating.

Therefore, I bought the stock, but only a small position because of the risks involved. And then, to increase the yield, I sold call options that expire in July for as many shares as I purchased. So I’m long the stock and short the calls. My plan is to keep selling call options against the stock as older options expire.

Thus, when the July call options expire out of the money, I’ll sell an equal number of call options that expire in August. When the August options expire, I’ll sell September options, and so on.

The key is to sell options that are far enough out of the money that they won’t be called unless I want them to be. With the stock at $30.50, I’ve sold $35 strike price call options. This is because I very much doubt BAC will climb back to $35 before the July options expire.

Many traders who play what as the covered call or call write market trade the highest yielding calls and hope their stocks will rise above the call’s strike price and be called away.

But I’m trading a high yield stock that I want to keep. So I’m taking a lower annualized yield of only about 10% instead of the highest available and riskier covered return of 44% on BAC July 30 strike calls. A call option gives the buyer of a call the right to buy calls at the strike price of the call. If a stock is trading at less than the strike price when the option expires, the call option expires worthless. If the stock is at or above the strike price, the call holder gets the stock for the strike price.

Based on Friday’s close, the BAC July 35 calls are 34 cents bid, which means they would provide an annualized covered return of 9.78%. The market is saying BAC will be worth $35.34 when the options expire in 40 days. I doubt it, given current market conditions.

Indeed, Credit Suisse rates the stock a neutral and estimates its fair value is $34, much less than Morningstar’s estimated fair value. Standard & Poor’s gives the stock three stars and a target price of $40. Rochdale Research calls the stock a hold and estimates its fair value at $35. Sabrient says the stock is a sell.

In addition to being caught up in the subprime mortgage mess, BAC is in the process of buying the troubled mortgage banker Countrywide, which presents a lot of potential problems. Last week, the NYT reported that BAC is determined to go through with the widely criticized deal. And reported more potential problems with Countrywide.

Felix Salmon outlines the risks of investing in banks here.

BAC’s daily, weekly and point and figure charts are here. The bearish price objective, which is not a prediction, is $28.

Full disclosure: I own BAC and am short BAC July 35 calls.

For educational purposes only. Research stocks at,, and Writing covered calls can be risky. The learning curve can be steep.


Posted by Donald E. L. Johnson on 06/08/08 at 06:45 PM
BanksStocksBank StocksCovered CallsOptionsPermalink

Capital One’s attracts me with an ad in the Rocky

Capital One Services Inc. (COF) has launced, “the new business marketplace designed to bring Denver business owners and customers together.”

The ad promoting the new site that


It’s the fault of mortgage brokers, banks, that subprime borrowers are in too deep?

Legislators in Washington and the states are debating how and whether subprime borrowers can be protected from their ignorance and the greed of mortgage brokers and bankers who suck them into home equity refinancings they can’t afford.

Lobbyists for banks and mortgage companies are arguing that too much regulation will shut down the subprime mortgage market and keep housing sales down forever. But another argument is that if people are forced to save to buy homes, they’ll be more secure in their homes and better off financially. That assumes, of course, that reduced home equity refinancings won’t end our economic boom and raise unemployment to unacceptable levels, whatever they may be.


Posted by Donald E. L. Johnson on 11/24/07 at 03:43 PM
BanksEconomyReal EstateRead More

Wachovia director is doing some serious buying; taken by investors as a good sign

Todd Sullivan writes at that one of Wachovia’s (WB) directors has become the company’s third largest individual shareholder with some serious buying. This is considered an important vote of confidence in the bank at a time when investors aren’t quite sure about the financial conditions of the major banks.

Posted by Donald E. L. Johnson on 11/23/07 at 02:43 PM
BanksStocksBank StocksPermalink

Speculators are looking for banks to buy; 5 reasons to buy Capitol Bancorp

Capitol Bancorp Ltd. (CBC), a Michigan-based owner of 57 banks around the country, looks attractive to George Spritzer. He outlines his five reasons for buying the stock over at

What he likes is that Capitol has little exposure to subprime loans and the beaten-down stock looks like it could rally soon.

Good analysis.


Posted by Donald E. L. Johnson on 11/23/07 at 02:22 PM
BanksStocksBank StocksPermalink
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