Recycling the CYN trade

On Friday afternoon, I shorted 50 shares of CYN at $41.22.  This is a recycled trade from August, but the investment thesis has slightly changed.

This is not financial health story.  I am not shorting CYN based on capital ratios, a speculated dividend cut, or anything to do with management.  I have no gripes in any of these areas.

Shorting CYN is a valuation story.  This is a California economy story.  This is a creditworthiness story.  This is a market is overvalued and going to harm CYN on its way down story.

From the August article, three arguments remain sound.

  • The market is overvalued at 1,100.  CYN is defenseless against a market decline.
  • Credit problems will hamper earnings.  Oncoming mortgage reset rates (Option-ARM & Alt-A) will be problematic and of lengthy duration.  When loans fail to be repaid, CYN will suffer.
  • California is of the four worst states to conduct business (the other three being New York, New Jersey, and Illinois).  The state has severe fiscal woes and rising unemployment.  Last week’s edition of The Economist publicized this in an article, stating that California has unfunded liabilities for retirement programs exceeding $100 billion through the next six years.  An unhealthy economy is sour news for banks operating within it.

Further, on a personal level, I am trying to increase my short exposure to better align myself with my portfolio allocation goals (which I am hoping to publish in early January).

One concern I am aware of is that 24.7% of float is short.  So, there is the potential that other short sellers simultaneously exit their positions, which would temporarily increase the stock price.

Other Reasonably Thinking news:

I still presume my option on SDS will be put to me.  (Though, this is not yet reflected in my account).

Also, I’m drafting an end of year page which should be up in early January.  Stay tuned!