Martin applied four criteria when examining banks’ health:

Banks that made profits in the very difficult fourth quarter of 2008 and first quarter of 2009 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost.)

Banks that lost money in the fourth quarter and first quarter may or may not be in terminal trouble; it depends on the amount of those losses and whether the red ink is expected to continue to flow going forward.

With the run-up in bank stocks in recent weeks, there’s been an accompanying rise in the ratio of share price to book value (stock price per share/book value per share). If that ratio is still below 30% – even after the recent price increases – the market lacks confidence in the bank’s ability to solve its own problems. Unfortunately, the market currently appears to be overly optimistic about some of the banks that still have considerable ongoing problems.

Management’s dividend policy is less of an indicator than it was just a few short months ago; several banks have sharply cut their dividends in order to repay the Troubled Assets Relief Program (TARP) capital they got in late 2008. Reasonably, profitable banks don’t want the government meddling in their business or compensation structures

This research revealed three “hidden gem” banks among the dross. They are (in alphabetical order):

BB&T Corporation (NYSE:BBT) – With $152 billion in assets, and a $3.1 billion TARP investment, this North Carolina-based regional bank has its primary operations in the Mid-Atlantic region. A recent share price of $23.42 meant that BB&T was trading at about 94% of book value. BB&T was profitable in each quarter of 2008 and in the first quarter of 2009, making $1.5 billion for all of last year and $271 million in first quarter of 2009. It maintained its dividend of 47 cents a share for first quarter of 2009, the only bank to maintain its full payout. The question, of course, it whether management will be tempted to follow fashion and cut the dividend next quarter; otherwise, it looks very solid.

State Street Corporation (NYSE:STT) – With $174 billion in assets, and a $2 billion TARP investment, this Boston-based bank is focused chiefly on serving institutional investors worldwide. Its recent share price of $37 meant that State Street was trading at 146% of book value. Its 2008 earnings per share (EPS) of $3.89 represented a year-over-year increase of 13%. First quarter net income down 16%, but State Street still earned $445 million. It pays a quarterly dividend of 24 cents per share. With a global business, conservative leverage and Boston management, State Street is a great risk. But it’s somewhat of an unexciting investment currently as securities issues and trading volume have fallen.

Bank of New York Mellon Corporation (NYSE:BK) – With $237 billion in assets and a $3 billion TARP investment, this New York-based bank has its primary operations in New York and Pennsylvania and has an institutional/corporate orientation. With its recent share price of $26.88, it is trading at 122% of book value. It reported 2008 net income of $1.39 billion, and first quarter profit of $322 million, after which the bank reduced its quarterly dividend from 24 cents to 9 cents a share. Looks solid to me.

U.S. Bancorp (NYSE:USB) has $266 billion in assets, and a $6.6 billion TARP investment and is a regional bank headquartered in Minneapolis that operates primarily in the Midwest and Northwest. A recent share price $18.97 means it is trading at 176% of book value. It reported a 2008 profit of $2.94 billion, and a first quarter profit of $419 million. U.S. Bancorp cut its quarterly dividend from 42.5 cents per common share to 5 cents a share, as it wants to pay back its TARP investment. This bank is in good shape, but its capital base would become too thin if it repaid TARP; I’m not sure I want to pay 11-12 times earnings for this stock when the dividend’s so low and the uncertainties are so high, as there’s still some chance of dilution, should it raise capital.

The company has bagged several new contracts with casinos for its latest PokerPro product in May alone.

PokerTek develops, manufactures and markets electronic poker-related products for use in gaming and amusement markets, targeting both large casinos as well as restaurants.

Any interest by institutional investors could substantially increase the share price. Recent contracts have only added fuel to the fire as the shares continue to head north.

We’re of two minds regarding the company. For one, even after today’s run-up, it’s still trading below $5.50… over 50% below its 52-week high. It has negative EPS of -1.14, and its stock price trajectory has follwed that of U.S. consumer sentiment downward. The momentum appears to steep, the trigger to flimsy to validate even a short-term hold.

Venturesome investors should consider a short poition between $5.50 and $6… betting on an equally rapid decline of up to 33% by mid-month.

Source: PokerTek, Inc. Up on Speculative Buying

CASH: Yes and no. In this business, there needs to be a critical mass of quantity… but the quality of the deal is important, too. You and I talk poker from time to time, and the way this week is shaping up reminds me of a key concept from Texas Hold ‘Em.

JL: Speaking of which, did I mention that I took down a large-field poker tourney 10 days or so ago? There were 180 players total, and I cut a path through 177 of ‘em. Dodging, bobbing, weaving — it was a beautiful thing. So we were down to three at the final table… me and two other guys, one a grinder and the other a full-time pro…

CASH: Um, yeah you mentioned it. You told me the story last week, remember?

JL: I did? Oh, right. Silly me. I’ll just have to gin up more stories by winning another one then. Meanwhile, I think I might know what you were going to say regarding poker analogies and this week’s IPO action.

CASH: Practicing your mind-reading skills, eh? Let’s hear it then.

JL: Well, the similarities are pretty clear. In poker, hand values are only the beginning. It’s just as important, if not more important, to have a clear bead on the competition. If your opponent is any good, he (or she) knows this, too. The game is so much more than numbers and statistics; the subtleties of human nature change everything. Greed and fear dominate the picture, too. That’s a big reason why I fell in love with poker in the first place: It stemmed naturally from my love of trading and investing.

CASH: Gosh. I must say, that was very insightful and well put. Too bad it has nothing to do with what I was getting at.

JL: Yeah yeah. I never claimed to be Miss Cleo. So fill us in then, wise guy. What were you getting at?

CASH: Well, in No Limit Hold ‘Em, as you know, there is a “dealer” button that gets passed from player to player in clockwise rotation. Before each hand begins, the two players sitting left of the “dealer” are required to ante up a fixed number of chips, known as the “blinds,” in order to seed the pot.

JL: Sure. There’s usually a big blind and a small blind, and the reason they call ‘em “blinds” is because the chips have to go in before the cards get dealt. The blinds help ensure there’s something to vie over in terms of pot size, and represent a voluntary cost of playing the game. In other words, you can’t just sit and wait for good cards without contributing in turn. You’ve got to pay to play.

CASH: Exactly. So that’s what this week is shaping up to be for me… It’s my turn to pay out some blinds. We’ve had some great cards dealt to us over the past two months, we’ve pressed our bets and made some nice bank, and now it’s time to contribute.

JL: Hmm. Methinks you’re reaching a bit with this analogy, but go on.

CASH: I think it’s a relevant parallel. The dealer is now on my right, and I’ve got to chunk some chips into the pot. Part of my bargain with the underwriters is keeping them happy, as you know. I participate in the bad deals along with the good, and use my trading skills to make the difference. To keep giving you my insightful backroom view of the IPO process, Cash is gonna have to take one for the team this week.

JL: I get it… You’re not a big fan of the deals going down this week, but you have to take some shares to keep your guys happy. This is like paying the blinds in that you do it to keep a seat at the table, with future opportunities in mind.

CASH: Yep, now you’re catching on. You know what? I don’t care what everyone says. In my book, you’re pretty sharp.

JL: Thanks, man, I appreciate tha– Hey wait a minute!

CASH: [snicker]

JL: Okay, I’ll give you that one. But when you least expect it… Anyway, back to the topic. So I guess the question now is, what kind of chips are you putting on the table? Red, green or black?

CASH: I’m trying to keep the blinds as low as I can, obviously. There’s a delicate balance between taking a big enough position to keep the underwriters happy, and keeping the position small enough to minimize impact on P&L.

JL: And by P&L, you mean profit and loss, of course.

CASH: What else would it be — power and lighting?

JL: Man, are you gonna get it…

CASH: I’m sure I will. I’m quaking in my boots here. But anyway, to give you a little more color on the stocks: The first IPO is American Capital Agency Corp (AGNC). Interestingly, the IPO is the beginning of the company. They’ve never done business before, and the founders actually have a pretty neat idea. They plan to raise a bunch of capital in the IPO offering, and then use the money to buy assets linked to residential mortgages.

JL: Oh, that sounds like an absolutely brilliant idea — buy toxic waste for 40 cents on the dollar and sell it for 50 or 60 cents, right? I suppose there could be some good money there… if the players are savvy enough and if they know how to play the vulture game without getting cute.

CASH: Right. The argument is that mortgage problems are now so widely publicized, and investor disgust so widespread, that the prices of these securities have the distress priced in. If these guys can pick up assets at 40 or 50 cents on the dollar as you say, and end up collecting 60 or 65 cents, that’s a 30%-plus return.

JL: And I would imagine with those kind of gains, they could absorb a few dud issues and still book double-digit profits. Worth a look, I guess — but I’m confused. You sound pretty upbeat on this idea, and I thought we were talking about deals set to flop.

CASH: Well, this isn’t the first “pass through” company. (That’s the lingo for their business model — that I’ve seen come through the deal pipeline.) And it seems like every time this type of structure is introduced the stock drops on the first few days of trading. Investors are savvy enough to realize that their initial IPO capital will be diluted by the expenses of the firm, the salaries and bonuses that must be paid to executives, and plenty of other little things like rent, maintenance, legal costs, technology costs and so on. All of this is taken out of the IPO capital raised before the first mortgage security is bought.

JL: So if, say, the company raises a cool $250 million, they might only have something like $230 or $240 million for investment proceeds, because a portion of that capital is already pre-committed.

CASH: Yes, that’s exactly how it works. And the stock price tends to reflect this dilution, too. So if they price it at $20, you will probably see it trade at $19.50 until investors start getting information that the capital has been put to good use, or the mortgage security prices are rising. Then the stock starts to trade on the future expectation of profits.

JL: A time delay of sorts?

CASH: That’s a fair way to put it. And so we don’t want to be long the stock until the “time delay” is worked through… and also until we get a sense of how management will actually be spending the IPO money.

JL: Gotcha. So what’s the other new issue that has you wincing in pain this week?

CASH: The second one is Verso Paper (VRS). This company supplies paper to catalog and magazine publishers.

JL: Interesting. I’ll have to check with the back office and see if we use any of their products. The publishing business still uses a lot of paper — but more and more, the Internet is starting to play a bigger role. Sending physical newsletters is obviously a bit more costly and time consuming than digital fulfillment. Not to mention the advantage of real-time delivery via the Web for more timely communications.

CASH: That long-term trend — away from paper and towards the Internet — is exactly why this IPO is going to go south. The business isn’t dead by any means, but it’s hardly thriving. There are only so many major consumers of this type of paper, and margins are getting squeezed as manufacturers like Verso compete for pieces of a shrinking pie.

JL: Doesn’t sound like all that profitable a niche.

CASH: You can say that again. The company lost $100 million last year.

JL: Yikes! And they’re going public why exactly?

CASH: Oh, management is spinning a big fat yarn about engineering a merger, needing to pay off debt, reorganizing the company to increase profitability, yada, yada, yada. So they expect to use the proceeds from the IPO to pay off their debt… and then we’re supposed to believe that they’ll get their act together and start making money.

JL: Do I detect a hint of cynicism?

CASH: Hey, it pays to be cynical in this market. Besides, you would be a grump too if you knew you had to take a long position with a 95% chance of going down the next day.

JL: True that. But, looking at this from our readers’ perspective, this seems to be an opportunity. What if someone were to short one of these names? After all, you’re pretty confident they’ll be headed south, right?

CASH: Indeed. I was going to let folks read between the lines… but you’re connecting the dots instead. Verso also represents the type of opportunity I’ll be covering in the new trading service.

JL: Oh man. I bet you just made thousands of ears perk up. What about AGNC, though, the other stock you mentioned?

CASH: AGNC is toast. There’s no opportunity there because the stock will open at a discount and likely go dormant almost immediately. But VRS has the potential to drift lower over the course of several weeks. You have to be nimble and quick, but there’s a great chance to make some profits shorting Verso Paper.

JL: Nice. I wasn’t expecting you to give out that kind of name to a broad audience.

CASH: Believe me, I won’t be making a routine habit of it. These kinds of opportunities — the real inside baseball-type stuff — are best suited for a smaller and more exclusive audience. If word gets out on the street that a connected player is spilling the beans, it would make my own trading that much harder… and might make it harder for me to dig up this kind of information, too.

JL: Don’t worry. We’ll get the kinks worked out behind the scenes so you can share your secrets with a more tightly knit circle of readers. Nobody wants to kill the goose that lays the golden trades.

CASH: Good deal. Next week we’ll talk about some more mainstream ideas — but for this week, you guys got a sneak peek into the deeper realms of Cash’s world.

JL: Yeah, thanks for that. And don’t lose too many of those black poker chips.

CASH: Oh, I won’t. And for every chip I give up, you know I’ll make even more back…

JL: I surely do. Have a great rest of the week.

by Justice Litle, Editorial Director, Taipan Publishing Group

Last week, we took a look at how you can accidentally hurt yourself when you mismatch a high-volatility stock with a stop loss. This week, we’ll discuss an easy way to keep you out of that kind of trouble.

Very volatile stocks aren’t just likely to trip your stop losses—if you even use stop losses—they also tend to look like they’re about to drop dead a few times a year. You see this, you sell the stock, and then the next week it’s back setting new highs and you’re groaning. So now, let’s look at how to measure volatility.

If volatility is simply a lot of movement, does that mean a lot of dollar points up and down each day? A large percentage of its stock price each day? Or, a lot compared to an index?

All those possibilities contribute something to the story. But the most intuitive place to start is with how much a stock goes up and down in price. We would accept gigantic moves to the upside, of course. But how much movement the wrong way are we courting to get that? Is the stock likely to gain or drop $5 in a single day on a regular basis, or only 75 cents in a normal swing?

There is a very simple way to check this. It’s free. If you have a computer, you can get the facts at Stockcharts.com easily. Another free source is Incrediblecharts.com. The tool you want is called “average true range,” or ATR. Let’s take a look:

Here’s a nice little biotech that is well established, Gilead Biosciences. On this chart, the ATR for Gilead was about $1.30 a day last November and $1.70 in March.

If all you want to know is how volatile your stock is, you can stop right here. You now have a tool you can use. Vaya con dios and prosper. If you want to learn a little more about where ATR comes from and what else it can predict, read on…

Gilead is a pretty busy stock, but even so, it’s not often that it moves up twice its ATR or more within two days. It’s even more rare for it to fall that much in two back-to-back days. Now that you’ve seen your first chart. Let’s look at ATR itself a little more closely.

The ATR is calculated over a set period. Usually, it’s a 14-day average of the true range. A “true range” is not a complicated statistic. It is simply how much a stock changes in a day. So it can be calculated as-

• Today’s high minus today’s low (that is, the whole range for today)
• Today’s high minus yesterday’s close (how much it went up since yesterday, if that’s more than today’s range)
• Or today’s low subtracted from yesterday’s close (how much it went down since yesterday if the stock is falling).

You don’t have to struggle with remembering that now that you have an idea what a true range is. It’s just today’s high to low, or the amount it went up or down since yesterday, if that’s a bigger number. Chart software will do all the calculating for you, anyway, but you know enough so this tool is not mysterious anymore. That’s all that’s necessary.

I began looking at ATRs years ago when trying to figure out whether a stock was likely to move enough in the short run to make an option pay off. From looking at hundreds of charts over the years, I developed a seat-of-the-pants notion that two times the ATR was a significant number I could use.

Even on a biotech stock, and much more so with blue chips, it is quite rare for a stock to move its full, current ATR range one day then continue in the same direction for an additional full ATR move the next day. And doing it with no backtracking or overlapping in price for three or four days is exceedingly rare.

It seems that two back-to-back full-ATR moves down (or three up) is about all you can expect from the stock’s normal behavior. After that, the stock usually reverses course or stands still for a while.

This then gives you an idea of what kind of sudden wrong-way movement you might have to put up if you buy a particular stock.

My two-times-ATR rule is just a rule of thumb I developed as one of my personal shortcuts. It has no textbook blessing that I know of. But it seems to have a bit of a pedigree after all.

And Rick Pendergraft sees Google continuing it’s search and advertising dominance online even against the possible combination of Yahoo and Microsoft. He says, “Microsoft and Yahoo! would create a virtual monopoly in instant messaging and would put them in a more dominant position in email service and the on-line news arena. But what else would the merger bring to the table?

Legislators are jockeying to voice their opinion on the potential merger. Most of them are concerned about potential unfair advantages for the merged company.

I don’t see it.

As I stated above, the combined entity of Microsoft and Yahoo! would not be dominant anywhere they aren’t already. Google would still be dominant in the search engine and ad revenue areas. I understand the posturing by Google and their CEO, but I for one don’t see the need for concern.”