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Update Short Position Capital One Financial (COF)

Capital One reported earnings and the markets are cheering.

music selection:  “Sign of the Gypsy Queen” — April Wine

I hold 61 shares short of COF in my main investment account.  The basis is a little over 5,000 dollars.  Yesterday after close, Capital One reported quarterly earnings and surprised to the upside.  Shares are up over 8% on the day.  I am now 328 dollars to the red.  I will continue to hold the short until 102.70 (a 25% hard stop).  I think I am still right about deteriorating credit quality in the auto loan and credit card loan books and that I am just “early” to the party.

Zacks had this to say: “increasing expenses continue to hurt Capital One’s profitability. Also, deteriorating credit quality remains a major near-term concern. In fact, asset quality is likely to continue to remain under pressure due to losses in the auto portfolio and U.S. card business.”  It should be noted that COF actually increased its provision for loan losses in response to growing default rates.  Net charge offs have increased 66 basis points year over year.  All this while deposits held at the bank fell 1%.  If this trend continues, Capital One could face a liquidity crisis that will reward shorts well.

Devour your prey raptors!

{ 2 comments… add one }
  • Chris B July 24, 2017, 10:13 pm

    I was wondering if this was one of those cases where earnings beat expectations by 4 huge cents due to accounting decisions, such as changes to goodwill or reduced loss provisions. However, the company’s cash flows increased by double-digit percentages since last quarter. This makes it more likely they will have the resources to pass their revised stress test plan and turn on the spigots of increased dividends and buybacks. That’s Wall Street’s theory anyway. I’d be tempted to take my tax losses on the trade now that part of the rationale has not played out as planned. At this point you’re relying solely on the timing of macroeconomic events. But then again I’m an investing coward. 🙂

    http://quotes.wsj.com/COF/financials/quarter/cash-flow

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