Talk to Chuck: Charles Schwab

The best thing you can do in times of financial crisis is panic, and Twitter did a great job of that the last 4-5 days led by the usual asshats. This situation with Schwab is completely overblown to me and I’ll explain why in this very short post.

This year has been a bit slow for my strategies, last year around this time it was WTI Crude (short post Russia/Ukraine) and a big Carvana short .

But here are again with another Wall Street situation led by Uncle Jerome tightening at a rate the markets haven’t seen in 40 years.

But that screw up is going to create dislocations and select dislocations is where some of my core strategies come alive and Schwab is a victim of said dislocation.

To be clear, this is no investment advice, nor do I specialize in banking stocks - but this met too many parameters for me not to punt into, as a trade - nothing more.

First, Schwab is NOT SVB - they make WAY more money, have a lot more in assets and run entirely different models.

One, which caught my eyes a year ago, is their advisory arm. They’re doing some interesting stuff there with training new advisors and the TD merger (if it goes through) was a big deal as well.

Like most things, at least in my experience, markets overreact due to terrible headlines but those headlines present situations to deploy capital so in some sense they are a necessary evil.

I also don’t like to invest into financials/banks at all for various reasons, but this was and is an opportunity for a ‘trade’.

And there’s a difference between an investment and a trade, I wrote about that here.

I don’t want to dive into a deep analysis here on their balance sheet, but I will share a few things, if not known already.

The issue is a lot of the securities to which they own, mainly their HTM assets that are trading at a substantial loss. The problem is if their Tier 1 capital gets too low - then they have a potential issue where they need to do a capital raise - in fact, they should because running the business in that manner doesn’t make sense.

But to my understanding, they have access to the Fed window and can borrow on some of their select assets, if needed.

Now there are a lot of things they (and other banks did) wrong given what The Fed has been stating the last 15 or so months and for it to get to this is a bit ridiculous but that doesn’t matter at this point.

And sure, it’s interesting to see the recent insider buying but that doesn’t mean much to me.

What I care about is seeing:

1. If they have to force liquidate some of their securities

2. If they need to cap raise

3. And finally, if they suspend or cut their dividend going forward

The move, technically speaking, was/and is overdone - I just need to see what comes next from here.

But let me be clear here before I move on - again this is a trade for me, not an investment hence the structure of the position.

This thing can trade back to ATH or $30s and I don’t care too much - though, I certainly hope to see it back to ATH and if they don’t have to cap raise or get creative with a few things I am certain it can get close.

That was from my post: Trades v. Investments

Schwab is a trade for me. It meets those parameters and the structure of it made too much sense not to put it on.

Done with duration based DITM calls that I expect to appreciate over the next 3-6 months - I have no desire to hold them to expiration and I do think, regardless of what they end up having to do, that this situation on their share price was overblown.

Maybe it’s a bad punt maybe it’s not - but I like situations like this where markets overreact, especially with a quality franchise like Charles Schwab.

Dan

Disclaimer: I and a fund that I control are long SCHW calls and LEAPS.

This article is presented for informational purposes only, is an opinion, and is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investments. Any such solicitation of an offer to purchase interest will be made by a definitive private placement memorandum or other offering documents.

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