Grim Words From Capital One

Grim Words From Capital One's CEO

By Eric Fry, TheDailyReckoning | 10 December 2009

Laguna Beach, California— If the credit crisis is genuinely over and the economy is genuinely on the mend, someone forgot to notify Capital One Financial, one of America's largest issuers of consumer credit.

Yesterday afternoon, at the Goldman Sachs US Financial Services Conference in New York City, Capital One's Chairman and CEO, Richard D. Fairbank, wowed the crowd with a dizzying collection of grim assessments and forecasts. In no particular order, Fairbank observed:

1) "The storm is not over and we continue to face several significant risks."

2) "With respect to commercial real estate, I believe we cannot see line of sight to the peak yet… I kind of feel it's going to get worse before it's better."

3) "The housing market remains severely dislocated."

Fairbank placed this last observation in the context of an economy that is still wobbling on its feet and unable to generate employment growth:

"Despite last week's modest improvement [in the jobs report]," he observed, "the average time to find a new job remains very high, a sign that the job market is more frozen than in past recessions. Similar to labor markets, the housing sector remains severely dislocated, despite some signs of stabilizing home prices. There is a growing backlog of foreclosures. Inventories of homes in foreclosure or with severely delinquent mortgages are increasing. This is likely to put downward pressure on home prices as the foreclosure inventory hits the market. Continued weakness in housing puts pressure on the broader economy and makes any emerging recovery fragile. And some of the apparent improvements in the economy may not be sustainable. As government stimulus programs like Cash for Clunkers, first-time home buyer tax credits and other direct cash payments to consumers may have only fleeting effects."

During his presentation, Fairbank also sprinkled in a few dashes of optimism about the economy's prospects… and several dollops of confidence about Capital One's ability to "weather the storm". Investors seemed to like what they heard, as Capital One's stock jumped more than 2% yesterday afternoon. Curiously, however, the insiders at Capital One cannot seem to find any reason whatsoever to buy the stock. In fact, they have been unloading it at a very rapid clip for the last few months.

Fairbank, for his part, has not made a single open market sale since May of 2008. But most of the other company insiders have shown no such restraint. Ryan Schneider, for example, President of the Card division, sold 31,848 shares of COF (worth $1.18 million) during the last four months, and just announced his intention to sell another 84,518 shares. All totaled, these sales would represent more than half his holdings. Over in the accounting department, CFO Gary Perlin, just sold $2.3 million worth of COF stock, or about one quarter of his holdings. (For perspective, the last time Perlin sold stock was in May of 2007— less than one month before COF began its swoon from $81 to $8.)

The recent flood of insider selling at Capital One is no guarantee that conditions will soon worsen at the large consumer lender. But as a rule of thumb, insiders do not sell when they believe their stock will be going UP.