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Turnaround Letter
Out-of-Favor Stocks with Real Value

July 14, 2022

We are moving shares of Credit Suisse (CS) from Buy to Sell.

We are moving shares of Credit Suisse (CS) from Buy to Sell.

As we have spoken about in recent weeks, our patience with the pace and likelihood of positive changes in the bank’s leadership, risk management, tactical execution and strategic direction have been wearing thin. Today, our patience has expired.

Our view has crossed into “time to sell” due to the accelerating pace of changes in securities prices across the board – stocks, bonds, currencies, commodities and private/alternative assets. Inflation has moved from mild to high and persistent with remarkable speed. This rapid acceleration is forcing the Fed and many other central banks into faster and bigger interest rate increases. In turn, this is creating exceptionally large price and direction divergences across capital markets, and rapidly changing economic conditions, in ways that greatly increase the risks to banks like Credit Suisse.

Some banks, like JP Morgan, are exceptionally well managed, technologically advanced, tightly risk-controlled and have solid balance sheets, and will readily survive. Yet even JPMorgan is starting to feel the capital markets’ stresses and is preparing for more stresses. A chronically mismanaged, technologically lagging, uncontrolled-risk bank like Credit Suisse, whose balance sheet may well contain sizeable old and new losses would seem to have little chance of recovery, let alone prosperity.

We regret having to take the approximate 55% loss on this investment, but Credit Suisse has a real chance of completely imploding. The slim chance for a turnaround from here, and the potential upside should this happen, is not worth the risk of an implosion.