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SunTrust Banks Inc. (STI)

Jul 09 2008

SunTrust Banks Inc. (STI)

After reaching a new 52 week low on Monday, SunTrust jumped 10% along with all financials on Tuesday but returned to its selling pattern on Wednesday falling 5%.

Construction Loans

            An analyst for Friedman, Billings, Ramsey & Co spooked investors on Monday reporting that SunTrust will have to cut its dividend and raise additional capital. The risk to the bank is the residential construction loans that it holds which are not doing well and will create default situations soon.

            Over 6% of the banks loan portfolio is residential construction loans in Florida and the Atlanta area where the company is headquartered. As recent as June 20th the company claimed to not need additional funding or a cut in its dividend. But the stock price continues to decline and their loan portfolio continues to be questioned.

The Trade

            You can go short SunTrust now that the bank rally has subsided and end the trade before their earnings are released on July 22nd. If the company does cut its dividend or has to write down its loan portfolio prior to their earnings, you could get a nice opportunity to end your short position with a healthy gain.

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