Posts filed under “Valuation”

Rinse. Lather. Repeat.

A brief review of recent Merrill CEO statements:

1. We don’t need capital;

2. We could use some capital, but we won’t sell shares, we’ll just sell some assets;

3. We need to sell shares and raise capital right away;

Where is Ken* when you need him?

The financial firms obviously think investors are utter fools. And for a while, they were correct. They suckered people into buying into this mess the whole way down. Bottom calls each and every level — all of which failed. Some analysts even called iBanks a "Generational Buys" — 30% higher.

Only not so much.

Release earnings. Issue guidance. A few weeks later, lower earnings. A few weeks after that, take more write-downs. Raise more capital.  Start it all over again next quarter.

Rinse. Lather. Repeat.

The banks have adopted a Chinese water torture approach — dribbling
out the bad news in small doses over time. Its been working up until now, but I doubt it will keep working much longer. Can they keep fooling people much longer? Merrill issued quarterly
earnings on July 17th, and then dropped this bomb shell on July 28th? They must really think we are idiots, and that the SEC is in their backpockets to even attempt getting away with this crap.

Bill King writes that "Eventually a critical mass of investors and traders will become cognizant of the obvious scheme and
distrust of financial firms’ results, guidance and motives will increase substantially.

John Thain’s credibility is now an issue."

I agree.
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Merrill CEO John Thain’s Public Statements

Mer_thain_statements_3

 
via Bespoke Investment Group

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But its not just Thain’s rep that is on the line. Look at how much intervention into the formerly free markets is being done under a guise of "Systemic Protection." That catchall rationalizes a lot of really bad decision making by Politburo Central planners senior government officials.

I don’t think this process will be fully resolved for quite a while, perhaps as long as 10 quarters. And I would expect that despite the best efforts of the American Communist Party Central Planning Committee SEC, the Treasury Department, and the Federal Reserve, these stocks ultimately end up going lower, and perhaps much lower.

$15 is a very realistic target. But how a bout single digits? It certainly is a possibility . . .

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A History of Merrill’s Writedowns

Merrwritedown

Chart courtesy of Jake

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* SEC Chairman Cox, a/k/a Ken

Category: Corporate Management, Derivatives, Earnings, Valuation

Merrill’s $5.7B Write-Down, $8.5B Share Issuance

Category: Corporate Management, Credit, Derivatives, Earnings, Valuation

Would Benjamin Graham Buy Financials? (No!)

Category: Credit, Earnings, Valuation

Have the Financials Bottomed?

Category: Credit, Federal Reserve, Real Estate, Valuation

Its Unanimous: Banks Have Bottomed!

Category: Contrary Indicators, Credit, Dividends, Financial Press, Valuation

Why Barron’s Housing Cover Is So Terribly Wrong

New Home Completions, 1968-2008 click for ginormous chart Major New Home Building Housing expansions since 1968 are marked as a red horizontal line at bottom. They previously lasted 2-4 years (71-73; 76-79; 83-87) The most recent boom far exceeded all previous expansions, running form 1992 – 2003 — then exploding upwards for another 3 years…Read More

Category: Data Analysis, Financial Press, Real Estate, Valuation

Quote of the Day: Hey, its cheap!

Category: Psychology, Valuation

Same As It Ever Was

Welcome to the second half of 2008.

We begin the second half pretty much the same way we finished the first half:  Equities under pressure in Asia, Europe, and judging by the futures in the US, domestically as well.

One of the things that us foolish idealists hope for is that the current set of crises will force the fantasy brigades to actually start interacting with that hypothetical construct known as reality. Perhaps by confronting the actual problems facing the economy, we can actually begin the process of repairing them by taking the painful write-downs and instituting the medicinal policies that make sense.

Such hopes are misplaced. The latest evidence of such comes from no other than Blackstone Group (BX) CEO Stephan Schwarzman. On the occasion of the private equity firm’s one year IPO anniversary, Schwarzman places the fault for the current crises squarely on FASB 157.

You read that correctly: This was not the fault of incompetent lending to borrowers who could never afford to pay back mortgages; nor was it the fault of the rating agencies that slapped AAA on paper that turned out to be garbage; nor was it the responsibility of an MIA Fed that utterly failed in their responsibilities as the chief supervisor of the banking system; nor was it the liability of fund managers who in a misguided grab for yields bought billions of dollars worth of securities that they had no idea of the specific details contained therein.

No, it was the accountants’ faults. 

You see, those persnickety bean counters forced banks and brokers to actually write down paper for which there was no market.

Therein lies the foible of Schwartzman’s Folly, for if you own marketable securities for which there is no market, then by definition, these are not really marketable securities.

How then to price all of this paper on the books? Why, just rely on the people who bought them in the first place! Never mind that they don’t understand what they own, they failed to do their due diligence before buying this garbage in the first place. Do not acknowledge these folks have an enormous personal incentives NOT to mark this junk down.

You can trust them! They’re good people.

Perhaps this helps to explain why Blackstone Group’s stock is off nearly 50% since the IPO: The foolish shareholders of BX have been making the mistake of marking the stocks-to-market. My suggestion: Forget that they are a private equity firm, and consider instead your own approximate fair value interpretation of what the company is worth!

Attention fund managers: Here is my new Stephan Schwarzman inspired idea. Y’all should be buying Blackstone in the open market today at $18, and at the four o’clock close, be marking it at $36. That will be not only be your fair value interpretation of what it’s worth, but it reflects a 100% gain instantly.

And, that’s before the $.30 dividend.

Indeed, for those investors struggling with the current selloff, I suggest you forgo mark-to-market accounting at present, and instead start implementing mark-to-subjective-self-interested valuations. Your portfolio returns, and you’re outside investors, will thank you for the immense improvements in your performance.

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The Blackstone Group, Since IPO
(daily chart, one year)

Bx

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Musical reference and soundtrack via the Talking Heads


Previously:
FASB 157 — Delayed, or Not? (November 15, 2007)
http://bigpicture.typepad.com/comments/2007/11/fasb-buncha-bit.html    

SFAS 157: Market Prices Too Low? Just Ignore Them!  (March 31, 2008)
http://bigpicture.typepad.com/comments/2008/03/sfas-157-market.html

 

Source:
Are Bean Counters to Blame? 
ANDREW ROSS SORKIN
NYT, July 1, 2008      
http://www.nytimes.com/2008/07/01/business/01sorkin.html   


Related:
Summary of Statement No. 157
Fair Value Measurements
http://www.fasb.org/st/summary/stsum157.shtml

Mohamed El-Erian Argues for Propping Up Asset Prices
Naked Capitalism, MARCH 18, 2008

http://www.nakedcapitalism.com/2008/03/mohamed-el-erian-argues-for-propping-up.html


 

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Category: Corporate Management, Credit, Derivatives, Finance, Valuation

Bloomberg: Can the Fed Cook Bear’s Books?

Category: Federal Reserve, Valuation

Fifth Third Bank

Bouncing around trading desks is this comment on Fifth Third Bancorp (FITB): “Given its recent performance, the company has announced they are changing its name to “Three Fifths” Bank . . .” Looking at the chart below, perhaps that should even be “Two Fifths” Bancorp ! > > Thanks, Mike! ~~~

Category: Favorite, Trading, Valuation