Posts filed under “Valuation”

Have the Financials Bottomed?

Nicely structured reasoning via Barron’s Randall Forsyth:

Borrowings at the Federal Reserve’s discount window averaged a record $16.4 billion in the week ended Wednesday, up $2.5 billion from a week earlier. A spokesman for the New York Fed had no explanation for the jump.

That, by the way, doesn’t include any of the new-fangled lending to securities dealers, which were nil in the latest week. (The Fed’s $29 billion of financing of the Bear Stearns assets in the JPMorgan Chase acquisition resides under the quaint heading of "holdings of Maiden Lane LLC.")

Keeping the borrowing from the so-called PDCF, or Primary Dealer Lending Facility, would seem to be a significant impetus behind the Securities and Exchange Commission’s crackdown on naked short-selling of big financial stocks, observes Joan McCullough of East Shore Partners.

In SEC Chairman Christopher Cox’s op-ed piece in The Wall Street Journal last week, McCullough writes, "he spilled the beans as to why naked shorting has been forbidden in that select litany of names. According to Mr. Cox, the list ‘applies to precisely those financial firms that the Fed has designated as eligible for access to its liquidity facilities — and for which the taxpayer could be on the hook.’

"So there you have it. Under the guise of not wanting to further burden the taxpayer, they put together that very telling list of [primary dealers] and [government sponsored enterprises]. Of course, they don’t give a fig about the taxpayer." The real aim was to avoid wasting the Fed’s powder on institutions targeted by evil short sellers, McCullough comments.

In any case, the myriad woes of the credit system strongly suggests that the stirring stock market rally led by the financials in the wake of the Fannie-Freddie bailout and the crackdown on short-selling was mainly the product of short-covering.

Not exactly an original notion, but one well-supported by the data. Bespoke Investment Group points out that banks were the most heavily shorted group among the Standard & Poor’s 1500 index in the latest short-interest numbers through July 15 — the day the financials made their lows. Short interest hit 19.6% of an average bank stock’s float; no doubt much of that has been bought back in the subsequent week. Last Thursday’s wicked selloff suggested that’s likely played out.

As the credit crisis prepares to mark its first anniversary, it’s only fitting that the bulls claim the bottom has been reached. MacroMavens’ Stephanie Pomboy notes similar declarations after bear-market bounces, as with the Nasdaq in 2001 and the Nikkei in 1990.

But, given the banking system’s record exposure to real-estate assets, which continue to deflate, the fate of the financials — and indeed the stock market — seems tied to the housing market.

"As long as real-estate values continue to decline, banks will continue to frantically reduce their exposure," says Pomboy. " This is why it seems irrational in the extreme to anticipate a bottom in financials before the bottom in housing is in!"

Irrational, indeed . . .

Isn’t It Rich? 

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.


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




Musical reference and soundtrack via the Talking Heads

FASB 157 — Delayed, or Not? (November 15, 2007)    

SFAS 157: Market Prices Too Low? Just Ignore Them!  (March 31, 2008)


Are Bean Counters to Blame? 
NYT, July 1, 2008   

Summary of Statement No. 157
Fair Value Measurements

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



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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

Read It Here First: Half of Wall St. Profits Are Gone (So Far)

Category: Credit, Derivatives, Earnings, Markets, Valuation

How Did Lehman Delever?

Category: Credit, Derivatives, Earnings, Valuation

Stocks: Negative Return Due to Inflation

Category: Commodities, Earnings, Valuation