Posts filed under “Valuation”
Barron’s: Buy Banks -Selectively (cover story)
Can you recall the last time 3 major media players all picked the bottom in a market or sector on the exact same day — and were all proven correct?
Perhaps the caveats are worth noting — I found it interesting that all publications had some moderating hedges in place (as opposed to some recent embarrassing cover articles).
As we noted early this week, we covered most of our shorts in the financials, and are now looking for a bounce play in these names. However I remain unconvinced that Banks are now a good long term investment.
Why? The business model of Leverage and Capitalization is now kaput. Its a new era of De-leveraging, and Re-capitalizing.
A long time ago, Banks were 3-6-3 spread players. Pay your depositors 3%, make loans at 6%, be on the golf course at 3pm. But the end of Glass Steagell, and the mergers with investment banks, have put an end to that simple but profitible business. For the past 10 years or so, we seen a model that involved taking on a lot of risk, then leveraging it up 25X, 35X, even 65X (for Fannie).
Now that model has come unglued. Banks of all types are unwinding risk, de-leveraging (selling off assets held on borrowed money) and raising capital. This means that until a new model is developed, profits will be anemic and the shareholder capital structure is about to get wildly diluted.
Freddie Mac (FRE), with its $6B cap, is seeking to raise $10B. That will be enormously dilutive to both future earnings, and shareholder equity. Remember that Lehman Brothers (LEH) capital raise? $6 Billion secondary priced at $28 with 8.75% coupon and an %18 conversion premium? The stock is now $19m, the cap is $13.3B. After the last debacle, good luck with future capital raises — they are likely to be treated much more skeptically.
Is "the" bottom in?
Well, it certainly looks like "a" bottom is in.
But longer term, this is a sector that is likely to have continued write downs, weak earnings prospects, and a whole lot more regulation and government supervision than it got away with in the past. P/E compression may also be in the cards — especially if we see some dividend cuts from some of the bigger houses.
Unless you have a decade long time horizon, does that make you want to rush out and own these things anytime soon? Me neither . . .
UPDATE: July 20, 2008 8:23pm
The last time out, they recommended as "cheap" Merrill (MER), Citigroup (C), UBS, HSBC (HBC), Morgan Stanley (MS), Deutsche Bank (DB), Bank of America (BAC), Credit Agricole (ACA) Washington Mutual (WM) and Credit Suisse (CS).
Ouch . . .
Hitting Bottom? Several Banks and Brokerages Are Ready to Pop Up for Air
BARRON’S COVER MARCH 24 2008
Forbes Video: More bank write-downs, U.S. recession, Avoid Home Builders (3/28/08)
Quote of the Day: Citibank on Glass Steagall (July 08, 2008)
Video: Still Too Bullish (Apr. 1 2008)
What to Bank On
Barron’s JULY 21, 2008
Jitters Ease as Citi, Rivals Show Signs of Bottoming Out
WSJ, July 19, 2008; Page A1
Hope, and Hints, That Financial Stocks Have Finally Touched Bottom
NYT, July 19, 2008
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
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.
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?
ANDREW ROSS SORKIN
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
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! ~~~