Nice piece in Barron’s about the under-performance of the Financials this week:
"Big sell-offs often create bargains, but, as Barron’s has warned ("No Bargains in Brokers," Oct 29) investors should tread carefully. Financial companies typically have huge balance sheets and relatively modest capital bases, making them vulnerable to asset write-downs. Bottom fishers in financials already have been burned badly this year."
Earlier last month on CNBC, I noted that the Banks and Brokers were major "avoids, with at least another 20% downside — but I didn’t mean this week!
Here’s a table from the Barron’s piece:
Five Days of Misery
Investors’ confidence in financial companies was shaken last week. So were the share prices of some of the sector’s erstwhile stalwarts.
|Bear Stearns (BSC)||102.16||-12.1||-37.2||11.12||9.2|
|Merrill Lynch (MER)||57.28||-13.3||-38.5||2.87||20.0|
|Washington Mutual (WM)||23.81||-16.7||-47.7||2.37||10.0|
|AMBAC Financial (ABK)||23.51||-46.9||-73.6||7.84||3.0|
NM = Not Meaningful.
Sources: Bloomberg; Thomson Financial
The Week That Shook the Financial Sector
Barron’s NOVEMBER 5, 2007
‘Underperformance’ of the financials?
That’s a kind word. ;)
A multiple choice quiz about the rumbling sound coming from the east coast of the US. Is it:
a) The sound of printing presses?
b) The sound of helicopters warming up?
c) Jets warming up to fly to the bagmen to the Caribbean banking centers?
d) The sound of trucks tranferring toilet paper from the investment bankers to Fort Knox?
e) Warming up the “wag the dog” geopolitical sound-stage?
I keep hearing that the economy is fine except for housing, autos and the financial sector. The pundits keep saying that the US is slowing down but the rest of the world particularly Asia will prevent the US from going into recession. I am really curious if that is possible.
The financials are clearly oversold so a snap-back next week shouldn’t surprise but it would only be a temporary reprieve I think; even with all the bad news that’s out there’s more bad news still to come IMO.
Whomever was smart enough to buy Jan 08 OTM LEAPS puts on any of these stocks does not have to care a lot about inflation for now. :-D
value traps, one and all.
Well, like Jim Rodgers mentioned the other day on Bloomberg, I think one of the real tricks will be in the ability to decipher what the ‘valuation’ of these “Level 3 Assests” is on some of the major Investment Banks Balance Sheets. What percentage is tied directly to the SubPrime Mortgage Mess, how much Leverage have the Major Investement Banks taken on, and what valuation methods will/can be used to determine this?
It would seem to me that the Major Financial Institutions, with the most exposure and most Leverage, would certainly have a lot of incentive for some major “Financial Wizardry and Smoke and Mirrors Accounting” here. This accounting standard/rule FAS 157 issued by the FASB is suppose to require these Banks to divide their tradable assets into 3 different groups, as I understand it — Level 1– Assests whose value is most easily determined like stocks— Level 2– assets not traded buy whose value are more easily determined— Level 3—more ambiguous assets like the different risked separated tranches of Mortgage Backed Securities/CDO’s (see article by Martin Hutchinson on PrudentBear.com Website). As stated above I’m not sure if these new accounting rules specify WHO determines, and HOW the values of these Level 3 Assets, will be determined. Will it be the Banks using thier own Models/and/or Incestuous accounting personnel–putting the Foxes in charge of the HenHouses, so to speak. One could easily think the Major Investement Banks would be tempted to classify as many of these suspected ambiguous Level 3 Assets as Level 1 or 2.
Then, we come to the downturn in Housing– what has it been 12 months? How long do Housing Recessions usually last before Housing Starts pick back up–32-48 months??? This one looks to be more severe than any of the others in the past. Combined with accelerating Home Price Declines (underlying asset class) in many states, tightening credit standards, liklihood of accelerating rate of default rates on Mortgage Payments and Credit Card Payments BECAUSE of the Housing Slump, Complex Credit Derivatives Market (barely existing before the Mid-90’s, but as of Sept. 26, 2007 valued at an estimated 45.46 Trillion by the ISDA) and, in some areas, tied Directly Back to an ever Increasing rate of Bad Mortgage/Credit Card Debt, and Soaring Energy Prices (any takers on when we see the Big “4” or “5” on those gas station Signs???), I have a strong suspicion there will be plenty of time before we need to think about buying the Major Investment Banks or Brokers.
Crude Oil gained 4.4%, this week.
Use all the rationalization you want. The rise in oil prices has little or nothing to do with supply or demand. This is a speculative bubble that impacts every American. It reminds me of the energy trading scams/manipulation before the last recession.
If the government bureacrats are ready to rejoin America as we used to know it, now would be a really good time to arrest a few “squeaky clean” hedge fund managers and wall street bankers for market manipulation, before they bring on the recession.
One or two of the last 4 will probably go under. Hopefully all the major ones will come out relatively ok.
Sometimes you just got to let it go, as with inflation and financial. They are between a rock and a hard place.
“For what advancement may I hope from thee
That no revenue hast but thy good spirits”
Are the financials acting as the proxy for fear in this market? Is large cap tech supposed to be safe (i.e. future growth assured)?
For example, Microsoft + Google market cap gain (about 60 billion in the past week or so) was about the same as what JP Morgan + Citi + BofA lost in about the same time.
Over-reaction of the herd on both sides?
blam – arresting traders would be a slow unfruitful process
How about nationalizing a large oil company to bring down prices? But I dont think that stategy would work. Systems come before folks. Maybe horse power, maybe solar power.
There are always opportunities in sector selloffs because sometimes the innocent get taken out and shot too. KEY is probably an example of that, they sold off their subprime subsidiary in Dec 2006 and have already absorbed the write-off. I think it’s a buy under $25.
Let’s see if the other shoe (an SEC action against WM to accompany Cuomo’s action against an appraiser that WM leaned on) falls. If so, WM would be this episode’s “Enron” that would allow for a clean story of malfeasance as the cause of investor and homebuyers’ losses.
This might be a good time to re-read the simple descriptions of the work that led to the 2007 “Nobel” prize in Econ — where one party — typically, a seller — has information about the real value of a good (used car; CDO) but withholds bad news from the buyer, who wants to buy but can’t afford the due diligence. Here we are as investors with NO CLUE about which risks are on or off the balance sheets of these firms.
All we know is that “Triple A isn’t.”