As investment banks look to raise new capital and calm the turbulent waves they’ve been riding, the recovery is far from soon, says Meredith Whitney, executive direct of equity research at Oppenheimer & Co.
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Future of Financials
June 12, 2008 3:30am by Barry Ritholtz
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CNBC’s streaming video quality is so horrible I can’t stand to watch it. It’s maddening.
Wake me up when it’s on youtube.
Reflexivity in the banks
Let’s say LEH trades at 42 and have 2010 EPS of 4 and 550 Mill shares outstanding. That’s a forward p/e of 10.5 based on 2010 earnings of 2.2 bn. Now let’s say they need to raise 8 bn in equity. If pricing at 40/share that’s 200 mill shares. So now they are going to make EPS of 2.2 bn/750 mill = 2.93. If the p/e is constant at 10.5 that’s a new share price of 30.80. So the shares drop on the dilution. Now let’s say the market later thinks that LEH will only make 1.75 bn in profit. That may send the shares down another 20% to 24.64. But wait, now they can’t issue shares at 40, but have to sell them at 20. But in order to raise 8 bn that means selling 400 mill rather than 200 mill shares bringing the total share count to 950 mill. That gives EPS of 1.75 bn /950 mill = 1.84. If keeping the p/e constant at 10.5 that gives a share price of 19.34. etc. etc.
It’s a race to the bottom for any bank out there who is not raising a ton of cash and selling assets as early as possible. And for those selling assets they are putting pressure on the value of other banks’ level 2 and 3 assets.
To paraphrase Meredith: I’M not yelling out “fire” in this crowded theatre; I’m just pointing out the plumes of smoke…and the rather large, hot, orange flames under that smoke. It’s not me saying you HAVE to run out of here but… you may WANT to.
Just curious – there has been much talk about the banks lately, but does anyone know what is going on with hedge funds? I mean, are they suffering/failing as well? Haven’t seen much word on it…
Scott,
Check out Hedge Fund Implode-O-Meter on the blogroll on the left of the page.
The whole “Shouting fire in a crowded theatre.” metaphor involves the theatre not actually being on fire. It’s usually used as an example of a limitation on free speech.
Heard Pete Najarian say last night on CNBC’s Fast Money that someone bought 100,000 BKX puts yesterday in one fell swoop (don’t recall the strike or the contract month). I’m gathering it was the June contract at a strike reasonably near the market. So, it probably was a speculative position he was reporting, rather than a hedge.
Looking at the bigger picture on the BKX (and I’m just evaluating things from a technical perspective here … we all know things are rotten to the core, fundamentally speaking), the financials ought to be seen as nearing a bottom that could last some months … and possibly extending a couple years.
This is not to say there will not be further tests over the near-term. But it does look like financials are groping for a bottom (again, technically speaking).
All said, then, this leads me to wonder which sector(s) will lead the way lower in a broad-based market meltdown over the next couple weeks?
All I know is the Congress is [rightfully] fit to be tied about Index Speculation driving up commodities prices. Thus, holders of issues benefiting from commodities ramp up MUST see the writing on the wall. The clamp down are coming, like it or not.
daveNYC
Gee thanks. I did not know that. Re-watch the video and re-read the post and hopefully you can see how a metaphor can be used in more than one way (maybe it’s me, maybe it’s you). If not, and I am off track, thanks for filling me in on the proper use of metaphor. (How is my spelling, by the way?)
I saw her interview yesterday on time….
Smart lady, however she seemed to veil her caution. I agree with most of what she said.
She articulated what many of the “pundits” have failed to do. Her perspective is secular in nature while, many of her colleagues remain in a cyclical mode. It was refreshing to hear her voice.
Best regards,
Econolicious