Rate Cut Brightens Outlook for Financial Shares -- Barron's

Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

A Brighter Outlook for Financial Shares by Andrew Bary

Summary: Last week's doom-and-gloom is looking a whole lot brighter in the wake of the Fed's decision Friday to cut its discount rate to 5.75% from 6.25% while hinting cuts may come to the Fed funds rate as well. The prospect that more cuts are ahead is allowing investors to look past immediate problems in the credit and mortgage markets and, Barron's says, could signal big potential for financial shares -- including many of those hard-hit by by the recent turmoil. Perhaps taking the biggest blow was Countrywide Financial (CFC), which skidded as low as $15 Thursday as it was hit by liquidity fears and many feared the mortgage-originator was headed for bankruptcy. Should Countrywide make it through the turmoil and mortgage markets stabilize, fund manager David King thinks shares could reach the high-$20s by year-end, and could emerge as an acquisition target next year -- with potential buyers including Bank of America (BAC), which reportedly was interested at at $45/share price not too long ago, and Warren Buffett's Berkshire Hathaway (BRK.A). Another possible bargain, according to King is mortgage-insurer MGIC Investment Corp. (MTG), which at $36.64 trades for a fraction of its $54 book value or the $50 book value it would have even if it fully wrote off its substantial investment in subprime mortgage company C-BASS. King argues that mortgage insurers stand to benefit from a tightening in lending standards, because it is getting more difficult to secure alternatives. Thomas Kahn, a partner at the Kahn Brothers investment firm favors well-capitalized thrift institutions that could be taken over such as Dime Community (DCOM), Flushing Financial (FFIC) and First Niagara (FNFG).

Related Links: Credit Market Chill Provides Opportunity in Marshall & Ilsley -- Barron's • How to Deal With the Current Crisis of Confidence in the Market • Blackstone Seeks To Capitalize On Market Downturn

Comments

[Quaker:]

The problem with economists is that they are incapable of the kind of three dimensional thinking that's, frankly, quite common in natural sciences. This is largely due to the spread sheet nature of their analysis.

That being said, I get a real kick out of this fed rate cut fantasia that sent trend traders into the stratosphere last week. For the record, the fed could take rates to zero and it wouldn't help the housing market long term. CFC's "growth" these last three years has been comical. Collosal increases in assets and liabilities and a paltry increase in equity, most of which is pissed away in dividends and share buybacks are hardly going to be fixed by minor cuts in rates.

The biggest problem America faces is that we're headed for "regime change". The old paradigm of steadily increasing debt fueled expansion is over. The credit, oil, currency and commodity markets simply cannot support any more deficit/debt spending. The American consumer, the great garbage disposal of world production, that has led to ridiculous expansion of Asian manufacturing capacity HAS to become a saver. Mortgages amortizations have to fit the LIFE OF THE AMORTIZEE. I have a client that 65 and has
THREE mortgages all over 10 years.

Look at the Japanese model for guidance. Asset inflation is not a substitute for real earnings long term. A 65 year old with $500,000 in his IRA and three mortgages is in a race against time. Like Japan, America will have to undergo YEARS of negative gdp to right the ship. Assets HAVE to drop as the economy deleavers.

Cash is king.

2007 Aug 19 10:45 AM

[TxAthlete47:]

If history bears itself out and I would expect that to be the case again, you can expect 2 more Fed Rate reductions over the next month or two. As this increases liquidity to the financial markets, calm should be restored. With calm will come a stop and look at " wow, the earnings rate of my companies has actually gone up ". Suddenly, people will realize this and the market will swing upward.

Having said all of that, I ask myself. " Who is watching the bank? How do we keep getting ourselves into these same financial over leveraged bailouts? Is there not someone out there responsible to stop this repeated set of mistakes? " Someone needs to sit down with our financial czars and explain something in clear language like " You own not letting this happen again! If it does happen, your head is going to roll! "

2007 Aug 20 08:28 AM