Dick Bove Says Banking Is Sound - Time to Buy Financials? 16 comments
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Bove's been around long enough to have seen this before as an analyst during the 1990 bank debacle. While the media and government figures continued to predict dire outcomes and questioned the viability of the banking industry, bank stocks actually bottomed in late 1990 and appreciated smartly thereafter.
Is today's crisis worse than 1990? Bove points out several issues that were present then that aren't now:
Developing countries were nearly bankrupt LBO's were failing
Commodities were deflating
Commercial real estate was in over-supply due to a change in the tax laws
The credit derivatives market was in dire straits mainly due to the junk bond fiasco.
THOUSANDS of banks and thrifts failed.
The only direct parallel today is the credit market implosion. The other conditions don't exist. Only 76 of 8233 banks are on the FDIC watch list. Hence, it would be up to the credit market collapse to take the system down, which Bove says requires an implosion in the single-family mortgage market.
He estimates that if 50% of the sub-prime mortgages behind the credit derivatives market fail, and the collateral value of these loans is reduced to the land only (the houses are worth zero), that the total write down might be about $500B. Although painful, this would represent only 1% of the total debt outstanding in the US economy. It would easily be absorbed by the system.
There are other issues weighing on bank stocks:A recent accounting change requires banks to value assets based on "comparables" rather than predicted cash flows. A variety of indexes were created to support this pricing requirement, yet the indexes lack liquidity and can be (and Bove believes are being) manipulated. The index which represents Commercial Mortgage Backed Securities is reflecting a default ratio of 6%, while actual defaults are at 0.27%. Yet banks must mark some of their assets to these indexes whether they reflect reality or not, deflating their balance sheets for no good reason.
Bank cash flows and true capital (as opposed to accounting entries which reflect a variety of non-cash adjustments) are actually in good shape. The current liquidity crisis is being caused by institutions unwilling to lend to one another, not by a true lack of funds. As opposed to a crisis where funds simply don't exist, a "fear of risk" based crisis will cure itself as interest rates adjust. Bove believes this is underway and may resolve itself soon.Bove picks apart yesterday's article in the Journal entitled "New Spasm Jolts Credit Markets" which made the following statement:"Rates banks charge each other remain elevated" - false because 3-month LIBOR has dropped (from 5.34% to 3% over the past 12 months) faster than Fed Funds signaling banks' willingness to lend to each other."The Price of insurance against bank debt default is soaring" - The point the journal makes here is that such insurance costs 20x what it did last summer. As Bove points out, that means it was one lousy forecaster of default last summer, so why should we believe it is a good indicator now? It is in fact a lagging, not a leading, indicator.
Interest rates on a variety of instruments are being "pushed up" - Then why is it that six months ago, 30 yr mortgages were 6.46% vs. 4.88% now, and AAA bonds were at 5.73% vs 5.48% today?"Banks are constrained for capital" - actually, common equity+reserves as a percentage of assets is just below an all time high. Bove believes the Journal (much like other media outlets, as I have previously commented) wants to sell bank panic just as it did in 1990. He notes that when he is quoted by reporters lately they highlight the negatives and ignore the positives. Bove concludes: "There is a financial panic underway fed by a definable problem; a steady flow of misinformation; bad accounting rules; manipulated indices; a lack of understanding of bank cash flows and capital; a demand for higher risk-adjusted returns; and a lack of financial leadership."He believes that bank stocks in general should be bought. None other than Warren Buffet agrees, as he bought shares of Wells Fargo (WFC) last quarter (I own WFC in some of my managed accounts). I know that when most everyone is leaning one way and sentiment becomes extreme in one direction, my gut instinctively tells me it's overdone and that the smart thing to do is be a contrarian. At the very least, be wary of taking media reports and market zeitgeist at face value. Conversely, I pay close attention to the few rational intelligent voices willing to go against the herd.
Disclosure: I own shares in Wells Fargo.
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This article has 16 comments:
Then the President was George HW Bush, now George W Bush
In 1990 Paula Abdul was a top rated pop star, now she evaluates pop stars
Michael Milken wore a toupee, now he doesn't.
But the point is not that 2008 and 1990 are different. The point is to establish what losses banks will suffer in a system-wide flight from risk and refusal to lend (which we didn't have in 1990!) Commodities were in deflation in 1990, fine, but houses are in deflation now and houses are a much bigger balance sheet item for this economy than commodities. This essay needs to be rewritten.
Contrary to what this author states, there are no 30 year fixed mortgage at 4.88% unless you are willing to pay cash at closing to buy the rate down. If the borrower wants to take out cash, pay interest only, borrow in excess of 70% of the appraisal or achieve some other individual goal, then the interest rate will be higher.
Mortgage rates are around 1% higher today as compared to mid-January.
I still do.
Here's a comment on Dick Bove from Ticker Guy/blogger Karl Denninger:
Oh Dick Bove! Remember Me?
Yesterday I was infuriated with both Bove and the stock-pumping media, which has done nobody any favors during this crisis, and still continues to attempt to retrospectively rewrite history.
Bove was back out there crooning about Bank America, and he now has a $14 one-year target on it according to Bloomberg, with a claim that "eventually" it will go back to its all-time highs. (When, exactly, is "eventually" Dick? Five years? Ten? Fifty?)
Second, The WSJ covered him again yesterday, and they said this:
Rising star Dick Bove - the Rochdale Research analyst who foretold much of the banking crisis - couldn't disagree more with Mayo. In restarting his coverage of Bank of America Corp. (BAC), he called the economy's bottom. (Bove, like Mayo, recently changed firms.) "My belief is that the economy has turned," Bove said in a note to investors. He said Bank of America's stock price will ultimately "return to its all-time highs."
He foretold much of the crisis?
I was going to be nice, after promising a bit over a year ago to hold his feet to the fire if his call from then proved wrong, but this is too much chest-puffery for me.
Here is what Dick Bove said a year ago:
"This is a generational opportunity to buy (bank stocks) on the cheap."
It was, huh?
In addition:
In fact, on the phone with me, he admitted that he expects a "mild to moderate" recession - remember that while I (and many others) believe we are in one right now, you can't call a recession until you are deep into the middle of it, and often they are not officially called until they are over!
Mild to moderate recession eh?
On March 18th of 2008, about a month from the end of a bear market rally that Mr. Bove called a "generational buying opportunity", BAC closed at $38.93.
Yesterday it closed at $7.48, for a loss of eighty percent from the date of his "generational buying opportunity" call, and he now has a $14 one year price target on the stock, a one-year forward target of less than half of where it was when he issued his "generational buying opportunity" call!
If that sort of performance is a "generational buying opportunity", I (and those who listened to this guy) would like to know what constitutes a reason to sell.
By the way, that's not an "outlier." Wells Fargo has lost half its value, Wachovia no longer exists, Washington Mutual no longer exists, Lehman no longer exists, Citibank went from $20.71 on 3/18/08 to $2.72 last night (a near-90% loss!) and more.
Every one of these stocks above, with the exception of Wells Fargo, has lost more than the broad S&P 500 index, which on 3/18/08 closed at 1330 - a loss of 39%.
And before someone claims that I am "cherry picking" bad banks to make Bove look bad let me point out that the broadest based bank index, the BKX, stood at 81.31 on 3/18/08. Yesterday it closed at 29.61 for a loss of nearly sixty four percent, much worse than the broad S&P 500.
To put this in perspective I issued a long-term SELL on the entire market in February of 2008, with the S&P 500 at about 1350.
If you sat in cash from that point forward to today you avoided a loss of 39% in your portfolio. By the way, my long-term investing signal remains on a sell and while my favored indicator for that has narrowed somewhat in the last month, it remains very close to its widest level in this Bear Market.
I called on Dick Bove's "generational buy" based on that long-term indicator, which at the time was widening (that is, strengthening its "sell" indication) along with my personal analysis and view of credit quality, expectations for unemployment and my outlook for the economy in general forward over the next two years.
I believed at that time Dick Bove's call was just dead-flat wrong and, if followed, was likely to lead your portfolio to ruin.
Dick Bove, in a very long phone call I had with him at the time, argued that one had to give his call a full year to play out before judging it.
Ok Dick, you got your year. Remember Dick, you and I started our email and phone calls over your Bear Stearns opinion - a piece that I wrote and you believed was "unfair".
How did it all work out for people who listened to you a year ago?
Still think I was "unfair" in going off on you for potentially leading people to ruin with what I believed were just dead-flat wrong calls on the direction of the banking sector in the market?
An investor's portfolio, invested per your call last March, has risen or fallen by how much? And how does that compare to my call that the market as a whole was a "sell" (and the banking system was REALLY a sell - call that a SHORT if you want; I did, even though "the street" never uses that term) and therefore the long-term investor would be best off sitting in cash or equivalents (e.g. short-term treasuries or actual FDIC-insured cash.)
Let's also remind readers that one of the outcomes of our conversation back then was that you did not believe the S&P 500 would fall by 25% (or more) forward from that date. I was calling for a sub-1000 SPX, which at the time was a roughly 30% decline.
I was wrong on that call - I wasn't bearish enough. You on the other hand were ridiculously bullish, measured against actual results one year hence.
Where is the media's "white-hot spotlight of truth"? Where is the media's responsibility to properly indicate the accuracy of one's prior calls when putting someone on the air as a person with a claim that they have the ability to make reasonable forward predictions?
None of us get it right all the time, myself included.
But the scrutiny applied to one's claimed prognostications should scale linearly with the audacity of one's prognostications when viewed in the historical light of fact.
Rising star?
From my perspective Dick Bove is more like a "shooting star" - two seconds before "Deep Impact".
Oh, Mr. Bove promised, after our previous altercation on the phone a year or so back, to contact me and go over our respective prognostications one year hence.
Time expired on that promise March 18th and neither my phone or email has seen incoming traffic from him.
Why not Dick?
PS: I'd have emailed you Dick, but you're not where you were a year back. You still have my email Dick, and likely still have my phone number. Feel free to ring me any time.