Financials Have Bottomed? Readers Say We're Nuts

Includes: FHN, IAT, IYF, KBE, KRE, XLF
by: Tom Brown

Reader e-mail has come streaming after I posted a piece here yesterday that argues the financial stocks are at or near a bottom. Let’s just say a lot of people aren’t convinced. Here’s a sample, along with my reaction:

You must have a lot of bank stocks you need to sell to the general public and get out of your bad positions. Anyone that follows these companies’ balance sheets knows they are ticking time bombs. PUMPER.

TKB: “PUMPER” in all caps! He must really mean it. . . . Actually, I agree with part of what this reader has to say. Everyone does know many banks’ balance sheets are under very severe stress. That’s a given, even an article of faith, among investors. Which is why they have driven the stocks down by 80%, 90% or more over the past year, to the point that the typical large-cap regional bank traded at 70% of book value at the end of last week. By now the stocks are more or less discounting the collapse of the banking system. I say that won’t likely happen. (For one thing, the federal government will move heaven and earth to prevent it.) As I noted yesterday, based on the second-quarter earnings reports we’ve seen so far, the incremental news on credit appears, at the margin, to be encouraging. Is there more bad news in store for the banks? Of course there is. But it won’t be nearly as severe, in my view, as what investors seem to expect. As people slowly realize that, the stocks should continue to rise.

LOL that's a funny one.  The financial institutions of the world are completely riddled with toxic crap loans. We have a market that is full of the likes of Lehmanron, Merrillron, Morgan Stanleyron, Citiron, Bank of Americaron.  Institutions just full of level 3 crap that they refuse to mark to market. In a few months you will be able to look back on your article and you'll know that you were completely full of crap.  I already know!!

TKB: So many -rons! Do you think he smells a conspiracy? By now, I’d hope readers who write me that “the financial institutions of the world are completely riddled with toxic crap loans” don’t think they’re telling me something I don’t already know. But again, the stocks valuations don’t merely reflect the huge losses the banks have already taken on those bad loans, but huge future losses, as well. And, indeed, incremental losses are presumably on the way. All that has to happen, in my view, is that those losses are less bad than are generally expected. That doesn’t mean that the assets aren’t severely impaired. They are. So what? As for the certainty that “level 3 crap” has been systematically mis-marked throughout the industry, I don’t see how he can know that. If anything, pressure from auditors and regulators must be enormous to mark those assets extremely conservatively. For that matter, newly installed CEOs (of which there are more than a few in the industry lately) have zero incentive to do anything but put their Level 3 risk behind them.

A year from now I going to send you an email that says "I TOLD YA SO"

We're just now entering the second inning of this Bear Market ball game....and you "market pumper pig men" haven't a clue as to what is coming. In the mean time those that actually listen to you and make decisions based on your "propaganda" are going to rue the day they were sucked in.

I pray to God that you see many sleepless nights in the year ahead.

TKB: Merry Christmas to you, too! So now I’m a “market pumper pig man”? Sounds like something out of a Bud Light ad. Anyway, I’d respond to this guy’s arguments, except that . . .  he doesn’t really offer any. But his note offers a good indication of the level of hysteria that’s become common in certain bearish precincts. There, it’s not about money anymore, and has more to do with a weird religious, end-is-nigh fervor. If these people really do expect to happen what they say they expect, I don’t understand why they haven’t sold everything they own and barricaded themselves in their houses with year’s supply of bullets, bottled water, and beef jerky.

I have extensive background in financials (particularly P&C insurance stocks) and I think we still have a way to go down before they go up.  Here is why:

  1. Soft market continues and pricing levels have not rebounded yet.
  2. Investment return is poor.  Particularly those with CDO exposures.
  3. Poor first and second quarter catastrophic loss results.
  4. Mismanagement of loss reserves (i.e. loss reserve deficiencies) which will result in adverse loss reserve development.

Many companies have been bleeding out their investment losses and offsetting them with prior accident year loss reserve redundancy take downs (which are running out).  They don't want to have what happened to AIG...happen to them. Therefore the write downs will continue and more blood will be spilled.  The PC market will firm (even harden by late 2009 or early 2010), but they are still going down.

TKB: This fellow is talking about insurance. I’m mainly talking about lending. The P&C industry hasn’t gotten clobbered nearly as badly as the banks and non-bank lenders have. And for good reason: the issues facing the two sectors are pretty different.

Reader reaction is still coming in. If you want to add your views, by all means pop me an e-mail.

Tom Brown is head of