Don't Believe the Lies: Ride the Bank Stocks Bull 77 comments
-
Font Size:
-
Print
- TweetThis
Wall Street's top ranked bank analyst, Tom Brown, says, "bank stocks have bottomed." "If you wait for the good news, you'll wait too long," says Brown of Bankstocks.com.
Brown believes many bank stocks are selling at rock bottom prices, calling them "extraordinarily undervalued." Brown thinks we are at the beginning of "the greatest financial stock bull market in our lifetime." He writes, "the bears have things all backwards. By the time their wish list happens, the stocks will be zooming"
With this sensible voice of reason, Brown fearlessly waded into a sea of bearish sentiment, and boldly stated his conviction. Brown first called the bottom in bank stocks on the 22nd of July, when he announced that bank stocks had bottomed on July 15, 2008. Jim Cramer followed Brown's lead with his own, tentative, "bottom's in" call on July 31st.
Yes, the bull market has arrived, but we are not completely out of the woods yet. The road upward runs through "Bear Town National Refuge" where we must endure bear propaganda and their exhausted clichés ad nauseam. Prepare for the CNBC short-selling guests as they reiterate "this is the first leg down," or, "we are waiting for the other shoe to drop." And let's not forget, "we are still in the early stages," and, "we are not quite halfway through the downside."
Regularly, short-selling bears appear on CNBC masquerading as pseudo experts, and proclaim the apparent end of the world. To a short selling bear, the downside of a contracting stock price is somewhere between infinity and the abyss. Nevertheless, the CNBC red carpet crew continues to court bearish short sellers for any morsel of negativity, false rumor, or half-truth.
Bank stocks are selling at huge discounts, but won't be for long. The smart money is accumulating bank stocks through "stealth buying." They will continue this until, and without warning, bank stocks rocket upward. If you're ready to jump in, you might want to look at Wachovia (WB) and Washington Mutual (WM). The Ultra Financials ProShares (UYG) and Financial Select Sector (XLF) ETFs are on my recommended list as well.
Position: Long WM and WB.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Bill Gross
-
3
Philip Davis
-
4
Tyler Durden
-
5
TraderMark
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 77 comments:
Check out the 3rd or 4th article down-Bank Shenanigans-which details a BofA response to a mortgage gone bad in FLA.
The call made by him to short financials were the earliest I know of, the research is exhaustive-just wade through one stocks worth of his DD.
IMHO
I could go on, but you get my point.
Sorry, I am in the mortgage capital markets and this is not over yet. Classic value trap. What evidence do you have that the banks can replace their earnings that have evaporated as their business models change to survive?
I think I will follow Roubini. Even if he is only half right, we have another 1/2 trillion in write offs to go.
Brown is a clown. He has called the bottom so many times I feel for his clients.
"President Putin announced from the Oval Office today that 6 zeros are being removed from US currency to make purchases easier. President Putin also announced rationing of flour and cooking oil..."
"the greatest financial stock bull market in our lifetime." C'mon financial astrologers, enough with the hyperbole.
Same hopeless knife catching/chronic bleeding under the masquerade of "serious" value investing. What a bunch of losers. These fools have been 1-2 years and billions of dollars early in their calls, yet just keep doubling down. If they were hedge fund managers, they'd be gone by now. If you want to follow someone with a decent track record, see Meredith Whitney.
Top ranked analyst says the bottom is in.
The bottom is in.
The bottom is in.
The bottom is in.
Smart money is buying, because the bottom is in.
Please.
MER just sold CDOs at 5 cents on the dollar (well 22 cents but they loaned the purchaser 75% of the money with the CDOs as the only collateral). Have the other banks written down their CDOs to 22 cents or the real 5 cents?
As for fools calling a bottom on CNBC, what a joke. Is the July 15th bottom a real bottom or just a bottom like the March bottom they all called. Cramer is a clown. He said one week C was going to single digits then he calls a bank bottom.
Today is options expiration day. Take a look back at when the last run in the banks ended. Yes, end of May, the Monday after options expiration. My assumption is that as usual the market is being manipulated for a short while and will end here.
At least pick a good "top analyst", lol!
The proof of that is to look at how far the banks have already fallen. Wachovia, for example, was a company with a $120 billion capitalization a year ago. Now it's at $32 billion. They haven't lost $88 billion since then. Not even close. Less than $10 billion. The reason the capitalization has fallen by $88 billion is that the market is assuming that they will ultimately lose that much. If they can beat that number, then it is gravy for investors at these prices.
of the money making machine. The only thing left for them to do is wish, wish, wish. Soooooo if you are not in financials at yesterdays bottom, its still not too late, todays bottom is also good.
you don't need to BAD MOUTH the ones who are in it and laughing all the way to their WM, BAC, etc.
Spreads.
Banks can borrow today on deposits, CDs, LIBOR, from the Fed etc at 2-3% rates, for a large portion of the liabilities. They can lend at 6% on government guaranteed mortgages, or 7% and upward on high grade intermediate corporates.
It is really hard to lose money, net, when you are earning 4% on a trillion dollars. Granted they work hard at it. But today's losses are the result of chasing spreads 10 basis points wide in the bubble, and those spread not remotely covering real credit losses. Spreads 40 times as wide will.
Banking is all about the spread.
Timers can wait for the news to tell them happy days are here again - which I predict will occur 14 seconds after Obama is sworn in, incidentally, not because the news will have changed but because journalist's incentives will - but for the rest of us, it is already easy to see last year's bank earnings, or this year's, or next, have essentially nothing to do with what banks will actually earn in the longer term.
They will earn more from all business put on at these wide spreads, for 5-10 years afterward. Banks are cyclical. Average their earnings over full cycles, buy them when they are losing money but spreads are already wide, sell them when they are making money but spreads have already disappeared.
Jason Jason Jason.... are you kidding me? The implosion of BS and Indy Mac must truly perplex you. You have a fundemental gap in your understanding of the US financial system. You apparently do not know the practice of Fractional Reserve Lending. Lets take your example. You are a bank, lets call it WAMO. You have 1 Billion dollars to lend from deposits, CD's, etc. Sure you can make an easy 4% by lending out $1 Billion. BUT why settle for a measely 4%. Why not lend out 20 Billion and make the same 4% on that? Then your return magically becomes 80% yoy. Now we're talking!
A bank can do this as long as they maintain a Federally mandated minimum reserve balance. So they now have a loan portfolio of $20 Billion that's now making them 80% a year.
But here's the Trillion dollar question Jason... What happens to that original 1 billion dollars of customer deposits if the value of the Assets that make up that loan portfolio drops by say 15%? How much money is left for the customers who put their money into your bank? Well you might say, their money is just fine since these are loans that must be repaid. Well then what happens when default rates in that $20 Billion loan portfolio go up to say 5%. Tell me Jason, in that scenario how much money is left for your bank - WAMO - to give back to their customers?
Here's another trillion dollar question: What happens to your $20 billion loan portfolio if Real estate values continue to drop?
Yet another question: What happens if when you try to liquidate your $20 billion portfolio investors, fearing further deterioration, will give you only 22 cents on the Dollar for it?
Again, the question Jason, how much money is left over for you customers who deposits originally totalled $1 Billion?
Maybe you should ask Indy Mac customers .
** Here's a tip: For anyone interested in catching the bottom, maybe you should look at the balance sheets BEFORE you buy that financial stock. First see how much they are leveraged in things like Mortgage backed securities, CDO's, etc. don't be surprised when you see banks leverage 20/1, 30/1, 40/1 and even (god help them) 70/1 !
You're telling Jason he doesn't understand the U.S. financial system? He's talking about banks and Net interest Margin (Return on Assets). You're talking about unregulated financial service entities, Return on Equity and leverage.
There isn't a bank in the country that deliberately went to a leverage ratio over 15:1, which is where the "Federally mandated minimum reserve balance" would put you. The banks that are over that got there because they had lending losses, or to a lesser extent, investment losses. The over leverage problems are confined to investment banks, mortgage REITs and hedge funds.
There is $2BB in bad debt so far, most all in neg-am option ARMS. They have $860MM in equity and $734 MM in reserves. This gives you a Texas Ratio of 123%. Not good.
What most do not realize is that for years these banks have been booking neg-am interest on an accrual, not cash basis. For Tom Brown, let me explain that in simple terms:
Monthly neg-am interest accrues at the note rate, which was never collected. The borrower paid a lesser amount each month, and added the unpaid interest amount to the previous month's loan balance. The bank recognized the unpaid interest income as it accrued and it was booked as INCOME.
When this loan goes bad, in addition to selling the collateral for MUCH LESS than the value of the original loan amount, all the years of the previously booked income must be REVERSED on the banks income statement.
Forty percent of CFC's income was accrued, not paid, option ARM interest. Wait till that reversal gets recognized by BAC!
So you see Tom Brown and sheeple, the banks not only lose on the balance sheet, but the income statement as well. Tell me again how their margins (operating income) will bail them out of this fuster cluck.
So far all these banks have done well is play a good game of "hide the sausage", with the help of FASB who are allowing them another year to mark to market on off balance sheet items.
WB has $122 BILLION in Option ARMS on the books. Mostly in Florida and Cali. Of the loans that are still actually paying, 72% are making only the minimum payment each month. They are not even paying towards principal. When these loans hit the 110% cap in the next few years, you will see wave 2 of this mess.
disclosure: Long SKF, SRS
Citi's Assets/Liabilities went from 20:1 in 2005 to 40:1 in December 2007! Surely that's not still a problem is it?
And maybe those two could also explain the Wall Street term of putting "Lipstick on a Pig".
Disclosure:
Puts on WM and WB
Assets equal liabilities. Equity is one of the liabilities. Everything a company owns is financed by something or other. And nobody owns anything without it being financed by something. Unleveraged just means the liabilities are all equity.
The 4% spread I spoke of is the difference between the earnings on the asset side of the sheet and the payments on the liabilities side of the sheet. Both are a trillion for the major banks. The value of the bank does not stem from the asset side being bigger than the liability side, but from the assets earning more than the liabilities cost.
If the investments earn more than they cost, no amount of leverage in the world - which is just the question, what is the ratio of the size of the whole sheet, to the equity portion - is going to kill them. When net worth is growing at annual rates in the tens of billions, you don't go bankrupt.
Now, obviously leverage risks still matter. The reason why is the assets are more volatile in value than the liabilities are. The latter are generally rock solid, other than the fluctuating leftover, "equity". The former can bounce around. Ok, when and why do the assets bounce in the down direction?
Loan losses, from loaning to deadbeats who never pay it back; changes in rates that make the financing cost exceed the earning rate on the asset; realized trading losses from poor timing, and the rest is minutae.
Can you lose money in any of those ways holding GNMAs at 6% with short rates at 2%? Only if you think rates are going to soar to 7% or more in a very short span of time, and stay at the higher level longer than about 4 years. Can you lose money in any of those ways lending to A rated corporates at 7% or more? Those have an historical loss rate of 0.14% per year. There have been 4 times in US history where spreads on them were this wide, and every one of them was an epic buying opportunity.
Banks are losing money, instead, on loans they made to deadbeats in the mid "oughts"; through trading silliness on fears when they borrow more at higher rates and invest the proceeds in more 2% T-bills to "add liquidity" and massage their Basel capital requirements.
But those causes of loss have all stopped operating. The subprime deadbeat stuff has simply been written off to nearly zero - should never have been made. The corporate stuff put on at tiny spreads when times were sunny has been marked to market. They still have some deadbeat losses to recognize on 2nd mortgages, and the default rate on prime ones may tick all the way up to 3% with recovery rates only 50%, instead of the usual less than 1 and 60 to 80. But that still only covers a 1.5% spread, not a 4% spread.
How much can say a Barclay's earn in 1 year at 4% spreads? 40 billion. That recreates the entire current market cap in a year and a half. Who cares what you think the equity position is? If some regulator does, pad the sheet with a little more new capital. The sheet will still earn huge new sums every year, that dwarf the present market cap, or book.
Will they have more write downs along the way? Undoubtedly. Banks lose money and overreserve at the bottom of the cycle - they are cyclicals. No, this doesn't mean whatever they lost last year will be lost again times two next year until there isn't anything. Every cyclical doesn't go to zero in finite time.
Spreads have already turned, and earnings will follow, with a lag. Old bad business will be liquidated and marked and reserved against - and the headline readers will think it is all about how bad things are now. Not remotely, it is about how dumb the spreads available and the credit underwriting standards were 3-5 years ago, and it is all ancient history. Everything they do today is fish in a barrel, and will earn hand over fist.
Banking, is *all* about the spread.
If it is "all about the spread" as you describe and make a compelling arguement for... then how do banks fail in this environment? Why are they failing?
Why are they not making more loans (since they will make billions of dollars off of them) and instead relying only in FNM FRE to fund new mortgages? This is widely reported around the mortgage community. Banks aren't bringing these new loans with great rates onto their books...
Also, aren't only the banks with Fed access able to get 2-3% rates? What about the rest of the banks?
I know this might read a little smart-ass like a lot of the other responses, but it isn't intended to... I'm really curious and I'm trying to wrap my brain around this.
It doesn't matter how good the spread is, if the liability holders (depositors, counterparties, etc) demand repayment from the bank. If the bank can't liquidate their so called "assets" (MBS, liar loans, etc.) to repay the liability holders, the bank can go under. This is basically what happened to Bear Stearns and IndyMac.
Massive depositor withdrawals can take down almost any bank, but WM, WB, and NCC don't have a whole lot of marketable assets to sell if a run on their bank occurs.
Reply: It's difficult to think that you truly believe what you just wrote. I'm going to save this little tid bit and check back after a few months.
But you are right about one thing, Banking is cyclical. The present cycle of credit expansion is now over and certainly not without precedent. Also cyclical is the insolvancy of lenders who find themselves caught on the wrong side of a (in this case) massive credit contraction. This "cycle" is well understood by the FDIC who, by the way, is currently hiring.
You still remember what happened in Texas right? It's too bad all those Banks didn't understand the benign effects of leverage. The truth, as you well know, is that leverage works both ways. The Sub-Prime wave has peaked. Next on deck is Alt-A, followed by Prime and warming up is Commercial.
If WAMU's ALT-A pool (WMALT 2007-0C1) is/was any indication, the worst is yet to come. Over 22% delinquent by 60 days or more and 3.5% REO. And all this with 92% rated AAA? YGBFKM
The issue here is not "assets earning more than the liabilities cost." Not by a long shot. The issue is non peforming assets, defaults and reserves.
Or more succinctly - Solvancy
Hope springs eternal
Cramer and Brown are simply doing what they do... but I need a bit more substance than "their" serial bottom calls to wade into this sector. I believe that any quote of a market guru should be acompanied by a disclosure of how many such bottom calls they have made.
In case you didn't realize it, your BS meter just went off.
Many Banks have extended credit well in excess of their reserves and the assets securing this credit are falling - hard. Many of these loans include "No Assets, No Income" verification loans (an actual product), teaser rates, 90-100% Loan to Value and 100%+ LTV HELOCS. Newly minted homeowners have no skin in the game (no down payment or equity to lose) so they walk away. Property values are falling fast. It makes little sense to float a big mortgage on a house now worth 20-50% less and with rent at half the cost.
Now, the bank who was happy to collect a leveraged "spread" is now getting envelopes with house keys inside instead of envelopes with mortgage payments inside. When they take these properties to auction they take a 40-50% haircut - a loss that counts against their (fractional) reserves. And since they lent out more than they actually have in reserves, eventually losses exceed the minimum capital required and the FDIC has to step in ala Indy Mac and others.
Something to keep in mind.... Banks will continue to suffer credit losses so long as property values fall. Prior to this massive expansion of credit beginning in the early 2000's, property values have for decades maintained a certain value relationship to income and rents. Since then (as a result of reckless leveraged lending) property values skyrocketed well ahead of income & rents ( at an extremely abnormal departure from the mean). In all likelihood these ratio's will return to their historical values. In other words, property values will have to fall much more to come back in line with income and rent.
Look around your neighborhood. Jason would have you believe that what you plainly see with your own two eyes is merely "Bearish propaganda" and has virtually no impact on the banks who lent out these huge sums of money. After all they were getting ~3% return per house so that oughta cover the losses - right?
concisetrading.blogspo.../
Ryan
Can't wait to see the look on BAC's face when they find out BAC wasn't on Mozilo's "Friend of Anthony" list. Countrywide was passing out loans like Jim Carrey on "Dumb and Dumber". BAC got the breifcase full of IOU's.
The downward pressure on the GSE's has caused a financial's wide liquidity crisis that (until the Greenspan/PIMCO led, CNBC facilitated beat down) didn't exist. Unlike banks, the only way for the GSE's to make money is to sell more mortgages. Contraction of the GSE's will do nothing but decrease critical liquidity and accelerate the meltdown.
We are on a razors edge and without some good news and bullish confidence in the financial market, we are going down the tubes. Based on what I've seen, the financial bulls are nothing more than sheep in bull's clothing so get your swimsuit on and enjoy the ride.
Then the music stopped, the Fed raised rates; and everything started to spiral downward. Now the banks refuse to loan to anyone who needs money. Now the housing market is in stasis since buyers can't get the loans to buy. The house values continue to collapse; foreclosures continue to rise as more people can't afford the heating bills; property taxes and, oh yes, the monthly mortgage payments.
Next ahead on the near horizon: Commercial loans and Credit Card Debt. The Fed cannot lower the rates since inflation would soar. And all this government can do is float "Stimulus Checks" that cause the dollar's exchange value to plummet!
But wait! Here comes President Obama! Let's soak the Rich, pump up our tires and all will be good again.
UGH!
I'm not in financials and won't be for quite awhile--that is, after the truth of the nearly insolvent financial sector slowly emerges.
Greenspin's BS about socializing losses not being fair is crap. Losses always have been and always will be socialized, either directly through bailouts or indirectly through increased prices. The companies sure don't eat distribution costs increases if gas prices go up, and now that they are going back down, I'm not holding my breath wating for my share of the profits.
Reggie, why do you no longer post on here, I used to look forward to your Seeking Alpha posts, but yeah, haven't seen them in a while? Usually very informative. Etrade sucked a bit, it will be interesting to see their portfolio unfold, as I think they're years ahead of what will happen everywhere else, since most of their loans cut off in 2006. Hopefully, the loan losses have peaked, it appears they might.
Hope all has been well with you. Looked like a good time on the boat the other day.
Tom Brown has made some of the worst calls on Seeking Alpha, pumping stocks that have dropped more than 50%. What is your basis for calling him a "top" analyst?
Where have you worked?
Where did you go to school?
At what price did you first go long WM?
Your track record may be even worse than Tom Brown's however.
Your first article here was on ZVUE, which you said you were long and attempted to pump up by flogging a Goldman Sachs connection.
Those who followed your advice and bought ZVUE on 2/12/08 for 1.18 would now have a stock worth 14 cents. Your first long call here resulted in an 88% loss on your money. Wow!
You constantly point to new institutional positions as "stealth buying" which is misleading as this buying is better disclosed than most other purchases. You also misleadingly state only the number of new positions, not the net change in institutional ownership.
And the proper word is didactic, not "didactical."
Have a look at my articles. Reggie and I have a lot of similar views and methods, though I focus on smaller financial stocks than he does.
Commercial banking is all about the spread with the underlying assumption that they know how to manage that spread with effective asset/liability management techniques and that the asset quality(loans) is maintained.
You asked about Wm or WB. I'll stick with WM as I have been watching them. Their equity to assets ratio at 6/30/08 is 7.8%. That equates to a leverage multiple of 12.8 times. Your comment about Citi's Assets to Liabilities ratio going from 20:1 in 2005 to 40:1 currently is ridiculous. If I assume you meant Assets/Equity you're still way off. At 6/30/08 Citi's Assets to equity was 6.5% which equates to 15:1.
I'm currently long WM, but I don't have any illusions about how poor their loan portfolio is. I just couldn't pass up the low price. I think they will make it but it will be at least a 2 year process. The large spread they have because of their branch deposit franchise will really help them.
To Big Al: your comments about runs on banks are true but there is a big difference between Bear Stearns and Indy Mac. One was an investment bank that tried to leverage itself at 30:1, the other a regulated bank backed by the FDIC that didn't know how to make loans. It made all the sense in the world for Bear's lenders to pull their funds. It made no sense for Indy Mac's depositors to pull theirs. It required a U.S. Senator (Schumer, D NY) to cheerlead the run.
My point here is that runs on banks are rare. In the late 80's and early 90's over 2300 financial institutions went under (compared to 9 in the current cycle) and in very few cases was it because of a run on the bank. Usually it was loan losses and required capital ratios were much lower then (S&Ls at 3.5%, banks at 5%). In Indy Mac's case they probably would have been closed by the FDIC anyway because their loan portfolio was really bad.
I stopped posting on Seeking Alpha because they no longer want my material. They often edited my material by changing the flavor and meaning of the content against my wishes, and one day caught me in a bad mood. I aired it out in their comments section and they didn't like that, and have never published anything since. It is probably for the best. SA sends a lot of traffic my way, but I truly don't believe my type of analysis and opinion fits in well with the rest of the content that they carry - with the article above being a prime example. I am a hardcore fundamental investor that specializes in forensic analysis. As a result, innuendo, unfounded sensationalism and speculation tends to rub my instincts the wrong way.
The boat ride was a LOT of fun. For those who are in the industry, financial media or the UHNW circles, I will be holding another one in NYC with an associated party in the meat market. See pics from the last one - boombustblog.com/conte.../ . I'll even invite the Seeking Alpha founder if he agrees not to alter my content :-)
As for this buy the banks stuff, to each their own - but I am reticent to take the word of anyone who does not supply any empirical evidence to back their assertions. I have had my staff perform a lot of historical and analytical research on the current bank problem, especially in comparison to the S&L crisis. We have, in real terms, already surpassed the losses of hte S&L crisis, and I doubt we are even half way through it yet. Many tend to compare the end result of the previous crisis with the onset of this crisis, and lament off of the favorable comparison.
Take a look at how we got to where we are now:the securitizaton crisis, part 1 - boombustblog.com/conte.../
HELOCS and rose colored glasses - boombustblog.com/conte.../
Capital, Leverage and loss in the banking sysem: boombustblog.com/conte.../
The infamous Doo Doo 32 banks - boombustblog.com/conte.../
The upcoming muni crisis borne from Asset Securitization - boombustblog.com/conte.../
Etc. etc. There are more than 30 articles on this topic as well as drill downs and individual company forensic analyses showing the Bear view of companies from the allegedly untouchable Goldman Sachs and American Express to GGP and Wells Fargo. I wll be moving away from the financials this week and into the next step of my investment thesis which will show the results of these banks imploding. It is much more serious than most understand. The banking system is the oil of our economic machine, and without it running properly, the machine crashes to a halt. The Government can't bailout everybodey.
I have fairly strong track record following the bubble formation and the bubble bust, but lord knows I can be wrong, and we all make mistakes - which is why I aggressively follow the logic and research of opposing trades. It is when the opposing trades lack a thoroughly researched logical prospective that I feel overconfident and ramp up my positions.
I welcome any and all to my blog to join me in the unfolding of the next step of my investment thesis.
You bears are late to the party and wrong in your convictions. Fundamentals only matter when the big boys say the do. Get ready for the squeeze and UYG 28. I will be laughing all the way to Wells Fargo.
UYG 22+ on Monday.
Unfortunately Enron accounting is still alive and well with FASB loopholes, level 3 Assets and off balance sheet garbage.
To Quote Mish (who places Citi's leverage at 19:1) "The absurdity is not $5 trillion coming back on bank balance sheets. Rather the absurdity is with accounting rules that let banks hold this much stuff off balance sheets in the first place. It makes a mockery of stated leverage, value at risk, and capitalization ratios. Banks claim to be well capitalized but the ratio is a mere 6% and that 6% does not include the effects of hiding $5 trillion off balance sheets."
- seekingalpha.com/artic...
Citi realistically leveraged 40:1 ?www.financialsense.com...
All is not what it appears
The article you cited to defend your 40:1 leverage ratio for Citibank is based on 12/31/07 financials and is obsolete. Citibank has increased its equity by almost 35% since then, $23 billion net of first half losses and mark-to-market adjustments.
I don't want to defend Citibank or accountants, I have problems with both. I do think you should be more careful about the numbers you throw around.
Kina said: "The article you cited to defend your 40:1 leverage ratio for Citibank is based on 12/31/07 financials ........ you should be more careful about the numbers you throw around. "
Kina, Kina, Kina....I'll repost exactly what I said, but this time slowly so you'll catch it.
"Citi's Assets/Liabilities went from 20:1 in 2005 to 40:1 ... in ... December ... 2007!"
I hope you investing is better than your reading comprehension. And of course two years of financial degredation is relevant when posing the question (did you miss this too):
"Surely ... that's ... not ... still ... a ... problem ... is ... it? "
And of course its relevant. Why would leverage increase for Citi over this period? In light of Jasons pitch that "its all about the spread" and leverage is essentially benign, maybe you can ponder that question while your portfolio slumps.
Kina: "Citibank has increased its equity by almost 35% since then, $23 billion net of first half losses and mark-to-market adjustments. "
Were all their off balance sheet assets "market to market"?
From the WSJ:
"Losses may "extend beyond where we've seen historical levels go," said Chief Financial Officer Gary Crittenden. "We are in uncharted territory."
And despite stockpiling more than $30 billion in capital in recent months, and repeated assurances from executives that Citigroup has a plethora of capital, Mr. Crittenden said in an interview he couldn't rule out the possibilities that Citigroup will raise more money or that the board will further cut the firm's dividend."
Readers, save yourself some heartache - globaleconomicanalysis...
BTW, RJ aka Jason, reconstituted a brand new puff piece similarly devoid of any convincing logic. The fact the SeekingAplha allows such blatant cheerleading surely dilutes its relevance in the world of financial information.
Airlines, autos and financials are bleeding red ink.
Commodities are rolling in cash (Witness BHP Billiton's latest earnings).
This is a classic bear market trader's rally that isn't even remotely grounded in fundamentals.
If you have a five-year horizon, you might want to buy financials. Anything less? I'd sideline your ambitions...a lot of these stocks are classic "value traps."
Also, Chopin's posted 3 articles in the last three days pumping financials. I'm wary of his motives.
No one knows what's on the financials' balance sheets. And with noise coming out about FRE and FNM teetering on the edge...well, that could get ugly...real fast.
'Assets equal liabilities. Equity is one of the liabilities.'
You are making the big assumption here that banks lend entirely deposited money on which they pay 2%.
If this is true how did they end up in this situation where they are scrambling for gov't financing and more equiity while still earning 6-7% on their brilliant mortgage soups?
Heck, even 5.25% of Fed funds rate would have left them with profit. Well, maybe all their assets were collateralized in liabilities that pay close to 6%. Maybe this is where the originate-to-distribut... term came from?
So if you're paying on those 'fee generating instruments' all you receive and the collateral goes bad, you risk losing your own fee stream and many of those banks even kept their own money (on the assets side) into these brilliant investments, which in turn creates a disbalance on the liabilities side when they lose value.
You may understand alot about old school banking, but it aint what's paying 100-200% bonuses at those institutions at year end.
Your response reminds me of the old epitaph in the cemetery:
"But... I had the right-of-way...
Pay attention to past mania phases, and you'll realize that financials will come back, in about 20 years.
there are banks out there with solids balance sheets, and with positive earnings. i will not mention names.
so since the sentiment is bringing ALL financials down, with some homework you can find and buy good banks on the cheap.
also some of these healthy banks pay good dividends (upwards of 6%)
The current situation does present opportunities.
Whether the sector overall has bottomed out is a psychic's guess.
Clark Jenkins
FishGoneBad.com