DreamWorks Animation SKG, Inc. (DWA) has recently put up some impressive numbers. On April 28, the company announced earnings for the first quarter and the stock rallied 25% immediately. The stock has held the gains firmly and it’s perhaps even more impressive that DWA has rallied an additional 15% since the first day of trading following the announcement.

The first quarter was the best Q1 in company history with revenues coming in at $263.5 million and net income of $62.3 million. Earnings per share was $0.68 after adjustments compared to just 26 cents last year. The performance was largely due to the blockbuster hit Madagascar: Escape 2 Africa. As of the date of the announcement, the feature had raked in $595 million in box office sales worldwide. This is truly an impressive feat considering trends in consumer spending.

Barron’s Jacqueline Doherty seems to think banks brought their mark-to-market accounting problems on themselves, by investing too much in securities. That’s nuts. Doherty misses three huge points:

1. If banks did not hold as many securities as they do, many more would have failed. In a liquidity crisis, where bank runs can kill a bank, a bank’s only source of liquidity is its securities portfolio. If you think securities prices are under pressure, look at whole loan pricing and try to sell loans quickly.

To further flesh out the point I made yesterday—that the bonds included in the ABX subprime mortgage index are, without exception, the longest-duration, least-creditworthy AAA bonds in the trusts from whence they came, I selected at random member of the ABX 07-1 index, the A2D class from the of GSAMP 2006-HE5 trust, and compared it to the recent prices of the other bonds from that same trust. Sure enough, the A2D is the runt of the litter. Its price is nowhere close to those of the trust’s other bonds. Take a look:

The mysteries of ABX index pricing became a whole lot more understandable to me after I read Freddie Mac’s (FRE) February 28 report discussing its subprime exposure. In a nutshell (and despite what most people think) the ABX wasn’t designed to represent all AAA-rated subprime ABS that have been issued recently, but rather just the longest-duration, highest-risk ones. Combine that fact with the recent spread widening that’s occurred throughout the financial markets lately (which of course hurts the longest-duration bonds the most) and uncertainty surrounding the ultimate credit losses, and you can see why the 07-1 AAA ABX is lately trading at around 62.

It’s worth taking a look at the summary of the Freddie report directly. It includes a section, starting on page 4, on how the enhancements in deals works (an area too often ignored) and, on page 6, why Freddie’s subprime bond exposure (which is essentially exposure to all subprime AAAs, in aggregate) is much different than the ABX’s exposure.

Credit Suisse (CS), the mysterious "Global Bank" that Bill Ackman told regulators has an Open Source Model for valuing subprime mortgage CDOs that's so accurate and powerful it can only run on NASA-style computers, may not be the go-to source for ABS valuation, after all. From Tuesday morning's WSJ ($):

ZURICH -- Swiss bank Credit Suisse Group, until now relatively unscathed by the credit crisis, Tuesday said first-quarter earnings will be reduced by $1 billion from mismarkings and pricing errors by traders which led to the reduction in the value of some asset-backed securities by $2.85 billion.

Remember back in April, when word of the J.C. Flowers-BofA-Chase acquisition of Sallie Mae came out, how First Marblehead's (FMD) stock got the stuffing knocked out of it? Well, I do. Investors were concerned that JPMorgan Chase (JPM) and Bank of America (BAC), two big Marblehead customers, would shift their private loan business to Sallie once they became owners of the company. The analyst at Prudential put his finger on the problem:

One . . . side issue [of the deal] for investors in other education-finance companies [read: First Marblehead] is whether two bank owners (Bank of America and JP Morgan) plan to use SLM more intensively for both loan originations but perhaps also for private loan securitizations. [Emph. added]

Liquidity crunch? What's that?

First Marblehead's (FMD) latest securitization, completed Monday morning, is a home run. Under the best-case scenario, I expect the company will generate a gain-on-sale margin of 15.8%; under the worst case, 14.5%. Either way, the results are a great validation of the strength in Marblehead’s securitization program and the strength of this underlying collateral. The results of the deal should enable the company to blow away the consensus E.P.S. expectation for the quarter of $1.06, and should also beat the prior peak fiscal first quarter estimate of $1.60, from back in March of 2007.

If what U.S. Bancorp (USB) had to say at its annual investor day last week is any indication, good things are happening out in Minneapolis. U.S.B. is stepping up investment in its key businesses, especially its fast-growing payments business, and is looking to get its various units to work more closely together. In addition, it’s begun a big push to boost both employee and customer engagement. The payoff from all this could take time, but when it happens it could be substantial. My bottom line: U.S. Bancorp could be the most attractive of all the big banks right now.

The main catalyst for the changes at the company is its new CEO, Richard Davis, who took over last December. Davis is one of the canniest, most competent executives in the banking industry. (I admit to being biased on that score; he’s on our advisory board.) Davis says he wants to move the company away from it historical focus on cost to a greater emphasis on revenue and employee issues, and has already made a number of encouraging moves.

Risk-taking hedge funds that invested in Sallie Mae (SLM) are furious at billionaire J. Christopher Flowers for threatening to pull out of his $25 billion takeover of the nation's largest student loan provider - a move that has already sent the stock into a tailspin. . . .

They also claim Flowers' hardball tactics could hurt his reputation as a respected dealmaker, although some bankers disputed that.

The oft-cited price-to-book versus ROE regression equation for life insurers is simply another way of looking at P/E ratios. Users of this equation are regressing “price divided by book value” against “earnings divided by book value (ROE)”, and essentially concluding that low PE stocks (those that trade below the regression line) are more attractive than high PE stocks (those that trade above the regression line). . . .

From 2002 through 2006, life insurance stock portfolios based on a price-to-book versus ROE regression investment strategy (rebalanced annually) would have generated returns very similar to life insurance stock portfolios based on a forward P/E investment strategy. Approximately 80% to 90% of the names in the most and least attractive portfolios are the same under both strategies, which supports the notion that both strategies are very similar. [emphasis added]

That would be worrying — except that Sproule’s methodology is all messed up. Apparently he arrived at his CPR number by looking at the change in number of loans in the trusts last month and annualizing it, and calling it the result prepayment speed. There’s tiny little problem with this technique: something like 60% of the change in the loan count in a trust is due to defaults, not prepayments. Sproule’s numbers are meaningless.