SunTrust Banks Inc. (STI)
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- The Facts Behind the Coming Congressional Mortgage Bailout Bill [view article]
- Big Little Stock - Fast Money Recap (8/25/08) [view article]
- Lehman Brothers Take-over: Implications for Financials [view article]
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- Big Ben's Jackson Hole, Wyoming Pep Rally [view article]
- Five Struggling Dividend Stocks I'm Still Bullish On [view article]
- Looking For Action? S&P 1500 Most Volatile Stocks [view article]
- Finding Relative Value in Financial Services [view article]
- Waiting for Financials' Other Shoe to Drop [view article]
- Bank Executive Compensation and the Bailout [view article]
- Wednesday Options Outlook: KRE, STI, WPI, IYR, BGG, SWY [view article]
- Finding Value in the P/B Ratio [view article]
loading ...Recent STI Articles
- Big Little Stock - Fast Money Recap (8/25/08)
- Monday Options Update: GE, LEH, C, RIMM, AMD, STI, TLAB, ALO
- Big Ben's Jackson Hole, Wyoming Pep Rally
- Lehman Brothers Take-over: Implications for Financials
- Five Struggling Dividend Stocks I'm Still Bullish On
- Looking For Action? S&P 1500 Most Volatile Stocks
- Finding Relative Value in Financial Services
- Waiting for Financials' Other Shoe to Drop
- Wednesday Options Outlook: KRE, STI, WPI, IYR, BGG, SWY
- A Dose of Reality: Long vs. Short
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Braunstein
Waiting for Financials' Other Shoe to Drop [view article]
You are right on! I'm avoiding financials too, and most retailers except liquor and beverages. The Fed is injecting massive liquidity into the system, but it's pushing on a string. No one want to make loans in this environment. Remember, housing and construction got us out of the tech bubble. With those pillars broken, I expect to see new lows in the markets below the 1999-2000 lows before we see the bottom. My guess is that we may see new highs in about 10 to 12 years. Oil prices will trade between $80-$120 during that time. The problem will be deflation, not inflation as the rest of the world lowers their interest rates while ours stays steady. The USD should rebound to 1.15 to the Euro over that time period. Many banks will likely fail. Unemployment could reach 7%. But in the end, the U.S. economy will eventually strenghen and recover. This is not Armagedden, but it will feel like it for quite a while. ReplyWednesday Options Outlook: KRE, STI, WPI, IYR, BGG, SWY [view article]
re STI -- I think the bears are wrong on SunTrust. Insiders are buying. Did not cut dividend, so 7% yield while waiting for rebound not too shabby. Yesterday, a large local branch in Miami Beach had crane put new signs up on the building and at entrance-way. That's an easy place to cut expenses, but they chose not to do that. Kind of reminds me of 'window/landscape dressing' when selling a property. I smell a buyout offer coming ReplyFinding Value in the P/B Ratio [view article]
I need to correct my prior post. ACAS has booked $1.261 Billion (or $1,261 Million) in unrealized losses during the first 2Qtrs of 2008. ReplyFinding Value in the P/B Ratio [view article]
In response to MichiganChetMy comment regarding the questionable valuation of ACAS investments was based upon analysis of the 2007 10K and is no longer correct.
I should have reviewed the 1Q 10Q wherein ACAS booked $997 Million in unrealized depreciation. The 2nd Quarter earnings announcement (released subsequent to my comment) booked an additional $264 Million in unrealized depreciation.
This means that ACAS may incur $1261 billion in realized losses over the life of these investments. No one knows what % of the unrealized losses will be realized ,or how many quarters these losses will be allocated to. But it would not be unreasable to assume that realized losses will amount to $150 Million per year for the 2009 to 2111 time period.
For 2008, the company is on target to make about $600 Million in net investment income and to pay shareholders $800 Million in dividends - a deficit of $200 Million.
So, my primary concern about ACAS is no longer improperly valued assests, but rather whether they can pay the current level of dividends after 2008. Obviously, the market has already priced in some decline in dividend payouts.
BTW I reaffirm the previous comment regarding out of control salary expenses. Salary expenses tripled (from $86M to to $254M) between 2005 and 2007 and Wilkus pulled down $24M in 2007. This is far more money than the CEO of any comparably sized regional bank would make. For reference, the CEO of Bank of America (which has about 140 times more assets than ACAS) made only $17M in 2007. Reply
Finding Value in the P/B Ratio [view article]
In reference to the eight stocks selected by a price/book screen, the first four stocks were evaluated by a mathematical model which this writter spent 10 years developing.The model predicts the stock's price in three month's time based on selected comp0any fundamentals and change in interest rates. The model does not include major upswings (current market) or downswings (recent history) or any of the risk factors which would be listed in a company's annual report. Not withstanding these exclusions, the mathematical model works quite well as any investor who reads this blog can determine by comparing the prices of these stocks on the evaluation date to the price three months later. Well - not quite. Sometimes the predicted price is attained in six weeks and sometimes as long as five months.
Here are the three month results of the mathematical model based on an initial evaluation date of August 6, 2008.
CBS Corp: $16.70 up to $19.14
Lehman Brothers: $20.46 up to $24.10
Capital One Financial: $45.01 with a negligible change to $45.79
American Capital: $22.54 up to $26.08
To rate these stocks there are three winners and one loser. From my personal perspective American Capital is a winner based on dividend alone. The other stocks would be passed over in favor of stocks with greater potential for appreciation.
To rate the price/book screen as a tool for selecting stocks without the advantage of the above described mathematical model, a realistic evaluation would require the comparison of prices over a period of time.
Skipjack
Disclosure: Author is long ACAS Reply
A Dose of Reality: Long vs. Short [view article]
you are correct I posted a similar post this morning on ubs, bac and Mer today. concisetrading.blogspo.../Ryan Reply
Finding Value in the P/B Ratio [view article]
The assertion that ACAS has "lost control of their salary expenses" is a puzzling one to me, because their three and six month salary and SGA expenses have decreased year on year - exactly what you would expect from good managment knowing that there will be a coming cash shortfall because of the economic issues. Further, ACAS states that they hire two outside firms to value their portfolio, who value a 13% sample and have so far reported that the valuation is fair. I think the criticism that the assets of ACAS are very difficult to value fully, and hence the company trades at a discount is a fair one, but so far I see no evidence of management deliberately overvaluing or 'squinting' at value impairments, which I noticed they took this quarterEvidently hedge funds agree as we have an enjoyable short covering rally going Reply
Finding Value in the P/B Ratio [view article]
ACAS is up $1.28 @ 21.81. Hope you didn't get in short nayr ReplyFinding Value in the P/B Ratio [view article]
I would be happy to take a basket of puts into January on those names.concisetrading.blogspo.../
Ryan Reply
Finding Value in the P/B Ratio [view article]
The book value for money center and major regional banks can be unreliable for three major reasons:1) Their investments can be worth far less than book value. If the investments are privately issued CDOs rated by a monoline insurer the real value is probably less than 50% of book (think Merril Lynch). Even if the investments consist of Fanny and Freddie paper, you can"t be sure what they are really worth.
2) The loans can be worth far less than book value. Theoretically, management has to disclose the amount of non performing loans, but you can't trust them to be honest here. It's common knowledge that a bank is in serious trouble when the ratio of non performing assets (i.e non performing loans plus OREO) to total loans exceeds 3 per cent - and managment will do almost anything to make sure they don't exceed that ratio.
3) The exposure to losses from off balance sheet arrangements - (i.e "conduits" or ABCP facilities) is not reflected on the balance sheet. The larger banks can billions of dollars worth of unrecognized exposure. You have to review the 10K to get even a hint of the bank's exposure here.
ACAS doesn't have these issues, but I don't think they can be trusted to value their investments honestly and they have lost control of their salary expenses. They are probably the last BDC (except maybe for ALD) I would own. If you have to own a BDC, ARCC, AINV, and GLAD are probably safer investments.
FYI I have no positions (long or short) in any of these companies. Reply
Finding Value in the P/B Ratio [view article]
How can you put a price-to-book and the banks, when no one knows what's on their books hiding? I think you should toss those out and start over. ReplyAnalyst: Commercial Banks Are Undervalued [Housing Tracker] [view article]
Um, everyone knows that banks will lose money on some mortgages. The question is, can anyone do math?No, they aren't nefariously delaying loss recognition, they just don't have the processing capacity to deal with so many loan workouts at once. That is why they are hiring everyone they can and paying them to perform workouts for them.
The rate of loans going into default on prime credits has increased to all of 2.5%. The spread on prime credits is 2.5% over their cost of capital. If they recovered nothing they'd still break even with spread that wide. They aren't recovering nothing.
The problems all stem from (1) prime mortgages written at tiny spreads and the rates lock in via derivatives at the time or (2) deadbeat mortgages with default rates well into double digits - 10-15% on alt-As and 35% on junk paper - where the spreads didn't cover that rate of default.
How much does a bank lose on a default? They expected something like 20% counting workout costs, but the reality these days is more like 50%, and if costs are high enough or resale hard enough, it can go still higher. But there is some recovery, of course. They get houses that aren't worth zero.
The math of it is, spread times 1 minus default rate (that is the profitable part) minus default rate times (100 minus recovery rate) - that being the loss part. With the spread part being per year and the rest causing loan exit and so being one-off.
Take prime mortgages at a 3% spread (e.g. 3% funding cost via CDs or whatever, and 6% mortgage rate), and a 2.5% failure rate (triple the long run average, but seen right now). They earn on the good ones .975 * 3% = 2.925% of total book size. Suppose the losses on prime loans run 50% when they default, then that is 1.25% of loan book, and the net is positive 1.675%. Push the recovery rate down to 30% and the losses rise to 1.75% of loan book, and they are still ahead 1.175%. Prime loans even in distress conditions, pay. The distress conditions cause low short rates on the funding side and thus keep the spread wide, and that is more than enough to cover even steep losses on the modest portion of prime loans that default.
But consider a subprime with a spread 3% higher (higher loan rate) thus 6% overall, but with a 35% default rate. The good portion of the subprime book earns 0.65 * 6% or 3.9% of total amount written. But the bad portion at 50% recoveries costs 17.5%. That still won't lead to 80% losses, only 13.6% losses. If the recoveries are only 30% it leads to 20% losses on the written book. The much steeper writedowns being taken on such loans reflect the banks conservatively projecting that they are going to be that bad every year over their expected lives of five years or so. By which time 90% of the loans will have defaulted and the book will have evaporated.
Loans to deadbeats don't pay, even at moderately higher spreads. They made them in the expectation that the losses on non-performing loans would be moderate, moderate enough that the spreads on the performing portion could cover them. That was false.
But it won't make loans on prime credits losers at wide spreads. It isn't the losses on non performers that matter, it is the spread on performers and how many perform.
FWIW... Reply
Analyst: Commercial Banks Are Undervalued [Housing Tracker] [view article]
Banks with real estate exposure are in big trouble. Here is why... I was looking at buying condos in DC recently and made several offers on "short sales". This is where the real estate is listed for less than what the bank is owed for the loan that was made to the original owner. In each case, the bank would not respond or delayed the response. In other words, they did not want to sell the property even though nobody was paying the mortgage and the property was going to seed. I got the impression that banks are intentionally delaying selling these properties because when they do sell them, they need to recognize the actual "hit" on each such property. These hits will then flow through into the income statement and affect the earnings. I think banks are intentionally delaying such transactions so that the effect on reported earnings is smoothed out instead of taking a large hit at once. When these short sales eventually occur, their prices will then affect real estate appraisals and this will have a reduction effect on real estate prices. My suspicion is that this delaying tactic will go on until the end of the year so that banks can then report losses in the following year instead of the current year.... It is all about the "reported earnings" and the bonuses that the executives of the banks get based on the reported earnings. ReplyFinding Value in the P/B Ratio [view article]
Greedy crooks in Banks and Broker firms wrapped subprime, credit cards, bad loans, etc. into structured finance vehicles i.e.: CDO-ABS-MBS-SIVs, they misled the market and bond insurers into these fraud and now everyone is paying the price with losses now the misleds have to clear up their books from that toxic waste! ReplyAnalyst: Commercial Banks Are Undervalued [Housing Tracker] [view article]
The ones who can't do business math are the permabears and the end of the world trade herd.You can't lose money as a bank with 5% spreads. Banking is all about the spread. They have losses now because they entered a ton of business at narrow spreads in the 2003-2006 period. But right now they can get all the funds they'd ever want at 3% or less, and they can lend them to A corporations at 7%, or government backed paper at 5.5%.
All you have to do to value them properly is look at their asset size and expect the ROA to revert to the long term mean in a year or three. Then for the weaker ones you have to leave some allowance for dilution in the meantime - present shareholders may not own the whole bank 3 years out. The more an individual bank has already raised and reserved, the less than forward dilution is going to be.
The system isn't going to work without profitable banks, and it is going to work. Spreads cure everything, the solution is already baked in. They just take time, as the higher earnings from them chomped their way through past mistakes.
The error the bears all make is to focus on the balance sheet only, or at most the current earnings without averaging them over full cycles. When they aren't just chasing the headlines. Commercial banks are franchises with funding cost advantages that always come back. They are just cyclical is all. People who can't be bothered to take a 7 year average of ROAs shouldn't touch cyclicals, but anybody who can add can see the banks were sells at 2006 prices but are buys at these prices. Reply