najdorf

Yes, Financial Companies Can Be Analyzed

Hey guys, news flash: the financial industry is not a monolith. There's a big difference between what Merill Lynch does and what a retail bank does (greater leverage, riskier investments, etc.). So when you say that banks are going down because of hard-to-value level 3 assets like CDOs and SIVs, it lets me know that you haven't read the WFC SEC filings. Their exposure to that kind of stuff is negligible if it even still exists. Their concern is what percentage of people default on HELOCs and whether they can recover anything out of the second lien position. This is a real concern, but you need to know what it is before you're qualified to discuss the issues at hand.

On the other hand, we do have some speculative financial investments available: will WM and WB pull through? Total guesswork. What will happen to equity-holders of FNM and FRE? Depends on unknown information. What will C have to do to survive? Could be anything. If you think about C for 5 minutes and decide "eh, they're not going out of business - might even go back up some time!" then you are speculating. If you read the WFC reports and see that they're earning through this crisis and laying the groundwork for a return to better profits, you might think that they're undervalued by enough to give you a margin of safety for investing. Certainly you had the margin of safety before 2Q earnings, but now that they've put out some (largely forseeable) good news it's reduced by the higher share price. If WFC at today's prices isn't an investment, what is? Almost everything depends on oil, housing, credit, and currency, and with all 4 moving all over the place it's hard to predict the near term future. All you can do is look for long-term values based on current prices.