Dick Bove is back pounding the table on the banks a month after making his 'there is liquidation value in the banks' argument. For those of you that have not heard this argument, Dick Bove basically believes that you need to buy any bank which has cash holdings net of tangible book value that exceed the market value of the company. One example he likes to use is JP Morgan (NYSE:JPM) which has $300 billion in cash, $123 billion in tangible equity, and a $112 billion market cap.
Though I have to say this argument has never made much sense to me. JPM has a $2.3 trillion in assets and $2.1 trillion in liabilities. In a liquidation, the first place you go to to pay off creditors is your cash. To put this in perspective, tangible equity as a percentage of non cash tangible assets is probably around 7%. So the real question you should be asking yourself is, do you think that after we back out intangible assets and cash and liquidate the remaining assets on JPM's balance sheet that a 7% cushion does the trick? In liquidation, do you believe that they will recoup at least 93% of the $1.95 trillion they are carrying on their books?
See, banks are not like non bank institutions; talking to me about cash on the balance sheet doesn't help me much when I know these balance sheets are huge. This is not some fabless semi company with no debt trading at .9x book with cash equal to 1.05x book (which by the way happens more often than you would think). This is a bank with liabilities that are 7x this liquidity. And the fact that they are sitting on this liquidity is not a sign of strength, but rather a symptom of a disease. Arguments like this from trained professionals confound me.
It's like when I was watching Bob Pisani talking about how GM is trading less than its cash value a few months ago. Yes Bob, GM's market cap is less than the $31 billion in cash they have on the books, but do you know anything about the rest of their balance sheet? Current assets less current liabilities amounts to $12 billion, and the company has over $10 billion in long term debt. Add that all up and your liquid assets value to market value argument vaporizes. Of course, if you knew anything about the automotive industry, you would never even think twice about making such an argument.
Same thing goes for the banks. If you understand the business, you wouldn't make a cash liquidation value argument for them. Why would a large bank ever be sitting on cash anywhere close to its aggregate liabilities? And when could you quickly liquidate a $2 trillion balance sheet without taking a haircut? These hypotheticals are pure fantasy. The only bank you are ever going to see that is sitting on the type of cash that would make you feel comfortable relative to its liabilities is one that just started its operations.
And there is a reason banks with multi-trillion dollar balance sheets are called 'too big too fail', it is because liquidating them in an orderly fashion without jolting markets and the economy is next to impossible (or at least that seems to be conventional wisdom). And when is it that we talk about cash on hand at large banks? It is when we are worried about their ability to withstand the stress on their balance sheets.
Arguments like these just waste time and do nothing but confuse people. That is not to say that the banks might not be attractive again at these levels. They might be a steal if you believe employment is set to really pick up and the real estate market is about to mount a steady and gradual recovery, but that's not the argument Bove is making. He is just saying buy banks because that is something he loves to do. Just check out his history:
March 2008 - Buy the Banks:
"The last time an opportunity of this nature existed to buy bank stocks this cheap was in 1990," the analyst wrote. "The next time will be in 20 years. This is a once in a generation opportunity."
June 2008 - Lehman will Survive
August 2008 - Buy Lehman:
The Koreans are signaling a desire to buy Lehman. Lehman is massively undervalued and this is a cheap stock.
April 2009- BofA going back to all time highs
March 2010- Bove Backs up truck on Citi and BofA
Jan 2011- We are entering a golden age of banking
May 2011- Citigroup to Triple by 2013
June 30, 2011- 9 Reasons to buy the banks today
July 27, 2011- Sell Everything (This lasted for about two weeks.)
Aug 23, 2011- Time to Buy the Big Banks
Nov 18, 2011- Buy Bank Stocks Hand Over Fist
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.