This is another one of those analyses that you won't be able to get from your local brokerage house, along the same vein as my last GGP post (GGP and the type of investigative analysis you will not get from your brokerage house ). It is the stuff only available from the blogoshpere minority, or high end buy side groups (who really tend not to share much).
I'm a private investor and I pride myself on an analytical approach to investing. I try very hard to look at things from a scientific perspective of risk vs. reward. It is an indomitable tenet, one that I attempt to instill within my three children, and one which has (at least for the last 8 years or so) has provided me with an investment return that is multiples of the broad market. Unfortunately (or maybe fortunately, in regards to my investment record), it is one which is not shared by most of the analyst community and those that follow them.
This brings me to the issue of Goldman Sachs. I have been
Posted by: Reggie Middleton in Risk Management, Mortgage Banking, Investment Banks, Insurers and Insurance, Heard on the Street, Global Macro, Financial Shenanigans, Financial Engineering, Commercial Banks, Capital Markets, Banking on
Jul 03, 2008
I've been preaching about the risks the CDS market poses to the financial system for some time now. Since the monolines faux business model has been laid bare, we will start seeing some real action in this arena. For those who don't want to take my anecdotal quips as gospel, I actual go in depth through Reggie Middleton on the Asset Securitization Crisis Series - The Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk - Beware what lies beneath!. A worth read for those not familiar with the Credit Default Sucker's market.
Now, to the point of the post. UBS is in a lot of hot water these days. Despite being eyeballs deep in rapidly disintegrating, highly leveraged trash assets they are also often in hot water. Reference the financial times:
Below are our initial observations on Goldman Sachs as compared to its peers. I've had a burning sensation telling me that GS is grossly overvalued, but I haven't had a chance to prove it empirically. I am now diverting the resources necessary to prove or disprove this "feeling". I will keep the blog posted.
From FT.com, Morgan Stanley is trying to raise cash to pad next months results. This past quarters results were essentially a loss sans the sale of operating assets. Morgan Stanley has few to no untainted assets left to sell, and the macro and operating environment is getting worse, not better:
Morgan Stanley, hammered by credit crunch losses, plans to sell half its remaining stake in MSCI, the portfolio analytics and equity indices company, for about $850m.
The move comes after Morgan Stanley boosted its second quarter profit with a $732m gain on a secondary offering of shares in MSCI, which went public last November. Morgan Stanley and other banks have been moving aggressively to raise cash after credit crises losses and declines in revenue.
I am predicting and betting heavily on another large bank failure in the US and the Eurozone. Many on the site have probably already guessed what it is that I do. Well, I may be significantly epanding my job description if the financial system takes the hits that I expect it to.
Nouriel Roubini, global macro Uber-Bear, has posted an interesting commentary on his blog - "The delusional complacency that the “worst is behind us” is rapidly melting away…and the risk of another run against systemically important broker dealers" which I am excerpting below with my comments in red:
The deleveraging process for the financial system has barely started as most of the writedowns have been for subprime mortgages; the writedowns and/or provisioning for the additional losses have barely started. Thus, hundreds of banks in the U.S. are at risk of collapse. The typical small U.S. Bank (with assets less of $4 billion has 67% of its assets related to real estate; for large banks the figure is 48%. Thus, hundreds of small banks will go belly up as the typical local bank financed the housing, the commercial real estate, the retail boom, the office building of communities where housing is now going bust. Even large regional banks massively exposed to real estate in California,
This was contributed by ChrisM regarding the recent banking meeting in Europe and my comments:
The meeting here in Basel has been very interesting, the main points are:
1) they don't expect the economy to slow much further in the second half.
In regards to the US and UK, I don't see much evidence to support this.
2) they are concentrating on fighting inflation first, before growth.
This should have been number one
priority from the beginning. Inflation is still woefully understated by
government numbers. On the boat ride, I shared with the fellow
boombustbloggers my observation that effective housing price inflation
is still rampant. Nominal prices have dropped sharply across the
country, but affordability is actually way down in many areas, due
primarily to the tightening of credit. The largest barrier for home
purchasers for the middle and working class is the down payment. This
barrier has increased significantly after the mortgage markets
Dick Fuld states that he is forgoing his 2008 bonus in light of the performance of the company. HMMM! It really makes you wonder what in the world would make anyone think he had an iota of a chance of recieving a bonus with the share price down over 60% in the last twelve months. Really now, was he expecting to get a bonus?
Cioffi, of Bear Stearns, has been incarcerated and indicted on fraud for allegedly misrepresenting investors as to the viability of the hedge fund he manageged. I don't know the particulars of the case, but incarceration does seem a bit harsh when his boss, Schwartz, got on CNBC and swore everything was just fine 5 days before he agreed to sell the company of less than 5% of its 365 day moving average price.
While on that note, didn't the Lehman CFO tell us everything would be alright and Lehman has no liquidity problems (despite going to the liquidity well 4 times in 4 months for more than $9 billion). Didn't Citibank say they would not have to cut their dividend a month or two before they cut their dividend. Sun Trust will be in the same boat in a quarter or two, if that long. I can go on with this list for quite a while, but I think you get the message.
I am going to release the draft of the Sun Trust analysis in pdf form for registered users. It hasn't been reviewed, but since STI is moving so fast, and I am short on time I decided to offer it to the blog early. I started my position in the mid fifties, and it has dropped precipitously, just like nearly the entire Doo Doo 32 list. One of the things that took my time was the BoomBustBlog Boat ride up the Hudson to the Pallisades. Sorry I was so late fellas, lots of fog and safety first (and I'm always late
). Below is Cap'n Vic, who takes the credit for shepherding us safely through the condo ridden waters of NYC's Hudson River.
I was able to show the BoomBustBloggers, most of which flew in from out of the country and out of state for the financial brainstorming and chit chat, how the myth of NYC's immunity to a real estate downturn was just that, a myth - or at least that was what was communciated by the big blogger himself. See "On the NYC Real Estate Front" then
I'm shorting as many as I can and have been short since last year. These guys are beyond funny, with buy and hold recommendations last week and "sells" this week as if there was some fundamental change in the businesses or macro environment of these stocks on a weekly basis. I thought they were all strong shorts last year, and I think they are stronger shorts this year.
Hey guys, stop bickering and put a few more of those arbitrary and capricious buy recommendations on each other one more time - just for me, pleeeeasse! If you are new to the blog, check out the entire section that I dedicated to these indecisive flip flop artists.
From the WSJ:
Analysts Downgrade Rivals in a Cycle Turning Vicious
You cut me down? Wait 'til you see what I do to you.
That is the game Wall Street analysts are playing, as they scramble to lower ratings on one another amid signs that their businesses are getting worse.
Thursday, the squabbling, which is
Posted by: Reggie Middleton in Research on
Jun 25, 2008
This is from BoomBustBlogger shaunsnoll's personal site on this blog. He has updated the pundit tool from my page personal files page to include all companies analytically referenced by this blog since inception. It does not take into consideration timing (ex. the time value of money), trading, leverage or derivative positions - all of which I use heavily in my proprietary accounts.
What it does do is illuminate how much value my trading acumen does add to my research. I consider myself to be an absolutely horrible trader and a fairly decent risk manager. Looking at the raw numbers, it is obvious that I am a much better trader than I give myself credit for. Maybe I'm too hard on myself...
I urge all to make use of the "my space" style web pages and all of the social networking aspects of this site - after all it is much more than a mere blog. Click the "My Website" button directly below the User Menu in the left margin of this page to get started.
The more I think about this transaction, the more it stinks. I am trying my best to give BAC's management the benefit of the doubt since banking is their profession, after all. Then again, my profession is ferreting out profitable opportunities, and methinks a shorting is in the air if they close on this deal. Most know how bad off Countrywide is, but let's waltz through and overview of Bank of America...
| |
1Q-2008 |
4Q-2007 |
3Q-2007 |
2Q-2007 |
1Q-2007 |
| Total Allowances at EOP |
14,891 |
11,588 |
9,535 |
9,060 |
8,732 |
| |
|
|
|
|
|
| Gross Charge off's as % of Loans |
|
|
|
|
|
| Residential mortgage |
0.03% |
0.01% |
0.01% |
0.01% |
0.01% |
| Credit card - domestic |
1.57% |
1.25% |
1.36% |
1.56% |
1.65% |
| Credit card - foreign |
0.87% |
0.86% |
0.89% |
0.88% |
0.89% |
| Home equity |
0.49% |
0.16% |
So all of those CEOs who say that they expect the spreads on their levereged bubble products to narrow in the (near) future, I suggest they surf on over to the Calculated Risk blog.
This year saw the smallest increase in sales from the Winter doldrums, to the Spring selling season, since the Census Bureau started tracking new home sales in 1963.
Note: Please see my earlier post for more on new home sales.
This graph shows the Not Seasonally Adjusted (NSA) new home sales for the last 45 years.
Usually sales increase in the spring - but not this year. The previous worst spring on record was 1982 - in the midst of a severe recession, with 30 year fixed mortgage rates at 17%, and close to double digit unemployment.
In 1982, sales picked up late in the year as interest rates declined sharply (30 year fixed rates fell from 17% to about 13% at the end of the year).
As far back as September of last year, I have been alleging that the
Here is a comparison of more banks and thrifts. In looking over this, I continue to doubt the wisdom of BAC's acquiring CFC. The upside does not seem to justify risking the downside. The spreadsheet below compares the five banks I have looked closely at over the last few months – WFC, STI, BAC, MTB and ZION across various parameters, primarily with respect to their asset quality. Please note our observations on the same and be aware that this is backwards looking from research I commissioned some time ago:
1. STI has high real estate exposure, higher NPA and 90+ days loan delinquent as proportion of tangible shareholders’ equity, lower allowance as a percent of NPAs, higher Texas ratio, higher ET shortfall to tangible equity, and lower NIM. Though STI does not report the geographic distribution of its operations, its primary markets include Florida, Georgia, Maryland, North and South Carolina among others. High exposure to Florida could make the bank highly
I hate to pick on these guys, but I just can't help it. From Bloomberg :
Analysts Backtrack on Banking Stocks After Saying Worst Is Over
Wall
Street analysts who only weeks ago were telling investors to buy bank
stocks because the worst of the credit crisis was over are now
flip-flopping.
Goldman Sachs Group Inc. reversed a call on financial stocks, saying on June 23 that its May 5 recommendation was ``clearly wrong.'' Merrill Lynch & Co. on June 17 cut its rating on Lehman Brothers Holdings Inc.
to ``neutral,'' just a week after telling clients to buy. Barron's, the
financial newspaper, said this week that its February advice to buy American International Group Inc. was a ``mistake.''
``Analysts probably have less credibility than they did 10 years ago,'' said Charles Geisst,
the author of ``100 Years on Wall Street'' who teaches finance at
Manhattan College in New York. ``This has just eroded it a little bit
more.'
First Franklin Monoline ABS Inventory (49)
DCF Valuation Model, with Value Drivers (16)
