Thursday, 21 January 2010 23:00

So, What Does This Obama Stuff Mean for the Banks???

Well, it looks like Blankein, Dimon, et. al. really should have tried
harder to make that meeting with the President a couple of weeks ago.
It appeared as if he may have had something important to discuss. As my
readers and subscribers know, I have been very bearish on the big money
center banks since 2007, and quite profitably so. The last 3 quarters
saw a much larger trend reversal than I expected, that resulted in the
disgorgement of a decent amount of those profits - a disgorgement that I am still
beating myself up over. You see, as a fundamental investor, I don't do
well when reality diverges from the fundamentals for too long a period.
Luckily for me, fundamentals always return, and they usually return
with a vengeance. To keep things in perspective though, I am still up
on a cumulative basis many, many multiples
over the S&P (which is still negative, may I add) as well as your
average fund manager. Why? How was I able to do this? Well, its not
because I am supersmart, or well connected. It is because I keep things
in perspective. Those that look at the records that I publish say,
"Well he was down the last couple of quarters, so..." while
disregarding what happened the 8 or even 40 or so quarters before that.
Such a short term horizon will probably not be able to appreciate the
longer term perspective and foresight that enabled me to see this
entire malaise coming years ago and profit from it. No, I am not
perfect and I do mess up on occasion, but I also do pay attention to
the facts.

These facts pointed to a massive overvalutation in banks throughout the
bulk of last year, again! I made it clear to my subscribers that the
banks simply have too many
things going against them: political headwinds, nasty assets,
diminishing revenue drivers, over-indebted consumers, and a soft
economic cycle. I also warned explicitly that I didn't think Obama
would be nearly as lenient on the banks as Bush was. Well, the
headwinds are stiffening. On that note, let's take an empirical look at
just what this means in terms of valuation (note, I will following this
up with a full forensic re-valuation for all subscribers, incuding a
scenario analysis of varying extents of principal trading limits). Some
of these banks are I-N-S-A-N-E-L-Y overvalued
at these post bear market rally levels considering the aforementioned
headwinds. Methinks fundamental analysis will make a comeback in a big
way for 2010 as it meets the momentum and algo traders in a mutual BEAR
feast on the big investment banks cum hedge funds. I can't guarantee it
will happen, but the numbers dictate that it should. We shall see in
the upcoming quarters.

We have retrieved information about trading revenues for GS, MS, JPM and BoFA. We have also retrieved some balance sheet data to reflect the trend in investment holdings and the level of leverage, but I will address that in a future post for the sake of expediency. While the banks don't break out the P&L for principal trading, we can sort of back into it. Remember, traders are fed bonuses off of net revenue, not profit.

Goldman Sachs

Trading revenues accounted for more than 50% of the total revenues over
the last 8 quarters. The impact on earnings is magnified with the total
trading revenues amounting to more than 150% of the total pretax income
over the last 8 quarters except for the last quarter in which the
earnings were positively impacted by substantial decline in
compensation expense which was negative 519 million in 4Q09 against 5.4
billion in 3Q09. The negative compensation charge during the quarter
was owing to accounting adjustments

Principal investments which are purely GS
proprietary transactions contribution ranged within 5% to 15% of the
total revenues except in 4Q08 when the huge write downs in principal
investments offset the positive revenues from other sources. Revenues
from principal investments ranged within 15%-50% of the total pre-tax
income except in 4Q08.

Click to enlarge.

image009.png

Note: In the GS income statement, revenues from trading and
principal investments is the GS total revenues from trading activities. This
revenue item comprises of two heads - trading and principal
investments.

Revenues from proprietary trading in FICC (Fixed income,
currency and commodity) and Equities is clubbed with the trading revenues
earned on the transactions done on behalf of clients and is reported under the
former head. In first nine months of 2009, nearly 41% of the trading revenues
came from interest rate related transactions and 37% came from equities.

GS trading revenues break up (in $ million)

3Q09

% of total

9M09

% of total

Interest rates

3,928

58.6%

8,314

40.6%

Credit

2,022

30.2%

4,358

21.3%

Currencies

(3,617)

-54.0%

(4,038)

-19.7%

Equities

3,406

50.8%

7,515

36.7%

Commodities and other


964

14.4%

4,307

21.1%

Total

6,703

100.0%

20,456

100.0

The latter head primarily represents net investment gains/
losses from certain corporate and real estate investments and investment in the
ordinary shares of Industrial and Commercial Bank of China Limited. Total
principal investments amounted to 20.7 billion which is just 6-7% of the total
investment portfolio of GS.

Thus, most of proprietary trading revenues is included the
former head . However, it difficult to differentiate between proprietary
trading and client related trading.
Revenues
from principal investments in case of GS and MS are not trading revenues but
are write-ups/downs on certain illiquid investments which are segregated as
principal investments. We have created various scenarios to demonstrate the impact of decline in trading
revenues on earnings.

image005.png

More of Reggie on Goldman Sachs

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· Morgan Stanley

Trading revenues contribution to total net revenues ranged with
15%-150% of the total revenues over the last 8 quarters except in 1Q09
when the trading revenues were more than offset by write-downs in
principal investments. The impact on earnings is magnified with the
total trading revenues amounting to more than 100% of the total pretax
income over the last 8 quarters except in 1Q09.

Principal investments contribution to total
revenues has been less than 5% of the total revenues over the last 8
quarters except in 4Q08 and 1Q09 during which huge write-downs were
recorded in the principal investments. Revenues from principal
investments ranged within 15%-25% of the total pre-tax income except in
1Q09.

image014.png

On Morgan Stanley - The Riskiest Bank on the Street

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JP Morgan Chase

image023.png

JPM’s trading revenues come primarily from principal transactions
(JPM’s proprietary revenues). Trading revenues contribution to total
net revenues ranged with 5%-15% of the total revenues over the last 8
quarters except in 4Q08. Total trading revenues ranged within 20%-100%
of the pretax income
except in 4Q08. As a commercial bank, JPM is doing horribly in terms of earnigns due to credit losses. I actually see this getting worse in the near future before it gets better (see the quarterly reviews and forensic reports below), and as it gets better it will do so gradually. Stripped of the risky, yet profitable prop trading, JPM will be looking a lot more like Citibank than many pundits may think!

image018.png

image019.png

Click graph to enlarge

image001.png

Cute graphic above, eh? There is plenty of this in the public preview.
When considering the staggering level of derivatives employed by JPM,
it is frightening to even consider the fact that the
quality of JPM's derivative exposure is even worse than Bear Stearns
and Lehman‘s derivative portfolio just prior to their fall.

Total net derivative exposure rated below BBB and below for JP Morgan
currently stands at 35.4% while the same stood at 17.0% for Bear
Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know
what happened to Bear Stearns and Lehman Brothers, don't we??? I warned
all about Bear Stearns way before they collapsed (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman as well ("Is Lehman really a lemming in disguise?":
On February 20th, 2008) by taking a close,
unbiased look at their balance sheet. Both of these companies were
rated investment grade at the time, just like "you know who". Now, I
am not saying JPM is about to collapse, since it is one of the anointed
ones chosen by the government and guaranteed not to fail - unlike Bear
Stearns and Lehman Brothers, and it is (after all) investment grade
rated. Who would you put your faith in, the big ratings agencies or
your favorite blogger? Then again, if it acts like a duck, walks like a
duck, and quacks like a duck, is it a chicken??? I'll leave the rest up
for my readers to decide.

AnFree stuff: Independent Look into JP Morgan Plenty more of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposur... Friday, 18 September 2009

The Real Stuff -

The JP Morgan Full Forensic Report is ready for download!
Must Read: An Independent Look into JP Morgan. This contains the "public preview" document (JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb), which is fre...Thursday, 24 September 2009

A Fundamantal Investor's Peek into the Alt-A Market:
This is one of the reasons why JPM needs to be a hedge fund to make money. Other banks to look at with suspect portfolios:
JP Morgan Chase
(Free Preview) JPM Public Excerpt of Forensic Analysis Subscription 2009-09-22 14:33:53 1.51 Mb
JPM ... Thursday, 14 January 2010
Quarterly Reviews:

Blog Stuff:
Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
JPM
derivative and off balance sheet lending commitments and guarantees
exposure Warning!!! This is the type of investigative, unbiased and
independent analysis that you will never find in the main stream media or the sell side... Thursday, 03 September 2009


...and scroll down to the second half.
JP Morgan securitization activities and QSPE exposure
JPMorgan securitizes and sells a variety of loans, including residential mortgage, credit card, a...
Tuesday, 13 October 2009

The Next Step in the Bank Implosion Cycle???

... Must Read: An Independent Look into JP Morgan. This contains the "public preview" document (JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb), which is fre...
Tuesday, 27 October 2009

Bank of America (this may be a literal moniker sometime soon if the system relapses)

Trading revenues contribution to total net revenues ranged within
3%-25% of the total revenues over the last 8 quarters except in 4Q08.
Although the trading revenues contribution to the total revenues has
been declining over the last few quarters, the impact on earnings has
been magnified because of reduced earnings (owing to high provisions
for loan losses and reduced income from other sources). While the
trading revenues amounted to 20-30% of the pretax income in 1Q08 and
2Q08, it has amounted to more than 100% of the total pretax income over
the last 6 quarters.

If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank

If the Bulge Bracket Sector starts to move down, "Look Out Below!"

I seem to have been one of the very few was bearish on Goldman and
Morgan Stanley in early 2008 (see links at the bottom of this post as
well as Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now! and It appears as if the patina on Goldman's Stock is fading... and The Riskiest Bank on the Street).

As illustrated to subscribers in the Morgan Stanley Forensic Outlook: Q1 2010 Morgan Stanley Forensic Outlook: Q1 2010 2010-01-05 04:20:36 504.53 Kb,
the bulk of the valuation increase for the big investment banks stems
from the peer group bear rally premium of the last 9 months. If, or
more accurately, when that premium dissipates, the whole sector will
drop in fundamental value. I don't believe the banks are worth what
they are trading at now, but comps are comps. Let's take a look at the
comp trend.

ibank_comps_trend.png

As you can see, thanks to the bear market rally, the enire I bank peer
group has enjoyed a big bump in valuation - one that I believe will
prove to be transient, to say the least.

bank_comps_bvps.png

If I am right, then these I bank stocks will collapse for the value
drivers just aren't there to drive the valuation. Nearly all business
units are trending down save a bump or two, FICC and trading arbitrage
can't last forever (some analysts say the party is over already), and
eventually the credit losses and asset devaluations on the balance
sheet will come a knockin', despite the "get 4 quarters' worth of free
mark to market lies" from the powers that be. Residential real estate
is resuming its downtrend (see If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...) as credit loses resume their uptrend (seeThe Truth! The Truth? Banker's Can't Handle the Truth!!! andResidential Lending Credit Losses Worsen as Unstainable Government Support Proves... Unsustainable).

Last modified on Thursday, 21 January 2010 23:00

8 comments

  • Comment Link fixitfrank Sunday, 31 January 2010 21:13 posted by fixitfrank

    Personally I think that we are having another bubble. Reality has taken a holiday. No one wants to admit just how bad things are. Money is flowing into what is going up not what makes sense. In reference to the article. Appearance and Posturing Who cares what the “Right side of the debate” is? The current crises is an out growth of the end of the world as we know it coming and everyone missing the point. (Oil crises 1973) If you want to visualize the effects of cutting oil production look at the Keynesian Cross. Cutting oil production pushes the reference line from 45 up and to the left. The economy is forced to contract. The prices of everything go up and we have stagflation. Understanding this and what to do about it was not apparently obvious to the people back then. Also the tech wasn't there to do a real switch from oil to something else (It is now). So the policies that were adopted didn't do squat for what was wrong.

    Reagan did something to address what was wrong he started a long term credit bubble that popped in 2006. (We'd had little pops before but always they were just fixed by restarting the bubble again.) So Obama's wanting to be on the right side of the debate is really short sided and superficial. And anything that he will do is wrong because he doesn't understand the problem and how it works. (This is rich coming from me as I'm a no body with no education.) The Voodoo economics tax cuts are what drove the cycle of bubbles that we've been having each one bigger than the last. Rich people don't spend there money they invest it. Poor people spend there money. Money flows from poor people to rich people, what happens on the way is GDP. If you want GDP to go up you've got'a give poor people more money. There are three ways to do this.
    One write them a check. This is the worst way to do it but in the short term very effective.
    Two give them a loan. They are poor so where are they going to get the money to repay the loan? Black woman straight off the boat from Africa got a $400K house with $100K worth of equity (125% loan) Just to fill out the quota for a % of minority loans written. Her fault?
    Three pay them for doing something useful. This is the best way and we have gotten away from doing this. It is far cheaper to pay someone $500/yr than $50k a year to do the same job. But in order to have GDP go up you have to loan the poor the difference. And how are they going to get the money to pay back the loan?

    I'm sorry for venting.

    Report
  • Comment Link Reggie Middleton Wednesday, 27 January 2010 10:43 posted by Reggie Middleton

    I don't believe JPM and GS are as protected as many think, but I do agree once the peer group breaks it will be a free for all.

    Report
  • Comment Link monday1929 Wednesday, 27 January 2010 09:00 posted by monday1929

    Reggie, I still think the way to go is to short all the unprotected stocks, not the fascistly protected, like JPM and GS. The disintegrating banking sector should be enough to take down all around them, even as the banks are propped up to look alive.

    Report
  • Comment Link NDbadger Monday, 25 January 2010 10:58 posted by NDbadger

    thanks for the comment. I agree. The more time I spent on it, the more I decided that this thing could still have some nasty surprises.

    Report
  • Comment Link shaunsnoll Monday, 25 January 2010 10:31 posted by shaunsnoll

    I wouldn't go long STI with somebody else's money. You can do whatever you think is profitable though.

    Report
  • Comment Link NDbadger Saturday, 23 January 2010 21:30 posted by NDbadger

    sounded much better than expected today. should we be going long?

    Report
  • Comment Link shaunsnoll Friday, 22 January 2010 10:26 posted by shaunsnoll

    trades at 2x bv, which is RIDICULOUS! most over valued stock ever?

    Report
  • Comment Link Reggie Middleton Friday, 22 January 2010 09:05 posted by Reggie Middleton

    Now this is interesting: [url]http://online.wsj.com/article/SB10001424052748704423204575017543560874692.html?mod=WSJ-hps-LEADNewsCollection[/url]

    [quote]Administration officials say the White House pivot came in October.

    Mr. Kanjorski was pushing an amendment to the House's financial-regulation bill that would clamp down on big banks. With the amendment gaining momentum, Mr. Geithner dispatched Michael Barr, an assistant secretary at the Treasury and confidant of Mr. Kanjorski, to help shape it. That month, Mr. Geithner testified before the Financial Services Committee that he backed the amendment's scope.

    Treasury officials feared headlines would blare that Mr. Geithner had backed breaking up the banks. But the president continued to endure criticism, in particular from his left, that he was coddling Wall Street. In talks with his financial team, Mr. Obama started letting his frustration show, asking why he was on the wrong side of the "too big to fail" debate.

    White House officials said the president called a meeting of his entire economic team to press for additional proposals. But its members were at odds: Messrs. Geithner and Summers argued that proprietary trading was a problem but not a central cause of the financial crisis, according to an official familiar with the talks. Mr. Volcker saw proprietary trading as a fundamental risk.

    In December, Mr. Obama decided he wanted to be on what he saw as "the right side" of the debate, according to an administration official. He asked his team to bring him specific proposals to limit the size of financial institutions and halt proprietary trading. Spurring their thinking: Goldman Sachs had sought the protection of the Federal Reserve during the financial crisis, and was now making big profits from its own trading, in part because it benefited from the explicit backing of the U.S.

    It was a big step for the administration. White House economists argued that transparency and disclosure alone could shape Wall Street behavior.

    But Mr. Obama was now on Mr. Volcker's side. His rhetoric began shifting against Wall Street in December, when he blasted "fat cat" bankers during a television interview. Last month, the president accompanied a proposed fee on big banks to recoup Wall Street bailout funds with a fresh rhetorical blast.

    A senior official said the president asked Mr. Geithner in mid-December to take another look at the former Fed chairman's ideas. On Christmas Eve, Messrs. Geithner and Volcker had an extended lunch, which persuaded the Treasury secretary to get behind Mr. Volcker.

    Then came Massachusetts, where Republican Scott Brown was on his way to taking the late Sen. Ted Kennedy's Senate seat—and with it, the president's lock on a Senate super-majority.

    As the Senate campaign raged last weekend, the economic and political team at the White House held a conference call to go over the new banking proposal and the plan to roll it out. One aide questioned whether the timing was right. Win or lose in Massachusetts, unveiling tough new bank regulations would look political.

    Other aides brushed by that concern. In fact, they argued, whatever Mr. Obama does after Massachusetts would be seen as political. And on the "too big to fail" front, they said, the administration needs to own the issue.[/quote]

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