Thursday, 18 February 2010 23:00

BoomBust Bank Research Should Really Start to Look Interesting

Now that the Fed has sent a clear signal that they are withdrawing some of the hyper-stimulus measures, combined with the fact that the monopolistic trading profits of the big banks are returning to mean, the trash on bank balance sheets should start coming to fore. Higher rates will compress net interest margins, and if you have been following my research the NIM of many banks were actually rather anemic despite zero interest rate policy. Now that banks are going to have to actually earn money by lending in lieu of a free lunch from the government, you should start seeing some very big hits to earnings - accounting and otherwise.

I will be revisiting this in detail after I finish the European
Crisis Series. Practically all of the big and regional banks have
purposefully contracted their loan portfolios and lending activities to
curtail risk. This means that they will be making less interest income.
Normalized (as in less) trading income, less interest income, the Fed
looking (we will see if this actually happens) to stop putting an
artificial bid under the MBS market, housing still in a downturn as
foreclosures/distress sales are still ramping, much tighter regulation, a
bunch of trash on the balance sheets (remember, the cause of this
malaise has never changed) and an increase in price of several hundred
percent for many banks is an elixir for a short seller's ambrosia.

It
may have taken 10 months or so, but believe it or not it appears as if
fundamentals may be returning to the investment game. If so, be aware
that the banks are quite overvalued. Keep in mind that the comp
valuation of many banks have increased because the peer group has risen
so much and so broadly. That doesn't negate the fact that the underlying
balance sheet issues are still there and regulatory and macro headwinds
are quite stiff. I am looking for the peer group valuations to return
to mean, which means a sharp dip in many of the banks that I have
covered. I will attempt to review relevant scenarios in detail for
subscribers.

See...

File Icon JPM 4Q09 review

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Last modified on Thursday, 18 February 2010 23:00

5 comments

  • Comment Link Reggie Middleton Monday, 22 February 2010 12:08 posted by Reggie Middleton

    I'd like to make clear to all that these two commentators are the same person, just a tad bit cowardly at how he approaches things. I would also like to address the comments - hopefully for the last time. This is a fundamental analysis site, and I believe a damn good one at that. I stand behind the track record, which STILL bests all of the market averages for the period that the site has been running, by a wide margin at that.

    I had a bad 3 quarters in 2009, which caused the year to go negative. No excuses to be made, shit happens. The reason behind it is that the fundamentals say that the companies with bad balance sheets, murky macro environments and regulatory headwinds are not worth nearly what they were during the bubble. This is not a difficult concept and I still stand behind it. The rally of 2009 was (and still is, IMO) a bear market rally. I expected it, but severely underestimated its extent. That being said, a dollar going up is not worth more than a dollar going down.

    The research on this site enabled me to pull the following returns:
    2007 (annualized): 55%
    2008: ~450%
    2009: -39%

    [b]The S&P is still significantly below where it was in 2007, significantly.[/b] So are most asset managers as well. This whips the pants off of every market average and index that you can find. I am very, very down on myself for underperforming in 2009, but it was due in part to an illness in the family which I allowed to distract me ([i]definitely not an excuse so I don't want anyone to take it as one[/i], but it is a reason albeit not an excusable one) and the fact that I took too long to go market neutral, which allowed too large a draw down. That being said, no one wins them all and I (and anybody who followed me from the start and took profits often as I recommended) should be miles ahead of all of the averages.

    I never professed to, and probably never will, catch all market opportunities. What counts is that I catch enough of them and the best ones. The market is still nohwere near where it was before it dropped, and it appears that the cowardly commenter above appears to forget this.

    As for my being lucky with GGP, I doubt so considering the amount of research that went into it to support my highly contrarian position, but if it was luck then you can say it was luck with Bear Stearns as well, MBIA, AMBAC, Washington Mutual, nearly all 32 of the Doo Doo 32 banks, the muni bonds, Hartford, Countrywide, AGO... I can actually go on since I caught many of the big companies that were driven out of business. At some point, even the cowardly anon commenters should be willing to part with some credit.

    The comparison with Ackman makes no sense either. The man made a good trade, that he managed well. Kudos. Does this mean that you bash him because he didn't catch GGP going down? GGP is now exactly where my original analysis says it was worth. I think that is a hell of a lot of luck! I went short on GGP and did well. I didn't go long and Ackman did, and he did very well (thus far).

    The market moved aggressively against the fundamentals last year, and this is a fundamental site. One is to expect some divergence. I do not give investment advice or buy/sell/trade signals, so no one should expect me to write about chasing prices, momentum or fads. That is what Cramer is for. Fundamentals always rule at the end of the day. Momentum chasers looked like stars in the dot.com bubble as well despite the fact the math didn't work, and you know the end of that story. They looked shiny during the first big leg up in the Great Depression, and you see how that ended as well. My knitting is assets and liabilities and profits and losses. On that note, nearly all of my research has been on point or very close to being so, even during the bull rally. Saying the Euro research is alright fails to give due credit. I warned about Spain and BBVA exactly one year ago. Contrary to the commenter above, it is original (and the stuff coming out this week will probably only be able to be found here, at least in a publicly available fashion).

    I know see it was a mistake not to discourage the hot money, fad chasers for they are the ones with unrealistic expectations. Lesson learned.

    If anyone really wants to be critical, one should compare results from the conception of this blog with the results of everyone else that they look up to. I may not be perfect, but I damn sure deserve better than anonymous, cowardly attacks over the web by those who refuse to put their name out there.

    From this point on, the basher really should produce your real name and your longer term investment results for the sake of comparison. If you can't do that, then you should hurl less stones.

    'nuff said

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  • Comment Link capsula Monday, 22 February 2010 09:09 posted by capsula

    Remember, you used to brag about your performance with comparison to popular benchmark and indices. What happened to it now ? Why don't you keep your flawed and biased reserach to yourself.

    The start of a transition from 2009's liquidity-driven asset price recovery was investment theme for 2009, and you got completely blindfolded. Sovereign crisis reserach is all good but there is nothing original in it. The fact of the matter is that somehow you just got plain lucky with GGP, and would continue to crow forever. Latest Ackamn scuffle is testimony to it, despite the fact that you don't have any econmic interest anymore.

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  • Comment Link phirang Sunday, 21 February 2010 09:08 posted by phirang

    just wondering

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  • Comment Link shaunsnoll Friday, 19 February 2010 13:45 posted by shaunsnoll

    http://www.youtube.com/watch?v=99HNFCn5RP8&feature=player_embedded

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  • Comment Link Todd Enders Friday, 19 February 2010 10:29 posted by Todd Enders

    Yesterday's start of an explicit tightening move by the Fed (in reaction to 6% GDP growth and 3-5% inflation, no wonder) is finally going to start tagging the yield curve (my firm, [url]http://www.Hedgeye.com[/url], calls it [b]The Piggy Banker Spread[/b]) - which is close to as high as its ever been. You can bet that when America stops subsidizing the cost of capital for the banks and loaning them money for free which they loan back to us at interest... profits will get hit.

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