This earnings season has shown this quarter's research to be quite accurate. I am still bearish on the market, and the weak earnings performance coupled with the still elevated equity prices and valuations make me even more suspect. The last time this happened to this extent (well, not quite to this extent) was right before the dot.com crash. As a quick recap for the past week.

Wells Fargo, right on point, nearly to the "T":

Caterpillar, very, very close to perfection. I also believe we have caught CAT in a shenanigan or two, which I will post on later:

GS, results are on point, valuation is through the sky as I have anticipated.

And just this morning, Starwoods, whose actionable intelligence item I posted very recently: Starwood Hotels (HOT) Intelligence Note_072009 -  Starwood Hotels (HOT) Intelligence Note_072009 - 2009-07-22 03:45:18 927.84 Kb. From WSJ.com:

Wednesday, 22 July 2009 20:00

DCF analysis explanation for K12 analysis

A few have wondered about the utility of using DCF in our K12 analysis posted the other day (see The Long-biased Forensic Analysis is Now Available to the Public). In particular, a question was brought to me as follows: "Isn't WACC at 7.4% really low for doing the DCF? You can't really use CAPM, because the beta would be skewed somewhat because the company just isn't that old. Using the build up method, I'm coming up with a WACC in the 11% plus range. Which would then drive down the per share price."

I would like to take the time to explain our conservative methodology.

This earnings season has shown this quarter's research to be quite accurate. I am still bearish on the market, and the weak earnings performance coupled with the still elevated equity prices and valuations make me even more suspect. The last time this happened to this extent (well, not quite to this extent) was right before the dot.com crash. As a quick recap for the past week.

Wells Fargo, right on point, nearly to the "T":

Caterpillar, very, very close to perfection. I also believe we have caught CAT in a shenanigan or two, which I will post on later:

GS, results are on point, valuation is through the sky as I have anticipated.

And just this morning, Starwoods, whose actionable intelligence item I posted very recently: Starwood Hotels (HOT) Intelligence Note_072009 -  Starwood Hotels (HOT) Intelligence Note_072009 - 2009-07-22 03:45:18 927.84 Kb. From WSJ.com:

 As is stated on my website, I am an investor that generates his own independent research. I usually use two teams of analysts to generate fundamental analysis reports and pursue macro research.  These teams consist of consultants, CFAs and forensic CPAs. They often compete head to head, and they are encouraged to come up with their own independent ideas, openly challenge my thesis and findings, and most importantly to challenge each other's work in combination with a direct challenge to my theses, viewpoints and opinions. This creates a competitive, yet open environment where Hubris simply cannot survive, and where you must out your money where your mouth is in terms of backing up your viewpoints with facts and analysis. This is not the type of environment or analysis you can get from a sell side bank or brokerage firm!

I have just uploaded several internal documents illustrating a bull/bear debate we had over DeVry Inc. If you recall, I released a comparison of various companies in this sector along with a brief summary of DeVry. I never released the analytical and valuation work on DeVry, so the valuation portion of this is new to subscribers. All paying subscribers can download the debate here: The Battle of the BoomBustBlog Analysts - DeVry The Battle of the BoomBustBlog Analysts - DeVry 2009-06-09 16:51:13 771.03 Kb

 As is stated on my website, I am an investor that generates his own independent research. I usually use two teams of analysts to generate fundamental analysis reports and pursue macro research.  These teams consist of consultants, CFAs and forensic CPAs. They often compete head to head, and they are encouraged to come up with their own independent ideas, openly challenge my thesis and findings, and most importantly to challenge each other's work in combination with a direct challenge to my theses, viewpoints and opinions. This creates a competitive, yet open environment where Hubris simply cannot survive, and where you must out your money where your mouth is in terms of backing up your viewpoints with facts and analysis. This is not the type of environment or analysis you can get from a sell side bank or brokerage firm!

I have just uploaded several internal documents illustrating a bull/bear debate we had over DeVry Inc. If you recall, I released a comparison of various companies in this sector along with a brief summary of DeVry. I never released the analytical and valuation work on DeVry, so the valuation portion of this is new to subscribers. All paying subscribers can download the debate here: The Battle of the BoomBustBlog Analysts - DeVry The Battle of the BoomBustBlog Analysts - DeVry 2009-06-09 16:51:13 771.03 Kb

From the Wall Street Journal:

Banks are having an easy time dialing for dollars.

J.P. Morgan Chase & Co., Morgan Stanley, American Express Co. and regional bank KeyCorp said Tuesday they sold a combined $8.7 billion in common stock. That pushed the total value of shares sold by the 19 financial firms that were stress-tested by the government to at least $65 billion since the results were announced May 7.

... Money is pouring in so fast that surprised bankers can hardly believe it, especially since most investors didn't want to go near financial stocks just three months ago, even though they were nearly 40% cheaper. [Possibly even more so sinceI believe the real estate malaise may actually pick up in intensity. Sales will probably occur at a faster pace, but at a lower and lower price point, causing the derivative and debt products associated with those products to drop even further in value. This includes commercial, residential, office and retail properties.]

"It's easy to raise capital now," one executive at a bank that recently raised capital through a public stock offering said Tuesday. Investors are "happy to gobble it up." [A fool and their money...]

Some investors who participated in recent bank-stock sales said the logic is simple: The likelihood that the economy will veer off a cliff is dwindling, and many banks look cheap on a price-to-earnings basis. [This is probably because it is now acceptable to make up your own asset values and write-downs in reference to legacy assets/toxic waste/horrible investment decisions, thuse the earnings portion is highly subjective. I never thought that I would be saying earnings are subjective. The world that we now live in...]

"The Armageddon trade is off the table," said David Tepper, president of Appaloosa Management LP, a Short Hills, N.J., hedge-fund firm that owns shares of Bank of America Corp., SunTrust Banks Inc. and Fifth Third Bancorp. Based on likely earnings in 2011 and 2012, the banking industry "may be the cheapest sector in the market," he added. [Love to see his returns for the last two to three years...]

Appaloosa participated in a common-stock offering and preferred-share swap by Bank of America, according to a person familiar with the situation. The Charlotte, N.C., bank said Tuesday it has raised nearly $33 billion and "now believes it will comfortably exceed" the $33.9 billion it was told to raise by the Federal Reserve.

Mutual funds and other large institutional investors have been aggressive buyers in some of the stock offerings, according to people involved in the deals. Because lots of those investors had previously shunned bank stocks, they lagged behind the overall market when bank stocks rallied starting in March. This month's frenzy of deals was a chance to increase exposure to the industry at a slight discount to the market price.  [Fools and their money...]

Analysts at Moody's Investors Service warned Tuesday that U.S. banks with debt that is rated by the Moody's Corp. unit face about $470 billion in losses through next year. If the economy continues to suffer, those losses could swell to $640 billion, and Moody's would likely accelerate its bank-debt downgrades.

"In such a scenario, absent continuation, and likely deepening, of U.S. government capital and liquidity support programs for the banking industry, numerous banks would be insolvent," the Moody's analysts wrote. [We all know where you have heard that before. Review the data in my recent posts if you doubt this:

  1. BoomBustBlog.com's Realistic Recast of SCAP BoomBustBlog.com's Realistic Recast of SCAP 2009-05-12 14:52:09
  2. My comments on the NYC condo market which seems to have wrinkled a few overly-sensitive feathers. Be sure to read through the comment section.
  3. Then be sure to read The Truth About the Banks Has Been Released: the open source spreadhseet edition and The Re-Release of the Open Source Mortgage Default Model. 
  4. After that, if you're bored, there is always the T2 Partners analysis or even the NY Times' perspective.]

One executive at a New York bank said investors seem to be embracing any tidbit of good news, while ignoring red flags about banks' ill health. ["Red flags"! I see it as blatant "Watch the f#@$k out!" signs!] He compared the industry with an intensive-care patient who has stabilized but remains critical. "A bucket of cold water will be thrown in people's faces," the executive said.

By one measurement, investors are more enthusiastic about the industry's future than bank executives are. At the 15 stress-tested banks that have raised capital by selling stock to the public, no senior executives have recently reported buying shares themselves, according to Jonathan Moreland, director of research at InsiderInsights.com. [Of course not, they are tired of losing money!] The New York firm tracks stock-buying and selling patterns among corporate executives.

From the Wall Street Journal:

Banks are having an easy time dialing for dollars.

J.P. Morgan Chase & Co., Morgan Stanley, American Express Co. and regional bank KeyCorp said Tuesday they sold a combined $8.7 billion in common stock. That pushed the total value of shares sold by the 19 financial firms that were stress-tested by the government to at least $65 billion since the results were announced May 7.

... Money is pouring in so fast that surprised bankers can hardly believe it, especially since most investors didn't want to go near financial stocks just three months ago, even though they were nearly 40% cheaper. [Possibly even more so sinceI believe the real estate malaise may actually pick up in intensity. Sales will probably occur at a faster pace, but at a lower and lower price point, causing the derivative and debt products associated with those products to drop even further in value. This includes commercial, residential, office and retail properties.]

"It's easy to raise capital now," one executive at a bank that recently raised capital through a public stock offering said Tuesday. Investors are "happy to gobble it up." [A fool and their money...]

Some investors who participated in recent bank-stock sales said the logic is simple: The likelihood that the economy will veer off a cliff is dwindling, and many banks look cheap on a price-to-earnings basis. [This is probably because it is now acceptable to make up your own asset values and write-downs in reference to legacy assets/toxic waste/horrible investment decisions, thuse the earnings portion is highly subjective. I never thought that I would be saying earnings are subjective. The world that we now live in...]

"The Armageddon trade is off the table," said David Tepper, president of Appaloosa Management LP, a Short Hills, N.J., hedge-fund firm that owns shares of Bank of America Corp., SunTrust Banks Inc. and Fifth Third Bancorp. Based on likely earnings in 2011 and 2012, the banking industry "may be the cheapest sector in the market," he added. [Love to see his returns for the last two to three years...]

Appaloosa participated in a common-stock offering and preferred-share swap by Bank of America, according to a person familiar with the situation. The Charlotte, N.C., bank said Tuesday it has raised nearly $33 billion and "now believes it will comfortably exceed" the $33.9 billion it was told to raise by the Federal Reserve.

Mutual funds and other large institutional investors have been aggressive buyers in some of the stock offerings, according to people involved in the deals. Because lots of those investors had previously shunned bank stocks, they lagged behind the overall market when bank stocks rallied starting in March. This month's frenzy of deals was a chance to increase exposure to the industry at a slight discount to the market price.  [Fools and their money...]

Analysts at Moody's Investors Service warned Tuesday that U.S. banks with debt that is rated by the Moody's Corp. unit face about $470 billion in losses through next year. If the economy continues to suffer, those losses could swell to $640 billion, and Moody's would likely accelerate its bank-debt downgrades.

"In such a scenario, absent continuation, and likely deepening, of U.S. government capital and liquidity support programs for the banking industry, numerous banks would be insolvent," the Moody's analysts wrote. [We all know where you have heard that before. Review the data in my recent posts if you doubt this:

  1. BoomBustBlog.com's Realistic Recast of SCAP BoomBustBlog.com's Realistic Recast of SCAP 2009-05-12 14:52:09
  2. My comments on the NYC condo market which seems to have wrinkled a few overly-sensitive feathers. Be sure to read through the comment section.
  3. Then be sure to read The Truth About the Banks Has Been Released: the open source spreadhseet edition and The Re-Release of the Open Source Mortgage Default Model. 
  4. After that, if you're bored, there is always the T2 Partners analysis or even the NY Times' perspective.]

One executive at a New York bank said investors seem to be embracing any tidbit of good news, while ignoring red flags about banks' ill health. ["Red flags"! I see it as blatant "Watch the f#@$k out!" signs!] He compared the industry with an intensive-care patient who has stabilized but remains critical. "A bucket of cold water will be thrown in people's faces," the executive said.

By one measurement, investors are more enthusiastic about the industry's future than bank executives are. At the 15 stress-tested banks that have raised capital by selling stock to the public, no senior executives have recently reported buying shares themselves, according to Jonathan Moreland, director of research at InsiderInsights.com. [Of course not, they are tired of losing money!] The New York firm tracks stock-buying and selling patterns among corporate executives.

About two and a half months ago I stated in the comments section that I was bracing for a violent market rally. Well, now I am preparing for a significant market dip as the technically driven, euphoria rally bumps into hard fundamentals and the macro reality. On that front, I am on the lookout for companies that have significantly deteriorated operating earnings and will have to rely on refinancing significant debt in the near term. I have created a shortlist of such companies, and am in the process of whittling it down. Here are the companies that made the initial shortlist from the initial scan of 892 candidates (sans my picks off of said shortlist) for subscribers only:

Non-financial scan for May 2009 Non-financial scan for May 2009 2009-05-28 01:36:30 435.37 Kb

About two and a half months ago I stated in the comments section that I was bracing for a violent market rally. Well, now I am preparing for a significant market dip as the technically driven, euphoria rally bumps into hard fundamentals and the macro reality. On that front, I am on the lookout for companies that have significantly deteriorated operating earnings and will have to rely on refinancing significant debt in the near term. I have created a shortlist of such companies, and am in the process of whittling it down. Here are the companies that made the initial shortlist from the initial scan of 892 candidates (sans my picks off of said shortlist) for subscribers only:

Non-financial scan for May 2009 Non-financial scan for May 2009 2009-05-28 01:36:30 435.37 Kb

reggie_middleton_flying_swords_to_behead_the_financial_villains.jpgBelieve it or not, the TRUTH can and will set you free - or get you locked up. I guess it all really depends on the perspective. You don't necessarily need swords and daggers to cut to the truth. I normarly use spreadsheets and forensic analysis, although every now and then a Katana or two doesn't hurt.  

Extensive Simulated Government Stress Tests Released!

I'm putting some more truth out today. Here is the first of a series of the government simulated stress tests that we have completed. This is normally high level subscriber-only material, but since these tests are so widely anticipated, I thought I would give the world a taste of what we do behind closed doors.

Be aware that I don't necessarily agree with the methodology and assumptions of the government's version of the stress test. For one, they don't risk weight earnings, only assets. Some of the investment banking operations take significant risks to generate earnings (see "Goldman Sachs Banking Secrets Mr. Geithner May Not Share With You! ), and these actions pose significant risk. In addition, I believe that the "stated" assumptions are much too lax to be considered a rigorous stress test, eg. unemployment is already higher than the baseline assumed unemployment. I do not know if the government modified its assumptions in the actual implementation of its tests. I have rectified the problem by creating a scenario analysis that covers multiple assumptions, thus the readers can decide for themselves which set of assumptions to use.

I stress, evaluate and value companies differently, thus my internal forensic analysis may very well bear different results than these government simulations. That being said, these are simulations and not necessarily an attempt at getting to the truth, the whole truth and nothing but the truth - just the government's version of the truth. Do you remember what Jack Nicholson told Tom Cruise when he asked for the truth in "A Few Good Men"? He said, "The TRUTH! The TRUTH! You can't handle the TRUTH!!!!". Well, in my opinion ladies and gentlemen, the TRUTH is that quite a few of the banks that are the subjects of my analysis are insolvent. That's just my opinion, but I actually believe that my opinion is money good.

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