Wednesday, February 4, 2009

Financials: 3 Strikes and Your Out-Financials?/BAC/ Parallels to 1990-1991?/ CISCO/Regulations and Conservatism

I thought that I would take some license and substitute a picture of myself taken about 40 years or so ago. I wish that Rogaine and Propecia had been invented in 1969. I would pay 10 grand for those curls. Now, I would admit to be better looking now but the younger version had better hair without question.

1. Bank of America: Bank of America common closed today below $5 a share, a new 52 week low. BAC: Summary for BK OF AMERICA CP - Yahoo! Finance We are now near the lows reached in 1987 and 1990. It would take a brave person, perhaps not entirely foolish, to venture into financials now. While it is always possible that the market is overreacting on the downside, it would be a contrarian position to say the least to buy a Region's Financial at $2.8 or a Citigroup at $3.3. Personally, I do not believe the market is being too harsh and negative on the banks and is basically saying that many of them are just busted with little or no equity left. And is that surprising? All banks operate on leverage. It does not take a large percentage drop in the value of the bank's assets to destroy its equity. When the investment banks were allowed to increase leverage to greater than 12 to 1 as a result of the SEC rule change, many went to over 30 to 1, where a mere 3% elimination of asset values would wipe out all of the equity supporting that mountain of debt. It is easy to lose confidence in the ability of any leveraged institution to pay back debt when you know that their assets have been smashed and run over by a bulldozer. Let me know when a bank can float a junior debt in the market, offering it at a rate that the bank can afford to pay, where the debt is not supported by a government guarantee. The rate on an existing debt (trust) preferred issue of Bank of America is yielding close to 15%. BACPRB Stock Quote - Bac Cap Tr X Stock Quote - BACPRB Quote - BACPRB Stock Price The yield on its floating rate equity preferred is over 20% when the price fell below $5 today with a $25 par value and a 4% guaranteed yield on this floater. BACPRE Stock Quote - Bank Of America Corporation Stock Quote - BACPRE Quote - BACPRE Stock Price I own 50 shares of that one and I am not eager to round that up to 100. It is a non-cumulative equity preferred issue. Basically, the only thing standing in the way of the elimination of that equity preferred dividend is the 1 cent a share being paid next quarter to the common shareholders. How am I going to spend all of that I wonder? But the market is sending us a message with this price action, and it would be best not to ignore it. Investors are also making a distinction when pricing trust and equity preferred issues from the same bank, more so now than in the recent past. I am not so sure that it will make any difference whether you hold one or the other in the event of a FDIC seizure, since I believe both would most likely end up being worthless pieces of paper. The debt preferred is at least cumulative which might make a difference long term provided there is no FDIC seizure. The equity preferred dividends from BAC are not cumulative to the best of my knowledge.

I mentioned earlier that my worst mistake last year was holding onto my BAC shares throughout 2008 particularly when I was super negative on financial stocks . I have given up on ever recovering the unrealized loss in that position.

2. Near Death Experience for Financials in 1990-1991: So, if anyone wants to be brave and buy one of these financials, it is conceivable that they would be rewarded handsomely in the distant future, as in several years from now, and possibly they will have a good laugh at my reluctance to join them in their black hole foray. I do remember those who braved traveling into the abyss in 1990-1991 by buying financials were rewarded for their courage or foolishness, depending on your perspective, but maybe this time it is different. Speaking for myself, I do not see so well in darkness, submerged ten feet under ground in a stinking tar pit. I just view it as one those situations where I say three strikes and your out, and the financials have taken that third strike. Just try to keep it simple sometimes. Stocks & Politics: Banks: Forget About Long Term Holds/Simulus as Transformational/More Discussion on Black Swan and Taleb's book/Bankruptcy of Ideas in the GOP
If anything, bankers have collectively proven to me that they are incapable of managing their businesses over long periods of time. By incapable, I really mean that it is impossible for them to do it. Just during my adult life, not counting 1974 when I was focused on other matters besides the market (working on an advanced degree after receiving a B.A. in 1973), the first strike was in the early 1980s, the second was around the late 1980s and the early 1990s, and that final third and last strike is still a work in progress (four strikes if you count 1973 to 1974). The only conclusion that I can draw is that bankers will find a way to blow up their institutions and their shareholder's along with them.

Having said all of the above, I would have to add that I am likely to speculate occasionally on just about anything, including a category of investment which I hate. If I do go crazy with the banks, what I might do in a few weeks or months is buy 50 or 100 shares in about 5 of them using about $1,000, thinking one or two might fail on me, and the rest might make it and be a ten bagger or better.

I am mindful of the current price of AEB.

3. Cisco Earnings: Cisco earnings were good relatively speaking. I am just trying to make gradations in the degrees of bad news here, so what used to be just bad news is now the new good news relatively speaking. The forecast for next quarter sales being down 15 to 20% is not good, even speaking relatively. Tech Trader Daily Saying that orders declining dramatically in January is the new bad news.Yahoo! Finance Excluding items, which is the custom which came into vogue during the internet bubble, the company earned 32 cents in the last quarter versus 33 cents a year ago . Cisco Reports Second Quarter Earnings: Financial News - Yahoo! Finance Yahoo! Finance Tech Trader Daily - Barron’s Online :Sales fell 7.5%. I take a lot of comfort just looking at the cash on the balance sheet, 29.5 billion as of 12/31/08. The company also repurchased 37 million shares at an average cost of $16.4. At the current valuations of the Tech Titans, I have a more favorable opinion of them than Cramer who recently compared them to banks and retailers. Still, it is not easy to muster much in the way of animal spirits on them so I will just continue my nibbles here and there, mostly there.

4. Prudential Earnings: Prudential had some bad news, reporting an operating loss of $2.04. Prudential Financial, Inc. Announces 2008 Results: Financial News - Yahoo! Finance MarketWatch
The company did reaffirm guidance which is relatively good. That forecast has Pru earning in the range of $5.25 to $5.65 based on after-tax adjusted operating income of its financial services business, which is a mouthful. I will look at the result more carefully later. My position is 250 shares of a senior bond in TC form, JZH, and about an equal amount in a short term senior bond. I have no plans to buy the common or to change my bond positions.

I read an article that said the Madoff trustee has recovered only 935 million in assets. I was curious whether those funds were all from his asset management business that was not in segregated accounts at the brokerage company, or was some part of it from segregated accounts held by the brokerage unrelated to Bernie's asset management business, or was part of that sum asset management assets that were held in segregated accounts at the brokerage. It is unclear to me from reading the story. Maybe some enterprising reporter could find out. I believe there may be different results depending on the answers to those questions. Whatever, the losses will be staggering.

Markopolos is going to tell SEC about his evidence of another billion dollar Ponzi scheme.

5. Regulations and Conservatism: The reason that the Republican party prefers no or minimal regulations has no relationship with conservative ideology. It only has to do with what the business interests want, and the business interests contribute most of the money that keeps the GOP in the power game. What the businesses want is to be free from as many regulations as possible, to do whatever they please which has nothing whatsoever to do with conservatism but everything to do with increasing their profits. When you drill down to the nitty-gritty, each regulation has to be addressed on how well it achieves its objectives under the state's police power to protect the public's health, welfare and safety and at what cost. Some would be found lacking while other would appear to be good on their face but not in their implementation. Some may have at best a tangential relationship to health or safety and cost a great deal of money to implement or virtually nothing other than an inconvenient hassle. A regulation is neutral in the distinction between conservatism and liberalism. It is similar to a decision to invade IRAQ which is neither a conservative or a liberal position. Boatloads of High Yield/HIgh Risk Opportunities/VIX ARTICLE BARRONS/ Going to War Decisions: Conservative or Liberal vs. Competent or Incompetent?
It is more a question of the justification for the regulation, whether it is reasonably related to achieving the stated objective of protecting the health, safety or welfare of the public, and whether the cost of compliance justifies the objective. When you hear the debate couched in terms of liberal and conservative, then it is time to be skeptical about the motives of the person who frames the issues in those categories. There most probably is a motive lurking somewhere underlying the labeling process to increase profit at the expense of public health, safety or welfare. Generally specific regulations are not mentioned by those who want the public to think in terms of simple categories, though the advocate for abolition has specific regulations clearly in mind.

Wall Street and Hank Paulson lobbied for a change in the SEC rule that limited the leverage of investment banks to 12 to 1. Was that a conservative or a liberal rule? Or was it just a sensible regulation?

Freedom from regulation is no more consistent with conservatism than freedom from responsibility. Responsible regulations are needed to protect individuals from those who would otherwise cause harm and that is consistent with conservatism. Admittedly, nothing of what I am saying in many of these posts is consistent with Republican orthodoxy. But that just proves my point, most Republicans are not conservatives and have never been conservatives. A True Conservative recognizes that many will use their freedoms to cause harm and the public deserves protection from those individuals. Conservatives do not ignore the lessons of history with a constant hourly stream of details reminding those paying attention that not all men are good and have the best of intentions (also discussed in this post: Risk Analysis & the Tyranny of Others: Freedom to Engage in Risk Analysis/Is the Failure to Learn from History Consistent with Conservatism? Sold FII)

After looking at Obama pay plan for banks seeking new TARP money, I have decided that it is more show than substance. The restrictions apply only for firms seeking "exceptional" aid from the government in the future and then only applies to senior executives. WSJ.comThis is just PR.

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