What Do The Stress Test Results Mean?

By now you know that the stress test results came out yesterday and that 15 of the 19 largest banks passed. The failed “banks” were Citigroup (C), Sun Trust (STI), Met Life (MET) and Ally Financial. I put banks in quotations because obviously Met Life is more of an insurance company. You can read this article for more details. Taking the results on face value, banks in general could starting to recover. At some point the businesses will start to get healthy and maybe this has already started. Anyone believing this to be the case might have received a green light of sorts yesterday. I have two reasons why I will still say Ni to domestic banks. The first one has to do with the book value argument that some, like Barron’s, have been making repeatedly since at least 2009. The counter argument to being cheap on a book value basis is that book value might be incorrect because there are very likely still more real estate write downs to come–I believe there will be more write downs. Anyone believing there will be no more write downs or that any future write downs will be negligible may use this argument as a reason to buy. Another reason to avoid them in my opinion is the example set by tech stocks in the aftermath of their implosion. Actually I would say ongoing aftermath given how many of them are still way below where they were 12 years ago. In many instances the earnings have gone up plenty since 2000 (obviously part of the problem) yet there are plenty of stock...

What Do The Stress Test Results Mean?

By now you know that the stress test results came out yesterday and that 15 of the 19 largest banks passed. The failed “banks” were Citigroup (C), Sun Trust (STI), Met Life (MET) and Ally Financial. I put banks in quotations because obviously Met Life is more of an insurance company. You can read this article for more details. Taking the results on face value, banks in general could starting to recover. At some point the businesses will start to get healthy and maybe this has already started. Anyone believing this to be the case might have received a green light of sorts yesterday. I have two reasons why I will still say Ni to domestic banks. The first one has to do with the book value argument that some, like Barron’s, have been making repeatedly since at least 2009. The counter argument to being cheap on a book value basis is that book value might be incorrect because there are very likely still more real estate write downs to come–I believe there will be more write downs. Anyone believing there will be no more write downs or that any future write downs will be negligible may use this argument as a reason to buy. Another reason to avoid them in my opinion is the example set by tech stocks in the aftermath of their implosion. Actually I would say ongoing aftermath given how many of them are still way below where they were 12 years ago. In many instances the earnings have gone up plenty since 2000 (obviously part of the problem) yet there are plenty of stock...

Market to BAC and T; Drop Dead

Or should it be the other way around? Bank of America (BAC) closed below $5 yesterday during the regular session although traded above the figure after hours. The whole sector was down a lot yesterday; I saw articles blaming Europe and others blaming the new capital requirements. I usually get pushback on this but I will say again that this is not over. The financials will continue to have more shoes drop. The book value arguments made by Barron’s and others over the last few years have not mattered and will not matter for a while longer. I don’t know how long this will last I just know we are not done yet. By financials I mean the big banks in the US that dominate the Financial Sector SPDR (XLF) and the big European banks although I would note that that our only US financial exposure is an index provider. Not related but I would also continue to avoid Chinese banks which means avoiding most China ETFs. The other news of the day was AT&T dropping its bid for DT and so presumably having to fork over the $4 billion break up fee. The worst reaction I can recall to an M&A going bad was when the LBO for UAL unraveled in 1989. It caused a 6.1% drop in the S&P 500 on October 13 of that year. I don’t know whether this news could be that significant (probably not) but it is worth knowing a little market history about this and that deals collapsing can adversely affect the entire market. The idea that the market volatility would decrease...

Market to BAC and T; Drop Dead

Or should it be the other way around? Bank of America (BAC) closed below $5 yesterday during the regular session although traded above the figure after hours. The whole sector was down a lot yesterday; I saw articles blaming Europe and others blaming the new capital requirements. I usually get pushback on this but I will say again that this is not over. The financials will continue to have more shoes drop. The book value arguments made by Barron’s and others over the last few years have not mattered and will not matter for a while longer. I don’t know how long this will last I just know we are not done yet. By financials I mean the big banks in the US that dominate the Financial Sector SPDR (XLF) and the big European banks although I would note that that our only US financial exposure is an index provider. Not related but I would also continue to avoid Chinese banks which means avoiding most China ETFs. The other news of the day was AT&T dropping its bid for DT and so presumably having to fork over the $4 billion break up fee. The worst reaction I can recall to an M&A going bad was when the LBO for UAL unraveled in 1989. It caused a 6.1% drop in the S&P 500 on October 13 of that year. I don’t know whether this news could be that significant (probably not) but it is worth knowing a little market history about this and that deals collapsing can adversely affect the entire market. The idea that the market volatility would decrease...

Europe Is Still Burning

By now you know that S&P put 15 Eurozone countries on credit watch with negative implications. This was of course not a black swan but simply the latest in a long unfolding saga. The point of today’s brief post (I have an incredibly hectic week) is to isolate the ongoing thesis that the worst financial crisis in 80 years for both the US and Europe is going to take a long time to fully unwind (unravel?). While it may no longer correct to say it is early days in this, using the baseball analogy I would say it is the middle innings at most and to take the analogy a little further it is the middle innings of a Red Sox-Yankees game which tend to last 4.5 hours as opposed to the normal three hours. I have had and continue to have serious doubts about valuation arguments for the most affected market segments. As I have been saying all along there will be trades to be had for those who are nimble–XLF is up 11.7% in the last five days–but a nice lift does not mean things are fixed fundamentally. At some point the valuation argument will turn out to be correct but for now the news continues to be bad without even a vague notion of what a resolution might be. Yes buying when there is fear and uncertainty is more than valid, there has been fear and uncertainty surrounding this for several years and “opportunistic” purchases has amounted to catching falling knives and it has worked out badly. Whatever positive argument anyone is making today, the same...

Europe Is Still Burning

By now you know that S&P put 15 Eurozone countries on credit watch with negative implications. This was of course not a black swan but simply the latest in a long unfolding saga. The point of today’s brief post (I have an incredibly hectic week) is to isolate the ongoing thesis that the worst financial crisis in 80 years for both the US and Europe is going to take a long time to fully unwind (unravel?). While it may no longer correct to say it is early days in this, using the baseball analogy I would say it is the middle innings at most and to take the analogy a little further it is the middle innings of a Red Sox-Yankees game which tend to last 4.5 hours as opposed to the normal three hours. I have had and continue to have serious doubts about valuation arguments for the most affected market segments. As I have been saying all along there will be trades to be had for those who are nimble–XLF is up 11.7% in the last five days–but a nice lift does not mean things are fixed fundamentally. At some point the valuation argument will turn out to be correct but for now the news continues to be bad without even a vague notion of what a resolution might be. Yes buying when there is fear and uncertainty is more than valid, there has been fear and uncertainty surrounding this for several years and “opportunistic” purchases has amounted to catching falling knives and it has worked out badly. Whatever positive argument anyone is making today, the same...