Bei Street.com lief heute in der Columnist Conversation eine interessante Diskussion, die um die Thesen von "Bär" Doug Kass kreist. Kass geht - fundamental argumentierend - davon aus, dass die Finanzaktien bald einen Boden bilden könnten (er selbst ist long Citigroup), hält aber zugleich Energie-/Gas-Aktien wie Exxon für stark überbewertet (er ist short XOM u. a.). Die Kombination aus long-Financials/short Energy gilt zurzeit als "Smart-Money"-Trade. Charttechniker wie Rev Shark wenden zu Recht ein, dass es weder bei den Financial-Charts ein Long-Signal noch bei den EnergieCharts ein Short-Signal gibt. Kass ist meist zu früh dran mit seinen fundamental begründeten Trades, dennoch sind seine Argumente lesenswert. Ich hab selbst in letzter Zeit Energieaktien geshortet (long DUG) und mit Finanzaktien als Longs zumindest geliebäugelt, wobei Lloyds of London (10 % Div-Rendite, 5-Jahres-Tief) mich besonders interessiert. Andererseits hab ich Wawidus Chart von der sagenhaften Short-Chance im "Footsie" (Eliott-C-Welle) noch gut in Erinnerung, weshalb es beim Liebäugeln blieb. Einige Leute in der Diskussion unten rechnen noch mit 30 % Abschlag bei Finanzaktien, ehe nachhaltige Kaufkurse da sind (vermutliche korrekt, diese Annahme).
From my perch, I believe that many disbelievers in financials and believers in energy are essentially playing the price momentum and are ignoring the value one on hand and the lack of value on the other hand.
I recognize that value is in the eyes of the beholder. That said, it is important to recognize that many macro indicators of the credit market are stabilizing (e.g., swap spreads not widening and bank preferred issues and bank debt not falling). As well, TED spreads and bids to cover at Fed auctions are not indicative of rising financial sector stress -- all the while the KBW Banking Index (BKX) moves ever lower.
Looking at financials for the intermediate term, I find extraordinary value.
Position: No positions in stocks mentioned
Heading Toward Oversold
Helene Meisler
6/12/08 9:02 AM EDT
Many readers have written to ask for some commentary given this week's market action. I know I usually say it in jest, but clearly the Meisler Vacation Indicator worked yet again!
I am not following the market as closely as I should, so this is just a quick observation. We are heading toward an oversold reading. By next Monday, at the latest, we will be maximum oversold on the Oscillator.
However, the 30-day moving average of the advance/decline line is not oversold (that is still a few weeks away). The number of stocks making new lows is rising, thus there is no positive divergence in place.
In terms of sentiment, the ISE has had two days of readings in the 70s. I don't know what that has portended in the past since I don't have all of my notes with me, but clearly it means folks are finally leaning bearish. The problem is that the CBOE put/call ratios are "just" elevated and not extreme. An equity reading at least in the 90s would show fear; the highest we've had so far was Wednesday's reading of 84%.
The bottom line: We're heading toward an oversold reading, so we should get some upside relief soon. But the intermediate-term indicators remain on the decline.
Position: None
Callan Demoted, Gregory Out at Lehman
George Moriarty
6/12/08 9:06 AM EDT
According to CNBC and Reuters, Erin Callan has been removed as CFO of Lehman. Interestingly, Lehman says she will return to the investment banking unit from whence she came.
COO Joseph Gregory is out.
In their stead, Bart McDade will become President and COO. Ian Lowitt has been named CFO.
Position: None
Lehman Nearing March 17 Spike Low
Brian Gilmartin
6/12/08 9:31 AM EDT
The March 17 spike low for Lehman is $20.25. The trading range for Lehman on that fateful Bear Stearns Monday was an open at $25.38, a low of $20.25 and a high of $34.91.
The trading action in financials the last few days feels like tech in June-July 2002. It does feel like a bottom is trying to be put in for this group, as the market separates the winners from the losers.
We are long a small position in LEH stock which we bought Tuesday.
A close below $20 on heavy volume today, and we'd exit the name.
Position: Long Lehman Brothers
Added to Energy Short Book
Doug Kass
6/12/08 9:36 AM EDT
Yesterday, I added to my energy short book by shorting Arch Coal (ACI), Peabody Energy (BTU) and Foundation Coal (FCL).
Position: Short ACI, BTU and FCL
Economy, Financials
Robert Marcin
6/12/08 9:45 AM EDT
Claims number rose a little more than expected. Economy still teetering. Retail sales boosted by spiking inflation. Don't confuse rising prices with healthy economy. Things sloppy but still not imploding. It feels however, as if there is another leg down in economy as consumers retrench discretionary spending.
I am using the rallies in financials to sell. Meredith Whitney made a compelling case for 30% more downside risk in many banks on CNBC yesterday. Check out the video. Morgan Stanley says "extraordinary value" but she contends extraordinary value trap. There will many counter trend rallies, as this will play out over the next two years. Be careful.
Position: none mentioned
Still Optimistic on the Short Term
Doug Kass
6/12/08 9:49 AM EDT
As a measure of my short-term optimism, I am maintaining an 8-3 market rating.
Did I mention that the market has no memory from day to day?
Get used to it!
(Editor's note: For an explanation of Doug's market rating system, please click here.)
Position: None
OVERSOLD RALLY
Jim Cramer
6/12/08 9:51 AM EDT
This is the classic oversold rally.. classic.
Position: none
Gold
Robert Marcin
6/12/08 10:15 AM EDT
Stick a fork in it, the gold trade is done. There was a ton of hype in that move, especially of BubbleVision aka CNBC. Don't confuse the supply/demand characteristics of gold with oil, they are vastly different. I much prefer cheap old tech to expensive gold stocks.
Also, I agree with Doug Kass on the coal call, but I have been so wrong on this, I have no Street cred. Everyone has their nemesis....
Position: none
Lehman: The Key Going Forward Is To Add Value To Their Customers
Christopher Atayan
6/12/08 10:22 AM EDT
It was clear as daylight to me when the Lehman first started promoting the now ex CFO that their were more issues. That is why I pointed it out at the time. So it only makes sense now that management throws her and her operating collegue under the bus. A very shrewd political move by the CEO.
The real issue here is does the firm add value to its customers. In my view,they do but only marginally. By way of referance,in the case of Bear Stearns, they really provided very little value other than providing the other side of a trade,their investment banking almost provided negative value as the service was so bad. Lehman does have an Investment Banking function that offers something credible to their customers. However, management really sold their soul to the trading devil. Unfortunately holding clients is difficult when your losing money at the rate they are. It is hard to present your self as a financial advisior if you cant keep your own house in order.
Hence,I see the key for Lehman going forward is how well they add value to their customers above and beyond the ordinary course. If they can succeed on that front,they will survive but be a smaller organization. If it appears they can't keep their customer base together,they will probably do some kind of partial spin off/ sale as their asset management is worth something and could be spun off. The rest could be liquidated sold.
Position: none
Better Financial Performance Around the Corner
Doug Kass
6/12/08 11:23 AM EDT
I have rarely disagreed more with RealMoolah's contributors' almost universal view that the financials should be avoided.
I have yet to see anyone respond to my observations with regard to the stabilization of credit market conditions, which are nearly always a precursor of better financial stock performance.
Dr. Bobby Marcin cites Morgan Stanley's negative research on banks earlier in the week, but what does Morgan Stanley's about-face mean today?
I am very aware that my long view is a variant call and that few are willing to "fight the tape," but, quite frankly, I see outstanding intermediate-term value opportunities.
I vividly remember shorting Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) in early 2007, which, as I recall, was also a variant view!
My buddy/friend/pal, Bob Olstein, who owns about 2.5 million shares of Citigroup, will be on Fox Business Network this afternoon between 3:00 p.m. EDT and 4:00 p.m. EDT.
Bob and I have shared notes on Citigroup. Stay tuned and get informed
Position: Long BAC, C and WFC
Bottom Calling in Financials
Rev Shark
6/12/08 12:08 PM EDT
As is most often the case, the bottom fishers were way too early calling for a bottom in financials. Just to get back to even in some of these names will require a substantial rally from here. At some point, a bottom call will turn out to be correct, but I see nothing at all rigorous about declaring yet again that everyone else is too negative.
The big problem with most folks who take a contrarian approach to the market is that they complete ignore their entry points and poor timing, and then act like they made a great call even though the trade is still far underwater from when it was first proposed.
Financials were oversold and due for a bounce. I see absolutely no reason to get excited about the potential upside just because one broker upgrading them to neutral.
Position: none
Epic Battle Over Financials, Deleveraging
Robert Marcin
6/12/08 12:10 PM EDT
Yes, Dougie, I realize that we disagree on financials. I have been short financials for a long time myself. I just think there is a final big leg down coming as the Great Unwind proceeds.
My negative case revolves around another decent drop in housing prices, a normal to severe recession, and significant further credit deterioration in the debt markets. That bodes severley ill for financials.
If this were just a normal credit cycle, the bottom would be near. But this might get worse than 1990, in that it's represents the unwinding of a debt supercycle. And during that downcycle, as the MS chart shows, banks stocks traded BELOW 1 times tangible book. That's a long way down from here.
We have been in a colossal leverage bull market for 20 years. Last summer, the correction process just began. I expect it to get much uglier in the next year. Mean reversion is rarely an elegant process, as shown in the new housing market. This Great Unwind, as I call it, will have massive and long lasting implications for the economy, investors, and consumers. It will make and break companies, sectors, and investment management firms.
An enormous reliquification is a very big deal and most do not appreciate it's significance. In a way, I would not be surprised if we experience an American version of the Japanese "depression" of the 1990's. And that's not priced into the financial services sector. Probably not the stock market either.
It's not the fault of Bush or Bernanke, or Paulson. And there is little the government can do to prevent it. There will be policies and programs to mitigate the adjustment process under a Democratic government(mean reversion in politics isn't capital friendly either) but they cannot prevent the delevering of the economy.
I hope that this predicted outcome is too dire. I could easily be too pessimistic. Perhaps all we get is a modest cyclical economic and debt contraction and we muddle along. But I fear that things do have the potential to get very bad. And I suggest that investors formulate another plan B, just in case things get really nasty.
Part of my plan B is shorting ground zero of the potential problem, the banking system, as a hedge to my long exposure in the cyclical components of the economy. If the credit crises drags down the entire real economy, I will have offsets to my real economy stocks. I have no problems if things work out well, I am not a permabear. This suspicion of the economy and credit cycle is a more recent development for me.
I just lived through the RTC I as a deep value investor, and if we get an RTC II it's premature ot own financials.
Position: none mentioned
That said, the compares to the 1990 banking industry carnage don't hold well because today's major money center banks have a strong advocate in the Fed (providing almost infinite borrowings at its window) and have a dominant presence in rapidly expanding emerging markets (which were submerging back two-plus decades ago).
As well, the deposit-gathering capabilities in 2008 dwarfed the circumstances in the 1990-1993 recession.
When coupled with the competitive demise of the shadow banking industry, today's largest financial institutions stand to be share gainers, serving to buoy core earnings power (as measured by net interest income).
Position: None
Respectfully Disagree
Frank Curzio
6/12/08 12:52 PM EDT
Doug,
To call a bottom in financials at this stage will require pure luck. As Rev said, eventually you will be right -- but it can be painful on the way down.
Let's take Lehman (LEH:NYSE) for example, which said back in February that its $1.9 billion offering of preferred stock was all it needed. Then one month later, Lehman raised another $4 billion and played it down again as if they didn't need it. Now another $6 billion later ...
Last year, AIG (AIG:NYSE) said that its exposure to subprime was "minimal" and its debt exposure was "high quality" with "substantial protection." Last month, the company raised $12.5 billion and reported a $7 billion loss.
Countrywide (CFC:NYSE), Citigroup (C:NYSE), UBS (UBS:NYSE), National City (NCC:NYSE), Washington Mutual (WM:NYSE): Can anyone analyze these balance sheets?? If so, you may want to give upper management at these firms a call, because it seems they have no clue.
If you want to play financials, be patient and wait for things to get better. We need more transparency, some sign of a rebound in the economy (which will lead to a stronger IPO and M&A market) and a rebound in housing -- as Bob suggests.
Of course, you will miss the first 20% move to the upside being late to the party, but you would significantly reduce risk and at least you will have a better perspective of what's going on at these firms -- instead of buying these stocks blindfolded.
Position: none
Financials and the Economy
Justin Ferayorni
6/12/08 12:55 PM EDT
Unfortunately, I share Bob M.'s view of the deleveraging process and the secular issues now associated with it on the financial system. I'd say book value is the appropriate measure for these banks, but I'd follow it with the query "what is book value?" No one honestly knows. At this point, I believe there are assets priced too conservatively and too aggressively on these balance sheets. It will take more than two or three quarters to square that all up.
The Fed has taken the right steps thus far to prevent calamity, but that as nothing to do with equity dilution, earnings power, or the yield curve and these institutions' ability to price product and risk appropriately. This last point is what concerns me about the economy: As the banks retrench, credit becomes more scarce by default and the cost to borrow increases -- the whole economy will face these headwinds as consumers and corporations alike utilize credit for asset accumulation. The more expensive the credit, the lower the desire for assets. Period.
If you asked me a few months ago, I would have told you that we were moving along with the healing process. Now I think the price of oil/energy and the inflation we are seeing across commodities and food has changed the calculus.
Doug may be spot-on for a near-term trade -- I am not sure of his horizon or price expectations(?). Sentiment is horrid, and that is probably a good enough reason to be "playing" these stocks. And the large deposit-centric banks will be able to take a lot of share along the way as the other banks fall by the wayside. I wouldn't buy them and forget about them just yet, though.
Position: n/a
Back to Dougie
Robert Marcin
6/12/08 1:05 PM EDT
Doug, clearly the investors in KeyCorp didn't get the memo about credit issues and dividend cuts being fully discounted in stock prices. One could say the same for a large broker's recent recap which is just settling today at prices much under water. Right there is a bunch of unknowing, unprofitable, extant investors. I'd venture there are many more.
Position: none
Back to Back
Doug Kass
6/12/08 1:11 PM EDT
My long interest lies only in the largest money center banks.
I am and have been short selected regionals for a year and a half.
Position: None
Citi Sleeps with the Fishes
Chris Laudani
6/12/08 1:11 PM EDT
Hey Dougie, the Street is projecting a pretty dramatic comeback for the company. If you look at First Call, analysts expect revenue to bottom out at $81.69 billion in FY 07 and then leap to $116.2 billion by FY10. That's a 42% jump in revenue in three years. If you go back to the last decent year, FY06, Citi had $89.6 billion in revenue. Revenue has to rebound 29.7% in four years? Even if Citigroup gets to $116 billion in revenue, the company will still have earned less than they did in FY06. (That's gotta be embarrassing!)
What's wrong with Rev Shark's approach? I know you're not a chart guy (I'm not either), but why not wait until the chart gives some sort of "all clear signal". Yeah, you won't catch the exact bottom, but so what.
I know bottom fishing financials is a lot of fun (especially when it's not your money). I've got half a dozen hedge fund clients doing it too. (It's not that contrarian!)
Position: none.
Market Rating for Financial Stocks
David Merkel
6/12/08 1:53 PM EDT
Doug, I'm 50% overweight financials, but they are all insurance companies, oh, and one credit card processor/issuer (with minimal credit risk). I'm still bearish on banks and investment banks though. I won't bore everyone here with the details, because they've mostly been spelled out by other contributors. I do have a question for you, though. This morning you wrote:
"As a measure of my short-term optimism, I am maintaining an 8-3 market rating."
What would that rating be if it were applied solely to financial stocks? How much of your rating is looking for a bounce versus an intermediate-term bottom.
Position: none
Back to Chris
Doug Kass
6/12/08 1:58 PM EDT
Chris,
Regarding Citigroup (C), I have revenue dropping to $79.5 billion in 2008, rising to $89 billion in 2009 and at $99 billion in 2010 (well below the revenue you mentioned), with core income of $21.5 billion (2008), $29.0 billion (2009) and $36.5 billion (2010). I have assumed that the loan-loss provision stays elevated over the 2008-2009 period at approximately $15.5 billion and drops to $9 billion by 2010. With radical cuts in fixed costs, non interest expense should be flat for the three year period -- providing the catalyst to operarting leverage.
This translates into fully diluted EPS of about 70 cents per share, $1.60 per share and $3.25 per share (ROE returning to 12.2% level) for 2008, 2009 and 2010, respectively.
Unlike Meredith Whitney, I expect dividends (which for 2008 will total $1.27 per share) to be raised to $1.35 in 2009, and again in 2010, to $1.45. Stated simply.
As the toxic stuff is extracted from the current portfolio, the consistency of core banking (net interest income) profits will be more apparent. And if one attaches a 20% deposit premium ($150 billion) on top of tangible book value ($61 billion), it produces a $37 to $39 per share franchise value -- and that's without assigning premiums to the core commercial, investment banking, wealth management and other businesses.
Dougie
Position: Long C
Financials
Norm Conley
6/12/08 2:20 PM EDT
Back in November, I posted a piece describing my aversion to Financials. Within the last week or two, I've moved from disliking the entire Financial sector (and a generally underweight portfolio stance versus the sector), to a neutral position on the sector. I've gotten back to even-weight in the Financial sector via reestablishment of a small long position in a (the?)leading brokerage firm. I also own a leading asset management company and a premier credit card processing firm.
Why the change in tune? First of all, the negativity on Financials reminds me, in both tone and substance, of the stance against Technology in late 2002. Sometimes when the sky has fallen it is worthwhile to declare victory and move on to the next trade. Some permabears show an inability to change their tune when their predictions have come true (and I'm not referring to any of the commentators on RM). Secondly, while earnings growth is likely a long way off for many companies in the sector, valuations in a number of quality names imply that earnings growth will never re-appear - which simply will not happen if the capital markets ever function properly again. Thirdly, we will have several brokerage company earnings reports in the next couple of weeks that could serve to add clarity (and potentially an upside catalyst to selected names' stock prices) to balance sheets and prospective ROE outlooks.
There is a massive amount of uncertainty out there, but this uncertainty has been subject to a truly massive amount of attention over the past year. Type "financial sector problems" into the leading search engine, and you get almost 29 million "hits." By way of contrast, type "george bush problems" into the same engine, and you get less than 1.6 million "hits." So is it really "variant" anymore to be negative on the Financial sector? I think not.
In my opinion, the risks have become well-discounted in parts of the financial sector, and a uniformly negative stance is no longer called for. Of course, I could be wrong. Real estate prices could continue to tube, and Bob Marcin's admittedly pessimistic outlook on the Great Deleveraging could come true. And even if the economic outlook doesn't deteriorate further, company management teams throughout the financial sector have demonstrated a truly mind-snapping ability to "blow it" with poor business decisions. But I think Mr. Market could be getting ready to play the part of The Great Humiliator again. And the permabears on Financials could be in his crosshairs.
Position: none mentioned
Even More Observations
Robert Marcin
6/12/08 2:36 PM EDT
It seems to me as if much of the "smart money" is trying to game the energy correction and financial bottom. I see very few fundamental stock pickers on CNBC touting Exxon or Schlumberger and many trying to pick the bottom on Citi. I also see the big long only shops overweighted in financials and market or under weighted in energy. I wonder if the trends stay in place til Fido and Legg reverse those portfolio positions.
I know that the momentum investors are aboard the long energy/short financial trade. I am referring to the big money, institutional managers that haven't yet bought into the energy trade in an overweighted manner and are still large in financials from the great debt bubble.
Position: no positions in stocks mentioned
Doug: Your Thoughts On The Financials Are Appreciated
Christopher Atayan
6/12/08 2:39 PM EDT
Doug I essentially am agreeing with your view on financials with a long range view. My take is to stick with the quality players who are going to gain market share in this mess. I posted on this yesterday. I lived through the early 1990s having been involved in some way in many of the major deals of that time. The one thing I learned was the quality players only got stronger.
Position: Long JPM MS
Humiliation
Alan Farley
6/12/08 2:54 PM EDT
Norm,
I imagine the financial bears would be fairly immune to humiliation at this point since they've been 100% dead-on right for the last 16-months. That builds quite a bit of insulation.
"The trend is your friend"
Position: n.m.
Don't Judge Sentiment on Anecdotal Observations
Doug Kass
6/12/08 3:03 PM EDT
Back to Bobby ...
Anecdotal observations about CNBC talking heads is no way to judge sentiment in my view. Bobby, you know it's nonrigorous in the sense that "you see it." Show me the numbers that support the view.
Frankly, I "see" the opposite in the media. I "see" sponsorship of all energy and I "see" total disdain for financials (with the lion's shares of talking heads saying "it's too early" and I will "wait for a turn" and then buy.
Same with your contention that plain vanilla institutions have overweighted financials and have underweighted energy. Show me the numbers that support your contention. For me I'll stick to my spreadsheets and let the credit markets be my guide.
Thin reed indicators like you mentioned, Bobby, are, well, thin reed.
Position: No positions
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