Archive for February, 2009
What Will Happen To the Banks This Week?
Posted by Jody Eisenman | Filed under Uncategorized
As the government frantically ponders its’ options, the question on everyone’s mind on Wall Street is future on the banking industry. Here is an article from Yahoo Finance that sums up the situation:
http://biz.yahoo.com/ap/090207/banks_on_the_brink.html?.v=2
The government has now taken over 9 banks this year, including three this weekend. There can be little doubt that many more will follow. The entire banking system, thanks to the incredible leverage of their balance sheets, needs a comprehensive solution pronto. According to Nouriel Roubini, the banks are under capitalized by somewhere between 1 and 1.4 trillion dollars. According to analysts at Goldman Sachs, it would take 4 trillion to clean up all the problem loans. According to the CIA’s World Fact Book, The total US Gross Domestic Product (GDP) was estimated at $14.58 trillion for 2008. Therefore, if the Goldman analysts are correct, we are talking about spending over 25% of the GDP on a comprehensive bailout. Now, bear in mind that the current deficit will exceed $11 trillion this year. Thus, if the government spends another $4 trillion (presumably by borrowing), it would seem that the total national deficit could actually exceed our GDP! Also, bear in mind that interest rates are incredibly low for treasuries right now. Should rates increase, it would cost the US much more to service this debt. I view this situation as precarious. Right now, there are only five countries in the world whose debt exceeds GDP (Zimbabwe, Lebanon, Japan, Jamaica and Italy).
Treasury Secretary Geithner will be unveiling his plan for the banks on Monday. Although we are still not sure of all the details, it is expected that the banks will be forced to supply some sort of mortgage relief to distressed homeowners. It is still not clear whether the government will buy the toxic assets from the banks, and if so, at what price. As I have stated earlier, I believe that if the government does decide to purchase assets, it will be at some sort of compromise price between the original value and the current mark to market value. President Obama is hoping that this initiative, combined with his stimulus package (which passed the senate on Friday) will uplift the economy. Good luck.
Perhaps in response to these planned initiatives, the market rose solidly the last 2 days. For the month of February, we are up about 3% on the DJIA, and almost 8% for NASDAQ. The money center banks traded up 15% off their lows on Thursday morning. Of course, the way these stocks trade, they could be up or down a similar amount on any trading day. If you are going to trade, use stop losses.
Bank of America Collapses
Posted by Jody Eisenman | Filed under Uncategorized
Bank of America (BAC) today dove to a close of $4.70, its’ lowest level since November of 1991. It seems like ages ago, but the stock actually traded up as high as $38.50 in late September, less than four and a half months ago. Although there was no real news today to account for the 11% drop today, the stock has been steadily declining. However, this move could be significant, as many institutions are prohibited from owning stocks under $5. This could lead to an extended decline. For example, Citi ( C ) closed below 5 on January 14. Four trading days later, it hit $2.80 (It has since recovered somewhat to close at $3.46 today). It could be that nationalization of these bank stocks is in the cards. It is very difficult for me to see buying most of these stocks at any price in this environment.
The DJIA started higher, then closed down 121 points, giving back most of yesterdays’ gains. Economic news remains poor. Layoffs continue across the country and consumers are tightening their belts in order to avoid spending money on most non-essential items. Consumer staple stocks have been reporting mostly disappointing earnings, most recently from Kraft, Disney and Time Warner. It is difficult to find people who are bullish here. Even the most optimistic analysts seem to think the economy will not bottom at least until mid year. Of course, some analysts (like Nouriel Roubini and Meredith Whitney) still think we are going lower.
Finally, Harry Markopolos, the investigator of Bernie Madoff, testified today. For a fascinating look at his submission paper, please click here: http://online.wsj.com/public/resources/documents/MarkopolosTestimony20090203.pdf
Stock Valuations
Posted by Jody Eisenman | Filed under Uncategorized
Many people have asked me over the last several months if the market is oversold. They point out companies like Dow Chemical selling at around 4 times earnings with a 14.5% dividend, and General Electric selling at 6 times earnings with a 10% dividend. They even point out that one could buy closed end municipal bond funds with 6-7% tax free dividends that are trading at 15-20% discounts to net asset values. Are these stocks really that cheap?
I don’t think so. In the cases of Dow and GE, you are talking about companies that have declining sales and earnings. Their dividends are certainly at risk. In Dow’s case, recent quarterly losses due to the economy are causing institutions to dump the stock out of their portfolios. GE might be in even worse shape. GE is now primarily a financial services company that has a leveraged balance sheet. As the recession deepens, the defaults on their loan portfolio is growing. There is really no telling where this could end, but it would not be a shock to me if the stock traded into the single digits. Already, the stock has lost about a third of its’ value in 2009 alone. Of course, if one thinks that we are nearing the end of the recession, these stocks are probably screaming buys. I still think the economy is going to get worse before it gets better.
In terms of the closed end funds, many have used leverage via auction rate preferred securities. This fact alone puts these funds in a high risk category. Some of these funds have shown huge losses due to the leverage employed and the decline in bond prices. Again, I think purchasing these funds only make sense to an investor with a high risk tolerance.
The stock market had a pretty good day, with the DJIA rising 141 points. After the close, Disney reported disappointing earnings, showing once again that the economy is taking its’ toll on almost every sector. The only trading that makes sense to me is that of the short term variety if you have that risk tolerance. If you want safety, stock to treasuries and insured CDS. You won’t make much of a return, but you won’t lose either.
