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Someone Is Paying a Lot for High Priced Doo Doo!
In reviewing the banks that were originally included in the Doo Doo 32
(a list of likely doomed banks created in the spring of 2008), I
decided to have a team take the devil's advocate perspective (an
exercise that we normally pursue) and attempt to build a bullish case
for the sectors that I viewed bearishly yet have outperformed the
S&P and escaped profitable shorting during the last three quarters.
The results are illuminating.
Below is a list of shortlisted
banks that have reported higher returns relative to S&P 500 between
the period March 9, 2009 and January 5, 2010 - the bear market rally of
2009. The methodology that we followed for this short listing is as
follows:
· We
took out a list of banks that are domiciled in the US and have market
capital of more than $500 million and current share price of more than
$10.
· Next we calculated returns for each bank and S&P 500 between period March 9, 2009 and January 5, 2010.
Clic Click any graphic to enlarge
· I shortlisted banks that reported higher return than S&P 500 and
prepared matrices with various key parameters like q-o-q growth in
NPAs, Texas ratio, Efficiency Ratio etc. over the last four quarters.
· We
then highlighted the positive and negative parameters for various
quarters and parameters using different conditions for each parameter
(please see row 2 and 3 in the attached spread sheet model below).
Conclusions
· We have highlighted four banks that have reported relatively
(this term must be stressed, for even these banks are giving up
significant amounts of common shareholder equity to non-performing
assets) sound fundamentals over the last four quarters which could
justify the increase in there share price to certain extent. This
statement is actually quite the stretch taking into account the banks
that have shown more blue highlights than orange (see the attached
spreadsheet, free registration required - 
Banks that outperformed the S&P 060110 2010-01-07 02:42:42 1.21 Mb).
More focus has been on q-o-q growth in NPAs and the Texas ratio to
choose the banks that have increased in relative health. As you can see
from the graphic below, nearly all banks that have shot up in price
have at the same time rapidly trended down in fundamental performance
and credit quality. The screen is comprehensive as well. We included
the following fundamental and credit quality metrics in the scan:
- Tier 1 ratio
- Q-o-Q growth in NPAs
- Texas ratio
- NPA as % of loans
- NPA as % of common equity
- Provision as % of loans
- Provision as % of common equity
- Reserve for loan losses as % of loans
- Cushion (Reserve less NPA) as % of loans
- Cushion (Reserve less NPA) as % of common equity
- Loan loss coverage
- Net interest margin
- Efficiency ratio
- Q-on-Q growth in net interest income (before provisions)
- Net Interest Income as % of revenues
- Q-on-Q growth in non interest income
- Return on assets
- Return on equity
Clu Click to enlarge a partial screenshot of the model
· Though
we have selected four banks, overall the shortlisted list of banks have
performed quite poorly over the last four quarters. When NPAs as a
percent of common equity are taking into consideration, those four
banks are on the downtrend as well.
· Only one bank I would consider relatively clean
(that is, without significant caveats, although its metrics are
deteriorating), and that bank's share price has went relatively nowhere
in comparison to the rest of the bunch who are giving up massive amounts of common equity to credit losses, and whose metrics are deteriorating in nearly every conceivable category used to measure bank health.
What is truly interesting is that this very poor showing of asset and
credit quality, as well as fundamental value trends is quite evident
AFTER the government has dumped hundreds of billions (if not more) into
bank rescue plans and FASB has basically given the green light to go
ahead and lie about asset values. See the effect this has had on not
only bank stocks but the broad market as well.
For more on this, see "How Regulatory Capture Turns Doo Doo Deadly".
It should be clear to all who study this model that banks stocks have
become trading vehicles and not representative slices of future income
or indicative of future asset values. On top of this evidence of
fundamental implosion, the macro seen looks absolutely HORRIBLE!
Residential real estate prices are trending down in the face of hundreds of billions of dollars of bubble blowing, (see"If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...").
Residential loans are still on a steady path of implosion - getting worse, not better (see "The Truth! The Truth? Banker's Can't Handle the Truth!!!"). The interesting issue is that all of the categories are at currently a level that scream solvency alert!
Commercial Real Estate Losses are REALLY ramping up, and this is just the beginning! See CRE 2010 Overview.
While you're at it, check out "The Latest REIT Updates are Now Available"
for added measure.You can see that not only is the collateral behind
the failing residential loans imploding at an unprecedented rate, but
the stuff behind the failing commercial loans make residential housing
look downright rosy in comparison. Compare and contrast how fast the
CRE values are falling against those of the residential values that get
much more press and airtime in the mainstream media...
See CRE Consulting for more info on CRE trends.
Tell me, dear readers, are we in Japan yet???!!! Don't let those who
don't run the numbers tell you otherwise. We are following damn near
(save some differences in structural rigidity) lockstep in their path.
Okay, I'm busted! Not exactly lockstep. Our property decline is probably STEEPER! Look at the second leg.
"Wait a minute buddy!" is being shouted at me from behind the Internet
pundit's bullish keyboard. We are in the midst of a recovery, and GDP
is forecasted to increase. You know, forecasted by the same guys who
somehow missed the biggest stock market and economic drop of a
lifetime. Yeah, I know... The GDP thang! Well, wasn't GDP humming right
along when all of this mess started. This is about assets and
liabilities, not revenue inflows and outflows. I hope you guys have
been practicing the use of your chopsticks, cause here we go, GDP
increase and all!!!
Practically all of Japan's global banks are no longer global. All as a
result of the silly, unsustainalbe, and guaranteed to fail game of
"Hide the Sausage" and "Extend & Pretend"!
Click to enlarge...
Source: Cap Gemini Banking M&A
I have been fairly accurate in observing this mess for the last 10
years. I had a rough 3 quarters but hey, nobody's perfect. One thing I
can say for sure, the signs pointing to significantly further asset
declines are much clearer now than they were over the last ten years.
Take it from someone who has bothered to stop and read the signs.,,
Understanding my proprietary investment style
I took a loss for the year (primarily due to Doo Doo being bought at
insane pricess as their business deteriorates, ex. market manipulation)
bringing my total gains down for the Asset Securitization Crisis
(yeah, go ahead and click it - the entire crisis has been documented in
real time, and some pretty nifty macro calls/observations as well), but am still up deep into the three digits since the crisis started and considerably more if you count the starting point of the bubble. I'm
thoroughly pissed at myself nonetheless, but we must keep things in perspective (see "Year End Note to BoomBustBlog Readers and Subscribers". The boom/bust cycle continues for this BoomBustBlogger, though!
Case Shiller index has been amplified by a factor of 10x for the sake of comparison to the S&P 500.
Hey, buddy! Ya' have any overpriced bank stocks to sell me in this new bull market for the new millenium?
I heard the sell side banks on Wall Street are pushing banks and REITs.
You know how they protected us in the first half of this downturn. Ya'
think they'll do just as good a job in the second half?
See
the following for a backgrounder on my opinion before we move on to the
risks emanating from other parts of the world stimulated by our number
one export from the "Too Big To Fail, but Too Big to Let Survive
Intact" club:
-
- The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets
- Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?
- As the markets climb on top of one big, incestuous pool of concentrated risk...
- Any objective review shows that the big banks are simply too big for the safety of this country
- The ARE trying to kick the bad mortgages down the road, here's proof!
- Why hasn't anybody questioned those rosy stress test results now that the facts have played out?
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 5 - PNC Bank
- The Next Step in the Bank Implosion Cycle???
- A Must Read: An Independent Look into JP Morgan. This contains the "public preview" document (
JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb), which is free to download.
- advertisements -
Congress has decided that the whole checks
and balance thingee
is sooooooo 1776/1789 ish)
Ha Ha!
Which side of the Pond?
Dear Mad King George, we're having more Tea Parties...
Good thing my puts on PNC don't expire until February...
I thought that banks might have a rough couple months giving housing issues but they seem unfazed by plunging pending orders along with rising long term yields and what that will do to home prices.
Great contribution Reggie. Thank you
Thanks for sharing the DooDOO32 LOL.
Great post Reggie. This government sponsored bear market rally is getting long in the tooth, in my view. I too maintained my short positions throughout 2009. Those fuckers mugged us. With Fed protector Dodd leaving and the Audit the Fed campaign picking up steam, they may lose control. I may yet make money on my Wells Fargo short, who happen to be the biggest criminals in banking.
The current banking and REIT stock pump is hysterical. Those advocating buying into these black holes (save for purchasing last march or april) are irresponsible hypsters trying to get others into the ponzi so they can get out.
i'm still utterly amazed that fraudulent accounting via FASB 157 has been legitimized this long from earlier in 2009...at most, it should have been a temporary stopgap with a specific ending date to force balance sheet asset recognition.
by the way Reggie, I am shocked that you haven't written about the FDIC gift to the banks relative to FASB 166/167....it's quite the regulatory capital forebearance xmas gift that, in the words of the immortal Cousin Eddie, "...just keeps on giving."
"..in the words of the immortal Cousin Eddie, "...just keeps on giving."
Deadhead,
Anyone who can weave a Cousin Eddie quote into their post receives my "Blog Poster of 2010 Award." Granted the year is still young but you're currently on top and everyone else is a wannabe.
Looking back at 2009, the change in the FASB 157 rule was the crossing of the Rubicon when measuring how far the powers that be would stoop to keep the Ponzi alive, if only for another year or two. Everything that has come afterward was little more than same ole same old.
I suspect that as this poorly knitted financial and economic sweater continues to unravel in 2010, there will be additional crossings of the Rubicon to be noted here on ZH. As I have said a few times here, this disaster is going to play out over a much longer period of time than we expect or even believe possible. When so many people's lives depend upon the Ponzi, there will be some strange bedfellows and incestuous relationships yet to be revealed or created.
Bingo! "As I have said a few times here, this disaster is going to play out
over a much longer period of time than we expect or even believe
possible. When so many people's lives depend upon the Ponzi, there will
be some strange bedfellows and incestuous relationships yet to be
revealed or created." Could not have said it better myself. DH is right on the 157 call, and you are right in thinking they will create many more bridges to perpetuate the Ponzi. ZH is right in the fact that they will remove all risk from the market falling and thus, eventually, have it all fall to Zero. (on a long enough timeline of course.)
shanky..always check your stuff and watch you over at kenny's during the day...
i swear bernanke reads EW and pumps more money in everytime it gets to a wave top!!!
DH,
Who is "kenny's" (Denninger?) and are you saying Elliot Wave when you say EW?
You describe exactly why I feel raped. The Fed understands that technical analysis (TA) works precisely because many people watch, and react, to it. Just when TA has everyone leaning one way, the Fed does exactly what isn't expected. This way they don't need huge shorts to squeeze, just some shorts squeezed often and regularly.
What I don't hear discussed much if at all is the obvious fact that the Fed sees the market in ways you and I can never, meaning they have access to bulk and individual positions. Since they now have the banks and brokers (not to mention SEC and FINRA) by the short hairs and they are the regulators after all, I can't help but feel they're looking at real time positions held at all the brokers (or at least the majors) and then feeding real time market posistion information to their minions to move the markets, or at least segments of the markets to cover the manipulation.
Just some thoughts as to how it's being done. But once you decide to manipulate, it makes no sense to only do a little. In a penny, in a pound.
Thanks CD.... I adore Cousin Eddie.
The FDIC on the off balance sheet crap gave banks a one year waiver and then another 6 months to start building capital, which i view as yet another trip across the Rubicon, though the FASB 157 was the biggie: i guess they are going to let the mark to menagerie go on indefinitely, I just don't know. the fdic release was on Dec 17 as I recall. It received absolutely no ink from anywhere that I read, which is pretty extensive. Granted, I could have missed an article or two, but I looked around and couldn't find anything.
you are absolutely correct in terms of the longer period of time playout.....the balance sheets simply are not being repaired, save for the Fed buying some of the crap, presumably at 100 cents on the dollar (i can't prove that because the Fed won't allow an audit and the US Congress has decided that the whole checks and balance thingee is sooooooo 1776/1789 ish). cash flows on some of those assets simply are going to force the issue.
the upshot in bank over the past 2 days must have been credit suisse et al buying as credit suisse, following ubs earlier, got into the bank upgrade game.
i think it interesting that ubs, credit suisse did this, probably part of the plea deal with the IRS in re the secret swiss bank account matter. "we'll give you guys a break if you play along the bank upgrade game like the rest of the boys in Club Fed"
the best part re banks over the long term is that just about all of them (there are exceptions, most notably for me is BAC's negative rating of AXP/COF and lack of a rating on WFC "under long term review" last I checked with my ML guy) are on the super duper, overweight, CONviction buy lists.....what are they going to do (besides additional Fed purchases of bank common equity and MBS etc paper) in terms of upgrades as we move down the time line?
For all of us shorting out there, here's more Cousin Eddie:
...if he does lay into ya, it’s best to just let ‘im finish.
and eventually we will be able to pull the plug on this bubble and yell:
Shitter was full!
Outstanding! Love the Mississippi Leg Hound!!
Barney Frank says, " "Hide the Sauasage" has a slightly different meaning where I come from".
well done, sir. good show.
The market can stay irrational longer than most investors can stand.
Reggie, you're all right.