Last week I posted a rather scathing diatribe, basically ridiculing
the fact that Dick Bove get's so much MSM airtime for his virtually
consistently wrong calls and analysis (see the repost of that particular
rant towards the bottom of this article. It appears as if Mr. Bove may
have read said diatribe and used his cache with the MSM to post a
response. To wit:
With a month left in 2011 and—barring a miracle—bank stocks headed for a negative year, Dick Bove is admitting he was wrong.
is both commendable and respectable. It is honorable and healthy to
admit when you are wrong, and we all have the opportunity to do so since
nobody is right all of the time!
widely followed Rochdale Securities analyst has been telling investors
for a good portion of the year that banks have recovered from the
financial crisis and are in much better shape they were three years ago.
and no! They are in much better shape than they were three years ago,
but that is highly misleading because they were nearly all virtually
bankrupt. Now they are merely borderline bankrupt, but only if marked to
reality. ... And no, they have not recovered from the financial crisis
or rates would be above virtual ZIRP zone!
Investors, though, haven’t been biting.
Because they read BoomBustBlog!
into Monday’s aggressive rally, the Standard & Poor’s 500
financials were off 26.3 percent on the year, and the KBW Bank Index had
fallen 31 percent.
Bove—Rochdale’s vice president of equity research—the decline has been a
maddening ride spurred not by bank fundamentals but rather by
investors’ belief that no matter how good the earnings look or how loans
are performing or where capital levels stand, investor worry over
bigger factors takes precedence.
macro factor will continue to be more important than the micro
factors,” Bove conceded over the weekend in a moderate mea culpa to
periods like this analysts, like me, who rely on traditional parameters
like company results and historic relationships between interest rates
and earnings yields, are going to have a tough time.”
In essence, Bove argues that he was wrong for the right reasons.
is nonsense. With all due respect, you were a Dick that was wrong for
all of the wrong reasons. Earnings looked good because reporting
standards have been gutted allowing for the facade of performing loans
and reserve releases padded losses. Capital levels looked impressive to
the great unwashed because mark to fantasy allowed gaping capital
deficiencies to be glazed over.
Liquidity, capital, loan performance, revenue, profits—all the metrics by which one would traditionally analyze banks—look good.
worries over the world’s debt crises, particularly in Europe and the
U.S., are making risk-averse investors unwilling to buy the banks in
Bove’s coverage universe.
My Dick! European liquidity issues
threaten a US liquidity issue. Massive uncertainty caused by unreliable
and downright untrustworthy financial reporting has caused a deserved
discount to financial assets, which is why valuations have tumbled.
divergence between the economic and financial fundamentals, on the one
hand, and the stock prices, on the other, reflects a change in risk
assumptions,” he wrote.
multiple reasons, investors keep demanding a higher and higher risk
premium on common stock investments, in general, and in bank stocks, in
Someone please see my statement above and explain it to Dick!
down what he got wrong this year, Bove said: “I failed to understand
that the fears in the market concerning banking were so great that the
fundamental improvements in the economy, the industry, and companies
like Bank of America [BAC 5.2017 0.0317 (+0.61%) ] and Citigroup [C 25.03 1.40 (+5.92%) ] would simply be ignored.”
Bove believes that an improving economy and—in his view—the European
crisis actually benefiting rather than harming U.S. banks will justify
his optimistic outlook that persists for 2012, even if he’s been dead
wrong so far.
stocks are being driven by fear despite the significant improvement in
the industry and individual company fundamentals. Presumably, at some
point, fear will either be realized or dissipate,” he told clients. “My
assumption is that it will dissipate. At this point, the industry’s
fundamentals will drive bank stock prices higher. This was my view at
the beginning of 2011 and it is my view at present.”
A BoomBustBlog Deep Dive on Dick Bove Analysis
Dick Bove is one of the, if not most oft quoted sell side bank analyst
in the mainstream media. I disagree with him, regularly. As the uber
independent investor/analyst that I am, I will never be accurately
accused of kissing [up to] Dick - regardless, let's grab Dick by the base [of his assumptions] and see if we can yank something usable out of it, shall we?
noted banking analyst Dick Bove said there is nothing for investors to
get upset about because the stress tests are pro forma and are not an
indication that the Fed has any particular concerns about the state of American banks.
was really required by the Dodd-Frank law that they have a stress
test,” the Rochdale Securities analyst told Larry Kudlow. “So every year
at about this time you have the Fed setting up a new stress test for
the banking industry.”
The six big banks to be tested are Bank of America [BAC 5.37 -0.12 (-2.19%) ], Citigroup [C 24.46 -0.54 (-2.16%) ], Goldman Sachs [GS 89.40 -1.90 (-2.08%) ], JPMorgan Chase [JPM 29.41 -0.50 (-1.67%) ], Morgan Stanley [MS 13.52 -0.08 (-0.59%) ] and Wells Fargo [WFC 23.93 -0.25 (-1.03%) ].
the Fed's stress tests will see whether U.S. banks can withstand any
further deepening of the European debt crisis crisis, Bove isn't worried
about contagion from the EU.
[the European banks] run into significant difficulties, it is not going
to create a massive crisis in American banks,” he said. “American banks are benefiting meaningfully as a result of the European banking crisis and it’s showing up in their earnings.”
someone buy Mr. Bove an Insitutional BoomBustBlog subscription. Of
course it won't create a massive crisis in American banks... The 8th
largest bankruptcy in this country's history doesn't even scratch the
radar, right??? The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications
That’s because European banks are selling American assets to American banks at discounted prices.
However, Bove thinks it’s highly unlikely that the European banks will collapse. He believes the European Central Bank will ultimately bail them out.
where do I start? Well, I must admit, I don't look, speak, think nor
act like any of the sell side analysts. If you are into convention, and
not into hard hitting analysis and outspoken brothers, then I'm just not
your man. If that's the case, I suggest you simply get you some Dick.
For those who (like me) don't favor dick, I have a slightly different
flavor to offer in terms of analysis and perspective.
not familiar with Mr. Bove, he made an interesting call on Bear Stearns
which was essentially antithetical to my research. I will copiiously (I
apologize Karl) excerpt a post from the Market Ticker which explains the
story explicitly: Dick Bove, Bear Stearns, And Controversey
Apparently Mr. Bove does not like my ticker from last night, and
believes that I have been in some way "unreasonable" in my
characterization of him, specifically this paragraph:
"The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK
BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th -
JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU
SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS,
ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO
ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!"
was kind enough to send me a copy of the full report which I have
edited to remove his email address and phone number (at his request),
but which is otherwise reprinted here with his permission. You are urged to read the report in full and draw your own conclusions about whether the market performrating
was reasonable or not. Links are at the bottom of this post. There
apparently is one word he can legitimately complain about in my original
ticker - the word "PUT". In fact, he maintained a "Market Perform" rating on the 11th of March; the upgrade to Market Perform from SELL appears to have occurred in February.
You can find an archived copy of that story here. It says among other things, in reference to Bear and Lehman:
said private equity may once again be able to fund activities in the
high yield markets, while adding that credit derivatives markets were
unlikely to go lower, and that the mortgage business may actually be
quite strong this year.
New York-based Lehman will likely recover faster than its peers due to the expected strength in mortgages, Bove said."
I apologize for the error in not noting that the actual upgrade
apparently came a month earlier, not that I think its material, but when
you're wrong, you admit you're wrong. Mr. Bove, of course, didn't
bother to mention when the rating was issued by him during our phone
call, nor that when he issued the rating the price of the stock was even
HIGHER (by nearly $20!) than it was in March when the
rating was "maintained" (even though he claims it really wasn't if you
read the narrative.) Now let's get to the meat of the matter and why I raised a stink about it in The Ticker - the rating. Dick claims that "anyone who read the report in full would see that I had told them to stay away from the stock."
After reading the report in full, I agree - the stock, by the narrative of the report, is indeed a sell - albiet a sell $20, or 25% of your money, too late!
here's the problem - the report clearly cuts the price target from $90
to $45 (a 50% haircut!) and further is a reduction of 25$ (from $59 to
$45) from the closing price on the day the report was issued.
report is intended only for institutional clients who pay his firm, but
it, like the report yesterday, was picked up and widely quoted in the
media. Take a look at the second page of that report, directly above Mr. Bove's certification, under the definition of "Market Perform":
"Common stock is expected to perform with the market plus or minus five percentage points."
I took the liberty of excerpting so much, I urge all who are interested
in this story to read Karl Deningers full post on his page - Dick Bove, Bear Stearns, And Controversey. In regards to me, let's contrast my opinions of Lehman and Bear in January of 2008, as opposed to Dick's - Is this the Breaking of the Bear?
Bear Stearns is in Real trouble
Stearns will soon be, if not already, in a fight for its life. It is
beset with the possibility of a criminal indictment (no Wall Street firm
has ever survived a criminal indictment), additional civil litigation,
and client defection and alienation. Despite all of these, the biggest
issues don't seem all that prevalent in the media though. Bear Stearns
is in a real financial bind due to the assets that it specialized in,
and it is not in it by itself, either. For some reason, the Street
consistently underestimates the severity of this real estate crash. If
you look throughout my blog,
it appears as if I have an outstanding track record. I would love to
take the credit as superior intelligence, but the reality of the matter
is that I just respect the severity of the current housing downturn -
something that it appears many analysts, pundits, speculators, and
investors have yet to do with aplomb. With a primary value driver linked
to the biggest drag on the US economy for the last century or so, Bear
Stearn's excessive reliance on highly "modeled" and real asset/mortgage
backed products in its portfolio may potentially be its undoing. This is
exacerbated significantly by leverage, lack of transparency, and
products that are relatively illiquid, even when the mortgage days were
Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back
I’ll admit it. I watch CNBC. Now that I am out of the confessional, I
can say that when I do watch it I hear a lot of perma-bulls stating that
this and that stock is cheap because it is trading at or below its book
value. They then go on to quote the historical significance of this
event, yada, yada, yada. This is then picked up by a bunch of other
individual investors, media pundits and other “professionals,” and it
appears that rampant buying ensues. I don’t know how much of it is
momentum trading versus actual investors really believing they are
buying on the fundamentals, but the buying pressure is certainly there.
They then lose their money as the stock they thought was cheap, actually
gets a lot cheaper, bringing their investment down the crapper with it.
What happened in this scenario? These investors bought accounting
numbers instead of true economic book value...
Level 2 and Level 3 Assets – Model Risk
risk, or the risk of the bank living in a spreadsheet in lieu of the
market, has already reared its head in the summer of ’07 with the blow
up of two of BSC’s hedge funds, which have left them in litigation with
their own customers. Basically, many of the assets of the fund were
levered highly, and valued based upon modeled cash flows from assets,
and not from the actual tradable value of the assets. This is fine,
until you need to liquidate by selling assets. As luck would have it,
they found no market they felt was acceptable and were forced to market
value down significantly, approaching zero. It has also manifested
itself more recently in the recent announcement that they will be moving
at least 7 billion dollars to the level three (the most BullSh1+)
category. Bear Stearns has recently announced another hedge fund blow
up, which doledout significant losses to investors and is attempting
liquidation. For my laymen’s plain English take on level 1, 2, and 3
asset accounting, see the Banks, Brokers and Bullsh|+series (Banks, Brokers, & Bullsh1+ part 1 for model risk,).
Level 3 Assets at 231% of Total Equity; Amongst the Highest on Wall Street
|Weighted average price (US$)|
|Methodologies||Weight assigned||Fair Price||Weighted average price|
|Fair price using P/Adj. BV approach||50.00%||33.84||16.92|
|Fair price using P/E approach||50.00%||39.00||19.50|
|Weighted average fair price||36.42|
|Upside from current levels (US$)||-58.2%|
book value numbers are after our economic marking and adjustments, of
course. The “E” portion of the P/E ration is quite conservative, since
the we built model incorporated BSC doing much better during the next 4
fiscal quarters than their peers are reporting for this quarter, and in
my opinion BSC will not only fail to match their peers, but underperform
due to the loss of their primary value drivers – mortgage derivative
and related fixed income products – not to mention their asset
management, legal, and litigation distractions as well as client and
talent retention issues.
Am I right about the Bear?
the Bear Stearns negative developments, and my opinion of its value,
Bear Stearns has managed to find investors as was mentioned earlier in
the insider transaction section. These are accomplished and wealthy
investors to boot. My concern is that so many astute, accomplished and
economically powerful investors have failed to realize and fully
appreciate the depth and breadth of the current real asset recession,
burst bubble, and quite possibly asset depression we have recently
entered. This has destroyed the value of many bottom fishing value
investors, both intitutional and retail.
And this is a summmary of my takes on Lehman Brothers from a similar period:
(February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers
Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are
paying off for them. The have the most CMBS and RMBS as a percent of
tangible equity on the street following BSC. The question is, “Can they
monetize those hedges?”. I’m curious to see how the options on Lehman
will be priced tomorrow. I really don’t have enough. Goes to show you
how stingy I am. I bought them before Lehman was on anybody’s radar and I
was still to cheap to gorge. Now, all of the alarms have sounded and
I’ll have to pay up to participate or go in short. There is too much
attention focused on Lehman right now. ) | I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton | Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008 | It appears that I should have dug deeper into Lehman! May 2008
that we've established a small base of potential credibility when it
comes to bank failure, back to today and Dick's proclamations on CNBC,
let's start with Bank of America, who Dick says won't be affected by
European malaise. This is Reggie's take...
Then there's Goldman Sachs, the bank where Reggie is just so loved...
all, I'm sure there'll be no volatility in the markets if Europe blows
up. Then again, even if there is volatility in the markets, Goldman's
prop desk can handle it, right? I sure hope you guys don't think I'm being a Dick, do you?
What Was That I Heard About Squids Raising Capital Because They Can't Trade? Well, you guys know where I stand on this, and I have warned you ad nauseum...the Squid Can't Trade!
After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?
Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?
to the next Banque de Dick... You'd think with Dexia in the news, one
would know to either stay clear of JP Morgan or at least subscribe to
the BoomBust, eh? CNBC reports today (as highlighted in the introductory
graphic) France, Belgium Wrangle About Dexia Deal: Reports. Why is this important? Well, look at why Dexia's in trouble in the first place. In the (must read) post
Dexia Sets A $5.1bn Provision For Loss On Trying To Sell The Same
Residential Real Estate Assets Upon Which JP Morgan Has Slashed
Provisions 83% to $1.2bn from $7.0bn you will find..
many sell-side researchers award stocks “buy” or “overweight” ratings
even as their internal asset-management units unload shares, presenting a
conflict of interest and ethical dilemma. Goldman’s most famous
front-runs to date were the Abacus transactions, through which the bank
allegedly postured for high ratings for its mortgage-backed CDOs, sold
them to clients and then shorted them.
to research from the Street.com, Goldman put a Conviction Buy
Recommendation on JP Morgan Chase shares and issued it to their clients,
and then sold 4,200,009 shares of JPMorgan Chase. At an average of
$45/share, that means that Goldman had a lack of conviction in its own
"Conviction Buy" recommendation to the tune of $189,000,405. I'd hate to
see what the company would do if they recommended clients sell, or
worst yet short sell, stock. Oh yeah! We already know, don't we.
Bloomberg reports: Dexia Takes 3.6 Billion-Euro Charge on Asset Sales
charge taken by Dexia was more than necessary, and most likely not
nearly enough. But wait a minute, why did JP Morgan do the exact
opposite regarding the exact same asset class?
Do you remember my recent missive "There’s Something Fishy at the House of Morgan"?
Well, in it I queried how it was that JP Morgan can continuously pull
risk provisions and reserves to pad quarterly accounting earnings at
time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:
invite all to peruse the mainstream financial media and sell side Wall
Street's take on JP Morgan's Q1 earnings before reading through my take.
Pray thee tell me, why is there such a distinct difference? Below are
excerpts from the our review of JP Morgan's Q1 results, available to
paying subscribers (including valuation and scenario analysis): JPM Q1 2011 Review & Analysis.
'Nuff said! Let's move over to Morgan Stanley... The Truth Is Revealed About The Riskiest Bank On The Street - What Does That Say About The Newest Bank To Carry That Title? You know, I'm still quite bearish on Asian, European and American banks. Just look at the facts as they're laid before you...