Banking Hell, Tuesday, January 12, 2010
As I have stated throughout all of last year, the macro, fundamental and political headwinds facing banks make them good shorts and risky investments. They faced a good run in this recent bear market rally, but the spirits have cursed them for the medium term. In addition, these guys act as if they have never heard of PR and strategy, ex. this bonus thing.
Recap in the news:
- Major Banks Being Targeted for Higher Fees, Taxes
- FDIC Floats Plan to Boost Fees
- Obama Going Where Money Is
- FDIC Wants to Shift Burden to Banks Taking Risks: Bair
These fees are coming when banks are not really making the money that it seems like they are making. The big profits stem from the fact that the government gave the "OK" to lie about the credit losses on the rotten assets. These profits are fake if netted out against credit and asset losses. Hence, the bonuses are fake too. If the bonuses get paid out against the backdrop of increasing credit losses and still deflating asset values held with significant leverage on the balance sheet, you would have let the last horse out of the barn.
These proposed fees will just make things worse for the banks. I see bonuses being reduced simply by the mere fact that they are given out as stock at the top of a mini-bank bubble!!!
I seem to have been one of the very few was bearish on Goldman and Morgan Stanley in early 2008 (see links at the bottom of this post as well as Get Your Federally Insured Hedge Fund Here, Twice the Price Sale Going on Now! and It appears as if the patina on Goldman's Stock is fading... and The Riskiest Bank on the Street).
As illustrated to subscribers in the Morgan Stanley Forensic Outlook: Q1 2010 2010-01-05 04:20:36 504.53 Kb, the bulk of the valuation increase for the big investment banks stems from the peer group bear rally premium of the last 9 months. If, or more accurately, when that premium dissipates, the whole sector will drop in fundamental value. I don't believe the banks are worth what they are trading at now, but comps are comps. Let's take a look at the comp trend.
As you can see, thanks to the bear market rally, the enire I bank peer group has enjoyed a big bump in valuation - one that I believe will prove to be transient, to say the least.
If I am right, then these I bank stocks will collapse for the value drivers just aren't there to drive the valuation. Nearly all business units are trending down save a bump or two, FICC and trading arbitrage can't last forever (some analysts say the party is over already), and eventually the credit losses and asset devaluations on the balance sheet will come a knockin', despite the "get 4 quarters' worth of free mark to market lies" from the powers that be. Residential real estate is resuming its downtrend (see If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...) as credit loses resume their uptrend (seeThe Truth! The Truth? Banker's Can't Handle the Truth!!! and Residential Lending Credit Losses Worsen as Unstainable Government Support Proves... Unsustainable).
Check out Goldman Sachs today, and for the last 30 days.
More of Reggie on Goldman Sachs
Free research and opinion
- Reggie Middleton on Goldman Sachs' fourth quarter, 2008 results
- Goldman and Morgan losses in the news, about 11 months late
- Blog vs. Broker, whom do you trust!
- Monkey business on Goldman Superheroes
- Reggie Middleton asks, "Do you guys know who you're messin' with?"
- Reggie Middleton on Risk, Reward and Reputations on the Street: the Goldman Sachs Forensic Analysis
- Reggie Middleton on Goldman Sachs Q3 2008
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