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Are big banks value traps ?

Spekulatius

By Spekulatius
in Strategies

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bennycx Newbie

bennycx

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Buffett seems to think interest rates will stay low. What is he seeing that others aren't?

 

Where did you get that? My impression is that he thinks it will rise eventually

 

He's said it lots of times during interviews. Kept talking about how the stock market is cheap if interest rates stay low. I don't think he would say that if he though interest rates were going to go up over the intermediate/long term.

 

He even said this in the recent letter:

 

"Forecasting interest rates has never been our game, and Charlie and I have no idea what rates will average over the next year, or ten or thirty years. Our perhaps jaundiced view is that the pundits who opine on these subject reveal, by that very behavior, far more about themselves than they reveal about the future.

 

What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time

perform far better than long-term, fixed-rate debt instruments."

 

If something close to current rates should prevail. That's the key which makes me think that he thinks those are the odds.

 

 

OK, but what he is Actually doing recently is issuing long term fixed rate bonds in EUR. I agree he may think it will stay around this level or rise very slowly but it is unlikely he thinks it will go lower or even stay this low for a very long time.

 

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stahleyp Newbie

stahleyp

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Buffett seems to think interest rates will stay low. What is he seeing that others aren't?

 

Where did you get that? My impression is that he thinks it will rise eventually

 

He's said it lots of times during interviews. Kept talking about how the stock market is cheap if interest rates stay low. I don't think he would say that if he though interest rates were going to go up over the intermediate/long term.

 

He even said this in the recent letter:

 

"Forecasting interest rates has never been our game, and Charlie and I have no idea what rates will average over the next year, or ten or thirty years. Our perhaps jaundiced view is that the pundits who opine on these subject reveal, by that very behavior, far more about themselves than they reveal about the future.

 

What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time

perform far better than long-term, fixed-rate debt instruments."

 

If something close to current rates should prevail. That's the key which makes me think that he thinks those are the odds.

 

 

OK, but what he is Actually doing recently is issuing long term fixed rate bonds in EUR. I agree he may think it will stay around this level or rise very slowly but it is unlikely he thinks it will go lower or even stay this low for a very long time.

 

Are you talking about the 5 year one for a billion eur? The yield is basically 0%. I agree that I don't think he thinks they'll go below zero here.

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rb Newbie

rb

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This is all very nice, but did anyone bother to run the numbers for the banks? Let's do that.

 

Given that the balance sheets for US banks are in pretty good shape you can do this fairly easily on the back of the envelope DDM. So the model looks like this:

 

P=(E*(1-d)-TCE*g)*(1+g)/(r-g) , where

 

E=earnings

d=discount to earnings due to NIM compression caused by low rates

g=growth rare

r=discount rate

 

You take LT rates down to zero and you basically get a d around 20% and r is a conservative 6%.

 

Normally I would like to use WFC here. But given their current challenges and the weird Q4 I don't think they're the ideal candidate. So I'll use BAC instead. Their E=26Bn and TCE=172B.

 

If g=2% the P=441Bn if g=4% then P=723Bn

 

Out of courtesy to our friend Spek, let's whack their earnings by 40% (not realistic, but no reason we can't have some fun with this). Then @g=2% P=308Bn and @g=4% P=452Bn.

 

BAC closed at P=224 Bn on Friday. In reality it's probably lower than that due to buybacks. That's a 27% discount to the lowest scenario enumerated above. Sure, I would LOVE to buy it below TCE. But there really isn't any reason to make sense to get there to buy it. Fact is that the US banks are cheap. I should really buy some more come monday.

 

As an aside, another interesting one out there is BK. They've had the shit kicked out of them during the past coupe of weeks. Their NII is much, much more sensitive to rates compared to moneycenter banks. But NII-to-non-NII is a much smaller ratio compared to moneycenter banks.

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Gamecock-YT Newbie

Gamecock-YT

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When things actually get bad in the economy what will they do next to stimulate?

 

Futures down ~3%. I am impressed. Could easily end up being an other limit down day.

 

limit down

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meiroy Newbie

meiroy

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My understanding of what FED people are saying is that negative rates would be "inappropriate" and that they assume reopening the economy by the beginning Q3, hence the forecasted rapid GDP growth in Q3 and Q4. If it doesn't reopen by then, it's a full-scale depression with the possibility of a financial crisis.

 

 

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