Get ready to lose money on BAC!

[Parsad]

the obsession with tangible book is transitory. someday US Trust Merrill Lynch will be valued at ~ 2 x TB. Someday the deposit gathering system will be worth more than tangible book. So this obsession with tangible book is really a ZH/CW "phenomenon" that will someday not matter. It's a function of confidence.

 

My point exactly...well said!  The main concern should always be is the business' operations improving?  Are the legal liabilities being crystalized and given an exact number?  Are loan losses increasing or decreasing?  Does the business have enough liquidity?  Cheers!

 

[Guest misterstockwell]

what is a ZH/CW "phenomenon"?

 

It's peter saying that any negative comment against anything bullish or sacred must have originated at ZeroHedge or something with initials CW, neither of which I read unless linked by someone(which is rare).

[Guest misterstockwell]

Maybe warrants, but Buffetts 700 million shares convert far below tangible book. I am not sure about the other preferreds

 

the obsession with tangible book is transitory. someday US Trust Merrill Lynch will be valued at ~ 2 x TB. Someday the deposit gathering system will be worth more than tangible book. So this obsession with tangible book is really a ZH/CW "phenomenon" that will someday not matter. It's a function of confidence.

 

Tangible book always matters. It is not an obsession. It's at the heart of any financial investment whether good times or bad.

 

[PlanMaestro]

My point exactly...well said!  The main concern should always be is the business' operations improving?  Are the legal liabilities being crystalized and given an exact number?  Are loan losses increasing or decreasing?  Does the business have enough liquidity?  Cheers!

 

 

Parsad, just to continue the discussion. I am much more worried about overzealous regulators than all those other issues. They carry their own strong momentum and are limited in their damage.

 

And after two years of improving on all those fronts, it might be time to give some thoughts, but only some, to the upside! (and I want a pony for Xmas)

[PlanMaestro]

nobody was mentioning the tangible book value of finance companies in 2007.

 

And that was a problem.

 

We want a well capitalized banking system that can survive shocks, not only one that makes money. Bankers will do stupid things, Wells will do eventually, and we want a system that can survive that stupidity. ie: Irish banks were money making machines ... and that was not enough.

[PlanMaestro]

that wasn't my point. my point is that financial companies were valued on earnings power (and not tangible bv). the last time was 2007. They will again.

 

Peter_Burke, sometimes I do not know what is your point. Maybe you are implying is that there are going to be greater fools, buying risky earnings with low TBV. I hope that is not your point, because I am not sure we want another crisis like this one for a long time.

 

That heavy emphasis on earnings valuation was a key component of this mess. The easy way to grow earnings is increasing leverage. Lehman, Bear and all the IBs going from 15x to 30x. Some retail banks increasing loans/deposits to 120%, TCE ratios of2% and using fleeting brokered deposits.

 

When you forget about TBV, you can be easy prey to risky bankers. Valuations have to be balanced against risk.

[PlanMaestro]

 

what is your point? mine is a simple one. you don't think there will ever be animal spirits flowing again with finance companies? you're talking about a utopia and a managed economy if you think that investors will never focus on what these companies will earn "next year". I am talking about human nature and what happens when everybody is happy, positive, and bullish in the sweet spot of the cycle. Yes, in a perfect world everybody will read their daily doses of ZH and CW and they will fret that BAC trades above it's tangible bv and nobody would ever overeach and do something silly like pay 14 times earnings for something. The reality is that we will over shoot again and start forgetting what happened in 2008/2009. Finncial history says as much.

 

Well 1940s, 1950s, 1960s was kind of banking Utopia (3-6-3). And there are several countries that have controlled those animal spirits.

 

I do not invest based on finding a greater fool and actually hope that a good capital and regulatory balance is achieved, because banking is a great LT investment w/o banking crisis. One of my great errors was not investing in Chilean banks when they were reprivatized after the 1982 crisis and the really strong banking regulation reform. But I was young.

[moore_capital54]

Peter Burke speaks the wisdom of an investor that has been through several cycles. I couldn't agree more.

[PlanMaestro]

perhaps the greater fools in late 2011 are ZH and CW.

 

We agree on that one.

[Cardboard]

"The reality is that we will over shoot again and start forgetting what happened in 2008/2009. We will start valuing finance companies on what they can earn again. Financial history says as much."

 

This is true, but the issue is timing. It may take 30 years to get there again. That is what history says too. And Moore_Capital, you should know that too well only looking at gold.

 

IMO, banks will look like regulated utilities for the next 10 to 15 years with decent ROE and low growth. Back in 06, they were earning such high return on book value that only a multiple of earnings made sense to value them. That is why no one looked at things like tangible book value. It was a warning side. If the ROE is now 10 to 12%, then trading above 1.5 times book will look silly. That ratio will go hand in hand with P/E, so people will keep looking at that ratio for a long time.

 

Cardboard

[Guest Hester]

Who is CW?

[SFValue]

I guess Countrywide???

[stahleyp]

what is a ZH/CW "phenomenon"?

 

It's peter saying that any negative comment against anything bullish or sacred must have originated at ZeroHedge or something with initials CW, neither of which I read unless linked by someone(which is rare).

 

 

ahhh, cool. Thanks! :)

[ubuy2wron]

perhaps the greater fools in late 2011 are ZH and CW.

 

We agree on that one.

ZH- such a concentration of nasty misanthropes. I do find myself straying over there when I want to hear what the otherside is thinking and they are the other side.

[txlaw]

I also think that BAC becoming more of a utility is much better in the long run and that this is what will happen, at least with respect to the commercial banking side.  In fact, I actually think that the hardcore focus by regulators has been great because it has forced companies like BAC to divest non-core assets and focus on the best businesses they have in their portfolio.

 

I really hope that BAC's commercial banking side becomes more like WFC.  Focus on cheap, sticky deposits, sound lending, and cross selling.  And then on the ML side, I hope that they become more like a GS. 

 

I agree with with Peter Burke on the big banks being valued on earnings power.  Ultimately, the thing that makes well run finance companies (key words -- "well run") attractive businesses is the intangible economic goodwill that WEB refers to in his letters.  Finance companies are weird because the liabilities are the assets, and the assets are the liabilities.  Value add comes from intangibles like the organizational structure, sticky deposit base, brand power, business relationships, underwriting discipline, etc.  TBV/share is a decent way to determine runoff value or recapitalization value, but only assuming that the regulators will not seize the problem operating subsidiaries or that there is no "run on the bank."

 

Further, if you do care about TBV, you should keep in mind that TBV before the financial crisis was comprised of a good proportion of toxic sludge.  TBV after the financial crisis, on the other hand, is comprised of much sounder assets than we have seen in a long time in the US banking sector, no matter what fear mongers might have you believe.  The pig is almost through the python.

[enoch01]

perhaps the greater fools in late 2011 are ZH and CW.

 

We agree on that one.

ZH- such a concentration of nasty misanthropes. I do find myself straying over there when I want to hear what the otherside is thinking and they are the other side.

 

The quality of the commentary has declined significantly since 2009.  Today it probably gets more traffic than back then, but it has become an echo chamber about political conspiracy theories, gold, Blythe Masters, John Paulson, etc - notwithstanding the quality of the posts by Tyler Durden.  I consider that a potential contrarian datapoint.

 

I would be worried about an upcoming crash if ZH's traffic started to decrease significantly.  I still read it regularly, to try and cover all bases.

[moore_capital54]

The way I look at ZH is "Glass half empty at best"

 

Btw do any of you know what Jim Chanos's long-term returns are? As a master cynic you always see him looking at the world glass half empty.

 

I will leave it to you guys to try and find out, if not I will post the answer.

[Uccmal]

The pig is almost through the python.

 

That sort of describes my sentiments.

 

Moore, last I checked, after the financial crisis, Chanos multi-year returns were zero.

 

Al.

[Parsad]

The pig is almost through the python.

 

That sort of describes my sentiments.

 

Moore, last I checked, after the financial crisis, Chanos multi-year returns were zero.

 

Al.

 

Well, actually Chanos provides a very important service of negative correlation to his institutional clients as I was told many years ago when I questioned his numbers.  ;D  It's worth it for those institutions to pay him "2 & 20" for near zero returns over 15-20 years!  Plus how else could he get a beautiful escort like Ashley Dupree to call him "Uncle Jim", when he was putting her up at his Hampton home for buddy Elliott Spitzer.  Cheers!

[moore_capital54]

LOL EXACTLY PARSAD ITS ZERO......

 

And I had this same argument with one of our LP's who has $5 million with Kynikos, hes had that $5 million with him since 1999.

 

Being a cynic is not how you make money in the stock market, unless you take concentrated short positions and construct a net short portfolio. Problem is being net short is extremely risky with the downside much higher than the upside (ask Elliot Management about shorting Volkswagen in 2009).

 

CDS's and other derivatives provided the asymmetry to be short a large amount of risk for very little down, but we now know this was only due to a flaw in the system (AIG).

 

For these reasons, the best way to make money as an investor in the stock market is being net long over time, equities, and being the most long when the cynics are out in full force. That is all contingent upon good research of course zeroing in on businesses trading at a fraction of their intrinsic value.

[moore_capital54]

Another thing about ZH, I lost a lot of respect for the guy when he started letting Doug Casey write guest posts, or when he started quoting Doug Casey.

 

For those that don't know about Doug Casey he is the type of human being that I believe was personified almost perfectly in the most recent Mission Impossible Movie as "Hendricks" the swedish physicist who wants to cleanse the world with a nuclear weapon.

 

Doug Casey has built a resort in Argentina in anticipation of the end of the world, he is absolutely crazy.

[treasurehunt]

 

Tangible book always matters. It is not an obsession. It's at the heart of any financial investment whether good times or bad.

 

nahh. Buffett could care less about tangible book for wells. I am positive there will be a day when people could care less about it and will focus entirely on earnings power. nobody was mentioning the tangible book value of finance companies in 2007.

 

Here's Buffett on Wells Fargo  at the depths of the financial crisis in March 2009: http://money.cnn.com/2009/04/19/news/companies/lashinsky_buffett.fortune/index.htm

 

Looks like peter_burke_ceo is absolutely correct. Some excerpts from the interview:

 

Dick Kovacevich specifically told me to ask you your views on tangible common equity.

 

What I pay attention to is earning power. Coca-Cola has no tangible common equity. But they've got huge earning power. And Wells ... you can't take away Wells' customer base. It grows quarter by quarter. And what you make money off of is customers. And you make money on customers by having a helluva spread on assets and not doing anything really dumb. And that's what they do.

 

But back to tangible common equity...

 

You don't make money on tangible common equity. You make money on the funds that people give you and the difference between the cost of those funds and what you lend them out on. And that's where people get all mixed up incidentally on things like the TARP. They say, 'Well, where'd the 5 billion go or where'd the 10 billion go that was put in?' That isn't what you make money on. You make money on that deposit base of $800 billion that they've got now. And that deposit base I guarantee you will cost Wells a lot less than it cost Wachovia. And they'll put out the money differently.

 

So what is your metric for valuing a bank?

 

It's earnings on assets, as long as they're being achieved in a conservative way. But you can't say earnings on assets, because you'll get some guy who's taking all kinds of risks and will look terrific for a while. And you can have off-balance sheet stuff that contributes to earnings but doesn't show up in the assets denominator. So it has to be an intelligent view of the quality of the earnings on assets as well as the quantity of the earnings on assets. But if you're doing it in a sound way, that's what I look at.

[Rabbitisrich]

LOL EXACTLY PARSAD ITS ZERO......

 

And I had this same argument with one of our LP's who has $5 million with Kynikos, hes had that $5 million with him since 1999.

 

 

Are you saying that the principal didn't budge over 12 years? What is your LP's reasoning for staying in the fund versus a simple hedging strategy?

[PlanMaestro]

 

Here's Buffett on Wells Fargo  at the depths of the financial crisis in March 2009: http://money.cnn.com/2009/04/19/news/companies/lashinsky_buffett.fortune/index.htm

 

I guess the indirect mention of Ireland to avoid a direct discussion against the master was lost (he had Bank or Ireland and Allied Irish Banks). If you invest in banks, the big risk is a financial collapse and the very real possibility of nationalization or at least large scale government intervention.  It has happened a lot (Chile, Mexico, Argentina, Scandinavia, IRELAND...) and remember that the master was heavy in financials at the time and nationalization of some financials was a real possibility.

 

Bankers risk taking is expressed both in high leverage and bad loans. But leverage is easier to detect and confirm. Those that have fallen shall be restored. Now is the time to focus on earnings, but do not forget TBV (and loans-to-deposits).

 

 

http://variantperceptions.wordpress.com/2010/09/08/charting-banking-xvi-loans-to-deposits/

http://variantperceptions.wordpress.com/2010/09/08/charting-banking-xvii-loan-to-deposits-history/

[treasurehunt]

 

Here's Buffett on Wells Fargo  at the depths of the financial crisis in March 2009: http://money.cnn.com/2009/04/19/news/companies/lashinsky_buffett.fortune/index.htm

 

I guess the indirect mention of Ireland to avoid a direct discussion against the master was lost (he had Bank or Ireland and Allied Irish Banks). If you invest in banks, the big risk is a financial collapse and the very real possibility of nationalization or at least large scale government intervention.  It has happened a lot (Chile, Mexico, Argentina, Scandinavia, IRELAND...) and remember that the master was heavy in financials at the time and nationalization of some financials was a real possibility.

 

Bankers risk taking is expressed both in high leverage and bad loans. But leverage is easier to detect and confirm. Those that have fallen shall be restored. Now is the time to focus on earnings, but do not forget TBV (and loans-to-deposits).

 

http://variantperceptions.wordpress.com/2010/09/08/charting-banking-xvi-loans-to-deposits/

http://variantperceptions.wordpress.com/2010/09/08/charting-banking-xvii-loan-to-deposits-history/

 

I wasn't trying to imply that tangible book value is unimportant. But the fact that Buffett himself does not seem to pay attention to TBV in valuing banks supports peter_burke_ceo's point that at some point in the future banks will be valued on earnings and not on TBV. Besides, doesn't Buffett's method make a lot of sense? Sure, you can use TBV and other metrics to ensure that a bank is safe, but it seems to me that the best way to value a bank is by using normalized earnings. Note that Buffett does say that the profits have to be earned conservatively; presumably he won't invest if he doesn't think operations are conservative.