Woohooo! Short squeeze is on...

[brewer12345]

Looks like someone finally bought the Fed a clue.

Dec. 12 (Bloomberg) -- The Federal Reserve plans to ease
``elevated'' short-term funding pressures by injecting cash to
banks through auctions and providing $24 billion in currency swap
lines to the European and Swiss central banks.
The Fed is coordinating the measures with the European
Central Bank, Bank of England, Bank of Canada and Swiss National
Bank, the Fed said in a statement in Washington. The Fed will
auction term funds to banks against a ``wide variety of
collateral.'' All ``generally sound'' institutions can
participate, the statement said.
The central banks are taking the steps after demand for cash
sent borrowing costs climbing. The Fed's previous attempts to
ease the credit squeeze that began in August have failed to have
lasting effects. One gauge watched by central bankers, the three-
month dollar London Interbank Offered Rate, rose to 5.15 percent
a week ago, the highest in almost two months.

[Rustic23]

Brewer,
For us uneducated in the world of finance, could you translate?

[brewer12345]

The money markets (short term funding) have been under a huge amount of stress, especially WRT funding over the end of the year. That is why short term rates have been rising (like any flavor of LIBOR you care to name) despite fed rate cuts. This has completely frozen the machinery of the regular funding markets of all kinds as liquidity was nowhere to be found (at any price, in some cases). Yesterday after the Fed cut rates was even worse because the market believed that the Fed was abandoning the system to its fate.

But this new action by the Fed means that they are dumping pretty much unlimited liquidity into the banking system and they are doing it away from the discount window (which carries a stigma). And the UK, Swiss, Canadian and UK central banks are coordinating similar actions with the Fed. If we have a modicum of luck, this will be the thing that cures the liquidity squeeze.

[TeeRuh]

Brewer, (Another uneducated question) Is there any particular investments I should be looking at to take advantage of this? (particular bonds or something?) Or is the benefit just that our economy will now survive and I can stop buying bullets?

Thanks,
t.r.

[brewer12345]

Assuming that this (and possibly other fed actions) work to break up the liquidity logjam, financials are the biggest and morst direct beneficiaries. You could play this by buying KRE (regional bank etf) or XLF (S&P financial index etf), or by buying finance company bonds (pick large names that have a solid business).

[FinanceDude]

Quote:

Originally Posted by brewer12345 Assuming that this (and possibly other fed actions) work to break up the liquidity logjam, financials are the biggest and morst direct beneficiaries. You could play this by buying KRE (regional bank etf) or XLF (S&P financial index etf), or by buying finance company bonds (pick large names that have a solid business).

Look like loading upon financials a couple months ago would have been fortuitous...........

I bought some large chunks of Wells Fargo and Washington Mutual, also JPMorgan and Bank of America.

[TeeRuh]

Thanks guys. I'm pretty new here but already have a lot of respect for your thoughts.

t.r.

[Running_Man]

In looking at all the data I still fail to see how this is a net positive for the banks. The reality is noone wants the paper they are dispensing so the Fed is providing them with funds that will not be obvious so they can borrow to meet reserve requirements without really meeting reserve requirements. This is a method to forstall the sale of worthless paper in the hopes the value of the paper will increase.

To my straight arrow view the financial world was borrowing short term and selling long term instruments and now the undoing of this mess is coming back to haunt them as their long term paper is going bad in record numbers. This is what happens when fees are the main motivation behind creating loans. If this desperate move does not work then what is next?

The data is showing the underlying problem is deepening not easing, so why hurry into these? I admit KRE has stopped falling for the last 2 weeks but still is only 2 points off it's low. The Federal Reserve and Central Banks are incapable of buying all the bad paper that has flooded the world, a hope that time will give value back is unlikely to me. I would continue to avoid the financial stocks until the outcome is much more certain.

[FinanceDude]

Quote:

Originally Posted by Running_Man In looking at all the data I still fail to see how this is a net positive for the banks. The reality is noone wants the paper they are dispensing so the Fed is providing them with funds that will not be obvious so they can borrow to meet reserve requirements without really meeting reserve requirements. This is a method to forstall the sale of worthless paper in the hopes the value of the paper will increase. To my straight arrow view the financial world was borrowing short term and selling long term instruments and now the undoing of this mess is coming back to haunt them as their long term paper is going bad in record numbers. This is what happens when fees are the main motivation behind creating loans. If this desperate move does not work then what is next? The data is showing the underlying problem is deepening not easing, so why hurry into these? I admit KRE has stopped falling for the last 2 weeks but still is only 2 points off it's low. The Federal Reserve and Central Banks are incapable of buying all the bad paper that has flooded the world, a hope that time will give value back is unlikely to me. I would continue to avoid the financial stocks until the outcome is much more certain.

You have to dig deeper..........each stock has varying degrees of exposure to the sub-prime market. In addition, the market has priced most of the bad news in, not that they couldn't drop 5-10% more for some of them.

I WOULD stay away from PMI folks like MGIC.......

[brewer12345]

Lots of babies being thrown out with the bathwater. Take a look at HCBK and AF today. Gettting hit pretty badly with the rest of the banks, but they have no liquidity issues, no credit issues, and ample capital. I could find you another dozen just like them.

[Running_Man]

I have just finished reading the AF third quarter earnings transcript and reviewed the SEC filed third quarter financials. Why banks continue to buy their own stock at times like this amazes me. AF purchased 20 million dollars worth of their stock in the 3rd quarter and for the year has purchased 67 million, which along with dividends paid of 71 million means they used 138 million for these 2 basic financing activities on a total income of of 105 million.

So far their earnings are down 18 percent year over year and they are expecting an increase in margins but admit that the rise in short term CD's is forcing them into borrowings from other sources and squeezing margins in the 3rd quarter.

To their credit they have only made very good prime loans and their non-performing while up about 50 percent from prior year is still very low. They are expecting loan originations to increase next year which seems unlikely but we'll see. Expecting earnings next year of maybe 1.75-1.85 up from the 1.50 they'll have this year and a 5-7 percent growth rate for future year and I'd pay a PE of 12 * 1.80 = 21.60 would be a price I'd be willing to pay assuming their information turned out to be correct. That would allow for 5-7 percent earnings growth and 4 percent dividend for a total expected return of 9-11 percent per year if the business stayed on track.


Now as the AF has twice bounced off of 23 I'd imagine there are quite a few people willing to pay 13-14 PE for their stock, but I'd wait for it to fall further myself and at the peak price of 31 and PE of 17.2 I'd always be a seller.

All of this of course ignores the risk that the housing market could suffer further strains and eventually effect their portfolio and with it the need for cash which would be hard to come by profitably for this bank if it occured.

[clifp]

Quote:

Originally Posted by Running_Man I have just finished reading the AF third quarter earnings transcript and reviewed the SEC filed third quarter financials. Why banks continue to buy their own stock at times like this amazes me. AF purchased 20 million dollars worth of their stock in the 3rd quarter and for the year has purchased 67 million, which along with dividends paid of 71 million means they used 138 million for these 2 basic financing activities on a total income of of 105 million. .

FWIW, I learn a lot watching you two toss jab arguements back and forth. Right now I am on Brewer's side of this debate, and my portfolio (sadly) reflects this.

If you don't mind Running Man, could you give me a little background on your investment training/history philosphy.

I guess I am interested in why are you reading financials for a fairly obscure S&L if you have no intention of investing in it?

I just bought some ASBC a nice boring conservative midwestern bank with minimal exposure to sub primie loans and 36 years history of raising dividends.

[Running_Man]

Quote:

Originally Posted by clifp FWIW, I learn a lot watching you two toss jab arguements back and forth. Right now I am on Brewer's side of this debate, and my portfolio (sadly) reflects this. If you don't mind Running Man, could you give me a little background on your investment training/history philosphy. I guess I am interested in why are you reading financials for a fairly obscure S&L if you have no intention of investing in it? I just bought some ASBC a nice boring conservative midwestern bank with minimal exposure to sub primie loans and 36 years history of raising dividends.

My investment training is as a self taught investor starting in the late 1970's. My first investments were disasters in a year the DJIA increased the mutual fund our retirement plan offered dropped 37 percent, back then we only had one choice. I determined I'd rather learn on my own than trust a group looking for my money. I originally worked as a chemist in research in the specialty chemical area through the 1980's and while working as a chemist found that the life expectancy of chemists is quite shorter than other professions so went to school and obtained my accounting degree and CPA credentials. My philosophy is that one can make plenty in the stock market if you wait for the odds to truly be in your favor and I believe in holding between 25 and 75 percent stocks in your portfolio based on where I believe the value of the stock market is at the time. This is truly the advantage of being an individual investor. This year is unique for me as I went against my rules to zero stocks because I was convinced early on this year the housing problem is far worse than anything people have thought and economies with severe housing issues have not had good stock market successes.

I read the financials of AF because Brewer has twice commented that the company was a good company. So I wanted to look at the company to see if it was indeed a good value. And of the banks I have looked at in the last 4 months I do think it is one of the best at making loans and knowing their market. They definitely feel they are going to improve their earnings next year but despite that I feel the stock is overvalued by what I stated earlier.

[brewer12345]

If AF has significangt credit quality problems, wewill be looking for overpasses to live under.

I predict that you will never buy a bank stock, as you clearly do not understand what you are looking at.

[Running_Man]

That I know is incorrect, back when you were in high school in 1991 I bought Synovous Financial and held until it was added to the S&P500 in 1997, it was a nice 6 year nine-bagger. 10 years later it is trading for only slightly higher price. There are times to buy bank stocks but they can trade very low. To buy such a high risk companies at a high PE is not necessary, they will continue to struggle and come to the prices I expect. IF not there will be other opportunities, but this housing crisis is a once in a lifetime event, it is just too easy to think it is over when it is just starting.....

[pedorrero]

Moral hazard is alive and well! May you turn out to not be the "greatest fool" when the end finally comes, if it ever does!

[brewer12345]

ASBC looks like a nice bank. I will have to do some digging on it. I like the geographic location and spread of business.

He was (mis)reading the financials of AF to jab at me.

[Running_Man]

Quote:

Originally Posted by brewer12345 ASBC looks like a nice bank. I will have to do some digging on it. I like the geographic location and spread of business. He was (mis)reading the financials of AF to jab at me.

You are misreading my intentions, you post on a great variety of stocks and subjects and I do not comment on the ones I do not feel I have sufficient knowledge, for example the shipping stocks, where I think your commentary is very good. I comment because I believe an opposite view should be told if I believe the opposite is true from what you state.

I try and be specific with my reasons, you have consistently maintained since June that they were absolute bargains, and that the regional banks are unaffected by the housing crisis, and I was wrong because am not understanding the banking financials.

The last six months have been a validation to this point in my position and I anticipate this to continue. However I am watchful to determine if I am incorrect and willing to admit it to be so if it happens. But when you look at a long term chart rarely do you need to rush in to buy a stock or risk missing a major move. You are having such a clear following on stocks to buy on these boards that I feel a note of caution is wise to those willing to conceded a different viewpoint and I attempt to keep my comments specifically and pointedly on the stocks themselves. Time itself will determine if my comments are of any value and I am quite patient in awaiting time's decision.

[clifp]

Quote:

Originally Posted by Running_Man You are misreading my intentions, you post on a great variety of stocks and subjects and I do not comment on the ones I do not feel I have sufficient knowledge, for example the shipping stocks, where I think your commentary is very good. I comment because I believe an opposite view should be told if I believe the opposite is true from what you state. I try and be specific with my reasons, you have consistently maintained since June that they were absolute bargains, and that the regional banks are unaffected by the housing crisis, and I was wrong because am not understanding the banking financials. The last six months have been a validation to this point in my position and I anticipate this to continue. However I am watchful to determine if I am incorrect and willing to admit it to be so if it happens. But when you look at a long term chart rarely do you need to rush in to buy a stock or risk missing a major move. You are having such a clear following on stocks to buy on these boards that I feel a note of caution is wise to those willing to conceded a different viewpoint and I attempt to keep my comments specifically and pointedly on the stocks themselves. Time itself will determine if my comments are of any value and I am quite patient in awaiting time's decision.

I appreciate hearing the opposite view a lot.

Brewer is clearly a smart guy and professional investors and as such I take his suggestions seriously. Now I don't buy any stock just because some guy on the internet says so, but I do investigate hot stick tip from anybody who I think has some good insights. I read the financials,look at what other analysts are saying (I give a fair amount of weight to M*) little to everybody else. I then make my decision based on how a stock fits in my portfolio.

I've tried using screener (P/S < 2 P/BV < 1.5 P/E < 20 etc.) and found that I generally wasn't able to gleam from just the financial information why a stock was likely to go up. So I needed a good story. The thing I like about Brewer is generally provides some context. "Day rates are skyrocketing and DSX has new fleet with fairly short term contracts" If I was a good Warren Buffet disciple I'd read annual reports, decide what the company is worth and then look at the stock price. Unfortunately, I suspect that Warren's way is the probably surest way to make money over the long run but I lack his discipline.

The one thing I have going for me is I am contrarian investor, and I have a natural tendency to want to buy when a stock goes down or sell when it goes up a lot. More often than not this leads me too buy and sell too early.

In the case of financial stock, I know have been trying to catch a falling knife. The folks at M*, smart guys like Brewer, my own bias toward companies paying healthy growing dividends, couple with a strong belief that the systems is rigged in favor of financial companies, scream bargain to me.

However when another smart guy with CPA looks at the financial says hey these stock are likely going to be marked down in the future. I wonder if I not looking at the Dec 23 20% mark down of Xmas cards, while I should be waiting for the 70% off sale after Xmas.

Brewer a bit of friendly advice a thick skin is handy thing on a discussion board, cause attacks against your ideas often aren't personal.

[FinanceDude]

Quote:

Originally Posted by brewer12345 ASBC looks like a nice bank. I will have to do some digging on it. I like the geographic location and spread of business. He was (mis)reading the financials of AF to jab at me.

I have owned ASBC for some time now........