Dawg52
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Talking heads saying stock market will test new lows for the year. Fed will probably cut rates. What to do? Buy, sell or hold? 
August jobs down 4,000..........
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Talking heads saying stock market will test new lows for the year. Fed will probably cut rates. What to do? Buy, sell or hold?
DCA and hold? That's my inclination, at any rate.
brewer12345
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This, IMO, puts rate cuts in the bag. Its the excuse the Fed was waiting for, so that Bernanke could cement his Whip Inflation Now credentials yet still ease rates for an economy that got sucker-punched in the last 6 weeks. The fact that the monthly job numbers are a lousy indicator and get revised all the time (in large amounts) will get forgotten in the immediate panic reaction.
The market wll have a knee jerk reaction downwards today, barring a sudden fed action (unlikely). But this means that the Fed will start whacking away this month. So I think that this may be an attractive buying opportunity for certain things. Banks will benefit enormously from rate cuts (KRE). The USD will probably continue sliding, so companies that get a lot of revenue overseas will be attractive, especially consumer staples. If you think that the BRIC cuntries will keep expanding, then weakness in shares of companies that will benefit from the continued expansion would be a buying opportunity.
Treasuries have had quite a ride, so it might not be a bad time to rebalance/take some money off the table.
The market wll have a knee jerk reaction downwards today, barring a sudden fed action (unlikely). But this means that the Fed will start whacking away this month. So I think that this may be an attractive buying opportunity for certain things. Banks will benefit enormously from rate cuts (KRE). The USD will probably continue sliding, so companies that get a lot of revenue overseas will be attractive, especially consumer staples. If you think that the BRIC cuntries will keep expanding, then weakness in shares of companies that will benefit from the continued expansion would be a buying opportunity.
Treasuries have had quite a ride, so it might not be a bad time to rebalance/take some money off the table.
Poundkey
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Brewer, would it be better to buy KRE now (before rate cuts) or wait untill they actually happen...or start happening?
Thanks
Thanks
brewer12345
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Dunno. All I can tell you for sure is that A) retail banks are as cheap as they have been in a decade and B) a sudden drop in lending competition plus rate cuts is a very happy combination for banks.
Poundkey
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OK....thanks Brewer. What you say certainly makes sense.
FinanceDude
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4,000 jobs isn't a lot to be down.......
brewer12345
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4,000 jobs isn't a lot to be down.......
Vs. expectations of +100k? Last two months' numbers were revised down, too, which carries some additional weight.
Running_Man
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I disagree that now is the time to buy banks, they have created a serious problem that is now leaking over to the rest of the economy. Only now is it even starting to hit stocks in general. The sense of this year I had was the following claims:
1) Subprime loans are not a factor
2) Subprime loans are not a factor for most banks and this will not spill over into the economy, regionally banks are still very strong.
3) Subprime loans will not effect the economy in general so the now is a good time to buy.
4) Subprime loans may effect the general economy some but it's effect will be controlled by the Fed and their foreign counterparts, the time to buy is when fear is around.
5) To now, well the subprime may be effecting the economy but now we are lowering interest rates so the bank stocks are a bargain.
Other than bank stocks, the decline in values in the stock market have never occured. There is too much panic in the policy makers actions to believe this is nothing to be concerned about in buying of stocks. I would wait for real declines before buying and banks would be the last item on my list until the entire scenario plays out. Despite all the assurances that they are not effected Countrywide continues to hit new lows.
I heard Mitt Romney yesterday say the FHA should roll over for the banks all the loans coming due in the next 2 years at the same interest rate that the holders have. If we get to the point where the government is taking on loans for mortgages that never should have been made, you know there is something seriously wrong in that sector and it is not a buying opportunity for anyone but individuals with highly confident information on the situation.
1) Subprime loans are not a factor
2) Subprime loans are not a factor for most banks and this will not spill over into the economy, regionally banks are still very strong.
3) Subprime loans will not effect the economy in general so the now is a good time to buy.
4) Subprime loans may effect the general economy some but it's effect will be controlled by the Fed and their foreign counterparts, the time to buy is when fear is around.
5) To now, well the subprime may be effecting the economy but now we are lowering interest rates so the bank stocks are a bargain.
Other than bank stocks, the decline in values in the stock market have never occured. There is too much panic in the policy makers actions to believe this is nothing to be concerned about in buying of stocks. I would wait for real declines before buying and banks would be the last item on my list until the entire scenario plays out. Despite all the assurances that they are not effected Countrywide continues to hit new lows.
I heard Mitt Romney yesterday say the FHA should roll over for the banks all the loans coming due in the next 2 years at the same interest rate that the holders have. If we get to the point where the government is taking on loans for mortgages that never should have been made, you know there is something seriously wrong in that sector and it is not a buying opportunity for anyone but individuals with highly confident information on the situation.
brewer12345
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RM, if you go dig around the balance sheets of individual banks, the vast majority have little or no exposure to subprime mortgages, either directly or indirectly. Some have some Alt A, which is of much better quality than subprime, and most have some home equity (but generally only prime quality loans). So while redit loss provisioning will remain higher than in the last couple years, you'd have to look hard to find regional/retail banks with significant credit quality problems sufficient to threaten the institution. The regulators have done a pretty effective job of keeing the real trash off bank balance sheets, by and large.
And look at the environment going forward. Most non-bank competition (who were enthusiastically pissing in the punchbowl) have either been blown into outer space sans pressure suits, or have been severely hampered by the capital markets suddenly refusing to finance them. Meanwhile, the vast majority of banks have healthy capital bases and continue to fund themselves the way they always did: with deposits and FHLB advances that are not market-dependent.
Adding 100BP of spread to bank loan portfolios and whacking deposit costs by 100BP makes a humongous difference in return on equity, especially when it is levered 10 to 14 times.
And look at the environment going forward. Most non-bank competition (who were enthusiastically pissing in the punchbowl) have either been blown into outer space sans pressure suits, or have been severely hampered by the capital markets suddenly refusing to finance them. Meanwhile, the vast majority of banks have healthy capital bases and continue to fund themselves the way they always did: with deposits and FHLB advances that are not market-dependent.
Adding 100BP of spread to bank loan portfolios and whacking deposit costs by 100BP makes a humongous difference in return on equity, especially when it is levered 10 to 14 times.
Running_Man
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Your assumption is inherently that the subprime is going to have no effect on the remainder of the economy therefore your regional banks leverage of loans of 12-14 times their deposit base is a license to print money. I think you have underestimated how deeply the interconnections are in the economy from the home mortgage to economic activity.
If the holder of a subprime mortgage is forced to sell his house at a 10-20 percent discount to market, it lowers the price of all the houses not just his as well as remove an active participant in the housing market who in most cases should not have been there in the first case. But the houses have been built for these people and all housing will feel the effects. A cut in the interest rate will not be immediately effective unless the government goes on an all out attempt to get the people who should not have had mortgages back in mortgages.
Also as the value of the paper behind these mortgages falls, the firms that hold the paper are forced to sell good assets to raise funds not the bad assets as noone wants those. The Fed is trying feverishly to contain this, but to state that all is well buy the banks when the effect is not evident to the average American yet, other than what they hear on the news is premature.
Now I admit I have felt this would be a problem from the start of the year when I sold 100% of my stocks and may be viewing the economy through shaded glasses. I myself am now actually purchasing stocks every month, however I am increasing my overall holdings by 1 percent per month of my portfolio looking to be 25% invested in 2 years, when I believe there will be a good chance to assess the damage.
Right now I feel as though the economy is the Titanic that struck and iceberg and all the staff is looking at drawings of the ship and closing the watertight holds. However there is leakage everywhere, yet noone wants the lifeboats available look how beautiful the ship is and how small the lifeboats are!
Even if the economy proves unsinkable I feel I will not miss much in the next 2 years as the economy limps along to port. You cannot have 20% of a mortgage market fail in the world's largest economy and then merely roar back in my opinion with the first rate cut. There is just too much building that occured for which there will be no occupants.
If the holder of a subprime mortgage is forced to sell his house at a 10-20 percent discount to market, it lowers the price of all the houses not just his as well as remove an active participant in the housing market who in most cases should not have been there in the first case. But the houses have been built for these people and all housing will feel the effects. A cut in the interest rate will not be immediately effective unless the government goes on an all out attempt to get the people who should not have had mortgages back in mortgages.
Also as the value of the paper behind these mortgages falls, the firms that hold the paper are forced to sell good assets to raise funds not the bad assets as noone wants those. The Fed is trying feverishly to contain this, but to state that all is well buy the banks when the effect is not evident to the average American yet, other than what they hear on the news is premature.
Now I admit I have felt this would be a problem from the start of the year when I sold 100% of my stocks and may be viewing the economy through shaded glasses. I myself am now actually purchasing stocks every month, however I am increasing my overall holdings by 1 percent per month of my portfolio looking to be 25% invested in 2 years, when I believe there will be a good chance to assess the damage.
Right now I feel as though the economy is the Titanic that struck and iceberg and all the staff is looking at drawings of the ship and closing the watertight holds. However there is leakage everywhere, yet noone wants the lifeboats available look how beautiful the ship is and how small the lifeboats are!
Even if the economy proves unsinkable I feel I will not miss much in the next 2 years as the economy limps along to port. You cannot have 20% of a mortgage market fail in the world's largest economy and then merely roar back in my opinion with the first rate cut. There is just too much building that occured for which there will be no occupants.
DblDoc
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For those of us accumulating:
The Fed cuts rates, the market climbs: DCA and Hold
The Fed cuts rates, the market crashes: DCA and Hold (and rejoice)
The Fed holds on rates: the market crashes: DCA and Hold (and rejoice)
The Fed holds on rates: the market climbs: DCA and Hold
Predicting the Fed, like the Stock Market, is not possible, ignore the noise, look to the long term and stay the course...
I agree with Brewer that Financials are the downtrodden sector and therefore have the most to gain in the future but I'm not slicing and dicing at that level. They are buried in my domestic AA
DD
brewer12345
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RM, I suspect that no amount of rational argument will change your mind, but I will offer a few items worth consideration:
- Subprime is a different animal than the rest of the mortgage market. I have looked long and hard for foreclosed properties to buy on the cheap as a result of the subprime bust. Ain't found nothing in an area I would want to own property in. Why? Guess where most of the subprime borrowers are? Poor/marginal/gentrifying/crappy towns and neighborhoods. Even a 50% drop in the value of these places means zippo to the average middle class suburbanite who would never live in these areas unless forced to.
- You seem not to get the central idea behind a regional/retail bank. These guys don't sell much paper even in good times because they are portfolio lenders. They do not care what secondary market conditions are, since they finance themselves with deposits and FHLB advances and rarely sell any loans. If there is zero liquidity for mortgages (as now) they do not care. All they care about is what spread they can make, how many (few) loans go bad, and what the loss is on those taht go bad. A portfolio of prime mortgages will generate vanishingly little in the way of realized losses (under 10BP over the life of the portfolio is typical even in bad times).
- As portfolio lenders, retail/regional banks had two mechanisms pushing them away from lousy loans. One, the bank regulators over the past few years have been increasingly aggressive in "suggesting" to banks what they avoid. Two, most of them knew that whatever loans they made they would have to live with, and most had seen down cycles before.
- Subprime is a different animal than the rest of the mortgage market. I have looked long and hard for foreclosed properties to buy on the cheap as a result of the subprime bust. Ain't found nothing in an area I would want to own property in. Why? Guess where most of the subprime borrowers are? Poor/marginal/gentrifying/crappy towns and neighborhoods. Even a 50% drop in the value of these places means zippo to the average middle class suburbanite who would never live in these areas unless forced to.
- You seem not to get the central idea behind a regional/retail bank. These guys don't sell much paper even in good times because they are portfolio lenders. They do not care what secondary market conditions are, since they finance themselves with deposits and FHLB advances and rarely sell any loans. If there is zero liquidity for mortgages (as now) they do not care. All they care about is what spread they can make, how many (few) loans go bad, and what the loss is on those taht go bad. A portfolio of prime mortgages will generate vanishingly little in the way of realized losses (under 10BP over the life of the portfolio is typical even in bad times).
- As portfolio lenders, retail/regional banks had two mechanisms pushing them away from lousy loans. One, the bank regulators over the past few years have been increasingly aggressive in "suggesting" to banks what they avoid. Two, most of them knew that whatever loans they made they would have to live with, and most had seen down cycles before.
While I agree that 4000 is accurate to within +/- 100,000, this is the excuse that Bernanke has been waiting for to act without having to endure "Helicopter Ben" jokes. He doesn't want to reward outlandish stock-market risk-taking but this gives him a thinly-veiled excuse to make sure that the Fed doesn't become part of the problem.
KRE is paying CD-like dividends spread among 50 regional banks that are either in decent shape or even approaching merger candidacy. I've been looking for a good way to buy Bank of Hawaii (also hitting multi-year lows) without single-stock risk and this solves the problem for at least 49 other banks as well. I had the same interest in 2001-2 but I held off too long and I don't want to wait another 5-10 years.
It's down 1.3% today yet still up over 5% in the last month, and this blue light won't be flashing much longer. When KRE briefly dipped below $40/share intraday last month the buying was strong enough to bounce it higher in less than an hour. Your wait for a real discount may be extended virtuous futility while fools rush in...
If "cheapest prices in 10 years" isn't good enough then I'd hate to see your version of the bottom.
KRE is paying CD-like dividends spread among 50 regional banks that are either in decent shape or even approaching merger candidacy. I've been looking for a good way to buy Bank of Hawaii (also hitting multi-year lows) without single-stock risk and this solves the problem for at least 49 other banks as well. I had the same interest in 2001-2 but I held off too long and I don't want to wait another 5-10 years.
It's down 1.3% today yet still up over 5% in the last month, and this blue light won't be flashing much longer. When KRE briefly dipped below $40/share intraday last month the buying was strong enough to bounce it higher in less than an hour. Your wait for a real discount may be extended virtuous futility while fools rush in...
brewer12345
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But to play devil's advocate to Nords, just because something is embarassingly cheap doesn't mean it cannot get cheaper.
twaddle
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Brew, I'm sure you're a big fan of Hussman.
He says banks aren't cheap enough, and that they often get down to book value.
Hussman Funds - Weekly Market Comment: September 3, 2007 - The Problem With Financials
He says banks aren't cheap enough, and that they often get down to book value.
Hussman Funds - Weekly Market Comment: September 3, 2007 - The Problem With Financials
brewer12345
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Brew, I'm sure you're a big fan of Hussman.
He says banks aren't cheap enough, and that they often get down to book value.
Hussman Funds - Weekly Market Comment: September 3, 2007 - The Problem With Financials
Hussman has a product to sell, just like Bill Gross. Medicine man speak with forked tongue, IMO.
Oh, and many banks are at book value and below.
Running_Man
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You are looking at one sector, two if you include housing related issues in decline in a huge overall market which has in fact not declined. I do not subscribe to the popular opinion that stocks are impervious to decline to any period of moderate duration and only sectors can decline. What the banks have pointed out is the backbone of the economy, the home equity loan, is not nearly as strong as thought. I do not consider a 3% increase in the current year of the market as a bottom or the cheapest prices in 10 years. Nor the yield on KRE to be anything special for the risks those corporations are in. But I can be wrong, I have seen much information over the last 9 months on banks prove to be most incorrect. I will revisit this issue in a few months. I may miss out an a spectacular increase but I doubt it myself.
Goldman today released their data that shows prime mortgage issuers have seen a 50% increase in deliquent mortgage payers. This is not in keeping of the basic theory that Brewer is proclaiming with the regional banks which also is at odds with the FDIC study that writeoffs are increasing everywhere for banks. Enough for now time will tell.
brewer12345
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Sure, prime delinquencies are up. But they were de minimus in the prior period. Double bupkus is still bupkus.
Tell you what: go look at a few banks and tell me what you see. How about a traditional retail thrift almost exclusively focussed on prime mortgages: AF. Tell me how much credit risk you think is in that balance sheet.
twaddle
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Brew, I see a P/B of 2, declining revenue, and declining earnings. I think housing sales volume still has a way to fall, and banks will continue to see declining revenue for a while still. Long-term, banks may be a good bet. I just think they may get a bit cheaper, even with a fed funds cut.
brewer12345
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Uhhh, we talking about AF or KRE? I get about 1.6X book for the underlying banks in KRE.
AF does indeed trade at almost 2X book, in part because they are perenially at or near the top of every analysts annual list of most likely take-over targets. As for declining revenue and earnings, that is a reflection of an unwavering refusal to take tons of credit risk and do stupid things just because everyone else is. The price of restraint is tough sledding on earnings sometimes. But they now have very little competition and a gigantic funding advantage over most other lenders. Check out the long term dividend performance that AF has mounted. And look at credit quality.
Running_Man
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Astorial Financial has traded between 25 and 30 for going on 4 years now. So obviously they are not highly volatile
I see they have 4 billion of loans sold for secured financing that they must repurchases, that is hardly in keeping with your proposition that they hold their loans. As they state they have received the money and if the value of the loans where to fall they need to repurchase at full price the loans if I am reading that correctly.
From their 10Q:
The description they give of their risks they see in a legal filing is more in keeping with what I fear and less what is being proposed here and the actions they are taking is of someone who feels an area of their business is unprofitable.
With more time tonight I will review their entire financials, I assume this is mostly a pristine company,
I see they have 4 billion of loans sold for secured financing that they must repurchases, that is hardly in keeping with your proposition that they hold their loans. As they state they have received the money and if the value of the loans where to fall they need to repurchase at full price the loans if I am reading that correctly.
From their 10Q:
The description they give of their risks they see in a legal filing is more in keeping with what I fear and less what is being proposed here and the actions they are taking is of someone who feels an area of their business is unprofitable.
With more time tonight I will review their entire financials, I assume this is mostly a pristine company,
brewer12345
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The $4B you are talking about is just reverse repurchase financing ("repos") of securities, mostly Fannie/Freddie/Ginnie paper. Repos are how the entire world finances these securities, and the way the fed maintains the fed funds rate at its target is via repos. Nothing mysterious about it.
The 10Q spook language is cheifly for CYA purposes. The multi-famiy and mixed commercial stuff they do is very conservatively underwritten on a number of levels. Actually, I understand that these loans have gone from tighter and tighter spreads with increasingly loose underwriting, to fat spreads with very tight underwriting and even the imposition of 50BP commitment fees, all within the NYC area.
The 10Q spook language is cheifly for CYA purposes. The multi-famiy and mixed commercial stuff they do is very conservatively underwritten on a number of levels. Actually, I understand that these loans have gone from tighter and tighter spreads with increasingly loose underwriting, to fat spreads with very tight underwriting and even the imposition of 50BP commitment fees, all within the NYC area.
Running_Man
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So you are saying that even though they are legally on record as of 8/8/07 saying these loans are not giving returns to offset the risks so that they are cutting back those loans but actually are getting better returns on them than ever in past years?
Having experience myself with writing 10Q's I can assure you they are CYA only in relation to the fact you better not lie here or you will go to jail. I have never met a corporation that did not take their 10Q filings deadly serious. To imply it is fluff is ludicrous, this is where you will get business to state what they really believe, because no executive wants to go to jail.
Having experience myself with writing 10Q's I can assure you they are CYA only in relation to the fact you better not lie here or you will go to jail. I have never met a corporation that did not take their 10Q filings deadly serious. To imply it is fluff is ludicrous, this is where you will get business to state what they really believe, because no executive wants to go to jail.
brewer12345
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I am saying that since that passage was written, the competitive environment for small commercial and multifamily loans in NYC and environs has changed quite dramatically. They had been cutting back on those loans for the past year or two, but I suspect that will no longer be t he case very shortly.
That's a small part of their portfolio anyway. Most of their loan book is single family residential mortgages, very conservatively underwritten.
