Financials for Investors

  • Avatar

    Posted: 12 December 2010 12:49 PM

    This thread is for investor content only.

    Excerpts from Bloomberg’s Interview with Brian Moynihan, CEO of Bank of America.

    Signature

    Black Swan Counter: 9 (Banks need money, Jobs needs a break, Geithner has no plan, Cuomo’s grandstanding, .Gov needs a hobby, GS works for money, flash crash, is that bubbling crude?).

    For those who look, a flash allows one to see farther.

         
  • Posted: 12 December 2010 01:14 PM #1

    Eric Landstrom - 12 December 2010 04:49 PM

    This thread is for investor content only.

    Excerpts from Bloomberg’s Interview with Brian Moynihan, CEO of Bank of America.

    I don’t like dividends myself.  They are taxed twice, once when the corporation that generated the profits that made the dividend possible, and again when the shareholder receives then.  The corporate tax rate is 35%, nominally the shareholder probably is in that tax bracket as well meaning that for every dollar of profit that becomes dividend the federal government takes 58%.  If the shareholder lives in a State that taxes income the bite is even higher.

    Another way to look at dividends is this: for every dollar of dividend paid it cost the corporation $1.35, not to mention the cost of maintaining the program. The primary beneficiary of dividends is the tax man.  Dividends are a horrible use of capital.

    If Apple were to return some of its cash horde to shareholders I’d much prefer a stock buyback.  The funds are still taxed at the corporate level, but the benefit to shareholders (besides higher stock valuation due to fewer shares outstanding) could be eligibility for long term capital gains treatment (15% for the next two years).

    Signature

    You can’t do more, make more, be more, than the next guy, if you think like the next guy. Think different.

         
  • Posted: 12 December 2010 04:08 PM #2

    I’ll add to discussion of Apple’s decision not to pay a dividend citing the close to $300 billion in shareholder value that’s been created by management over the last 14 years and that increase in value could reach one-half trillion dollars by the end of CY2011.

    Comparatively, a dividend would add virtually nothing to total shareholder return with the share price rising with earnings growth.

    The double taxation issue is an important factor. As long as there is a reasonable capital gains tax differential, it’s best left to shareholders when to create taxable income from Apple’s success.

         
  • Posted: 12 December 2010 05:33 PM #3

    In addition to what is pointed out above, another advantage of capital gains is that the investor gets to choose the timing of when the income is realized.

    Dividends are almost always wrong under current tax law.

         
  • Avatar

    Posted: 13 December 2010 01:44 PM #4

    I’m continuing to puzzle through where we are heading next year.

    The big bear concerns I have are sovereign debt from the Eurozone and municipal debt domestically. Circumstantially, I see how municipalities will work themselves out of a hole: My city gets its water from Minneapolis. While my city has, as far as I am aware, no debt, Minneapolis is saddled with debt. And I think my water bill is a bellwether as to how municipalities are working through their debts. By way of example our water costs $2.10 per 1,000 gallons. But my city has implemented a new “sewer tax” of $2.75 per 1,000 gallons. The billing will assume that any water in will also by way of zero sum, also wind up in the sewer (nobody waters their lawn for example). I have not asked, but I suspect Minneapolis has hit its surrounding suburbs with a sewer tax which is being passed along to property owners.

    Assumptions:

    I think we will see one final leg down in housing prices on non-starter houses. I think the starter house market has bottomed.
    I think people will continue to roll out of fixed into other assets in 2011 fueling speculation.
    I know the middle class is participating in Christmas this year whereas Christmas 2009 was just the upper class.
    I know that commerce is expanding (my family bought two new Toro snow blowers Saturday alone for example).

    What I don’t know is whether or not PE ratios will, on aggregate, continue to contract. The theory is that contracting PEs is a classic bear trend whereas expanding PE ratios is a classic bull trend. What I do know is that over the last century during bull markets stocks gained an average of 14.6% per year as GDP grew 6.3%. Conversely, during bear markets GDP grew an average of 6.9% while equities fell an average of 4.2% per year. Meaning the economy continues to expand in bear markets and so an expanding economy isn’t a stand-alone bullish signal (source: Crestmont Research).

    FREDDIE MAC 2011 US HOUSING PROSPECTS   13-Dec-10

    1) Low mortgage rates will continue throughout 2011.
    2) Housing prices will likely touch bottom and start a slow but sustained recovery in 2011.
    3) There will be more housing sales in 2011, with first-time homebuyers spurred by low housing prices.
    4) There will be fewer 2011 refinances, with many of those eligible for refinancing having already done so. The U.S. refinance program expires Jun 30, 2011.
    5) Rates of mortgage delinquency will drop.

    http://www.appliancemagazine.com/news.php?article=1451614&zone=0&first=1

    Back to my part: According to backtesting the economy and Wall Street do not follow suit. From ‘66 to ‘81 the economy grew an average of 9.6% while the Dow contracted during the same period. Then, from ‘82 to ‘99 the economy grew at 6.2% while the Dow grew an average of 15.4%. The take away is that high inflation creates above average GDP growth but also causes PE ratios to decline. The reverse is also apparently true: lower inflation causes an increase of PE ratios.

    If PE ratios expand, then the bears are flat out dead wrong.

    [ Edited: 13 December 2010 01:49 PM by Eric Landstrom ]

    Signature

    Black Swan Counter: 9 (Banks need money, Jobs needs a break, Geithner has no plan, Cuomo’s grandstanding, .Gov needs a hobby, GS works for money, flash crash, is that bubbling crude?).

    For those who look, a flash allows one to see farther.

         
  • Posted: 13 December 2010 01:55 PM #5

    Eric Landstrom - 13 December 2010 05:44 PM

    I’m continuing to puzzle through where we are heading next year.

    The big bear concerns I have are sovereign debt from the Eurozone and municipal debt domestically. Circumstantially, I see how municipalities will work themselves out of a hole: My city gets its water from Minneapolis. While my city has, as far as I am aware, no debt, Minneapolis is saddled with debt. And I think my water bill is a bellwether as to how municipalities are working through their debts. By way of example our water costs $2.10 per 1,000 gallons. But my city has implemented a new “sewer tax” of $2.75 per 1,000 gallons. The billing will assume that any water in will also by way of zero sum, also wind up in the sewer (nobody waters their lawn for example). I have not asked, but I suspect Minneapolis has hit its surrounding suburbs with a sewer tax which is being passed along to property owners.

    Assumptions:

    I think we will see one final leg down in housing prices on non-starter houses. I think the starter house market has bottomed.
    I think people will continue to roll out of fixed into other assets in 2011 fueling speculation.
    I know the middle class is participating in Christmas this year whereas Christmas 2009 was just the upper class.
    I know that commerce is expanding (my family bought two new Toro snow blowers Saturday alone for example).

    What I don’t know is whether or not PE ratios will, on aggregate, continue to contract. The theory is that contracting PEs is a classic bear trend whereas expanding PE ratios is a classic bull trend. What I do know is that over the last century during bull markets stocks gained an average of 14.6% per year as GDP grew 6.3%. Conversely, during bear markets GDP grew an average of 6.9% while equities fell an average of 4.2% per year. Meaning the economy continues to expand in bear markets and so an expanding economy isn’t a stand-alone bullish signal (source: Crestmont Research).

    FREDDIE MAC 2011 US HOUSING PROSPECTS   13-Dec-10

    1) Low mortgage rates will continue throughout 2011.
    2) Housing prices will likely touch bottom and start a slow but sustained recovery in 2011.
    3) There will be more housing sales in 2011, with first-time homebuyers spurred by low housing prices.
    4) There will be fewer 2011 refinances, with many of those eligible for refinancing having already done so. The U.S. refinance program expires Jun 30, 2011.
    5) Rates of mortgage delinquency will drop.

    http://www.appliancemagazine.com/news.php?article=1451614&zone=0&first=1

    Back to my part: According to backtesting the economy and Wall Street do not follow suit. From ‘66 to ‘81 the economy grew an average of 9.6% while the Dow contracted during the same period. Then, from ‘82 to ‘99 the economy grew at 6.2% while the Dow grew an average of 15.4%. The take away is that high inflation creates above average GDP growth but also causes PE ratios to decline. The reverse is also apparently true: lower inflation causes an increase of PE ratios.

    If PE ratios expand, then the bears are flat out dead wrong.

    I’m on the side that things will continue to improve this coming year.  It would be better still if unemployment benefits weren’t extended forcing more people to make the inevitable tough employment decisions but so be it.  This showed up in my inbox today courtesy of the good folks at Wells Fargo.

    Economic & Market News
    ? The U.S. trade deficit narrowed sharply in October with exports rising and imports falling. The 13 percent contraction was driven by a 3.2 percent advance in exports to their highest level since August 2008. The numbers should boost Q4 GDP.
    ? The consumer sentiment index continued to strengthen in December with expectations and current conditions improving.
    ? In a positive sign for consumer spending, U.S. household wealth grew by $1.2 trillion in the third quarter. The 9.1 percent increase was fueled by strong equity market gains. Meanwhile, Americans also cut debt for the tenth consecutive quarter.
    ? Treasury prices were clobbered last week on speculation President Obama?s tax proposal would spur economic growth and require greater government borrowing.
    ? Japanese stocks hit a seven-month high as GDP grew at a better-than-expected 4.5 percent annualized rate in the third quarter.

    Signature

    I don’t mind being wrong…,I just hate being wrong so FAST!

         
  • Posted: 13 December 2010 05:13 PM #6

    Eric Landstrom - 13 December 2010 05:44 PM

    [...]

    Back to my part: According to backtesting the economy and Wall Street do not follow suit. From ‘66 to ‘81 the economy grew an average of 9.6% while the Dow contracted during the same period. Then, from ‘82 to ‘99 the economy grew at 6.2% while the Dow grew an average of 15.4%. The take away is that high inflation creates above average GDP growth but also causes PE ratios to decline. The reverse is also apparently true: lower inflation causes an increase of PE ratios.

    If PE ratios expand, then the bears are flat out dead wrong.

    Unexpected Returns by Easterling demonstrates that your hypothesis has historically been true.  Inflation has been generally bad for equities.  The exception to that, I suppose would occur if the bubble created by the inflation were to reside in equities.

         
  • Avatar

    Posted: 15 December 2010 05:19 PM #7

    Bank of America is rumored to be in settlement talks with mortgage insurers leading to a reversal of today’s loss. Currently trading at $12.54 in AH up from a $12.29 close.

    Given the prior hardline against settlement, my speculation is that the regulators has told BAC to resolve the downside risk mortgage put-backs before moving forward with reinstating the divvy and and moving forward with a buyback program.

    [ Edited: 15 December 2010 06:08 PM by Eric Landstrom ]

    Signature

    Black Swan Counter: 9 (Banks need money, Jobs needs a break, Geithner has no plan, Cuomo’s grandstanding, .Gov needs a hobby, GS works for money, flash crash, is that bubbling crude?).

    For those who look, a flash allows one to see farther.

         
  • Avatar

    Posted: 27 December 2010 12:33 PM #8

    Banking sector is now up 11% for the month of December largely because dead cats do bounce.

    Bears are still trying to sell the trillions of dollars of derivatives exposure as the reason not to invest going forward. Except that apart from claiming that there are trillions of dollars of derivatives, the market cannot know how the derivatives are placed, or hedged, or when they expire because derivatives are not centrally cleared through an exchange. As such, mortgage and bond derivatives are a huge, scary bogeyman that the bears reference in nearly all commentary. The thing of it is though that every settled bear I’ve spoken to is prepared to buy the dips and that is telling. The willingness of net short investors to buy dips suggests that even in the bearish thesis, a sudden collapse unexpected but a market correction is expected. The market correction thesis fundamentally aligns net short investors with net long investors who also expect a market correction for a variety of reasons in the first half of the year.

    Meanwhile, what about the derivatives market bogeyman? The way forward is to get bond derivatives to trade on an exchange instead of OTC so that market participants can see where risks and opportunities are building up mush in the same way that equity derivatives are traded right now. Clearing bond derivatives through an exchange is the most obvious way to increase transparency of the bond derivatives. With increased transparency of bond derivatives the bear case can then be quantified and risks can be truly assessed. Toward the end of bringing transparency to the OTC bond derivatives market, SEC Commissioner Luis A. Aguilar gave a December 15th, 2010, speech Requiring That Derivatives Be Centrally Cleared As the Centerpiece of Reform. In other words, IMO, the bear case for bond derivatives blowing up and collapsing economics and nation-states is at best early and in markets being early is another phrase for being wrong.

    Cross-posted in the intraday thread the week of Dec. 26th.

    Signature

    Black Swan Counter: 9 (Banks need money, Jobs needs a break, Geithner has no plan, Cuomo’s grandstanding, .Gov needs a hobby, GS works for money, flash crash, is that bubbling crude?).

    For those who look, a flash allows one to see farther.

         
  • Avatar

    Posted: 27 December 2010 01:36 PM #9

    Eric-

    You’re focusing on the trees, not the forest.

    Signature

    The ends don’t justify the means…

         
  • Avatar

    Posted: 27 December 2010 07:08 PM #10

    Bill Black throws some cold water on the ‘cake and eat it too’ crowd.

    Yeah - that means you Eric!

    http://www.bloomberg.com/video/65536926/

    Signature

    The ends don’t justify the means…

         
  • Avatar

    Posted: 28 December 2010 12:01 PM #11

    Mayor Quimby - 27 December 2010 11:08 PM

    Bill Black throws some cold water on the ‘cake and eat it too’ crowd.

    Yeah - that means you Eric!

    http://www.bloomberg.com/video/65536926/

    Mike, I watched the video. Bill Black stated that it is the small banks that face the headwinds. He stated that conditions are favorable for big banks. Watch from 7:40 on. The Muni-market is discussed from 9:10 on.

    Signature

    Black Swan Counter: 9 (Banks need money, Jobs needs a break, Geithner has no plan, Cuomo’s grandstanding, .Gov needs a hobby, GS works for money, flash crash, is that bubbling crude?).

    For those who look, a flash allows one to see farther.

         
  • Avatar

    Posted: 28 December 2010 01:46 PM #12

    He said:

    Euro may still go to hell
    Lies and fraud and mark-to-myth have undermined trust in markets
    Exported inflation to China is a huge potential problem for EUR and therefore exports and USD and exports
    Gvmts lie and manipulate data so as to control the sheeple (shocking I know) - ie stress tests in Spain and Chinese GDP figures are all lies
    Gvmts overreport positive and underreport negative developments
    Munis are in jeopardy
    Small banks get screwed
    Big bank see winds at their backs

    Muni, Euro, rate rises and many other issues such as continued housing depreciation will all continue to pressure financials.

    Signature

    The ends don’t justify the means…

         
  • Avatar

    Posted: 28 December 2010 03:13 PM #13

    Mayor Quimby - 28 December 2010 05:46 PM

    He said:

    Euro may still go to hell
    Lies and fraud and mark-to-myth have undermined trust in markets
    Exported inflation to China is a huge potential problem for EUR and therefore exports and USD and exports
    Gvmts lie and manipulate data so as to control the sheeple (shocking I know) - ie stress tests in Spain and Chinese GDP figures are all lies
    Gvmts overreport positive and underreport negative developments
    Munis are in jeopardy
    Small banks get screwed
    Big bank see winds at their backs

    Muni, Euro, rate rises and many other issues such as continued housing depreciation will all continue to pressure financials.

    Mike,

    1) I expect the Euro to face serious headwinds and political change.

    2) “Lies and Fraud” are the basis of our lawful accounting practices. Your moral objection is based on your personal view of right and wrong and not upon an unlawful and therefore culpable practice.

    3) I cannot speak beyond my own holdings but I’ve brought home more money made in China than I’ve spent on Chinese goods. Even so, given the communism of China, all IPOs are effectively loans to the Chinese government. China in turn looks for safe havens for investment and continues to buy more and more American debt so as to push off the need to raise the value of their currency relative to the dollar. As I understand from the FOREX guys, it is assumed China will continue to buy our debt at the same rate it has until it expands its balance sheet by at least one more third in order to push back against forces that wish to raise the Chinese Yuan against our dollar. Moreover, the Chinese bubble is expected to expand for at least another five or ten years?a length of time that can be reckoned in dog years in so far as investment themes are concerned. If you don’t believe me ask anybody who has shorted Japan over the last fifteen years; they’ve all lost their shirts because collapse never came.

    4) Of course governments lie. We’re Americans. It why we have a constitutional right to own weapons so that we can shoot our government and install a new one when we become cross enough. That said, I’m aware that our government stats are often questionable and one of the reasons the Fed is slow to react is because they “believe” the official numbers rather than the shadow stats. The Chinese also under-report problem and over-report victories. Well aware of that but it doesn’t effect big banking because big banks act on their own research.

    5) A few munis are in jeopardy but not to the extent that Whitney painted the problem. As an owner of RE, I can clearly see in new billing structures and cut services how munis have been compelled to address shortfalls. Those munis that for whatever reason (unions) cannot cut spending will BK and emerge in a better position after forcing debt holders to renegotiate. Any muni collapse will be cathartic and not systemically devastating, IMO.

    6) Over leveraged small banks will either merge or be merged. The increased M&A in regional banks is a sign of healing and not apocalyptic. I’ll give you an example: my local City-County Credit union has been forced to merge with Wings my local aviator credit union. The writing on the wall was on the wall when I looked at City-County’s repo list in 2007 and found no less than ten repossessed Bentleys among 600+ cars, boats, and RVs as the RE collapse unfolded. My reaction was to move my house account over to TCB after City-County closed my local branch office (‘cause too many of my seemingly more affluent neighbors they served apparently had built themselves a house of cards). My point is that: (a) Bank M&A is cathartic and leads to (b) increased profits for the survivors.

    7) Big bank wise, the expected leg down this summer in RE prices is both priced in as well as provisioned for. Small bank wise, continued weakness in RE should be devastating and people like myself cannot wait to swoop in and write offers.

    For my part, I see a continuing trend of PE compression even as the survivors of our economic mess blunder through over the next decade. So the question is: what to own or short in order to make money over the next decade?

    Signature

    Black Swan Counter: 9 (Banks need money, Jobs needs a break, Geithner has no plan, Cuomo’s grandstanding, .Gov needs a hobby, GS works for money, flash crash, is that bubbling crude?).

    For those who look, a flash allows one to see farther.

         
  • Avatar

    Posted: 28 December 2010 04:01 PM #14

    1. Agreed.

    2.  Not true at all.  Once again solvency means banks can meet their depositors’ needs no matter what.

    3. “it is assumed China will continue to buy our debt at the same rate it has until it expands its balance sheet by at least one more third in order to push back against forces that wish to raise the Chinese Yuan against our dollar. ”  Not true.  Their funding is nominally based upon our consumption.  Overlay bond purchases over imports and you will see the correlations.

    ” Moreover, the Chinese bubble is expected to expand for at least another five or ten years?a length of time that can be reckoned in dog years in so far as investment themes are concerned. If you don’t believe me ask anybody who has shorted Japan over the last fifteen years; they’ve all lost their shirts because collapse never came. “

    Not at 15% inflation it isn’t.  They have DAILY inflation over there and that bubble will burst much sooner than anyone realizes.

    As for Japan - well, the Nikkei is a long ways from 30K (it’s peak).  The collapse not only came but STAYED.

    4. Agreed.  I plan on getting my first weapon this year.

    5. Agreed as well.  In fact - all defaults are cathartic but be careful - TBTF becomes less so as interconnectivity collapses.  Should muni’s default and nix the absurd union benefits there is less of a need to keep TBTF afloat.

    6. Agreed.

    7. Not agreed.  Only a small % is priced in and I expect the insane Fed to cause another bubble of asset price speculation which will once again lead to more defaults.  Many of the subprime and prime loans that held on will split as cost of living rises.  As for TBTF - I think TBTF banks all eventually get broken up but that may be a few years off.

    8. PEs?  Margin compression will be here for sure but I think jobs are the loser, not profits.  I think valuations are anybody’s guess.  They’re already way too high but that’s to be expected with bond yields so low and Ben throwing the kitchen sink FACTORY at the markets.  The trillion dollar question is:

    Are yields rising because of a potential recovery (ie if Ben is going to print until we get inflation then I’m not holding a 10 year at 2.75%!)

    or

    Are they quietly selling since .usa is going Greek (ie pricing in a default risk).

    I hate to say it but I believe it is the latter.  If so - you won’t ever see a sub 3% 10 year bond ever again.

    Signature

    The ends don’t justify the means…

         
  • Posted: 28 December 2010 06:21 PM #15

    Regarding the solvency of banks under the current practices of fiat money and fractional reserves:

    Money is created by the existence of debt (public and private).  In the former case the Fed buys a treasury bond by creating money out of thin air.  The treasury spends the money and into banks it goes as deposits.  The bank can then lend 10x that amount.  When the banks make a loan, more money is created, more deposits result.  Rinse and repeat.

    Thus most banks are insolvent if the definition is the ability to immediately meet all demands of depositors. But with the Fed behind them, does this matter?  Cannot the Fed just devalue the dollar at just the perfect rate necessary to keep the scheme going?  The answer to that question is crucial to the survival of the current system.

    It is hard for a bank to fail to make money under conditions of massive money creation.  At least until the collapse comes.