Also as I stated in my 13 Outlier Predictions for 2008, I do think the investment banks will in fact be a good investment in the latter half of the year - unlike the traditional banks who hold all this junk on their books, the investment banks are more like 'enablers' - they did hold some of this junk in their trading desks but as they write down quarter after quarter, the value will eventually be marked down appropriately and then they are good to go - no real exposure to the consumer. That said, part of their businesses are gone forever (or if not forever, until the next time the Fed cuts rates to 1% and hedge funds decide buying mortgages is a great thing), but they are the middle men of all the world's major financial transactions and M&A activity will continue, foreign cash rich companies will continue to buy up assets of our subprime nation, new IPOs will continue to be brought to market, all good and lucrative things. Aside from Bear Stearns (BSC), the other 4 investment banks will come out of this fine in the end. While the group is due for a bounce soon enough, I do expect some more pain in the first half of the year, but unlike the money center banks, I do expect the back half of the year to be quite fruitful for some of these players
So I am mulling over which investment bank to enter and when. The knee jerk reaction is to go with Goldman Sachs (GS) because they seem the least unscathed. But a series of news items from Lehman Brothers (LEH) makes me wonder about them as well, and truth be told they are in the best technical condition.
Lehman Brothers Hikes Dividend to 68 Cents, and Increases Share Buyback
- Lehman Brothers Holdings Inc (LEH), the Wall Street investment bank, on Tuesday raised its common stock dividend 13 percent and said its board of directors authorized the buyback of up to 100 million shares.
- The quarterly dividend will rise to 17 cents per share from 15 cents.
- New York-based Lehman said the buyback program covers nearly 19 percent of its 530.6 million shares outstanding at year end, and supersedes a prior authorization.
As for the other 3 - Merrill Lynch (MER) has a great CEO now but appears to be an epicenter of subprime slime. A lot of risk but reward there ... still too early I think. Morgan Stanely (MS) I really don't hear much about but it's stock is moribund - no reactive bounce off Fed cuts tells me more shoes to fall and those "in the know" are telling us that by the stock not moving. Bear Stearns (BSC) is a disaster but you are playing Bear for a buyout offer. With a $12B market cap that is easy picking for China or a Middle Eastern buyout. But I don't really buy stocks for buyout potential; I'd rather have a nice business.
So at this time, going back to the previous two, I am leaning toward Lehman Brothers (LEH). As I wrote above, unlike the money center banks I think we might have 1 (or maybe 2) more quarters of write offs in the investment banks and then the decks should be cleared. So either "now" or "soon" might be the time to get in. What I will be looking for in LEH is a move above the 200 day moving average which sits at $65. Or (looking at the chart) an entry around $54 would also be potentially advantageous. So I want to buy on a "panic pullback" or "breakout". The stock traded $85 a year ago... so it has not fallen as much as the 3 not named Goldman, so the (potential) reward is not so great as buying one of those 3, but the risk appears to be far lower. Which suits me fine.
No positions but putting Goldman and Lehman on radar
5 comments:
Lehman looks very interesting and their actions indicate that they are emerging from this in a relatively stronger financial position. That said, I'm still concerned that they might be hiding something from shareholders regarding their true exposure to the mortgage mess. Actions speak louder than words obviously, but I'm still a skeptic.
I'm having trouble getting past risking money in financial stocks outside of BLK and maybe SST (they seemed to clear up a lot of concern in their last conference call). Perhaps I'm just way too paranoid.
I think you are correct to be wary. Anything tied to the consumer I'd be avoiding for a long time. What I like about the investment banks is once they clear these mine fields they will go back to doing their main business which is essentially being a middle man, and taking a cut off all the world's transactions. Keep in mind these are companies global in nature, so deals done in Middle East or Asia... they are getting more and more of that pie each year.
I think the regional banks or even national banks are still in a lot of trouble, especially if the consumer is as bad as I think. They are the investment of choice the past week due to Fed cuts but I think they will (in between 20-30% spikes off dead cat bounces) just be going sideways (at best) for a long time. I am differentiating the investment banks - as I said I think most (except maybe Merrill) will have most of their bad stuff written off by this summer/fall so the time to buy is about 6 months ahead of that. But I want technicals to confirm my thesis. :) Once again Citibank is not Lehman is not Blackrock is not Mastercard. There are different kind of financials - people view them as a monolith ...
I don't know if you ever catch CNBC's Fast Money, but I remember a while back I saw it and Karen Finerman was talking about how LEH had mysteriously moved some of their assets from one classification to an unknown.... I forget the terminology she used, something like "from tier 1 to tier 2". Basically, she was saying that they had a whole mess of assets that they "couldn't determine their value" or something because there was no market for them. So, that plays into the whole 'not knowing what LEH has on its books' aspect. So, she continued to go short based on that info. I forget the exact wording from a few months back so I'm sorry for being so vague. But, my point is, they have stuff on their books that they haven't written down, but is essentially worthless... they just shuffled it around to a different classification or something. I'd say go GS if you want investment bank in 6 months. But, short-term, SKF just put in a reversal bar on the chart today and looks like its time to get short some financials again.
m.h., I don't trust any of them. The problem with these banks is they are "black boxes" - I've written about this during the fall. I cannot analyze them like I can like a typical company that "makes something". Banks are hard to analyze and even those who follow them daily cannot analyze them. They hide everything both on and off the balance sheet and its opaque.
Goldman is far from "safe" - I wrote about them here in Oct
http://www.fundmymutualfund.com/2007/10/goldmans-blowout-quarter.html
As for the tiers, you mean levels. Here is an article
http://www.bloomberg.com/apps/news?pid=20601087&sid=a9yNwqgsVPGA&refer=home
But just google level 3 assets. THe problem is again, there is no market for level 3, and the gains/losses are pure fiction. That is why much of what these banks have had as income for the past few years, is all a joke.
I am just plugging my nose and thinking that the market wants to make the financials a place to go so I need to find the least offensive one. I am not buying them because I trust them. Or that they are not lying about something or other.
Essentially I am buying a proxy on financials falling back in favor relatively soon but I dont want a commercial or regional bank. So I'm sorting through the junk of the investment banks to eventually find a candidate. ANy of these can write off $5 Billion tomorrow for all I know. Or all anyone knows. That is the crux of all this - even the companies themselves don't know what they have. As the underlying mortgages go bad one by one, all their CDOs lose more and more value - its a dynamic never ending situation and why its overhanging the market for a long time.
I like Fast Money but the best guy left (Eric Bolling) - the remaining crew is mixed ;)
Ahh yes the different levels of assets, that's what I was trying to reference. And yea Bolling definitely was the best, I keep waiting to see him pop up on fox business.
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