Friday, February 22, 2008

Kool Aid Drinkers in Financials Unhappy with Today's Reality Checks

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The Kool Aid drinkers who pushed financials up in the latter half of January cannot be happy with the news flow in the past 12 hours.

First, Meredith Whitney, who nailed Citigroup (C) last fall when the previous generation of Kool Aid drinkers were saying "bathroom sink was in, problems are contained", is back at it again.

Meredith Whitney, Oppenheimer & Co.'s banking analyst who was the first to say Citigroup needed to cut its dividend last year, told CNBC the bank would need to cut payouts again and raise more capital.

Whitney also said after markets closed Thursday that she believes financial stocks, which have been weak recently in the wake of the credit crisis, housing crunch and fears of a recession, could fall at least another 15 percent and as much as 50 percent.

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This morning, Merrill Lynch is saying our fine GSE's Fannie Mae (FNM) and Freddie Mac (FRE), which our government in their infinite wisdom saw fit to stuff with $500K, $600K, heck $700K mortgages as part of the "stimulus" plan just passed, have some dark days ahead. Keep in mind folks, if things get really sour, "we" the US taxpayer will be bailing out these 2 institutions... which in general have been poorly run to begin with.... are already under major stress, and we are top loading them with new more expensive mortgages so that we can try to sustain home prices in expensive coastal areas to levels they should not be. We could not be bothered with small facts like that 3-4 weeks ago when financials were ramping up 30-40% for no good reason but when the Kool Aid punch bowl gets taken away, those darn things we call facts tend to come to the surface.
  • Investors dumped shares of Fannie Mae (FNM) and Freddie Mac (FRE) Friday after a Wall Street analyst warned that both stocks could hit new lows as investors come to appreciate the depth of problems in the financial sector. Merrill Lynch analyst Kenneth Bruce downgraded, to sell from neutral, shares in the government-sponsored mortgage firms, saying, “we think further deterioration in financial market conditions and worsening credit performance will undermine fundamentals and the market’s assessment of their respective financial position, likely leading to further valuation compression.”
  • Valuations have already been greatly compressed at Fannie and Freddie, with both stocks down more than 60 percent from their highs ahead of last summer’s credit crunch. But Merrill expects fair value book value - a measure of the companies’ net worth - to fall sharply when fourth-quarter numbers come out later this month, as the companies take mark-to-market writedowns of their mortgage securities holdings. He adds that the shares could languish for years to come, given the prospect that a “tepid earnings recovery” will combine with a downturn in sentiment as “market participants capitulate on the quick recovery in mortgages.”
Better late than never I suppose.....

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Last, it appears some of our favorite people will be testifying next week about how they deserve incredible compensation in the face of ruining the financial economy of the US :) Now that should make for some fun reality TV....
  • Two high-profile former Wall Street CEOs and the head of the nation's largest home lender will testify next week before a congressional committee examining the link between executive pay and the mortgage crisis.
  • A total of 10 witnesses are due to appear before the House Committee on Oversight and Government Reform on Thursday including Countrywide Financial's (CFC) founder and CEO Angelo Mozilo, former Merrill Lynch (MER) Chairman and CEO Stanley O'Neal and ex-Citigroup (C) chief Charles Prince.
  • All three executives made headlines last year for their company's bad bets on the U.S. housing market - and for their own lofty compensation. Their pay is drawing scrutiny from lawmakers at a time when homeowners across the country are at risk of losing their homes and as the country teeters on the brink of recession.
  • Upon his departure from Citigroup, Prince left with approximately $68 million, while O'Neal collected $161 million.
  • Countrywide's Mozilo reportedly stood to collect a windfall of $115 million dollars after his firm agreed to a $4 billion sale to Bank of America (BAC) in January. But after facing heavy criticism from Capitol Hill lawmakers, Mozilo said he would forfeit $37.5 million in payments tied to the deal.
I doubt much will come from it, but it is nice to see they actually have to sweat for a few hours instead of sipping Margaritas on the beach while the institutions they left behind lay smoldering in near ruin.

No positions in any junk mentioned in this article, but long Ultrashort Financials in fund and personal account

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