Friday, June 20, 2008

Bookkeeping: Adding to Blackrock (BLK) Slowly - as Wall Street Wakes up to Regional Bank Problems

You know a financial selloff is getting hot and heavy when they get around to beating down the best and brightest - namely the Blackrock-s (BLK) of the world. So this is when we want to take advantage of the sale prices and begin to rebuild a position. I'm in no rush but since the regional banks are finally taking serious damage, we are seeing some widespread damage in the financials. First we had the investment banks, and large money center banks hit the worst in the first stage of the credit crisis last summer/fall/winter, and now we are on the next stage - major damage in the regional banks. Remember as I wrote in this week's summary I felt the Federal Reserve will allow some of these to go under because they are smaller and they want to put up a front that they are allowing free markets to work. That's a lie - they are basically supporting a series of banks that should of gone under by now.
  • But today Fifth Third and other regional banks across the nation are being shaken to the core by a 21st century financial crisis. For many of them, things are going from bad to worse.
  • Home mortgages and other loans that the banks made in good times are souring so fast that many of the lenders are scrambling to prop themselves up. If the pain worsens — and many analysts say it will — some of these banks, like Fifth Third’s predecessors, may eventually seek out suitors, most likely large national rivals.
  • “Everybody is trying to figure out where the bottom is,” said Jennifer Thompson, a regional bank analyst for Portales Partners in New York. “Every time a bank reports another capital raise or reports that things are worse than they anticipated, there is another round of selling.”
  • But Wednesday was just one more bad day in what has been a horrible year for small and midsize banks. Their descent in the stock market has been remorseless, reflecting the economic pain in their own backyards. Weakening housing and construction markets in regions like the Midwest, Southeast and Southwest have hit lenders in those areas hard.
  • But the breadth and depth of the current troubles have caught bank executives by surprise. Federal regulators are particularly concerned about the exposure of smaller banks to the commercial real estate market, which has softened in some parts of the country.
  • But more than anything, the problems confronting regional banks underscore the extent to which the housing crisis has spread throughout the country. In the Southeast, Regions and SunTrust are reeling from loosely underwritten mortgages now that real estate values are plummeting in the region. (wait, everyone tells me the problems in housing are only in CA, FL, MI, NV, AZ, and OH?)
I wrote this fall when everyone on CNBC was saying that first round of writeoffs was the "kitchen sink" and "subprime is the issue, don't worry about anything else".... I was saying that's complete nonsense and that subprime is the tip of the proverbial iceberg. (keep in mind last summer/fall, almost no one was calling for recession either) Just in mortgages alone we had to work through subprime, then Alt A (no document), then prime mortgages (just because you were a prime credit doesn't mean you did not buy way too much home than you could afford). Then we had to go through consumer debt - cars, credit cards, personal loans (these are things hit by recession). Then we had to go through commercial loans (also hit by recession). We were just getting started... but the Kool Aid drinkers were saying, it was already over... in August. Then September. Then October. And so on. One day they will be correct. The irony is, most of the subprime damage is probably close to being over (within next 1-2 quarters) but as the recession (err, slowdown) builds all those other loans are going to see serious delinquency rates. You will be seeing many Americans defaulting on many types of loans as their wages are not keeping up with the costs of life - no matter what the government says the cost of life is. That is just starting to register with the NYC crowd. [Dec 4: Et tu, 1st half 2008? Predictions for the Coming 6 Months]

Anyhow Blackrock is an asset manager, and the best one at that, so they will be picking among the carcasses from the side of the road (just like Goldman) and be one of the ultimate winners from the blanket stupidity of 90% of our "we will regulate ourselves, just trust us" financial system. The stock has retreated very nicely to its 200 day moving average of $196, down from a peak of $228 just three weeks ago, so this is a nice 14% discount. Could we get much cheaper fare elsewhere in this space? Of course - but I don't want to deal with that junk, even if it will rebound with a greater % return - can't trust what those other players are doing or what they have on the balance sheet.

Today's purchases in $195s/$196s takes Blackrock from a 0.2% stake to 1.2% stake. If we get something in the $170s I'd like to add more there.

[May 8: Blackrock is Fix It Firm to Manage Risky Assets of Others in Distress]

Long Blackrock in fund; no personal position

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