Friday, December 05, 2008

Catching up...

A few of you fine folks asked me to explain why I feel the banks and some other companies that have gotten bailouts are worthless and in time their share price should reflect that. Here goes;
The government is basically 1/2 way nationalizing the entire banking system, and is well on its way to doing the same with the insurers, and the automakers. My guess is they will also do some other financial institutions as well in the end.
The banks have had a massive recent rally on the, I believe, false notion that since the Fed won't let them fail it's a safe haven. While it's probably true that the Fed, foolishly as it will end up being, has done things to protect the companies themselves, the deals that they are cutting, in my opinion, can't possibly leave any shareholder value. The notion that they will make money on these deals is preposterous. They are basing it on an illusion that with the toxic assets off their books (which the Fed is responsible for) the banks will make money, pay huge interest premiums and the Fed owns a lot of stock that they can sell back to the banks, or in the market at a later date when things stabilize.
There are several flaws with this line of reasoning. #1 it assumes that things will stabilize in a reasonable period of time. #2 it assumes there will be buyers for the toxic assets or equity, and that the banks will be able to pay them the interest they have a deal for. #3 that the market will go up, and thus the banks share prices will appreciate #4 that there won't be a contraction in these sectors, which I think is inevitable. In NYC there's at least one back on every block and sometimes literally 2 or even 3. It's like Starbucks was. The banking sector will collapse under it's own weight.
Every point and illusion the Fed has is fatally flawed. I could go into great details on each subject, but suffice to say that the Fed has diluted the shareholder equity, taken large chunks of potential profits away from shareholders, and left a lot of debt still on the books that will need to be written off in most instances. Today after the close JPM announced they are participating in some FDIC backed debt sales. If the banks were healthy they would not be participating in these programs. There are so many trillions of dollars in bad defaulting debt in these companies that they are worthless from what I've seen. The reason why they don't loan to each other is because they don't have the money, and no one is coming to borrow it. Americans are finally saving money, that's a very good thing. The government doesn't want us to save money, it wants us to spend money. That's what got us into this mess to begin with. LEVERAGE. So, now instead of these institutions being able to have 50 X's leverage they are allowed up to 20 X's. Let me tell you something, 20 X's is insane. It should be NO LEVERAGE. That way you get clean financials and no bubbles. Also, a lot of people are taking their money out of banks and putting it into treasuries, so these banks can't collect fees or use the money that's being funneled into the Fed's hands. This same setup has occurred with AIG, and will soon happen to GM and F. If C was worth a dime it would be $25 right now. C is one name people want to own bank wise, so for the stock to stall out up til now is a very bad sign longer term. Assuming we get a rally January Effect style, C may very well make it to $10s or higher, but it's got no reral value to shareholders and I believe that anyone holding it for more than a trade will get crushed when the proverbial sh&( hits the fan. Next week we'll hear how the market shrugged off bad news and thus we have indeed bottomed! Yes, and the tooth fairy is real and leaves you Tarp money under your pillow! Ah huh. In the meantime, I do feel the bottom is in until Obama is sworn in and perhaps a bit more. Then its death spiral for this market, mark it down! RULE Waxie


Tim said...

Hi Mike,

I admire your many original thinkings very much.

I just want to hear your current view on the crude oil. I remember this year around June you said you are a "peak oil theory guy". But obviously things changed a lot. Where do you think it will go from here $40?

Tim said...

Hi, Waxie. I admire your many original thinkgs about the market and the economy.

I just want to hear your thought about the crude oil. I remember this year around June you said you are a "peak oil theory" guy. But then things changed a lot and I noticed that you seldom talk about oil. So I want to hear your view from here aroung $41.

Tim said...


Erik28 said...


What if Obama starts to crank up the printing press, as soon as he get's in there?

pjkoko said...

Hi Waxie,
Thanks for the great explaination of your position on the financials. Great blog. What do you think could turn the market around? Would it have to be some kind of reverse 911 type event or could it be the market just get tired of being bearish? Right now I see a lot of "perception" trumping reality.
Thanks again for your opinions.