The Credit Crisis Financial Stocks Short Journal

There is one tricky issue that could complicate the pricing of these bad assets, political risk.
http://www.elitetrader.com/vb/showthread.php?threadid=158449

The bids will in all likelyhood be lower than otherwise to reflect that chances the rules will be changed. Lets say all bids get to be 10% higher than the held-to-maturity value of the assets, 10% seem resonable given that a too high of a number is likely to be marked down by the political risk. This increases the Net Present Value of XLF by 10%(Although an adjustment to equity offerings that are avoided by the overpaying needs to be made)

In theory it would mean that XLF bottoms 10% higher than otherwise, doesnt sound like a big deal
 
Pres Obama on 60 minutes addressed some of the criticism of his banking plans and had
to address the 'even from Warren Buffett' question. He said something to the effect of 'He is a large player in the financial markets, he owns a lot of Wells Fargo stock'. This sounds like a man who will make banks issue 'a lot of common stock at very low prices' just like Buffett fears
 
Quote from Daal:

I would agree with this. I just find resonable to expect positive returns with US stocks at 13x Shiller PE and at 8-10x Peak earnings. The actual % I dont know but his numbers seem resonable in the assumption that the recession ends in somewhere in 2010
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What if the expected long-run (10 year) return from stocks is just the dividend yield plus inflation? Remember back when stocks used to yield more than Treasuries to compensate for the extra risk? 10 year inflation could easily be flat, or even negative. Even if it's 1%, that plus the 3.5% S&P yield gives a 4.5% return - and that is assuming dividends and earnings hold up, rather than fall in a deleveraging world of quasi-socialism.

Given that government bonds are yielding 3%, one has to ask if 1.5% is an adequate extra return to compensate for the risk of losing 50% in 12 months.
 
Quote from Daal:


This increases the Net Present Value of XLF by 10%(Although an adjustment to equity offerings that are avoided by the overpaying needs to be made)

In theory it would mean that XLF bottoms 10% higher than otherwise, doesnt sound like a big deal
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It seems that my numbers are wrong. If the bank increases the Net Present Value of every asset by 10% by selling to the bad bank, the NPV increase of the bank would depend on the size and quantity of the assets sold. If they sold all their bad assets they would decrease their losses by 10% at the most, and this assumes they will sell all assets that will lose money

Bill gross estimates there is $2T in bad assets in the banks books, if they will be overpaid by 10%(I cant claim this number is accurate), the value of the subsidy is $200b, $100b in this first tranche. Total US bank capital is $1.4T, so they get a help of less than 10% of their total capital
 
Quote from Cutten:

What if the expected long-run (10 year) return from stocks is just the dividend yield plus inflation? Remember back when stocks used to yield more than Treasuries to compensate for the extra risk? 10 year inflation could easily be flat, or even negative. Even if it's 1%, that plus the 3.5% S&P yield gives a 4.5% return - and that is assuming dividends and earnings hold up, rather than fall in a deleveraging world of quasi-socialism.

Given that government bonds are yielding 3%, one has to ask if 1.5% is an adequate extra return to compensate for the risk of losing 50% in 12 months.
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Shiller earnings yield is about 6.6%, that should grow at about 6% a year from 2011 and on(probably less during 2011/12). If you hold PE constant(in order to remove a speculative component of trying to predict PE directions), then thats the kind of return one could expect a year(6-7%).
Of course this is all theorical, in the real world we will probably get more declining PE ratios, the dividends will offset some of this. So I dont know if it will be 3% or 8%, but it seems resonable to expect positive returns at this point.

But I'm not excited about US equities at all, I'm finding much better values in bonds with lower risks. If the SP goes to 5xx, then expected returns will begin to look good
 
People seem to be misunderstanding the Geithner bad asset plan.
Paul Krugman says its a bad deal for the taxpayers and a hidden way of giving capital to banks.

Thats totally wrong, this plan will hurt banks profitability and as a result their long-term capital given that markets are risk averse right now, the cheap put and cheap financing is nice but nobody wants to lose money and take gambles.

Bill Gross, blackrock and others will be careful in their pricing. We are talking bond funds with more than $10b in assets, not amateurs. IF the banks hit those bids, then I know which side got the better deal and its not the banks. I'm trying to do some math on the amount of capital US banks will need and the XLF capitalization, its quite possible that Geithner will own XLF by the end of this(this means XLF will break its lows)but I havent finished yet as I cant seem to find the market cap of the US banking system
 
Quote from Daal:

I havent finished yet as I cant seem to find the market cap of the US banking system
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See attached. price > $1, sector financial (out of all SP500), mcap > $500m

Total market cap of these SP500 stocks (which are money center banks, brokers, insurance co's etc. etc) is $815bln
 

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Quote from Daal:

I just finished a research note to a firm about US bank stocks. I was able to make it avaliable for free
I'm growing more and more confident XLF is going to tank big
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Did you factor in the coming mark-to-maturity values that will keep these loans afloat for eternity?:D
 
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