Saturday, August 04, 2007



Why Markets Will Recover Quickly

No one wil argue if you say that global liquidity is more than ample. The current jitters are not new and readers can peruse my previous postings to get further elaboration. My main argument is just to highlight 3 huge financial stocks in the US. Bank of America closed at 47.00, Citigroup at 45.80 and Wachovia at 44.94. At those prices, the dividend yield for Bank of America stands at 4.77%. Citigroup's dividend yield comes in at 4.9% while Wachovia's at the same dividend yield as well. No matter how you cut it, these are enticing dividend yields for any cash holder in US dollars. Considering the US Treasuries are yielding 5%, but you still have to ay federal levy of 35%: hence these stock dividend yields are highly attractive.


The subprime worries has weighed down financials for the past few weeks. The current weakened share prices translates to just 10x of previous year's earnings for the 3 stocks! Hence the financials will be very attractive once the jitters evaporate. Even now, they are highly attractive but no man dare bargain hunt aggressivey during such uncertainty. However, the evidence shows that the rebound will be substantial once it happens. We have to consider also that most other sectors are unaffected by the subprime worries.

This weakened state is largely contained in certain pockets in the US. The rest of the world will just have to wait it out. The longer US dawdles, the greater the likelihood of markets decoupling from the US.

Do I think this indicates that the worst is over? I shall answer this question with two rhetorical questions.

Do taxi drivers pick their noses at traffic lights?

Does Dolly Parton sleeps on her back?

10 comments:

sopskysalat said...

dali,

dolly's twin towers will keep her back stick to the bed. hahaa....

stock prices run ahead of current situation, thus, the current cloat may surface in the many more months ahead.

so, the yield curve for dividend will probably close down, of course not for now.

i mean, yes, the current cycle is still short, but are we hitting the apex already? we will see when we are lower.

Citysleeker said...

The US property scene has been red hot in the last couple of years leading up to 2006. It's estimated that over 20% of the loans given out were subprime.

With that in mind, I sincerely doubt that not many institutions are exposed to this problem. I think a lot don't even know the extent of their exposure as this debt has be repackaged and sliced into different forms. Hence companies and funds may not understand how much subprime risk actually sits in their hands.

One thing for sure -- the high liquidity party has somewhat ended for now. Indiscriminate lending will slow down as the appetite for risk will be reduced. When you lose money on something... you will tend to pull back others (esp profitable ones)... that's always a natural reaction.

This is not all that bad... If we don't hv this problem now... where it seems manageable, I think the next big problem will potentially hurt everyone big time.

As for your argument abt yield from the banks... well... I think that will fall as they will see lesser M&As and LBOs... you name it... and if they got to write-off some of these subprimes stuff... you can bet their bottom line will take a big hit.

My take is we may see this market going lower before heading up again. But for now, guess we can just keep our fingers crossed as we witness more casualties being unfold.

SAMMY MU said...

Somebody once said, "Opportunities are made up easier than losses."
It’s not necessary to play every move, it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.
Look at it this way, the dot.com bubble burst and it left tech in its wake (NDX 5000 anyone)? Real Estate was next and the ripples are still being felt by homeowners. If the debt bubble has indeed cracked--like it feels it has--it's gonna be a long and arduous process. I don't wanna be a perma bear, I'm just trying to be realistic. The FOMC isn't without blame but they're certainly not the cause.
We have to make our own decisions as we're the one who will reap the reward or bear the consequences. It's one thing for someone to scream that the DJIA will be 1000 points higher in one breath and suggest financial armageddon a few days later. It's an entirely different thing to base our financial decisions on those assertions.
Tomorrow, as they say, is promised to nobody.
Let's remind ourselves, discipline over conviction.

Wile said...

I absolutely agree this is a great time to pick up financial stocks.

ikanair said...

When you see one cockroach scurrying around, you can bet that behind the cupboard there's a whole lot more.

yusuf said...

'This weakened state is largely contained in certain pockets in the US.'

well dali, the problem is the california and the west coast subprime loans has not taken a hit yet as such once they are made known the problem will aggravate.

Salvatore_Dali said...

i think we have to look at subprime not as a whole but the percentage of that that was done recklessly ...the ones i trouble are those that were part of the end cycle where mortgages were based on NO MONEY DOWN 100% finacing ... pure recipe for disaster ... these were in the less vibrant areas .. as for California the property prces is stable... the dip n prices s more in mid west areas ... again, as long as people have jobs, the bulk should be able to ride it out... this is nothing new, property prices started falling some 10 months back, each month ... now the shit hit the fan, some who has higher exposure will fall, the hype and heightened anxiety ndicates the end consequences NOT the beginning

simon_alibaba said...

Barely holding on. The MSCI World Equity Index (MWI) is holding just above its major support trend line after pulling back during the global market rout in the past
fortnight. Weekly MACD and RSI indicators have already caved in, which is worrying as this is usually an early warning sign of further weakness ahead for
global equity markets in the medium term. Critical week ahead. Before last Friday’s sell-off in US equity markets, we were
looking forward to a rebound of global equity markets. But we are not certain now. 4-year trough cycle not completed yet. In addition, global stock markets have
not completed their 4-year trough cycle. This could happen in 3Q07 if the sharp pullback over the past fortnight is any indication of the potential correction ahead
for global markets.Watch S&P500 at 1,450 and 1,488. After hitting a peak of 1,555 in mid-Jul, the
S&P500 turned south rapidly and fell to 1,433 last Friday, a 7.8% decline.

Major uptrend is over? Based on our preferred wave count, the MAxJ could have completed its major “Wave 3” bull run. Expect a protracted correction. The current correction is not expected to be like the Feb sell-off which was completed in a fortnight. We believe that this correction
will last no less than 2-3 months if the downtrend is “fast and furious” while a gradual decline could take 3-6 months, if not longer.

Windsurfer said...

http://seekingalpha.com/wp-content/seekingalpha/images/financials_01.png

The Great Game said...

Hi Dali

Have been a silent reader of your blog for some time, and I found it to be highly educational for a novice like me.

Just to share my 2 cents on this subprime crisis.

Although subprime only constitutes a relative small % of total mortgage market, the rippling effect to other credit markets (or the investor confidence in strucutred finance), e.g. the leveraged loans is unquantifiable, & has been grossly underestimated by many.

The financial institutions are trading at such low multiples mainly due to the huge leveraged loan (those funky 'covenant-lite' notes) that they warehoused for the buyout house especially for the notoriouly tough negotiator like KKR. In particular, I think Bear Stearns and Lehman would be hit the worst, given their lack of balance sheet strength and hence high % of leveraged loan to market cap, vs the like of Citi & JP Morgan.

If the credit market deteriorates, some of the early LBO transaction commensurated might even folded. Let alone the constraints on capex spending (which further impending growth), massive layoff to meet the rising interest cost might even be plausible. Thus, the current healthy corporate performance is not going to last for too long (even less than 24 months). This might transpire to be even worse than the collapse of the junk bond market in the 80s.

In the worst case scenario, the liquidity would soon be drying up due to the self-perpetatuing investor confidence crisis when every hedge fund is being forced sale to meet the margin call, which results in further decline in asset value and further forced sale. Coupled with the intrisicaly linked global financial market (mainly via CDS) we have today , the result would be truly disatrous.

What I have found interesting is that nobody has highlighted the conflicting role of the rating agencies (the big 3, S&P, Moody and Fitch) play in this crisis. Being highly profitable, structured finance (both advising and evaluating) has been a bonanza for them in the past few years.