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« More on "The Lost Decade" | Main | SEC on Marking to Market: Another Problem Solved »

March 29, 2008



I can't speak for Dick Bove but as I understand his investment thesis it is that in the coming year or two banks who take deposits and make loans will be advantaged over the other financial institutions who lacked a deposit base and who obtained their funding from leverage and the derivatives markets. Right now everyone is suffering but it seems reasonable to me to think that the depository institutions may come out of the mess a bit stronger and the non bank financials weaker. On the other hand Ms Whitney's research seems much more about playing who's got the old maid and trying to get the next qtr right for a few points. I own some of both GS, WFC and some others but still a bit underweight the sector over all. Leaning in the Bove direction though.


Mike C - I believe that I have been consistent in my approach. Investors are quite interested in whether there will be more write-downs and what inference to draw from that. Whitney seems to know better than anyone else the true value of the assets and also offers plenty of advice to bank executives on their mistakes and what they should do now.

This article is all about looking at two analysts and evaluating their reasoning.



Mike C

One more comment that applies to the asset writedowns.

One recurring theme with respect to Fed analysis is this question of normative versus empirical analysis. The difference between what the Fed should do versus will do.

Shouldn't the same theme/concept apply to these writedowns? The focus of some seems to me to be reversed with the discussion being centered on the normative, how the assets *should be* marked, as opposed to the empirical of how they actually will be marked. Whitney in her CNBC interview lays out the chain of events for how these assets will be marked along with resultant cuts in dividends and necessary raising of capital.

Will the assets ultimately be worth more then the marks? Maybe, maybe not. Should they be marked in some different method, other then mark to market? Maybe, maybe not. But if we are going to analyze the Fed with what is rather then what should be, I would think one should be consistent here.

If ultimately more writedowns are indeed coming, leading to further substantial stock price erosion, then going long the names here because of how the assets ***should be*** marked is basically choosing to act/trade on normative analysis and a ticket to lose money.

Mike C

Well, if nothing else Meredith Whitney is certainly better looking then Dick Bove. :)

Kidding aside, I've avoided banks and financials up to this point because they lie outside my "circle of competence" so I knew I couldn't get a good handle on what their book value really was. A really smart money manager once told me, "it is ONLY WHAT YOU OWN that can hurt you". Still, at some P/B multiple they become interesting.

In terms of Whitney and Bove, I have ZERO doubt that their knowledge of financial companies and banks exceeds mine by a enormous margin. Having said that, if I was going to use their research to "get up to speed" who should I listen to? Who has been more right on how this would unfold since the beginning of this credit crisis in August? Should that matter?

I remember Dick Bove swearing up and down unequivocally that Citigroup wouldn't have to cut their dividend. Whitney said they would. What did Citigroup do? What other mistakes has Dick Bove made? What other things has Whitney been spot on right(writedowns)?

Dick Bove says financials are an excellent long opportunity here, while Whitney says to expect more downside. Sometimes the best bet is simply to pass, but if forced to choose, it would seem going with Whitney is the better bet?

alex morrow

I believe the way to look at financials is through the windshield and not the rear view mirror. I agree with you on valuation. It's impossible to place a value on many assets. The mark to market accounting valuation is not 100% accurate in the real world.(If I owned a printing company with a large paper inventory and my competitor goes under, has a liquidation sale and the paper goes for .30 cents on the dollar, why should I mark my entire inventory down by 70 percent. It makes no sense. I'm still in business and will sell based on what the market will bear).Financial businesses that have assets that were created to make money over some time frame, that plan to stay in business and have the financial wherewithal to do it should value assets accordingly.
In any event, it's tough for the outside observer to figure out these values.
I think it's safe to predict their will be more regulation which will place constraints on earnings power. There will be more limits on leverage employed. The too big to fail financial institutions will also be too big to take some of the risks that earned the most money.
I've been focusing my efforts on hedge funds and financial businesses that will not be as regulated and will have the ability to make money by being entrepreneurial. These businesses have always had lumpy returns. This beaten down sector presents opportunity for those with a longer time horizon. In my opinion, now is the time to invest. If the prices go down, add to positions. The key of course, is to pick the right horse.

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