If Asset Prices Are Dropping, Why are Bank Stocks Rising? http://seekingalpha.com/article/157510-if-asset-prices-are-dropping-why-are-bank-stocks-rising David P. Goldman August 21, 2009 My favorite indicator of bank portfolio quality, the traded price of riskier assets (in this case securities backed by subprime mortgages issued in the middle of 2007), has taken a big dip during the past couple of weeks: hat should be a surprise given 1) rising default rates, 2) poorer consumer performance and 3) more loan modifications with uncertain implications for bond holders. Iâve been calling attention to the cognitive dissonance between the jump in asset prices (mainly due to so-called Public-Private Investment Partnerships funded by the government with cheap leverage and an asset price put) and the underlying deterioration of asset quality. There was something of a mini-bubble in distressed asset prices driven by PPIP demand that seems to be abating. But what of bank stocks? WSJ this morning cites the failure of numerous regional banks who hold these securities. U.S. banks have been dying at the fastest rate since 1992, mainly because of bad loans they made. Now the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks. Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history, and broker a sale of the Texas bank to Banco Bilbao Vizcaya Argentaria SA of Spain. Guarantyâs woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nationâs worst lenders. The large banks own the same toxic waste. I have argued all year that they can squeeze out enough cash flow to keep one nostril above water, and that Citi (C) (for example) should trade around $4 a share just in terms of option value on a possible future recovery. But options can go wrong as well: we simply donât know how bad things are in the Citi portfolio. Bank stocks have rallied well past the level at which I am comfortable. I took profits too early, but there is a big enough risk of a relapse to keep me on the sidelines.
That chart is showing clear higher default risk, but still a rally in bank stock. So because the government is the (counterparty) with the public private investment plan, it is no fear of the government to default? And that will buy more time on the recovery rate?
If Asset Prices Are Dropping, Why are Bank Stocks Rising? ------------------------------------------- This guy has missed the boat. He is grasping at straws and trying to make a coherent arguement by tying together too many different indicators. Hence the question for the title.
When he is saying "Asset Prices are dropping" I think that is the bad bank loans with higher default risk. So he ask why the stock is up with higher default risk known (the chart).
"that Citi (C) (for example) should trade around $4 a share" Apparently he has made a fundamental determination and the price is now irrational according to his calculations and he has indicators to prove it. He is wrong and doesn't know why and makes no sense to him and is asking us to agree with him. No thanks. The whole market is jacked up and he is on the sidelines with bank stocks.
Ok. He is saying he is fearful because it make no sense to him, so his position is cash, no bank stocks for him. I am saying the risk he show is true. But that risk(default) is the counterparty of the government. So people do not fear counterparty risk when it is the government is maybe the reason. Not a dissonance cognance like bylo is saying. I am not saying I am right, I am giving my opinion from only what I know now.
So for the bank stock, and people who buy them now, and keep the stock price high (even with a high default risk) they are like options trader who are paying a price now with a bet it will go higher (only they buy it already) The risk to them they see is low because they see a goverment hedge that risk. A long bias because the recovery rate in time has government money to help.