XBD Amex Securities Broker/Dealer 218.86 +3.11 +1.44% 8/29/2007 BKX Phlx Bank Index 105.92 +1.63 +1.56% 8/29/2007 BIX S&P Bank Index-Bix 366.84 +6.88 +1.91% 8/29/2007 Any other comment needed ?...
Covering BSC at 113.49, MER at 75.86, GS at 181.86. Hope, you liked brokers / financials like I did last couple of days.
Valuation concerns The credit crunch has increased concerns about how well investment banks value some of their assets. The firms hold some complicated securities that don't trade much, making them more difficult to value than things like stocks and government bonds. "The more important, broader question is whether they can truly value the assets that they hold," Bove said. "And the answer is that they cannot. They've overstated their assets and therefore their book values, so the stocks should go lower." These assets include so-called residuals, which are often riskier parts of mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). When an investment bank securitizes loans, they chop them up into different "tranches." Some slices are less risky, pay lower interest rates and have higher ratings. But to get AAA ratings on the best bits, investment banks sometimes have to take the riskiest tranches that are exposed to the first losses on the underlying loans, Bove explained. These are residuals. Bear, Lehman, Goldman, Morgan Stanley and Merrill have between $4 billion and $11 billion of "residual interests" on their balance sheets, according to a report that Michael Hecht, an analyst at Banc of America Securities, issued on Friday. These include MBS, other asset-backed securities, CDOs, muni and corporate bonds, he added. [...] Marking to model Some assets are so esoteric and trade so infrequently that investment banks have to value them based on mathematical models, rather than the market prices of similar or related securities. These are known as Level 3 assets. This, in theory, gives firms lots of leeway in valuing these assets, which include things like derivatives, private-equity investments, residuals of CDOs and mortgage-servicing rights, Bove said. Wall Street firms use mark-to-model techniques to value 9% of the Level 3 trading inventory on their balance sheets, estimates Bernstein's Hintz. Goldman is top at 15%, while Merrill is bottom at 2%. Source: Bernstein Research brokerage Percentage of Level 3 trading inventory valued using mark-to-model techniques Goldman Sachs 15% Morgan Stanley 13% Lehman Brothers 8% Bear Stearns 7% Merrill Lynch 2% Level 2 assets are those that may not trade much, but that can be valued by checking market prices of similar securities and making assumptions about variables such as interest rates, Bove explained. These can include MBS, some corporate bonds and CDOs, he added. The five largest U.S. brokers and the biggest universal banks -- Citigroup, J.P. Morgan Chase and Bank of America -- have $4.1 trillion of Level 2 assets on their balance sheets, according to Bove, who got the data from the companies' regulatory filings. [...] Fixed-income fallout The credit crunch has also disrupted several markets in which investment banks have generated lucrative fees recently. Sales of asset-backed securities are down 28% in the third quarter versus the second quarter and MBS issuance is off 24%, according to Banc of America Securities. Sales of high-yield debt are down almost 32% in the quarter, versus the previous quarter, the bank also estimated. Weakness in the MBS market will likely hit Lehman and Bear the hardest, analysts said. Bear was the leading underwriter of MBS last year, with an 11% market share, according to Dealogic data complied by Bernstein. Lehman was second with 10%. Bernstein's Hintz expects Bear's third-quarter fixed-income sales and trading revenue to slump by half versus the second quarter. Lehman's may drop 37%, while Goldman and Morgan Stanley could see declines of 28% to 30%, he added. Credit market problems have already disrupted some large leveraged buyouts. If investment banks continue to struggle to sell leverage loans that help pay for these acquisitions, M&A volumes may continue to drop from what were record levels earlier this year. The volume of completed M&A deals during the third quarter is down by roughly 25%, Bernstein estimated recently, citing Dealogic data. Still, equity trading volumes surged in July and August, while stock, commodity and currency markets became much more volatile. That will likely boost revenue and earnings in the equity and derivatives trading departments of investment banks, analysts said. Equity trading volumes on the New York Stock Exchange are up 17% this quarter versus the previous three months and up 24% from a year ago, Banc of America Securities' Hecht noted on Friday. Equity options volume is up 62% from a year earlier, he also noted. Indeed, Hecht expects third-quarter results from the top investment banks to be a "stabilizing" event and advised clients to invest in the stocks ahead of the reports. http://www.marketwatch.com/News/Sto...x?guid={0ADCFB73-4EBE-435D-BF91-99B4BF7B608E}
"Indeed, Hecht expects third-quarter results from the top investment banks to be a "stabilizing" event and advised clients to invest in the stocks ahead of the reports." Is that so. Well no long positions for me on these guys ahead of earnings...not until they've either: 1. Moved above their respective 200-day emas on decisive volume 2. Had an independent auditor crawl up their respective asses to decipher these "esoteric" holdings (liabilities) to the satisfaction of insitutional (volume) investors. Look at their charts. All of them. They've *all* been under heavy distribution for months. These guys are hiding something, I don't care what anyone says. GS was my favorite short for a long time. I don't buy the recent limp-wristed rally in that stock. If and when it gets to its 200-day and *if* it fails at that line of resistence following earnings, I'm ALL IN as a short. I will short that motherfker right into the ground and I will be ecstatic the whole ride down. If, however, it does cross and close above the 200, I suppose I'll be a reluctant long since everyone (volume) seems to like that damn stock so much. Something about shorting GS. It's a beautiful thing.
Excellent link, ASus. The doomsday news is priced into the b/d's so far as I can see. The pundits, talking about BSC and LEH in particular, make it sound like next week's earnings will be a sudden revelation of total financial apocalypse. Anything milder than that is likely to drive the b/d's higher.