August 31, 2009

“Where’s the Beef?”

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , at 3:42 PM by Robert Barone

As the woman in that infamous Wendy’s commercial asked, “Where’s the Beef?”, we should also be asking the same  when it comes to company earnings, “the Beef” being top-line growth.  There was virtually none of it in the second quarter of 2009.  Instead we saw companies meet analyst estimates by cost cutting, inventory stuffing, and accounting manipulations. And Wall Street, still reeling from its performance over the last two years, has run up the stock prices of the most debt burdened companies, leaving behind much stronger companies and blindly hoping that it’s different this time.

On August 14, 2009 Abercrombie and Fitch, reported their second quarter earnings.  In the report, they where upbeat about same store sales only being down 30% from last year.  On that awful news, the stock was bid up.  However, in that same report, the company revealed how it was able to achieve massive cost savings by cutting payroll, direct to consumer expenses and other variable costs.   This scenario was common in the second quarter.  So, again I ask, “Where’s the Beef?”

Do you wonder why, like I do, financial company stock prices have done so well for the last few months?  How did they manage to report such wonderful earnings?  This was partly accomplished by the changing of the mark to market accounting rule by FASB in early April (retroactive to the 2nd quarter). That change alone allowed JPMorgan to take a huge write up in their valuation of Washington Mutual’s assets.  However, I came up short in my search through their financial statements for signs of  real economic growth.  So, after two years, there still remains question marks as to the real value of big bank assets.  Furthermore, I am concerned over the financial system’s capacity to even refinance existing debt, much less finance any new growth!  Clearly, no “Beef” here.

Where is the money going to come from for top line growth?  The market would have you think that the consumer is going to come back to life from his zombie like state.  The government and helicopter Ben would like you to believe that we can spend and tax our way out of this conundrum.  Others believe that China is the great red savior.   In the end, I believe that this equity market just does not have the fundamentals to sustain its current levels.

Joshua Barone

August 31, 2009

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778

August 21, 2009

How Accounting Exacerbates the Financial Crisis

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , at 5:58 PM by Robert Barone

In a commentary posted on Bloomberg on August 12th (reiterated in Seeking Alpha on August 16th), Jonathan Weil bemoans the apparent discrepancy between the carrying or book values of some bank loans and their “fair-value”.  Bank of America and Wells Fargo are cited as having large discrepancies ($64.4 billion for BAC with total Tier 1 capital of $111 billion, and $34.3 billion for Wells with total Tier 1 capital of $47.1 billion).  Weil also says that this is true of half of the 24 banks in the KBW Bank Index including SunTrust and KeyCorp.

Banks have a choice in accounting for their loans and can use “fair-value” accounting if they so choose, he says, but nearly all choose not to “on the grounds that they intend to keep them to maturity and hope the cash rolls in”.  He concludes, “the difference between being well capitalized and woefully undercapitalized may come down to nothing more than some highly paid chief executive’s state of mind”.  Sounds foreboding, doesn’t it?

Those who continue to push “mark-to-market” accounting onto bank balance sheets, like Mr. Weil, fail to recognize what “fair-value” means, the nature of bank balance sheets, and the dire consequences that will occur if such accounting is imposed.  Let’s not forget that the low point of the financial crisis passed when the FASB suspended some of the “mark-to-market” accounting rules earlier this year.

What is “fair-value”?

Let’s start by defining what “fair-value” isn’t.  It isn’t what some speculator is willing to pay for an illiquid asset during a financial crisis.  We are too consumed with the bid-ask regimen we see daily in the stock exchanges.  Most transactions don’t work that way.  Shoppers find different prices for the same or similar goods at department stores than they do at Wal-Mart or Target.  When there is no ready or liquid market for an asset, “fair-value” is not some speculator’s low ball bid.  When bid prices for bank loans are ridiculously low, “fair-value” should be measured in some other way.  FASB even says so!

For example, if the loans are current and have been paying consistently and there is an expectation that they will continue to do so to maturity, then “fair-value” is more likely to be measured by their discounted cash flow – unless, of course, we expect Armageddon, which clearly Mr. Weil expects.  But, if that’s the case, who the hell cares about this topic?

Nature of Bank Balance Sheets

Think about what a bank does.  It makes its money by turning fairly illiquid assets (like real estate, autos, receivables, etc.) into liquid assets.  It does so by putting the illiquid assets on its balance sheet and giving the borrower access to cash.  To now attempt to price such illiquid assets at prices which will “blow them out” in a short period of time is pure folly.  Anyone who understands an estate sale or what happens in a forced liquidation of a retail business knows that the prices paid by the buyers are significantly below what “normal” market prices would be.  So why do we want to impose this on our financial system which has worked pretty well for the past 70 years?

To be fair to Mr. Weil, he does acknowledge, at the end of his piece, that “fair-value” estimates in the short-term can be a poor indicator of an asset’s eventual worth, especially when markets aren’t functioning smoothly.”  He also quips that “at least now we’re getting some real numbers even if you have to dig through the footnotes to get them.”  To which I would reply, “why isn’t footnote disclosure enough?”

Consequences

The imposition of marking illiquid assets to a speculator’s bid will have dire consequences for economic growth.  Financial institutions will be forced to significantly lower their loan-to-value ratios (LTV).  The norm for a single family home or a condo is somewhere between 80% and 95%.  With the imposition of “mark to illiquid market accounting”, the LTVs would fall significantly, maybe even to 40% or 50% as banks would be forced to protect their capital from loan mark downs during economic slowdowns.  Talk about a deflationary spiral!

Under this scenario, if LTVs for homes fell from 80% to 50%, the price of the home would have to fall by about 60%.  For example, if a buyer has $40,000 down (most don’t have this much) on a $200,000 home (LTV of 80%), if the LTV were to drop to 50%, this buyer could only afford an $80,000 home.

Conclusion

Already the financial system’s capacity has been significantly reduced.  I’ve seen well researched studies indicating that the existing refinance needs over the next five years cannot be met with current capacity.  Just think of the havoc “marking to illiquid asset accounting” will wreak!

Robert Barone, Ph.D.

August 17, 2009

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778.

August 11, 2009

Where is the Outrage II?

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , , , , , , , at 6:03 PM by Robert Barone

We recently blogged about how we taxpayers saved the large Wall Street firms only to have it thrown back in our faces with unconscionable bonuses and the continued reckless behavior of politically connected “too big to fail” institutions.

It is clear to us and to many who analyze economic behavior that the consumer driven U.S. economy is going to sputter until new jobs are created.  It is widely acknowledged that small business, not the giants that we saved, are the engine of job creation.  Since the hundreds of billions of dollars of TARP funds were given to those that are “too big to fail” last fall, commercial and industrial loans have fallen every single month (St. Louis Federal Reserve Bank).  Those TARP funds have been pocketed as bonuses or simply went into shoring up the capital bases of these institutions that now prowl the countryside looking for takeover targets (to get even bigger).

At the same time, there is a segment of the financial community that has never shirked their responsibilities when it comes to small business and community lending.  We call these folks “community banks”.   Unfortunately, government regulators and many in Congress look at these folks as “too small to save”.  But are they?

Generally, community banks are owned by locals, are often the largest or one of the largest public entities within the communities they serve, and are, more often than not, responsible for the financing and building of their communities.  You can consider them the communities’ lifeblood when it comes to local lending.  Shelia Bair, the Chairwoman of the FDIC recently said: “Community banks are the life blood of our nation’s financial system, supplying much needed credit to countless individuals, small businesses, non-profit organizations and other entities in large and small towns across the country.”  We doubt she means what she says, because the regulatory authorities, including the FDIC, have shown a hostile attitude toward community banks by: 1) Granting only a miniscule amount of TARP funds to community banks, even to those banks whose capital bases were severely impaired by the government takeover of Fannie Mae and Freddie Mac only weeks after Barney Frank, Chairman of the House Financial Services Committee, assured the public that Fannie and Freddie were solvent; 2) The heavy handed tactics now being employed by the regulators which make it impossible for community banks effected by the Fannie and Freddie caper and by the severe economic contraction to raise needed capital.  It is almost as if the regulators view their oversight of 8000 institutions as too burdensome and wish to reduce the number of their charges by half because they are well on their way to accomplishing that goal.

So, we are outraged at the way America’s community banks are being ravaged, not by economic conditions, but by their regulators and, by the inaction of the Congress.  And you should be outraged too, because without these institutions, small businesses will not be able to get the financing that they need to create the jobs America needs!

Democrats now control both houses of Congress.  They say they represent the “little guy”.  So far, we see them only protecting the rich and greedy on Wall Street.  Congressman Frank, House Majority Leader Pelosi, Senate Leader Reid, prove us wrong!

Robert Barone, Ph.D.

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778

August 4, 2009

Where is the Outrage?

Posted in Banking, Finance, investments, Uncategorized tagged , , , , , , , , , , , , , , at 9:51 PM by Robert Barone

Last Friday, the front page of the Wall Street Journal blared: “Nine Lenders That Got Aid Have $33 Billion Bonus Tab.”

Citigroup received $45 billion in US taxpayer money and paid $5.3 billion in bonuses. That’s on top of very generous salaries. One trader there has a contract for almost $100 million a year. Good work for a company that lost $23 billion last year. Similarly, Bank of America received $45 billion and paid out $3.3 billion in bonuses. JPM Morgan received $25 billion and paid $8.7 in bonuses.

The list goes on. These well heeled financiers lose billions. The US taxpayer fronts their losses. We pay their salaries. We pay their bonuses. For what?

“We can’t attract good talent without large pay packages,” they wine. “Hey, pay me $5 million and I will lose only $10 billion,” we respond.

Let us also remember, these banks and certain financial institutions can borrow from the Federal Reserve at .05%. That is effectively free money. My small business friends cannot borrow near that rate. Many are now denied funding for heretofore good loans. Yet we are asked to contribute our tax dollars for this fiasco?

Remember, these institutions are private. They are not government owned. They make billions in good times, keep it for themselves and ask us to pony up in bad times. We rescue them with taxpayer money, pay their excessive salaries and then pay them bonuses for poor performance?

Paul Volcker questioned the constitutionality of the “independent” Federal Reserve loaning private banks and investment banks such as Goldman Sachs, for example, $22 billion. This loan was granted by Henry Paulson, an unelected Treasury official and former chairman of Goldman Sachs. Goldman Sachs is a wealthy enterprise that has no US depositors. Yet it received a huge loan and now has split bonus money of $4.8 billion (almost $1 million per employee).

Public US taxpayer money for private enterprises?  Instead of taxpayer money for education or health care, we spend it on the irresponsible, reckless behavior of private institutions that are politically connected.

White House Chief of Staff, Rahm Emanuel said today: “The industry is already back to their pre-meltdown bonuses… where the institutions have all the upside and the taxpayers have all the downside.”

In “Democracy in America” Alexis de Tocqueville wrote almost 200 years ago, “the American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

Fred Crossman, J.D, C.P.A.

The mention of companies in this article should not be considered as an offer to sell or a solicitation to purchase any securities of the companies mentioned.  Please consult an Ancora West Investment Professional on how the purchase or sale of securities can be implemented to meet your particular investment objectives goals.

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778