Thursday, January 29, 2009

Morning Comments: Bad Banks and Stock Risk

The blogosphere is full of commentary relating to the banks, the "bad bank" situation, and the like. For those who can't enough of this stuff, here are several links to commentary. In no special order, there are the following:

"Taleb Says Nationalize Banks, You Can’t Trust Them" ( note-Roubini agrees with nationalizaton);

"Op-Ed: Recession Turns Japanese"(Minyanville- note- reprises this blogs "Land of the Setting Sun" post);

"Geithner Discusses Nationalization in $2 Trillion Bailout Proposal" (Mish).

The above are of a piece. There appears to be real resistance to and anger about further giveaways to the same financial institutions that "goofed".

Switching gears, a number of Dow "Industrials" have reported earnings. Having learned from the collapses of AIG, Lehman, Fannie and Freddie, etc., I am ignoring headline earnings (of historical interest only and different from what they tell the IRS they earned) and focusing only on the balance sheet. Things are not pretty.

In addition, to show how out of touch some companies are, even a relatively straight shooter such as Boeing has tried to show that it is getting real by downgrading its prospective pension returns. To what yearly level has it downgraded them? To 8%. In this environment, I would say that 3-4% is more realistic if they want any stock exposure (to account for losses on stocks; and if the stocks outperform, they can book the gains), and 5-6% if they want to stick only with high-quality corporate bonds.

As an example of what can happen to a large and seemingly solid company, the unthinkable has happened to AIG. A year ago it was about a $56 stock. Now it is at $1.41 only because of the bailout. Otherwise it would be at $0.00. A look at the balance sheets of Boeing, AT&T, GE, P&G, etc., gives pause. Financial fortresses these companies are not. With estimates of U.S. and world growth heading down, estimates of financial firms' write-offs increasing on a rapid and regular basis, and growing resentment of governmental and Fed policy regarding financial companies, there may be asymmetric risks skewed to the downside in common stocks. The strongest balance sheets are now seen in large tech stocks such as Cisco and Microsoft. For now, the best short-term macro news may be the recent stalling of gold's ascent.

Copyright (C) Long Lake LLC 2009

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