Bigger worries?

Unfortunately, good news takes longer to travel around - and bad news does spread like fire!

"Banks could lose as much as $242 billion from the mortgage crisis, leaving the industry in need of more capital, analysts at Friedman, Billings, Ramsey & Co. warned on Monday". Most of the losses posted so far by financial services firms relate to lack of liquidity in (high-risk) securities backed by loans and resultant lower mark-to-market valuation. Their analysis predicts another category - actual credit losses on book loans - to rise its head in 2008 and may be 2009...which means higher-than-expected write-downs.

My personal reaction (Disclaimer - I honestly dont have the data & analysis that these guys do, though!) - its a classic case of bad news designed to chase bad news. Like the S&Ps and Moodys of the world lowering ratings AFTER every market collapse, while they are supposed to do that BEFORE (if they are truly doing what they are supposed to do)!. The bad news has been factored in already & its now the turn of shorts in the market to depress things further. It just takes a whiff of positive news from a C, JPM or for that matter any of the biggies to turn the tide and have the shorts run for cover!

Now, let me touch on one of my earlier picks - ETFC. Its been pummelled from the 25s to 15s, from 15s to 8s and from 8s to 3s...and it ended at 2.83 today. It does take some courage to stand for this stock now; but i hold on to my view.
Look at this:
- USD 30 bn in mortgage and home equity loan assets and another USD 12 bn in MBS.
- Only USD 5 bn of the loan assets is with LTV > 80%
- Of the USD 16 bn in ABS and MBS, the Citadel deal has removed USD 3 bn of the worst ABS
This leaves us with a worst-case loss of USD 400 mn for the year. Assuming some revenue loss on the brokerage side due to bad press, we should still approx an EPS of 0.50. Even a price of 5 makes a P/E of hardly 10, pretty lean! Obviosuly there are a lot of variants here - but that's like a good guess. Wait for Jan 24 (earnings) and you should by all means see them doing better than what this market expects! They need to immediately do further to stop the negative press though. However, i do repeat - you got to have a 12 month holding period and closely watch the earnings announcement on the 24th to ensure there's nothing turning fundamentally weak there!