Wednesday, November 28, 2007
Wednesday, November 21, 2007
Saturday, November 17, 2007
Thursday, November 15, 2007
- Subprime is about 13% of the $10 trillion total mortgage market, or about $1.3 trillion.
- Currently about 17% of subprime loans are delinquent. For our purposes here, however, let's assume that 50% of subprime loans ultimately default.
- That would put the total defaults at $650 billion.
- But remember these loans are backed by homes, so let's assume that when the homes are ultimately sold, the debt holders will receive 50 cents on the dollar, or $325 billion.
- My study of the situation indicates that the banks and investment banks sold about 50% of the loans to insurance companies, retirement plans, hedge funds, private equity groups, etc., and kept the rest. That would put the amount in banks and investment banks at near $163 billion.
- Next, assumed that approximately 70% of the loans stayed in the US and 30% went abroad. That would give us a final exposure to the US banking system of near $115 billion.
Tuesday, November 06, 2007
Having said this, I believe the bank is dealing with its issues in investment banking and will be one of the first big banks to get its writedowns behind it.
The current dividend yield is 5.5%. BAC has raised it dividend in each of the last 20 years. Dividend growth, during that time, has averaged nearly 13%, and nearly 15% over the last 5 years.
The past is no guarantee of the future, but I believe the company will continue to increase dividends, albeit at a slower pace.
Wall Street analysts are now estimating that BAC's earning over the next 3-5 years will average near 8%. The chart above uses 8% dividend growth in 2008.
The green candy cane at the far right of the chart is the implied value of BAC at this 8% dividend growth rate. That price is $56 per share.
No one knows the magnitude of the subprime loan problems that lurk in bowels of banks today, but we can make some simple observations. Unless the US economy falls off a cliff, the banks have enough capital to withstand a lot more trouble that the subprime problems appear to present. BAC's management has a reputation for being straight talkers. They did not sugar coat their writeoffs, and CEO Lewis said the performance was unacceptable and that changes were coming in the investment banking group.
By the swiftness of the subsequent actions, the plans must have already been underway on the day of the earnings announcement, because three weeks later they have already replaced many of the top managers of investment banking, and announced the elimination of 3,000 jobs.
Including dividends, if BAC reaches $56 per share over the next 12 months, that will represent nearly a 29% total return.
I admit that it doesn't seem possible in light of the news of the day, but, as I said earlier, if Fed does its job and the economy has even modest growth, the subprime fiasco will gradually fade from the headlines, which will allow the banks to move higher.
I own BAC and have for many years. At 5.5% dividend yield, it doesn't take much price appreciation to make a double digit return. That might look pretty good a year from now.
If you are not a client of DCM, please do not act on my discussion here alone. Consult your own financial advisor.
Thursday, November 01, 2007
- The odds are increasing for a recession.
- The Fed got it wrong.
I do not believe there is a high probability of a recession, but I do believe that the Fed got it wrong. The good thing is, they can still get it right and well before the next meeting in December. Fed governors give speeches everyday. All they have to do is to take away the implication that the rates cuts are done.
They have now lost the lead in taming the ongoing banking worries, and they will have to do some heavy lifting to regain that position, but if they speak with one voice, they can regain their rightful leadership position by December.
As it now stands, the Fed Funds Target Rate is 4.5%. After yesterday's and today's rallies in T-Bills, they now yield about 3.7%, yield spread of about .8%. That is still high by historical standards and implies the credit and liquidity crunch is far from over.
The Fed is the banker of last resort, and I'm confident that they will ultimately get it right. Having said this, I think they made a mistake in reading the markets that Alan Greenspan would not have made.