I am a great fan of Edward Chancellor and Naked Capitalism linked to a paper by him on sound reason why China is in a bubble. You have to register to read the paper.
GMO has a number of interesting papers, of which I am reviewing, "Was It All Just A Bad Dream? Or, Ten Lessons Not Learnt."
Lesson 1: Markets aren’t efficient.
Lesson 2: Relative performance is a dangerous game.
Lesson 3: The time is never different.
Lesson 4: Valuation matters.
Lesson 5: Wait for the fat pitch.
Lesson 6: Sentiment matters.
Lesson 7: Leverage can’t make a bad investment good, but it can make a good investment bad!
Lesson 8: Over-quantification hides real risk.
Lesson 9: Macro matters.
Lesson 10: Look for sources of cheap insurance.
There was one piece on financials that caught my interest:
VII: Has your negative general view on the prospects for
financial services stocks changed at all?
SR: We believe in reversion to the mean, so it can make a
lot of sense to invest in a distressed sector when you find
good businesses whose public shares trade inexpensively
relative to their earnings in a more normal environment.
But that strategy lately has helped lead many excellent
investors to put capital to work too early in financials.
Our basic feeling is that margins and returns on capital
generated by financial institutions in the decade through
2006 were unrealistically high. “Normal” profitability
and valuation multiples are not going to be what they
were during that time, given more regulatory oversight,
less leverage (and thus capital to lend), higher funding
costs, stricter underwriting standards, less demand, and
less esoteric and excessively profitable products.
I copied that one because it mirrors what I was saying a couple years back about financial stocks:
Here is something that people that figure they are picking up banking stocks on a "bottom" are completely missing:The structured finance market -- which packages loans and bonds to be re-sold in chunks across the investment community and which has been a key source of funding for many banks -- may take longer than that to return, S&P said in a report.
"The structured finance market has been significantly affected and it may take years for the market to return," the report said.
This "key" source of funding is damaged until such time the experience of those of us watching and in the market has been diluted, like say when our unborn children of the next generation or two are adults and don't have such experience to draw on.
But, I suppose the people picking up these banking stocks will learn the hard way rather than figuring out where the money came from and that a huge stream of it isn't coming back, and the stream that stays is now being shared with many more because of the enormous equity raising financial institutions have been forced to do.