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Finally a Little More Truth Mix With Drunken Optimism

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January 18, 2008 – Comments (3)

The S&P is coming out and saying banks will suffer into 2009, which is closer to the truth than this rubbish we've been reading that that things are going to turn around in the second half of 2008. 

I don't think all the garbage loans that were issued work their way through the system until 2010 and maybe even 2011, so I think they are still being at least a year optimistic, and the credit card and commercial real estate problem seem to be following the mortgage problem.  Currently some people are actually using their credit card to pay their mortgage, exchanging cheap long term debt for ensure-you-go-bankrupt, expensive, short-term-debt.

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.

It says most banks have the financial strength to weather this.  I suppose 51% of banks is most banks, so in that sense I'd agree, but I think we see banks going under before this is over.

3 Comments – Post Your Own

#1) On January 18, 2008 at 9:36 AM, dwot (50.85) wrote:

Here's another to add to today's reading list, Thrill Ride.

Gotta love this, "nuclear winter in corporate profits." 

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#2) On January 18, 2008 at 2:00 PM, floridabuilder2 (99.24) wrote:

to your point above

Currently some people are actually using their credit card to pay their mortgage, exchanging cheap long term debt for ensure-you-go-bankrupt, expensive, short-term-debt.

I mentioned on my blog that one of the advantages that the top public builders had was they had long term debt financing long term assets (land)... whereas the weaker publics and the privates utilized short term debt to finance long term assets (land)....  since these assets are not being converted to cash based on the timeline they gave the banks and the assets are now down 65% in value... well that is insolvency...  It is the reason why a company like KBH with a mountain of cash and a an untapped revolver will be an animal while others are trying to survive...  i think historically a case can be made that once the dust clears the remaining names in an industry are that much stronger with less competition...

I would like to get into banks and investment banks and other financing stocks... but as you point out, there are still a lot of time bombs and i haven't seen anyone on the banking side have the high liquidity/cash position of KBH vs the low risk writedown position

As always, you are one of my favorite bloggers... do you use caps now as your main blog or your home page website? 

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#3) On January 19, 2008 at 1:05 AM, dwot (50.85) wrote:

I have been blogging more here.  I have done far more in depth well researched blogs on my other blog and I've done a bit of research, but not the same quality.  I think I will rewrite and sharpen my Six Degrees of Leverage and hopefully post it in one post.  I should have done that one in one post with several comments here.  I didn't think of that.

I have been far more reactionary to what I've been seeing in the market here. 

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