Thursday, January 22, 2009

Is Cheap Really Cheap ?

I had a break this morning and was poking around some of my favourite blogs to see what was what and caught Barry Ritholz's post Celebrating Incompetent Insider Stock Buys over at his excellent blog The Big Picture. I had just posted on my blog regarding insider buying in the banks and Barry had done similar. Besides his post being head and shoulders above mine, Barry's opening line is a classic where he says;

"The investor capacity to lie to themselves is truly an awesome thing to witness."

I wish I had said it myself Barry. I urge you to check out his blog, The Big Picture, as it is full of wit, candor and insight.


Pom Pom TV (CNBC) has now had on 2 guests this morning, one an analyst/fund manager named Anton Schutz and the other the head of Stifel Nicholas brokerage. Both were promoting the bank shares to viewers. The comments emanating from their mouths was beyond laughable and in fact was downright frightening.

Schultz called bank share prices like Citi and Bank America call options or leaps. For the uninitiated call options and leaps are very cheap ways to give the buyer the right but not the obligation to buy shares in the future at a set price. One pays a faction of the price to lock in that right. Okay. Now lets forget the fact that Mr. Schutz is up to his eyeballs long financials just for a moment and focus on his statements.

That is that bank shares are a low priced call option. I remember hearing similar chatter on Fast Money from the panelists regarding Washington Mutual among others. My question here is when will we learn. When will we learn that just because a share price looks cheap, the absolute number like say $3 on Cit for example, does not necessarily make it so.

The Stifel Nicholas representative stated that bank stocks can only go to zero. Now he is absolutely correct but I would humbly counsel that with Citi hovering around $3/share, a move to zero would represent a 100% loss for long stock holders, or gain for a short sellers if you're inclined. Now this return is much, much more than the paltry 36% gain I made shorting Citi last year just north of $44 and covering just south of $29.

The point here is don't be fooled by shills and charlatans claiming that something is cheap just because it is basically a single digit stock and they own it! Remember Jesse Livermore's admonition that the average boob measure his bargains by how many points off the top it has sold. Using this logic C is a screaming bargain !! Not!!

The pundit discussion then went on to the issue of the banks Tier 1 capital and other capital measures (tangible) and the fact they are better than the market gives credit for. Anyone who claims he can tell what the financials capital positions are is lying to you plain and simple. The banks refuse to fess up, refuse to bring back onto the books all the off balance sheet, Enronesque shenanigans. The kicker in the capital conversation was the comment, I believe from Mr. Schutz, that the banks have written down assets that is not permanent and can come back an be worth a lot more. (hope and prayer strategy)

In contrast to these gurus, I would counsel that the banks are insolvent. That the vast majority of assets on and OFF their balance sheets are overvalued and carried at fantasy marks. But that matters not a whit as long as one can hold onto the dream. The dream similar to one that many, many tech investors who held Nortel, INTC, CSCO (post bubble) alongside many others like them continued to drink this Wall St. Kool-Aid of long dated call option can only go to zero baloney. Unfortunately Nortel's recent bankruptcy put the kibosh on its recovery.

Again to quote Barry Ritholz, "the investor capacity to lie to themselves is truly an awesome thing to witness." Investors are not the only ones so let's add Wall St. and Washington to investors as well to make the quote complete.


Good speculating to you all and never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 2 units Ultrashort MSCI EAFE ticker EFU @ $89.80 stop at $89.80
Long 1 unit Ultrashort Financials ticker SKF @ $102.60 stop @ $148.18
Long 1 unit Ultrashort S&P500 ticker SDS @ $66.15 stop @ $66.15
Long 2 units Ultrashort Real Estate ticker SRS @ $55.23 stops @ $54.75/$55.670
Short 1 unit Darden ticker DRI @ $27.70 stop @ $28.70
Short 1 unit of Mantech ticker MANT @ $56.80 stop @ $60.14

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