First, I am obviously coming from a place of inexperience being that I am a level one candidate and I happen to also have no industry experience… so, I apologize if I am being intoleranly banal.
I get that banks are sellling off because they had priced in a 25BP rate hike in guidance and now that plan is on delay AND of course the market in general is in correction (which banks are one of the top losers in) …but what I don’t get, for example, is why MS is trading at a 5year low PE even though they reported at 13% increase in their top line in Q2??? Now I did listen to the earnings call and noticed a healthy portion of that success was as a result of wealth management in Asia. I can see some worries there but after that I still don’t get the punishment.
Is the sell off in the financials more about the worries attached to fundamental changes in how the industry is forced to run since reform from Dodd-Frank? Or is this sell off just a case of temporary bad sentiment without valid basis.
All stocks trade on short-term fundamental views, which are hard to predict, and technicals, leading the market to remain inefficient over the mid-term and very noisey over the short-term. Banks are no different.
MS is not valued based on P/E
Most of the volume in the market is quant funds trading back and forth, there is rarely anything to “get” about non-news driven short-term prices. More sellers than buyers today, that’s all. Except biotech. Biotech is being sold by idiots who thought these stocks had value and/or would continue forever. And we hope they’re on margin and go bankrupt very soon. That is all.
except in a commodity bear market, there are usually about 10 Minsky moments. i count this as number 4. haha. but yes, any heavily indebted, medium-to-high cost producer should go bankrupt soon and this process will further depress the values of the not so heavily indebted low cost producers.
I am not short VRX. I avoided the crowded jihad shorts. I am somehow profitable on the book today (suck it biotech). Longs are mostly down but a number of my shorts are down 7-15% today alone after being down as much on Friday. They do however remain 100% overvalued in many cases (any price above zero is overbought). There is some truly horrific stuff out there now that has leeched off the capital markets for the last few years as a result of QE.
I’m taking some short gains today and then looking to get significantly net long real assets going into the end of the year – cash flow producing industrials and consumer stocks, maybe some tech if there is anything that isn’t severely overvalued right now within small caps.
On a side note, a lot of “value investors” aren’t. The best performing VIC writeups of all time based on user ratings (not stock performance) are ONTY and SNMX, both of which are stock frauds I’ve shorted in the past. At no point were they ever value investments at all (one is a lying failed cancer company and the other is a pump and dump flavorings company that loses money consistently). I don’t know how you go to your clients if you are a value investor and try to explain that. If you ever bought either and claim to be a value guy you should be fired.
Given consideration to the current fundamerntals, how is historic PE not a valid perspective on overbought / oversold conditons? The strait PE value alone may be trivial… but used as a marker for how expensive or cheap a price investors have been willing to tolerate owning the stock in the past is not trivial. The last time MS was trading at a PE of 10 the dividend was only .05 compaired to .15 now and net profit margins were lower. I know that is a sickly brief glance but the point is, if investors were willing to pay a PE of 10 then, they should be willing to pay more now… given a turnaround in “short-term fundamenal view”… which will most likely occur by the end of year …given Janet Yellen doesnt want to get lynched.
Yellen is a puppet, she doesn’t care or have any real power.
The point was: Why use a PE multiple for an asset that isn’t valued based on PE? You could do that, but you would be out of sync with how the market values the asset and likely to get confused.
I’m not valuing the actual asset of MS based on PE… I am rating investor willingness to buy MS based on PE. I’m using it as a pure technical indicator… and I’m saying sentiment is low based on the fundamentals that seem to actually be in place.
…that is all to say that my fundamental view of MS is as simple as I have made it… which probably isn’t the case. That brings me to my original quandry: Are the fundamentals for financials as bad at the market is painting them right now… this sell off is overkill for a 25BP let down and market correction put together.
Yeah you’re probably right but this would be the first big producer to implode fairly quickly which could trickle through to other sectors. I think there’s $40b in debt at risk along with the remaining equity…
It’s possible that Yellen is a puppet, but if so, of whom? The president can’t fire her, and Congress would have to impeach her or amend the Federal Reserve Act to control her.
Muppet might be a better word then. Hurry up and do the right thing by raising rates, you’ve already created another generationally sized equity bubble Yellen.
Yeah but you can that some analyst somewhere is evaluating Hillary Clinton’s drug price proposals based on the smell of someone’s fart in California. It’s a sentiment indicator (of something) but if no one else is looking it at as an indicator, it’s irrelevant.
So you’re saying if some crappy company had flat earnings for some time as well as a flat PE… and then they start having a decline in earnings, but inflated sentiment kicks in (we can even say it’s based on a Hilary Clinton tweet!) and the price of the stock goes up or even stays the same, raising the PE to a historic high even though fundamentals are NOT at an all time high… you are saying that we can’t read the historically high PE as an overbought/inflated sentiment indicator because no one else uses PE as a technical indicator?
I think bromion’s point is that banks are valued on their price to book rather than price to earnings. Therefore, that is what serious fundamental bank analysts are looking at.
Part of the reason is that banks - more than non-financial companies - tend to have profits that are clsoely conencted to their balance sheet performance and ROE, so PB gives you a less noisy signal than PE. In addition, bank balance sheets vary much more with the financial performance of their assets, unlike traditional businesses, because there isn’t a lot of stuff like PPE in there whose values change independently of financial performance. Bank balance sheets are pretty much all financial assets.
Now, some of those assets can be really difficult to value, given that there may be lots of optinality and wierd payoff strucutres, etc.
Thanks Bchad, I got caught up in an argument about divergance in buyer sentiment and company fundamentals…and now that you bring up PB I can see where my thinking has been flawed and what Bromion was trying to tell me. There are many facets to a company’s value… facets. to the things buyers are willing to pay for. To try to nail down the price paid to any one fundamental element doesn’t work as a historical measure of sentiment. One item, the earnings, may be the reason to buy at some point, but at another time earnings may be down but buyers are willing to pay for another strong item (like book value or whatever). The PE would be high compaired historically, but that does not neccessarily mean sentiment is is getting exhuberant and the equity is overbought. … right? ok ok… I GET IT
case in point: back to MS… low historic PE, but high historic PB
