Today I want to take a break from the general economy discussions and get a little more focused on how to make $$! Let's discuss a stock that I've been a fan of for a while and think has some serious long term (albeit somewhat iffy short term) prospects.
Industry I Like - Emerging Market Wireless Telecom
I mentioned long long ago when I first started Investing Decoded, but generally when trying to find stocks I want to invest in I first try to find industries that I think will be strong. My rationale for this is simple - if you're an outstanding company in a poor industry, your company will probably still not perform very well in the stock market (Check out Toyota motors' 1 year stock chart, for example). Furthermore, industry trends are a little easier to predict because there are no company specific variables that you have to factor in.
With that said, one of my favorite long term industries is emerging market wireless telecommunications. Yes, this is a very specific industry, and you might be asking "How in the world did you think of something like this?" Well, as with many of my investing inspirations, is personal experience.
10 years ago, the wireless revolution was well on its way in the US. The average person was starting to get a cell phone in his/her hands and it was beginning to become a staple tool in both business and personal environments. This isn't surprising - a heavily industrialized society like the US needs the most efficient communication means possible. What did surprise me, however, was when I was on a trip to India, I saw a similar revolution! Wireless communications was taking its hold at much the same pace as in the US - something that I don't think most people would've expected. Wireless service providers were able to get their phones in the hands of even the poorest peasants in the Indian countryside, dramatically revamping the way they want about their daily lives.
With that experience I was able to come to a basic conclusion - wireless communication is one of the earliest and most revolutionary advancements any emerging market experiences, and any company that can efficiently tap this market in its infancy will be extremely successful.
Enter Millicom International Wireless
So now I have the industry picked out, so I decided to see if I can find any companies to invest in the concept in. There's always the usual candidates - Verizon, Vodafone, AT&T, etc. But these guys are big and diversified - I was looking for emerging market, not large diversified market. BUT, there was one name that instantly hit the chord. Millicom, a European based company that's been providing wireless services for over 20 years, specifically targets emerging markets that have not experienced the wireless revolution yet.
http://www.google.com/finance?q=micc
What Makes MICC So Special?
A natural question here would be "Why MICC? Wouldn't the big guys with all their resources just destroy a smaller player when they wanted to?" Well, yes, except when the big boys don't have the expertise and know-how to do what MICC does best. MICC competitive advantage lies in its ability and experience in penetrating markets earlier than anyone else. They are experts in going into war-torn third world countries and setting up distribution networks as well as infrastructure to get the citizens cell phones. They make money by setting up these networks and selling pre-paid cell phones to the citizens of a third world country - thereby making them an early entrant on what usually is a very lucrative market. And, like I said earlier, there's always a market for wireless communications in third world countries. What's not to like??
How To Play MICC
MICC has traded between a high in the $120s to a low of $20s over the past year. So if you don't have the stomach for it, don't invest here. However, at it's current price of the mid-50s I think there's an attractive opportunity here. I think the stock has long term running room to at least the mid-70s, and you get a nice 4+% dividend yield to hold you over until then. There may be some shorter term downside, and I would definitely dollar-cost average down during those times.
As long as there's emerging markets in the world, MICC will be able to benefit from doing what they're better than anyone else at doing - connecting those markets and getting them on the path to communications revolutions. If you see the big boys like Verizon starting to do this, I would definitely consider that a sell signal for MICC. However, until that day (which I still think is pretty far away), MICC is buy in my book.
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.
Monday, May 18, 2009
Monday, May 11, 2009
Chrysler's Bankrupt...Time for Some Change - Part II
As I mentioned in the previous post, the troubles the auto-makers are currently facing have been years in the making. It’s wrong to blame the crisis in Detroit on the current recession since the seeds of the crisis were planted years ago through poor strategic decision making by the management of these companies.
However, instead of continuing to dwell on the reasons for the issues, I want to now discuss where to go from here. I strongly believe that American designed/built cars are on par with cars made in any other country. Despite the current climate, American talent and ingenuity is still very much intact and can be leveraged to pull the troubled auto industry out of the hole it has dug itself in. If I were the CEO of one of the big three, I would go to my next meeting with the board of directors with a plan that would look something like this:
Not So Classic Simplicity
I strongly believe that a lot of the issues that Ford, GM, and Chrysler face are related to size – the companies became too large, too complex, and too spread out in order to function effectively. 20 years ago, having Chevy, GMC, Oldsmobile,
In the end, I think the auto-makers should simplify their branding and marketing strategy to the following. All other brands can either be eliminated or absorbed into the existing ones:
GM – Chevy, Cadillac, Corvette, Buick (Buick primarily because of it’s success overseas)
Ford – Ford, Lincoln
Chrysler – Dodge, Chrysler, Jeep
Leaner, Meaner, and more Nimble
On the production side, the Big Three need to also simplify and become more efficient in their production processes. This means reducing the production capacity and making some tough, yet necessary, cuts in areas that are just not profitable. Again, this is something that’s already occurring, but it needs to aggressively continue. Companies like Honda have been very successful as the smaller, but more nimble player in the marketplace where they can easily react to changes in consumer tastes. Following this trend, at least initially, will help the big three reset themselves in position for future growth and success. In other words, take a few steps back now to take a whole lot more steps forward in the future.
Listen Very Carefully – You Can’t Afford Not To!
This goes hand in hand with the previous points. Now that you’ve simplified your company and made it more responsive to the needs of the car buyer, you need to listen to those buyers very very carefully. Figure out exactly what they’re looking for. Obviously GM wasn’t listening when they built cars like the Aztex and the HHR. You need to be proactive. not reactive, to the tone of the marketplace and this is the best time to strongly emphasizing this trait.
Always Keep Quality In Mind
The quality of cars has advanced by light years over the past 15 years. In 1990, quality was a differentiating trait – a marketing tool that some auto-makers used and some largely ignored. Today, however, advances in production technology have really evened out the playing field when it comes to build quality. This means that having high quality cars won’t differentiate you positively (since so many cars today are such high quality). On the other hand, making poor quality cars will get you kicked out of the party in a real hurry – there’s no easier way to negatively impact your image than to sub-standard build quality. Therefore, having a strong focus on quality at all times is not only a good thing, it’s imperative. The big three need to continue investing and staying ahead of the curve in this department to stay competitive.
Those are some of the high-level steps that I think the big three need to take to bring them back to prominence in the automotive landscape. There’s no doubt that the process will be a long and arduous one – one that may include more than one bankruptcy. However, there’s no doubt in my mind that if the right steps are taken, prosperity will reign.
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.
Sunday, May 3, 2009
Chrysler's Bankrupt...Time For Some Changes Part I
Last week it finally became officially - the Chrysler Corporation filed for bankruptcy. I say finally because it was a long time coming...for much longer than this recession has gone on for. But don't think I'm pessimistic about the state of the US auto industry. On the contrary, I'm more on the optimistic side. Nonetheless, I think it's worth discussing how the US auto industry came to this point.
Cars That People Want...Not as Simple As It Sounds?
The current state of the US auto industry really has its roots in the 90's. During that time, the US carmakers were rolling in profits through the newest fad in autos - SUV's. The 90's gave birth to the biggest growth in the SUV market and made the heavy, gas guzzling, yet very suitable for families vehicles a mainstay in driveways around the world. Gas was well under $2 a gallon (sometimes below even $1) and people were willing to pay a premium for big cars that did not carry a stigma of 'family haulers'. Detroit automakers understood this demand and took full advantage of it - perhaps too much. Soon enough they began relying on these high profit margin cars to support their bottom line.
But when gas prices began their steady but uninterrupted rise over the last 5 years, sales of those big SUV's fell dramatically. US automakers realized that they were overly dependent on the SUV's. They were slow to realize the shift their customers were making from big expensive vehicles to smaller more efficient ones. Other carmakers - particularly the Japanese ones - did see this shift and came out with cars that they understood very well - efficient, high quality, and respectable cars with less frills and more practicality.
Since this time, the big 3 (Ford, GM, Chrysler) have steadily lost market share in the US - to the point where Toyota is now in contention with Ford as the 2nd leading automaker in the US in terms of sales.
Straw The Broke the Camel's Back
Although the US automakers were incredibly slow in reacting to the change in the marketplace for cars in the US and lost more market share than in any other point in their history, they were still able to survive. Why? Because the economy was so good and credit was easily available. Yes they were losing market share, but they were still able to sell enough cars to stay afloat until the cars they made aligned with the market demand.
Unfortunately, with the credit crisis, the time frame for this return to prosperity was drastically cut short. And soon GM and Chrysler found themselves in a precarious situation where their options became very limited. Even the billions the American government injected to the automakers was not enough to stave of the event that was 10 years in the making - a major automaker declaring bankruptcy.
Leading Up To Bankruptcy
Out of the 3 automakers, Chrysler has been in the most dire situation for a while now. In my opinion, their cars are by far the worst quality and least appealing out of all the automakers. Furthermore, after Daimler sold Chrysler (the Mercedes carmaker owned Chrysler for about 10 years) to private equity firm Cerberus, much of the management was retained at Daimler, leaving Chrysler weaker than even.
It's no surprise then that Chrysler was the first to go under. For weeks they tried to restructure over $6 billion in debt with the help of the Obama administration. They also tried to forge an alliance with Italian automaker Fiat as a restructuring effort. Unfortunately, an agreement could not be reached and Chrysler was forced into bankruptcy. Although Chrysler as a company will still be around, it will be in a much different form than it is now.
In my next post, I will discuss what this new structure may look like and the bumpy road Chrysler has in store. I will also discuss how the Obama administration has tried to twist the bankruptcy and unfairly blame the debt holders for the bankruptcy. So, stay tuned!
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
Cars That People Want...Not as Simple As It Sounds?
The current state of the US auto industry really has its roots in the 90's. During that time, the US carmakers were rolling in profits through the newest fad in autos - SUV's. The 90's gave birth to the biggest growth in the SUV market and made the heavy, gas guzzling, yet very suitable for families vehicles a mainstay in driveways around the world. Gas was well under $2 a gallon (sometimes below even $1) and people were willing to pay a premium for big cars that did not carry a stigma of 'family haulers'. Detroit automakers understood this demand and took full advantage of it - perhaps too much. Soon enough they began relying on these high profit margin cars to support their bottom line.
But when gas prices began their steady but uninterrupted rise over the last 5 years, sales of those big SUV's fell dramatically. US automakers realized that they were overly dependent on the SUV's. They were slow to realize the shift their customers were making from big expensive vehicles to smaller more efficient ones. Other carmakers - particularly the Japanese ones - did see this shift and came out with cars that they understood very well - efficient, high quality, and respectable cars with less frills and more practicality.
Since this time, the big 3 (Ford, GM, Chrysler) have steadily lost market share in the US - to the point where Toyota is now in contention with Ford as the 2nd leading automaker in the US in terms of sales.
Straw The Broke the Camel's Back
Although the US automakers were incredibly slow in reacting to the change in the marketplace for cars in the US and lost more market share than in any other point in their history, they were still able to survive. Why? Because the economy was so good and credit was easily available. Yes they were losing market share, but they were still able to sell enough cars to stay afloat until the cars they made aligned with the market demand.
Unfortunately, with the credit crisis, the time frame for this return to prosperity was drastically cut short. And soon GM and Chrysler found themselves in a precarious situation where their options became very limited. Even the billions the American government injected to the automakers was not enough to stave of the event that was 10 years in the making - a major automaker declaring bankruptcy.
Leading Up To Bankruptcy
Out of the 3 automakers, Chrysler has been in the most dire situation for a while now. In my opinion, their cars are by far the worst quality and least appealing out of all the automakers. Furthermore, after Daimler sold Chrysler (the Mercedes carmaker owned Chrysler for about 10 years) to private equity firm Cerberus, much of the management was retained at Daimler, leaving Chrysler weaker than even.
It's no surprise then that Chrysler was the first to go under. For weeks they tried to restructure over $6 billion in debt with the help of the Obama administration. They also tried to forge an alliance with Italian automaker Fiat as a restructuring effort. Unfortunately, an agreement could not be reached and Chrysler was forced into bankruptcy. Although Chrysler as a company will still be around, it will be in a much different form than it is now.
In my next post, I will discuss what this new structure may look like and the bumpy road Chrysler has in store. I will also discuss how the Obama administration has tried to twist the bankruptcy and unfairly blame the debt holders for the bankruptcy. So, stay tuned!
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
Monday, April 20, 2009
Have We Reached the Turning Point?
If you've been paying attention to the markets over the last six weeks, you've been witnessing history. The Dow Jones Industrial Average (the most commonly used metric for the stock market) has had its biggest six week rally since the 1930's. But, perhaps more important than just the point gains is the fact that the rally is on heavy volume - meaning there is a great deal of money flowing into the market. The reason why this is so important is because it indicates that investors who were previously on the sidelines after being burned by the downturn are starting to buy back in, and it's widely believed that without broad participation in a rally, it is unsustainable.
So Where Do We Go From Here?
So have we FINALLY reached a turning point in the market? Is the pain experienced by investors, hard working employees, and those planning for their retirement at an end? Well, you can ask 50 people and probably get as many answers. But here's my take:
I mentioned in a previous post that I won't be convinced of an economic turnaround until one of the fundamental causes for the recession begins showing signs of a rebound - housing prices. This single metric I feel is the key in an economic recovery. But, to get housing prices to bottom, the following needs to happen:
Stock Market vs. Economic Recovery
So you might ask, well the market is up 20% over the last few months, doesn't that already indicate recover? Well, yes, it does. But it indicates a stock market recovery, not an economic one. The stock market is a leading indicator - it tries to predict the direction of the economy. Right now it's predicting that the recovery is upcoming. But don't mistake it for already being here.
Should I Start Investing in the Stock Market Then?
If you ask me, yes! What I'm seeing in the market now is a reduction in panic...a sign that investors have found a price that they're comfortable with. Although I still think we'll see some volatility over the next few months, over the longer term, I definitely see some upside in the market. The value is out there, go get it!
So What Should I Buy?
Watch out for my next post. I'll get into that one in detail.
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
So Where Do We Go From Here?
So have we FINALLY reached a turning point in the market? Is the pain experienced by investors, hard working employees, and those planning for their retirement at an end? Well, you can ask 50 people and probably get as many answers. But here's my take:
I mentioned in a previous post that I won't be convinced of an economic turnaround until one of the fundamental causes for the recession begins showing signs of a rebound - housing prices. This single metric I feel is the key in an economic recovery. But, to get housing prices to bottom, the following needs to happen:
- Housing Inventory needs to come down so the supply of homes that there is such a glut of can be eliminated
- Foreclosure numbers need to come down. This is something that will eventually happen, but we just need to give it the time
- Demand for Housing needs to Increase - This is basically already happening with the governments incentives. Right now it's value buyers that are getting into the market. Soon, it will be more broad based buying.
Stock Market vs. Economic Recovery
So you might ask, well the market is up 20% over the last few months, doesn't that already indicate recover? Well, yes, it does. But it indicates a stock market recovery, not an economic one. The stock market is a leading indicator - it tries to predict the direction of the economy. Right now it's predicting that the recovery is upcoming. But don't mistake it for already being here.
Should I Start Investing in the Stock Market Then?
If you ask me, yes! What I'm seeing in the market now is a reduction in panic...a sign that investors have found a price that they're comfortable with. Although I still think we'll see some volatility over the next few months, over the longer term, I definitely see some upside in the market. The value is out there, go get it!
So What Should I Buy?
Watch out for my next post. I'll get into that one in detail.
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
Monday, March 23, 2009
The Best Bank Out There - Conclusion
In my previous post we discussed how to analyze the balance sheet of a financial institution. We went over some of the key metrics needed to determine the health of a given bank and researched/calculated these metrics for Wells Fargo. I've gone ahead and performed the same analysis for several other banks and (drumroll please!) here are the results (click image for full size view):
For me there were a few surprises and a few clarifications that I think are important in these results. They may look somewhat close in terms of statistics, but some information here stands out more than others:
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
For me there were a few surprises and a few clarifications that I think are important in these results. They may look somewhat close in terms of statistics, but some information here stands out more than others:
- JP Morgan - This bank looks pretty strong in all categories. It isn't the best in any of them, but it performs well across the board - something I think is more important than being strong in a single area.
- US Bancorp - I was surprised to see the weakness associated with USB's balance sheet. A very low loan loss reserve and a relatively high Nonperforming assets ratio concerns me in that the bank hasn't adequately shielded itself from future losses and writedowns.
- Goldman Sachs - This perennial powerhouse seems to perform decently well. No major concerns here, but given the high valuations the market likes giving this company, I expected it to perform better.
- Morgan Stanley - I would probably buy this bank over Goldman Sachs at this point. It's the closest remaining competitor to Goldman and its balance sheet is pretty comperable. However, the stock is trading at a significant discount to Goldman, and I'm starting to believe not all of it is justified.
- Citigroup - I wanted to put Citi here because I wanted a comparison point to arguably the most troubled of banks. The biggest concern I see here is the Tangible Common Equity. However, with the recent injections of additional government capital, this numbers has probably increased somewhat. Overall, if you have the guts to ride out a roller
- Wells Fargo - After comparing it to the other banks, Wells still looks like it's in the upper echelon of banks. It's low nonperforming assets ratio reflects the companies principles of mainly lending to higher quality borrowers. When taken as a ratio to loan loss reserves (.42), it is much better equipped to handle further uncertainty than even JP Morgan (.49).
- NP Assets For GS and MS - I wasn't able to find this information for those to banks. I'm guessing this is because up until recently, they weren't retail banks and, instead, were investment banks. I might be wrong here, and, if anyone has the corrected information, please let me know.
| JP Morgan | A |
| Well Fargo | A- |
| Morgan Stanley | B+ |
| Goldman Sachs | B |
| Citigroup | C+ |
| US Bancorp | C+ |
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thursday, March 12, 2009
The Best Bank Out There - Part I (WFC)
With the recent and severe decline in bank stock prices, I've been getting the impression that it may be a good buying opportunity. However, as I'm sure you guys already know, there's a lot of risk associated with buying a bank right now (and a lot of potential reward too). Therefore, due diligence is always important, and for today's post, I will go through some of this due diligence for a stock that I already own, and am thinking of buying more of. I will use this blog as a sounding board for my thought process of whether or not to buy stocks in a specific bank. We'll go through the due diligence for a few key banks including:
Once I complete the analysis, we'll pick the best one and make a recommendation.
The due diligence I want to perform is really useful information I found in the following article about key performance metrics for banks. I'm basically going to be using the guidance in the article and do some digging to find the metrics for Wells Fargo. Also, since I probably won't be able to describe the metrics better than the article already does, I will be quoting it directly.
http://www.smartmoney.com/Spending/Budgeting/Is-Your-Bank-Healthy-How-to-Diagnose-It-Yourself/?afl=yahoo
Tier 1 Ratio
Final Grade: A-
Appendix: Check out WFC numbers and Annual Report here:
Balance Sheet: http://data.cnbc.com/quotes/WFC/tab/7.1
10-K: http://data.cnbc.com/quotes/WFC/tab/7.4
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
- Wells Fargo
- US Bank
- JP Morgan Chase
- Goldman Sachs
- Morgan Stanley
- Citi (just to see if there's a hint of light there)
Once I complete the analysis, we'll pick the best one and make a recommendation.
The due diligence I want to perform is really useful information I found in the following article about key performance metrics for banks. I'm basically going to be using the guidance in the article and do some digging to find the metrics for Wells Fargo. Also, since I probably won't be able to describe the metrics better than the article already does, I will be quoting it directly.
http://www.smartmoney.com/Spending/Budgeting/Is-Your-Bank-Healthy-How-to-Diagnose-It-Yourself/?afl=yahoo
Tier 1 Ratio
"The Tier 1 ratio tells you how much capital a bank has set aside to absorb losses. “Essentially, it shows how strong its balance sheet is,” says Chris Fortune, an analyst at investment firm T. Rowe Price who covers regional banks. Generally, a Tier 1 ratio needs to be at least 6% for a bank to be well capitalized, but in today’s environment, banks should have 8% or 9% to be considered healthy, he says. Look for Tier 1 information in the Management Discussion section in 10-K Annual Report forms."
For WFC, the most recent quarterly filing has the (12/08) says the following regarding it's Tier 1 Ratio:
"At December 31, 2008, consolidated Tier 1 regulatory capital was $86.4 billion, after the impact of purchase accounting for credit impairments of loans and write-down of
The Nonperforming Asset Ratio
"The nonperforming asset ratio, also known as NPA ratio, tells you how much exposure your bank has to assets that are a potential problem. Loans that are 90 or more days late, for example, are considered nonperforming assets. This ratio is determined by dividing these problem assets by the bank's total assets. “Today, anything below 1% is really good,” says Fortune. “Below 2% is OK. And, as you start to get above 4%, you start to worry.”"
For WFC, the most recent quarterly filing has the (12/08) says the following regarding it's Nonperforming Asset Ratio:
"Total nonperforming assets (NPAs) were $9.01 billion (1.04% of total loans) at December 31, 2008, compared with
Tangible Common Equity Ratio
"The tangible common equity ratio shows how much of a loss a bank can take, as a percentage of assets, before common shareholders are wiped clean, says Jamie Peters, an equity analyst with financial research firm Morningstar. If a bank’s common equity ratio is 3%, for example, the bank would have to write off 3% of its assets before shareholders lose everything. (As a rule of thumb, anything below 3% is too low, says Peters.)
Figuring this ratio out is tricky, since banks don't generally disclose it in their financial statements. To calculate it, divide your bank’s tangible common equity by its tangible assets. (Tangible common equity is total shareholders’ equity minus preferred stock minus goodwill and intangibles; tangible assets is total assets minus goodwill and intangibles). All of the numbers you need to calculate this are listed in the bank’s balance sheets."
I took a look the balance sheet for WFC (check it out at the end of the post) and did a quick calculation based on the description in the article.
Common Equity = $67,752million
Total Liabilities & Shareholders Equity = $1,309,639million
Dividing the 2 results in a TCER of 5.2%
However, this number has likely dropped since the end of 2008. I would think a more realistic number for this is more like 4.5%
Loan Loss Reserves
"This is the amount a bank has set aside to deal with problem loans. This figure will give you a good idea of the bank's ability to remain healthy in an unhealthy environment. To calculate your bank’s loan loss reserve ratio, simply divide its allowance for loan losses by its total loan portfolio. The higher the percentage, the better your bank’s ability is to cover potential losses. A reserve of 1% or less is considered weak, according to Fortune, while anything over 2% is considered strong."
As is mentioned in the article itself, WFC's LLR is 2.4% - well above the healthy threshold.
Overall Results
So, WFC's numbers breakdown as follows:
- Tier 1 Ratio - 7.8%
- Nonperforming Asset Ratio - 1.01%
- Tangible Common Equity Ratio - 5.2% (but we'll be conservative and say 4.5%)
- Loan Loss Reserves - 2.4%
Final Grade: A-
Appendix: Check out WFC numbers and Annual Report here:
Balance Sheet: http://data.cnbc.com/quotes/WFC/tab/7.1
10-K: http://data.cnbc.com/quotes/WFC/tab/7.4
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
Tuesday, March 3, 2009
Political Prisoners of the Bailout – Good Banks
Instead of writing about a specific topic in finance and providing background and context (as well as dangerously getting ever closer to making this blog sound more like a textbook), I wanted to take a break and talk about something more political in nature. The reason I want to talk about this topic in particular is because it’s been grabbing a lot of headlines lately on various news wires and I’m beginning to believe that both politicians and news agencies are grandstanding this issue and twisting the truth.
The issue that is frustrating me is the scrutiny financial companies have begun receiving with how they spend their money. The populist argument today is that since these financial firms received government assistance by way of the TARP funding (the $700 billion dollar bank bailout that was passed last year to save the US banking system), they should not be spending money on things like vacations for their employees or sport sponsorships. Politicians and ‘experts’ (PLEASE notice how I put them in 2 distinctly different groups) have come out vehemently protesting specific banks as they held these controversial events.
Now, to a certain extent I agree with this argument. If you run a company that is performing so poorly that you had to beg the government for assistance, then you should by no means be awarding lavish vacations to your employees. That is just a blatant misuse of taxpayer money. However, the key to this argument is that the company is performing poorly enough to require government aid. In reality, many of the financial firms that received money from the TARP were not performing poorly at all – in fact, some are even still profitable. Why then would they go to the government begging for money? That’s the thing, they didn’t.
TARP – The Ultimate Political Trump Card
When the initial $350 Billion of TARP funds was approved, it was initially supposed to go to buying the toxic assets (i.e. mortgage backed securities and collateralized debt obligations) that banks could not get rid of. However, then Treasury Secretary Hank Paulson soon dropped that strategy in favor of directly investing in banks and essentially buying their stocks. The interesting thing about this strategy change was that the banks had no say whether or not they actually wanted any TARP funds. The treasury basically picked a bunch of major financial institutions and forcibly invested in them. In fact, some bank executives came out in protest of the TARP saying they didn’t want the government owning a part of them (and I don’t blame them in the least). The government’s justification was that it would not interfere in their day-to-day operations – it would be a silent partner.
Well, here we are now. Over the last few weeks, and the silent partner is being anything but silent. 2 examples in particular come to mind where financial institutions that are relatively healthy are being scrutinized since they were recipients (albeit unwilling) of the government bailout.
- Wells
- Northern Trust – Another forced recipient of TARP money, Northern Trust has actually been performing fairly well in the downturn – mainly because it’s more of an asset manager and less of a bank. Here, the politicians vilified the company for continuing to sponsor a PGA golf tournament even though they received TARP funds basically saying “These companies spends millions to sponsor these events to wine and dine themselves and their clients.” In fact, this outrage recently forced Wells Fargo to cancel it’s sponsorship of its own PGA event (thereby losing out on millions of dollars worth of exposure and contract cancellation fees).
I strongly believe that the above 2 examples are situations where politicians are using the financial crisis to gain support from voters by twisting the truth. Granted both companies received TARP funds, but neither wanted or needed them. The government forced it upon them and the changed the rules – that’s what I think is not fair. I whole-heartedly agree in situations where truly poor institutions should be scrutinized (e.g. Citi and AIG), but Wells and Northern Trust are not those cases.
Think Before You Judge
I agree that banks played an integral role in the collapse of the financial system. They made many irresponsible decisions that caused the current situation. However, it is also important to separate the good from the bad. Not all banks were irresponsible. So next time you hear about politicians ranting about how companies are spending the TARP funds, take a step back and make sure the context around the issue is correct – then make an appropriate judgment. The government unfortunately has done a poor job of distinguishing between the good and bad apples in the financial sector, so I hope you’re able to pick up the slack.
Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!
The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I’ve said above. This includes consulting with a financial advisor.
Subscribe to:
Posts (Atom)