What the equity market is saying about the US Center Banks?
January 13, 2012
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J.P. Morgan, Citigroup, B of A, and Goldman
When you look at the Model Price charts of each one of these banks they are trading below EBV-3. Looking under “Key Concepts” and select box “Economic Book Value” one can see EBV-3 is the last line we use. What does this mean? Simply put, the market does not believe the stated book values these banks are reporting.
Under normal circumstances, when normal operating companies fall below EBV-3, this will signal future write-off of stated assets on the balance sheet. They’re maybe other reasons as well, and we will do a major blog post on companies that fall below EBV-3. However, the above noted TBTF (Too Big To Fail) banks are NOT normal companies. They depend on “the system” to survive. The system that bailed them out in 2008! Also they rarely ever take write-offs as normal companies do. If they did take write-offs (mark to market), the bank(s) would show huge losses, in-sighting deposit holders to panic and withdraw support, leaving “the system” to save them (again) – which is you the taxpayer.
So we play this game. The regulators turn a blind eye on impaired assets on their balance sheets. The public markets still fund the ongoing operations, and customers still support their bank by leaving their deposits with a bank they think is secure (FDIC insured) and everyone pretends its business as usual. Hopefully, down the road the banks’ assets will become more valuable when the economic conditions change for the better.
When will an investor know, the above noted banks, economic conditions have changed for the better? When the stock price emerges above EBV-3, of course.
There is a positive side to this story. The above noted banks are NOT, what we call “deep in the blue” like their European counterparts (which we will talk about later). Sure, B of A, will have to double in stock terms to get to EBV-3, but we have witnessed worse situations for banks in general over the years. Investors should monitor these money center banks from time to time. When these equities start to transit their EBV-3’s this will be very bullish for the financial system as a whole (finally emerging from the 2008 financial crises) and US equities in general.