Capital Ideas & Analysis

I went through the conference calls for the brokers and have a lot of notes so I’ll try to be as brief as possible (which isn’t very brief lol).

LEH: cleared the air. It is really that simple, they gave clairity to an area that had none (for outsiders).The line heard round the world, “the worst is behind us”. If you didn’t hear LEH say that then you were confused by tuesdays move. They described that the environemnt was difficult, but that their book value per share increased, and outlined that they have 10% in sub-prime and a very small amount in non-investment grade. Fixed income was bad and commercial paper as well. Though they said commercial paper has been clearing up in the past week or two. They revised global GDP from 5% to 3.7%. The next part of intrigue is that they see deals gettind done, though large deals are having trouble, and that they see strategic buyers (corporations) stepping in here more than LBO’s and starting to fund with stock more than cash–not a good thing in my opinion (reminance of late 90’s). Derivatives and wealth management was strong. Predicting 3 months or so for the dislocation of credit crunch to work its way through.

MS: The disappointment. We knew bear was bad, but people expected MS to be next to GS but they lost in securities revenues and “credit significantly impacted” them. Market neutral funds got crushed, along with quants which was more headlined. Once again, asset/wealth management and derivatives were very strong. They have less than 40% (which I take as in the 30% range) in convedent lite loans. They were more leavered to the US vs. LEH and GS. They also hinted at the idea that retail investors got out durring july/august/early sept. They also see it taking 1-2 quarters for the credit market to get up and going in the manner it has been.

BSC: need I say more? The bear of all bears–pun intended. They basically said that they were challenged and disappointed right out of the gate. equities were at a record with fixed income stinking up the place, specifically CDO’s. Asset backed commercial paper (ABCP) declined over 200 billion. 38% decline in revenue and EPS decline of 63%. International revenue increased 90%, showing how much you have to be leavered to the rest of world. Fixed income tanked 88% citing a lot of mark to market losses. They were the only one to say they lost in asset management. They do believe though that the worst is behind us in the mortgage market (not the housing market) as well as the ABCP market. they are seeing 1-2 quarters for the ABCP market to get up and running at full function.

GS: If they were on a runway with the others, they were the only one strutting. The call only took 30 min while the others were about an hour longer. They were good in fixed income, asset management crushed the numbers again. Record levels in equities as well as derivatives. Their outlook on the global economy is still favorable. they repurchased $11 billion with 23 left on their plan. LBO backlog was lower due to deals getting done. The quants are up 16% from the time when they doubled down. Mutual funds had inflows and did well. The global alpha fund had 1.6 billion in redemptions. GS sees us as much closer to the bottom in the mortgage market. On that front, they marked all assets to market, stating that mortgages are important but less so for them than all competitors. They are still growing more than all others in the ROW and very excited about positions in China.

Overall, I see GS as a buy, but also all asset managers like TROW or BEN are ways to get ahead of the curve. If asset managment is exploding then those that do only that should be strong. Also, records in security trading and volume especially in deriviatives, how are exchanges not buys off of this? NMX, ICE etc.

also, to get more complex in regards to structured products, this is the breakdown for each of them.

Quick explanation, level 1 assets are those in liquid markets, these are equities and are not derivatives. Level 2 are going to be mortgages and derivatives. Level three is some derivatives, LBO’s, real estate, corporate priciple investments (commercial paper etc).

GS has 6% in L3 expecting it to increase to 7% from L2’s to L3’s.
MS has 3% L3 with it becoming 7% as L2’s becoming L3’s.
BSC has 4% in L3 and is not expecting any increase. I find this very curious.
LEH is predicting they will end up with 8% in L3 assets.

For those that get out on the worst day, insist on being 100% in cash, this is something to keep in mind when this strategy is taken more than about four times in your lifetime. In a 25 year period if you miss the best 50 days your preformance suffers a little over 24%. In this time period there were about really only two times you didn’t want to be in (and one if you can take short term pain) and that was the 1987 crash and the 2001-2002 bear market. By 1988 you were breaking even in the former and in 2007 you were breaking even. This thinking also only applies if you are preforming exactly how the market does.

 Source: MarketMinder.com