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business newsBank of America: Equity? What Equity?
John Thain's carpet can't hide bank's troubles.
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For those following along, the logic of bank trade was that President Obama wouldn't make his first move as Commander-in-Chief vaporizing the shareholders of financials. I said at the time and I'll repeat it now for clarity: I don't think he or anyone else actually can save the equity holders; I just had full faith he would try. There was some pain while I waited for the horribly misguided, yet inevitable, plan. I vaguely recall crying for an impeachment hearing on Inauguration Day. Yet within hours, a plan to rescue the financial system, and, more to the point, financial equity holders, was being leaked.
The government was going to aggregate all the toxic garbage hidden on the balance sheets of our financial system (picture agents in HazMat suites dragging airtight dumpsters) and create a giant "Bad Bank." By presumption, the existing banks -- having thus purged their toxic quasi-assets -- would be left with nothing but high-quality, top-notch, wildly undervalued Good Assets.
I refuse to debate whether or not this plan makes long-term sense for 2 reasons. First, if you argue in favor of the plan's sustainability, I'll simply feel sorry for you. Second, the actual execution of the plan didn't matter a whit to my trade. Bank stocks exploded simply on the leak. The plan was everything I could've hoped for when I bought (actually rented) my bank stock basket. As a cherry on top, it even came with a catchy "Good Bank/ Bad Bank" label.
Yahtzee!
The point isn't a post-mortem on a winning trade. Trading is like golf; there's a reason the scorecard only has room for the number - it's because no one actually cares about the details of your birdie. The point is, in the endless search for winning trades, it's hard to avoid coming to the conclusion that however you care to phrase it, repeatedly preying on the weak and gullible is the only thing consistently working. No one is trading stocks off value; it's all emotion.
"Value" is always at least a little bit of imagination. In a world of weekly law changes and a government giving some companies free money while letting others die, "finding value" is simply a waste of time as an investment exercise.
I could be wrong. I'm wrong all the time, usually in public. I'll freely cop to being wrong on the uselessness of value if you do one thing: Give me a specific value, or even a fair price within 20%, for General Motors (GM). That's what GM has to do as a non-binding provision of their December bail-out: prove the company has a positive Net Present Value (NPV) by the end of March.
I went to business school. I know consumers. I'll take a run at it if you tell me one thing: how much money is General Motors going to get for free from the government? If you don't know cost of capital, you can't even start calculating NPV. Anyone who tells you otherwise is selling you something, or is a Congressman.
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