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“The Special Investigation Commission (SIC), which was established by Althingi, the Icelandic Parliament, in December 2008, to investigate and analyse the processes leading to the collapse of the three main banks in Iceland, will deliver its report to Althingi on Monday 12th of April.”
A summary and excerpts in English will be available here tomorrow.
The Guardian reports: “A damning account of Iceland’s failure to protect ordinary depositors – including hundreds of thousands in the UK – who entrusted their savings to online bank account Icesave will be published tomorrow by a specially convened truth commission, set up in the wake of Iceland’s banking meltdown 18 months ago.”
I am looking forward to this. I remember in 2007 reading only a few bearish blogger’s posts about the impending problems of Icelandic banks. This report I hope will serve as a learning tool for those involved and also everyone else in the financial industry. Thanks to Simoleon Sense for the great linkfests.
Here is a write-up I did on H&R Block, my most recent investment. After shares fell from $23 to $16, I now see substantial value in the company.
In the most recent bank failure update, Calculated Risk shows the number of banks that have failed in each year since 2007. 205 banks have failed since 2007 and the easy prediction is that more than 140 and less than 534 banks will fail in 2010. We already have a pretty good start this year with 37 failed thus far.
There are still opportunities, both long and short, in the world of small banks, though I think they are certainly beginning to shrink. For this post, I did a screen for banks trading between $3 and $5 per share and with negative earnings. I chose four banks at random from the results and one or two might be good short opportunities.
The banks are WAL, FSBI, UBFO, and HEOP. They are located in Las Vegas, Atlanta, Fresno, and Paso Robles, CA, respectively. Some of the criteria to look at to determine the susceptibility of the bank for further asset and capital level deterioration are the returns on equity and assets, the ratio of noncurrent assets to assets, and the percentage of commercial real estate and construction loans to total loans. In this spreadsheet, I’ve highlighted the problematic areas for these banks and have determined that WAL and HEOP might deserve further scrutiny if one was looking to successfully short a bank into the ground.
If anyone is interested in demutualization opportunities, Jacksonville Bancorp has filed an S-1 to offer shares of common stock for sale and so has Peoples Federal Bancshares. If I have the time I am definitely going to look at these.
I also just finished reading the transcript of Geoff Gannon’s recent show on how he goes about estimating a bank’s intrinsic value. It’s definitely worth a read.
Last week I finished reading Corporate Financial Distress and Bankruptcy by Edward Altman, the man who created the z-score. The book was published in 2005 and is pretty much a compilation of a lot of data and studies on pretty much every aspect of the distressed debt investing world. It was interesting, but it’s definitely not a good “how-to” book. The following are notes I took on the various aspects of post-Chapter 11 performance which you might find interesting.
Some facts:
Additionally, there are some large companies that have many related filings. An extreme example is Footstar in 2004 whose case had about 2,510 separate filings—about 20 percent of all Chapter 11 cases expected to be filed that year. This problem can lead to an overstatement of confirmation rates.
A large proportion of companies do emerge from Chapter 11, though not all remain publicly registered. The most important firm characteristic related to whether firms successfully reorganized rather than liquidated was firm size, measured by the prepetition assets of the company. Availability of debtor-in-possession financing to large companies is also an important determinant of the reorganization versus liquidation outcome.
Some key data from studies:
Not surprisingly, firms on average fail to meet their projections, which are often too optimistic. There is an important distinction here: pre-BK managers projections have a larger negative forecast error while mangers that come in post-BK tend to have a smaller forecast error.
Incidence of Subsequent Distressed Restructurings
Interesting fact: there has only been one “Chapter 44″ case (i.e., a firm that has gone through Chapter 11 four times) and that is TransTexas Gas Corporation.
When I was in grade school, I often awaited for the release of a computer or video game. In high school and college I eagerly awaited the release of a new album or an upcoming concert. Now I eagerly await such things as annual reports and the release of FDIC data.
There are several banks out there that I want to check up on, but I suppose I should first do an update on Atlantic Southern (ASFN), one of the struggling banks in my former hometown of Macon, Georgia. One of the first big local banks to fail in that area was Security Bank, so I have used the last several quarters of Security Bank’s existence as a rough benchmark for Atlantic Southern’s likelihood of success of avoiding failure.
Here are my thoughts on the current data for ASFN:
Right now I’m pretty undecided about the future of Atlantic Southern. They could struggle through this difficult time and survive intact or they could very well fail, albeit in a slow motion kind of way.
I occasionally find it fun to look for “patterns” in the price movements of stocks and indexes as a way to see what might happen in the future. I put patterns in quotations because I actually tend to think that my efforts are mainly just my brain’s meager attempt to find order in what really is probably meaningless chaos. However, I have read that Jim Simons main hedge fund works on the basis of taking advantage of patterns, so I’m not really sure about the utility of spending my time on this subject…
Anyways, in the chart below you will see two boxes, the first one being the pattern, and the second box containing a rough tracing of where the index will go if this pattern reoccurs (click for larger image).
I think I will continue to regard technical analysis as something I should not entirely disregard. It will be a very minor consideration in investment decisions.
I have been trying to study and look at historical yield spreads to see how helpful they can be in describing risk and predicting market tops. For now I’ve just been downloading the historical data and manipulating it a bit in a spreadsheet, but I will try to see if there are any academic papers out there on the subject. For now, here is one of the charts I’ve created with various yield spreads and the S&P 500 price (click for larger view):
As you can just tell by looking at the chart, when spreads like the 10 year and the 3 month and the 2 year and the 3 month become zero or negative, you should be looking out for a market top as this seems to signal that there is no longer a risk premium (I think that’s the correct way to describe it). There is no fool proof way to predict tops or bottoms, but I think looking at such things as the yield curve should is a very worthwhile thing to do, for when the yield curve flattens out or inverts, that is usually a sure sign that things are getting silly.
Brown & Brown (BRO), the world’s sixth or seventh largest insurance agent/broker, recently missed estimates by a fairly significant margin. The stock is down about 6% for the week and has fallen from its 2009 high of $20 to $16.50. Here are some reasons why I think BRO is a good potential investment:
Here’s a chart of BRO’s stock price and normalized P/E ratio for the past 15 years:
As you can tell from the chart, it generally was a good time to purchase the stock after a peak in the P/E ratio, after the ratio had compressed by about 50%. It seems we are in a similar situation where the last clear peak was in 2005 and 2006 when the ratio was at 30. With a P/E now at 14, this looks like another good entry point for BRO.
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