Sunday, November 23, 2008

Thoughts About Financial Stocks

Most banks now have more ready cash than market capitalization. If it weren't for debt covenants and government angst, a rational company would simply dividend out the cash. Goldman Sachs probably has more than $ 65 per share in cash, but the stock is trading at $ 52 per share. Why not simply dividend it out? These considerations demonstrate the absurdity of the current market pricing of financial stocks. The fact that there is no debt financing around explains why no one takes these companies private. But, clearly they would if they could. This is a major victory for the behavioral finance crowd, since arbitrage activity should make this Goldman anomaly disappear. But, it doesn't disappear. Bear Stearns and Lehman Brothers would probably have survived, had they been private companies. There is a lesson in this, but the lesson is to find a way to stay private, but still have access to capital.

This too shall pass. Look for stocks to be above 10,000 by February. One would normally argue that financial stocks should lead the way, but government help to the financial sector may prevent that.

Our current problem is mostly a confidence problem from too much inept government participation in the economy. If we could get Paulson, Bernanke, Pelosi, Frank, etc. off the front page and off of our television screens, we could begin the process of recovery. Where is FDR when we need him? ("The only thing we have to fear is fear itself"). The government has turned a problem into a disaster. There is nothing wrong with Citi and GS. The government should stay out of this, so that folks can begin to analyze these companies with a cooler head. Turn CNBC off.

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