Bank Shares Undervalued, Luxury Goods and Silicon Valley Ones Overvalued?

As a kind of bank activist, practically pulling my hair watching banks do so much damage to their valuations by such “fraudulent” practices on mortgage lending to interest rate and precious metal price fixing, it would be normal to say to avoid these “mafia” like institutions.

In fact, the breadth of the size of mis-selling was so huge of different regular to synthetic products by certain banks, it dwarfs probably anything of the worse organized “bandits”. Hence, why would anyone want to trust Wall Street?

However, one has to recognize change. The US bank sector is now probably the most regulated sector in its history. It has government regulators planted inside these private institutions in droves coming up their – well let’s not go there.

The Dodd Frank legislation with new Basel rules provided by the Bank of International Settlements (Yes, the one that gets blown up in my new novel that might want to make them “ban” it?) on very strict capital ratios. The US Senate is filled with enough hungry wolves against Wall Street, along with government consumer watchdogs galore. In addition, a lot of the liberal media is looking for the next bad bank banking practice story as their audiences have a large appetite for them.

However, with the clean out of so many bad loans, bad asset sell-offs, and near end to settlements on the mortgage derivative debacle of the 2007 meltdown catastrophe, and with prospects for some interest rate increases and Trump pro-growth policies for the US, I think one can conclude that US big banks in particular are under appreciated. Most are not even trading much above their book values. And some are beginning a pathway to healthy dividends.

Contrast this to the luxury retail sector and Silicon Valley where growth rates are slowing and in Apple’s case, its debt has been growing too. Book values based on tangible value are way smaller to market based share values compared to banks and P/E ratios are enormous.

That is an interesting thought in a world of evermore greater risk and brutality where the new conservatism in Wall Street may need to be better appreciated over highly leveraged sectors too presumptuous about their ever improving future ahead. Tech may be trendy but banks finance everyone and will continue to do so and run the world in the end.

That is even after a (lengthy) bout of humiliating populism that Wall Street and many in the elites well deserves. If one questions this, then answer the question as to how many Goldman Sachs former executives are in the Trump administration? How would Marie Le Pen, the French nationalist do without having a good banker? And finally where did the so-called independent,leading candidate for the French presidency come from -Bank Rothschild.

That means, once again years down the road that the big and powerful banks will ensure government bails them out and even Goldman Sachs got the US Congress to essentialky promise it on their riskier hedge funds. Never mind living wills and Dodd Frank, the top five will survive even if one or more has to buy the “failing” one out – or done so by one of those growing central bank “hedge funds” As we can see, neither Silicon Valley nor the giant luxury retail industry has any such guarantees. That even semi-backstop should not be forgotten by prudent investors who lack financial stocks in their portfolios because of 2007.

An excellent article in the Financial Times of London, by Tom Braithwaite (11/12 February, 2017) shows that stellar, big profile, Silicon Valley companies like Twitter are not performing so well. And many of these companies, one might conclude from looking at this analysis, have the real abusive levels executive salaries and overall benefits even more so than Wall Street in some cases. (Interesting, as Silcon Valley executives backing Hillary Clinton have been presumed to be the equality guys over Wall Street, full of primarily Republicans.)

When one watches what happened to Blackberry to even Nokia, most of Wall Street post 2008-2009 has survived better even if certainly not doing as well as the Apples. And one can now begin to say are providing tangible actual cash to shareholders through dividends, the banks that is.

In the luxury retail sector, one has to be concerned as well. This comprehensive report indicates caution is ahead and possibilities of unfavourable generational change.

The Financial Times shows that one of the very top luxury companies has a net book value of 26 Swiss francs per share while the market value is moving towards 80. I am speaking of Richemont. /tearsheet/ financials?s=CFR:VTX

Aggressive buybacks by the company, combined with quantitative easing, low interest money to borrow can help companies inflate their underlying values. While not necessarily based on hard evidence, I believe if subject to a more regular interest rates these companies might more easily fall to 50 percent of current share price values. This deserves more study.

Interestingly, before a step up in share buybacks and not so many months back, its share fell to around 53 Swiss Frances or about 35 to 40 percent of its current share value. That was a good time to buy it (not stellar bargain though) And some no doubt did. I called for a floor at 50 Swiss francs and told a number of its employees about it. https://www.richemont. com/investor-relations/share-buy-back-information/share-buy-back-information-archive.html

It should be noted that half of the company’s shares are in the hands of one shareholder whose immense wealth and control gives him the power to get shares bought back through even fairly long periods of unfavourable retail markets as being experienced, presently.

But some “panic” was seen about company valuation when he severely restructured the company knocking out serious layers of executives and gravitating more power to a new CEO and himself. This shows that the leadership is dynamic at least enough and still has faith in the company. The question remains whether the current share prices are sustainable on the longer term, if not the short term.

Buybacks of shares may be also done to help mitigate the lack of retail action in many markets where distributors own company shares. This goes with increase buybacks of less trendy merchandise that is not selling. The idea is to keep the vast distribution network with potential in place until better times come.

Some big retail chains may employ these tactics to keep distributors and retailers from moving to the competition or even folding if they see potential in the future for them. However, over an extended time frame, such a strategy could be shown to be using up corporate cash and possibly worsening the financial leverage in the sector.

In summary look more optimistically at Wall Street banks like, JP Morgan, Bank of America and Wells Fargo and be more careful with Silicon Valley stocks including the giants. The same goes for luxury retail giants.

Still I expect after a decent correction, the Dow to do well excluding any major calamities in geopolitics and black swans. Central Banks have turned into giant hedge funds with even the staid Swiss National Bank buying US stocks. Thus, my article remains true on buying gold, which by the way does not exclude buying your partner a nice gift from a reputable luxury retail brand. What a happy ending if added to a Valentine’s gift of the newest iPhone with what’sapp and instogram!

Leave a Reply

Your email address will not be published. Required fields are marked *