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CFA Institute Blog: “Hide-‘Til-Maturity” Accounting

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The Silicon Valley Bank collapse recalls the tussle over the accounting for financial instruments after the global financial crisis [GFC] in 2009, particularly the debate about whether some financial instruments should be carried at amortized cost (held-to-maturity, HTM) rather than at fair value (available-for-sale, AFS), or what is referred to as the “mixed measurement model.”  — Sandy Peters, CPA, CFA To read the article on the CFA Institute Blog >> —– Related: 4 Very Good Reasons Why We Don’t Like Dividends of Banking Stocks Banks & Money Centers: AXP, BAC, BBT, BK, C, DFS, FITB, GS, HBC, JPM, KEY, MS, NTRS, PNC, RF, STI, TFC, USB, WFC Valuentum does not believe the long-term dividend health of any financial institution can be accurately … Read more

ALERT: Going to “Fully Invested” in the Best Ideas Newsletter Portfolio

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Image: Since the publishing of the first edition of the book Value Trap, the stylistic area of large cap growth (SCHG) has meaningfully outperformed both the equal-weight S&P 500 (SPY) and small cap value (IWN). Summary of Best Ideas Newsletter portfolio changes UnitedHealth Group (UNH): 0% –> 4%-6% Booking Holding (BKNG): 0% –> 4%-6% Chipotle (CMG): 1%-2% –> 6%-8% Technology Select Sector SPDR (XLK): 0% –> 4%-6% By Brian Nelson, CFA With the debt-ceiling debate behind the markets, the regional banking crisis largely in the rear-view mirror, and the Fed winning the fight against inflation, a continuation of the strength in the markets as witnessed from the October 2022 lows can probably be expected. We “rode” the latest upswing with … Read more

Long Live Apple and Large Cap Growth!

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Image: Since the release of the book Value Trap in December 2018, an ETF that tracks large cap growth (SCHG) has outperformed not only the S&P 500 (SPY), but also the areas of dividend growth (SDY) and small cap value (IWN) by sizable margins. By Brian Nelson, CFA We explained in part why we don’t like the dividends of banking firms in this note here, and we’re starting to see dividend cuts in the regional banking space, with PacWest Bancorp (PACW) as the latest banking entity to slash its quarterly payout. Right now, executives in the regional bank arena seem to be like deer caught in headlights, and we’re even seeing banking deals fall apart. The proposed deal between Toronto-Dominion … Read more

Quick Take: Fed Raises 25 Basis Points; This Banking Crisis Is Far from Over

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Image: FOMC Chairman Powell answers a reporter’s question at the March 20, 2019 press conference. By Brian Nelson, CFA On March 22, 2023, the Federal Reserve raised its benchmark rate 25 basis points, to the range of 4.75%-5%, a move that we think reflects a government agency that is now more or less a deer caught in headlights–given the nascent regional banking crisis in the United States. The bottom line is that the U.S. banking system does not have enough cash on hand to redeem all deposits (it never has), and with respect to U.S. banks, deposit insurance is only up to $250,000 per depositor, per FDIC-insured bank, per ownership category. The U.S. public has grown concerned, and that may … Read more

ALERT: We’re ‘Raising Cash’ in the Newsletter Portfolios

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Image: American Union Bank, New York City. April 26, 1932. Public Domain “We firmly believe that an investment in a bank must come with the acknowledgement of the distinct possibility that another financial crisis may occur at an unknown time in the future. Why? Banks do not keep a 100% reserve against deposits. Our good friend George Bailey knew this very well when he tried to discourage Bedford Falls residents from making a “run” on the famous and beloved Building and Loan.” – Brian Nelson, CFA, September 4, 2013   SUMMARY OF CHANGES Best Ideas Newsletter Portfolio Johnson & Johnson (JNJ): 4%-6% à 0% Exxon Mobil (XOM): 4%-6% à 0% Chevron (CVX) 3%-5% à 0% Dollar General (DG): 3%-5% à 0% Korn/Ferry (KFY): 1%-2% à 0% … Read more

SVB Financial, Silvergate Capital, Credit Suisse Reveal Cracks in Global Financial System

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Image: SVB Financial looks to be collateral damage of the Fed’s rate-hiking cycle, and we can’t rule out that other regional banks could have also managed interest-rate risk wrong. Shares of SVB Financial have collapsed, and other banks could be facing similar issues that have yet to come to light. Image Source: TradingView By Brian Nelson, CFA We don’t include any banks in the newsletter portfolios, but we include slight “exposure” to the Financial Select Sector SPDR (XLF) in the Best Ideas Newsletter portfolio, primarily for diversification reasons. We have never been fans of the banking business model, and here is what we wrote in the first edition of Value Trap: Theory of Universal Valuation: It’s likely we will have … Read more

Hut 8 Mining Is an Interesting Play on Cryptocurrencies

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Image Source: Hut 8 Mining Corporation – November 2021 IR Presentation By Callum Turcan Hut 8 Mining Corporation (HUT) is headquartered in Toronto, Canada (in the province of Ontario), and “mines” digital assets from two operations in Alberta, Canada (in the city of Medicine Hat and town of Drumheller). The firm is in the process of developing a third mining operation in Ontario, Canada, at the small city of North Bay, having secured a long-term power purchase agreement with Validus Power Corp. Overview  Though Hut 8 Mining mines for both bitcoin (BITO) and ether, two of the most popular cryptocurrencies, when it mines for Ether it historically has preferred to get paid in bitcoin. Hut 8 Mining has built up … Read more

Bank Earnings Solid During Second Quarter 2021

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Image Source: Bank of America Corporation – Second Quarter of 2021 IR Earnings Presentation In Alphabetical Order by Ticker: BAC, MS, JPM By Callum Turcan In this note, we cover three recent reports from the banking industry as earnings season gets underway. Ongoing coronavirus (‘COVID-19’) vaccine distribution efforts are enabling the domestic economy to reopen in earnest, and consumers are beginning to return to “pre-pandemic activities,” though the risk of variants remains. In our view, the outlook for the US economy is quite bright. The outlook for net interest margins (‘NIMs’) should improve alongside the domestic economy, though yields remain rather low as of this writing and lackluster NIMs weighed on the performance of the banking space at-large last quarter. … Read more

Banks Holding Up Well, Some Feel Pain from Archegos Capital Collapse

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Image Shown: Bank of America Corporation has an optimistic view towards the ongoing US economic recovery. Image Source: Bank of America Corporation – First Quarter of 2021 IR Earnings Presentation By Callum Turcan Earnings season is now underway! In this article, we cover the performance of two large US banks and the problems facing one major European bank in light of losses stemming from Archegos Capital Management blowing up. Large reserve releases last quarter–due to the US economy holding up better than expected–during the coronavirus (‘COVID-19’) pandemic played an outsized role in bolstering the financial performance of key US banks after these institutions recorded large reserve builds in 2020. Net interest margins (‘NIM’) continue to face headwinds from the low … Read more

Fourth Quarter Bank Earnings Roundup: MS, GS, BAC, C, WFC, JPM

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Executive Summary: Though we’re generally cautious on banking business models due to the arbitrary nature of cash-flow generation within the banking system and the difficulty in valuing such entities on the basis of a free-cash-flow-to-the firm framework, we like Morgan Stanley–and its return on tangible equity of 17.7% during the fourth quarter of 2020 speaks to solid economic-value creation. Goldman’s annualized return on total equity (ROTE) was an impressive 22.5% during its fourth quarter, helping drive the full-year measure to 11.1% for 2020. Bank of America had been an idea in the Best Ideas Newsletter portfolio in the past, but we removed the company June 11, 2020. We continue to view the banking system more as utility-like serving as an extension … Read more