When is a Black Swan not a Black Swan? When the "perfect storm of highly improbable events" happens all the time.
Nicholas Nassim Taleb coined the term Black Swan to explain how massive unforeseen events have the greatest impact on markets. But only the most naïve and optimistic of investors was not expecting further fallout from the abominable banking sector.
Bradford & Bingley (B&B), like Northern Rock, RBS, Alliance & Leicester, Barclays and HBOS before it, is in the spotlight and in a lot of trouble.
The company has launched a £258m rights issue at an offer price of 55p a share. They are set to issue a profit warning. Steven Crawshaw has stepped down as CEO. And they have agreed to sell 23% of their shares to Texas Pacific Group (TPG) Capital, a US private equity firm for £179 million.
This "perfect storm" hit the firm so hard that the FSA were forced to come in and suspend trading in the shares.
The downturn in the buy-to-let housing market means the UK’s eighth largest bank, from £3 billion in 2006, now is worth a mere £404m — less than Dignity funeral care. Which is shocking, viewed in isolation.
But, I’m pretty blasé about all of these rights issues and share plunges. Anything happening in the banking sector is a write-off (pun intended). Regular readers know that I’ve no interest in bottom-fishing for ‘bargain’ banks.
Despite my antipathy, I have been constantly advised to pile into banking shares. In the past 3 months I’ve been told:
To buy Barclays at 510p; the shares are now 363p;
To buy RBS at 330p; now 222p;
And to buy HBOS at 497p; now 368p.
All three tips were made, among other things, on the basis of big dividend yields, which seem to cover a multitude of sins.
Except they don’t. All three tips have incurred a greater capital loss than their total annual dividend payout would compensate for. And, none of these three firms is paying a dividend in cash. They’re paying them in shares instead.
This only serves to hurt the per share profitability, which lowers the already low share price... not what the dividend hunters signed up for.
The world’s worst stock tipper
I will no doubt receive another tip for Bradford & Bingley. Why do the tippers persevere with banks?
Because the culprit ultimately responsible for all of these tips is still at large, pushing bank stocks like never before.
Let me now reveal to you who that culprit is. This is today’s the print-out from my Bloomberg terminal, objectively ranking stocks by their value credentials:
- Bradford & Bingley, Score: 99:89
- Alliance & Leicester, Score: 83.96
- HBOS, Score: 80:86
- Barclays, Score: 78.68
- RBS, Score: 76.42
Blame the machines.
Across the entire UK stock market, banks are the five best value investments around today. And it’s not just Bloomberg... running any value ‘stock screen’ from Reuters, to Digital Look, to Zacks, to ADVFN produces the same result. This is what every investor and fund manager has been seeing on their screens since late-October.
In objective terms, these are the shares to buy. But anyone who’s been following this advice over the last 12 months has lost, and lost big.
There are two ways to look at investments, bottom-up and top-down.
Bottom-up investing uses stock-screens — systems that zero-in on company fundamentals. Think of it as tunnel-vision investing. In a bull-run, it is a great way to buy stocks. I used to build stock screens for a critically-acclaimed investment service, so I can personally testify to how effective they can be.
Top-down investing is quite different. This method is far more big picture. The first question is not ‘What company should I look at?’ It’s ‘What assets should I look at?’
Top-down investors are not only looking at numbers, but at sentiment and market opportunities outside of a machine’s scope.
While neither method is perfect, in a market downturn it is essential to think big.
Bottom-up investing can lag reality — in the 2000 bear market, stock screeners were picking out the companies that had fallen hard and were more value trap than value opportunity. The same thing is happening here. A system is not a substitute for common sense.
If the market falls by 20%, you have to sit up, take notice and, depending on the portfolio, take action.
The fallout was an opportunity to re-evaluate and find safe-havens for your money. Those who did this have profited in the last six months. Those who had well diversified portfolios in a variety of sectors have probably broken even.
Those who held the ‘good value’ banks, house-builders and retail stocks must now take drastic action to pull things back.
Theo Casey
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