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September 19, 2007
Big Ben and the Burgeoning Below Book Value List
There were some who thought the academically inclined Bernanke would bring a new religion to the Fed and/or that the ‘Greenspan put’ was dead. They were wrong. ‘Helicopter Ben’ cut the Federal Funds rate by 50 bps yesterday and equities moved sharply higher.
So, Lower Interest Rates Got Us Into This Mess, Now They’re Going To Get Us Out??? Mission Residential
While Fed rate cuts will likely not be enough to cure what ails the U.S. economy and financial markets, there is little utility in attacking Bernanke. The reality is that while some countries compete in the global marketplace by building things, or by mining/extracting things from the earth, and/or by trying to keep their currency artificially depressed or inflated, the U.S. competes primarily by consuming. Well aware that this consumption is fueled by debt creation, endless asset bubbles, and the hoarding of global savings, when debt creation slows and asset prices decline preemptive Fed rate cuts are the immediate response.
As Bernanke’s Fed voted to keep up the norm yesterday the hope is that a weaker dollar will continue to spur exports and alleviate some of the pressures inherent in the debt/asset bubble/consumption model. There is also the more specific hope that stock market wealth can be created faster than housing wealth is destroyed. Longer-term these hopes are likely to be dashed as debt and asset price growth crest. However, policy makers are making it clear that their job is to try and postpone the day of reckoning.
Are The Bargains Gone?
Before yesterdays FOMC announcement there was 2,081 U.S. companies trading below book value (BBV). This total is up by more than 300% over the last 16-months, and up smartly since August. Despite the majority of these stocks trading (or in most cases not trading) on the pink sheets, before yesterday there was 553 stocks trading below book on the AMEX, NYSE, and NASDAQ (or more than the total number of stocks trading below book value when the Wish List last interrogated the list in 2Q06).
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While many stocks in the BBV list are actually trading above tangible book and many more are about to be delisted and/or take balance sheet write-downs, there are some companies that could warrant attention today. Specifically, REITs (more on these in a moment).
Conclusions
It doesn’t matter if homebuilder stocks surge for a couple of days following their fantastic declines. It doesn’t matter if short covering sparks a record rally in the 30 Dow components, or if the tech leaders can continue to attract capital. No, what matters to the individual investor not willing to gamble on short term bounces in the markets is whether or not more companies are reaching attractive price levels as other investors sell out of fear.
Although time will certainly tell, Bernanke and company are unlikely to stop the BBV list from growing in the coming months. Rather, with consumer spending to be challenged by the slow down in the housing market, and the jobs market already stalled (beaten down major U.S. staffing companies didn’t exactly jump for joy yesterday), more stocks are likely to come under pressure as U.S. economic and earnings growth slows or contracts.
With that said, the BBV list is not exactly full of screaming bargains. By way of comparison, before the last bear market started to roll (December 2000) there was more than 100 REITs trading below book, and former Wish List REIT, HRP, was trading at more than a 25% discount to its current p/b figure.
As one of the most beaten down groups today, REITs are worth investigating further as some Trust’s could offer decent yields going forward. But unless you believe that Bernanke’s actions have ensured that corrections, bear markets, and recessions will never happen again, there is no rush to buy into what could still be high p/NAVs.
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