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Sea Changes in the Markets: Winners, Losers and Best Bets

Sea Changes in the Markets: Winners, Losers and Best Bets. Sean J. Egan President, Egan-Jones Ratings PMI Forum April 22, 2010. Background. Independent – not paid by issuers Fortune Magazine designation History of warning investors. Recently: near collapse.

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Sea Changes in the Markets: Winners, Losers and Best Bets

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  1. Sea Changes in the Markets:Winners, Losers and Best Bets Sean J. Egan President, Egan-Jones Ratings PMI Forum April 22, 2010

  2. Background • Independent – not paid by issuers • Fortune Magazine designation • History of warning investors

  3. Recently: near collapse • 60% of investment banks: BS, Leh, Mer • Largest mortgage bank: Countrywide • Largest insurance firm: AIG • Largest Banks: Citi, BAC, WB, NCC • Largest mortgage holders: FNM, FRE • Largest monolines: MBIA, Ambac, etc. • Largest S&L: WaMu • Largest Industrials: GE, GM, Chrysler

  4. Massive Dislocations • AIG, Bear, Countrywide, GE, Fannie, Freddie, IndyMac, Lehman, Monolines, NCC,New Century, Wachovia, WaMu • Base causes for breakdowns • Shifts in the funding process

  5. Old Funding Process • Local Banker and Credit Officer • Reviewed by Credit Committee • Reviewed by Bank Examiner • Focus on accurate credit anal. / Rt. Bal.

  6. New Funding Process • Mortgage Broker, Mortgage Banker, Investment Bank, Risk Assesor all paid on flow, with little recourse • Pushed market to breaking point: 0 down, option arms, subprime, alt A Low ability to absorb losses

  7. Golden Age • Massive global markets coming on line • Low funding costs • Low labor costs • Tech explosion • Govt. support for critical industries • Cleansing of the markets • High need to earn and save

  8. Current Status • Massive margin improvements • Beggar thy neighbor showdown • US intervention likely to shift to states • Implementation of Democrat programs • Politics more relevant than usual, but slipping

  9. Current Status • Trash is cash (shift to second tier players) • Cash is trash • US intervention if needed • Nearly every industry has improved • Much harder to find good shorts

  10. Looking for Value • Radio Shack • Amazon • Great Atlantic and Pacific, Saks, NCR • Goldman • E*Trade • Eastman Kodak

  11. How to Locate • Two notch or more difference • Our view on support • Hard to get 100% comfort • Fundamentals are lagging

  12. Opportunites over 6 to 12 Mos. Recovering: Safe: Airlines, Autos Healthcare Some Banks, Finance Processing Cos. Capital Intensive Tech Servicer Builders, Media Tobacco Most Retailers, RV’s Some Food Steel “Warren”, India Real demand in China

  13. Nuances • The core problem is not subprime, alt A, adjustable ARM’s, NINJA, or HELOC’s (see a 95 year old man) • The problem is the market’s immaturity • Evolving fiduciary exposure: STT, Res • Restoring markets

  14. Contact Information Sean Egan Egan-Jones Ratings & Analytics www.egan-jones.co

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