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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

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

Sean J. Egan

President, Egan-Jones Ratings

PMI Forum

April 22, 2010


Background
Background

  • Independent – not paid by issuers

  • Fortune Magazine designation

  • History of warning investors


Recently near collapse
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


Massive dislocations
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


Old funding process
Old Funding Process

  • Local Banker and Credit Officer

  • Reviewed by Credit Committee

  • Reviewed by Bank Examiner

  • Focus on accurate credit anal. / Rt. Bal.


New funding process
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


Golden age
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


Current status
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


Current status1
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


Looking for value
Looking for Value

  • Radio Shack

  • Amazon

  • Great Atlantic and Pacific, Saks, NCR

  • Goldman

  • E*Trade

  • Eastman Kodak


How to locate
How to Locate

  • Two notch or more difference

  • Our view on support

  • Hard to get 100% comfort

  • Fundamentals are lagging


Opportunites over 6 to 12 mos
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


Nuances
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


Contact information

Contact Information

Sean Egan

Egan-Jones Ratings & Analytics

www.egan-jones.co


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