These tech companies have been using their cash on acquisitions and to develop new products. Mortgage bankers increased their liquidity in big ways last year, but we see very little of that cash being used on acquisitions.
What’s your ratio of Account Execs + loan officers to
full-time employees? If you read page six of Flagstar’s latest
prospectus, they have 3,411 full-time equivalent employees and 336 AE’s
and LO’s for a 10.1-to-1 ratio. It’s probably not a meaningful metric
to compare yourself to unless you’re in the servicing business like
Flagstar, but we find all ratios to be of interest. By the way,
Flagstar’s prospectus is for their new capital raise of $250 million.
We
think very highly of Flagstar’s people and believe, absolutely, that
they’re a survivor, but their last three years have been really tough.
Losses were $39 million in 2007, $275 million in 2008. and $513 million
in 2009. The Board has adopted a five-part strategy to return the bank
to profitability, and we completely agree with the focus and goals of
this strategy.
Would you invest in a company laden with huge amounts of debt and
moderate growth or a company with high growth and no debt? What if the
choice were between countries with those profiles, one with tons of debt
and one with no debt. You’re given a choice to (a) put all your money
into 10-year U.S. Treasuries or (b) 10-year Chinese government bonds.
Which would you invest in? The mere fact that you probably paused for a
few seconds says a lot about our economies and its interrelatedness to
the out-of-control federal deficit.
Fiscal irresponsibility
abounds not just at the federal level but at the state level as well.
The Illinois Pension Fund is only 54% funded with a deficit of $54
billion. Considering how crappy things are in California, it’s a
surprise that that State Pension fund is 87% funded. A stunning 46
states are underfunded, but Washington State and Wisconsin are fully
funded and Florida and New York are slightly over funded.
San
Francisco’s Mayor Gavin Newsom warned the labor unions that they needed
to agree to pay cuts to deal with a large deficit. When they refused to
negotiate and demanded pay raises, the Mayor exercised his legal
authority and sent layoff notices to 17,000 city workers. Those who get
re-hired will automatically be given a 6.25% pay cut
Investors
tend to look at Price-to-Earnings ratios on big banks and Price-to-Book
ratios on small banks. If we look at Price-to-Book ratios for the big
banks, we find that many are trading below book value, obviously a
reflection of investors’ distrust of what the book value really is when
you apply serious mark-to-mark on loans. Anyway, here’s the ratio for a
few of them.
The higher number for U.S. Bank is clearly a vote of investor confidence. By the way, there are tons of community banks whose stocks trade at big discounts to book, and many of these will be 10-baggers for investors with patience and strong stomachs.
