Risk, Oil, Deals, And Malone Vs Buffett

Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted -Albert Einstein

In the business and investment world, risk is considered the danger of loss, usually money. In full display this week was the concept of risk management, with the prominent example being the common equity of the largest bank in Europe, Deutsche Bank (DE:DBKGn). If you have not been paying attention, central banks across the globe have engaged in a first of a kind, coordinated effort, to keep interest rates low, and in many places of the globe, negative at the short end of the yield curve.

For banks, this kind of lending curve makes it very difficult to have a profitable economic model, especially when regulatory requirements are raised on capital levels and potential risk activities, like proprietary trading. Deutsche Bank is a money center bank and investment bank which has suffered from the current environment, and this week traded at .20 times book value.

If you are not aware of what this means, book value is a common metric used to evaluate the market value of a financial institution. For example, the largest and most well known banks in the United States (JPMorgan Chase & Co (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup Inc (NYSE:C), and Wells Fargo & Company (NYSE:WFC)) trade at values anywhere from .66 to 1.25 times book. You can see from these ratios, that Deutsche appears quite cheap using this statistic. Of course, there is risk here, as Deutsche has over a trillion dollars of notional derivatives on the books.

A major reason the bank’s stock has been pummeled, is because of a Department of Justice request for 14 billion dollars to settle mortgage backed security litigation. With reserves allocated of 3 billion or so, you can see how investors are a little freaked out, and when you combine this with news that some hedge funds were pulling assets, kind of like Lehman way back when, well, you can understand why the market was down 200 points on Thursday.

Mid-day on Friday we learned the bank has negotiated a settlement for about 5 billion, and the market breathed a sigh of relief. None of this changes the lending environment for banks, which is the root of the problem, along with structural issues all across Europe. Don’t you feel better now that we got that off our chest?

In conjunction with the lovely news at DB, the Wells Fargo CEO testified in front of the House this week and once again was raked over the coals, as he should be. My expectation is he will ultimately lose his job, and this scandal will persist and be a drag on Wells Fargo for quite some time. Every class action attorney in the country is probably lining up to take a shot. Buckle up boys, you earned this one. I for one have never owned a share of Wells as my personal experience with the bank made me steer clear. I hope you did as well.

In the oil world, OPEC decided to cut a deal to agree to lower production quotas for the Saudis and other countries as a way to support oil prices. We shall see if it sticks, as usually it does not. In the technology world, rumors of a large deal between Qualcomm (NASDAQ:QCOM) and NXP Semiconductors NV (NASDAQ:NXPI) helped sentiment a great deal. For those of you who are interested, this week’s Barron’s cover has a story about Liberty Media (NASDAQ:LMCA), led by John Malone and Greg Maffei, has outperformed Warren Buffett and Berkshire Hathaway (NYSE:BRKa) over the last 12 years.

Buffett and the S&P have returned about 7% annualized versus Liberty’s 13%. Many of you who have been reading the blog know we have long been invested in both, so the comparison is personally relevant and interesting. Looking ahead into the future, the idea that both entities will have the same kinds of returns might be a bit of a stretch (300 billion, 100 billion dollars in market value). There is much to be learned from both, and they will go down as two of the best all time investors and business leaders.

Dislcaimer: Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.