ROE and modern markets

The list of big companies, gods of the market decline, could continue. Examples of those that once were the blue-chip, the stars of the Exchange. And the color of which now tends to gray if not black. So that in operation rooms, a nasty nickname is in vogue: black-chip. A metamorphosis that is not confined to scholars but is also relevant for investors. The blue-chip Indeed, a company with greater market capitalization, represent (or represented) a fixed point in the strategy of many investment funds and operators. Who, now, they wonder: in the current crisis, such as find the true blue-chip?

Profitability, or the fallacy of the "race to the Roe '
Among the blue chips that have lost color, or even have tacked to a shade of black, of course, many lending institutions. By Societe Generale UBS up to RBS, the list is long. Yet, before the credit-crunch, many of these banks were champions in the production of wealth. Issued for their profitability. Already, profitability. Just the unbridled hunting stratospheric ROI marked sentence for many companies. 'It was the madness of Roe, the return on equity, "said Carlo Gentile, founder of Nextam partners. The search for a relationship between net income and shareholders' equity paid scant attention to the laws of gravity values up to 30% which, compared to a traditional activity such as that lend money, have no effect. "How can we think - highlights Gentili - that banks are subject in the center of the functioning of modern economies, can generate a return much higher than the average market. It was, and is a fiction. " It was, many say, the "race to Roe." The search for ever greater profits. Returns would be higher. How? It 'simple: by focusing on activities away from the traditional brokerage (investment banking, trading), and without much regard to the real substance of these new businesses. Examples are the famous Conduit: financial vehicles that, by exploiting the securitization or fanciful derivatives, generating income but without being accounted for in the budget. Thus, the denominator of the ROE (net worth or supervisory board) is not growing, while the numerator (earnings) shoot up. And the ratio may go up too, up there where the shareholders and investors want it to arrive. Except, you know, "everything that goes up eventually comes down." And so it was also for Roe. Which fell and crushed under the weight of profits crushed by rising credit-crunch as well as forced equity, increased to give more (appearance) of solidity.
So far the recent past. But for now and future? The ROE must be put in a corner, abandoned in the attic? "I do not think - kindly respond - Sure, we must analyze carefully the type of activities undertaken by the bank. Return on equity, but a sensible, more content, combined analysis of the other key of course, could provide a good foundation of assessment. Roberto Magnatantini a different view, manager of the Oyster World Opportunities Fund of Syz Bank: "The balance sheets of banks - say - are still indecipherable. Do not know how it is the net worth, or you can be sure of how it is realized profit. Moreover, banks enter into this phase of recession with economic accounts too fragile. Not forgetting, then, that their lives often depend on government rescue plans and, therefore, the political will of governments. " As if to say, in short, stay away from banks. And the "game of Roe," for now, it's better not to involve the banks.

No the stock piking
While large banks have, at least for now, a color that tends to gray (chip) who may aspire to a nice shade of blue (chip)? Difficult to answer. "Also because - emphasizes Gentili - in hindsight rather than focus on a single company is better to look at the baskets that combine the big cap. The Dow Jones rather than the S & P / Mib, relativamante have been able to do better than the general indexes of individual markets. So if you just look for the defensive nature of large-cap, it is toward these baskets themselves that we must turn our gaze. Maybe using an ETF.

The Debt to equity? Yes, please!
Beyond this indication of the strategy supported by many is to look to the cyclical securities. At these large companies that produce goods, at least in theory, characterized by inelastic demand: that is, not affected (in theory) from the general recession in consumption. So, for instance, for luxury goods companies. "You can analyze evidence of this sector - says Sergio Peeps, president of consultancy Peeps - But at this stage, in addition to exploiting all the classic indicators of 'fundamental analysis, you must have an eye for debt management. And, therefore, use the resources of third parties on equity ratio, ie the so-called Debt to Equity (net debt on equity, ed). Which must have such characteristics in? "In the past - meets Peeps - a ratio of 3 could also be acceptable. Now, with the crisis of credit, a value greater than 1.5 is unacceptable. "

Tags: budget, BOT, Citigroup, Crisis, Crisis Grants, 2008 market collapse, Dell, Dow Jones, insolvency, Quotes BOT, Recession, ROE, USA

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