Opinion on  Credit Suisse Group (CS)     Sector: Financial  >  Industry: Investment Services
Credit Suisse Group - They aren't the sharpest tools in the shed

Of all the smart managements of financial stocks out there Credit Suisse isn't one of them.  What can I say about Credit Suisse?  Hmm, nothing positive ! I am adding Credit Suisse to my list of financial stocks to short although they have historically had one of the better balance sheets out there they have consistently proven they aren't very good at acquisitions and risk management.  The Swiss have always had thrown a lot of money at a problem in order to solve it.  How do they make a small fortune? Answer: start with a large one.  CS will likely get hammered in the coming CDS disaster and no one is going to be looking to bail them out.  CDS exposures are in the trillions and will make the sub prime mess look like an odd lot.  One hedgefund has said that if you took all the equity capital of the firms with exposure  to cds it would be less the .1% of their exposure to the product.  CDS will very likely be the straw that broke the financial industry's back.  I don't think you want to own any financial even at these levels.  Beware of owning any of them because the next leg down is going to look a lot worse than the first one.  The impact of the looming disaster will have a far reaching impact and trying to stop the disaster will likely cause the US to lose its AAA rating.  If you think they look cheap you had better look again.

When considering weather bottoms are in or not you should first try to understand what is driving the madness. To put it simply the market is wringing the leverage out of the market. The problem with the financial stocks is that they run highly leveraged balance sheets. Since the model is to borrow short and invest long the absence of available credit is causing leveraged balance sheets to contract. Libor spreads have blown out meaning banks aren't lending to banks. The commercial paper market is frozen up so companies cannot roll their CP when it comes due. For companies that must roll CP they have an immediate and sometimes (AIG, LEH, BSC) contraction. How low can they go? The answer is zero because if you have for example a 20 billion equity cap but a 100 billion balance sheet that is short term financed and you can't roll your cp then you rapidly become illiquid. Lenders who are senior to the equity see their debt becoming impaired so they buy CDS and short equity to try to limit their exposure. Since the dollars on the debt side are so large in comparison to the equity the equity gets squished. So just because GS and AIG are fundamentally sound given a normal operating environment they aren't in an environment where credit is unavailable. This can and will get a lot worse. Don't be quick to jump in because it will be hard to tell who was dumber the person who lost the first 90% or the person who jumped in just in time to lose the last 10%. This is no time to be speculating in the equity of highly leveraged balance sheets.  This isn't a bottom it is the edge of the abyss.