Dick Bove, Bear Stearns, And Controversey

Apparently Mr. Bove does not like my ticker from last night, and believes that I have been in some way "unreasonable" in my characterization of him, specifically this paragraph:

"The Truth: The "powers that be" (including the media, The Fed and The Banks) are absolutely beside themselves with the possibility that stocks, especially bank stocks, might decline in value. For "why" see the top of this blog entry. If you fall for this you will be wiped out. DICK BOVE PUT A MARKET PERFORM RATING ON BEAR STEARNS STOCK ON MARCH 11th - JUST THREE DAYS BEFORE IT BLEW UP AND (THE FOLLOWING MONDAY) WENT TO $2! You have NOT and you WILL NOT see CNBC or DICK BOVE take responsibility for the wipe out of SEVERAL BILLION DOLLARS IN SHAREHOLDER WEALTH - when he could have preserved YOUR MONEY if he had told you the truth about our financial institutions and that YOU SHOULD SELL ALL OF THEM AS THERE ARE AND WILL BE MORE EXPLOSIONS, ALTHOUGH NEITHER HE OR I HAVE NO WAY TO KNOW WHICH ONES AND NEITHER DO ANY OF THE ANALYSTS SINCE WE CAN'T SEE HONEST BALANCE SHEETS!"

He was kind enough to send me a copy of the full report which I have edited to remove his email address and phone number (at his request), but which is otherwise reprinted here with his permission.

You are urged to read the report in full and draw your own conclusions about whether the market perform rating was reasonable or not. Links are at the bottom of this post.

There apparently is one word he can legitimately complain about in my original ticker - the word "PUT".

In fact, he maintained a "Market Perform" rating on the 11th of March; the upgrade to Market Perform from SELL appears to have occurred in February.

You can find an archived copy of that story here. It says among other things, in reference to Bear and Lehman:

"He said private equity may once again be able to fund activities in the high yield markets, while adding that credit derivatives markets were unlikely to go lower, and that the mortgage business may actually be quite strong this year.

New York-based Lehman will likely recover faster than its peers due to the expected strength in mortgages, Bove said."

Ok, I apologize for the error in not noting that the actual upgrade apparently came a month earlier, not that I think its material, but when you're wrong, you admit you're wrong.

Mr. Bove, of course, didn't bother to mention when the rating was issued by him during our phone call, nor that when he issued the rating the price of the stock was even HIGHER (by nearly $20!) than it was in March when the rating was "maintained" (even though he claims it really wasn't if you read the narrative.)

Now let's get to the meat of the matter and why I raised a stink about it in The Ticker - the rating.

Dick claims that "anyone who read the report in full would see that I had told them to stay away from the stock."

After reading the report in full, I agree - the stock, by the narrative of the report, is indeed a sell - albiet a sell $20, or 25% of your money, too late!

But here's the problem - the report clearly cuts the price target from $90 to $45 (a 50% haircut!) and further is a reduction of 25$ (from $59 to $45) from the closing price on the day the report was issued.

The report is intended only for institutional clients who pay his firm, but it, like the report yesterday, was picked up and widely quoted in the media.

Take a look at the second page of that report, directly above Mr. Bove's certification, under the definition of "Market Perform":

"Common stock is expected to perform with the market plus or minus five percentage points."

So therefore we can conclude that one of two things must be true:

• On March 11th, Mr. Bove believed that the S&P 500 would fall between 20 and 30% from its price on the 11th of March, and therefore, Bear Stearns' would indeed be a "market perform." (And in all fairness, a 25% haircut, while grossly under representing the collapse that did happen, is a serious decline.)

OR

• The "Market Perform" rating is false.

Take your pick.

For the record, Mr. Bove told me on the phone (in an hour-and-a-half phone call that got quite contentious and left us with more disagreements than agreements) that he does not expect the S&P 500 to decline by 25% in the next 12 months

For the record, I do expect the S&P 500 to decline by that much.

Therefore, we get to the gist of the matter - the rating, according to his own standards, was unreasonably inflated.

Now in fairness I am compelled to also include that part of Mr. Bove's argument is that everyone who is reporting this stuff, including CNBC yesterday, is stealing from him and his firm since they're not being paid for the analysis.

My counter-argument is that I will be happy to accept his complaint of theft when I see lawsuits filed against The Associated Press and CNBC for their coverage of his call yesterday, which was partly responsible for that nutty ramp job post the SOQ in the indices.

That of course will not happen since Punk, Ziegel along with all the other analyst firms on the street love the free publicity that they get from these ramp-job rocketshots and controversial calls on the market, especially when they get mentioned 4 times an hour on national television without having to spend one nickel in advertising buys.

By the way, Mr. Bove really does believe that the banks are a "generational buy", and disagrees that the issues of excessive leverage and capitalized interest (in the case of banks like WaMu) will kill them, arguing instead that the interest rate environment will allow them to earn like crazy.

I've heard this before, and my counter-argument is that Japan thought that too and they wound up with a bunch of zombified banks because of the lack of transparency and mark-to-market.

He claims also to have been "right" on his calls in the banking sector since last year; I will leave that to the reader's judgment, as I am disinclined to go back through ALL of his reports, but I did note while on the phone with him that in fact I expected the financials to get hammered last April and have been writing about it since.

Mr. Bove is also quite upset about all the "hate email" he's gotten. I, for my part, pointed out that but for two little words he wouldn't have gotten any of that hate email, that under the black letter of his firm's disclosure he had every obligation to slap a SELL rating on Bear on the 11th, and that he and only he was responsible for those two little words. Sorry Mr. Bove, but I don't see how you can avoid the responsibility for the very things you type.

I have been on the receiving end of "hate email" for more than 20 years, having run an Internet company before there was an Internet, never mind The Ticker. It comes with shooting your mouth off in public. If you don't like that, then I would recommend that you find a job that doesn't involve shooting your mouth off, and you won't have to face derision from people who think you're a fool.

Taking criticism, even vehement or foul criticism, is part of the job description if you're going to publish things. Google me sometime if you want to see what people have said about me over the years, but be prepared to sit and read for several months.

I also pointed out that should he be wrong on his latest call of a "generational buy" that he's likely to get much more hate email than he did from this one!

We shall see who's right about his latest call in the fullness of time.

In the meantime I maintain that this report will prove to be one of the poster children of "grade inflation" when the books are written about this mess in our markets. We had a big dose of this nonsense back in the 2000 tech wreck, and, despite the protests, I stand by my original position - the stock was not a "Market Perform" on March 11th, it was a SELL and, it appears, the black letter of Mr. Bove's research report along with the disclosure page make clear that is exactly what the stock's rating should have been.

First page is linked here.
Second page is linked here.

I hope you're having a nice Good Friday :)