Francis Chou Semi-Annual Letter 2010
Francis Chou is largely considered the top mutual fund manager in Canada of the last 15 years. His recent letter offers his insights into the current investing environment and explains his thoughts behind buying warrants of US financials.
Well, starting in 2007, financial institutions went through a cataclysm. Directly or indirectly, almost all of them had to be bailed out by the U.S. government. Looking back at the crisis, this is what we have observed:
1) The U.S. government will not let major financial institutions fail.
2) The financial institutions that survive will be the ultimate beneficiaries of any recovery in the economy.
3) Interest rates will be kept at artificially low levels for the foreseeable future. The spreads between what the banks are paying for deposits and borrowings in the market (like FDIC insured), and what they can lend at is enormous. After being severely burned, they have tightened
their lending criteria and have been extremely cautious with their lending practices. In general, the quality of loans now being made are quite high and for the first time in many years, banks are being paid handsomely according to the risks they are taking.
4) Financial institutions in general are hoarding capital. This will provide them with ample cushion to absorb losses if a double dip recession were to occur.
5) The books of financial institutions were carefully examined by all kinds of government agencies, including regulators, before the government allowed them to repay the U.S. Treasury under the Troubled Asset Relief Program (TARP).
6) Most of the big banks are selling below 10 times their potential earning power in the future.
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