Unfortunately for all those ABS holders there is bad news, expect 3.50 in the long term, sure they increase profits, the underlying problem is that they have to raise capital and borrow more as a percentage than the percentage increase in profit. Stop and think for a moment. Increasing profits sure, sounds good, look at the balance sheet and it takes more capital raised and borrowed as a percentage to increase these profits.
I borrow from someone $100 and then make $120, I make $20 profit, not bad.
Next year I borrow from someone $200 and I make $230, I make $30 profit, I then tell market that this year my profit is 50% better than last year, but I course I tell nobody that this year it was harder to make the profit, I had to raise 100% more funds to do this.
This is the problem with ABS, it is the way that they make the profit that is the problem, long term this will come back to bite them, I think that $3.50 is what the market will judge them at in the long term.
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