To the Banking Industry Victors Go the Spoils

A remarkable man once said," For every action there is an equal and opposite reaction.". This seems quite credible as it has been the basis for all things up to this point.

It is easy to be quite bearish now as the market has collapsed from its highs. It seems that over the years Warren Buffett has used this to create his vast wealth and should continue to into the foreseeable future. If this holds true, it seems that many could become rich on the losses of others, and all you have to do is look deep inside yourself to find out if you are going to become one of the big winners or big losers.

Poor retail numbers, manufacturing data and unbelievable libor rates seem to make a recession inevitable, though if you believe as I do, you know the recession is already here. If you agree with me, you only have to ask yourself if you believe another hypothesis of mine and that is whether the market has bottomed. I know it is hard to get bullish, but if you believe most of the pain has passed us, the market has to only go up. Lastly, you only have to decide how long we will remain at these numbers. I think the Dow will track 8000-10,000 and with this, there is a good proposition with respect to risk/reward.

If you don't believe these things, or if your investment time frame is less than three to five years, you may as well stop reading, but if not let's explore the possibilities ahead. The current consolidation of the banking industry historically leads to the survivors reaping the spoils of the turmoil now. This is how JPMorgan (JPM) became who it is and will continue to only get bigger. It not only worked with the government to buy Bear Stearns, but also purchased Washington Mutual's deposits for a mere $1.9 billion. It now has an unbeatable framework and one would only have to wait for the company to become the world's largest bank by my estimates.

If you don't like domestic banks, as many don't, Brazil is a great bet. Banco Bradesco (BBD) is one of Brazil's largest banks in a country that has great growth and looks to benefit in the future from probable inflation. Banks in this area have no subprime exposure and have great retail businesses. HSBC (HBC) is another great international value. It has expanded into rural China which has helped with some of its subprime write-downs. Many of these banks have great dividends which help an investor by paying them to wait.

Since I spoke of him earlier, the best way to play this may be with Warren Buffett. His increasing positions in Wells Fargo (WFC) seemed a little strange at the time, but he seemed to have bought some of this company on the basis of an understanding of its position. The company has placed itself in the epicenter of retail growth with respect to California. The urge must have been great to enter into many of the riskier endeavors of this area, but the company held back, looking to the future as opposite to chancing it.

Other banks lent risky mortgages and sold them to investment banks that shuffled them and sold them as debt to other investors. This has caused a transparency issue that is either too difficult to see or something they may not want us to see. Either way the average investor thought it better to get rid of his or her positions than to try and figure it out until the mess clears.

I am sure that Wells has some exposure, but nothing that would make me think its balance sheet will suffer or cause a dramatic surprise to Wall Street. This stock has been all over the place from its high of $44.75 to its price currently at $32.32. Its current EPS is $2.181 and it trades at a decent multiple of 14. The reason this multiple looks good is its consolidation which we will get to later. Its currently PEG of 1.98 over the next five years is very high as I believe its growth prospects are much better as it gobbles up small regional banks to firm its national presence. Most importantly, the company has a 4.1% dividend as an investor can reinvest in shares even if the stock tips downward over the short term.

Even in the midst of mortgage problems, Wells has seen its delinquency rates and credit quality improve with respect to its $25 billion subprime portfolio. Now it has turned from being a regional player and jumped into the national scene. Its purchase of Century Bank moved it into Arkansas and Texas and its balance sheet points to increasing acquisitions in the future. Fifteen of its businesses are already national and that number is increasing. Eighty percent of its expansion is by providing more to its current customers, and with each depository acquisition it can expand in a current 5.64 products on average, but this expansion number has a target of eight products and the CEO attests this is very attainable.

If we look at the banking business as a whole, it is the epicenter of our economy. New protections have the Federal Government firmly behind big banks with good balance sheets, and they are going to scoop up all of the speculators. New accounting rules give these banks the ability to write off the majority of their losses on acquisitions much quicker, which will cause the pain to be quick, like ripping off a band aid as opposed to drawing the problem out over a longer period of time.

Lastly, we just have to look at where the banking industry is headed. We are looking toward a much more conservative and regulated system that will protect its investors. On top of this, we have an internet based system that is increasing every day, and before you know it the majority of transactions will be online. Sometimes it is better to look into the eye of the storm, it is much calmer there. Since my last recommendation on this stop 234 days ago this stock is up 5%. Compared to its competitors, Wells Fargo is vastly ahead.

Stock position: None.

Comments

[ashizashiz:]

Dear Fellow Victims:

Together, daily, we share news of the latest in the greatest financial ripoff in the history of history. Billions---literally--... human beings left to suffer and freeze and starve over the next 5-10 years, as the Plutocrats and Kleptocrats hunker down with their riches, their mansions, their Lamborghinis, etc.

Well, I take my lessons from 2 sources: Mohandas K. Gandhi and Billy Ray Valentine. Gandhi you know, I hope. Valentine, played gracefully by a young Ediie Murphy, was the guy in TRADING PLACES who goes from being poor to rich, at the expense of Winthorp, played gracefully by a skinny Dan Aykroyd. ANYWAY....

So, here's the point:

1. Gandhi organizes a day of "fasting and prayer" to protest British rules in India. Of course, a day of fasting and prayer also means 500 million Indian workers off the job: no trains, no buses, no public works---which effectively leaves 100,000 British ex-pats in India totally cut off from the world. A bad day for the Brits, to say the least.
2. Billy Ray Valentine (Capricorn) points out to Lewis Winthorp--as Winthorp cleans out his shotgun barrel in preparation, one can only assume, for a knee-cap shattering meeting with The Dukes brothers (Randolph and Mortimer Duke, of Duke and Duke Commodities, INC.)---that the way you really get a rich person back is NOT by shooting him, but instead by making him poor.

OK, you with me so far?

Now for the union of Gandhi and Valentine.

It seems to me that the real criminals in all of this are the bankers, the folks in the financial industry, the Paulsons and Bernankes and Fulds and all of the folks who have become wealthy on the backs---and on the debt---of the rest of us. This system of FRACTIONAL RESERVE BANKING, a system in which money = debt, this system can only function and make millionaires of a few while leaving the rest in the dust if and only if the rest of us choose to play.

Look, what terrified Paulson more than anything---and then he convinced Bush to be terrified, and he convinced the scumbags in Congress to be terrified----was the idea of a financial system, whose very existence is dependent upon growth and therefore upon more and more debt, collapsing because the borrowing cycle had been shut down.

They admitted it, and they assumed the rest of us wouldn't really get it. They said, flat out, that we are risking a systemic financial collapse unless we can get the credit markets working again.


Let's stop playing! I say, get together with people in your community and come up with a plan so that (a) everyone can eat and (b) everyone can stay warm and (c) everyone has water to drink and (d) EVERYONE STOPS PAYING FOR THINGS THAT ARE MAKING THE MoFos RICH!!!

I say we need to come together in our communities and protect each other and help each other and go on strike from giving our hard earned money away/I say, this needs to be a mass movement. A mainstream movement of protest against a financial system that CAN ONLY SURVIVE on the growing debt burden of the ordinary folk.

2008 Oct 18 06:04 PM

[nyka:]

Used WHAT to create his vast fortune? And what's with all the its at the beginning of sentences? It is one of those hastily used words that lacks meaning if the reader cannot determine the antecedent of "it." Start sentences with nouns, followed by verbs, then objects. That's grade-school
learnling that you apparently choose to ignore. Overdependence on pronouns makes your writing void for vagueness.

2008 Oct 19 07:38 PM

[nyka:]

Capitalize the word "Internet." That's common knowledge.

2008 Oct 19 07:39 PM

[PainfullyAware:]

Nyka, Try a little bit of Substance Over Symbolism.

To dis over grammar is weak.

You are obviously not as fearful as some. How about some consoling words instead of insults. Maybe some irrefutable evidence to calm the nerves?

Something for you:

Banking Collapse 1340s – the more things change the more they stay the same. – Long but interesting

www.schillerinstitute....

"Between 1250 and 1350, Venetian financiers built up a worldwide financial speculation in currencies and gold and silver bullion, similar to the huge speculative cancer of “derivatives contracts” today. This ultimately dwarfed and controlled the speculation in debt, commodities, and trade of the Bardi, Peruzzi, et al. It took all control of coinage and currency from the monarchs of the time.

The banks of Venice were deceptively smaller and less conspicuous than the Florentine banks, but in fact had much greater resources for speculation at their disposal. The Venetian financial oligarchy as a whole, which ruled a maritime empire through small executive committees under the guise of a republic, centralized and supported its own speculative activities as a whole."

2008 Oct 20 01:40 PM