Time to Buy Bank Stocks 39 comments
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In case you missed the rally the past few days, the opportunity is knocking again. Tuesday's session saw some big drops in the banking index and major names like BAC, JPM, C and WFC were all feeling the heat of misplaced expectations of investors (or I should say traders). Most people were loading up these shares in the hope that Tuesday Mr. Tim Geithner would announce a plan to close his eyes and sweep clean the banks. Or maybe swing a magic wand and every bank suddenly finds 1 Trillion dollars each in their balance sheet. And when magic didn't happen traders started selling these shares with their eyes closed. This just shows how naive market players are these days. So I'll leave the rest of the article for wiser, calmer and valued investors.
Major national retail bank shares are a good buy at these levels. And in case you were reluctant to pick them up while they went up almost 25% in the past 4 sessions, here is your opportunity again to snap them up. First, details or no details, what Geithner (with almost a 2 Trillion dollar on the line) and the Federal Reserve (with unlimited dollars) have been telling us time and again, is that these national banks will not fail (or will not be allowed to fail in one way or another). So investors should not even think about that outcome.
Second, banks have become more thoughtful in lending money (which is irritating law makers. Talk about hypocrisy, on one side they are chiding them for lending blindly in the past and on the other side they are asking them to loosen up credit for general consumers. When will they understand that most people do not earn enough in this country to support the lifestyle they want to live). But, the good thing is that banks are doing what seems to be right. Give credit to only the most qualified customers, who especially in these times, provide them the guarantee to pay back in the future.
Third, management of the remaining banks is behaving more prudently and participating more closely in the policy making. And finally, policy makers (read: White House) themselves are more prudent and smarter than the past bunch we had there.
I see value in particular in the stocks of Bank of America, Citigroup and JP Morgan. These stocks are good buy and hold candidates right now. Volatility is higher than usual for these, and the overall market in general, but these companies are sitting on a huge customer deposit base. And they will be in a very good position to earn profits as soon as the credit conditions normalize. Some life insurers including Metlife (MET), Prudential (PRU) are also good buy candidates whenever their stock weakens. These two companies operate in global markets. With great partnerships in countries like China and India - with ICICI (IBN) bank - these companies will be able to weather the storm in a much better way. The important thing to keep in mind is to pick companies which have good future earning power, a global presence and solid customer base. These companies will eventually weather any storm. Their fundamental products (life insurance policy, health insurance policy, Certificate of Deposits, Commercial Paper financing) will always be in demand.
While their current balance sheets might be pressured due to asset devaluation, that also presents a huge upside in future once the assets have been marked down. I would recommend XLF and UYG as well but only with a pinch of salt there because these ETFs have holding in some smaller and regional banks also. While national banks will emerge victorious, regional banks might be taken over by either FDIC or their bigger counterparts at fire sale prices. So sticking to particular names will be a more prudent strategy in the current environment than trying to diversify through these ETFs.
Happy investing as always.
Disclosure: Will be a buyer of BAC and C. No position in other shares at the time of writing.
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This article has 39 comments:
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Cheers:
John Olagues
Where, oh where, is the SEC hiding?
BAC should have let the FDIC take over Country Wide then all of them would have been put in jail for Collusion, Fraud, and breaking the RICO ACT.
I must confess, i am surprised you have any money to invest.
Discretion is advised in buying bank stocks. I can't say that people won't gamble to get TARP volatility upside moves and win, but using rational financial logic to justify it just isn't right.
I will steer clear of all financial stocks for a long, long time.
On Feb 12 03:06 AM Banks must survive wrote:
> If Citigroup goes down get your dog, some beef jerky and your gun
> and head for the woods because the world will be in a depression.
> A depression like the 30's, not like the word we just throw around
> aimlessly, I mean 24% unemployment. It will be scary! Citigroup is
> one the largest banks in the world, not just the USA. Moral hazard
> aside, it will not fail and a bad bank will be created to hold all
> of its and its contemporaries lousy deposits. Its not just, its not
> right, but it is what it is or our whole system will go down. Grab
> your nuts, close your eyes and buy the banks. You will be richer
> in long run (only the big ones).
Small investors like us must invest in companies like KO, PG, JNJ and PFE that deal with hard products, not with money.
Check out CATY and EWBC. These 2 serve the Asian
communities very well and always have dividends.
Today's price: $3.61.
BTW, if you're a US taxpayer, you've already bought banks.
And this is just the beginning...
And as long as the Obama administration does anything that does not involve overpaying for toxic assets (which would be political suicide), shareholder equity in the banks holding those assets will be hurt.
Let's run through the options:
1. Nationalization - 'nuff said.
2. Stealth nationalization - the Treasury takes a stake in the banks in return for injecting new capital, clearing out the toxic assets, guarantees, etc. This would dilute shareholders.
3. Delayed nationalization - the Treasury gets warrants or preferred stock convertible to common stock, in return for capital injections, clearing out the toxic waste, guarantees, etc. This would still dilute shareholders, albeit over a longer period. It would still hurt shareholders unless the share price is rising.
On Feb 12 05:03 PM klarsolo wrote:
> Wouldn't preferred stock ETFs be a smarter bet than common stocks?
> At least you'd be ranked pari passu with the government TARP money
> and don't have to worry about additional dilution.
You got it. There are all kinds of preferreds, converts, and bonds which are ranked ahead of common, and which sport attractive yields. Common is probably the worst way to play a dodgy bank. Bank of America debt has to be paid, B of A, preferred stock still pays its dividends. . . and the common? Worth anything? Who knows . . .
~~~~~~~~~~reply~~~~~~~...
Jeez! Are you joking !!??
I see value in particular in the stocks of Bank of America, Citigroup and JP Morgan.
~~~~~~~~~reply~~~~~~~~...
And I see three drunks trying to hold each other up. Mark my word that one of more of these three will be taken down, sooner than later. I believe is will be their HUGE derivative portfolios that steal the last breath. But if you want to take a chance on your dart picking the right one to invest in, then be my guest.
I am not very impressed by this article. Why not buy ICICI Bank directly. Read "Boomers, your crisis has come". India and China are not at the same stage as USA in their cycles. They are probably in the high zone right now, with everyone moving forward and raging trough unprecented opportunity for growth and development. Why try to stick with American banks whose share price seems low but quality seems to justify the situation ?
If you want to play low price with not too bad quality, try Allied Irish Banks. If you want a bank as big as BAC but who did not need government help and managed trough crisis unscathed and growing in Good Banking Business (Read buying Deutsche Postbank) and whose share price still plummetted 80% off highs, try Deutsche Bank. If you want a p/e around 8 in banking activities with a sustainable dividend of about 6% right now, look north, Canada is just there, with a debt load and budget deficit who will prevent your Canadian dollar dividend to lose value... This is Toronto Dominion Bank. No housing boom in most of Canada, no subprime mess at TD and core tier-1 at 9%. (USD may stand still or go down in the very long term)
You like insurance companies ? Try MFC, a losing AAA company for last quarter, but soundly managed and capitalized. It is suffering a normal downturn like in a classical recession. Its business viability is not called into question, and this is a reason why my wage insurance policy is with them.
Right now, Americans will drive a great benefit to hold assets in solvent countries with less bad fundamentals than what is offered in USA. Europe, Emerging and Canada are the place to protect yourself from fed's reckless dollar printing.
Why
If you really want to stick with US Financials
You're probably right about that. However, any further capital put into institutions like Citi will be so dilutive that any past or near future investors will effectively be wiped out. This is a speculative play at best.
On Feb 11 05:40 PM mpharbold1 wrote:
> This is probably one of the worst articles I've read on seekingalpha.
> It is totally one sided and completely neglects the current economy.
> How are the banks going to handle escalating individual bankruptcies?
> Have you noticed people have been losing jobs? How about more foreclosures?
> How about commercial developers' bankruptcies? -a new problem. Geithner
> never said how the government is going to handle banks that fail
> the stress test. He did not take off the table the possibilty of
> nationalizing them. Or they could be ruled insolvent and the FDIC
> could step in like it did with WAMU. The argument in this article
> is nothing more than "too large to fail." The toxic assets could
> be too large with C and BAC - I expect Uncle Sam to let the worst
> ones fail. At this point we have no idea as to the true magnitude
> of the toxic assets. If you buy insolvent banks now, you are rolling
> the dice on what Uncle Sam will do and you have no clue.
After a spate of bank closings by the FDIC this week we are up to thirteen so far this year. That's already a little over half of last year's total which was itself a jump from only four on '07. So far none of these have been major institutions.
Could you guys tell how to buy these preferred in my brokerage account ? You said there is an ETF ...what would be the symbol for that.
Thanks in advance
----------------------...
On Feb 12 09:08 PM Rhunzzz wrote:
> Well the problem is this - the toxic assets have to go, it's that
> simple.
>
> And as long as the Obama administration does anything that does not
> involve overpaying for toxic assets (which would be political suicide),
> shareholder equity in the banks holding those assets will be hurt.
>
>
> Let's run through the options:
>
> 1. Nationalization - 'nuff said.
>
> 2. Stealth nationalization - the Treasury takes a stake in the banks
> in return for injecting new capital, clearing out the toxic assets,
> guarantees, etc. This would dilute shareholders.
>
> 3. Delayed nationalization - the Treasury gets warrants or preferred
> stock convertible to common stock, in return for capital injections,
> clearing out the toxic waste, guarantees, etc. This would still dilute
> shareholders, albeit over a longer period. It would still hurt shareholders
> unless the share price is rising.
Rememeber, banks must mark to market on those securitized CDO, which most banks already mark down to 30 c on the dollar on the super senior tranche (that assume a 70% default with zero recovery. well, the foreclosed property could not be valued at zero. it must worth something)
for those mortgages not securitized, the banks are working it out through various means which mean it will take long time to recognize loss, giving banks enough time to offset those loss with the zero rate funding cost and almost zero rate deposit cost.
for banks with deep depository basis, such as BOA, WFC, USB, they shall be fine. Not so sure about Citigroup which does not have deep depository basis comapred to BOA, etc.,
On Feb 12 04:56 AM constructe wrote:
> I understand the impetus for buying solvent banks like JP Morgan.
> I bought options in them myself this week. However, how can you value
> the bad banks like Citibank. Their losses are hidden in off balance
> sheet derivatives and other junk and the consensus is, not only would
> recognizing them make them insolvent, it would put them into such
> a big hole paying them $100 billion dollars to stumble along is cheaper
> than cleaning up their catastrophe.
>
> Discretion is advised in buying bank stocks. I can't say that people
> won't gamble to get TARP volatility upside moves and win, but using
> rational financial logic to justify it just isn't right.
Buying large, multi-national banks like C and BAC (with their massive deposit bases all over the world) at valuations like these is a complete no-brainer. This is a once in a lifetime opportunity. The rest of you are idiots.