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.