I continue to be bearish on banks, especially the 10 banks in the chart below. I've been bearish on banks since April. Something about their ability to avoid marking down assets on their balance sheets and their ability to underforecast losses and not set aside enough for loan loss reserves irks me. I love NYU Stern's V-Lab's Systemic Risk Analysis Tool. Bank of America is still fighting out for the top spot.
I wanted to step forward and suggest that this concept of Operation Twist, as covered by Cullen Roche over at PragCap.com, is like a gun with two barrels. The first barrel is pointed at the target and the second barrel is pointed back at your face. Basically, I see it killing the profitability of the banking system. It is my belief that banks make money by lending at greater rates than they borrow at some point in the future. The steeper yield curve effectively is their cash cow. Seeing as how the banking system is already on ice and we already have a lot of exposure to a Euro contagion in the US Banking system -- I don't see this solving any problems.
On Additional Fiscal Stimulus This is where I get controversial. I think that this whole crisis that has been brewing since 2008 actually started brewing much earlier. I think that the trigger that caused the crisis is actually higher prices at the pump, which have crushed the prices of homes in suburbia. I think that the people commuting to work from 25-45 minutes outside of cities were faced with paying their mortgages or paying their fuel bills at the pump. Given the opportunity cost of losing your job or falling behind on mortgage payments, falling behind on mortgage payments is the obvious winner. As such, I think that additional fiscal stimulus at this point in time will not create more jobs in the economy but will simply allocate global economic resources suboptimally and thus drive gas prices higher at the expense of businesses that would otherwise be able to add more value.
Take Baby Steps Want something actionable? I think a great idea would be for the US Government to sign a 24-month contract with General Motors (NYSE:GM) to convert all Postal Service vehicles to Liquified Natural Gas in the next 24 months. I also then would set up liquified natural gas stations at or very near the post office.
In the Meanwhile Banks are not safe. We are in a global balance sheet recession. Liquidity should continue to dry up as I still don't perceive that there is an actionable solution in place or en route that will help the European crisis. If you've followed me, Greece has and will continue to be in default. This whole discussion about whether it is in default or not is nonsense. Then again, to expect sense is the hallmark of nonsense. All I am saying is that I'm not getting bullish on banks even though the prices are lower. I hope that at some point in the future I can change that stance. Until then, I will continue to try to look at things from the perspective where there are limitations to ownership. Right now, those limitations are working against the banks, not for them.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.