3 Reasons To Be Bullish on the Investment Banks

I'm looking for Wall Street to do well no matter who wins the election this year. 

 Three factors will keep the cash register ringing for investment banks:

1. Demographics of baby-boomers saving for retirement.

 2. The cheaper dollar, meaning that foreign firms will be on a shopping spree for U.S. companies, which will help M&A advisory.

3. Mortgage portfolios that have been marked to market.  When liquidity returns to this market, portfolios of mortgages will start to show profits.

It would seem that Wall Street also hasn't forgotten that it is the second most regulated industry in the U.S. (after nuclear energy) and that it needs to keep track of where its bread is buttered.  Banks are betting that the butter will be spread by a Democrat in 2009.

On the next pullback, which I think is coming once all the shorts are done covering, I'll be looking to buy the investment banks cheap again.  Look out for U.S. firms like Goldman Sachs (GS), Lehman (LEH), Morgan Stanley (MS) and Merill Lynch (MER) to continue to do well.  I own the investment banks directly, but rather than pick individuals, the Exchange traded fund (IAI) works well as a proxy.

Disclosure:  I do not own IAI or MER.  I do own LEH, GS and MS.  I have traded MER, GS, LEH and MS in the past year.  My last trade in LEH was a sell. My last trade in GS was a buy. My last trade in MER was a sell.  My last trade in MS was a sell.  I also own the preferred shares and debt of Lehman.

I am a former Managing Director at Morgan Stanley and Lehman. I am still a participant in their executive compensation, deferred compensation and pension plans.

Comments

[flatman:]

I guess I'm still wondering how well they will do with smaller balance sheets and less leverage.

2008 Mar 23 03:13 PM

[Nate C:]

David--keep drinking that kool-Aid. The investment banks are insolvent thanks to their highly leveraged business models. Why is GS, LEH, and MS going to the fed to get money? Do you actually believe their bogus reasons such as "we are testing the new Fed facility" which GS claimed or do you believe LEH's excuse that they were "demonstrating strength and leadership." The banks are facing collapse. No one in the world is willing to enter into repo agreements with the investment banks because word is out that the investment banks are going insolvent. The only way they can postpone their collapse, is to borrow directly from the Federal Reserve.

Just because the shares of LEH, MS, and GS all went up last week does not mean all is well. Remember two weeks ago when the Fed announced their latest attempt to bring $200 billion in liquidity (it happened on a Tuesday). By Thursday night Bear Stearns was calling the Fed and the SEC, telling them that they were going to be forced to file for bankruptcy Friday morning.

Do not invest in the Investment banks. Last week's rally was short covering and idiot institutions who believe that the Fed will save the financial markets yet again. Dont be a sheep and follow their lead.

2008 Mar 23 04:09 PM

[Msrpaul:]

I think that what you're not counting on is continued consolodation in the brokerage industry. The pace of M&M and mortage backed securitization will never return to its former days, and a lot of deleveraging has to take place. HOmes will return to being homes, not commodities to flip, and they will be financed accordingly. The "house of cards", this time made with bricks and mortar, has a long way to go to regress to the mean. That's bad gor LEH and MER especially, no?

2008 Mar 23 07:15 PM

[eh:]

Given the bad news yet to come -- and when you see the data on deteriorating YoY and QoQ results, mortgage delinquencies, unsold LBO debt, etc, one suspects there's a lot of it out there -- right now the financials look more like a value trap to me. There are sectors that do not appear to be trading on fundamentals, like the homebuilders, and financials may soon fit that bill too, although the Fed's ill-advised actions will give some support short-term. I'll pass.

2008 Mar 23 07:49 PM

[siegfried:]

What's to keep the investment banks from creating more ABS and sell them to the Fed at par? It seems like the Fed is guaranteeing profits, isn't it?

2008 Mar 23 09:11 PM

[ItsJustMe:]

Before his investment in Wells Fargo, Warren Buffet always advised investors to stay away from banks because it was too easy for them to hide their true liabilities. As a CPA, I can tell you that is especially true of the non-regulated investment banks.

I would hope that people finding out that 80 billion dollars in "pretend" book value didn't actually exist last weekend would have taught some lessons, but apparently not. When the Chase auditors spent the weekend looking over BSC's books, they found more scary liabilities than assets.

Not only did the other 2 institutions looking at their books that weekend not bid on BSC, but Chase finally had to be bribed by the Fed to buy the firm for a fraction of the worth of their valid REAL ESTATE assets.

Quite frankly, I suspect that all the investment banks and quite a few commercial banks are just as insolvent. That doesn't mean they'll all go under however. If the Fed continues to keep them liquid as they are apparently trying to do, then it is possible that over the next several years, the large investment banks (those that are too big to fail) can slowly deleverage and get solvent again.

However, Chase established their true market value last weekend. When their stock prices begin to get closer to that level - and I suspect they will over the coming year as reality sinks in - I'll consider catching them on the bounce since they'll be under new banking regulations by that point...

2008 Mar 23 09:34 PM

[User 159681:]

If an investor has decided to acquire bank stocks, it is recommended that you do not discount or avoid purchasing BAC. It is currently trading at -$15.00 off its high, and the current yield is very good. This bank should do well in the long term.

2008 Mar 23 10:12 PM

[TM:]

I got into XLF right after the BSC meltdown, thus far it has proven to be rather lucrative, but given this market who knows what is going to happen this week. However, XLF is a good way to play the banks if you work at one and have trading restrictions...

-TM

2008 Mar 23 10:30 PM

[zenalgorithm:]

I believe it is up to the FED whether or not LEH goes BK in about 6-9 months.

I knew BSC was insolvent last year, considering they had $48 billion in MBS last April.

The goverment needs to not bail out the bubble speculators. The FED should not be purchasing this MBS garbage, these actions would subsequently sustain the real estate bubble...and perpetuate the unfortunate reality that houses aren't affordable to young people.

2008 Mar 23 10:53 PM

[phlash79:]

I agree the investment houses maybe an investment someday...but just in the last few days...S&P downgraded both GS and LEH...The monthly default rates of RBMS' (Residential Backed Mortgage Securities) is accelerating with huge increases in subprime loans not even close to reset dating back only to AUG 07...we haven't even started seeing many of the 2006 resets of 2/28 loans...the lending criteria was so loose that 2006 defaults will far surpass 2005's...and even the first half of 2007 2/28 resets are still 18 months away...CBMS (commerical backed mortgage securities) are seeing increased defaults...I wonder why when you have empty buildings because the economy is in a downturn...ALT A and even Prime borrowers are defaulting at higher rates...

Why would you invest in a sector that may be rallying on short covering? Or why would you invest to find a bottom when we are at least a year away from any type of recovery...CIT is failing as we speak...BSC's purchase will be mired in lawsuits for the foreseeable future...Earnings on banks will be lower for at least the next year...what is positive about this? or is it wishful thinking...I would imagine had Apple turned in a 42% loss and said it's earnings would be down 50% for the rest of the year...it wouldn't go up $20 rather it would tank to almost worthless...I think that the S&P is so heavily waited in financials that we see self-fulfilling prophecy in action...too many are wishing it would go up and others are artificially pushing it up...the deleveraging in commodities maybe the best sign we have of a move to bolster balance sheets...

But most of all I think the headline was misleading and could create misconception...yes when we are at a true bottom then bottom fishing will take guts...re run this article then...lol

2008 Mar 24 01:31 AM

[venividivici:]

Read the letters mate! You might learn something.

2008 Mar 24 02:49 AM