Why It's Time to Invest in Domestic Banks

I was listening to a national talk radio show yesterday morning on the subject of "Is it still safe to keep your money in an American Bank"? (What a title, huh?)

The interviewees were discussing how the stronger banks (the ones that compose the UYG) could soon be gobbling up the smaller distressed banks at pennies on the dollar and reinvesting their deposits (the good stuff) in the current high yield environment. So rather than many smaller regional banks failing (the 150 or so recently mentioned in the national news), they will probably be "gone" (bought-out or merged before failing).

The larger domestic banks also have the advantage of being able to access the Fed's discount window anonymously (euphemistically called Temporary Auction Facility) at 2% and then loaning that money out in the current very restrictive credit environment to businesses through short-term loans at 10-12%. Said banks re-liquefy their balance sheets in the process.

Talk about having your cake and eating it too! The likes of JP Morgan (JPM), Wells-Fargo (WFC), Goldman Sachs (GS) et al get to pick up new assets and deposits at 50 cents on the dollar (or less) and also lock in a 8-10% profit on some new loans they make (“credit cruncher” rates). This is probably the best buying opportunity for domestic financials in 10 years (and for us who buy these financials). The well-managed large banks [who have cash and reduced their subprime or Alt-A mortgages earlier in the game) will be like cats chasing mice on a square mile of white linoleum.

I am playing the financials through the Exchange Traded Fund (UYG). At its low on Tuesday morning (two days ago), this banking index was down 80% from the previous year. Even the 2002 Nasdaq couldn't top that.

Comments

[djsnaz:]

Agreed. The bottom for the UYG was in at $14. Check the volume this week - just unreal...

2008 Jul 18 10:26 AM

[Brett Cole:]

Agreed. UYG has been negatively correlated with the VIX which hit a high of 38 on Tuesday. Early in the week was a great time to buy on fear... But UYG is leveraged, isn't it? Therefore, not quite a fair comparison to Nasdaq post internet bubble...

2008 Jul 18 11:26 AM

[westwest888:]

Oh, it's that easy. Just take the deposits and invest them in high yield instruments. What about the fact that those banks on average have 67% of their assets in US real estate? You know, the stuff that is going to go down another 50% in price?

2008 Jul 18 02:34 PM

[Ames Tiedeman:]

The bottom? No chance...You do not go up like a V. They re-test.

2008 Jul 18 09:42 PM

[Chipstocktr...:]

Not bank stocks. In the last two financial crisis (1990, 1998) they plummeted straight down, losing over 60% of their value in a matter of weeks, and then doubled or tripled over the next year after the crisis lifted. You buy these kinds of things when you feel least likely doing so (the last week). I fully expect UYG to cross 30 before the end of this year. I'll take that.

2008 Jul 19 12:33 AM

[Eli55:]

Enter your comment hereA large position in “Brady Bonds” whose value declined precipitously clobbered Wells Fargo a number of years ago. With patience the bond's price firmed and they became whole (may have suffered opportunity costs). Wells is taking a proactive posture on riding out the cyclical housing/mortgage market, working closely with delinquent payers, which was not done in previous cycles. While long term they again may suffer opportunity costs they will lose little or no money on their mortgages.

Their stores (branches) are growing by their clients using more of their eight product lines (5+ of 8 for individuals and 6+ of 8 businesses). They are incrementally buying bank companies and increasing sales.

They have no off the book loans, derivatives, CDOS, CMOS, SIVS or what have you, i.e. Enron, Citigroup. They did not make a market in these instruments, as purportedly did JPM.

Wells Fargo is a well-run money store.

2008 Jul 19 06:33 PM

[Lilliana:]

What has NAKED SHORTING done todisrupt the market?
IOHO..The SEC must remove this "sharp practice"
Selling ..without actually owning or covering a stock ..is nothing more than injecting gamblers luck into the commodity market. ....at the expense of the overall investor.

2008 Jul 20 05:13 AM