Barron's Goes Bullish on Banks, Again

For the second time this year, Barron's cover story goes bullish on financials.

S&P financials are down 43% over the last 12 months, even after major bull runs on Wednesday and Thursday. More than $1T in market value has disappeared, and the once mighty sector now boasts just a 10% gain over the duration of the bull market than began in Oct. 2002. So why the bullishness? 

 A slew of earnings reports last week from marquee banks like Wells Fargo and JPMorgan Chase suggests that most financial companies have sufficient earning power to offset a rising tide of bad loans and should be able to absorb further write-downs without having to seek significant amounts of additional capital. 

In 1990, financials took a 24% hit. In 1991, they jumped 43%.

Financials have taken a cumulative $447B in losses and write-downs, and raised $331B of new capital. A detailed study by analysts at Keefe Bruyette & Woods sees banks needing another $30B - which sounds manageable even with the Street's decided lack of appetite. The firm likes Fifth Third Bancorp (FITB), National City (NCC) and Sovereign Bancorp (SOV).

Nearly every major financial name trades for less than 10x 2009e earnings. They also trade at low price-to-book value ratios - and history has favored those who buy big financials for book value, getting their ongoing revenue streams for nothing.

"This is a once-in-a-generation opportunity in the financials," money manager Mark Boyar says - naming JPMorgan (JPM), Lehman (LEH), Travelers (TRV) and Bank of New York Mellon (BK).

Looking at regional banks, Barron's notes their deposit bases - usually a much-hoarded asset - are now being largely ignored, with names like SunTrust Banks (STI), Marshall & Ilsley (MI), Comerica (CMA), Wachovia (WB) and Zions (ZION) trading at around their tangible book value.

Buffett followers can pick up his financial holdings - American Express (AXP), Wells Fargo (WFC) and U.S. Bancorp (USB) - some for less than what Buffett paid.

There's no guarantee volatility won't continue to haunt the sector. Barron's Buffett-based advice: Buy good companies at fair prices, and then turn off the quote screen.

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• Barry Ritholtz is freaked out by the fact that Barron's, WSJ and NYT posted coincidental stories championing a banking sector bottom. "Can you recall the last time 3 major media players all picked the bottom in a market or sector on the exact same day -- and were all proven correct?" he asks. 
• While specifically addressing the issues surrounding Fannie Mae (FNM) and Freddie Mac (FRE), Porter Stansberry thinks we're nowhere near clearing the woods on this one. "I believe we have begun the monetary crisis that will end the dollar standard that has governed world trade since World War II." His picks: gold (GLD) and silver (SLV). 
• John Gilluly thinks we're about to see a slew of big banks snapping up smaller fry at $0.50 on the dollar. They'll be "will be like cats chasing mice on a square mile of white linoleum," he says. He like Ultra Financials ProShares (UYG).

Comments

[Medici]

Barrons Loved GM, The Housing Sector and Now Banking? They Will go 3 for 3 with this pick, 3 for 3 to the downside that is.....Maybe there is still a little pop left after last weeks huge run, but the banks are a long way from being outright buys-

[Dame Daxx]

Meanwhile this from the BBC today:

"The chairman of one of the world's most powerful banks has warned that house prices in the UK and the US are likely to fall for another two years.

Sir Win Bischoff, the chairman of the US banking giant Citigroup, has told me that he expects it will take two years for these markets to find a floor. "

tinyurl.com/59vphj

If the housing market will continue to deteriorate, and consumer credit along with it, I can't see how they can call a bottom in Financials.

[Jimmy Lathrop]

A better title for the article would be "Barrons assures shareholders that banking advertising revenues will pick up after puff pieces spur brief rally"

[investor88]

As a practical trader, by all means call the bottom but put in stop loss; if stopped out re-assess before the next move. This is one way to control risk to the portfolio. Of course there are other methods of trading/investing, it depends on personal investment style and strategy. Maybe investing is both a economic science and an art.

[JPD]

Barrons long on banks can mean only one thing:
Short the bejezzus outta banks. Just like last time.

They make investing easy.

[valueinvestor123]

Barron's makes up part of my "go opposite trifecta" which also includes Fast Money and Jim Cramer. Go the opposite of those 3 sources and you can't go wrong.

[bearfund]

There are only a handful of really good banks out there, WFC and USB among them. But those are not the companies available below book and 8x earnings. In fact both are expensive again. They were good buys at 21 on Tuesday but the upside is gone now. As we've seen time and again, once Buffett is in a name you can forget making any money investing in it; investors make all their money when they buy and "Buffett stocks" are always expensive. The best we get now are a few great trading opportunities like we had last week.

As for the rest of the banks, go ahead and take this "once in a generation" opportunity. Be sure to get the certificates and frame them; that stuff might fetch a decent price on eBay later on.

[dixie]

There are many small regional and community banks that are trading at a fraction of book. Some have taken small losses and others have had their earnings trimmed.
However, as the economy begins to stabilize in 2009 and the growth in NPA's fades, earnings will again accrue. These "main street banks" understand the local commercial customer better than their "wall street" counterparts.
Stock valuations in this sector may well increase 50% to 100% within the next 2 years. Discover the babies that have been tossed out with the proverbial bath water.

[Egg]

I don't get it.

So they decided to "call a bottom" after the stocks rallied 25% or so from the bottom?

Really going out on a limb, aren't they?

[Dirtt]

Barry Ritholtz poses the question when did three major publications announce "coincidental bottoms?" Not sure but...

The Harvard Economic Society is quoted as follows:

on Jan 18 "...there are indications that the severest phase of the recession is over..."

on Apr 19 "... the outlook is favorable..."

on May 17 "...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."

on June 28 "... irregular and conflicting movements of business should soon give way to a sustained recovery..."

on August 30 "... the present depression has about spent its force..."

But wait. August 30? It's still July. Ahhh. But is it 1930?

credit to gold-eagle.com for the quotes. It would be entertaining if it weren't so pathetic and serious.

[quetzalcoatl]

I've looked at some of Mr. Hoffman's stock picks in the recent past and was consumed by paroxysims of fear. The opinion expressed in this article produces the same result. There will probably be a further upsurge in banking stocks when BAC reports 'better than expected reduced earnings'. However, there will be a time to come when those who invest now will rue the day.

[SA Editor Eli Hoffmann]

Hi quetzalcoatl,

Thanks for taking the time to comment.

Just to set the record straight, these are by no means my stock picks. Seeking Alpha summarizes some of the major Barron's articles each week, and I take a part in that project. But the opinions expressed are those of Barron's magazine, not mine nor Seeking Alpha's.

[quetzalcoatl]

My apologies, Mr. Hoffman.

[contrarian@coalmine]

I'll take the second derivative of this contrarian arguement and state the following investment thesis: if the majority of Wall Street pundits think that the calling of the bottom in financial stocks by major financial media sources is a contrarian indicator, then perhaps the bottom in financials is actually here, and that covering one's shorts is the prudent measure (i.e. taking profits on a short bet during maximum fear,distain,or capitulation within a sector or at a targeted stock).

Remember, stock bottoms are always reached, and they're rarely reached, even at the worst of times, at zero. It's the counterpoint of stock valuations never quite moving beyond the finite ceiling of the "greatest fool", who knows he's always the last to the party, and has no willingness to place the bet that he isn't.

contrarian@coalmine

[Dame Daxx]

Maybe an intermediate bottom in a secular bear market in financials. Citibank's stock is still where it was about 10 years ago. I expect to go long the XLF or the UYG this week, for a 6 week or so trade, but I'm not calling a bottom in a secular bear market just because of a short covering rally in a deteriorating Macro environment.

[DavyJ]

Re: "Barry Ritholtz is freaked out by the fact that Barron's, WSJ and NYT posted coincidental stories championing a banking sector bottom. "Can you recall the last time 3 major media players all picked the bottom in a market or sector on the exact same day -- and were all proven correct?"

That can be taken two ways. Either he's skeptical that they are right or he's convinced that they are right.

A third way to take it might be the there was some pressure from the "invisible hand" and they succumbed.

I lean towards the latter.

[Kunst]

The real bottom in financials will come when the big overseas (oil exporters) money decides its time to trade in their dollars for banks.

[jse17]

Who knows, perhaps Barrons received confidential news that Goldman has purchased all of the financials they want/need and thus, it is time to move this universe up!

Additionally, pervasive negativity is the rule at or near bottoms e.g., see 90% of the previous posts! In any event, Eli’s work is sincerely appreciated!

[DavyJ]

Oops!

After doing a little research on "invisible hand" I find that it doesn't mean what I thought it did.

So I rephrase my statement to read: A third way to take it might be the there was some pressure from "behind the scenes" and they succumbed.

[gaucho]

When Barrons is Pumping the big boys are dumping. This rally is caused by limited short selling. After the initial squeeze then you will see a return to the slide. The fundamentals have not changed.

WFC was mentioned as a great investment but looking at their financials you see that they CHANGED THEIR ACCOUNTING method for writing off loans delinquent from 90 days to 120 days. They would have missed earnings by 4 cents instead of beating by 8 without this trick. Another trick to raise share prices was to raise the dividend. For a company in financial distress this was a stupid posturing move. Watch the dog and pony show next quarter.

City Bank has 330 billion in off the books VIEs that when marked to market are worth about 1/3 that price. With just this one category they need to write off 210 billion and given that they have 90 billion in share holder equity they are sunk. Now add the SIVs and the CDOs and the XYZs etc and you get the picture.

Many banks have miraculously 'reduced their exposure' to this toxic crap. While doing so they have written down a small fraction of that amount. This is done by moving it off the books. Any one hear of a company called Enron.

Who is that man behind the curtain?? Now click you heels together three times and repeat the banks are screwed, the banks are screwed, the banks are screwed and come back to reality.

[Norman Lepoff, M.D.]

Valueinvestor123 said it well. Especially in the reference to Cramer.

[The Hammer]

It seems the market has corrected a nice portion of the toxic securities, but what about the upcoming credit deterioration of all those poorly written loans, credit cards, auto loans, student loans home equity loans. residential & commercial loans due to a weakening economy.
The banksters have heisted the country with their greedy ways.

[whenmusicstops]

Ok! My mattress is full of cash! Now what?!

[The Hammer]

The issue we have to worry about most in the future the downgrading of US sovereign debt. We are on our way to achieving this one with the absolute disaster of fnm & fre and the reckless ways of wall street and Banksters. How long can we print , dilute and forgive our way to prosperity?

[Kunst]

You got it, Hammer.

See my post at
7/20/08: seekingalpha.com/artic...

[iThinkBig]

Dixie and Kunst provide the best comments on this article in my humble opinion. For Dixie, he said:

'These "main street banks" understand the local commercial customer better than their "wall street" counterparts.
Stock valuations in this sector may well increase 50% to 100% within the next 2 years. Discover the babies that have been tossed out with the proverbial bath water.'

Kunst mentions when big oil overseas starts buying banks then bottom has been reached. One nuance Kunst, don't think this will just be overseas, big domestic private equity tycoons would also buy. And I am not talking about Paulson & Bernanke making weekend deals either, that is not a bottom, that is desperation to prevent systemic collapse.