Stifel Nicolaus to Market: Banks? You're Nuts!

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Includes: WFC
by: TraderMark

Interesting to see the brokerages reactions to the "new bull market in financials" - again take anything the analysts say with huge amounts of salt but....

Morgan Stanley Cuts Wachovia, Wells Fargo

  • Morgan Stanley downgraded Wachovia (NASDAQ:WB)
    and Wells Fargo (NYSE:WFC) to "underweight" from "equal-weight,"
    saying it was concerned about the increasing deterioration rate
    in housing values and the relatively large exposure that the
    two stocks have to housing assets.
  • "We are underweight large cap banks and expect higher loan
    losses and reserve hikes to drive down EPS through 2009,"
    analyst Betsy Graseck wrote in a note to clients.

I liked the Stifel Nicolaus call even more - the language is so true (at least from my vantage point but of course I am biased)

  • The rally in regional-bank stocks since the Federal Reserve's emergency rate cut two weeks ago is overdone, Stifel Nicolaus & Co. said Monday.
  • The gains are "bordering on euphoric and occurring at a time when fundamental deterioration is accelerating, not stabilizing or even showing signs of slowing," wrote analyst Christopher Mutascio in a note to clients Monday.
  • Regional bank stocks overall have added about 25 percent in the nine trading days since the Fed cut the target interest rate three-quarters of a percentage point, he said.
  • Mutascio downgraded shares of Wells Fargo, U.S. Bancorp and SunTrust Banks Inc. because their stocks are approaching all-time highs.
  • The analyst is concerned Wells Fargo does not have enough reserves to cover bad consumer loans, particularly home equity lines of credit.

If I had to buy a bank it would probably be US Bancorp (Buffet is in it) and Wells Fargo (save for the fact they are so tied to California) - but they seem to be run very well. That said, this move is "euphoric" and bizarre. But this is the playbook - buy on panic Fed cuts, and benefit. The question is, and has been, is this your mother's 2 quarter's and done recession. If so, those were trough lows.

I somehow think not since this will be the first US consumer led "slowdown" (recession) we've had since early 80s. People are using the playbook of the early 90s and early 00s - which were business-led slowdowns (consumers kept astounding all the pundits with their unrelenting spending). While I can't see this downturn becoming as severe as the early 80s due to the "proactive" government we have nowadays (we will do anything to support asset prices and keep Americans spendings and getting into more debt), I do think it will be worse than what we have been conditioned to.

Again, that does not mean the stock market needs to go down. Asset prices of all forms will be inflated by easy money. Including stocks. But as for the economy - I am not bullish at all. Once again, parts of these companies (banks) business won't be returning at all. Period. So people thinking earnings will just go back to what it was in 2004-2005 are kidding themselves. But this will take a long time to come to bear, and stubborn bulls will continue their hopeful commentary.

So let's review this folks - back in late summer banks had a boost on first cuts as people were discounting no real economic slowdown, just a financial hiccup - 6 months from now things will be fine. Then by fall we began discounting just a 1 quarter "kitchen sink", still no US slowdown, and then financials back on their feet - 6 months from now things will be fine. Then early winter, well the financial situation is serious but no real US slowdown - 6 months from now things will be fine.

Now we are to the point we have a recession risk, and serious financial risk but it's still OK! The Fed cuts solve it all. So you can see the pattern. No matter what the news people discount "great things" within 6 months. And since the market discount ahead of time, we constantly get these hope rallies... since in 6 months everything will be fine. We are Pavlov dogs and we are trained in "heavy Fed cuts = everything will be fine". Maybe it will be. But one of these times the continued "Fed cuts creating new bubbles" will blow up in our collective faces.

I will say, being a US bank executive is the best job in the world - when you (bleep) up, the entire US government is behind you to make sure you can print money hand over fist. With the yield curve as is, any monkey can make money now in banking. So this will alleviate some of the issues... but again, at a major cost to us all on Main Street. Inflation.

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