Jan. 11 (Bloomberg) -- No U.S. industry has faster profit growth than banks and brokers, and no group is more hated by investors.
Analysts say earnings at financial companies rose 120 percent in the fourth quarter, accounting for all of the income increase in the Standard & Poor’s 500 Index, and will triple by 2011, climbing four times as fast as the market. Should the estimates prove correct, the shares are trading at a 15 percent discount to the index, data compiled by Bloomberg show.
That’s not enough for money managers burned by the 84 percent drop in the stocks from February 2007 through March and more than 160 U.S. bank failures in the past two years. Financial companies are the least-favored equities, according to a Bank of America Corp. survey of investors with $617 billion in assets that showed 38 percent of 123 money managers are holding fewer shares than are in benchmark indexes.
“The stocks are clearly too cheap,” said Mark Giambrone, a fund manager who bought PNC Financial Services Group Inc. and Bank of America stock for USAA Investment Management Co., which oversees about $74 billion in San Antonio. “There may be some bumps in the road ahead, but for the most part those are reflected in the valuations.”
So far the analysts have proven right after the S&P 500 Financials Index gained 15 percent in 2009. Now, Jennifer Thompson, whose ratings for New York-based research firm Portales Partners LLC returned 31 percent in the past two years, eight times the gain for all the companies she follows, said PNC and Fifth Third Bancorp are poised to rally.
Analysts are more bullish on bank stocks in the S&P 500 than any other industry based on their average share-price forecasts, which call for a 14 percent rally, according to data compiled by Bloomberg. That would extend the group’s 145 percent rally since March that was spurred by better economic data and government rescues of companies from New York-based Citigroup Inc. to American International Group Inc.
The industry has risen the most of 10 in the S&P 500 during the past 10 months. The benchmark index itself gained 2.7 percent last week and closed at 1,144.98 on Jan. 8. Futures on the gauge added 0.4 percent to 1,146.10 as of 12:56 p.m. in New York.
The S&P 500 Financials Index of 78 banks, brokerages and insurers remains down 60 percent since peaking in February 2007. The slump is twice the drop of the S&P 500, which has lost 27 percent from its October 2007 record, after the subprime mortgage market collapse caused $1.71 trillion in losses and writedowns for financial firms worldwide and led to the demise of New York-based Lehman Brothers Holdings Inc. and Bear Stearns Cos., data compiled by Bloomberg show.
The problem here is that the proftis are not real. Yes, acocunting profits have jumped, but that is after over a trillion dollars of stimulus and bailouts from the US government, and an explicit "go ahead" from the government to both lie about the values of assets on the books as well as to pretend that clearly devalued loans are no devalued as long as the borrower is still credit worthy. As my readers are quite familiar, these tactics have created phantom earnings that have catapulted share price at the same time that true fundamentals have significantly weakened.
A picture is worth a thousand words...
Then there is the threat of extend real asset declines...
Here is a reformatted version of the bank model that illustrates the fundamental trends of all of medium and large banks that outperformed the S&P last year to put things into perspective (available to all subscribers). Banks that outperformed the SP 060110 2010-01-11 04:12:28 1.14 Mb
Instead if fighting what may an extended trend, I will release market neutral strategies to attempt to capture any downside that my occur when this fantasy stops as well as potentially benefit from a move upward if that move is significant enough. As many pundits ponder when the Fed will start to withdraw liquidity and QE en masse, I am doubtful it will be anytime soon. Any receding of the tide will show that this entire industry has no clothes.
I will also release similar fundamentals vs price trend comparison models for REITs and insurers later on today.
Disclosure: short all tickers mentioned above