With the recent run-up in financial stocks (God bless), they have also grown increasingly risky. Think for a moment. Stocks, as represented by the S&P 500, have risen 25.3% since its intraday low on 6 March. Through the same period, bank stocks, as measured by the S&P Banking Index (BIX) has risen 71.8%. Question: just how much more upside do the banks have after their stellar rise over the past month? That question alone will give pause to some, thinking that there will inevitably be a pullback in the very near future.
So sensitive are financial stocks that just one analyst opinion today, reported first by Bloomberg, initially drove the BIX down 6.8% at its lowest point from Friday’s close. The S&P Banking Index only came back when another prominent bank analyst opined on CNBC a different perspective. The BIX rebounding rather strongly in the last hour of trading, pulling the S&P 500, along with it.
Two individual opinions moved the market today. Amazing.
The first bank analyst to rain on the parade today was Mike Mayo of CLSA (who?). In his research note, he marked many bank stocks with a ‘sell’ rating, and some others with an ‘underperform’. The big statement out of the report was that bank loan losses could exceed that of the Great Depression by 2010 and that government efforts might not have the impact many hope. It also didn’t help that CNBC touted this dude as a star bank analyst. Excuse me, but I’ve been in the business for 18 years, and Mayo ain’t no star. If, admittedly, I’m a ham-and-egger, then Mayo is second string, a bench rider (in my view, Tom Brown of Bankstocks.com is among the best).
In the afternoon, belle de jour, Meredith Whitney, had a slightly different take: essentially that although banks are in such a bad spot, their severe problems are more or less expected, and that possibly banks might react positively to earnings announcements. Although she didn’t say that banks were buys — and stressed that she’s still bearish — she did say that she wouldn’t short them here. To lay ears, she expressed concern; in traders’ language, however, she signaled a buy, if only for the short-term.
There’s also a chasm between opinions regarding the changes to Financial Accounting Standard 157 Mark-to-Market. Some think that the changes were forced by politicians, and they are somewhat correct. They also think that MTM will lead to less transparency and won’t do a damn thing for the banks. Here, I think they are incorrect. The other camp believes that FAS 157 on level 3 assets was idiotic from the start. I agree, and believe that that accounting rule is based on a flawed hypothesis. To some measure, in my view, eased 157 can help bank capital, but it certainly isn’t an answer unto itself.
Financial companies will begin reporting first-quarter earnings. First up, Goldman Sachs. In my opinion, Goldman has a better chance of posting results that might meet or exceed expectations than miss them. The company is THE prime beneficiary from AIG’s Financial Products Group’s foul-ups. In addition, J.P. Morgan, Bank of America, and even beleaguered Citicorp, said that the first two months of the quarter were profitable. If so, Goldman Sachs probably did better, in my view.
If I’m correct, and Goldman Sachs, the first to report, exceeds expectations, then banks stocks might have (a little) further to go.
Risky, but I’m still in.
Keep pressing,
Chris Monoki
Reconnaissance Capital 