ON A BOTTOM IN BANKS?

FEAR AND GREED

Barron's continues to make contrary calls on it's cover this weekend, following last Saturday's cover story suggesting a bottom in Housing market woes.  This Saturday's cover focuses on the Banks, with a story titled:  "What to Bank On".  Here's an excerpt:

"AFTER A RECORD-SETTING RALLY LAST Wednesday, the brutal selloff in financial stocks -- the worst for any major industry group since the technology bubble burst in 2000 -- could be over.

Many financial companies face additional loan losses and credit-related write-downs in the coming quarters, particularly if the economy stays weak into 2009. Yet 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.

Financial stocks in the Standard & Poor's 500 index are down 29% this year and off 43% in the past 12 months, even after a record-setting 13% gain Wednesday and a 6% rise Thursday. The group was up slightly Friday. Financials are the worst-performing group this year in the S&P, which is off 14%. And they've risen just 10% since the most recent bull market began in October 2002, against a 62% advance by the index. Financials are down to 14% of the S&P 500 from a high of 23% in late 2006 as more than $1 trillion of market value has vaporized, in part because of huge declines in such former mega-stocks as Citigroup (ticker: C) and American International Group (AIG).

U.S. financial stocks beckon because nearly every major company now trades for under 10 times projected 2009 profits. Though there is considerable uncertainty about '09 profits, considering the tough economic outlook, what is comforting is that many financials combine low forward P/Es with and low ratios of price-to-book value, derived by subtracting liabilities from assets and dividing by the company's outstanding shares. It historically has proven profitable to snap up major financials around book value because purchasers effectively are getting the ongoing businesses for nothing."

It's always tough to make a bullish case on anything in the throes of a raging bear market.  Fear gets overdone just as fiercely as greed does, especially where markets are concerned.  The Barron's article, regardless of one's view on this issue on going forward, is a solid, college try.

Comments

[Alex Tolley]

Michael, do you ever look back at old issues of Barrons and check if their predictions were correct?

I stopped reading Barrons in the late 1990's. Firstly Abelson, whilst a delightful writer, was essentially a permabear and missed the whole 1990's bull run. A study by an academic showed that the Roundtable recommendations underperformed the market (possibly because the participants were talking up the stocks prior to dumping them). Other writers, like the economics editor, Gene Epstein consistently misinterpreted the economy based on his Austrian school leanings.

Barrons may or may not be correct about financial stocks, but one has to wonder whether all the bad news is really out given the reluctance banks have in lending to each other. I would like to read an analysis of the yield spreads between treasuries and inter-bank rates and what they would mean in terms of asset risk. Maybe those book values are just too inflated to be meaningful?