Banking stocks have been beaten down to their lowest levels in years
thanks to the combination of mortgage and credit problems. It seems
like the write-downs on these losses continue to increase every quarter
by billions of dollars, which has many would-be investors sitting on
the sidelines until the picture gets a little clearer. However, a
zealous Federal Reserve issuing emergency rate cuts and a 12% rally on
Wall Street has many investors ready to buy now!
The Federal Reserve’s actions are often seen as a precursor to
banking stock turnarounds. In the past, an aggressive Federal Reserve,
such as the one we are seeing today, that dramatically steepens the
yield curve by cutting rates. Unfortunately, we have seen aggressive
rate cuts but the yield curve this time is inverted and only moderately
steepening – much different than in the past. It appears that banks’
benefit from lower rates is a bit too modest to offset the massive
credit problems we’re seeing today.
The real driver behind the growth in the banking sector today is the
borrower. Consumer credit is extremely weak these days as they relied
on housing prices to increase in order to pay off their debts with
longer term debts from other sources – a dangerous cycle. Meanwhile,
there is some risk that CRE and corporate borrowers may also soon face
problems in the event of an economic slowdown. Many believe that the
latter is not yet priced in to the market.
So, who was the big buyer if things still aren’t any better? Well,
there is some speculation that hedge funds took the opportunity to
close out some of their short positions. There appeared to be a
correlation between the top performers and most heavily shorted stocks,
although there were some long-term buyers who didn’t want to miss a
bottom that likely got in towards the end of the rally. Unfortunately,
the bottom is not likely here quite yet as mortgage defaults promise to
continue amid a much weaker consumer.
Banking stocks may be cheap now, but prudent investors may want to
hold off buying them until they can see the situation with some
clarity. However, one of the best banking plays for those looking to
take on some risk may be Bank of America
(NYSE: BAC) as they have relatively little subprime exposure and
recently acquired Countrywide Financial at bargain-basement prices!
Related Companies
JPMorgan Case & Co. (JPM)
Citigroup Inc. (C)
Wachovia Corporation (WB)