Are Bank Stock Fearmongers Shooting Blanks?

The Reflex, Flex ...

Strength in techs today was impressive, but market players continue to fret about financials. The Philadelphia Stock Exchange/KBW Bank Index fell 2% and is now down 19% from its all-time high on April 27.

The BKX's latest decline was attributed, on the one hand, to another upturn in bond yields and, on the other hand, to a Wall Street Journal article which detailed the "gathering storm" in banks' balance sheets, namely their commercial loan portfolios.

If the Journal says it, it must be so. So let's move on.

Oh wait, that's right. The whole point of this column -- and TheStreet.com itself -- is to not take things at face value, regardless of the source.

"There is not a pattern of increasing commercial loan problems that are significant in any way," said Mark Davis, vice president of research at Banc Stock Group, a financial industry research and investment house. "There is an overall increase [in problem loans] but it's relatively minor. And while there have been significant problems in select institutions [such as Summit Bancorp (SUB - Cramer's Take - Stockpickr)], it's not industry-wide."

A big factor in the declining reserves -- which Davis acknowledged is "an issue" for some institutions -- were the heavy write-offs taken by "very biggest institutions" in the third quarter of 1998 because of their exposure to Russia, Asia and Latin America. But "regional institutions that didn't have the same overseas exposure and write-downs have reasonably good reserves," he said.

Moreover, loan activity represents only 42% of all revenue generated by bank holding companies vs. more than 80% a decade ago, Davis said. Banks have new revenue streams (ie: fees) to keep cash coming in even if there were some large systemic problem, he said. (Which there ain't, he claims, in case you weren't paying attention.)

And as loans declined as a percent of their revenue base, banks are not the "interest-rate sensitive organisms" they are perceived to be, he continued. Also, technological developments helped banks "dramatically" improve management of their "asset-liability mix," he said, to the point where they are "interest-rate neutral."

Moreover, higher interest rates are actually beneficial to some banks, Davis claimed. As rates rise, adjustable-rate loans (including mortgages and credit cards) generate more revenue. Simultaneously, banks' cost of funds is nada for noninterest bearing deposits (like some checking accounts), which total 16% of deposits for the average U.S. bank. Thus: "net margin increases," he said. The real danger is if higher rates cause recession, he argued. Looking at today's retail sales report, "obviously interest rates have not gone up anywhere near enough to slow this juggernaut."

Davis recommends First Republic Bank (FRC - Cramer's Take - Stockpickr) and North Fork Bancorp (NFB - Cramer's Take - Stockpickr), in which Banc Stock Group's investment arm holds long positions.

"No question, we've got a conflict of interest," he said (probably with a smile, although we were on the phone so I can't verify).

Brian Gilmartin, a portfolio manager at Trinity Asset Management, agreed that the issues raised by the Journal are "not that big of a deal," especially since the financial industry is "awash in capital."

Banks are far better equipped to handle loan problems (should they arise) than in the past, he said. Furthermore, it's usually something new or unforseen that brings the next big problem.

"It's never the same thing that comes back to bite you on the ass."

Gilmartin would "definitely be buying" financial stocks in their current weakened state. He recommends (and is long) Bank of America (BAC - Cramer's Take - Stockpickr), Chase Manhattan (CMB - Cramer's Take - Stockpickr), First Star Bancorp (FSAR - Cramer's Take - Stockpickr), Fifth Third Bancorp (FITB - Cramer's Take - Stockpickr) and Zions Bancorp (ZION - Cramer's Take - Stockpickr), which recently agreed to merge with First Security (FSCO - Cramer's Take - Stockpickr).

River City for Tiger

In the wake of last night's report about turnover at Tiger Management, a source noted the hedge fund is a major shareholder of Federal Mogul (FMO - Cramer's Take - Stockpickr), which tumbled 22.9% today after its profit warning late Monday.

Indeed, Tiger held 8.5 million shares of the automotive parts maker as of June 30, according to federal filings. A source close to the fund said the position has been "significantly" reduced since. Still, it's safe to say Tiger suffered another in a growing string of major ouches.

Tiger's spokesman (who I suspect is getting sick of hearing from me) said Tiger doesn't comment on its positions. Federal Mogul's spokeswoman declined to comment on the firm's stock or shareholders.

The Walls Come Tumbling Down

Criticism that CNBC engages in market "cheerleading" suddenly has a more serious implication after the network announced it will acquire a 12.4% stake in Archipelago, an electronic communications network. Terms were not disclosed.

CNBC is not the first media outlet to take a stake in a trading vehicle, but there's something not quite right about this deal. None of CNBC's media counterparts in ECN-land -- Bloomberg, Dow Jones(DJ - Cramer's Take - Stockpickr) and Reuters(RTRSY - Cramer's Take - Stockpickr) -- has a parent which could have made the investment, much less a parent such as General Electric (GE - Cramer's Take - Stockpickr).

Moreover, as TSC's Dan Colarusso pointed out to me, GE is a major shareholder in Paine Webber Group (PWJ - Cramer's Take - Stockpickr), which seems a more natural fit for such an investment.

I didn't see/hear it, but I understand Mark Haines was squawking (pun intended) about the deal this morning. Haines could not be reached for comment. His CNBC colleague, Ron Insana, agreed to talk about it, if the network's PR folks cleared it. A network spokeswoman wouldn't give him permission to discuss it. She merely reiterated the company's position that it will deal with whatever conflict arises. (See TSC's story on the CNBC investment.)