NEW YORK (
) -- Every time big bank stocks get socked in the throat, it begs the question of whether to dive in while the getting is good, or run like hell before the mayhem gets worse.
The problem with trying to answer that question, however, is that Wall Street has come down a mild case of schizophrenia when it comes investing in the banks: Everyone is generally bullish about the stocks at these levels but no one is quite sure when the best time to buy them will be, even with second-quarter reporting season, usually a positive catalyst, a little more than a month away.
The recent market rout all began with
The firm has been hit hard in the past several weeks, first by charges of civil fraud from the Securities and Exchange Commission, then embarrassing e-mail disclosures, a criminal investigation from the Justice Department, a public whipping by Congress and a subpoena from the Financial Crisis Inquiry Commission -- all amid ongoing criticism in the press.
If Goldman was a lone populist punching bag, then the problem would be contained, but that isn't the case. Uncle Sam is reportedly investigating the practices of Goldman's white-shoe brethren, too. Meanwhile, a
poll released this week shows that it's not just Joe the Plumber who's angry at Goldman; a solid majority of investors and analysts think the firm is getting what it deserves.
>>>What's Goldman's Reputation Really Worth?
Since the SEC charges were first filed, Goldman has lost over one-quarter of its market value as of Wednesday's close. The broader U.S equity indexes have lost less than half that amount. Other banks have gotten clobbered as well, but relatively speaking, a popular bank-stock ETF was down "just" 18%.
As Goldman takes its lashes, the financial reform bill is still being hammered out in Congress, with no shortage of election-day rhetoric in tow. The bill threatens to chop up large banks into smaller, less profitable pieces. All banks could be weighed down by hefty capital requirements, operational restrictions, and fee caps if the Senate's so-called "finreg" measure passes as-is.
Meanwhile, Europe seems to have exploded overnight with a cornucopia of problems. In early May, concern heated up that Greece could potentially default on its debt. Those fears bled over into four other EU countries that were fiscally askew: Portugal, Ireland, Italy and Spain. Hungary was recently added to the list, creating a friendlier acronym of debt-stricken nations: PHIIGS, rather than PIIGS. (More fruit, less succulence.)
The EU's coalition government outlined a $1 trillion rescue package, but it failed to impress. Additionally, the people of fiscally conservative nations like Germany and Luxembourg were really ticked off that they'd have to pay for their profligate neighbors. That led to more angry rhetoric, a short-selling ban and worries that the EU structure was financially untenable. That, in turn, sent the euro's value into oblivion, stoking more worries about conglomerates that do major-cross border business.
The spiral didn't stop there.
All the talk of overstretched balance sheets in Europe and ongoing financial stress in the United States. got people thinking about other parts of the world, too:
¿ What about Japan, whose debt is approaching 200% of GDP, vs. roughly 115% for Greece, 86% for the U.S. and an average of 56% for the world?
¿ And then what about China -- can it remain bulletproof now that problems have turned global? What if demand weakens, particularly now that the Yuan isn't looking as cheap as it once did?
¿ And what if this whole "debt contagion" and market volatility leads to a double-dip global recession?
Let's not even get into the "flash crash" of May 6, which has largely been forgotten amid the more explicable problems that have since emerged.
"On a dike made out of grass, you can plug all the holes you want, but the water's just gonna come through," says Harley Lance Kaplan, who manages money for private individuals through a firm called Beta Industries.
Of course, at the center of the grassy dike lie the banks -- particularly the large, global institutions like Goldman and
and the money-center titans,
Bank of America
. Since the Goldman charges were announced, those six stocks have declined by an average of 21%.
Analysts recently had to face the inevitable -- slashing earnings and price targets, even if they continue to hold onto their generally bullish view on the sector. Many have shrugged off "finreg" concerns as overblown, asserting that U.S. bank exposure to Europe is limited and boldly declared that the economic recovery will conquer all. According to
, Wall Street generally holds "buy" or "strong buy" ratings on all of the Big Six banks.
"Despite the fact that negative momentum is likely to carry bank stocks lower than the 25% I had earlier estimated, I believe that these prices will more than regain their losses by year end," Rochdale Securities analyst Dick Bove said in a recent report. He outlined the "opportunity to buy these stocks at relatively low prices once again."
But separately, he cut earnings estimates for Goldman, Morgan Stanley, Wells Fargo and Bank of America, and lowered target prices for all of those except Wells Fargo. (Bove is most bullish on Citigroup, whose earnings estimates and price target he left alone. He says Citi is trading below liquidation value and that investors not buying the stock are "making a big mistake.")
Similarly, Credit Suisse's Moshe Orenbuch issued a research note last week titled "Large Cap Banks Positioned for Strong Book Value Growth." In the note Orenbuch suggested investors get particularly overweight in JPMorgan and Bank of America -- the biggest of the big.
"There are several headwinds facing the banking industry," Orenbuch acknowledged. But he still maintains that "improved earnings growth off of depressed levels
will help drive organic book value growth in 2010."
Collins Stewart's Todd Hagerman was a bit more circumspect, noting that the reform bill "has taken a more draconian turn," with 320 hostile amendments added to Sen. Chris Dodd's original proposal. Nonetheless, Hagerman maintains a buy rating on three of the four money-center banks, leaving Citigroup as the sole "hold" in his portfolio. He doesn't seem think "finreg" will have as much of an impact as some fear -- certainly not as much as the recovery.
Oliver Ireland, an attorney who works with financial firms at Morrison & Foerster, tends to agree. Though some of the "finreg" proposals sound scary -- particularly proposals by Sens. Blanche Lincoln, Sen. Richard Durbin, Sen. Susan Collins, and former Federal Reserve Chairman Paul Volcker -- Ireland notes that the final rules haven't been decided, that they will take time to put into effect, and that they will be meted out according to regulators' judgment, rather than political sentiment.
"This is worse than anything in my experience and it's still playing through," says Ireland, referring to broader financial stress over the past few years. "You throw a big rock in the water, and it makes big ripples that head out and hit the shore and then come back at you. We're still seeing the results of the splash."
So, if the Euro-zone reached a resolution for its burgeoning debt crisis, the impact of "finreg" might not be quite so bad and Wall Street is bullish on big banks, why are their stocks still so depleted?
"The financial analysts, which the sell-side salesmen sift through, they're saying we're more interested in the financial stocks now than we were before," says Chuck Hill, chief market strategist at First Coverage. "In my view, it's high-risk but improving, too. But that doesn't count as much as what the sell-side is saying to their institutional clients. Clearly over the last six weeks, their outlook for buying financial stocks has declined."
Given that view, it's only natural to ask what it will take for the current correction to do an about-face. King Lip, chief investment officer at Baker Avenue, says his sentiment indicator shows a market that's only bullish on 20% of stocks. Lip, who's also quite bearish, won't become optimistic til that level breaches 50%, and investors start buying not just on good news, but bad news as well: "Rising tides lift all ships," he says.
Lip is positive only on gold and cash, and particularly dour on bank stocks. He thinks they'll trade within their current range until second-quarter earnings begin rolling out in mid-July. Then, investors will get a better sense of whether the headline news has had as much of an impact on the bottom line as it has had on investors' gut feelings.
Ireland, of Morrison & Foerster, explains the current sentiment by reflecting on the events of the past few years: "People got hurt -- individual people and institutional investors got hurt. They remember that pain and they got skittish. They don't want to get hurt again."
Kaplan, the financial adviser, has been advising clients for 27 years and takes a "here we go again" attitude of the current market drama. He sounds a bit like a financial Mr. Migayi of
fame when outlining his macro view.
"The market will reach new heights like it never reached before," says Kaplan. "Hopefully it'll happen in my lifetime, but it'll certainly happen. But it'll also crash again too. A broken clock is right twice a day."
-- Written by Lauren Tara LaCapra in New York