Keeping My Money in the BanksThe financial future may be imagined, but it can never be absolutely known, which brings me to the bank stocks. Contrarian bets that ignore the trend (like shorting housing-related securities two or three years ago) often yield large rewards. Bank stocks have never been so cheap, and, in the fullness of time, long positions could be rewarded. As lynx-eyed Dick Bove remarks in his research missive over the weekend, "the situation is simply not as bad as it appears." Dick, who I have known personally for over 30 years and who I admire, makes the following points in his piece, which is entitled, "Bank Stocks Are in Free Fall, but Banking Companies Are Not."
- 1. Banking cash flows signify the industry's health, and the signs are positive:
- common equity builds;
- reserve builds; and
- deposit flows.
- Market share shifts benefitting unit sales for core group of industry leaders; and
- margins are stable but are about to rise.
2. Like all companies, growth in unit sales at healthy margins determine secular profit growth:
3. Bank cash flows are adequate to allow these companies to pay and increase their dividends.4. Loan losses and security writedowns are cyclical, not secular, phenomena.5. Disparity between stock prices and industry health creates investment opportunity.6. The catalyst that will turn bank stocks up at this point is unknown, but by one measure, core bank earnings power is near its peak.
'Blahflation' Around the Corner?The U.S. stock market has rallied impressively since the March test of the SocGen low, racking up solid gains in April and May, but my bearish intermediate-term stock market outlook remains, due to multiple concerns:
- inflationary pressures are mounting, consumer confidence is dropping;
- credit turbulence remains a market mainstay;
- the Federal Reserve faces the dual policy challenges of moderating economic growth and rising inflation; and
- there is an increased likelihood of a squeeze in corporate profit margins (which will lead to disappointing profits).