Banking Games IV

Bank Stocks

To buy or not to buy?!?!?

            Banking and other financial stocks have burning up the charts this year with monstrous gains. Should we jump on the wagon or take this opportunity to sell off or run away from the sector? Up until now I have only maintained a trading philosophy in this sector mainly through puts and calls. (I recently bought 1000 shares of Citigroup, consider this full disclosure) To buy and hold is a tough thing to do as it is hard to value some of these companies because we really do not know how they are carrying in their loan portfolios. There is still a lot of subprime paper out there on the books and a large number of floating rate or adjustable rate mortgages that will be resetting in the next 12 months. There is news this weekend about some of the prime rate mortgages meeting with some defaults. Folks, if prime rate loans to start to falter, then the economy is in worse shape that we think.

            Banks are also not making very many new loans. This is necessary to keep the flow of money moving in our economy. This was also the second reason for the government stimulus packages to these banks. To stabilize and then to make loans! Why are they reluctant? Perhaps they are afraid that they might not get paid back. That’s always been a risk you say? This is true, but until this decade banks never had things like NINJA loans or STATED loans on their balance sheets. (NINJA – No income, No job or assets; STATED – State your income, no W2 or tax returns required) It was all great with fat sales to Wall Street to get them off the books and go out and sell some more until this ticking time bomb finally exploded. Then there was no one to buy the stinker loans and look who got left holding the bank. It was suppose to be the banks and investment houses but it wound up being you and me, the US taxpayer. Now those loans are a thing of the past or at least they are until the next boom cycle and the question is to own or not to own. (Try getting a loan now without pristine credit, 80% Loan to Value of the property and stellar tax returns)

            I guess you have to decide what camp you are in. I am not going to advocate one way or the other but I will say that the 1000 shares I bought was purchased with “speculative” dollars. In another words, this is money I realize could be completely lost. Never purchase a stock until you evaluate the risk and in the banking sector you must be cognizant of the fact you could lose this money. Now on to “which camp are you in”

            If you believe that the economy is on the mend, the government intervention has worked, the financial system has used this bailout period to strengthen their balance sheets and returned to responsible lending, then now might be time to start evaluating the banks out there that have lost 50% - 80% of their value. Obviously a lot of people think that some are “too big to fail” and have run up certain stock prices in certain institutions. Doomsday scenarios rarely happen and even if one did, would green paper dollars really be worth anything anyway? So far the failures have been absorbed into the system. (83?) They have been smaller regional institutions and some people think that there are too many banks in this country anyway. I could go on but if you see yourself with this type of view, then consider investing some speculative dollars in the institution of your choice.

            On the other hand, if you think that the damage is far from over, commercial portfolios and credit card portfolios are next, and the banking system has used the bailouts and continued with business as usual, then perhaps you should stay away.  (If you’re really ballsy, buy some puts) There are a lot of headwinds out there. The same credit default swap problem that was in the mortgages also exists in the credit card portfolios. The commercial real estate market is still foundering and the unemployment number (although a lagging indicator) is still creeping higher. Look at people in your circle of influence. Are you and your friends and neighbors better off economically or no worse that you were before this latest recession? Most folks are not. I myself make ½ what I used to. (Part recession, part personal choice of job work life balance)

            This may or may not have helped you, but of you stick to the basics you should be all right. Before investing always do your own research. Stock tips at the water cooler break room or those that arrive on the office fax machine are for the gullible. Until next time make solid decisions, not only in finance but also in life.

This has not been an exhortation to buy or sell any stocks. This has only been opinion and not meant as investment advice. If you want advice, consult your broker of choice.