Bank on It

Banks were among the few companies demonstrating gains in the stock market today. With long-term yields rising due to a better-than-expected Durable Goods report, confidence in the banks caused credit spreads to tighten throughout the sector. What was the cause for the optimism in the financial sector? It was Dick Bove' and his prediction that bank share prices will quadruple the next four years. Although I agree that banks will continue to improve, a quadrupling of bank share prices is an aggressive call. Mr. Bove' has been consistently optimistic and incorrect for the last two years. The banks have headwinds which will slow, but not stop their recovery.


First there is new legislation. The Dodd bill will limit the leverage a bank can take. It will also restrict certain activities, such as proprietary trading. These changes will impede the banks' drive for profit. However, the new rules should result in less risk and cleaner balance sheets. This is good news for bond holders.

Secondly there are troubled. loans. Many people believe that loans which were considered to be troubled in 2008 and 2009 are all right now. This is not the case. What has changed is that profits (for most, but not all large banks) has enabled banks to offset losses. Some reports that severity among home equity loans may be approximately 90% . Not good for profits.


Banks will; be profitable and offer good values in the fixed income market, but be cautious of outrageous claims.

Speaking of banks and outrageous, did anyone see the new JPM preferred today? If you did you missed it. JPM issued a $25-par trust preferred with price talk in the 6.875% to 7.00% (bet on the low side). The deal is fairly large at 20mm shares, but it went quickly as many firms (but not all) gave their clients notice that the deal was coming. By 3:10 EDT the deal was done. This was just over an hour after Bloomberg News published a story featuring unofficial details.


Having deals sell out quickly is going to be the norm for the foreseeable future. There is just too much money chasing too few ideas. Investors who purchased shared for income should not be disappointed, but trading opportunities are few and far between.


I will be off line for a few days as I will be on the road. See you all next week.