Meredith Whitney, bank analyst extraordinaire, reiterated what she's been saying from long before the financial crisis propelled us into the worst recession in most people's memories. Banks are overvalued, she said, and the government enabled them to have better first quarter earnings than they should.Whitney said that "the underlying core, earnings power of these banks is negligible," and added that as consumer liquidity retracts and consumer credit contracts, "consumer spending is going to be less than people expect going forward."
Another problem she cites is the changing of the rules arising from government involvement, which could create a big problem for investors. "I would not own these stocks," she said.
As much as I have nothing but the utmost respect to the person who foresaw the financial crisis unfolding and the problems at the bank, I feel qualifiers must be added, especially in light of the recent rally in bank shares.
While Whitney calls the rally "the great government momentum trade," fact is that if you haven't been part of it and taken advantage of it, you've missed a great rally and opportunity to earn back a few dollars. This was a risky opportunity, perhaps, but one for the taking nonetheless.
I wouldn't dream of contradicting Whitney, and I've long stopped trying to make sense of banks' balance sheets. But as long as investors are disciplined and know when to take profit, there's nothing wrong with making a momentum trade.
Here are a few choice bank returns since March 9 lows. If you managed to get even a quarter of that, you did well:
Bank of America Corp. (NYSE: BAC) -- 330%
Citigroup Inc. (NYSE: C) --270%
Wells Fargo & Co. (NYSE: WFC) -- 187%
American Express Co. (NYSE: AXP) -- 153%
JPMorgan Chase & Co. (NYSE JPM) -- 121%
S&P 500 -- 33%
Closing Bell: Can't go up every day (BAC, HE, HPW, COMS, BRCD, WMT, AMD)
Wal-Mart grows profit and cash flow in Q3, but comps still ailing
Chasing Value: Ten stocks for 2010 -- Part 2
Reader Comments (Page 1 of 1)
5-12-2009 @ 12:59PM
Iridium said...
The question to ask is: Is there any support at all for any corporation outside of an IPO to jump 330% in the face of continuing losses?
Yes it was great if you bought shares and made money. It still stands to reason that the opportunity should have never existed in the first place. All the rally did was put more money in the hands of the people who should not have it to begin with.
Government involvement was neccesary to keep the shell game con going. Wall Street is just a giant ponzi scheme. The loss of mass market confidence last fall exposed the scheme for all to see. There was not enough money in the system to pay back all the investors that wanted out.
The government was forced to step in and pay trillions to keep the scheme affloat. That was the "Economic Pearl Harbor". That the scam would be exposed and the whole system of stealing money would be seen by the little people.
Perhaps Maddof was singled out for misdirection to create a story in order to hide the bigger scheme from view. Once the storm passed the too big to fail companies would be forced into bankrupcy one at a time rather than all at once.