Its Unanimous: Banks Have Bottomed!

Very strange confluence of media coverage this morning on the banking sector. All three major financial papers (WSJ, NYT, Barron’s) have stories on the bottom of the banking sector:

WSJ: Jitters Ease as Citi, Rivals Show Signs of Bottoming Out

NYT: Hope, and Hints, That Financial Stocks Have Finally Touched Bottom   

Barron’s: Buy Banks -Selectively  (cover story)

Can you recall the last time 3 major media players all picked the bottom in a market or sector on the exact same day — and were all proven correct?

Perhaps the caveats are worth noting — I found it interesting that all publications had some moderating hedges in place (as opposed to some recent embarrassing cover articles).


As we noted early this week, we covered most of our shorts in the financials, and are now looking for a bounce play in these names. However I remain unconvinced that Banks are now a good long term investment.

Why? The business model of Leverage and Capitalization is now kaput. Its a new era of De-leveraging, and Re-capitalizing.

A long time ago, Banks were 3-6-3 spread players. Pay your depositors 3%, make loans at 6%, be on the golf course at 3pm. But the end of Glass Steagell, and the mergers with investment banks, have put an end to that simple but profitible business. For the past 10 years or so, we seen a model that involved taking on a lot of risk, then leveraging it up 25X, 35X, even 65X (for Fannie).

Now that model has come unglued. Banks of all types are unwinding risk, de-leveraging (selling off assets held on borrowed money) and raising capital. This means that until a new model is developed, profits will be anemic and the shareholder capital structure is about to get wildly diluted.


Freddie Mac (FRE), with its $6B cap, is seeking to raise $10B. That will be enormously dilutive to both future earnings, and shareholder equity.  Remember that Lehman Brothers (LEH) capital raise? $6 Billion secondary priced at $28 with 8.75% coupon and an %18 conversion premium? The stock is now $19m, the cap is $13.3B. After the last debacle, good luck with future capital raises — they are likely to be treated much more skeptically.

Is "the" bottom in?

Well, it certainly looks like "a" bottom is in. 

But longer term, this is a sector that is likely to have continued write downs, weak earnings prospects, and a whole lot more regulation and government supervision than it got away with in the past. P/E compression may also be in the cards — especially if we see some dividend cuts from some of the bigger houses. 

Unless you have a decade long time horizon, does that make you want to rush out and own these things anytime soon?  Me neither . . .

Charts & Tables:
click for larger graphic



UPDATE: July 20, 2008 8:23pm

Bottom_banks Several readers have noted that this is Barron’s 2nd attempt to tag a banking bottom in 4 months.

The last time out, they recommended as "cheap" Merrill (MER), Citigroup (C), UBS, HSBC  (HBC), Morgan Stanley (MS), Deutsche Bank (DB), Bank of America (BAC), Credit Agricole (ACA) Washington Mutual (WM) and Credit Suisse (CS).

Ouch . . .

Hitting Bottom? Several Banks and Brokerages Are Ready to Pop Up for Air   


Forbes Video: More bank write-downs, U.S. recession, Avoid Home Builders (3/28/08)

Quote of the Day: Citibank on Glass Steagall (July 08, 2008)–3.html

Video: Still Too Bullish (Apr. 1 2008)>


What to Bank On
Barron’s JULY 21, 2008

Jitters Ease as Citi, Rivals Show Signs of Bottoming Out
WSJ, July 19, 2008; Page A1

Hope, and Hints, That Financial Stocks Have Finally Touched Bottom
NYT, July 19, 2008


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What's been said:

Discussions found on the web:
  1. VennData commented on Jul 19

    All three lose readership in bear markets. It’s self-preservation. …as opposed to wealth-preservation.

  2. George Phillies commented on Jul 19

    Have banks bottomed? There’s a remarkable coincidence of press opinion here. However, the interesting parts of Option Adjustable mortgages of various types are still incoming, and I just saw–may have missed them in the past–the first press discussion about high default rates in the OAR mortgage rather than the subprime mortgage group.

  3. mike commented on Jul 19

    Im with Meredith Whitney….stay away !!

  4. Chief Tomahawk commented on Jul 19

    Has anyone seen anyplace why Bush took so long to remove the Executive ban on off-shore drilling? Why didn’t he do it a year ago? One would figure it just would’ve placed the public’s ire all the more on the Dems for blocking the issue.

    This morning, on the Fox Business Block, Bush is being credited/lauded for the week’s drop in oil prices. However, Sharon Epperson, CNBC’s reporter in the pits on Tuesday, said the first definitive selling came from banks liquidating positions to raise badly needed capital. Then the demand destruction evident in Wednesday’s government inventory data accelerated oil’s slide. So to did news of the U.S. government sending an envoy to a metting with Iran (de-escalation of geopolitical tensions.)

  5. Mark E Hoffer commented on Jul 19

    these ‘Banks’, even by their own, generous, accounting rules, are Bankrupt. They have been, utterly so, for over a year..

    if one has a decade long time horizon, they’d be better off planting fruit trees..

    these ‘Headline’ stories are just more proof that their purveyors have become our TASS, dealing in their own version of the ‘truth’, at our expense.

  6. UrbanDigs commented on Jul 19

    I think this bank rally will last longer than most think, maybe 6-7 weeks, off and on but generally trading higher.

    Tons of negative news out there, beaten down stocks, beaten down estimates, tons of shorts. That combo can lead to a fierce and unexpected bear market rally.

    However, the general picture is still bleak and the key takeaway I took from better than expect earnings, was JPM CEO Dimon’s acknowledgment that it is spreading to higher quality debt classes.

    As this continues, alt-a & prime, how could these guys possible be a good 12 month play?

    I say, short the coming rally btu give it time and let the shorts get squeezed first.The only thing that may stop it is an unexpected event that rattles the credit markets from already rattled levels

  7. Rich Shinnick commented on Jul 19

    SKF now under $140.00. SRS under $100. For many of us the question is not whether the banks have bottomed but whether the double inverse shorts have bottomed.

    The MSM is always going to extrapolate the last 3 days action as if it will go on for years….. Did BoA deserve to be at $18? No. Does it deserve to be back to $28? Maybe. Does it deserve to be at $40.00 again, Hell No!

    Did oil deserve to be at $147? No, OPEC does not want to destroy their customer base, but will it go below $100? Doubt it, that is probably maximum pain tolerance but sustainable. I just don’t think oil producers are going to take less ever again. Too much cash in reserve, they can afford to manage supply at this point.

    Will we drill here at home? Maybe by the time my kids are in college…they are 3 and 1 currently.

    It was a great ride this week!

    I guess all you can do here is play the volatility.

  8. bdg123 commented on Jul 19

    What we did have is a counter-trend move during OE week. Almost predictable in a steep decline. And, we had quite a few anecdotal data points that sentiment was getting very extreme including volume and new lows. So, we had alot of people cover their short positions. That’s not bullish. In fact, it opens up the market to another potential shove down.

    If I were to speculate, and that’s all it is, I would say the markets have finally discounted the housing crisis in banking stocks. Since that isn’t the problem the global economy faces, we might see banks tread water until enough market participants see the true problems start to arise.

    This has taken much longer than I would ever hadd anticipated to come to pass. That is not good news.

  9. John commented on Jul 19

    I’m inclined to buy into the conventional wisdom here as it applies to the major banks with the exception of Wachovia. As for smaller and mid size banks like WAMU obviously a bunch of these are going to fail although there are some of them who are going to do well snapping up cheap assets, but I suspect the majors are starting to get their arms around the problem. You have to remember they are basically down 50-80% from their peaks and most are selling way below book. You can argue their traditional business model is broken and this is going to depress earnings for years but at the end of the day these guys still sit at the crossroads of international business levying tolls so it’s not going to be too long before they work out new business models and raise the tolls on those parts to their model that are still working. Sorry can’t go with on this particular lane of pessimism BR but no matter there are plenty more.

  10. Barry commented on Jul 19

    About our anti-semitic troll:

    One should never rise to that sort of flame bait.

    I delete, ban and purge anything associated with it. Never argue with a bigot — its a waste of your time . . .

  11. Nihilism commented on Jul 19

    As BDG pointed out above — we have seen two aspects playing out in the market!

    # The psychological moves driven by:

    It’s all about me and my pain crowd (financials): The Goldmans, broker-dealers and banks controlling the market moves in short run (OE, Oil, their “economic” hedges).

    I bet if they investigate the big player who sold oil (down $9) during that 10 minute span on Tueday during Benny’s testimony and probably bought equities/tech — it would come out to be GS or some other broker-dealer playing the dirty tricks in the short term.

    # The real economy and average folks: Which is slowing down and hurting.

    And I doubt that any person with average understanding/feel for the economy would say that things are improving over next 6-9 months. And that will come back to haunt the market once the short term “mind-driven moves” take a back stage and the market is forced to face the reality.

    Combine that with:

    – the possibility of fed showing real–backbone (which may sound like an oxi-moron for the US fed).

    – OBama leading the polls in Sept/October and possibly winning the election and hence possibility of higher taxes for the market participants.

    – More regulation and I would say at least a re-test of the lows if not lower prices for the financial ETF XLF ($16.77) by October/November.

    The acceptance stage has arrived for wall street and if they have a fake inside after all this — they have no bottom when it comes to individual names.

    Thaks BR for adding the “bailout” sub-index to the blog — I was suggesting that back in March when the city was young and growing.

  12. JP commented on Jul 19

    All three biz papers telling me it’s time to buy banks can mean only one thing: Short the bejezzus outta the banks.

  13. Alex commented on Jul 19

    A related problem facing most financial institutions is that the originate to distribute model is badly broken. In a sense, this was a form of economic leverage, and it is not nearly as lucrative as it once was. As a result of securitization of practically everything being a shadow of its former self, revenues will be structurally much lower for many years to come. What will be the earnings engine to replace this big money maker? Still unknown at this time…

  14. rational commented on Jul 19

    When newspapers published pictures of Bears on their covers, we were told it is a sign of the bottom. Now that the magazines are publishing pictures of Bulls (urging us to buy bank shares), should we construe that as a sign of the top?

    Satire alert…

  15. DL commented on Jul 19

    Friday’s Barron’s provides another (and more realistic) view in the “Investors’ Soapbox” section:


    “Morgan Keegan says the latest rally is not sustainable.”

  16. PeterR commented on Jul 19

    BKX/SPX ratio bottom is market bottom?

    Could actually be a market top IMO, similar to 2000.

    See 5th chart on p. 8 at link above.

    Similar to second chart posted by BR above.

    Have a good weekend!


  17. Jeff commented on Jul 19

    Amen Barry. I may start nibbling at a financial ETF for my retirement funds (am at least 25-30 years from retiring), but short term, I don’t like this sector at all until they come up with a new gold rush. Until that time, caveat emptor.

  18. Alex Sharp commented on Jul 19

    Barry, I just wanted to say thanks for writing such a great post. I couldn’t agree more that the main financial periodicals often paint way too rosy a picture. Although, I’ve never read Barron’s much, my WSJ subscription is about to expire, and I can’t find a good reason to re-up when there so much quality content on the web, such as yours. On a side note, the only reporter in the journal that I think did a good job of writing honestly and critically about the economy and markets is Justin Lahart, who used to do the “Ahead of the Tape” column, but it looks like he’s been moved off the front page of the Money & Investing section. Big surprise.

  19. Lucy commented on Jul 19

    Classic Bear Market Rally.
    Lower lows, higher lows.
    What changed this week? Government regulation, more government bail outs proposed and Citi didn’t lose quite as much as expected. Citi still pays a dividend dispite the fact that bu their own admission they will not have profits for another year. What didn’t change most of the major financial instituitions still face billions in right downs, credit failures are growing into prime loans and inflation and interest rates are on the rise. Merrill rallied because is had double the neagtive earnings it was estimated to have had….? And don’t talk about this being the kitchen sink quarter because that was exactly what was siad after the last 3 no profit quarters. After August 2007, after BSC ceased to exisit, the bottom was suppossed to have been put in. Yet through all of this the asset class that this market bubble was built on continues to decrease in value. We need one or two of the majors to cease to exisit (leh, mer?)and we need these major institutions to figure out how to make money (other than GS). This time last year it was the 2nd half of 2008 and this mess was going to be done. I think we are at least 9 to 12 months away from a bottom.

  20. Donkei commented on Jul 19


    Same here on Lahart. Although I love having the hard paper to ease the start of my day, when the info, without the bullshit, is available for free, why pay for it?

    Great observations, Barry. I don’t get where everyone calls a bounce from near Armegedon a recovery. All dying cats have a few twitches left in them before they finally expire.

  21. larster commented on Jul 19

    Great post Barry.

    One flaw in the Barron’s article was their use of stated book value for a measurement tool. After multiple write-offs, does anyone believe the banks stated book value? What about the SIV’s? Have all of those been uncovered and fairly valued? What will really kill the financials is the continual building of false hope. sort of like the husband who falls off the wagon after the fifth promise to be sober.

    OT, but related, there was an interesting column by Ignatius in the WAPO yesterday, relating an interview with Paulson. Paulson is in full Pravday mode, rewriting history. According to the interview, Paulson warned Bush that the financial system was under heavy stress and that the derivatives were going to blow up at some time, when he interviewed for the treasury job. From everything I have read, you do not walk into Bush and tell him that he is sitting on a pile of crap that will shortly hit the fan and expect to be hired. If only Paulson was as smart in real time as he appearts to himself in retrospect.

  22. johnnyvee commented on Jul 19

    The next couple of months will be the eye of the storm. The Option Arm loan adjustments are coming. The equity in the property is gone in order to refinance and there is no motivation to pay the adjusted rate. The next big-down is the one that we will find a bottom-one more year.

  23. Francois commented on Jul 19

    1) Big rally on the lousiest of fundamentals in decades. The 16 of July move in the SPDR was an 11-sigma (!!) event. As per Doug Kass, “the odds of an eleven standard deviation event is equivalent to the world ending – between three and four times.”
    Hmmm! Looks like a healthy rally to ya?

    2) Selective enforcement of the naked short rule to “protect” 19 publicly traded financial institutions.

    3) 3 covers in financial medias claiming a bottom in the banking sector.

    My conclusion?

    To quote a financial (mad) genius: “Sell! Sell! Sell!”

  24. Baba commented on Jul 19

    Hey Barry,

    Great blog, I love it.

    I see a lot of similarities between what is happening now and the March – May rally. We’ve had gov’t intervention and both during earnings week, good earnings were greeted with a pop and companies reporting bad earnings didn’t get hammered, because the market had already priced it in.

    There will be a lot of new money going into financials and I think these people will eventually be wiped out.

  25. VJ commented on Jul 19

    Its Unanimous: Banks Have Bottomed!

    Somebody forgot to tell the insurers.

    The CDR Counterparty Risk Index has surged 24 basis points just this week. The index tracks five-year credit default swaps, which pay out in the event of default. It is an indicator of the cost of insuring against a default by some of the largest banks and brokerage firms in the world. The cost to insure a $10 million bond from a large financial institution has tripled over the past 12 months, and hasn’t been this high since Bear Stearns collapsed in March.

    LINK to CDR Counterparty Risk Index CHART

    The index peaked during the Bear Stearns collapse, but after the Federal Reserve arranged a bailout through J.P. Morgan Chase, the index fell back below 100 basis points, but is once again spiking.

    The CDR Counterparty Risk Index, created by Credit Derivatives Research in Walnut Creek, Calif., is made up of credit default swaps tied to these major financial institutions:

    ABN Amro Bank, Bank of America Corp, BNP Paribas, Barclays Bank Plc, Citigroup Inc, Credit Suisse Group, Deutsche Bank AG, Goldman Sachs Group Inc, HSBC Bank Plc, Lehman, JPMorgan, Merrill Lynch, UBS AG, and Wachovia Corp.

  26. Eric Davis commented on Jul 19

    Want to talk 11 sigma

    Barry, Ibankcoin and cramer are all in agreement.

    XLF to 5.

    I guess we will see.

  27. philipat commented on Jul 19

    Great post Barry and I agree with all. As we write, this month, ARM resets finally peak and from hereon will slowly decline. As it will take, typically, 6 months to forclosure, expect another round of problems for financials. This does not even factor in the possibility of something going very badly wrong in the CDS arena. I look forward, however, to reading your comments on the releases from the NAR which will I’m sure have a different take on the ARM reset peak.
    3-6-3 sounds still sounds like an attractive business model for a PRIVATE Company?

  28. emptyframe’s me2DAY commented on Jul 19

    Beatmania의 생각

    규제완화의 덫. 이 기사님 칼럼들 강추. 지난주 금융주 반등으로 경제위기는 끝났는가에 대한 글, Its Unanimous: Banks Have Bottomed! 이번해 여름은 예상외로 잔인한 계절이 될듯. (오늘은 여기까지.)

  29. Tarun commented on Jul 19

    You really think so ? what about theimpeding slowdown and its impact on unsecured portfolios – credit cards ? what about shrinking margins because of deleveraging and recap ? what about ARMs related issues to come – I think this will bounce only to get slammed again before we find equilibrium ie stable – no growth

  30. Steve W commented on Jul 19

    The only financials that I would buy are the pawn shops symbols EZPW and CSH. These companies have easy access to cash due to the feds desire to prop up the banks and these companies have a growth business model–they take advantage of the fact that the economy is in such bad shape and everyone needs to raise cash by pawning their valuables… The worse the economy gets the higher these stocks will rise, as the return on capital of these companies are the highest of all the financials. As for the banks–how are they going to make $$ going forward??? Assuming they can clean up the mess and recapitalize where is the growth coming from??? Traditional Banks and Investment Banks going forward have a broken business model.

  31. constantnormal commented on Jul 19

    How about a “wisdom of the crowds” thing on how long this run-up will last?

    I confess that I haven’t a clue, and could see it lasting anywhere from 2 weeks to 5 months.

    I suppose that watching the VIX is the way to go here as well, going long until it hits the bottom of the current “trading range”?

  32. surferdude commented on Jul 19

    philipat says “Great post Barry and I agree with all. As we write, this month, ARM resets finally peak and from hereon will slowly decline. ”

    sorry to disappoint on this topic but we are only on the backside of the subprime resets. the alt-a stuff does not start in any meaningful way until 2009 and stretches into 2011. this is the option ARM prodcut and it is larger dollar exposure. as WB and IMB show, this stuff is toxic and given the substantial HPD where this stuff was underwritten, there is very little ability to rework. thus there is another down leg to come when these start resetting and defaulting.

  33. philipat commented on Jul 20

    Surferdude is quite correct, it’s not until December 2011 that it is all over. My point was that there is no respite for the financial. Even as Subprime issues peak, there is another wave of problems from forclosures on the same. And then new problems kick in from Option ARMS. On top of this there is a potential CDS nightmare and increasing defaults on CC debt. Oh, and the business model is broken. So all in all, to anyone believing the problems facing the financial sector are over, I would say “caveat emptor”

  34. easy$ commented on Jul 20

    A few more bank runs and the prices will come down again. Fact is most shares should be priced with a big fat minus sign in front of them, if this was possible.

  35. A.L commented on Jul 20

    Any nation who pays a private bank to print their money leads to one and one thing only.

    Enjoy your depression. The Chinese will be starting their new cars, while you’re riding your shiny new bikes.

  36. paul commented on Jul 20

    If you are inclined to play the financials I recommend buying the PFF (75% financial preferred) in a non-taxable account and hedge it with the SKF in a taxable account. If you are right, PFF should do very well while also paying you a fat dividend all untaxed. You can write off your loss in the SKF on your taxes. If you are wrong, well at least between the fat PFF dividend and the gain in the SKF you shouldn’t lose much.

    (Weighting these is a problem as the history of these two funds is minimal. You will have to do some guessing here).

  37. kcdallas23 commented on Jul 21

    B.S.!!!! I’ll repeat…. B.S. on a bank bottom. The smart money has not been so smart this year. Now the smart money will be proven to be even dumber. A bottom in financials/banks? B.S. If anyone had half a brain and looked at the financial reports, they would NOT be buying. It’s market manipulation at its best so the banks can raise capital. Period. They are so under capitalized it’s not even funny. Take a look at the latest report by Wells Fargo. After manipulating the loss provisions from 120 days to 180 days, this enabled them to delay a write down of $250+ million. The Non Performing loans on their books are INCREASING every quarter and expectations are they will continue to increase. The economy is going to get worse. Commercial real estate is going down right now. Losses will accumulate quickly, thus ADDING MORE LOSSES to the banks. Let’s not forget the CINA gains which is PHANTOM INCOME due to come back off the books – which has been reported as INCOME. Bottom in financial companies??? Come on…. Quit drinking the Kool-Aide. Sure, stock prices are rising. Maybe that has to do to the recent SHORT SQUEEZE and not the HORRIBLE financial statements being put out there. Do you want to invest money in a company that LOST more money over the previous quarter AND sees more losses coming? The bottom??? Come on. Are these the people that helped spread the news that “The Worst is Over”? Ride the B.S. wave up, make your quick money and ride it back down again. The Worst is Just Getting Started.

  38. winslow commented on Jul 21

    We won’t be near the bottom until the beginning of the new presidential cycle (it’s getting closer). Most, if not all, of the financial problems today can be planted at Bush’s feet. His administration’s ideology of “hands off” precipitated the dilemma. There were many tell-tale signs years ago and all of these were ignored. It was just a few short months ago the administration honchos were spewing how good the economy was. I am amazed that anyone continues to believe this administration about anything. What does worry me, is that neither candidate has concrete plans for the future, just sound bites and negativity about the other party (although not as bad as the Karl Rove agenda). If the candidates were to announce a 10 yr energy plan and a short-term financial plan with a corresponding longer-term plan for the deficit, social security, and medicare, we would be on the way for a brighter future. But, alas, it is much easier to travel and campaign instead of working with the best minds in the US to “plan” for the future.

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