Gentleman,
I've been hearing a lot of what I think is relatively sound analysis that major U.S. banks and to some degree other financial inst. are currently undervalued and are about to break out of their long term rut and start to lead the market (obviously we've still seen a very big run up in a couple of names just recently, but i mean more than that and broader)... Jim Cramer is probably the most vocal guy on this, but plenty of more respectable analysts (not tv personalities, no offense to Jim) seem to be seeing things the same way... As people realize dodd frank isn't the end of the world financial stocks should be trading at a premium rather than a discount to book value --- so the story goes.
What do you guys who actually know more about banking/bank stocks think on this one? Any particular guys to buy and or stay away from? I'm already in JPM and have seen a nice uptick over the 60 days or so i've held it, but that seems the only obvious choice... Met life (a already own some) took a hit after failing the stress test so i think this could be a good time to buy that dip as well, thoughts?
Financials are kind of difficult to invest in unless you have some experience in the field.
That said, buy Met now if you like Met. They are cheap historically. However, low rates continue to depress returns on equity, and we know helicopter Ben isn't raising them anytime soon. It could be a while before the market prices in these undoubtedly higher future profits.
As for banks, some still have questionable accounts on their balance sheets. We also don't know if the larger banks will ever regain pre-crisis margins. The Volcker rule won't kill banks, but it makes them less profitable. Therefore, they will have lower P/B ratios...our entire definition of "normal" ratios could be wrong.
I would stick to well capitalized, regional banks. Life insurers are cheap on a long term time horizon. I would also look at reinsurers- they took losses on Fukushima and their share prices reflected it. FinTech is also a cool space, and is often neglected until the shares "pop".
Stress test was a complete farce. Did no one notice they left out any interest rate spikes from the test? That's the one metric they conveniently forgot about because the Fed knows that all these banks are insolvent at higher rates. Not exactly hard to stay afloat with free money at 0% at treasuries at 2-3%, plus leverage. Interest rates are historically around 6%, what happens when we get back to there? Gonna be interesting to see how long they keep this con going.
Have read a few interesting things on financials lately. One was from Martin Capital: http://www.mcmadvisors.com/downloads/mcm_2011_annual_report.pdf Thesis is basically that "quality" banks like WFC and USB that have manageable or quantifiable exposure to things like Europe, further mortgage litigation, etc and strong deposit bases are already trading at rich valuations and other banks have huge risk overhangs of one kind or another.
Two different IG credit strategy presentations I've seen recently were pitching long non-bank financials relative to banks; one in particular had an interesting chart on upside beta versus downside beta but now I can't find it.
We are in a parabolic reach for yield caused by fed/ECB/BOJ/etc largesse and in this situation being long the crappiest of the crap financials is the best place to be...not to toot my own horn which is always risky but this is a theme I have been on the last few months since it became clear how big the 3y LTRO was going to be. I will stick with this theme until it shows me some sustained weakness...
http://www.wallstreetoasis.com/forums/recent-move-in-3m-libor
[quote=Bondarb]We are in a parabolic reach for yield caused by fed/ECB/BOJ/etc largesse and in this situation being long the crappiest of the crap financials is the best place to be...not to toot my own horn which is always risky but this is a theme I have been on the last few months since it became clear how big the 3y LTRO was going to be. I will stick with this theme until it shows me some sustained weakness...
http://www.wallstreetoasis.com/forums/recent-move-in-3m-libor[/quote]
Out of curiosity, how're you putting these trades on (if you care to share)? Equity, credit etc? Always curious to know how macro funds are expressing their views.
A mantra of mine is simple simple simple...long XLF/short EUR in equal dollar amounts.
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