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The Banks Win, Again

By , Chief Investment Strategist, Money Morning • @ShahGilani_TW -

Finally, some well-deserved help for beleaguered monster banks is on its way.

Make that, well on its way.

Those poor big banks accidently and inadvertently got caught up making so many easy loans to deserving, hard-up borrowers, who wanted to buy overpriced dream homes, and a few million other folks who deserved two homes and McMansions to keep up with the Joneses (you know the Joneses... most of them were "friends of Angelo").

But now, at last, the banks are making profits again.

After suffering the indignity of insolvency and near collapse for all their hard work, the New Samaritans are still being haunted by their generosity, as regulators hound them into settlement submission, merely for doing God's work.

So, what's the good news?

The second quarter may be a good one for the three biggest servicer banks, namely Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and - the little bank that could, run by that kid named Jamie - JPMorgan Chase (NYSE:JPM).

What's strange is that these do-gooders are being helped by some of the same government folks who are still attacking them in public venues where voters hang their hats.

What's not strange is that tons of underwater homebuyers, who are drowning in debt on dwellings whose prices have fallen 30% to 40%, aren't blaming banks and are running to their rescue.

Okay, maybe they're not running, maybe it's more that they're being corralled, like sheep. But either way, they are helping banks fatten their profits pools (make that bonus pools) again.

They're repaying the banks' favor of giving them loans in the first place by coming (more like being forced) back to the banks to get refinanced on better terms.

But they're not doing it on their own. The banks have a partner helping to round up their old customers and corral them into the breeding profits barn.

That Partner is HARP 2.0

The original Home Affordable Refinance Program, which was launched in April 2009, failed miserably (because there was nothing in it for banks). But the powers that be (the banks... DUH) harped for a new HARP, and they got it last November.

The new program is known as HARP 2.0 (that's because it's twice as profitable for the big banks that sunk the economy and the world under Housing Bubblemania 1.0).

Okay, enough sarcasm; let me slice and dice this succinctly for you.



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What I Learned From My Lunch with Vikram Pandit

By , Global Investing Specialist, Money Morning -

I've long been bearish on bank stocks and financials - but something happened last week that made me rethink my position.

I was having lunch with Citigroup Inc. (NYSE: C) Chief Executive Officer Vikram Pandit, and he had some interesting points.

According to Mr. Pandit, providing money and financial services to business is still a pretty attractive undertaking on a global scale.

Of course, he was also quick to mention that top quality risk controls and much higher liquidity are absolute necessities.

"Banks need to realize they are in a new reality," he said.

He couldn't be more right.

I warned you back in August that bank stocks were headed for a "catastrophic decline," and that proved to be true.

Since that article's Aug. 17 publication, Bank of America Corp. (NYSE: BAC) has tumbled 12.7%, Goldman Sachs Group Inc. (NYSE: GS) fell 9.9%, JPMorgan Chase & Co. (NYSE: JPM) is down 5.5%, and Morgan Stanley (NYSE: MS) is down 2.1%.

In fact, the MSCI US Investable Financials index is down 12.6% on the year and has achieved a less-than-stellar return of -12.6% per annum over the last five years.

And it's not hard to see why.

Third-quarter bank earnings were mediocre at best, and some of the special protections offered to banks are being wound down. Additionally, banks are in popular odium and demonstrations against them are erupting in every major U.S. city. And the effects of increased regulation are yet to come fully into view.

Still, for the first time since the stock price "bounce" of 2009, bank stocks are beginning to look somewhat attractive and the time to start bottom fishing may be at hand.

Banks Worth Buying

For those few banks with genuine global networks, international banking remains on a growth curve as globalization intensifies and more emerging market companies diversify outside their own country and region. Domestically, retail banking remains a good business. Credit card losses are beginning to decline while spreads remain at record levels.

Consequently, there are very good bargain-buying opportunities at large.

Remember, though, that any investment should be made gradually over time, because while the chances of a repeat of 2008 are remote -- at least in the United States -- there is still a great deal of risk and uncertainty in the banking sector.

You should avoid banks with large exposures to problems of the past. That means staying away from Bank of America and Wells Fargo & Co. (NYSE: WFC). Both of these banks remain heavily exposed to West Coast real estate, and in BofA's case, to the mortgage-backed securities disaster, as well.

However, the following financial firms are worth looking at:



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It's Time to Bail on Bank Stocks

By , Global Investing Specialist, Money Morning -

There was a time when bank stocks actually looked like good investments. And many, having racked up big gains over the past two years, proved to be just that.

But sadly, U.S. banks no longer offer the value and profit-making potential they did immediately following the financial collapse. In fact, they're actually heading for what could be a catastrophic decline.

Let me explain.

On February 18, 2009, I wrote a piece that said bank stocks should not be written off.

I observed at the time that the best U.S. banks had huge business strengths that were not fully undermined by the financial crisis. So I advised investors buy shares of the best among them.

As it turns out, that recommendation may have been too timid.

That is, most bank stocks - including some of the weakest and least investment-worthy - have surged since my article's publication.

Even following a lukewarm second quarter and last week's market meltdown, the top six banks - Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (NYSE: GS), and Morgan Stanley (NYSE: MS) - are in a relatively impressive position.

Take a look for yourself:

  • Goldman Sachs stock is up about 22%.
  • Bank of America is up 30%.
  • JPMorgan is up about 49%.
  • And Wells Fargo is up 55%.
Only Citigroup, down about 13%, and Morgan Stanley, down 20%, have seen their stock plunge.

But in light of this remarkable run up, and the disastrous pitfalls that lie ahead, now is the time to bail on bank stocks.

Margins are narrowing, government regulation is increasing, and the outlook for big deals is drying up.

In other words: The risks related to bank stocks are as present as they ever were - just the profitability is missing.



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