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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 , 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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We Warned You Not to Buy Bank Stocks - And Here's Why

By , Associate Editor, Money Morning -

If you weren't convinced before, hopefully you've seen the light now: Don't buy bank stocks.

Money Morning Global Investing Strategist Martin Hutchinson first warned it was time to bail on bank stocks on Aug. 17. He said the sector was headed for a "catastrophic decline."

"Margins are narrowing, government regulation is increasing, and the outlook for big deals is drying up," said Hutchinson. "In other words: The risks related to bank stocks are as present as they ever were - just the profitability is missing."

Hutchinson was right on with his call. Anyone who heeded his warning saved themselves from the losses U.S. banks have since sustained.

Share prices for many big U.S. banks tumbled in the period between the publication of Hutchinson's article and yesterday's (Wednesday's) market close. Bank of America Corp. (NYSE: BAC) lost 11.6%, Goldman Sachs Group Inc. (NYSE: GS) fell 9.3%, JPMorgan Chase & Co. (NYSE: JPM) 6.5%, and Morgan Stanley (NYSE: MS) 2.2%.

The Standard & Poor's Financials Sector Index now is down more than 18% for the year. Global bank stocks have hit their lowest valuation in 40 years.

And this industry's stock losses are just the beginning of the price pain.

Poor Earnings Reflect Banks' Struggle

Hutchinson pointed to key factors that would weigh on bank profits, like trading losses, decreased lending, and the overhang of dead mortgages.

This season's dismal bank earnings have supported Hutchinson's forecast.



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Bank Stocks Are Bad Investments - But Excellent Trading Opportunities

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

Long gone are the days when bank stocks were safe investments. Now, and for the foreseeable future, the only safe way to play banks and financials is by trading them.

Banks face so many issues, both in the near term and on a long-term secular basis, that putting shares away, even now when they look cheap, could be hazardous to your wealth and your mental state.

On the other hand, precisely because many of the headwinds banks face are obvious, closely following the developments affecting banks can lead to profitable trading opportunities. And, by familiarizing yourself with how bank stocks trade, you'll be in an excellent position to determine exactly when they've become good long-term holds.

As a trader, I'm always looking for sectors and stocks where developments affecting earnings and profitability are mainstream news. It means I don't have to mine mountains of arcane data to get the big picture. And right now, all the news coming out about banks makes them ripe for trading.

Here's what I look at and how I would trade bank stocks.

Banking on Volatility

The first thing I see when I'm looking at banks is that most of them have been exceptionally volatile. Volatility is the lifeblood of trading. They've definitely got that going for them.

The most common measure of an individual stock's volatility is how it compares to the volatility of the market as a whole. Beta measures how volatile a stock is relative to the Standard & Poor's 500 Index. A beta of "1" means that the stock is as volatile as the market. A beta of "2" means the stock is twice as volatile as the market.

Here are some betas for bank stocks you should consider as good trading candidates: Bank of America Corp.'s (NYSE: BAC) beta is 2.76; Citigroup Inc.'s (NYSE: C) is 2.89; Wells Fargo & Co. (NYSE: WFC) 1.78; Morgan Stanley's (NYSE: MS) is 1.10; JPMorgan Chase & Co.'s (NYSE: JPM) is 1.43; and Goldman Sachs Group Inc.'s (NYSE: GS) is 1.26.

There are many very volatile European banks to trade, too. But these are even riskier. Personally, I don't like unanticipated volatility. I like to understand what is happening, what developments are ebbing and flowing to generate volatility.

With the banks, there's a fairly long list of negative headwinds, which is where their e mbedded volatility comes from.

Big Questions For Bank Stocks

U.S. banks, and even more-so their European counterparts, are facing some very big issues. Each hurdle is big in and of itself, and collectively they form a tremendous weight on the sector.

The biggest question marks are:

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