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Bank Shares: Down, Down, Down. There Is a Good Reason.

Written by Gary North on December 14, 2011

The banks are in trouble. They have been the worst-performing sector in 2011. If the economy is strong, why are the banks weak?

A Reuters story reveals the problem.

The sector is down 20 percent this year, by far the worst performer in the S&P 500. The weakness has been so pervasive that the S&P, which is down 1.8 percent in 2011, would be up 3.3 percent on the year if financials were excluded, according to Standard & Poor’s Equity Research.

Most market participants agree these stocks are set for a rebound over the long term. They still appear too risky for short-term traders.

What is the basis for hope in a rebound. Greater profitability? Citigroup plans to lay of 4,500 people. This is “profit by cutting costs.” This is not the mark of expansion and optimism.

The aruthors are correct: “But the problems dogging banks all year – from the debt crisis in Europe to the bleak outlook for profits – do not appear to be abating.”

The aversion to financials is great. Assets in bank-focused funds have dropped by 40 percent in the last six months, and the group is the only one of 10 S&P sectors trading at less than the value of the assets on their books.

Market participants cite various reasons for financials to decline further, including regulations, weakness in the housing sector and fears linked to Europe’s escalating debt crisis.

So, why buy bank shares?

In the last six months through the week ended December 7, the assets under management (AUM) in the U.S. financial/banking funds sector have dropped a net $8 billion, or nearly 40 percent, according to Thomson Reuters’ Lipper U.S. Fund Flows database.

Assets in the sector hit a peak in February 2011 of nearly $23 billion in AUM. Since then, it’s been mostly outflows.

Europe’s crisis will spread here if it accelerates.

Whenever the outlook for Europe worsens, the banks are punished, particularly brokerages such as Morgan Stanley and Jefferies & Co, on fears of exposure to Europe. It has contributed to high volatility in the sector.

“The things that made these stocks cheap are still around. It’s still a risky business and you have no idea how bad business can get until they really get bad,” said Manley.

Things have not yet gotten really bad.

When Bank of America shares fell to a fresh two-year low of $5.03 last week, instead of betting on a rebound, option traders moved to hedge themselves against more declines.

Caution is a widespread attitude.

Even some of those speak positively about the banks are staying cautious. BNY Mellon’s wealth management core portfolio recently moved to a slight “overweight” position on the group due to the bad news already priced into the sector.

The banks are at the heart of the U.S. economy. When they are in the tank, why should investors be optimistic about the rest of the economy?

 

 

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One thought on “Bank Shares: Down, Down, Down. There Is a Good Reason.

  1. georgesarant says:

    It depends on the bank. JPMorgan Chase is in good shape.