Financials Are In A Funk

The financials seem to be weighing on the market as they are way down in an up market. Financials face a number of headwinds. There is continued dilution as banks raise equity to pay back TARP and because shares are being issued in lieu of cash bonuses at many firms. In addition, balance sheets remain impossible to decipher from where I sit. On top of that there are credit market worries because of the sovereign debt problems. I continue to steer clear of financial stocks other than Berkshire Hathaway.

1 comment:

PJ said...

That's not all of it.

The fact is we're in the seasonally low-income part of the year. In the January NFP data, NSA jobs declined 1.1 million compared to December. (They were seasonally adjusted to a sizable rise.) The winter and early spring are when employment is lowest and income lowest.

Meanwhile debt levels remain extremely hard for many people to service. We can expect defaults to rise sharply over the next 3-4 months. Indeed, defaults were rising all through the strong summer-fall season, despite a great deal of government support that is going away in the spring.

We can expect housing prices to fall significantly with the expiration of tax credits and the modification programs that have kept foreclosures off the market. With 10 mn mortgage holders already well underwater, and underwater being the best predictor of default, that's another reason defaults will rise in the next six months.

Meanwhile the CRE issue is coming to a head, as CRE projects in the pipeline continue to be completed, putting more pressure on rents.

Banks are going to face huge losses this year, and their balance sheet crisis will return. It doesn't help that they've been exaggerating their earnings for a year now, delaying recognition of losses. Soon that will come back to bite them.

I consider banks a "safe short." They have only one direction to go in, down. Higher-valued stocks like the techs may decline more in a steep sell-off, but will also rally strongly. Banks will underperform in rallies.