Thursday, June 9, 2011

Three Different Looks at Bank Stocks

Banks continue to make headlines.

First there's the public dispute between Treasury Secretary Timothy Geithner and European regulators about how best to try to regulate the banking sector.

For the sake of brevity, I won't go into all of the details here, but sufficient to say that (once again) the Americans do not agree with the Europeans.

Former IMF chief economist Simon Johnson has been harshly critical of U.S. banking policy for several years now, and wrote a book called 13 Bankers which essentially eviscerates everyone involved in the financial crisis of 2008.

He wrote a blog post today in the New York Times which continues this general theme of harsh criticism of Secretary Geithner. I am noting it here not necessarily because I totally agree with his thoughts, but rather to give an indication of just how hard the regulatory headwinds are beginning to blow:

Mr. Geithner’s thinking on bank size is completely flawed. The lesson should be: big banks have gotten themselves into trouble almost everywhere; banks in the United States are very big and have an incentive to become even bigger; one or more of these banks will reach the brink of failure soon....

...The right conclusion for Mr. Geithner should be: huge cross-border financial operations are immune from orderly resolution; such companies should therefore be run on a completely segmented basis, with separate capital requirements and no recourse to parent companies. Consequently, capital requirements should be much higher than currently proposed by any official, for capital is the buffer that stands between bad management decisions and taxpayer bailouts when bank resolution is not possible.

Ah, you say, this is all very interesting, but what does it mean for my portfolio?

Here's a couple of videos that might help. The first is features former Morgan Stanley strategist Barton Biggs, who now runs a $1.3 billion hedge fund called Traxis Partners. I have long been a fan of Mr. Biggs, who is a very smart investor as well as a terrific writer.

He doesn't like bank stocks in here, believing that their book values are overstated. He does, on the other hand, like big tech companies, which I will discuss in my next post tomorrow:

Finally, from Jim Cramer of Mad Money fame. I know, Cramer can sound ridiculous sometimes, but there was a time that he was a very successful hedge manager himself, and in this piece about bank stocks he makes some comments that I think make sense.

Unlike Mr. Biggs, Cramer looks at the stock charts of some of the big financial companies and concludes that they are "dead money" for a while. Yes, they could rally for a couple of days, but Cramer's view of the charts is that many of the stocks have broken down, and that they are closer to "value traps" rather than investment opportunities: