| Commentary | |
Bank stocks: April Fool or the real deal?
On the first day of the second quarter, investors are shrugging off bad news from the financial sector and are accentuating the positive. Is the worst really over?
NEW YORK (CNNMoney.com) -- It's another gloomy day for the financial services industry.
UBS (UBS) and Deutsche Bank (DB) are reporting more multibillion dollar subprime-related writedowns .Lehman Brothers (LEH, Fortune 500) needs to raise $4 billion to quell credit concerns. Legg Mason (LM) is talking a nearly $200 million charge to bail out a struggling money market fund. And National City (NCC, Fortune 500), hit hard by the mortgage meltdown, has hired Goldman Sachs to shop it around.
Wait..there's more! Goldman Sachs slashed its earnings estimates on Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) Tuesday morning due to expectations of more credit writedowns. And Morgan Stanley analysts in London wrote in a report that "the industry is facing the most severe investment banking crisis in 30 years." Ouch!
But I'm sorry. Did I say it was a gloomy day for banks? April Fool! For some reason, investors are treating this latest round of bad news as a good sign...a possible indication that the worst may soon finally be over for the beleaguered financial services industry.
Shares of the Switzerland-based UBS surged more than 11% Tuesday morning in trading in New York while Germany's New York-listed Deutsche Bank shares rose 3%. Lehman's stock shot up nearly 10% and Legg Mason gained 2%
National City gained more than 4%. Citigroup and Merrill Lynch, despite another earnings haircut, soared 7% and 9% respectively.
So is this it? Now that the brutal first quarter is finally behind us, is it time to move forward and proclaim that the credit crunch is history?
To be sure, there is some legitimately good news to be found in Tuesday's bleak bank headlines.
In the case of UBS, investors appear to be focusing less on its $19 billion in additional writedowns and more on the fact that the company is planning to raise $15 billion from a sale of new stock. In addition, the company's embattled chairman, Marcel Ospel, is stepping down.
The UBS news, combined with Lehman's decision to sell $4 billion in convertible preferred stock, could be interpreted as a sign that both banks will shore up the necessary amount of cash on their balance sheet to avoid becoming the next Bear Stearns.
And if National City can find a buyer, that could be the start of healthy consolidation that is sorely needed in the banking industry. (I define healthy consolidation as a bank merger in which the Fed doesn't have to guarantee to cover $29 billion in losses in order for the deal to go through...and at a fire-sale price to boot!)
But declaring that the worst is really over might be a bit, dare I say it, foolish.
Keep in mind that many investors were hopeful back in October that banks were reporting a kitchen sink of subprime charges in their third quarter so that they would not have to disclose any more bad news beyond that. And bank bulls said the same thing in January when many financials were reporting huge losses in the fourth quarter.
We're now preparing for another wave of red ink in the first quarter. So that's the third consecutive quarter in which banks will be hit with big charges...and the third straight time that these charges are supposed to represent the last of the big writedowns.
And some pretty smart people are still scared about the future of the financial services industry.
Bond guru Bill Gross of Pimco, in his commentary out Monday, said the new rules and regulations for investment banks will force companies such as Goldman, Merrill and Lehman to adopt reserve requirements that he thinks will result "in reduced profitability" for major brokerage houses.
And Oppenheimer analyst Meredith Whitney, now widely acknowledged as the "axe" among bank analysts on Wall Street, is still sounding alarm bells about the balance sheets and earnings of Citigroup, Merrill Lynch and others.
Yes, it's starting to feel better at long last. And the Federal Reserve's series of rate cuts and liquidity injections might finally be starting to restore order in the credit markets.
But with many key analysts continuing to cut their estimates for leading commercial banks and investment banks in recent weeks, it's hard to get that excited about the financial sector just yet.
"We are contrarian investors, so you'd think we'd be dipping our toes into financials," said Michael Petroff, manager of the Heartland Value Plus fund. "But we still think it's way too early."
Petroff said he thinks banks will report more charge-offs and subprime writedowns in the coming months, and that another shoe to drop could be writedowns of goodwill (i.e. intangible assets such as brand name) by banks that have made numerous acquisitions.
There still seems like there could be more bad news in the cards. So buying into Tuesday's bank rally might be a bad idea.
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