"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?"
"We still think it's way too early."
Michael Petroff, Heartland Value Plus fund.
+
Bank stocks: April Fool or the real deal?
April 1, 2008
NEW YORK (CNNMoney.com) -- It's another gloomy day for the financial
services industry.
UBS (UBS) and Deutsche Bank (DB) are re****ting 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 re****t 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 re****ting 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 re****ting 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 re****t 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.
Issue #1 - America's Money: All this week at noon ET, CNN explains how
the weakening economy affects you. Full coverage.
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this article at:
http://money.cnn.com/2008/04/01/markets/thebuzz/index.htm?section=money_markets
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