Turnaround 2012 for Banks?

Most of the time, an investment strategy that fights the Fed (or the central authorities writ large) is like spitting into the wind-that is, it’s a bad idea.  They are, after all, TPTB.  This brings me to the Fed’s purpose, namely banking.  The stated rationale for the Federal Reserve Act of 1913 was to make the banking system work better.  This has taken a century’s worth of twists and turns, but anyone who has read The Theory and Practice of Central Banking by one of the architects of the Federal Reserve and who served as its first treasurer, written during FDR’s first term, knows that one constant is that the Fed is joined at one hip with the banking system and at the other with the Treasury Department, but only indirectly affects the economy at large.  

This post briefly discusses the other end of the size spectrum from banks that the OWS and Ron Paulites (amongst many others) typically focus on:  small, geographically compact banking companies that were uninvolved in the worst shenanigans of the bubble and post-bubble era and which may have been harmed rather than helped by Fed actions over the past few years.

This may be a time in which banking has seen its nadir both from an operational standpoint and in terms of public image.  Both could hardly be lower.

That combination often spells “opportunity” fin terms of investing in the best operators in any sector.

A year ago, I began investing in microcap bank stocks that had survived the Category 5 Hurricane Lehman of fall 2008.  What I am seeing now is the absence of sellers, improving financial returns in some of the banks and in some cases surging stock prices off of very low levels.  My trading sense is that these are washed-out stocks that we might look back on in 3-8 years the same way we old-timers looked back on oil drilling stocks in 1991 following their disaster in the first half of the 1980s and say- hey, these survivors were cheap, and we continued to need oil all the while.  Why didn’t we buy them (I mentally asked in 1991) when the oil crash of 1981-3 had passed and just waited patiently for the investment worm to turn?

By analogy, the economy continues to function via the Old Normal, with banks as intermediaries for mortgage loans, small business loans, a place to park cash other than under the mattress, etc.  And a survivor of Hurricane Lehman and its aftermath is a survivor, pending of course another major financial hurricane (as opposed to a garden-variety recession).

One good thing about microcap stocks is that small investors have an absolute advantage over institutions; where else can one say that?  Microsoft, PepsiCo, GM- you name a large-cap and you might just be wasting your time studying it.  The big guys know all you know and vastly more than you will ever know about each company- and they know it first.  But truly small cap stocks are too small for them to care about.  With research you can find a number of little bitty bank stocks that did not take TARP money, sell at or well below tangible book value- which the regulators have made them scrub down to conservative numbers- and 2-4+% dividend yields, that you might just be comfortable owning for years on end because they may pay stable to rising dividends and because at the end of the day, their asset values will rise proportionately with inflation and currently may well exceed their stock market valuation.  In fact, what I have found in some of these stocks is that there are very few sellers at current prices.  It may take much higher prices to motivate these shareholders to sell.

Investing in banks is a contrarian thing, the recent surge in stock prices of some of them notwithstanding.  It does not sit well with many individual investors, but most individual banking institutions acted honestly in the run-up to 2008, even if management made mistakes.  

Strategically, banks in general prosper when spreads between short-term cost of funds and longer-term interest rates rise (I presume they are all hedged for that eventuality in their investment position), so if one’s financial assets are predominantly in cash and muni bonds, a bank stock might act as a hedge against a rise in rates or rise in price inflation in a cash/bond-heavy portfolio.

The tectonic plates of the Earth are always moving.  The atmosphere is always circulating.  And investment themes are always in motion, as well.

It has often paid for investors to remember that just as summer follows winter, investment sectors that have gone cold often get hot again.

Think different.

 

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5 comments to Turnaround 2012 for Banks?

  • No Country For Constitutional Men

    How can insolvent banks have a turnaround? I Have a chart for the 5 largest banks which shows their assets against their derivatives exposure. Check this out before signalling the all clear for these thieves in suits.

    Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

    http://www.zerohedge.com/news/five-banks-account-96-250-trillion-outstanding-derivative-exposure-morgan-stanley-sitting-fx-de

    PS- it’s all notional until a single counterparty can’t ring the bell. Good luck greater fools.

  • No Country: Did you read the post or just the headline? Obviously I didn’t discuss the TBTFs.

  • [...] Written by DoctoRx From The Daily Capitalist: Most of the time, an investment strategy that fights the Fed (or the central authorities writ large) is like spitting into the wind-that is, it’s a bad idea.  They are, after all, TPTB.  This brings me to the Fed’s purpose, namely banking.  The stated rationale for the Federal Reserve Act of 1913 was to make the banking system work better.  This has taken a century’s worth of twists and turns, but anyone who has read The Theory and Practice of Central Banking by one of the architects of the Federal Reserve and who served as its first treasurer, written during FDR’s first term, knows that one constant is that the Fed is joined at one hip with the banking system and at the other with the Treasury Department, but only indirectly affects the economy at large. [...]

  • No Country For Constitutional Men

    When all assets have multiple claims against them it doesn’t matter if they are TBTF or The Bank of Bumbleshitz AL. My point was and is that derivatives will blow the entire system up, and it won’t matter what you are in if it’s just a piece of paper. Hard assets are your friend.

  • No Country:

    Yes, I have posted positively on gold for three years. But a well-run bank that lends against a properly priced hard asset known as a home benefits from inflation. And if the bank’s price is below the current value of its assets, then it qualifies as a “value” investment.

    Of course, if you think that the “system” is going to “blow up” completely due to derivatives, then you are probably uninterested in scouting out stock market investments, and then my post was not of practical value to you.

    I’m hoping that such a disaster does not come to pass.