The Banks Have Bottomed
The banks have bottomed, so it’s time to start buying.
That was Cramer’s message during Monday’s Mad Money. Of course, this isn’t a blanket statement. There’s always a method to his madness. So he provided some dos and don’ts on how Homegamers should go about getting in on the action.
How does Cramer know we’ve hit bottom in the banks? Some key stocks in this group stopped falling after the run on IndyMac and Washington’s moves to save Fannie Mae and Freddie Mac.
Then three things happened to take the banks higher: Cramer’s “financial fortresses” – JPMorgan Chase, Wells Fargo, US Bancorp and Bank of America – reported good earnings. Congress stepped in with meaningful legislation to combat the problem. Those financial fortresses got in position to takeover all the other failing U.S. banks, most likely without any concern about anti-trust regulation.
The bank earnings weren’t perfect by any means, but the write-downs were less than expected, and customer deposits seem to be generating a decent about of revenue. The move by Congress, coupled with a decrease in single-family housing starts, which is where most of the supply bulge is, should result in house price stabilization. And the buying up of struggling banks by surviving banks is very similar to what happened at the end of the savings-and-loan debacle in 1990, Cramer said.
Back then, healthy companies would buy up the good portions of a banks portfolio, and the government would buy up the rest. Cramer’s expecting the same strategy this time around as well. Some banks, he predicted, will be taken over entirely, probably by the financial fortresses.
This all comes courtesy of the SEC’s renewed focus on illegal short selling. As the shorts race to cover their positions, the big banks will be able to raise capital through equity deals, giving them the money they need to takeover their weaker peers.
Here’s how you play it:
The only big name Cramer will recommend right now is US Bancorp. It’s the only bank that’s pulled back enough to ensure the proper entry point. Plus, the USB has a great 6% yield, and insiders have been buying up tons of their own company. It’s a good sign.
There is the chance for weakness, though, as Washington Mutual and Wachovia report earnings Tuesday. (American Express’ poor quarter Monday night was a good start.) Cramer recommended buying the other three names – JPMorgan, Bank of America and Wells Fargo – on any resultant dip because Cognress’ vote on the housing bill Thursday could send the stocks higher.
“I think we’ve bottomed at last,” Cramer said. “I look forward to massive takeovers, consolidation and a dramatic advance in financials” – at least JPM, BAC, USB and WFC – “over the next year.”
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