Bank stocks: lighten up going into earnings season?
Calyon's Mike Mayo(formerly of Deutsche Bank) got a lot of play yesterday by initiating coverage of the bank sector: "A key implication is that loan losses (to total loans) should increase to levels that exceed the Great Depression," he wrote, and that "new government actions might not help as much as expected."
He concluded that further problems are likely because "loans have been marked down to only 98 cents on the dollar."
While the Great Depressioncomment is a bit melodramatic, most traders in financial stocks are working under the following assumptions regarding bank earnings:
1) Credit trends will continue to deteriorate through the second and third quarter, and possibly into the fourth quarter;
2) Losses in commercial and industrial real estate, as well as credit cards, will come to the fore, replacing the concern over residential real estate,
3) Reserves for non-performing loans (NPLs) will continue to increase;
4) Of the 19 banks being stress-tested, a handful (perhaps a quarter) will not pass (lists are being passed around now), which brings the risk of further dilution.
Remember, all bank stocks are basically momentum stocks; nobody is buying Citi or any other bank stock for a long-term hold.
Note that the ProShares UltraShort Financials (twice the financial index) hit a 52-week low on Friday; many consider this a contrarian indicator.
On the "hold" side is Meredith Whitney, who advised yesterday that she will not be shorting the banks until after the dust from earnings season settles because tangible book values will be rising.
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