Risk Trade Now: From Banks to REITs

The risk trade: out of banks, hide in REITs*. Another weak day for banks, particularly regional banks. It's been an absolutely miserable month: The Regional Bank HOLDRs Trust (RKH), a basket of regional banks, is down about 12 percent in August.
*(REITs: Real Estate Investment Trusts)

The good news is that loans losses continue to decline and that banks in general are much better capitalized, and in a much better positioned for a slowdown than they were three years ago.

But look at this lousy performance from well-known names, below.

Banks Lag This Month:

Synovus Financial down 19%

Zions Bancorp down 17%

Wells Fargo down 15%

PNC Financial Services down 14%

SunTrust Banks down 13%

Fifth Third Bancorp down 13%

So why are banks of all size having such a terrible month? And it IS terrible — even for big names. One veteran trader of financials told me this morning that even a venerable name like Bank of America was trading at $12.48, just above tangible book value of roughly $12.40. That's TANGIBLE book — bricks and mortars. Citigroup , the trader noted, was trading at $$3.72, below tangible book of roughly $4.19.

Blame it on the continuing housing weakness (regionals are particularly heavily levered to commercial and residential loans).

Also, the flat yield curve is also a real problem. How to make money when they are paying 25 basis points for deposits, and they can only invest it for roughly the same amount?

Another problem: revenue growth has been largely flat, thanks to de-leveraging, weak loan demand, and adjustments for the Dodds-Frank Act.

All this means investors in financial stocks have been largely avoiding banks...meanwhile REITs have fared much better this month. Not only do they offer superior dividends, but many have successful refinanced their higher-yielding debt. AND there has also been far fewer negative headlines around commercial real estate than around residential, and the hurricane season has been mild so far.

REITs this Month:

Simon Property up 1.5%

Equity Office Properties flat

Equity Residential flat

Kimco Realty (KIM) down 0.6%

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