I see lotsa stuff out there about a banking collapse; short the banks! Don't think that'll work now, and not just because of the two-year auction that went so well. I am staking out the positive bank ground, as I believe the end-of-quarter rally could be upon us, based on the money in -- there is plenty -- and the incredible negativity that will not let up.
What's the fundamental reason or reasons for this foolishness? Why buy here, right now? Because the pace of deterioration is moderating, which I regard with great comfort. There's something going on that's not in the numbers that makes me feel there could be some upside surprises: the deposit competition. It seems like it is going away. Every time we get one of these moments where there is stress, (and this time there was ALOT of stress), there are banks that start paying ultra high interest for hot money to fund their books.
The FDIC is cracking down on these free riders of the system. That could produce spectacular "turn the lights on, make money" kinds of results - which were seen in the early '90s, etc. Sure, there isn't a lot of lending going on yet - bank reserves at the Fed are sky-high. I see it will come with the house-price stabilization that is becoming obvious even to the bears. We will then, as nonperformers start to peak, and deposit competition goes away, be able to build models for earnings. That's what's been lacking more than anything in the bank stocks.
One obvious risk is commercial real estate. If it is as bad as the bears say, then the residential mortgage bottom won't matter. But I kind of shake my head at that, as this system has been under stress for an awfully long time, and we haven't seen much of any commercial real estate stress yet. I am wondering it if this won't turn out to be much ado about nothing....
Always - always - keep an eye out on California. If the bottom has truly been reached in California real estate, as I think it has, you can only imagine what it means for the models of BAC, WFC, and, to a lesser extent, JPM (Washington Mutual). Sure, it'd be great to see the refis and the mortgage originations be stronger here, but, as is often the case, people are just trying to game the market. I think those who are holding off will be back.
The thesis is what it is; the bears are pressing their bets because the names are so, so volatile. JPM bounces between 30 and 40 like a pinball. (Dated reference!) But the short bet, to me, looks like a sucker's bet, and I would move on going into the next quarter....
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