The Banks - Whadaya Think

[chinaco]

I was looking at SPDR KBW Bank ETF (KBE).

https://www.spdrs.com/product/fund.seam?ticker=KBE


The PE is about 9.5 and the PB .74 Expense is .34%

And Div Yield of 1.03%


It holds about 25 banks.

It just got beatup... probably some sentiment because of that law suit (some of the holdings are identified in the suit)... also probably due to economic sentiment.

It has been off its peak (about $60) for over 4 years. It is less than 30% of its all time high. and is off about 30% from its recent high (much of that in the last month).

They are obviously still adjusting...

What is your outlook for banks over the next 3 - 5 years? Another 5 years would approaching 10 years since the meltdown.

Would this be a good value investment (for the sector).... buy it, then cash out (3 - 5 year time frame).

What do you think the down-side might be (over that period)? Anymore nasty surprises out there or are we just looking at the healing process?

Opinions if you got 'em. Even better... recent analysis if ya did it (or know of a handy source).

 

[Lsbcal]

What do any of us know that the market as a whole has not priced in? And 1% yield, that's worse then the SP500.

 

[GregLee]

Morningstar's Fair Value graphs mostly show a recent trend toward more undervalued for financial services and banks in most regions:
Market Fair Value by Sector, Industry, Super-Sector, Index | Morningstar

 

[CCdaCE]

Hehe. I was ready to back up the truck and load up at the beginning of the year. Then things really fell off a cliff lately. It seems like I thought the worst was over, but, there still has to be lots of deleverging left to do.

If you look at the graphs linked above, regional banking has always been "cheap", since '01 or '02, even. But, now is the second lowest "dip" since it's been ranked.

It's hard to see how you could go wrong (Google finance says it is at PE 4-something), but like I said, I've thought that it was 'how-can-it-go-any-lower' low before. It does seem like an overreaction. Just a matter of your timeframe, I guess.

Looking at the list of holdings, I'd be more inclined to believe your PE number, but I haven't done the math.

-CC

 

[FIRE'd@51]

Personally, I'd be more comfortable buying JPM which has a 3% yield, and IMO, is a much stronger bank than most contained in the KBW ETF.

 

[Animorph]

I'd want to know how much foreign debt each bank holds before I'd touch them with a ten-foot pole. I think the European debt crisis is still being largely under estimated. It appears that many US banks have significant PIGS debt exposure. There could be plenty of fallout when that all implodes.

 

[FIREd]

I bought some shares of Wells Fargo today. Time will tell if it was a wise decision.

 

[Uncle Drew]

FD, I had a limit order placed for WFC today, but it didn't get filled. (I missed the price dip in the morning).

 

[FIREd]

FD, I had a limit order placed for WFC today, but it didn't get filled. (I missed the price dip in the morning).

I put in a limit order for $23 last night. Then, before the market opened this morning, I felt I was being too greedy and upped the limit to $23.50.

 

[Gone4Good]

Bernanke sees "manageable" exposure to European banks

Read the above article today and it reminded me of "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. " - Bernanke, March 2007

 

[GusLevy]

What do you think the down-side might be (over that period)? Anymore nasty surprises out there or are we just looking at the healing process?

The biggest bull case for the banks since '08 is prob that since there has always been banks, that there will always have to be banks as long as capitalism exists. Therefore, the banks that survived will not only be eventually stronger, but also bigger, since the industry had to consolidate post-crisis. That's the easy part - the hard part is to get a decent entry point in a world that has a whole lotta arrows pointed in all directions with very bad aim. Macro forces, unfortunately, are not making it easy to buy banks and feel even somewhat comfortable these days.

I would like to buy the banks as well but the following thoughts and opinions, in no particular order, are what holds me back for now:

1) [Mod edit] Blame for the inevitable result of all this is irrelevant as an investor - however, the fact that it will take a long time for the housing market to be "fixed" is relevant and that amount of time is yet unknown.

2) "Operation Twist" - this current market chatter that the Fed will buy long bonds in order to flatten the yield curve for a lengthy period of time is growing louder by the minute. The target of this policy is almost comical: To maintain low mortgage rates so that more people can afford homes (the ones that were kicked out in San Bernandino can now buy homes in Palmdale, and vice versa!) or for current homeowners to be allowed to refinance their current mortgage into lower rates! The problem here, of course, is that (1) the banks cannot make money in a flat curve environment (borrow short, lend long...), and (2) the Fed Govt wants the banks to take in old mortgages at par and refi them at lower rates. Not good.

3) Europe is clearly a sh!tshow. The mortgage and leverage problem in #1 above became a global problem since money has no borders. Real estate in Ireland and Spain, for example, became even more insane than the US market...and the problem is magnified in Europe since they basically have only adjustable mortgages so their growth rates are almost boxed in. Add this to the various Govts' fiscal problems that we all read about in the WSJ in addition to the fundamental problem in the structure of the Euro in which the currency is only a monetary union rather than a political one...uh oh. The banks hold each others mortgages, each others Govt bonds, each others corporate bonds, etc...we have a prisoners' dilemma where if nobody moves everybody loses and if someone moves everybody loses. We need a war to divert attention.

4) Recession. The only way we don't get recession at this point is through monetary inflation - which is neither good nor bad in itself except for the fact that ultimately the Fed will run out of bullets themselves. I suppose that we'll hear a lot in the next several months about how the Fed Govt can magically create employment and heal housing if only the country had the political will to do so but I believe that doing so will not be possible in this politically bifurcated climate that we live in.

 

[chinaco]

Thanks for the comments.

Here is a recent analysts comment on US Bank exposure to the US downgrade. He comments on the European Exposure.

Banking Sector Expert Equity Analyst Sees No Effect From US Debt Downgrade And European Sovereign Debt Crisis: An Interview With Christopher Mutascio Of Stifel, Nicolaus - Yahoo! Finance

 

[FIRE'd@51]

Here is a recent analysts comment on US Bank exposure to the US downgrade. He comments on the European Exposure.

Banking Sector Expert Equity Analyst Sees No Effect From US Debt Downgrade And European Sovereign Debt Crisis: An Interview With Christopher Mutascio Of Stifel, Nicolaus - Yahoo! Finance

Direct exposure is probably minimal, and presumably one can learn that by looking at a bank's balance sheet. I'm more concerned with indirect exposure through swaps with European (and other) banks where there is counter-party risk, but I don't know how one can know that with any degree of accuracy.

 

[MichaelB]

Direct exposure is probably minimal, and presumably one can learn that by looking at a bank's balance sheet. I'm more concerned with indirect exposure through swaps with European (and other) banks where there is counter-party risk, but I don't know how one can know that with any degree of accuracy.

Once you find the BoA 10-K for 2010 (they don't make it easy), you'll need to read 866 pages. I tried this in '08, thinking then to invest a bit but wanting to first see what kind of assets were on the balance sheet. Maybe it is obfuscation, perhaps my analytical capabilities are in decline, or it could be that it wasn't worth the effort, but I couldn't find any of the specifics I was searching for.

 

[CCdaCE]

I bought some shares of Wells Fargo today. Time will tell if it was a wise decision.

Warren Buffet loves it, and keeps loading up.

Why Warren Buffett's Berkshire Hathaway owns Wells Fargo - Apr. 20, 2009

And again last quarter.

And there's no mention of options to make 10% guaranteed profit or anything like that, for him.

-CC

 

[Gone4Good]

Maybe it is obfuscation, perhaps my analytical capabilities are in decline, or it could be that it wasn't worth the effort, but I couldn't find any of the specifics I was searching for.

I think a truism of bank accounting is that outsiders can't ever really tell what is going on inside. As we've found out recently, even insiders don't always know. I'm actually surprised Buffett is taking a flyer in this sector, it doesn't seem to lend itself to the kind of analysis he's known for.

 

[CCdaCE]

I think a truism of bank accounting is that outsiders can't ever really tell what is going on inside. As we've found out recently, even insiders don't always know. I'm actually surprised Buffett is taking a flyer in this sector, it doesn't seem to lend itself to the kind of analysis he's known for.

He seems to think they don't follow the "group think" of other banks, they're the top of the heap, and aren't as exposed in risky areas (ARMs, T-bills, etc.) as other banks are/were.

-CC

 

[FinanceDude]

I'm actually surprised Buffett is taking a flyer in this sector, it doesn't seem to lend itself to the kind of analysis he's known for.

Fro Warren, it's all about the warrants he gets with such deals.........

 

[FinanceDude]

The only bank I would buy right now is JPM. Jamie Dimon is the perferred son of the Treasury, and that's not likely to change. Should another Beat Stearns opportunity arise, he is the first one they will approach........

 

[Animorph]

Here's some general data on PIGS debt in the U.S. and globally:

The Street Light: Betting On the PIGs

I remember seeing some bank-specific data somewhere, but can't locate it now. Anyway, this looks to me like it has serious falling-knife downside for now.

 

[jebmke]

Fro Warren, it's all about the warrants he gets with such deals.........

I seem to recall he is underwater on all the warrants. In the black on Wells common. I may be misremembering tho.

If we are lucky, the litigation will put BofA out of its misery. Couldn't happen to a sleazier bank.

 

[CCdaCE]

More info on WFC and Warren. I don't know why this is so enthralling. I must be bored.
http://seekingalpha.com/article/173410-why-warren-buffett-loves-wells-fargo

-CC

 

[jebmke]

The banks and financial institutions are just out to rob you!
Robin Hood was an outlaw! The banks are worse!
Good business practise will produce profits - so why do banks offer such crappy returns on your hard earned money!
There are solutions!
Comments Very welcome

Because the financial services industry is a defacto cartel. OPEC is a rank amateur compared to Wall Street.

 

[MichaelB]

The banks and financial institutions are just out to rob you!
Robin Hood was an outlaw! The banks are worse!
Good business practise will produce profits - so why do banks offer such crappy returns on your hard earned money!
There are solutions!
Comments Very welcome

Well, if banks are not safe what do you suggest we do to improve portfolio returns?

 

[jebmke]

Well, if banks are not safe what do you suggest we do to improve portfolio returns?

If you are already diversified and your allocation is approximately equal to your target, you have a couple of choices. These would potentially increase expected returns but obviously, with more risk.

Tilt your equity to small cap value
Increase your allocation to Emerging markets.

With both of these options, you have to have the stomach for the tracking error.

You could also increase your overall equity allocation but that involves risk as well.