Tuesday, February 14, 2012

Reconsider Financials?

I have long had a bias against financial (particularly bank) stocks, for reasons explained in prior posts.  Though it is still appropriate to require a higher hurdle for financial stocks to clear to warrant investment (particularly because of the opacity of their financial statements), there will likely be times to favor the group.

A contrarian anecdotal sign appeared in Barron's this week that may indicate that investors have become too pessimistic about the stocks.  A full-page ad for an ETF of high-dividend yield stocks touted that it has no financial stocks.  Perhaps sentiment is too negative on the group.  

On the other hand, the vehement objection of the major banks and investment banks to the Volcker Rule suggests that future profitability will be impaired.  Proprietary trading had been a huge profit source for these firms in recent years, and the requirement that banks divest or shut down such activities in order to continue to receive the Federal guarantee will change the nature and size of their profits in the future.

A common view has been that stocks won't have a lasting gain until the financial stocks lead the move, or at least participate.  They're off to a good start this year.  Though I am still wary of the largest bank stocks, I am investigating very small banks, ideally geared to the booming agricultural economy.  

My hunch is that the market will decline over the near term and that maybe later this year might be a better time to own the major financial stocks.

Steve Lehman

S & P 500: 1345

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