Very strange confluence of media coverage this morning on the banking sector. All three major financial papers (WSJ, NYT, Barron's) have stories on the bottom of the banking sector:

WSJ: Jitters Ease as Citi, Rivals Show Signs of Bottoming Out

NYT: Hope, and Hints, That Financial Stocks Have Finally Touched Bottom   

Barron's: Buy Banks -Selectively  (cover story)

Can you recall the last time 3 major media players all picked the bottom in a market or sector on the exact same day -- and were all proven correct?

Perhaps the caveats are worth noting -- I found it interesting that all publications had some moderating hedges in place (as opposed to some recent embarrassing cover articles).

As we noted early this week, we covered most of our shorts in the financials, and are now looking for a bounce play in these names. However I remain unconvinced that Banks are now a good long term investment.

Why? The business model of Leverage and Capitalization is now kaput. Its a new era of De-leveraging, and Re-capitalizing.

A long time ago, Banks were 3-6-3 spread players. Pay your depositors 3%, make loans at 6%, be on the golf course at 3pm. But the end of Glass Steagell, and the mergers with investment banks, have put an end to that simple but profitible business. For the past 10 years or so, we seen a model that involved taking on a lot of risk, then leveraging it up 25X, 35X, even 65X (for Fannie).

Now that model has come unglued. Banks of all types are unwinding risk, de-leveraging (selling off assets held on borrowed money) and raising capital. This means that until a new model is developed, profits will be anemic and the shareholder capital structure is about to get wildly diluted.

Freddie Mac (FRE), with its $6B cap, is seeking to raise $10B. That will be enormously dilutive to both future earnings, and shareholder equity.  Remember that Lehman Brothers (LEH) capital raise? $6 Billion secondary priced at $28 with 8.75% coupon and an %18 conversion premium? The stock is now $19m, the cap is $13.3B. After the last debacle, good luck with future capital raises -- they are likely to be treated much more skeptically.

Is "the" bottom in?

Well, it certainly looks like "a" bottom is in.

But longer term, this is a sector that is likely to have continued write downs, weak earnings prospects, and a whole lot more regulation and government supervision than it got away with in the past. P/E compression may also be in the cards -- especially if we see some dividend cuts from some of the bigger houses. 

Unless you have a decade long time horizon, does that make you want to rush out and own these things anytime soon?  Me neither . . .

Charts & Tables:
click for larger graphic

>

\

Previously:
Forbes Video: More bank write-downs, U.S. recession, Avoid Home Builders (3/28/08)
http://bigpicture.typepad.com/comments/2008/04/forbes-video-32.html

Quote of the Day: Citibank on Glass Steagall (July 08, 2008)   
http://bigpicture.typepad.com/comments/2008/07/quote-of-the--3.html

>
Related:
Video: Still Too Bullish (Apr. 1 2008)
http://www.cnbc.com/id/15840232?video=700094755>

>

Sources:
What to Bank On
ANDREW BARY 
Barron's JULY 21, 2008
http://online.barrons.com/article/SB121642073624766417.html

Jitters Ease as Citi, Rivals Show Signs of Bottoming Out
DAVID ENRICH
WSJ, July 19, 2008; Page A1
http://online.wsj.com/article/SB121636319957764985.html

Hope, and Hints, That Financial Stocks Have Finally Touched Bottom
FLOYD NORRIS
NYT, July 19, 2008
http://www.nytimes.com/2008/07/19/business/19charts.html

I sent this letter today to the Wall Street Journal:

Donald Libert speculates that Sen. John Sherman sponsored the 1890 antitrust act that bears his name out of "a desire to 'pay back' the New York industrialist-dominated delegation who he blamed for denying him the Republican nomination for president at the 1888 convention" (Letters, July 19).  Revenge might well have been part of the Senator's agenda. But another part of that agenda likely was his desire for political cover.

Sherman, a staunch protectionist, was a senate champion of the McKinley Tariff.  This tariff, enacted a mere three months after passage of the antitrust act, set import duties at (what at the time were) record high levels.  (So much for Sen. Sherman's credentials as friend of consumers!)  Free-trade Democrats rightly accused protectionists as being architects of monopoly power - an accusation that Sen. Sherman no doubt sought to conveniently deflect by putting his name on an antitrust statute.

Sincerely,
Donald J. Boudreaux

Once again, the relevant research here was done by Tom DiLorenzo.  See: Thomas J. DiLorenzo, "The Origins of Antitrust: An Interest-Group Perspective," International Review of Law and Economics (June 1985).

Excellent discussion from PBS News Hour, on Moral Hazard:
click for video
>

>

Sources:
Bailout of Mortgage Firms Could Set Risky Precedent  (Transcript)
July 18, 2008   
http://www.pbs.org/newshour/bb/business/july-dec08/bailouthazard_07-18.html

Audio Recording
http://www-tc.pbs.org/newshour/rss/media/2008/07/18/20080718_risky28.mp3

Smartest thing the McCain has done in 6 months:

Former Texas Sen. Phil Gramm resigned Friday from his role as Republican presidential candidate John McCain's campaign co-chairman, hoping to quiet the uproar that followed his comments that Americans had become a "nation of whiners" whose constant complaints about the U.S. economy show they are in a "mental recession."
-McCain adviser Gramm leaves campaign 

>

Previously:
Whining US CEOs: Economy is "Dismal" (July 2008)
http://bigpicture.typepad.com/comments/2008/07/us-ceos-economy.html

Amity Shlaes Does Not Know What a Recession Is (July 2008)
http://bigpicture.typepad.com/comments/2008/07/amity-shlaes-do.html

Source:
McCain adviser Gramm leaves campaign
AP,  9:43 p.m. ET, Fri., July. 18, 2008 
http://www.msnbc.msn.com/id/25742187/

Interesting discussion:

"The political establishment is embracing a time-honored response to the nation's economic turmoil. It's going on a witch hunt.Politicians of all stripes worry that improper trading by short sellers has contributed to turmoil in the stock markets. And "excessive" oil traders have replaced oil-company executives -- themselves twice keelhauled by congressional committees this year -- as the bogeymen behind the run-up in gas prices.  For Washington veterans, the sharpened attacks are the incarnation of a standard political trope, one found especially in election years"

Source:
Economic Woes Get a Fix: Witch Hunt
GREG HITT
WSJ, July 19, 2008; Page A3
http://online.wsj.com/article/SB121642556479566791.html