Bank stocks: Ignoring failures and roaring ahead
On the one hand, we've got the highest number of bank failures in years.
And in the other, we've got the stocks of Big Banks soaring.
How does that add up?
It doesn't.
It's a lesson in how you can't always relate stocks' performance to what's going on in plain sight.
And, there's a huge division between Too-Big-to-Fail banks and smaller ones.
This divide has been unfolding for the last five months.
If, on the day the stock market hit its recent bottom March 9, you had picked up a bundle of those Too-Big-To-Fail banks, oh how smart you'd look now.
You may have thought, "What more pain could there be?" Back in March, the market had taken trillions out of the nation’s collective portfolios. The banks had tottered and the government had bailed them out.
So you thought that since they were Too Big To Fail, they might just be a good bet.
In the stock market, you would have been correct.
But back in the real world, the shakiness of the banking industry was really just beginning to be widespread.
In fact, of the 99 bank failures by Thursday Oct. 22 -- the highest annual number since the S&L crisis -- 83 of them happened since the market bottomed out in March.
This cascade of bank failures has not been among the ranks of the big-name banks. They have for the most part been smaller, more local banks that were closely tied to poor housing markets.
Week after week, the FDIC has been announcing the closings of banks from Calabasas to Chicago late on Fridays, with the institutions reopening the following Monday under new ownership.
But let's say you ignored all that and you boldly chose your stocks, from the 19 stress-tested, too-big-to-fail list..
Say you bought JP Morgan Chase. Between March 9 and last Thursday, Oct. 22, you saw it go up 187 percent. Wells Fargo, up 203 percent. Bank of America, up 341 percent.
Or you chose Citigroup and you’re ahead 325 percent.
(In South Florida, there's Bank Atlantic, which has shot from 30 cents on March 9 to $2.00 by last week, a 565 percent streak.)
Why were these such good performers?
Relief, for one thing. “They were coming from such a distressed level. In March, we thought the government was going to nationalize them,” said Morningstar Senior Equity Analyst Jaime Peters. The thought was that if one of these giants failed, they’d all come tumbling down.
Fundamental improvements in their financial position, courtesy to a large extent from the government bailouts, are another reason the market picked up on big bank shares. And many of those who were stress-tested were required to raise more capital, so they are in a better position now. Some have seen profits go up since March as credit markets have recovered and they've gone back to profiting from old-fashioned things like bond trading.
Meanwhile, there are more than $10 billion in losses for the 11 regional banks in the Standard & Poor's 500 this year, says an estimate from Thomson Reuters. Treasury Secretary Timothy Geithner this week said that small regional banks "were still struggling," according to The New York Times.
And the long-term investors in Big Bank stocks?
Theirs is a very different story.
“Those who owned Citi at the beginning of the year only own 24 percent of the company now,” Peters aid. “The government owns 33 percent.”
JP Morgan Chase for the five years ended Oct. 22 was up a princely amount of 10.3 percent. It is the leader in this select group.
It had a better performance than Wells Fargo ( which is down 5.5 percent, about the same as the Standard & Poor’s 500 record), Bank of America (down 61 percent) and Citi.
Citi, over five years, is down 89 percent.
Back in early 2000, Citi was trading near $60. Today it's under $5. Peters says the $50 and up days aren't coming back. "It will not recover to the levels it previously was," she said.
Okay, I’m not a trader. I'm one of those investors who still believe in long-term investing. Call me deluded.
But I recognize when the traders win.
With the Too-Big-To-Fail bank stocks, they did win, big time.
Harriet Johnson Brackey, the personal finance columnist for the Sun Sentinel, is an award-winning business reporter. Her columns for 2008 were named "The Best in the Business," a national award chosen by her colleagues at the Society of American Business Editors and Writers.
