The interweb had a little fun yesterday poking fun at Dick Bove, the sell side bank analyst from Rochedale Securities. It started with his mea culpa of sorts that was picked up by FT Alphaville, was contributed to by his mid-day appearance on Fast Money and was jumped on by various bloggers on Twitter. Bove gets a lot of face time on TV, his opinions get dissected in many places and he has very specific opinions several of which have been wrong in very loud fashion.
Later in the day there was another segment on CNBC not involving Bove where an analyst tried to make a bullish argument for financial stocks that with just one ear on the segment seemed to be based on valuations.
The valuation argument has been around for a while post-meltdown (Barron’s seems to write this up every three weeks) but hasn’t mattered yet as the sector, as measured by the Financial Sector SPDR (XLF) is still in the dumps. XLF went from $38 before the crisis to a low in March 2009 of $6.18 to a post meltdown high of $17.17 in February of this year and it closed yesterday at $12.12.
As a quick recap, I was underweight financials long before the crisis due to the sector’s weight exceeding 20% in the SPX, then went more underweight when the yield curve inverted and have been very underweight and very skeptical ever since. The book value argument is sketchy as I don’t think book value is reliable these days because I do not believe the banks are done writing down the crisis.
One observation that I think contributes to the conversation is that twelve years ago we had a tech bubble and many of the big surviving companies are trading at fractions of where they were 12 years ago, earning much more money than they were 12 years ago and fundamentally are much better businesses than they were 12 years ago but the market appears not to care..yet. Intel (INTC) peaked at $73 and is now at $23. Cisco peaked at $79 and is now at $18. And there are others but obviously there have been some success stories too like Amazon (AMZN).
There could be success stories with US banks too but there won’t be a lot of them as I believe the financial crisis is far more serious than the tech wreck. With the tech wreck, the market took something new and overreacted sending valuations to unsustainable levels. With financials the valuations were fine but then the industry got far too aggressive on just about every front which dominoed into their blowing themselves up. If tech has not recovered after 12 years for a bubble that was not as bad as the financial bubble then how long do you think it will take for the banks to recover?
Obviously people draw their own conclusions and so you may view this much differently than I do but for now I continue to prefer banks from select foreign markets, exchange stocks (although we don’t own one currently) and we also own an index provider.