Tags: hans | parisis | bank | default

Not Time Yet to Buy Financials

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Tuesday, 30 Dec 2008 11:23 AM Current | Bio | Archive

Banks will likely post their first quarterly loss since 1990, reports The Wall Street Journal, citing a rising tide of troubled loans even as the feds step in to help with cash injections.

Profits are down 94 percent from a year earlier, when U.S. banks collectively made $1.7 billion in the third quarter. On top of problem mortgages and borrowers who are overextended on credit cards, add rising unemployment and a rapidly weakening economy.

Credit ratings agencies are already warning of a sharp increase in junk-rated defaults. Barclays Capital, for instance, warns that deleveraging by banks and hedge funds will take years to complete. It sees high-yield default rates rising to 10 percent in the United States and 6.5 percent in Europe, reports Thomson.

Citigroup, meanwhile, sees investment-grade spreads functioning, but only on a long-term basis. Dresdner Kleinwort sees the global junk-grade default rate elevated for more than a year.

In my view, apart from the all points that are cited above, it is a fact that it will be practically impossible for banks to generate profits when “deflation perception” is developing because of rapidly deteriorating economic conditions, which are is bringing down the real values of all assets.

Jean-Claude Trichet, President of the European Central Bank, warned a couple of weeks ago about the extremely serious situation that is spooking the markets now.

It’s when this deflation perception starts definitively getting anchored in the mind of the general public that this phenomenon will contaminate in an extremely severe way the banks’ assets and profits and, of course, at the same time economies in general, in a way that we haven’t experienced since World War II.

Sliding from the “well-anchored perception” into the “real stuff” is very difficult to abort.

So, my standpoint is that it’s way too early to start thinking about picking up some financials. On the contrary, investors shouldn’t lose their patience and keep their powder dry in cash equivalents like Treasuries until we’ll see their prices coming down in a serious way.

Until that happens, we’ll be in awful deflation land.

But, of course, the time will come that investors (and I’m not talking about traders) will have a “once in lifetime” opportunity to do really good investments in all sorts of assets. But, that time hasn’t come yet.

It’s first to be getting much worse before it’s going to get better, sometime after 2009.

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Banks will likely post their first quarterly loss since 1990, reports The Wall Street Journal, citing a rising tide of troubled loans even as the feds step in to help with cash injections.Profits are down 94 percent from a year earlier, when U.S. banks collectively made...
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2008-23-30
Tuesday, 30 Dec 2008 11:23 AM
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