Ok, here it comes.
After the government released the results of its stress tests, banks are scrambling to come up with ways to raise huge amounts. It seems that the government money that was a much vaunted and absolutely necessary lifeline to banks has become tainted now that it comes with, horror of horror, strings on how the money can be spent. As if the banks ever handed out a huge loan to anyone without some sort of control on the collateral.
Be that as it may, banks want out of TARP and they want out now. Even banks that would be much better off holding on to their TARP dollars are looking to buy back the government shares of preferred stock that they had to put up in order to their money. Seems there is a feeling that the banks that do keep their TARP funds will be viewed as sickly or less stable than their counterparts who repay, regardless of the cost or wisdom of doing so.
The only way for these banks to raise the kinds of dollars being thrown around is by selling off assets, which is fine if they are not part of the core business (which begs the question why they were acquired in the first place), and by selling more stock to the public. The latter means undoing decades of stock buybacks in some cases, and flat-out printing new shares in other cases. Either way, that is a huge flood of bank stocks headed for the market.
Buy, Sell, or Short Bank Stocks?
What’s an investor to do?
Get out of the way.
Frankly, there are too many variables here for any bank stock investment to be anything other than an educated guess at this point. Trading on banking stocks based on whatever methodology or information you have analyzed can be nothing more than the equivalent of counting cards in blackjack and may be nothing better than picking red or black on a roulette wheel.
When you start using gambling analogies to discuss trading options, its time to step back.
At issue, is what will happen as the various banks strive to implement their business plans to both get out from under the government thumb and pay back their TARP money. What is about to occur is unprecedented.
Typically, large corporations carefully time any additional stock sales or new issues into markets viewed as particularly favorable to their goals. Nobody is saying that is the market we are looking at today, and yet, oodles of banks are looking to unleash the single largest infusion of bank stocks into the market in…well, forever.
Secondly, as banks focus on implementing their TARP pay backs and mending their image, they are more likely than ever to take their eye off the ball when it comes to actually running their businesses. Already, companies have made consumer relations missteps that have become front page news, and Congress is talking about making credit card issuers make money fairly, instead of with fine print and contract double-talk, something most of them haven’t done in years, and may not be able to do anymore at all.
In other words, it is completely possible that thanks to a recovering economy, the largest government intervention in recent history will be a huge success and the Feds will get back all of their investment dollars and get to claim credit for saving the economy. Along the way, bank stocks may absorb the huge infusion of supply and continue upward.
It is also completely possible that more than one bank will bungle throwing off the government shackles, or in doing so weaken itself too much to stay competitive, resulting in the credit crunch failing to unwind, a short-lived dead cat bounce in the economy and the onset of a second recession or banking crisis, this time that may cause the banks to stay in government hands for good, or that will leave investors holding the bag…and their shiny brand-new shares of common stock that are now worthless.
Go buy Wal-mart or GE, or company that’s upside during a recovery is not tied solely to how it plays the game during the next 10 months.